Inventories are stated at the lower of cost or market on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Any inventory on hand at the measurement date in excess of the Company’s current requirements based on historical and anticipated levels of sales is classified as long-term on the Company’s consolidated balance sheets. The Company’s classification of its inventory as either short- or long-term inventory requires it to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of goods sold over the next 12 months.
The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of SeptemberJune 30, 20152016 and December 31, 2014,2015, work-in-process inventories issued to active production jobs approximated $2.29$6.01 million and $2.05$3.02 million, respectively.
The Company’s jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, the majority of jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends nor is obsolescence a significant factor. The Company has very small market penetration in the worldwide jewelry market, and the Company had the exclusive right in the U.S. through August 2015 and has the exclusive right in many other countries through mid-2016into the third quarter of 2016 to produce and sell created SiC for use in jewelry applications. During the nine monthsyear ended September 30,December 31, 2015, management identified an opportunity to sell approximately $2.28 million of slow movingslow-moving loose jewel inventory of less desirable quality. As a result of this sale and feedback from customers on the value of some of these goods, the Company determined a lower of cost or market reserve of $293,000$528,000 and $352,000 as of June 30, 2016 and December 31, 2015, respectively, was required on some of the remaining inventory of these lower quality goods. In view of the foregoing factors, management has concluded that no excess or obsolete loose jewel inventory reserve requirements existed as of September 30, 2015 on goods other than the lower quality goods noted previously.
The Company manufactures finished jewelry featuring moissanite. Relative to loose moissanite jewels, finished jewelry is more fashion oriented and subject to styling trends that could render certain designs obsolete. The majority of the Company’s finished jewelry featuring moissanite is held in inventory for resale and consists of such basic designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company manufactures small individual quantities of designer-inspired moissanite fashion jewelry as part of its sample line that are used in the selling process to its wholesale customers.
The need for adjustments to inventory reserves is evaluated on a period-by-period basis.
14
Results of Operations
The following table sets forth certain consolidated statements of operations data for the three and ninesix months ended SeptemberJune 30, 20152016 and 2014:2015:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Net sales | | $ | 6,518,064 | | | $ | 4,521,894 | | | $ | 22,372,000 | | | $ | 18,431,094 | | | $ | 6,527,004 | | | $ | 6,183,535 | | | $ | 17,920,275 | | | $ | 13,199,621 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of goods sold | | | 3,890,791 | | | | 3,268,803 | | | | 15,196,231 | | | | 12,256,826 | | | | 3,894,094 | | | | 6,092,858 | | | | 13,057,982 | | | | 10,521,481 | |
Sales and marketing | | | 3,008,840 | | | | 2,520,426 | | | | 9,500,074 | | | | 6,886,651 | | | | 1,803,010 | | | | 1,787,930 | | | | 3,331,595 | | | | 3,145,874 | |
General and administrative | | | 1,574,903 | | | | 1,790,588 | | | | 5,343,064 | | | | 5,543,269 | | | | 1,693,123 | | | | 1,191,879 | | | | 3,135,818 | | | | 3,057,242 | |
Research and development | | | 6,351 | | | | 3,863 | | | | 15,455 | | | | 15,364 | | | | 980 | | | | 7,043 | | | | 2,848 | | | | 9,104 | |
Loss on abandonment of assets | | | - | | | | - | | | | - | | | | 2,201 | | |
Total costs and expenses | | | 8,480,885 | | | | 7,583,680 | | | | 30,054,824 | | | | 24,704,311 | | | | 7,391,207 | | | | 9,079,710 | | | | 19,528,243 | | | | 16,733,701 | |
Loss from operations | | | (1,962,821 | ) | | | (3,061,786 | ) | | | (7,682,824 | ) | | | (6,273,217 | ) | | | (864,203 | ) | | | (2,896,175 | ) | | | (1,607,968 | ) | | | (3,534,080 | ) |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | - | | | | 2 | | | | 11 | | | | 51 | | | | - | | | | - | | | | - | | | | 11 | |
Interest expense | | | (17 | ) | | | (583 | ) | | | (801 | ) | | | (901 | ) | | | (5 | ) | | | (767 | ) | | | (1,512 | ) | | | (784 | ) |
Loss on abandonment of property and equipment | | | | (115,548 | ) | | | - | | | | (115,548 | ) | | | - | |
Gain on sale of long-term assets | | | - | | | | - | | | | 125 | | | | - | | | | - | | | | - | | | | - | | | | 125 | |
Total other expense, net | | | (17 | ) | | | (581 | ) | | | (665 | ) | | | (850 | ) | | | (115,553 | ) | | | (767 | ) | | | (117,060 | ) | | | (648 | ) |
Loss before income taxes | | | (1,962,838 | ) | | | (3,062,367 | ) | | | (7,683,489 | ) | | | (6,274,067 | ) | |
Income tax net expense | | | (3,243 | ) | | | (3,093 | ) | | | (9,579 | ) | | | (4,048,870 | ) | |
Loss before income taxes from continuing operations | | | | (979,756 | ) | | | (2,896,942 | ) | | | (1,725,028 | ) | | | (3,534,728 | ) |
Income tax net expense from continuing operations | | | | (3,500 | ) | | | (3,243 | ) | | | (6,743 | ) | | | (6,336 | ) |
Net loss from continuing operations | | | | (983,256 | ) | | | (2,900,185 | ) | | | (1,731,771 | ) | | | (3,541,064 | ) |
| | | | | | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | | | | |
Loss from discontinued operations | | | | (4,708 | ) | | | (1,147,351 | ) | | | (579,078 | ) | | | (2,185,923 | ) |
Gain on sale of assets from discontinued operations | | | | - | | | | - | | | | 15,463 | | | | - | |
Net loss from discontinued operations | | | | (4,708 | ) | | | (1,147,351 | ) | | | (563,615 | ) | | | (2,185,923 | ) |
Net loss | | $ | (1,966,081 | ) | | $ | (3,065,460 | ) | | $ | (7,693,068 | ) | | $ | (10,322,937 | ) | | $ | (987,964 | ) | | $ | (4,047,536 | ) | | $ | (2,295,386 | ) | | $ | (5,726,987 | ) |
Consolidated Net Sales
Consolidated net sales for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 comprise the following:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | | | Three Months Ended June 30, | | | Change | | | Six Months Ended June 30, | | | Change | |
| | 2015 | | | 2014 | | | Dollars | | | Percent | | | 2015 | | | 2014 | | | Dollars | | | Percent | | | 2016 | | | 2015 | | | Dollars | | | Percent | | | 2016 | | | 2015 | | | Dollars | | | Percent | |
Loose jewels | | $ | 2,867,309 | | | $ | 2,324,234 | | | $ | 543,075 | | | | 23 | % | | $ | 10,454,665 | | | $ | 10,015,297 | | | $ | 439,368 | | | | 4 | % | | $ | 4,956,825 | | | $ | 3,766,309 | | | $ | 1,190,516 | | | | 32 | % | | $ | 14,597,642 | | | $ | 7,587,438 | | | $ | 7,010,204 | | | | 92 | % |
Finished jewelry | | | 3,650,755 | | | | 2,197,660 | | | | 1,453,095 | | | | 66 | % | | | 11,917,335 | | | | 8,415,797 | | | | 3,501,538 | | | | 42 | % | | | 1,570,179 | | | | 2,417,226 | | | | (847,047 | ) | | | -35 | % | | | 3,322,633 | | | | 5,612,183 | | | | (2,289,550 | ) | | | -41 | % |
Total consolidated net sales | | $ | 6,518,064 | | | $ | 4,521,894 | | | $ | 1,996,170 | | | | 44 | % | | $ | 22,372,000 | | | $ | 18,431,094 | | | $ | 3,940,906 | | | | 21 | % | | $ | 6,527,004 | | | $ | 6,183,535 | | | $ | 343,469 | | | | 6 | % | | $ | 17,920,275 | | | $ | 13,199,621 | | | $ | 4,720,654 | | | | 36 | % |
Consolidated net sales were $6.52$6.53 million for the three months ended SeptemberJune 30, 20152016 compared to $4.52$6.18 million for the three months ended SeptemberJune 30, 2014,2015, an increase of $2.0 million,$343,000, or 44%6%. Consolidated net sales were $22.37$17.92 million for the ninesix months ended SeptemberJune 30, 20152016 compared to $18.43$13.20 million for the ninesix months ended SeptemberJune 30, 2014,2015, an increase of $3.94$4.72 million, or 21%36%. The increase in consolidated net sales for the three months ended SeptemberJune 30, 20152016 was due primarily to the growth in sales, primarily in finished jewelry, of our direct-to-consumer businesses, Moissanite.com and Lulu Avenue®, which increased 77% to $1.20 million and 255% to $1.42 million, respectively, compared to the corresponding period of the prior year, as well as increasedstrong wholesale loose jeweljewels sales compared to the corresponding period of the prior yearyear. This increase was largely offset by the decrease in finished jewelry sales. Our direct-to-consumer e-commerce business, Moissanite.com, sales decreased over the corresponding periods due to timinglower conversion rates which we believe are due to the lack of orders shippedclearance inventory on Moissanite.com. We expect this trend to continue into the fourth quarter of 2016 until we re-merchandise and the launch of our newupgrade Forever OneMoissanite.comTM loose jewels.. The increase in consolidated net sales for the ninesix months ended SeptemberJune 30, 20152016 was due primarily to the increase in our wholesale business in both the domestic and international markets through our distributor channels, the sale of approximately $6.77 million of slow-moving inventory to our largest domestic customer as a result of our efforts to reduce inventories, and the growth in sales primarily in finished jewelry, of our direct-to-consumer businesses,e-commerce business, Moissanite.com and Lulu Avenue®, which increased 70%5% to $3.56$2.49 million, and 358% to $4.07 million, respectively, compared to the corresponding period of the prior year.
Sales of loose jewels represented 44%76% and 47%81% of total consolidated net sales for the three and ninesix months ended SeptemberJune 30, 2015,2016, respectively, compared to 51%61% and 54%57% of total consolidated net sales for the corresponding periodsperiod of the prior year. For the three months ended SeptemberJune 30, 2015,2016, loose jewel sales were $2.87$4.96 million compared to $2.32$3.77 million for the corresponding period of the prior year, an increase of $543,000,$1.19 million, or 23%32%. For the ninesix months ended SeptemberJune 30, 2015,2016, loose jewel sales were $10.45$14.6 million compared to $10.02$7.59 million for the corresponding period of the prior year, an increase of $439,000,$7.01 million, or 4%92%. The increasesincrease for the three and nine months ended SeptemberJune 30, 2015 were2016 was primarily due to the launchincrease in the domestic market through our distributor channels and an increase in wholesale sales to one of our newsignificant customers as compared to the corresponding period of the previous year. In addition, we saw an increase in international sales as we serve distributors in the China and Hong Kong markets. The increase for the six months ended June 30, 2016 was primarily due to the sale of approximately $6.77 million of slow-moving inventory during the period, our Forever OneTM loose jewelssales in the second quarter of 2016 doubling from the first quarter of 2016, and a focusthe increase in international sales as we serve distributors in the China and Hong Kong markets as compared to reduce inventorythe corresponding period of slower moving Forever ClassicTM and other lower quality loose jewels through existing distribution channels.the previous year. Sales in these markets may fluctuate significantly each reporting period. We are evaluating our options to enforce collection from one customer with which we are in dispute.
Sales of finished jewelry represented 56%24% and 53%19% of total consolidated net sales for the three and ninesix months ended SeptemberJune 30, 2015,2016, respectively, compared to 49%39% and 46%43% of total consolidated net sales for the corresponding periodsperiod of the prior year. For the three months ended SeptemberJune 30, 2015,2016, finished jewelry sales were $3.65$1.57 million compared to $2.20$2.42 million for the corresponding period of the prior year, an increasea decrease of $1.45 million,$847,000, or 66%35%. For the ninesix months ended SeptemberJune 30, 2015,2016, finished jewelry sales were $11.92$3.32 million compared to $8.42$5.61 million for the corresponding period of the prior year, an increasea decrease of $3.50$2.29 million, or 42%41%. The increaseThis decrease for each corresponding period was primarily attributable to lower sales through our wholesale distribution segment as we have transitioned our largest customer to larger purchases of loose jewels and fewer purchases of finished jewelry. For the three months ended June 30, 2016, the decrease also was attributable in part to the decline of our direct-to-consumer e-commerce business which had a decrease of 9% in finished jewelry sales into $1.03 million. This decrease was due to lower conversion rates which we believe are due to the threelack of clearance inventory on Moissanite.com. We expect this trend to continue into the fourth quarter of 2016 until we re-merchandise and nineupgrade Moissanite.com. For the six months ended SeptemberJune 30, 20152016, this decrease was primarily due tooffset in part by the growth of our direct-to-consumer e-commerce and home party businesses,business which offset the decreasehad an increase of 7% in finished jewelry sales in our wholesale business.to $2.24 million.
United States, or U.S., net sales were 86%accounted for approximately 84% and 91%90% of total consolidated net sales for the three and ninesix months ended SeptemberJune 30, 2015,2016, respectively, compared to 77%92% and 89%91% of total consolidated net sales for the corresponding periods of the prior year. U.S. net sales increased $2.10decreased to $5.45 million, or 60%4%, to $5.60 million forduring the three months ended SeptemberJune 30, 20152016 from the corresponding period of the prior year primarily as a result of an increase in U.S. finished jewelrydecreased sales throughof our direct-to-consumer businesses, Moissanite.com and Lulu Avenue®, and the launch of our new Forever OneTM loose jewels to limited distribution, primarily in the U.S. For the nine months ended September 30, 2015,e-commerce business. U.S. net sales increased $3.84to $16.09 million, or 23%33%, to $20.32 million compared toduring the six months ended June 30, 2016 from the corresponding period of the prior year primarily due to the increase in U.S. finished jewelryas a result of increased sales throughof our direct-to-consumer businesses, Moissanite.come-commerce business and Lulu Avenue®.the sale of $6.77 million of slow-moving inventory to our largest domestic customer in the first quarter of the current year.
Our largest U.S. customer during the three and nine months ended SeptemberJune 30, 20152016 accounted for 11% and 26%, respectively,27% of total consolidated sales compared to 27% and 29%, respectively,1% during the corresponding periodssame period of 2014. Two2015. This customer during the six months ended June 30, 2016 accounted for 14% of total consolidated sales compared to 11% during the same period last year. One other U.S. customerscustomer accounted for 13% and 11%52% of total consolidated sales during the ninethree months ended SeptemberJune 30, 2014,2015, but did not account for a significant portion of our total consolidated sales induring the correspondingsame period of 2016. This customer during the six months ended June 30, 2016 accounted for 38% of total consolidated sales compared to 40% during the same period of 2015. We expect that we will remain dependent on our ability, and that of our largest customers, to maintain and enhance retail programs. A change in or loss of any of these customer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately 14%16% and 9%10% of total consolidated net sales for the three and ninesix months ended SeptemberJune 30, 2015,2016, respectively, compared to 23%8% and 11%9% of total consolidated net sales for the corresponding periods of the prior year. International net sales decreased $101,000, or 10%,increased 107% and 61% during the three and six months ended SeptemberJune 30, 2015,2016, respectively, from the corresponding periodperiods of the prior year primarily as a result of a decreasewe serve distributors in loose jewel sales to our international wholesale customer base. International net sales increased $102,000, or 5%, during the nine months ended September 30, 2015, from the corresponding period of the prior year. We believe the economicChina and market conditions that face our larger international customers have caused some fluctuation in our international net sales. As we attempt to expand our international markets, we will continue to evaluate each of the existing distributors, as well as potential new distributors, to determine the best long-term partners within these markets, as well as enforcing the collection from two customers with which we are in dispute. As a result of these conditions and our evaluation of long-term partners, our salesHong Kong markets. Sales in these markets may continue to fluctuate significantly each reporting period. We are evaluating our options to enforce collection from one customer with which we are in dispute.
We did not have an international customer account for more than 10% of total consolidated sales during the three and ninesix months ended SeptemberJune 30, 20152016 or 2014.2015. A portion of our international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers. Our top three international distributors by sales volume during the three and six months ended SeptemberJune 30, 2015, in order,2016 were located in Hong Kong, the United Kingdom,Taiwan, and India. Our top three international distributors by sales volume during the nine months ended September 30, 2015, in order, were located in Hong Kong, Hong Kong, and the United Kingdom.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 are as follows:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | | | Three Months Ended June 30, | | | Change | | | Six Months Ended June 30, | | | Change | |
| | 2015 | | | 2014 | | | Dollars | | | Percent | | | 2015 | | | 2014 | | | Dollars | | | Percent | | | 2016 | | | 2015 | | | Dollars | | | Percent | | | 2016 | | | 2015 | | | Dollars | | | Percent | |
Product line cost of goods sold | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loose jewels | | $ | 1,489,997 | | | $ | 1,424,318 | | | $ | 65,679 | | | | 5 | % | | $ | 6,773,455 | | | $ | 5,288,016 | | | $ | 1,485,439 | | | | 28 | % | | $ | 2,369,823 | | | $ | 3,062,218 | | | $ | (692,395 | ) | | | -23 | % | | $ | 10,183,883 | | | $ | 5,283,392 | | | $ | 4,900,491 | | | | 93 | % |
Finished jewelry | | | 1,826,738 | | | | 1,447,258 | | | | 379,480 | | | | 26 | % | | | 5,851,605 | | | | 5,832,871 | | | | 18,734 | | | | 0 | % | | | 1,195,674 | | | | 1,737,833 | | | | (542,159 | ) | | | -31 | % | | | 1,960,781 | | | | 3,446,003 | | | | (1,485,222 | ) | | | -43 | % |
Total product line cost of goods sold | | | 3,316,735 | | | | 2,871,576 | | | | 445,159 | | | | 16 | % | | | 12,625,060 | | | | 11,120,887 | | | | 1,504,173 | | | | 14 | % | | | 3,565,497 | | | | 4,800,051 | | | | (1,234,554 | ) | | | -26 | % | | | 12,144,664 | | | | 8,729,935 | | | | 3,415,269 | | | | 39 | % |
Non-product line cost of goods sold | | | 574,056 | | | | 397,227 | | | | 176,829 | | | | 45 | % | | | 2,571,171 | | | | 1,135,939 | | | | 1,435,232 | | | | 126 | % | | | 328,597 | | | | 1,292,807 | | | | (964,210 | ) | | | -75 | % | | | 913,318 | | | | 1,792,086 | | | | (878,768 | ) | | | -49 | % |
Total cost of goods sold | | $ | 3,890,791 | | | $ | 3,268,803 | | | $ | 621,988 | | | | 19 | % | | $ | 15,196,231 | | | $ | 12,256,826 | | | $ | 2,939,405 | | | | 24 | % | | $ | 3,894,094 | | | $ | 6,092,858 | | | $ | (2,198,764 | ) | | | -36 | % | | $ | 13,057,982 | | | $ | 10,521,481 | | | $ | 2,536,501 | | | | 24 | % |
Total cost of goods sold was $3.89 million for the three months ended SeptemberJune 30, 20152016 compared to $3.27$6.09 million for the three months ended SeptemberJune 30, 2014, an increase2015, a decrease of $622,000,$2.20 million, or 19%36%. Total cost of goods sold was $15.20$13.06 million for the ninesix months ended SeptemberJune 30, 20152016 compared to $12.26$10.52 million for the ninesix months ended SeptemberJune 30, 2014,2015, an increase of $2.94$2.54 million, or 24%. Product line cost of goods sold is defined as product cost of goods sold in each of our wholesale distribution and direct-to-consumer e-commerce distribution and direct-to-consumer home party distribution operating segments excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory valuation allowance adjustments; and other inventory adjustments, comprising royalties on design of goods, costs of quality issues, damaged goods, and inventory write-offs.
The increasedecrease in cost of goods sold for the three months ended SeptemberJune 30, 20152016 compared to the correspondingsame period in 20142015 was primarily due to a $379,000 increase in finished jewelry product line cost of goods sold due to increased finished jewelry sales through our direct-to-consumer businesses, Moissanite.com and Lulu Avenue®, a net increase of $177,000 in non-product line cost of goods sold, and a $66,000 increase in loose jewels product line cost of goods sold primarily due to increased loose jewel sales to our wholesale customers. The cost of goods sold for the three months ended September 30, 2015 also included the effect of a finished jewelry melt of slow moving and obsolete jewelry that we identified during the quarter, from which we recovered the cost of the metal and loose jewels, which was less than the carrying cost of the finished jewelry. The net increase in non-product line cost of goods sold comprises a $516,000 increase in other inventory adjustments, which includes $26,000 of royalties on fashion jewelry design work, a $293,000 increase in non-capitalized manufacturing and production control expenses, and a $25,000 increase in freight expenses due to increased sales through our direct-to-consumer businesses. These increases are partially offset by a $657,000$692,000 decrease in inventory valuation allowances, including inventory obsolescence, shrinkage, recuts, repairs, and scrap reserves.
The increase in cost of goods sold for the nine months ended September 30, 2015 compared to the corresponding period in 2014 was primarily due to a $1.49 million increase in loose jewels product line cost of goods sold resulting from the sale of slow moving loose jewel inventory of less desirable quality at lower product margins to one customer and increasedin the three months ended June 30, 2015. Additional decreases in costs of goods sold included a $542,000 decrease in finished jewels product line cost of goods sold as a result of lower finished jewelry sales through our direct-to-consumer businesses, Moissanite.com and Lulu Avenue®,in the three months ended June 30, 2016 compared to the corresponding period in the prior year and a net increasedecrease in non-product line cost of goods sold of $1.44 million.$964,000, or 75%. The net increasedecrease in non-product line cost of goods sold comprises a $926,000 increase$169,000 decrease in non-capitalized manufacturing and production control expenses primarily due to timing of receiving work in process into inventory and allocating overhead, a $411,000 decrease in the change in inventory valuation allowances, including inventory shrinkage, recuts, repairs, and scrap reserves, and a $395,000 decrease in other inventory adjustments,adjustments. These decreases were offset in part by an $11,000 increase in freight out due to increased sales volume.
The increase in cost of goods sold for the six months ended June 30, 2016 compared to the same period in 2015 was primarily due to a $6.77 million sale of slow-moving loose gemstone inventory at low margins, which includes $93,000was partially offset by a decrease in non-product line cost of royalties on fashion jewelry design work;goods sold of $879,000, or 49%. The net decrease in non-product line cost of goods sold comprises a $530,000$560,000 decrease in the change in inventory valuation allowances, including inventory shrinkage, recuts, repairs, and scrap reserves, and a $429,000 decrease in other inventory adjustments. These decreases were offset in part by a $95,000 increase in non-capitalized manufacturing and production control expenses;expenses primarily due to timing of receiving work in process into inventory and allocating overhead, and a $91,000$15,000 increase in freight expensesout due to increased sales through our direct-to-consumer businesses. These increases are partially offset by a $111,000 decrease in inventory valuation allowances, including inventory obsolescence, shrinkage, recuts, repairs, and scrap reserves.volume. See Note 3, “Segment Information and Geographic Data,” in the Notes to Condensed Consolidated Financial Statements for further discussion of non-product line cost of goods sold.
Sales and Marketing
Sales and marketing expenses for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 are as follows:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | |
| | 2015 | | | 2014 | | | Dollars | | | Percent | | | 2015 | | | 2014 | | | Dollars | | | Percent | |
Sales and marketing | | $ | 3,008,840 | | | $ | 2,520,426 | | | $ | 488,414 | | | | 19 | % | | $ | 9,500,074 | | | $ | 6,886,651 | | | $ | 2,613,423 | | | | 38 | % |
| | Three Months Ended June 30, | | | Change | | | Six Months Ended June 30, | | | Change | |
| | 2016 | | | 2015 | | | Dollars | | | Percent | | | 2016 | | | 2015 | | | Dollars | | | Percent | |
Sales and marketing | | $ | 1,803,010 | | | $ | 1,787,930 | | | $ | 15,080 | | | | 1 | % | | $ | 3,331,595 | | | $ | 3,145,874 | | | $ | 185,721 | | | | 6 | % |
Sales and marketing expenses were $3.01$1.80 million for the three months ended SeptemberJune 30, 20152016 compared to $2.52$1.79 million for the three months ended SeptemberJune 30, 2014,2015, an increase of $488,000,$15,000, or 19%1%. Sales and marketing expenses were $9.50$3.33 million for the ninesix months ended SeptemberJune 30, 20152016 compared to $6.89$3.15 million for the ninesix months ended SeptemberJune 30, 2014,2015, an increase of $2.61 million,$186,000, or 38%6%.
The increase in sales and marketing expenses for the three months ended SeptemberJune 30, 20152016 compared to the correspondingsame period in 20142015 was primarily due to an increase of $417,000 in net compensation expenses; a $97,000$245,000 increase in office-related expenses; an $85,000advertising; a $40,000 increase in professional services primarily related to operation of our sales platformcustomer service and fulfillment services for our direct-to-consumer home party business; andpublic relations; a $4,000$12,000 increase in advertising expenses.market research; and an $8,000 increase in recruiting fees. These increases were partially offset by an $89,000a $205,000 decrease in compensation expenses; a $43,000 decrease in travel expense due to fewer international sales tripstrips; a $28,000 decrease in office-related expense; and a $26,000$14,000 decrease in depreciation expense related to the Moissanite.com e-commerce sales platform.
The increase in advertising expenses for the three months ended June 30, 2016 compared to the same period in 2015 comprises a $368,000 increase in outside agency fees primarily related to the outside agency hired to build a brand strategy and Lulu Avenue® e-commerce websites’ direct sales platforms.architecture and develop a brand design and messaging; a $59,000 increase in internet marketing; and a $31,000 increase in trade show related expenses. These increases were partially offset by a $102,000 decrease in samples; a $76,000 decrease in cooperative advertising; a $28,000 decrease in print media expenses to develop and promote brand awareness campaigns; and a $7,000 net decrease in all other advertising expenses.
Compensation costs for the three months ended SeptemberJune 30, 20152016 compared to the correspondingsame period in 2014 increased2015 decreased primarily as a result of an increasea $288,000 decrease in severance expense related to the personnel changes within the wholesale sales organization in the corresponding period of the prior year and a decrease in commissions of $345,000$94,000 for sales to specific wholesale customers under which commission plans of sales representatives are based and the increase in sales within our direct-to-consumer home party line of business;based. This decrease was partially offset by a $69,000$91,000 increase in salaries and related employee benefits; and a $9,000$55,000 increase in bonus expense; a $25,000 increase in stock-based compensation expense. These changes were partially offset byexpense; and a $6,000 decrease in bonus expense.
The increase in advertising expenses for the three months ended September 30, 2015 compared to the corresponding period in 2014 comprises an increase in internet marketing of $128,000 which is partially offset by a $56,000 decrease in cooperative advertising; a $52,000 decrease in agency and other media and awareness spending, and a decrease of $16,000 in print media expenses to develop and promote brand awareness campaigns. The decrease in cooperative advertising expenses resulted primarily from management’s decision to offer sales discounts to most of our international customers in lieu of cooperative advertising assistance.relocation expense.
The increase in sales and marketing expenses for the ninesix months ended SeptemberJune 30, 20152016 compared to the correspondingsame period in 20142015 was primarily due to an increase of $1.96 million in net compensation expenses; a $436,000$431,000 increase in office-related expenses;advertising; a $357,000$53,000 increase in professional services primarily related to the operation of our sales platformcustomer service and fulfillment services for our direct-to-consumer home party business;public relations; a $43,000 increase in recruiting fees; and a $116,000$35,000 increase in advertising expenses.market research. These increases were partially offset by a $153,000$216,000 decrease in compensation expenses; an $85,000 decrease in travel expense due to fewer international sales trips andtrips; a $99,000$41,000 decrease in office-related expense; a $30,000 decrease in depreciation expense related to the Moissanite.com e-commerce sales platform; and Lulu Avenue® e-commerce websites’ direct sales platforms.a net decrease of $4,000 in miscellaneous other expenses.
The increase in advertising expenses for the six months ended June 30, 2016 compared to the same period in 2015 comprises a $387,000 increase in outside agency fees primarily related to the outside agency hired to build a brand strategy and architecture and develop a brand design and messaging; a $93,000 increase in internet marketing; a $79,000 increase in cooperative advertising; and a $31,000 increase in trade show related expenses. These increases were partially offset by a $101,000 decrease in samples; a $33,000 decrease in print media expenses to develop and promote brand awareness campaigns; a $24,000 decrease in promotions; and a $1,000 net decrease in all other advertising expenses.
Compensation costs for the ninesix months ended SeptemberJune 30, 20152016 compared to the correspondingsame period in 2014 increased2015 decreased primarily as a result of an increasea $282,000 decrease in severance expense related to the personnel changes within the wholesale sales organization in the corresponding period of the prior year and a decrease in commissions of $1.41 million$233,000 for sales to specific wholesale customers under which commission plans of sales representatives are based and the increase in sales within our direct-to-consumer home party line of business;based. This decrease was partially offset by a $319,000$144,000 increase in salaries and related employee benefits; and a $279,000$93,000 increase in severance expense related to personnel changes within the wholesale sales organization. These changes were partially offset bybonus expense; a $36,000 decrease$46,000 increase in stock-based compensation expenseexpense; and a $20,000 decrease in bonus expense.
The$16,000 increase in advertising expenses for the nine months ended September 30, 2015 compared to the corresponding period in 2014 comprises an increase in internet marketing of $312,000, and an $87,000 increase in agency and other media and awareness spending, including $93,000 of increased samples expenses. These increases were partially offset by a $275,000 decrease in cooperative advertising and a decrease of $8,000 in print media expenses to develop and promote brand awareness campaigns. The decrease in cooperative advertising expenses resulted primarily from management’s decision to offer sales discounts to most of our international customers in lieu of cooperative advertising assistance, partially offset by the decision of our domestic distributors to not utilize the advertising credits we had accrued during 2014 within the allowable period that we reversed during the three months ended March 31, 2015.We expect our total sales and marketing expenses mayincrease as sales increase; however, this will be dependent on which overall companywide strategies and in which sales channels we may choose to make further investments to increase overall consumer awareness of mossanite and overall sales growth. Regardless of which future overall strategy is followed, we believe the overall rate of growth should slow and become a lower percentage of sales as expenses more variable in nature, such as advertising and commissions, may increase as part of our strategy to build sales; but fixed expenses remain relatively constant. While employee compensation costs may fluctuate from period to period as we continue to build a more efficient and productive sales organization, we expect that these costs will become more fixed in nature over time.relocation expense.
General and Administrative
General and administrative expenses for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 are as follows:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | |
| | 2015 | | | 2014 | | | Dollars | | | Percent | | | 2015 | | | 2014 | | | Dollars | | | Percent | |
General and administrative | | $ | 1,574,903 | | | $ | 1,790,588 | | | $ | (215,685 | ) | | | -12 | % | | $ | 5,343,064 | | | $ | 5,543,269 | | | $ | (200,205 | ) | | | -4 | % |
| | Three Months Ended June 30, | | | Change | | | Six Months Ended June 30, | | | Change | |
| | 2016 | | | 2015 | | | Dollars | | | Percent | | | 2016 | | | 2015 | | | Dollars | | | Percent | |
General and administrative | | $ | 1,693,123 | | | $ | 1,191,879 | | | $ | 501,244 | | | | 42 | % | | $ | 3,135,818 | | | $ | 3,057,242 | | | $ | 78,576 | | | | 3 | % |
General and administrative expenses were $1.57$1.69 million for the three months ended SeptemberJune 30, 20152016 compared to $1.79$1.19 million for the three months ended SeptemberJune 30, 2014, a decrease2015, an increase of $216,000,$501,000, or 12%42%. General and administrative expenses were $5.34$3.14 million for the ninesix months ended SeptemberJune 30, 20152016 compared to $5.54$3.06 million for the ninesix months ended SeptemberJune 30, 2014,2015, an increase of $79,000, or 3%.
General and administrative expenses are allocated across our distribution channels, which in 2015 included allocations to Charles & Colvard Direct, LLC, a decreasesegment we are reporting as discontinued operations. See Note 12, “Discontinued Operations,” in the Notes to Condensed Consolidated Financial Statements for further discussion of $200,000, or approximately 4%.discontinued operations. Approximately $340,000 of the overall increase in general and administrative expenses in the three months ended June 30, 2016 explained below is attributable to the general and administrative expenses allocated to our remaining two continuing operations distribution channels that was previously allocated to discontinued operations.
The decreaseincrease in general and administrative expenses for the three months ended SeptemberJune 30, 20152016 compared to the correspondingsame period in 20142015 was primarily due to a $205,000$349,000 increase in compensation expenses; a $166,000 increase in bank fees primarily attributable to our Credit Facility; a $16,000 increase in bad debt expense associated with our allowance for doubtful accounts reserve policy; a $6,000 increase in depreciation and amortization expense; a $5,000 increase in board retainer fees; and a $1,000 increase in professional services. These increases were partially offset by a $21,000 decrease in travel expense; a $14,000 decrease in office-related expenses; and a $7,000 decrease in business and franchise taxes.
Compensation expenses increased for the three months ended June 30, 2016 compared to the same period in 2015 primarily due to an increase in salaries and related employee benefits in the aggregate of $314,000 and an increase in bonus expense of $42,000. These increases were partially offset by a decrease in stock-based compensation expense of $7,000.
Professional services increased for the three months ended June 30, 2016 compared to the same period in 2015 primarily due to an increase of $34,000 in consulting and other professional services primarily related to human resources and sales and use tax projects and a $32,000 increase in audit and tax services primarily due to the timing of work performed. These increases were partially offset by a decrease in legal fees of $42,000 and a decrease of $23,000 in public relations expenses that are now included as part of the marketing function.
The increase in general and administrative expenses for the six months ended June 30, 2016 compared to the same period in 2015 was primarily due to a $192,000 increase in bank fees primarily attributable to our Credit Facility and a $165,000 increase in compensation expenses. These increases were partially offset by a $101,000 decrease in professional services; a $79,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve policy; a $49,000 decrease in professional services; a $28,000$31,000 decrease in board compensation due to having fewer board members during the period;retainer fees; a $26,000 decrease in depreciation and amortization expense; an $18,000 decrease in travel expense; a $17,000 decrease in business and franchise taxes; and a $25,000$6,000 decrease in travel expenses; and an $8,000 decrease for moving the corporate headquarters to its new leased space during 2014. These decreases were partially offset by a $79,000 increase in office-related expenses associated with the new facility; a $45,000 increase in compensation expenses; and a $1,000 increase in depreciation and amortization expense.
Professional services decreased for the three months ended September 30, 2015 compared to the corresponding period in 2014 primarily due to a decrease of $70,000 in investor and public relations expenses and a decrease in legal fees of $22,000. These decreases were partially offset by a $30,000 increase in audit and tax services primarily due to the timing of work performed and an increase of $13,000 in consulting and other professional services.expenses.
Compensation expenses increased for the threesix months Septemberended June 30, 20152016 compared to the correspondingsame period in 20142015 primarily due to an increase in salaries and related employee benefits in the aggregate of $37,000$521,000 and an $8,000 increase in stock-based compensation expense.
The decrease in general and administrative expenses for the nine months ended September 30, 2015 compared to the corresponding period in 2014 was primarily due to a $869,000 decrease in bad debtbonus expense associated with our allowance for doubtful accounts reserve policy; a $30,000 decrease in business and franchise taxes; a $22,000 decrease in other administrative expenses, primarily associated with the move of the corporate headquarters to its new leased space during 2014; an $11,000 decrease in board compensation, and an $8,000 decrease in depreciation and amortization expense.$77,000. These decreasesincreases were partially offset by an increase in compensation expense of $488,000; a $194,000 increase in office-related expenses; a $46,000 increase in professional services, and a $12,000 increase in travel expense.
Compensation expenses increased for the nine months ended September 30, 2015 compared to the corresponding period in 2014 primarily due to an increasedecrease in severance expense of $335,000 associated with the departure of oura former President and Chief Executive Officer; an increaseOfficer in salaries2015 and related employee benefits in the aggregate of $121,000, of which $11,000 was related to the transition of our President and Chief Executive Officer; an increasea decrease in stock-based compensation expense of $30,000, the$98,000, a majority of which was related to the transition of our President and Chief Executive Officer; and a $2,000 increaseOfficer in bonus expense.the prior year period.
Professional services increaseddecreased for the ninesix months ended SeptemberJune 30, 20152016 compared to the correspondingsame period in 20142015 primarily due to an increasea decrease in legal fees of $74,000, consisting$127,000, of which approximately $85,000 relatingwas related to the transition of our President and Chief Executive Officer in the prior year period, and a decrease of $61,000 in public relations expenses that are now included as part of the marketing function. These decreases were partially offset by lower fees for other corporate matters; an increase of $73,000$72,000 in consulting and other professional services of which approximately $18,000primarily related to the transition of our Presidenthuman resources and Chief Executive Officer;sales and use tax projects and a $21,000$15,000 increase in audit and tax services primarily due to the timing of work performed. These increases were partially offset by a decrease of $122,000 in investor and public relations expenses.
Research and Development
Research and development expenses for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 are as follows:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | |
| | 2015 | | | 2014 | | | Dollars | | | Percent | | | 2015 | | | 2014 | | | Dollars | | | Percent | |
Research and development | | $ | 6,351 | | | $ | 3,863 | | | $ | 2,488 | | | | 64 | % | | $ | 15,455 | | | $ | 15,364 | | | $ | 91 | | | | 1 | % |
| | Three Months Ended June 30, | | | Change | | | Six Months Ended June 30, | | | Change | |
| | 2016 | | | 2015 | | | Dollars | | | Percent | | | 2016 | | | 2015 | | | Dollars | | | Percent | |
Research and development | | $ | 980 | | | $ | 7,043 | | | $ | (6,063 | ) | | | -86 | % | | $ | 2,848 | | | $ | 9,104 | | | $ | (6,256 | ) | | | -69 | % |
Research and development expenses were $6,000approximately $1,000 for the three months ended SeptemberJune 30, 20152016 compared to $4,000approximately $7,000 for the three months ended SeptemberJune 30, 2014, an increase2015, a decrease of approximately $2,000,$6,000, or 64%86%. Research and development expenses were $15,000approximately $3,000 for the ninesix months ended SeptemberJune 30, 2016 compared to approximately $9,000 for the six months ended June 30, 2015, compared to $15,000 for the nine months ended September 30, 2014, a slight increasedecrease of approximately 1%$6,000, or 69%.
ResearchThe decrease in research and development expenses for the three months ended SeptemberJune 30, 20152016 compared to the correspondingsame period in 2014 increased2015 was primarily due to an increase of $2,000 in compensation costs and office expenses for time and materials allocated by operations personnel to research and development activities.
Research and development expenses for the nine months ended September 30, 2015 compared to the corresponding period in 2014 remained consistent due to an increase of $7,000a $6,000 decrease in compensation costs and office expenses for time and materials allocated by operations personnel to research and development activities and a $2,000 increase of materials specifically purchased for these activities,$1,000 decrease in jewel research testing, partially offset by a $9,000$1,000 increase in purchases of materials for testing.
The decrease in consultingresearch and development expenses for the six months ended June 30, 2016 compared to the same period in 2015 was primarily due to a $6,000 decrease in compensation costs and office expenses for time and materials allocated by operations personnel to research and development activities and a $1,000 decrease in jewel research testing, partially offset by a $1,000 increase in professional services.
Interest Expense
Interest expense for the three and six months ended June 30, 2016 and 2015 is as follows:
| | Three Months Ended June 30, | | | Change | | | Six Months Ended June 30, | | | Change | |
| | 2016 | | | 2015 | | | Dollars | | | Percent | | | 2016 | | | 2015 | | | Dollars | | | Percent | |
Interest expense | | $ | 5 | | | $ | 767 | | | $ | (762 | ) | | | -99 | % | | $ | 1,512 | | | $ | 784 | | | $ | 728 | | | | 93 | % |
Interest expense was approximately $0 for the three months ended June 30, 2016 compared to approximately $1,000 for the three months ended June 30, 2015, a decrease of approximately $1,000, or 99%. Interest expense was approximately $2,000 for the six months ended June 30, 2016 compared to approximately $1,000 for the six months ended June 30, 2015, an increase of approximately $1,000, or 93%.
The decrease in interest expense for the three months ended June 30, 2016 resulted primarily from the interest charged on amounts due for late filings of compliance returns in various sales and use tax jurisdictions around the country in the prior period which were not incurred in the current period.
The increase in interest expense for the six months ended June 30, 2016 resulted primarily from the interest charged on the balance of amounts due for late filings of compliance returns in various sales and use tax jurisdictions around the country during the period. These interest charges were realized at the time of filing once we were able to complete the registration and filing process, and to compile accurate information for future timely filings.
Loss on Abandonment of AssetsProperty and Equipment
Loss on abandonment of assetsproperty and equipment for the three and ninesix months ended SeptemberJune 30, 2016 and 2015 and 2014 areis as follows:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | |
| | 2015 | | | 2014 | | | Dollars | | | Percent | | | 2015 | | | 2014 | | | Dollars | | | Percent | |
Loss on abandonment of assets | | $ | - | | | $ | - | | | $ | - | | | | - | % | | $ | - | | | $ | 2,201 | | | $ | (2,201 | ) | | | -100 | % |
| | Three Months Ended June 30, | | | Change | | | Six Months Ended June 30, | | | Change | |
| | 2016 | | | 2015 | | | Dollars | | | Percent | | | 2016 | | | 2015 | | | Dollars | | | Percent | |
Loss on abandonment of property and equipment | | $ | 115,548 | | | $ | - | | | $ | 115,548 | | | | 100 | % | | $ | 115,548 | | | $ | - | | | $ | 115,548 | | | | 100 | % |
Loss on abandonment of assetsproperty and equipment was $116,000 for the three and six months ended June 30, 2016 compared to $0 for the ninethree and six months ended SeptemberJune 30, 2015, compared to $2,000 for the nine months ended September 30, 2014, a decreasean increase of $2,000,approximately $116,000, or 100%.
ForIn the ninethree and six months ended SeptemberJune 30, 2014,2016, we abandoned a trademark with remaining carrying costs of $2,000 after we determined the trademark would no longer be utilized.construction in progress related to website branding and design for our direct-to-consumer e-commerce business, Moissanite.com, due to a change in our corporate strategy to consolidate our web properties.
Provision for Income Taxes
We recognized an income tax net expense of approximately $3,000$3,500 and $3,200 for each of the three monthsthree-month periods ended SeptemberJune 30, 2016 and 2015, and 2014.respectively. We recognized an income tax net expense of approximately $10,000$6,700 and $6,300 for the nine monthssix-month periods ended SeptemberJune 30, 2016 and 2015, comparedrespectively. Income tax provisions in these periods primarily relate to an incomeestimated tax, net expense of $4.05 million for the nine months ended September 30, 2014.penalties, and interest associated with uncertain tax positions.
As of each reporting date, management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. Management had previously considered various strategic alternatives that would reduce its pre-tax operating losses, resulting in management determining that a valuation allowance was not necessary at March 31, 2014. During the three months endedAs of June 30, 2014,2016 and December 31, 2015, management determined that such strategic alternatives were no longer in our best interest. Accordingly, management concluded that thesufficient positive evidence was no longer sufficientcontinued to offset available negative evidence, primarily as a result of the pre-tax operating losses incurred during the six months ended June 30, 2014, and forecastedexist to continue through the remainder of 2014. As a result, management concluded thatconclude it was uncertain that we would have sufficient future taxable income to utilize itsour deferred tax assets, and therefore, we establishedmaintained a valuation allowance against our deferred tax assets resulting in a tax expense of $4.05 million for the nine months ended September 30, 2014. This valuation allowance remained as of September 30, 2015.assets.
For the three and nine months ended September 30, 2015, we recognized $3,000 and $10,000, respectively, of income tax expense for estimated tax, penalties, and interest associated with uncertain tax positions. During the three and nine months ended September 30, 2014, we also recognized approximately $3,000 and $9,000, respectively, of income tax expense for estimated tax, penalties, and interest associated with uncertain tax positions.
Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of SeptemberJune 30, 2015,2016, our principal sources of liquidity were cash and cash equivalents totaling $5.60$11.11 million, trade accounts receivable of $2.86$2.23 million, and current inventory of $12.81$10.12 million, as compared to cash and cash equivalents totaling $4.01$5.27 million, trade accounts receivable of $5.51$3.85 million, and current inventory of $13.32$10.74 million as of December 31, 2014.2015. As described more fully below, we also have access to aour $10 million credit facility.Credit Facility.
During the ninesix months ended SeptemberJune 30, 2015,2016, our working capital decreasedincreased by approximately $1.40$4.34 million to $17.85$20.37 million from $19.25$16.03 million at December 31, 2014.2015. As described more fully below, the decreaseincrease in working capital at SeptemberJune 30, 20152016 is primarily attributable to a decrease in trade accounts receivable, a lower allocation of inventory to short-term, a net increase in accrued expenses and other liabilities, and an increase in trade accounts payable, offset in part by an increase in our cash and cash equivalents due to our increased cash from operations, a decrease in trade accounts payable, an increase in prepaid expenses and other assets, a net decrease in accrued expenses and other liabilities and a decrease in accrued cooperative advertising. These increases were partially offset by a decrease in trade accounts receivable and a decreased allocation of inventory to short-term from long-term.
During the ninesix months ended SeptemberJune 30, 2015, $1.672016, $6.52 million of cash was provided by continuing operations and $935,000 of cash was used in discontinued operations. The primary drivers of positive cash flow were a decrease in inventory of $4.73$6.19 million and a decrease in trade accounts receivable of $3.13 million, a net increase in accrued liabilities of $232,000, and an increase in trade accounts payable of $11,000.$1.98 million. These factors were partially offset by our lossa decrease in trade accounts payable of $7.69 million that included $1.68 million of non-cash expenses and$260,000, an increase in prepaid expenses of $412,000.$171,000, and our loss of $1.7 million that included $741,000 of non-cash expenses, and a decrease in accrued liabilities of $227,000. Accounts receivable decreased primarily as a result of collection efforts during the first ninesix months of 20152016 on sales made in the third and fourth quarterquarters of 2014, and a significant reduction of2015. We did not offer any extended wholesale customer payment terms thatduring the six months ended June 30, 2016; however, we may offer these terms from time to time, thatwhich may not immediately increase liquidity as a result of current-period sales. We believe our competitors and other vendors in the wholesale jewelry industry have expanded their use of extended payment terms and, in aggregate, we believe that by offeringthrough our use of extended payment terms, under certain circumstances, we have provided a competitive response in our market and that our net sales have been favorably impacted. We are unable to estimate the impact of this program on our net sales, but if we ceased providing extended payment terms in select instances, we believe we would not be competitive for some wholesale customers in the marketplace and that our net sales and profits would likely decrease. Generally, we have not experienced any significant accounts receivable write-offs related to revenue arrangements with extended payment terms; however, we have previously increased our reserves for uncollectible accounts primarily due to one customer with extended terms and isare pursuing legal proceedings to collect on the outstanding balances.balance. We do not believe the terms are a factor with this customer’s non-payment. Inventories decreased primarily as a result of sales, including a $6.77 million sale of slow-moving jewels to our largest customer, offset in part by the purchase of new raw material SiC crystals during the quarterfirst half of the year pursuant to our new exclusive supply agreement, or the New Supply Agreement, with Cree, Inc., or Cree, which we entered into on December 12, 2014;Agreement; purchases of jewelry castings, findings, and other jewelry components; and production of moissanite loose jewels. Prepaid expenses and other assets increased primarily as a result of the timing of payment of insurance premiums,premium payments and other payments in advance of goods or services received. Accounts payable increaseddecreased primarily as a result of the timing of costs incurred but not yet paid as of SeptemberJune 30, 20152016 associated with inventory-related purchases and professional services incurred but not yet due under our vendors’ payment terms.
We manufactured approximately $4.54$4.53 million in loose jewels and $3.71$2.00 million in finished jewelry, which includes the cost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production, during the ninesix months ended SeptemberJune 30, 2015.2016. We expect our purchases of precious metals and labor to increase as we increase our finished jewelry business. In addition, from the beginning of 2006 through the thirdsecond quarter of 2015,2016, the price of gold has increased significantly (approximately 110%151%), resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry.
Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with our reduced sales during the periods when the purchase commitments were in effect, have resulted in levels of inventories that are higher than we might otherwise maintain. As of SeptemberJune 30, 2015, $21.192016, $15.96 million of our inventories were classified as long-term assets. Loose jewel sales and finished jewelry that we manufacture will utilize both the finished good loose jewels currently on-hand and, as we deplete certain shapes and sizes, our on-hand raw material SiC crystals of $6.65$4.55 million and new raw material that we are purchasing from Cree.
In connection withpursuant to the prior exclusive supply agreement with Cree, or the Cree Exclusive Supply Agreement, which was set to expire in July 2015, we had committed to purchase from Cree a minimum of 50%, by dollar volume, of our raw material SiC crystal requirements. In February 2013, we entered into an amendment to a prior letter agreement with Cree, which provided a framework for our purchases of SiC crystals under the Cree Exclusive Supply Agreement. Pursuant to this amendment, we agreed to purchase at least $4.00 million of SiC crystals in an initial new order. After the initial new order, we agreed to issue non-cancellable, quarterly orders that must equal or exceed a set minimum order quantity. Our total purchase commitment under the amendment (as subsequently amended) until July 2015, including the initial new order, was dependent upon the grade of the material and ranged between approximately $7.64 million and approximately $18.56 million.
On December 12, 2014, we entered into the New Supply Agreement which superseded and replaced (with respect to materials ordered subsequent to the effective date of the New Supply Agreement) thewith Cree, Exclusive Supply Agreement.our raw material SiC crystal supplier. Under the New Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the New Supply Agreement will expire on June 24, 2018, unless extended by the parties. We also have one option to unilaterally extend the term of the agreement for an additional two-year period, subject to certain conditions. Our total purchase commitment under the New Supply Agreement until June 2018 is dependent upon the size of the SiC material and ranges between approximately $29.6 million and approximately $31.5 million.
During the ninesix months ended SeptemberJune 30, 2015,2016, we purchased approximately $4.95$3.82 million of SiC crystals from Cree. We expect to use existing cash and cash equivalents and other working capital, together with future cash expected to be provided by operating activities and, if necessary, our credit facility described below,Credit Facility, to finance our purchase commitment under the NewSupply Agreement.
On July 14, 2016, Cree announced that it had entered into an Asset Purchase Agreement with Infineon Technologies AG, or Infineon, pursuant to which Infineon will purchase certain portions of Cree’s SiC materials and gemstones business. The transaction, which Cree indicated is expected to close by the end of calendar year 2016, contemplates that the Supply Agreement, including all rights and obligations under the Supply Agreement, will be assigned by Cree to Infineon. We do not expect the transaction to have a material effect on our supply of SiC materials and, together with Cree, we are conducting certain transition planning to prepare for the transfer of the Supply Agreement.
We made no income tax payments during the ninesix months ended SeptemberJune 30, 2015.2016. As of SeptemberJune 30, 2015,2016, we had approximately $882,000 of remaining federal income tax credits, $533,000 of which expire between 2018 and 2021 and the balance without an expiration, which can be carried forward to offset future income taxes. As of SeptemberJune 30, 2015,2016, we also had a federal tax net operating loss carryforward of approximately $12.21$12.1 million expiring between 2020 and 2034, which can be used to offset against future federal taxable income,income. In addition, we had a North Carolina tax net operating loss carryforward of approximately $14.32$18.05 million expiring between 2023 and 2029,2030, and various other state tax net operating loss carryforwards expiring between 2016 and 2034, which can be used to offset against future state taxable income.
On June 25, 2014, we and our wholly owned subsidiaries, Charles & Colvard Direct, LLC and Moissanite.com, LLC, collectively referred to as the Borrowers, obtained a $10,000,000 asset-based revolving credit facility, or the Credit Facility from Wells Fargo Bank, National Association, or Wells Fargo. The Credit Facility willmay be used for general corporate and working capital purposes, including transaction fees and expenses incurred in connection therewith and the issuance of letters of credit up to a $1,000,000 sublimit. The Credit Facility will mature on June 25, 2017.
The Credit Facility includes a $5,000,000 sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank. Advances under the Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts and inventory, less reserves. Advances against inventory are further subject to an initial $3,000,000 maximum. We must maintain a minimum of $1,000,000 in excess availability at all times. There are no other financial covenants.
Each advance accrues interest at a rate equal to Wells Fargo’s 3-month LIBOR rate plus 2.50%, calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate of 3% in excess of the above rate. Any advance may be prepaid in whole or in part at any time. In addition, the maximum line amount may be reduced by us in whole or part at any time, subject to a fee equal to 2% of any reduction in the first year after closing, 1% of any reduction in the second year after closing, and 0% thereafter. There are no mandatory prepayments or line reductions.
The Credit Facility is secured by a lien on substantially allassets of the Borrowers, each of which is jointly and severally liable for all obligations thereunder. Wells Fargo’s security interest in certain SiC materials is subordinate to Cree’sthe security interest in such materials pursuant to the New Supply Agreement and an Intercreditor Agreement with Wells Fargo.
The Credit Facility is evidenced by a credit and security agreement dated as of June 25, 2014 and amended as of September 16, 2014 and December 12, 2014, or the Credit Agreement, and customary ancillary documents. The Credit Agreement contains customary covenants, representations and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.
Events of default under the Credit Facility include, without limitation, (1) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (2) an event of default under any other indebtedness of the Borrowers in excess of $200,000, and (3) a material adverse change in the ability of the Borrowers to perform their obligations under the Credit Agreement or in the Borrowers’ assets, liabilities, businesses or prospects, or other circumstances that Wells Fargo believes may impair the prospect of repayment. If an event of default occurs, Wells Fargo is entitled to take enforcement action, including acceleration of amounts due under the Credit Agreement and foreclosure upon collateral.
The Credit Agreement contains other customary terms, including indemnity, expense reimbursement, yield protection, and confidentiality provisions. Wells Fargo is permitted to assign the Credit Facility.
As of SeptemberJune 30, 2015,2016, we had not borrowed against the Credit Facility.
We believe that our existing cash and cash equivalents and other working capital, together with future cash expected to be provided by operating activities, will be sufficient to meet our working capital and capital expenditure needs over the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors, including our rate of sales growth; the expansion of our sales and marketing activities, including the operating capital needs of our wholly owned subsidiaries;activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewel business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and risk factors described in more detail in “Risk Factors” in this report, in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014,2015, and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterquarterly period ended March 31, 2015.2016. We obtained the Credit Facility to mitigate these risks to our cash and liquidity position. Also, we may make investments in, or acquisitions of, complementary businesses, which could also require us to seek additional equity or debt financing.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended SeptemberJune 30, 2015,2016, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
There are no material pending legal proceedings to which we are a party or to which any of our property is subject.
We discuss in our Annual Report on Form 10-K for the year ended December 31, 20142015 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 20152016 various risks that may materially affect our business. Except as set forth below, thereThere have been no material changes to such risks.risks, except as set forth below and that the risk factor relating to our President and Chief Executive Officer transition is no longer applicable because we have successfully completed the transition.
We may experience quality control challenges from time to time that can result in lost revenueOur business and harm to our brands and reputation. Part of our strategy for success is to establish Charles & Colvard with reputable, high-quality, and sophisticated brands. The achievement of this goal depends in large part on our ability to provide customers with high-quality moissanite, finished jewelry featuring moissanite, and fashion finished jewelry. Although we take measures to ensure that we sell only the best quality products, we may face quality control challenges, which could impact our competitive advantage. There can be no assurance we will be able to detect and resolve all quality control issues prior to shipment of products to our distributors, manufacturers, retailers, and end consumers. Failure to do so could result in lost revenue, lost customers, significant warranty and other expenses, and harm to the Company’s reputation.
We may not be able to adequately protect our intellectual property, which could harm the value of our products and brands and adversely affect our business. We rely primarily on patent, copyright, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We had U.S. product and method patents for moissanite jewels, which expired in August 2015, under which we believed that we had broad, exclusive rights to manufacture, use, and sell moissanite jewels in the U.S. We continue to have these same patents in a number of foreign jurisdictions, most of which expire in 2016. We believe that the foreign patents create substantial technological barriers to our potential foreign competitors. However, our U.S. patent expirations could enable competitors and other businesses to duplicate and market a similar product and enter the U.S. marketplace. Without U.S. patent protection, we must rely primarily on our branding strategy and the New Supply Agreement with Cree under which Cree supplies SiC crystals exclusively to us, as well as confidentiality procedures, to protect our proprietary rights in the U.S., which may or may not be sufficient. In addition, at the present time, we are dependent on Cree’s technology for the production of SiC crystals. There can be no assurance that any patents issued to or licensed by or to us or Cree will provide any significant commercial protection, that we or Cree will have sufficient resources to protect our respective patents and proprietary rights, that any additional patents will be issued in the future, or that any existing or future patents will be upheld by a court should we or Cree seek to enforce our respective rights against an infringer. At this point, we cannot reasonably estimate the impact these patent expirations will have on our future results of operations.
Our former South Korean patent is no longer valid as a result of a ruling by the South Korean Patent Court, and there can be no assurance that we will not incur similar outcomes in other jurisdictions in the future. For example, on August 14, 2012, we learned that BetterThanDiamond.com requested that the Canadian Intellectual Property Office, or CIPO, conduct a re-examination of our Canadian Patent No. 2,230,262, or the ‘262 Patent, for manufacturing SiC gemstones based on claims of prior art. On November 3, 2012, the CIPO granted the re-examination request based on its finding that the information provided in the request raises “a substantial new question of patentability.” The U.S. Patent and Trademark Office, or USPTO, upheld in October 2012 all claims of our U.S. Patent No. 5,723,391 in a similar challenge by BetterThanDiamond.com, but there is no certainty of the same outcome with respect to the challenge of the ‘262 Patent. If the CIPO were to determine that some or all of the claims in the ‘262 Patent are invalid, our business, financial condition, and results of operations could be negatively impacted.materially adversely affected as a result of our inability to fulfill orders on a timely basis. As sales of our loose moissanite jewels increase, including our Forever Brilliant® and Forever OneTM jewels, certain shapes and sizes may be at risk for depletion. In addition, finished jewelry has a large variety of styles of which we maintain on-hand stock for such basic designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets; and make-to-order under strict deadlines for certain wholesale and direct-to-consumer e-commerce customers. We must adequately maintain relationships, forecast demand, and operate within the re-examinationlead times of third parties that facet and/or enhance the jewels and manufacture the finished jewelry setting to ensure adequate on-hand quantities and/or the shipment of customer orders in a timely manner. In addition, we are currently dependent on two vendors for all of the ‘262 Patentfaceting of our loose jewels. If one or both of these vendors were to cancel their arrangements with us, we could experience a disruption in our operations and incur additional costs to procure faceting services from a replacement vendor. The inability to fulfill orders on a timely basis and within promised customer deadlines could result in substantial legal expenses and could divert our management’s time and attention away from our business operations. We believe that alla cancellation of the claimsorders and loss of the ‘262 Patent are validcustomer goodwill that could materially and enforceable, and we intend to vigorously defend the patents that protect our moissanite jewels and technology.
The existence of valid patents does not prevent other companies from independently developing competing technologies. Existing producers of SiC crystals or others may refine existing processes for growing SiC crystals or develop new technologies for growing large single crystals of SiC or colorless SiC crystals in a manner that does not infringe our foreign patents. Accordingly, existing and potential competitors may be able to develop products that are competitive with or superior to our products, and such competition could have a material adverse effect onadversely affect our business, results of operations, and financial condition.
Our operations could be disrupted by natural disasters. We conduct substantially all of our activities, including executive management, manufacturing, packaging, and distribution activities, at one North Carolina location. Although we have taken precautions to safeguard our facility, including obtaining business interruption insurance, any future natural disaster, such as a hurricane, flood, or fire, could significantly disrupt our operations and delay or prevent product shipment during the time required to repair, rebuild, or replace our facility, which could be lengthy and result in significant expenses. Furthermore, the insurance coverage we maintain may not be adequate to cover our losses in any particular case or continue to be available at commercially reasonable rates and terms. In addition, we have certain trademarks and pending trademark applicationsthe vendors that support our moissanite branding strategy, and we use certain brand names for which we do not currently have proprietary rights. The successperform all of the faceting of our growth strategy depends onloose moissanite jewels are located in regions that are susceptible to tsunamis, flooding, and other natural disasters that may cause a disruption in our continuedvendors’ operations for sustained periods and the loss or damage of our work-in-process inventories located at such vendors’ facilities. Damage or destruction that interrupts our ability to usedeliver our existing brand names in order to increase consumer awareness and further develop strong brands aroundproducts could impair our moissanite jewel and finished jewelry collections. We cannot assure that any future trademark or other registrations will be issued for pending or future applications or that we will be able to obtain licenses or other contractual rights to use brand names that may infringe the proprietary rights of third parties. We also cannot assure that any registered or unregistered trademarks or other intellectual property or contractual rights will be enforceable or provide adequate protectionrelationships with our customers. Prolonged disruption of our proprietary rights. Our inability to secure proprietary protection with respect to our brandsservices as a result of a natural disaster may result in product delivery delays, order cancellations, and loss of substantial revenue, which could have a material adverse effect onmaterially and adversely affect our business, results of operations, and financial condition.
We also cannot be certain that our products and brand names do not or will not infringe valid patents, trademarks, and other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Litigation to determine the validity of any third party’s claims could result in significant expense and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. In the event of an adverse result of any such litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses for, and pay royalties on the use of, the technology subject to the litigation. We have no assurance that we would be successful in such development or that any such license would be available on commercially reasonable terms.
Departure of President and Chief Executive Officer
On November 11, 2015, H. Marvin Beasley resigned as our President and Chief Executive Officer and as a member of our Board of Directors, or the Board, effective December 1, 2015. In connection with his resignation, we proposed a Transition Agreement with Mr. Beasley, or the Transition Agreement, which was approved by the Board and delivered to Mr. Beasley on November 11, 2015. The terms of the proposed Transition Agreement provide that Mr. Beasley may not execute and deliver the Transition Agreement until December 1, 2015.
Under the proposed Transition Agreement, Mr. Beasley is entitled to receive severance in an amount equal to the remainder of his current base annual salary not already paid prior to December 1, 2015 through March 17, 2016 (less applicable taxes and withholdings), payable in substantially equal installments on the same payroll schedule that was applicable to Mr. Beasley immediately prior to December 1, 2015, in exchange for a standard release of employment claims. We have also agreed as of December 1, 2015 to accelerate the vesting of 100,000 options previously granted to Mr. Beasley. Those options will be exercisable as set forth in the applicable option agreement. Furthermore, we have agreed that the restrictions on 100,000 shares of restricted stock previously granted to Mr. Beasley will lapse effective December 1, 2015. The proposed Transition Agreement also contains such confidentiality provisions and other terms and conditions as are usual and customary for agreements of this type. All of Mr. Beasley’s obligations under his employment agreement, dated March 17, 2015 regarding covenants not to compete, confidentiality, and proprietary information will continue.
Appointment of President and Chief Executive Officer
On November 11, 2015, the Board appointed Suzanne Miglucci, a current member of the Board, as our President and Chief Executive Officer effective as of December 1, 2015. While Ms. Miglucci will retain her position as a member of the Board, she relinquished her membership on our Compensation Committee as of November 11, 2015 and for the duration of her service as President and Chief Executive Officer as she is no longer an independent director under the NASDAQ Listing Rules.
Ms. Miglucci, age 55, served as Chief Marketing Officer of ChannelAdvisor Corporation, or ChannelAdvisor, a software and services solution provider, from June 2012 to November 2015. Prior to joining ChannelAdvisor, Ms. Miglucci served as Senior Director, Global Procurement Solution Marketing, at SAP, a market leader in enterprise application software, from November 2010 to March 2012. Prior to her time at SAP, Ms. Miglucci served as a Strategic Marketing Consultant for Miglucci on Marketing, LLC, a marketing consultant company, from January 2010 to November 2010. Ms. Miglucci has also held executive marketing positions at SciQuest, Inc., MicroMass Communications, and Arsenal Digital Solutions.
While serving as President and Chief Executive Officer, Ms. Miglucci will not receive compensation for her service as a member of the Board. Ms. Miglucci entered into an employment agreement with us, effective as of December 1, 2015, or the Employment Agreement, with a term of one year that renews automatically on an annual basis. Under the terms of the Employment Agreement, Ms. Miglucci will receive a signing bonus of $75,000 to be paid in December 2015 and an annual base salary of $335,000. Ms. Miglucci also will be entitled to receive such benefits as are made available to our other similarly-situated executive employees, including, but not limited to, life, medical, and disability insurance, as well as retirement benefits.
In addition, Ms. Miglucci will receive, on the effective date of the Employment Agreement, a stock option to purchase 300,000 shares of our common stock. The award will vest over a two-year period, with 50% of the option award vesting on the grant date and an additional 25% of the option award vesting on each of the following two anniversaries of the grant date provided Ms. Miglucci remains continuously employed with us through each anniversary.
Pursuant to the Employment Agreement, if Ms. Miglucci’s employment is terminated by us without cause (as defined in the Employment Agreement) Ms. Miglucci will continue to receive her base salary at the time of termination for a period of one year from such termination, or the Termination Compensation, so long as she complies with certain covenants in the Employment Agreement. If we experience a change of control (as defined in the Employment Agreement), Ms. Miglucci may voluntarily terminate her employment for good reason (as defined in the Employment Agreement) within six months after such change of control and be entitled to the Termination Compensation. During her employment with us and for a period of one year following termination of her employment, Ms. Miglucci is prohibited from competing with us or attempting to solicit our customers or employees.
The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
Exhibit No. | | Description |
| | |
10.1 | | Board Compensation Program, effective January 1, 2016Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on September 10, 2015) |
| | |
10.2 | | Employment Agreement, effective as of December 1, 2015, by and between Charles & Colvard, Ltd. and Suzanne MiglucciMay 20, 2016) |
| | |
31.1 | | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
31.2 | | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
32.1 | | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
32.2 | | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
101 | | The following materials from Charles & Colvard, Ltd.’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20152016 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | CHARLES & COLVARD, LTD. |
| | |
| By: | /s/ H. Marvin BeasleySuzanne T. Miglucci |
November 12, 2015August 4, 2016 | | H. Marvin BeasleySuzanne T. Miglucci |
| | President and Chief Executive Officer |
| | |
| By: | /s/ Kyle S. Macemore |
November 12, 2015August 4, 2016 | | Kyle S. Macemore |
| | Senior Vice President and Chief Financial Officer |
| | (Principal Financial Officer and Chief Accounting Officer) |
Exhibit No. | | Description |
| | |
10.1 | | Board Compensation Program, effective January 1, 2016Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on September 10, 2015) |
| | |
| | Employment Agreement, effective as of December 1, 2015, by and between Charles & Colvard, Ltd. and Suzanne MiglucciMay 20, 2016) |
| | |
| | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
101 | | The following materials from Charles & Colvard, Ltd.’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20152016 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements. |
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