☒
|
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|
☐
|
Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934
|
North Carolina
|
56-1928817
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
170 Southport Drive
Morrisville, North Carolina
|
27560
|
|
(Address of principal executive offices)
|
(Zip Code)
|
Large accelerated filer
|
☐
|
Accelerated filer
|
☐
|
|
Non-accelerated filer
|
☐
|
(Do not check if a smaller reporting company)
|
Smaller reporting company
|
☒
|
Emerging growth company
|
☐
|
Page
Number
|
||
PART I – FINANCIAL INFORMATION
|
||
Item 1.
|
Financial Statements
|
|
1
|
||
2
|
||
3
|
||
4
|
||
Item 2.
|
18
|
|
Item 3.
|
28
|
|
Item 4.
|
29
|
|
PART II – OTHER INFORMATION
|
||
Item 1.
|
29
|
|
Item 1A.
|
29
|
|
Item 2.
|
30
|
|
Item 6.
|
30
|
|
31
|
Item 1. |
Financial Statements
|
March 31, 2018
(unaudited)
|
December 31,
2017
|
|||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$
|
4,494,729
|
$
|
4,594,007
|
||||
Accounts receivable, net
|
2,536,377
|
3,377,451
|
||||||
Inventory, net
|
10,932,050
|
11,208,658
|
||||||
Prepaid expenses and other assets
|
771,034
|
969,857
|
||||||
Total current assets
|
18,734,190
|
20,149,973
|
||||||
Long-term assets:
|
||||||||
Inventory, net
|
20,010,266
|
19,764,959
|
||||||
Property and equipment, net
|
1,189,871
|
1,242,200
|
||||||
Intangible assets, net
|
15,367
|
8,597
|
||||||
Other assets
|
63,626
|
64,978
|
||||||
Total long-term assets
|
21,279,130
|
21,080,734
|
||||||
TOTAL ASSETS
|
$
|
40,013,320
|
$
|
41,230,707
|
||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$
|
3,971,232
|
$
|
4,466,163
|
||||
Accrued expenses and other liabilities
|
668,614
|
980,800
|
||||||
Total current liabilities
|
4,639,846
|
5,446,963
|
||||||
Long-term liabilities:
|
||||||||
Deferred rent
|
428,985
|
463,526
|
||||||
Accrued income taxes
|
466,359
|
461,592
|
||||||
Total long-term liabilities
|
895,344
|
925,118
|
||||||
Total liabilities
|
5,535,190
|
6,372,081
|
||||||
Commitments and contingencies (Note 8)
|
||||||||
Shareholders’ equity:
|
||||||||
Common stock, no par value; 50,000,000 shares authorized; 21,575,673 and 21,580,102 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
|
54,243,816
|
54,243,816
|
||||||
Additional paid-in capital
|
14,923,996
|
14,726,438
|
||||||
Accumulated deficit
|
(34,689,682
|
)
|
(34,111,628
|
)
|
||||
Total shareholders’ equity
|
34,478,130
|
34,858,626
|
||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
40,013,320
|
$
|
41,230,707
|
Three Months Ended March 31,
|
||||||||
2018
|
2017
|
|||||||
Net sales
|
$
|
6,762,750
|
$
|
5,645,382
|
||||
Costs and expenses:
|
||||||||
Cost of goods sold
|
4,115,548
|
3,220,615
|
||||||
Sales and marketing
|
1,865,940
|
1,915,335
|
||||||
General and administrative
|
1,354,410
|
1,054,171
|
||||||
Research and development
|
-
|
819
|
||||||
Total costs and expenses
|
7,335,898
|
6,190,940
|
||||||
Loss from operations
|
(573,148
|
)
|
(545,558
|
)
|
||||
Other expense:
|
||||||||
Interest expense
|
(139
|
)
|
-
|
|||||
Total other expense
|
(139
|
)
|
-
|
|||||
Loss before income taxes
|
(573,287
|
)
|
(545,558
|
)
|
||||
Income tax expense
|
(4,767
|
)
|
(14,088
|
)
|
||||
Net loss
|
$
|
(578,054
|
)
|
$
|
(559,646
|
)
|
||
Net loss per common share:
|
||||||||
Basic
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
||
Diluted
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
||
Weighted average number of shares used in computing net loss per common share:
|
||||||||
Basic
|
21,371,416
|
21,118,335
|
||||||
Diluted
|
21,371,416
|
21,118,335
|
Three Months Ended March 31,
|
||||||||
2018
|
2017
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net loss
|
$
|
(578,054
|
)
|
$
|
(559,646
|
)
|
||
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
Depreciation and amortization
|
123,123
|
107,656
|
||||||
Stock-based compensation
|
197,558
|
32,293
|
||||||
Provision for uncollectible accounts
|
(11,000
|
)
|
9,000
|
|||||
Provision for sales returns
|
67,000
|
80,000
|
||||||
Provision for inventory reserves
|
(248,000
|
)
|
(266,000
|
)
|
||||
Provision for accounts receivable discounts
|
33,520
|
-
|
||||||
Changes in assets and liabilities:
|
||||||||
Accounts receivable
|
751,554
|
471,140
|
||||||
Inventory
|
279,301
|
(528,145
|
)
|
|||||
Prepaid expenses and other assets, net
|
200,175
|
64,866
|
||||||
Accounts payable
|
(494,931
|
)
|
(76,486
|
)
|
||||
Deferred rent
|
(34,541
|
)
|
(30,476
|
)
|
||||
Accrued income taxes
|
4,767
|
14,088
|
||||||
Accrued expenses and other liabilities
|
(312,186
|
)
|
82,969
|
|||||
Net cash used in operating activities
|
(21,714
|
)
|
(598,741
|
)
|
||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases of property and equipment
|
(69,710
|
)
|
(197,953
|
)
|
||||
Intangible assets
|
(7,854
|
)
|
(992
|
)
|
||||
Net cash used in investing activities
|
(77,564
|
)
|
(198,945
|
)
|
||||
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
(99,278
|
)
|
(797,686
|
)
|
||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
4,594,007
|
7,427,273
|
||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
4,494,729
|
$
|
6,629,587
|
||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid during the period for interest
|
$
|
139
|
$
|
-
|
1. |
DESCRIPTION OF BUSINESS
|
2. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
As of March 31, 2018
|
||||||||||||
As
Reported
|
Adjustments
|
Without
Adoption
|
||||||||||
Cash and cash equivalents
|
$
|
4,494,729
|
$
|
-
|
$
|
4,494,729
|
||||||
Accounts receivable, net
|
2,536,377
|
-
|
2,536,377
|
|||||||||
Prepaid expenses and other assets
|
771,034
|
(227,000
|
)
|
544,034
|
||||||||
Total inventory, net
|
30,942,316
|
227,000
|
31,169,316
|
|||||||||
Total other long-term assets
|
1,268,864
|
-
|
1,268,864
|
|||||||||
Total assets
|
$
|
40,013,320
|
$
|
-
|
$
|
40,013,320
|
||||||
Accounts payable
|
$
|
3,971,232
|
$
|
-
|
$
|
3,971,232
|
||||||
Accrued expenses and other liabilities
|
668,614
|
-
|
668,614
|
|||||||||
Total long-term liabilities
|
895,344
|
-
|
895,344
|
|||||||||
Total liabilities
|
5,535,190
|
-
|
5,535,190
|
|||||||||
Total shareholders’ equity
|
34,478,130
|
-
|
34,478,130
|
|||||||||
Total liabilities and shareholders’ equity
|
$
|
40,013,320
|
$
|
-
|
$
|
40,013,320
|
Three Months Ended March 31, 2018
|
||||||||||||
As
Reported
|
Adjustments
|
Without
Adoption
|
||||||||||
Net sales
|
$
|
6,762,750
|
$
|
-
|
$
|
6,762,750
|
||||||
Costs of goods sold
|
4,115,548
|
-
|
4,115,548
|
|||||||||
Other costs and expenses
|
3,220,489
|
-
|
3,220,489
|
|||||||||
Income tax expense
|
4,767
|
-
|
4,767
|
|||||||||
Net loss
|
$
|
(578,054
|
)
|
$
|
-
|
$
|
(578,054
|
)
|
Three Months Ended March 31, 2018
|
||||||||||||
As
Reported
|
Adjustments
|
Without
Adoption
|
||||||||||
Net loss
|
$
|
(578,054
|
)
|
$
|
-
|
$
|
(578,054
|
)
|
||||
Adjustments to reconcile net loss to net cash used in operating activities, net
|
162,201
|
-
|
162,201
|
|||||||||
Changes in assets and liabilities:
|
||||||||||||
Accounts receivable
|
751,554
|
-
|
751,554
|
|||||||||
Inventory
|
279,301
|
227,000
|
506,301
|
|||||||||
Prepaid expenses and other assets, net
|
200,175
|
(227,000
|
)
|
(26,825
|
)
|
|||||||
Accounts payable
|
(494,931
|
)
|
-
|
(494,931
|
)
|
|||||||
Deferred rent
|
(34,541
|
)
|
-
|
(34,541
|
)
|
|||||||
Accrued income taxes
|
4,767
|
-
|
4,767
|
|||||||||
Accrued expenses and other liabilities
|
(312,186
|
)
|
-
|
(312,186
|
)
|
|||||||
Net cash used in operating activities
|
(21,714
|
)
|
-
|
(21,714
|
)
|
|||||||
Purchases of property and equipment
|
(69,710
|
)
|
-
|
(69,710
|
)
|
|||||||
Intangible assets
|
(7,854
|
)
|
-
|
(7,854
|
)
|
|||||||
Net cash used in investing activities
|
(77,564
|
)
|
-
|
(77,564
|
)
|
|||||||
Net decrease in cash and cash equivalents
|
(99,278
|
)
|
-
|
(99,278
|
)
|
|||||||
Cash and cash equivalents, beginning of period
|
4,594,007
|
-
|
4,594,007
|
|||||||||
Cash and cash equivalents, end of period
|
$
|
4,494,729
|
$
|
-
|
$
|
4,494,729
|
3. |
SEGMENT INFORMATION AND GEOGRAPHIC DATA
|
Three Months Ended March 31, 2018
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
2,652,956
|
$
|
864,468
|
$
|
3,517,424
|
||||||
Finished jewelry
|
1,087,823
|
2,157,503
|
3,245,326
|
|||||||||
Total
|
$
|
3,740,779
|
$
|
3,021,971
|
$
|
6,762,750
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
1,412,983
|
$
|
474,910
|
$
|
1,887,893
|
||||||
Finished jewelry
|
1,049,192
|
985,209
|
2,034,401
|
|||||||||
Total
|
$
|
2,462,175
|
$
|
1,460,119
|
$
|
3,922,294
|
||||||
Product line gross profit
|
||||||||||||
Loose jewels
|
$
|
1,239,973
|
$
|
389,558
|
$
|
1,629,531
|
||||||
Finished jewelry
|
38,631
|
1,172,294
|
1,210,925
|
|||||||||
Total
|
$
|
1,278,604
|
$
|
1,561,852
|
$
|
2,840,456
|
||||||
Operating loss
|
$
|
(362,075
|
)
|
$
|
(211,073
|
)
|
$
|
(573,148
|
)
|
|||
Depreciation and amortization
|
$
|
92,218
|
$
|
30,905
|
$
|
123,123
|
||||||
Capital expenditures
|
$
|
66,421
|
$
|
3,289
|
$
|
69,710
|
Three Months Ended March 31, 2017
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
3,212,216
|
$
|
717,504
|
$
|
3,929,720
|
||||||
Finished jewelry
|
276,777
|
1,438,885
|
1,715,662
|
|||||||||
Total
|
$
|
3,488,993
|
$
|
2,156,389
|
$ |
5,645,382
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
1,673,661
|
$
|
316,469
|
$
|
1,990,130
|
||||||
Finished jewelry
|
249,552
|
564,660
|
814,212
|
|||||||||
Total
|
$
|
1,923,213
|
$
|
881,129
|
$
|
2,804,342
|
||||||
Product line gross profit
|
||||||||||||
Loose jewels
|
$
|
1,538,555
|
$
|
401,035
|
$
|
1,939,590
|
||||||
Finished jewelry
|
27,225
|
874,225
|
901,450
|
|||||||||
Total
|
$
|
1,565,780
|
$
|
1,275,260
|
$
|
2,841,040
|
||||||
Operating loss
|
$
|
(448,998
|
)
|
$
|
(96,560
|
)
|
$
|
(545,558
|
)
|
|||
Depreciation and amortization
|
$
|
79,381
|
$
|
28,275
|
$
|
107,656
|
||||||
Capital expenditures
|
$
|
194,332
|
$
|
3,621
|
$
|
197,953
|
Three Months Ended March 31,
|
||||||||
2018
|
2017
|
|||||||
Product line cost of goods sold
|
$
|
3,922,294
|
$
|
2,804,342
|
||||
Non-capitalized manufacturing and production control expenses
|
452,460
|
367,749
|
||||||
Freight out
|
129,182
|
70,797
|
||||||
Inventory valuation allowances
|
(248,000
|
)
|
(266,000
|
)
|
||||
Other inventory adjustments
|
(140,388
|
)
|
243,727
|
|||||
Cost of goods sold
|
$
|
4,115,548
|
$
|
3,220,615
|
Three Months Ended March 31,
|
||||||||
2018
|
2017
|
|||||||
Net sales
|
||||||||
United States
|
$
|
6,321,849
|
$
|
5,242,341
|
||||
International
|
440,901
|
403,041
|
||||||
Total
|
$
|
6,762,750
|
$
|
5,645,382
|
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
|
March 31,
2018
|
December 31,
2017
|
|||||||
Raw materials
|
$
|
4,998,446
|
$
|
4,853,049
|
||||
Work-in-process
|
9,848,005
|
9,219,383
|
||||||
Finished goods
|
17,062,266
|
17,896,992
|
||||||
Finished goods on consignment
|
867,859
|
1,093,752
|
||||||
Supplies inventory
|
82,740
|
75,441
|
||||||
Less inventory reserves
|
(1,917,000
|
)
|
(2,165,000
|
)
|
||||
Total
|
$
|
30,942,316
|
$
|
30,973,617
|
||||
Short-term portion
|
$
|
10,932,050
|
$
|
11,208,658
|
||||
Long-term portion
|
20,010,266
|
19,764,959
|
||||||
Total
|
$
|
30,942,316
|
$
|
30,973,617
|
March 31,
2018
|
December 31,
2017
|
|||||||
Loose jewels:
|
||||||||
Raw materials
|
$
|
4,445,916
|
$
|
4,288,360
|
||||
Work-in-process
|
8,923,877
|
8,328,719
|
||||||
Finished goods
|
9,477,595
|
9,487,245
|
||||||
Finished goods on consignment
|
55,823
|
26,281
|
||||||
Total loose jewels
|
$
|
22,903,211
|
$
|
22,130,605
|
||||
Finished jewelry:
|
||||||||
Raw materials
|
$
|
552,530
|
$
|
564,689
|
||||
Work-in-process
|
924,128
|
890,664
|
||||||
Finished goods
|
5,683,671
|
6,304,747
|
||||||
Finished goods on consignment
|
796,036
|
1,007,471
|
||||||
Total finished jewelry
|
7,956,365
|
8,767,571
|
||||||
Total supplies inventory
|
82,740
|
75,441
|
||||||
Total inventory
|
$
|
30,942,316
|
$
|
30,973,617
|
6. |
ACCRUED EXPENSES AND OTHER LIABILITIES
|
March 31,
2018
|
December 31,
2017
|
|||||||
Accrued compensation and related benefits
|
$
|
451,405
|
$
|
652,177
|
||||
Deferred rent
|
135,455
|
131,389
|
||||||
Accrued cooperative advertising
|
58,324
|
134,018
|
||||||
Accrued sales tax
|
9,503
|
20,844
|
||||||
Other
|
13,927
|
42,372
|
||||||
Total accrued expenses and other liabilities
|
$
|
668,614
|
$
|
980,800
|
7. |
INCOME TAXES
|
8. |
COMMITMENTS AND CONTINGENCIES
|
9. |
LINE OF CREDIT
|
10. |
STOCK-BASED COMPENSATION
|
Three Months Ended March 31,
|
||||||||
2018
|
2017
|
|||||||
Employee stock options
|
$
|
77,261
|
$
|
71,323
|
||||
Restricted stock awards
|
120,297
|
(39,030
|
)
|
|||||
Totals
|
$
|
197,558
|
$
|
32,293
|
Shares
|
Weighted
Average
Exercise Price
|
|||||||
Outstanding, December 31, 2017
|
2,377,265
|
$
|
1.46
|
|||||
Granted
|
42,500
|
$
|
1.31
|
|||||
Forfeited
|
(50,000
|
)
|
$
|
1.04
|
||||
Expired
|
(29,503
|
)
|
$
|
2.17
|
||||
Outstanding, March 31, 2018
|
2,340,262
|
$
|
1.45
|
Dividend yield
|
0.0
|
%
|
||
Expected volatility
|
61.9
|
%
|
||
Risk-free interest rate
|
2.54
|
%
|
||
Expected lives (years)
|
5.6
|
Options Outstanding
|
Options Exercisable
|
Options Vested or Expected to Vest
|
||||||||||||||||||||||||||||||||
Balance
as of
3/31/2018
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
3/31/2018
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
3/31/2018
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||||||
2,340,262
|
7.66
|
$
|
1.45
|
1,561,847
|
6.94
|
$
|
1.68
|
2,181,387
|
7.55
|
$
|
1.48
|
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||||
Unvested, December 31, 2017
|
355,417
|
$
|
1.11
|
|||||
Granted
|
134,500
|
$
|
1.31
|
|||||
Vested
|
(274,614
|
)
|
$
|
1.11
|
||||
Canceled
|
(80,803
|
)
|
$
|
1.11
|
||||
Unvested, March 31, 2018
|
134,500
|
$
|
1.31
|
11. |
NET LOSS PER COMMON SHARE
|
Three Months Ended March 31,
|
||||||||
2018
|
2017
|
|||||||
Numerator:
|
||||||||
Net loss
|
$
|
(578,054
|
)
|
$
|
(559,646
|
)
|
||
Denominator:
|
||||||||
Weighted average common shares outstanding:
|
||||||||
Basic
|
21,371,416
|
21,118,335
|
||||||
Stock options
|
-
|
-
|
||||||
Diluted
|
21,371,416
|
21,118,335
|
||||||
Net loss per common share:
|
||||||||
Basic
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
||
Diluted
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
12. |
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
|
March 31,
2018
|
December 31,
2017
|
|||||||
Customer A
|
29
|
%
|
18
|
%
|
||||
Customer B
|
12
|
%
|
*
|
%
|
||||
Customer C
|
** |
%
|
12
|
%
|
* Customer B did not have an individual balance that represented 10% or more of the total gross accounts receivable as of December 31, 2017.
|
**Customer C did not have an individual balance that represented 10% or more of the total gross accounts receivable as of March 31, 2018.
|
Three Months Ended March 31,
|
||||||||
2018
|
2017
|
|||||||
Customer A
|
16
|
%
|
*
|
%
|
||||
Customer B
|
** |
%
|
10
|
%
|
||||
Customer D
|
12
|
%
|
25
|
%
|
*Customer A did not have net sales that represented 10% or more of total net sales for the three months ended March 31, 2017.
|
**Customer B did not have net sales that represented 10% or more of total net sales for the three months ended March 31, 2018.
|
· |
Our future financial performance depends upon increased consumer acceptance, growth of sales of our products, and operational execution of our strategic initiatives.
|
· |
The execution of our business plans could significantly impact our liquidity.
|
· |
Our business and our results of operations could be materially adversely affected as a result of our inability to fulfill orders on a timely basis.
|
· |
The financial difficulties or insolvency of one or more of our major customers or their lack of willingness and ability to market our products could adversely affect results.
|
· |
We are currently dependent on a limited number of distributor and retail partners in our Traditional segment for the sale of our products.
|
· |
We expect to remain dependent upon our exclusive supply agreement, or the Supply Agreement, with Cree, Inc., or Cree, for the sole supply of our silicon carbide, or SiC, crystals for the foreseeable future.
|
· |
We face intense competition in the worldwide jewelry industry.
|
· |
Our failure to maintain compliance with The Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock.
|
· |
Our current customers may potentially perceive us as a competitor in the finished jewelry business.
|
· |
We may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation.
|
· |
Our business and our results of operations could be materially adversely affected as a result of general economic and market conditions.
|
· |
Our operations could be disrupted by natural disasters.
|
· |
Sales of moissanite jewelry could be dependent upon the pricing of precious metals, which is beyond our control.
|
· |
Seasonality of our business may adversely affect our net sales and operating income.
|
· |
Recent U.S. tax legislation may adversely affect our financial condition, results of operations, and cash flows.
|
· |
If the e-commerce opportunity changes dramatically or if e-commerce technology or providers change their models, our results of operations may be adversely affected.
|
· |
We may not be able to adequately protect our intellectual property, which could harm the value of our products and brands and adversely affect our business.
|
· |
A failure of our information technology infrastructure or a failure to protect confidential information of our customers and our network against security breaches could adversely impact our business and operations.
|
· |
We are subject to certain risks due to our international distribution channels and vendors.
|
· |
Negative or inaccurate information on social media could adversely affect our brand and reputation.
|
· |
If we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer.
|
· |
Governmental regulation and oversight might adversely impact our operations.
|
· |
Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our company.
|
· |
Drive organic revenue growth in the U.S. and maintain attractive margins. We plan to continue engaging our target customers through creative and progressive marketing campaigns and 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 enhancing our jewelry offerings to include unique, curated collections and new styles at multiple price points that will appeal to a broad 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 by way of cross-border trade 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.
|
Three Months Ended March 31,
|
||||||||
2018
|
2017
|
|||||||
Net sales
|
$
|
6,762,750
|
$
|
5,645,382
|
||||
Costs and expenses:
|
||||||||
Cost of goods sold
|
4,115,548
|
3,220,615
|
||||||
Sales and marketing
|
1,865,940
|
1,915,335
|
||||||
General and administrative
|
1,354,410
|
1,054,171
|
||||||
Research and development
|
-
|
819
|
||||||
Total costs and expenses
|
7,335,898
|
6,190,640
|
||||||
Loss from operations
|
(573,148
|
)
|
(545,558
|
)
|
||||
Other expense:
|
||||||||
Interest expense
|
(139
|
)
|
-
|
|||||
Total other expense
|
(139
|
)
|
-
|
|||||
Loss before income taxes
|
(573,287
|
)
|
(545,558
|
)
|
||||
Income tax expense
|
(4,767
|
)
|
(14,088
|
)
|
||||
Net loss
|
$
|
(578,054
|
)
|
$
|
(559,646
|
)
|
Three Months Ended
March 31,
|
Change
|
|||||||||||||||
2018
|
2017
|
Dollars
|
Percent
|
|||||||||||||
Loose jewels
|
$
|
3,517,424
|
$
|
3,929,720
|
$
|
(412,296
|
)
|
-10
|
%
|
|||||||
Finished jewelry
|
3,245,326
|
1,715,662
|
1,529,664
|
89
|
%
|
|||||||||||
Total consolidated net sales
|
$
|
6,762,750
|
$
|
5,645,382
|
$
|
1,117,368
|
20
|
%
|
Three Months Ended
March 31,
|
Change
|
|||||||||||||||
2018
|
2017
|
|
Dollars
|
Percent
|
||||||||||||
Product line cost of goods sold
|
||||||||||||||||
Loose jewels
|
$
|
1,887,893
|
$
|
1,990,130
|
$
|
(102,237
|
)
|
-5
|
%
|
|||||||
Finished jewelry
|
2,034,401
|
814,212
|
1,220,189
|
150
|
%
|
|||||||||||
Total product line cost of goods sold
|
3,922,294
|
2,804,342
|
1,117,952
|
40
|
%
|
|||||||||||
Non-product line cost of goods sold
|
193,254
|
416,273
|
(223,019
|
)
|
-54
|
%
|
||||||||||
Total cost of goods sold
|
$
|
4,115,548
|
$
|
3,220,615
|
$
|
894,933
|
28
|
%
|
Three Months Ended March 31,
|
Change
|
|||||||||||||||
2018
|
2017
|
Dollars
|
|
Percent
|
||||||||||||
Sales and marketing
|
$
|
1,865,940
|
$
|
1,915,335
|
$
|
(49,395
|
)
|
-3
|
%
|
Three Months Ended March 31,
|
Change
|
|||||||||||||||
2018
|
2017
|
Dollars
|
Percent
|
|||||||||||||
General and administrative
|
$
|
1,354,410
|
$
|
1,054,171
|
$
|
300,239
|
28
|
%
|
Period
|
Total Number
of Shares
Purchased (1)
|
Average Price
Paid per Share
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
|
||||||||||||
January 1, 2018 - January 31, 2018
|
106,502
|
$
|
1.11
|
-
|
$
|
-
|
||||||||||
February 1, 2018 - February 28, 2018
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||
March 1, 2018 - March 31, 2018
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||
Total
|
106,502
|
$
|
1.11
|
-
|
$
|
-
|
(1) |
Represents shares of performance-based restricted stock originally granted on February 23, 2017 that were forfeited in connection with the restructuring of the awards on January 30, 2018 from 100% restricted stock to 70% restricted stock and 30% cash. As part of this restructuring, 30% of each performance-based restricted stock award was forfeited and replaced with a cash award, resulting in an aggregate of 106,502 shares of restricted stock being deemed purchased by our Company for purposes of disclosure in this table.
|
Exhibit No.
|
Description
|
Charles & Colvard, Ltd. 2018 Senior Management Equity Incentive Program, effective January 1, 2018 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on February 1, 2018)
|
|
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 March 31, 2018 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements.
|
CHARLES & COLVARD, LTD.
|
||
By:
|
/s/ Suzanne Miglucci
|
|
May 8, 2018
|
Suzanne Miglucci
|
|
President and Chief Executive Officer
|
||
By:
|
/s/ Clint J. Pete
|
|
May 8, 2018
|
Clint J. Pete
|
|
Chief Financial Officer
|
||
(Principal Financial Officer and Chief Accounting Officer)
|
1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 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
|
|
May 8, 2018
|
Suzanne Miglucci
|
|
President and Chief Executive Officer
|
1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 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/ Clint J. Pete
|
|
May 8, 2018
|
Clint J. Pete
|
|
Chief Financial Officer
|
Document and Entity Information - shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
May 03, 2018 |
|
Document and Entity Information [Abstract] | ||
Entity Registrant Name | CHARLES & COLVARD LTD | |
Entity Central Index Key | 0001015155 | |
Current Fiscal Year End Date | --12-31 | |
Entity Well-known Seasoned Issuer | No | |
Entity Voluntary Filers | No | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 21,575,673 | |
Document Fiscal Year Focus | 2018 | |
Document Fiscal Period Focus | Q1 | |
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Mar. 31, 2018 |
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) - $ / shares |
Mar. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
Shareholders' equity | ||
Common stock, par value (in dollars per share) | $ 0 | $ 0 |
Common stock, shares authorized (in shares) | 50,000,000 | 50,000,000 |
Common stock, shares issued (in shares) | 21,575,673 | 21,580,102 |
Common stock, shares outstanding (in shares) | 21,575,673 | 21,580,102 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) [Abstract] | ||
Net sales | $ 6,762,750 | $ 5,645,382 |
Costs and expenses: | ||
Cost of goods sold | 4,115,548 | 3,220,615 |
Sales and marketing | 1,865,940 | 1,915,335 |
General and administrative | 1,354,410 | 1,054,171 |
Research and development | 0 | 819 |
Total costs and expenses | 7,335,898 | 6,190,940 |
Loss from operations | (573,148) | (545,558) |
Other expense: | ||
Interest expense | (139) | 0 |
Total other expense | (139) | 0 |
Loss before income taxes | (573,287) | (545,558) |
Income tax expense | (4,767) | (14,088) |
Net loss | $ (578,054) | $ (559,646) |
Net loss per common share: | ||
Basic (in dollars per share) | $ (0.03) | $ (0.03) |
Diluted (in dollars per share) | $ (0.03) | $ (0.03) |
Weighted average number of shares used in computing net loss per common share: | ||
Basic (in shares) | 21,371,416 | 21,118,335 |
Diluted (in shares) | 21,371,416 | 21,118,335 |
DESCRIPTION OF BUSINESS |
3 Months Ended | ||
---|---|---|---|
Mar. 31, 2018 | |||
DESCRIPTION OF BUSINESS [Abstract] | |||
DESCRIPTION OF BUSINESS |
Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation founded in 1995, manufactures, markets, and distributes Charles & Colvard Created Moissanite® (hereinafter referred to as moissanite or moissanite jewels) and finished jewelry featuring moissanite for sale in the worldwide jewelry market. Moissanite, also known by its chemical name silicon carbide (“SiC”), is a rare mineral first discovered in a meteorite crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. The Company sells loose moissanite jewels and finished jewelry at wholesale prices to distributors, manufacturers, retailers, television shopping networks, and designers, including some of the largest distributors and jewelry manufacturers in the world. The Company’s finished jewelry and loose moissanite jewels that are mounted into fine jewelry by other manufacturers are sold at retail outlets and via the Internet. The Company sells at retail prices to end consumers through its wholly owned operating subsidiary, charlesandcolvard.com, LLC, third-party online marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation - The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the six-month transition period ending June 30, 2018. The condensed consolidated financial statements as of and for the three months ended March 31, 2018 and 2017 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of December 31, 2017 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 9, 2018 (the “2017 Annual Report”). The accompanying condensed consolidated financial statements as of and for the three months ended March 31, 2018 and 2017 include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC, formed in 2011; Charles & Colvard Direct, LLC, formed in 2011; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was re-activated in December 2017. Charles & Colvard Direct, LLC and Charles & Colvard (HK) Ltd. had no operating activity during the three-month period ended March 31, 2018 and the year ended December 31, 2017. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 after its operations ceased in 2008. All intercompany accounts have been eliminated. Change in Fiscal Year-End – On January 30, 2018, the Board of Directors of the Company approved a change in the Company’s fiscal year from a fiscal year beginning on January 1 and ending on December 31 of each year to a fiscal year beginning on July 1 and ending on June 30 of each year. This change to the Company’s fiscal year reporting cycle will begin July 1, 2018. As a result of the change, the Company will have a six-month transition period from January 1, 2018 to June 30, 2018. In connection with this transition, the Company plans to file a transition report with its results for the six-month period ending June 30, 2018 on Form 10-KT with the SEC. Significant Accounting Policies - In the opinion of the Company’s management, with the exception of the Company’s adoption of new revenue recognition guidance as disclosed below, the significant accounting policies used for the three months ended March 31, 2018, are consistent with those used for the year ended December 31, 2017. Accordingly, please refer to Note 2 to the Consolidated Financial Statements in the 2017 Annual Report for the Company’s significant accounting policies. Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, sales contract assets, sales contract liabilities, deferred tax assets, uncertain tax positions, cooperative advertising, and revenue recognition. Actual results could differ materially from those estimates. Reclassifications - Certain amounts in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current year presentation, primarily amounts presented on the condensed consolidated statements of cash flows, relating to the reclassification of certain accrued expenses and other liabilities. Change in Accounting Policy - The Company adopted the new accounting standard in connection with revenue recognition guidance that was issued by the Financial Accounting Standards Board (the “FASB”) with a date of the initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. The Company applied the new accounting standard using the modified retrospective approach. Based on the Company’s analysis, the timing and measurement of revenues under the new revenue recognition guidance is consistent with the Company’s prior policies. Accordingly, no adjustment was required to the Company’s opening balance of equity as of January 1, 2018. Except for required disclosures of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, the changes resulting from the adoption of the new accounting standard did not have a material effect on the Company’s condensed consolidated financial statements. Comparative prior period information has not been adjusted and continues to be reported under the accounting guidance in effect prior to the change of accounting. Revenue Recognition – Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this principle, the Company performs the following five steps: (i) identification of a contract with a customer; (ii) identification of any separate performance obligation; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligation in the contract, if any; and (v) recognition of revenue when the Company has satisfied the underlying performance obligation if any. The Company recognizes substantially all of its revenue at a point in time when control of the Company’s goods has passed to the customer, which typically occurs upon shipment, with the exception of consigned goods. The Company considers its performance obligation satisfied at the time this control is transferred. Customer payment terms for these shipments typically range between 30- and 90-days. The Company has elected to treat shipping and handling performed after control has transferred to customers as a fulfillment activity, and additionally, has elected the practical expedient to report sales taxes on a net basis. The Company records shipping and handling expense related to product sales as cost of sales. The Company has a variable consideration element related to most of its contracts in the form of product return rights. At the time revenue is recognized, an allowance for estimated returns is established and any change in the allowance for returns is charged against net sales in the current period. For the Company’s Traditional segment and Online Channels segment customers (excluding those of charlesandcolvard.com), the return policy generally allows for the return of jewels and finished jewelry with a valid reason for credit within 30 days of shipment. The Company’s charlesandcolvard.com customers can return purchases for any reason within 60 days in accordance with the Company’s returns policy as disclosed on the charlesandcolvard.com website. Periodically, the Company ships loose jewel goods and finished goods to Traditional segment customers on consignment terms. Under these consignment terms, the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year. The Company’s Online Channels segment and Traditional segment customers are generally required to make payments on consignment shipments within 60 days upon the customer informing the Company that it will keep the inventory. Accordingly, the Company does not recognize revenue on these consignment transactions until the earlier of (i) the customer informing the Company that it will keep the inventory; (ii) the expiration of the right of return period; or (iii) the customer informing the Company that the inventory has been sold. The Company presents disaggregated net sales by its Traditional segment and its Online Channels segment for both loose jewels and finished jewelry product lines. The Company also presents disaggregated net sales by geographic area between the United States and international locations. For financial reporting purposes, disaggregated net sales amounts are presented in Note 3, “Segment Information and Geographic Data”. Returns Asset and Refund Liabilities In connection with the adoption of the new revenue recognition accounting standard, the Company has established a returns asset account and a refund liabilities account to record the effects of its estimated product returns and sales returns allowance. The Company’s returns asset and refund liabilities are updated at the end of each financial reporting period and the effect of such changes are accounted for in the period in which such changes occur. The Company estimates anticipated product returns in the form of a refund liability based on historical return percentages and current period sales levels. The Company also accrues a related returns asset for goods expected to be returned in salable condition, less any expected costs to recover such goods, including return shipping costs that the Company may incur. As of March 31, 2018 and December 31, 2017, the Company’s refund liabilities balances were $604,000 and $537,000, respectively, and are included within accounts receivable, net, in the accompanying condensed consolidated balance sheets. As of March 31, 2018 and December 31, 2017, the Company’s returns asset balances were $227,000 and $0, respectively, and are included within prepaid expenses and other assets in the accompanying condensed consolidated balance sheets. Prior to the adoption of the new revenue recognition accounting standard, the Company reported the net effect of its estimated returns asset as an adjustment to its inventory balances. Impacts on Financial Statements The following information summarizes the impacts of the adoption of the new revenue recognition accounting standard on the accompanying condensed consolidated financial statements: Condensed Consolidated Balance Sheet
Condensed Consolidated Statement of Operations
The timing and measurement of revenues under the new revenue recognition guidance are consistent with the Company’s policies in effect prior to the adoption of the new accounting standard. Accordingly, there are no adjustments affecting the Company’s results of operations resulting from application of the new standard in the period presented. Condensed Consolidated Statement of Cash Flows
Recently Adopted/Issued Accounting Pronouncements – In February 2016, the FASB issued guidance that establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the early stage of its analysis, but currently expects that upon adoption of this standard, ROU assets and liabilities will be recognized in the balance sheet in amounts that will be material. |
SEGMENT INFORMATION AND GEOGRAPHIC DATA |
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SEGMENT INFORMATION AND GEOGRAPHIC DATA [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SEGMENT INFORMATION AND GEOGRAPHIC DATA |
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of the Company’s operating and reportable segments. The Company manages its business through two operating and reportable segments based on its distribution channels to sell its product lines, loose jewels and finished jewelry: its “Traditional” segment, which consists of wholesale, retail, and television customers; and its “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets. The accounting policies of the Traditional segment and Online Channels segment are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies” of this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements in the 2017 Annual Report. The Company evaluates the financial performance of its segments based on net sales; product line gross profit, or the excess of product line sales over product line cost of goods sold; and operating income (loss). The Company’s product line cost of goods sold is defined as product cost of goods sold, excluding non-capitalized expenses from the Company’s 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 costs of quality issues, damaged goods, and inventory write-downs. The Company allocates certain general and administrative expenses from its Traditional segment to its Online Channels segment primarily based on net sales and number of employees to arrive at segment operating loss. Unallocated expenses, which also include interest and taxes, remain in its Traditional segment. Summary financial information by reportable segment is as follows:
The Company does not allocate any assets to the reportable segments, and therefore, no asset information is reported to the chief operating decision maker and disclosed in the financial information for each segment. A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:
The Company recognizes sales by geographic area based on the country in which the customer is based. A portion of the Company’s Traditional segment sales made to international wholesale distributors represents products sold internationally that may be re-imported to U.S. retailers. Sales to international end consumers made by the Company’s Online Channels segment are included in U.S. sales because products are shipped and invoiced to a U.S.-based intermediary party that assumes all international shipping and credit risks. All intangible assets, as well as property and equipment, as of March 31, 2018 and March 31, 2017, are held and located in the United States. The following presents net sales data by geographic area:
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FAIR VALUE MEASUREMENTS |
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FAIR VALUE MEASUREMENTS [Abstract] | ||||||||||||
FAIR VALUE MEASUREMENTS |
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy consists of three levels based on the reliability of inputs, as follows:
The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The financial instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, trade accounts receivable, and trade accounts payable. All financial instruments are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these financial instruments. Assets that are measured at fair value on a non-recurring basis include property and equipment, leasehold improvements, and intangible assets, comprising patents, license rights, and trademarks. These items are recognized at fair value when they are considered to be impaired. For the three months ended March 31, 2018 and 2017, no impairment was recorded. |
INVENTORIES |
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INVENTORIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INVENTORIES |
The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:
Inventories are stated at the lower of cost or net realizable value 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, which are based on historical and anticipated levels of sales for the 12-month go-forward period, is classified as long-term on the Company’s condensed consolidated balance sheets. The Company’s classification of its inventory as either short- or long-term inventory requires management 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 March 31, 2018 and December 31, 2017, work-in-process inventories issued to active production jobs approximated $3.45 million and $2.99 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 had the exclusive right in the U.S. through August 2015 and had the exclusive right in many other countries into the third quarter of 2016 to produce and sell created SiC for use in jewelry applications. 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 over time. The majority of the Company’s finished jewelry featuring moissanite is held in inventory for resale and largely consists of such core 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 holds smaller quantities of designer-inspired and trend moissanite fashion jewelry that is available for resale through retail companies and through its Online Channels segment. The Company also carries a limited amount of inventory as part of its sample line that is used in the selling process to its customers. The Company’s operating subsidiary carries no net inventories, and inventory is transferred without intercompany markup from the Company’s Traditional segment as product line cost of goods sold when sold to the end consumer. The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:
Total net loose jewel inventories at March 31, 2018 and December 31, 2017 including inventory on consignment net of reserves, were $22.90 million and $22.13 million, respectively. Total net finished jewelry inventories at March 31, 2018 and December 31, 2017, including inventory on consignment net of reserves and finished jewelry featuring moissanite manufactured by the Company, were $7.96 million and $8.77 million, respectively. As of March 31, 2018 and December 31, 2017, management established an obsolescence reserve of $1,301,000 and $1,417,000, respectively. Typically, in the jewelry industry, slow-moving or discontinued lines are sold as closeouts, liquidated in alternative sales channels or melted down for liquidation. Regularly, management reviews the legacy loose jewel inventory for any lower of cost or net realizable value and obsolescence issues. Accordingly, based on demand during the three months ended March 31, 2018, and ongoing feedback from customers on the value of some of these goods, management identified some of the remaining inventory of these lower quality goods that could not be sold at its current carrying value and increased the lower of cost or net realizable value reserve on this remaining inventory to approximately $1,244,000 as of March 31, 2018 from $1,326,000 as of December 31, 2017. As of March 31, 2018 and December 31, 2017, management identified certain finished jewelry that was obsolete due to damage and other factors that indicate the finished jewelry is unsaleable, and established an obsolescence reserve of $57,000 and $91,000, respectively, for the carrying costs in excess of any estimated scrap values. Management reviews the finished jewelry inventory on an ongoing basis for any lower of cost or net realizable value and obsolescence issues. As of March 31, 2018 and December 31, 2017 management established a rework reserve for recut and repairs of $523,000 and $557,000, respectively. Loose jewel inventories at March 31, 2018 and December 31, 2017 included recut reserves of $432,000 and $468,000, respectively. The finished jewelry inventories at March 31, 2018 and December 31, 2017 include a repairs reserve of $91,000 and $89,000, respectively. As of March 31, 2018 and December 31, 2017 management established a shrinkage reserve of $93,000 and $191,000, respectively. The loose jewel inventories at March 31, 2018 and December 31, 2017 include shrinkage reserves of $16,000 and $18,000, respectively. The finished jewelry inventories at March 31, 2018 and December 31, 2017 include shrinkage reserves of $77,000 and $173,000, respectively. The need for adjustments to inventory reserves is evaluated on a period-by-period basis. Periodically, the Company ships finished goods inventory to certain Traditional segment customers on consignment terms. Under these terms, the customer assumes the risk of loss and has an absolute right of return for a specified period. Included in the total shrinkage reserve is the shrinkage reserve for finished goods on consignment of $16,000 and $60,000 as of March 31, 2018 and December 31, 2017, respectively, to allow for certain loose jewels and finished jewelry on consignment with certain Traditional segment customers that may not be returned or may be returned in a condition that does not meet the Company’s current grading or quality standards. The loose jewel inventories on consignment at March 31, 2018 and December 31, 2017 include shrinkage reserves of $10,000 and $5,000, respectively. The finished jewelry inventories on consignment at March 31, 2018 and December 31, 2017 include shrinkage reserves of $6,000 and $55,000, respectively. |
ACCRUED EXPENSES AND OTHER LIABILITIES |
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ACCRUED EXPENSES AND OTHER LIABILITIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ACCRUED EXPENSES AND OTHER LIABILITIES |
Accrued expenses and other liabilities, current, consist of the following as of the dates presented:
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INCOME TAXES |
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Mar. 31, 2018 | |||
INCOME TAXES [Abstract] | |||
INCOME TAXES |
As a result of the effects of the Tax Cuts and Jobs Act (the “Tax Act”), the Company wrote down its net deferred tax assets as of December 31, 2017 by approximately $519,000 driven principally by the lower U.S. corporate income tax rate from 35% to that of 21% effective January 1, 2018. Likewise, the Company recorded a corresponding net adjustment to its valuation allowance related to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax. The Company substantially completed its provisional analysis of the income tax effects of the Tax Act as of the year ended December 31, 2017. As provided under specific guidance issued by the SEC staff, the Company estimated the tax impacts related to the changes in its deferred tax assets and liabilities as a result of the Tax Act and included a reasonable estimate of those amounts in its consolidated financial statements as of and for the year ended December 31, 2017, on a provisional basis. However, the Tax Act repealed the corporate alternative minimum tax (“AMT”) regime, including claiming a refund and full realization of remaining AMT credits. At year-end, the Company was not able to make a reasonable estimate with respect to the realization of its existing AMT credit carryforwards. Therefore, it continued to apply the income tax-related guidance that was in effect immediately prior to the enactment of the Tax Act and maintained a full valuation allowance against its AMT-related deferred tax asset. As of March 31, 2018, the Company continues to analyze the nature, validity and recoverability of its AMT-related deferred tax credit carryforwards in order to record the underlying appropriate tax benefit. Accordingly, the ultimate impact related to the Tax Act may differ, possibly materially, due to, among other things, completing the Company’s analysis of the realization of available AMT credit refunds, further refinement of the Company’s calculations, changes in interpretations and assumptions that the Company made, additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions that the Company may take as a result of the Tax Act. The Company expects its analysis to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018. The Company recognized an income tax net expense for estimated tax, penalties, and interest associated with uncertain tax positions of approximately $5,000 and $14,000 for the three months ended March 31, 2018 and 2017, respectively. 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. As of March 31, 2018 and December 31, 2017, the Company’s management determined that sufficient negative evidence continued to exist to conclude it was uncertain that the Company would have sufficient future taxable income to utilize its deferred tax assets. Therefore, as set forth above, notwithstanding the possible effects on its deferred tax assets as a result of the Tax Act, the Company continued to maintain a full valuation allowance against its deferred tax assets as of March 31, 2018 and December 31, 2017. |
COMMITMENTS AND CONTINGENCIES |
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Mar. 31, 2018 | |||
COMMITMENTS AND CONTINGENCIES [Abstract] | |||
COMMITMENTS AND CONTINGENCIES |
Purchase Commitments On December 12, 2014, the Company entered into a new exclusive supply agreement (the “Supply Agreement”) with Cree, Inc. (“Cree”). Under the Supply Agreement, subject to certain terms and conditions, the Company agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of the Company’s required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement will expire on June 24, 2018, unless extended by the parties. Accordingly, the Company is reviewing various alternatives with respect to its purchase of SiC material, including whether to exercise its unilateral option, subject to certain conditions, to renew the Supply Agreement for an additional two-year period. The Company’s total purchase commitment under the Supply Agreement until June 2018 is dependent upon the size of the SiC material and ranges between approximately $29.60 million and approximately $31.50 million. As of March 31, 2018, the Company’s remaining purchase commitment through June 2018 under the Supply Agreement ranges from approximately $2.66 million to approximately $4.56 million. During the three months ended March 31, 2018 and 2017, the Company purchased $2.49 million and $2.21 million, respectively, of SiC crystals from Cree. |
LINE OF CREDIT |
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Mar. 31, 2018 | |||
LINE OF CREDIT [Abstract] | |||
LINE OF CREDIT |
On June 25, 2014, the Company and its wholly owned subsidiaries, Charles & Colvard Direct, LLC, and Moissanite.com, LLC (now charlesandcolvard.com, LLC) (collectively, the “Borrowers”), obtained a $10.00 million asset-based revolving credit facility (the “Credit Facility”) from Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility may 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 $1.00 million sublimit. The Credit Facility was scheduled to mature on June 25, 2017. Effective June 22, 2017, the Credit Facility was amended to extend the maturity date to June 25, 2018. The Credit Facility was also amended to reduce the interest rate payable on advances under the Credit Facility to a rate equal to Wells Fargo’s daily three-month LIBOR rate plus 2.00%, calculated on an actual/360 basis and payable monthly in arrears. In addition, the Credit Facility was amended further to include the addition of an EBITDA covenant, whereby the Borrowers were required to maintain a specified minimum monthly EBITDA through December 2017 if the cash position for the Borrowers’ demand deposit account maintained at Wells Fargo falls below $3.00 million or the Borrowers draw upon the Credit Facility. In connection with this amendment, the Company paid a 3% facility fee in the amount of $150,000 that is being amortized over the life of the underlying term of the Credit Facility amendment. The Credit Facility includes a $5.00 million 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 $3.00 million maximum. The Borrowers must maintain a minimum of $1.00 million in excess availability at all times. Each advance accrues interest at a rate equal to either (i) Wells Fargo’s three-month LIBOR rate plus 2.00%, or (ii) Wells Fargo’s Prime Rate plus 1%, each 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. There are no mandatory prepayments or line reductions. The Credit Facility is secured by a lien on substantially all assets 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’s security interest in such materials pursuant to the 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, as amended (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, (i) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (ii) an event of default under any other indebtedness of the Borrowers in excess of $200,000, and (iii) 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. Since the Credit Facility matures on June 25, 2018, the Company is currently reviewing various credit facility alternatives. As of March 31, 2018, the Company had not borrowed against the Credit Facility. |
STOCK-BASED COMPENSATION |
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STOCK-BASED COMPENSATION [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
STOCK-BASED COMPENSATION |
The following table summarizes the components of the Company’s stock-based compensation included in net loss:
No stock-based compensation was capitalized as a cost of inventory during the three months ended March 31, 2018 or 2017. Stock Options – The following is a summary of the stock option activity for the three months ended March 31, 2018:
The weighted average grant date fair value of stock options granted during the three months ended March 31, 2018 was $0.75. The total fair value of stock options that vested during the three months ended March 31, 2018 was approximately $56,000. The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the three months ended March 31, 2018:
The following table summarizes information about stock options outstanding at March 31, 2018:
As of March 31, 2018, the unrecognized stock-based compensation expense related to unvested stock options was approximately $280,000, which is expected to be recognized over a weighted average period of approximately 29 months. The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at March 31, 2018 was approximately $452,000. This amount is before applicable income taxes and represents the closing market price of the Company’s common stock at March 31, 2018 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. This amount represents the amount that would have been received by the optionees had these stock options been exercised on that date. No stock options were exercised during the three months ended March 31, 2018 or 2017. Restricted Stock – The following is a summary of the restricted stock activity for the three months ended March 31, 2018:
As of March 31, 2018, the estimated unrecognized stock-based compensation expense related to unvested restricted shares subject to achievement of performance goals was approximately $125,000, all of which is expected to be recognized over a weighted average period of approximately four months. Dividends – The Company has paid no cash dividends in the current year through March 31, 2018. |
NET LOSS PER COMMON SHARE |
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NET LOSS PER COMMON SHARE [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NET LOSS PER COMMON SHARE |
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss from operations per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options that are computed using the treasury stock method. Antidilutive stock awards consist of stock options and unvested restricted shares that would have been antidilutive in the application of the treasury stock method. The following table reconciles the differences between the basic and diluted net loss per share presentations:
For the three months ended March 31, 2018 and 2017, stock options to purchase approximately 2.34 and 1.82 million shares, respectively, were excluded from the computation of diluted net loss per common share because the exercise price of the stock options was greater than the average market price of the common shares or the effect of inclusion of such amounts would be anti-dilutive to net loss per common share. For the three months ended March 31, 2018 and 2017, approximately 135,000 and 416,000 restricted shares, respectively, that have been issued but not yet vested have been excluded from the computation of diluted net loss per common share. |
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK |
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MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK |
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. At times, cash balances may exceed the Federal Deposit Insurance Corporation (the “FDIC”) insurable limits of $250,000 per depositor at each financial institution. The Company has never experienced any losses related to these balances. Non-interest-bearing amounts on deposit in excess of FDIC insurable limits at March 31, 2018 approximated $4.22 million. Trade receivables potentially subject the Company to credit risk. Payment terms on trade receivables for the Company’s Traditional segment customers are generally between 30 and 120 days, though it may offer extended terms with specific customers and on significant orders from time to time. The Company believes its competitors and other vendors in the wholesale jewelry industry have also expanded their use of extended payment terms and, in aggregate, the Company believes that by expanding its use of extended payment terms, it has provided a competitive response in its market and that its net sales have been favorably impacted. The Company is unable to estimate the impact of this program on its net sales, but if it ceased providing extended payment terms in select instances, the Company believes it would not be competitive for some Traditional segment customers in the marketplace and that its net sales and profits would likely decrease. The Company extends credit to its customers based upon a number of factors, including an evaluation of the customer’s financial condition and credit history that is verified through trade association reference services, the customer’s payment history with the Company, the customer’s reputation in the trade, and/or an evaluation of the Company’s opportunity to introduce its moissanite jewels or finished jewelry featuring moissanite to new or expanded markets. Collateral is not generally required from customers. The need for an allowance for doubtful accounts is determined based upon factors surrounding the credit risk of specific customers, historical trends, and other information. During the three months ended March 31, 2018 and 2017, the Company has not experienced significant accounts receivable write-offs related to revenue arrangements with extended payment terms. At times, a portion of the Company’s accounts receivable will be due from customers that have individual balances of 10% or more of the Company’s total gross accounts receivable. The following is a summary of customers that represent 10% or more of total gross accounts receivable:
A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent 10% or more of total net sales:
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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of Presentation and Principles of Consolidation | Basis of Presentation and Principles of Consolidation - The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the six-month transition period ending June 30, 2018. The condensed consolidated financial statements as of and for the three months ended March 31, 2018 and 2017 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of December 31, 2017 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 9, 2018 (the “2017 Annual Report”). The accompanying condensed consolidated financial statements as of and for the three months ended March 31, 2018 and 2017 include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC, formed in 2011; Charles & Colvard Direct, LLC, formed in 2011; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was re-activated in December 2017. Charles & Colvard Direct, LLC and Charles & Colvard (HK) Ltd. had no operating activity during the three-month period ended March 31, 2018 and the year ended December 31, 2017. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 after its operations ceased in 2008. All intercompany accounts have been eliminated. |
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Change in Fiscal Year-End | Change in Fiscal Year-End – On January 30, 2018, the Board of Directors of the Company approved a change in the Company’s fiscal year from a fiscal year beginning on January 1 and ending on December 31 of each year to a fiscal year beginning on July 1 and ending on June 30 of each year. This change to the Company’s fiscal year reporting cycle will begin July 1, 2018. As a result of the change, the Company will have a six-month transition period from January 1, 2018 to June 30, 2018. In connection with this transition, the Company plans to file a transition report with its results for the six-month period ending June 30, 2018 on Form 10-KT with the SEC. |
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Significant Accounting Policies | Significant Accounting Policies - In the opinion of the Company’s management, with the exception of the Company’s adoption of new revenue recognition guidance as disclosed below, the significant accounting policies used for the three months ended March 31, 2018, are consistent with those used for the year ended December 31, 2017. Accordingly, please refer to Note 2 to the Consolidated Financial Statements in the 2017 Annual Report for the Company’s significant accounting policies. |
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Use of Estimates | Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, sales contract assets, sales contract liabilities, deferred tax assets, uncertain tax positions, cooperative advertising, and revenue recognition. Actual results could differ materially from those estimates. |
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Reclassifications | Reclassifications - Certain amounts in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current year presentation, primarily amounts presented on the condensed consolidated statements of cash flows, relating to the reclassification of certain accrued expenses and other liabilities. |
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Change in Accounting Policy | Change in Accounting Policy - The Company adopted the new accounting standard in connection with revenue recognition guidance that was issued by the Financial Accounting Standards Board (the “FASB”) with a date of the initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. The Company applied the new accounting standard using the modified retrospective approach. Based on the Company’s analysis, the timing and measurement of revenues under the new revenue recognition guidance is consistent with the Company’s prior policies. Accordingly, no adjustment was required to the Company’s opening balance of equity as of January 1, 2018. Except for required disclosures of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, the changes resulting from the adoption of the new accounting standard did not have a material effect on the Company’s condensed consolidated financial statements. Comparative prior period information has not been adjusted and continues to be reported under the accounting guidance in effect prior to the change of accounting. |
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Revenue Recognition | Revenue Recognition – Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this principle, the Company performs the following five steps: (i) identification of a contract with a customer; (ii) identification of any separate performance obligation; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligation in the contract, if any; and (v) recognition of revenue when the Company has satisfied the underlying performance obligation if any. The Company recognizes substantially all of its revenue at a point in time when control of the Company’s goods has passed to the customer, which typically occurs upon shipment, with the exception of consigned goods. The Company considers its performance obligation satisfied at the time this control is transferred. Customer payment terms for these shipments typically range between 30- and 90-days. The Company has elected to treat shipping and handling performed after control has transferred to customers as a fulfillment activity, and additionally, has elected the practical expedient to report sales taxes on a net basis. The Company records shipping and handling expense related to product sales as cost of sales. The Company has a variable consideration element related to most of its contracts in the form of product return rights. At the time revenue is recognized, an allowance for estimated returns is established and any change in the allowance for returns is charged against net sales in the current period. For the Company’s Traditional segment and Online Channels segment customers (excluding those of charlesandcolvard.com), the return policy generally allows for the return of jewels and finished jewelry with a valid reason for credit within 30 days of shipment. The Company’s charlesandcolvard.com customers can return purchases for any reason within 60 days in accordance with the Company’s returns policy as disclosed on the charlesandcolvard.com website. Periodically, the Company ships loose jewel goods and finished goods to Traditional segment customers on consignment terms. Under these consignment terms, the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year. The Company’s Online Channels segment and Traditional segment customers are generally required to make payments on consignment shipments within 60 days upon the customer informing the Company that it will keep the inventory. Accordingly, the Company does not recognize revenue on these consignment transactions until the earlier of (i) the customer informing the Company that it will keep the inventory; (ii) the expiration of the right of return period; or (iii) the customer informing the Company that the inventory has been sold. The Company presents disaggregated net sales by its Traditional segment and its Online Channels segment for both loose jewels and finished jewelry product lines. The Company also presents disaggregated net sales by geographic area between the United States and international locations. For financial reporting purposes, disaggregated net sales amounts are presented in Note 3, “Segment Information and Geographic Data”. Returns Asset and Refund Liabilities In connection with the adoption of the new revenue recognition accounting standard, the Company has established a returns asset account and a refund liabilities account to record the effects of its estimated product returns and sales returns allowance. The Company’s returns asset and refund liabilities are updated at the end of each financial reporting period and the effect of such changes are accounted for in the period in which such changes occur. The Company estimates anticipated product returns in the form of a refund liability based on historical return percentages and current period sales levels. The Company also accrues a related returns asset for goods expected to be returned in salable condition, less any expected costs to recover such goods, including return shipping costs that the Company may incur. As of March 31, 2018 and December 31, 2017, the Company’s refund liabilities balances were $604,000 and $537,000, respectively, and are included within accounts receivable, net, in the accompanying condensed consolidated balance sheets. As of March 31, 2018 and December 31, 2017, the Company’s returns asset balances were $227,000 and $0, respectively, and are included within prepaid expenses and other assets in the accompanying condensed consolidated balance sheets. Prior to the adoption of the new revenue recognition accounting standard, the Company reported the net effect of its estimated returns asset as an adjustment to its inventory balances. Impacts on Financial Statements The following information summarizes the impacts of the adoption of the new revenue recognition accounting standard on the accompanying condensed consolidated financial statements: Condensed Consolidated Balance Sheet
Condensed Consolidated Statement of Operations
The timing and measurement of revenues under the new revenue recognition guidance are consistent with the Company’s policies in effect prior to the adoption of the new accounting standard. Accordingly, there are no adjustments affecting the Company’s results of operations resulting from application of the new standard in the period presented. Condensed Consolidated Statement of Cash Flows
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Recently Adopted/Issued Accounting Pronouncements | Recently Adopted/Issued Accounting Pronouncements – In February 2016, the FASB issued guidance that establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the early stage of its analysis, but currently expects that upon adoption of this standard, ROU assets and liabilities will be recognized in the balance sheet in amounts that will be material. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impacts on Financial Statements | The following information summarizes the impacts of the adoption of the new revenue recognition accounting standard on the accompanying condensed consolidated financial statements: Condensed Consolidated Balance Sheet
Condensed Consolidated Statement of Operations
Condensed Consolidated Statement of Cash Flows
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SEGMENT INFORMATION AND GEOGRAPHIC DATA (Tables) |
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SEGMENT INFORMATION AND GEOGRAPHIC DATA [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary information by reportable segment | Summary financial information by reportable segment is as follows:
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Schedule of reconciliation of product line cost of goods sold to cost of goods sold as reported in consolidated financial statements | A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:
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Net sales by geographic area | The following presents net sales data by geographic area:
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INVENTORIES (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INVENTORIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of inventory, net of reserves | The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:
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Schedule of inventories by product line maintained in its wholesale distribution segment | The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:
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ACCRUED EXPENSES AND OTHER LIABILITIES (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ACCRUED EXPENSES AND OTHER LIABILITIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | Accrued expenses and other liabilities, current, consist of the following as of the dates presented:
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STOCK-BASED COMPENSATION (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
STOCK-BASED COMPENSATION [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule for components of stock based compensation | The following table summarizes the components of the Company’s stock-based compensation included in net loss:
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Summary of the stock option activity | The following is a summary of the stock option activity for the three months ended March 31, 2018:
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Weighted average assumptions for stock options granted | The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the three months ended March 31, 2018:
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Information about stock options outstanding | The following table summarizes information about stock options outstanding at March 31, 2018:
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Restricted stock activity | The following is a summary of the restricted stock activity for the three months ended March 31, 2018:
|
NET LOSS PER COMMON SHARE (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NET LOSS PER COMMON SHARE [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reconciliation of basic and diluted net loss per share | The following table reconciles the differences between the basic and diluted net loss per share presentations:
|
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of customers that represent greater than or equal to 10% of total net sales and receivables | At times, a portion of the Company’s accounts receivable will be due from customers that have individual balances of 10% or more of the Company’s total gross accounts receivable. The following is a summary of customers that represent 10% or more of total gross accounts receivable:
A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent 10% or more of total net sales:
|
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Returns Asset and Refund Liabilities (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Dec. 31, 2017 |
|
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract] | ||
Refund liabilities | $ 604,000 | $ 537,000 |
Asset returns | $ 227,000 | $ 0 |
Minimum [Member] | ||
Disaggregation of Revenue [Line Items] | ||
Number of days for customer to make payment after being invoiced | 30 days | |
Maximum [Member] | ||
Disaggregation of Revenue [Line Items] | ||
Number of days for customer to make payment after being invoiced | 90 days |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Statement of Operations (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
Condensed Consolidated Statement of Operations [Abstract] | ||
Net sales | $ 6,762,750 | $ 5,645,382 |
Cost of goods sold | 4,115,548 | 3,220,615 |
Other costs and expenses | 3,220,489 | |
Income tax expense | 4,767 | 14,088 |
Net loss | (578,054) | $ (559,646) |
Adjustments [Member] | ASC 606 [Member] | ||
Condensed Consolidated Statement of Operations [Abstract] | ||
Net sales | 0 | |
Cost of goods sold | 0 | |
Other costs and expenses | 0 | |
Income tax expense | 0 | |
Net loss | 0 | |
Without Adoption [Member] | ASC 606 [Member] | ||
Condensed Consolidated Statement of Operations [Abstract] | ||
Net sales | 6,762,750 | |
Cost of goods sold | 4,115,548 | |
Other costs and expenses | 3,220,489 | |
Income tax expense | 4,767 | |
Net loss | $ (578,054) |
SEGMENT INFORMATION AND GEOGRAPHIC DATA, Data by Geographic Area (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
Net sales [Abstract] | ||
Net sales | $ 6,762,750 | $ 5,645,382 |
Continuing Operations [Member] | ||
Net sales [Abstract] | ||
Net sales | 6,762,750 | 5,645,382 |
Reportable Geographical Components [Member] | Continuing Operations [Member] | United States [Member] | ||
Net sales [Abstract] | ||
Net sales | 6,321,849 | 5,242,341 |
Reportable Geographical Components [Member] | Continuing Operations [Member] | International [Member] | ||
Net sales [Abstract] | ||
Net sales | $ 440,901 | $ 403,041 |
FAIR VALUE MEASUREMENTS (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
FAIR VALUE MEASUREMENTS [Abstract] | ||
Asset impairment | $ 0 | $ 0 |
ACCRUED EXPENSES AND OTHER LIABILITIES (Details) - USD ($) |
Mar. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
ACCRUED EXPENSES AND OTHER LIABILITIES [Abstract] | ||
Accrued compensation and related benefits | $ 451,405 | $ 652,177 |
Deferred rent | 135,455 | 131,389 |
Accrued cooperative advertising | 58,324 | 134,018 |
Accrued sales tax | 9,503 | 20,844 |
Other | 13,927 | 42,372 |
Total accrued expenses and other liabilities | $ 668,614 | $ 980,800 |
INCOME TAXES (Details) - USD ($) |
3 Months Ended | 12 Months Ended | |
---|---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
Dec. 31, 2017 |
|
INCOME TAXES [Abstract] | |||
Tax effect of remeasurement of deferred tax assets | $ 519,000 | ||
Federal statutory income tax rate | 21.00% | 35.00% | |
Income tax expense for estimated tax, penalties, and interest for other uncertain tax positions | $ 5,000 | $ 14,000 |
COMMITMENTS AND CONTINGENCIES (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
Long-term Purchase Commitment [Line Items] | ||
Percentage committed to be purchased | 100.00% | |
Period of exclusive supply agreement | 2 years | |
Actual purchases under purchase amendment | $ 2,490 | $ 2,210 |
Minimum [Member] | ||
Long-term Purchase Commitment [Line Items] | ||
Purchase commitment in initial new order | 29,600 | |
Remaining purchase commitment | 2,660 | |
Maximum [Member] | ||
Long-term Purchase Commitment [Line Items] | ||
Purchase commitment in initial new order | 31,500 | |
Remaining purchase commitment | $ 4,560 |
NET LOSS PER COMMON SHARE (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
Numerator [Abstract] | ||
Net loss | $ (578,054) | $ (559,646) |
Weighted average common shares outstanding [Abstract] | ||
Basic (in shares) | 21,371,416 | 21,118,335 |
Stock options (in shares) | 0 | 0 |
Diluted (in shares) | 21,371,416 | 21,118,335 |
Net loss per common share [Abstract] | ||
Basic (in dollars per share) | $ (0.03) | $ (0.03) |
Diluted (in dollars per share) | $ (0.03) | $ (0.03) |
Stock Options [Member] | ||
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
Shares excluded from the computation of diluted net loss per common share (in shares) | 2,340,000 | 1,820,000 |
Restricted Shares [Member] | ||
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
Shares excluded from the computation of diluted net loss per common share (in shares) | 135,000 | 146,000 |
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