☐ |
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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☒ |
Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934
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North Carolina
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56-1928817
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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170 Southport Drive
Morrisville, North Carolina
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27560
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(Address of principal executive offices)
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(Zip Code)
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Title of each class
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Name of each exchange on which registered
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Common Stock, no par value per share
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The Nasdaq Stock Market LLC
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☐ (Do not check if a smaller reporting company)
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Smaller reporting company
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☒
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Emerging growth company
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☐
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Page
Number
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PART I
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Item 1.
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2
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Item 1A.
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19
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Item 1B.
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27
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Item 2.
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27
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Item 3.
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27
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Item 4.
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27
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PART II
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Item 5.
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28
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Item 6.
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28
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Item 7.
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29
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Item 7A.
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52
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Item 8.
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53
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Item 9.
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87
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Item 9A.
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87
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Item 9B.
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88
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PART III
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Item 10.
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88
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Item 11.
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88
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Item 12.
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88
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Item 13.
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88
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Item 14.
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88
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PART IV
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Item 15.
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89
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Item 16.
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92
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· |
Drive organic revenue growth and maintain attractive margins – We plan to continue engaging our target customers through creative and progressive marketing campaigns and to continue leveraging technology to ensure efficiencies in our marketing, sales and customer service functions.
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Expand our gemstone and jewelry offerings to serve a broad range of customers – We plan to continue innovating our moissanite gemstone offerings and further enhance our jewelry offerings to include unique, curated collections, and new styles at multiple price points that will appeal to a broader and more sophisticated audience.
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Target the global market opportunity through continued brand building, focused channel expansion and world-class customer service – We plan to diversify and expand our global customer base in a low-risk manner by introducing our brand in select markets via cross-border trade, or CBT, initiatives and through established marketplaces.
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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.
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Catalyze – Build positive momentum with customers and influencers by being thoughtful and trustworthy in every interaction.
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Innovate – Disrupt the jewelry industry through use of technology – in gemstone and jewelry design, business processes and engagement with our audience.
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Aspire – Be socially conscious, economically informed and environmentally responsible. Build a sustainable business and give back through community acts.
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Obsess – Think like a consumer, act like a friend. Constantly seek ways to reduce friction between the brand and our audience.
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Achieve – Focus attention on the interdependent successes of individual, brand and shareholder.
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Enrich – Promote personal growth and the ability to effect positive change in the business by cultivating a culture of critical thinking and creativity.
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Social Media – To reinforce and support our position as the leading source of ethically-sourced, lab-created moissanite, our marketing team manages several social media initiatives that target current and future jewelry consumers to support the promotion and sale of Charles & Colvard Created Moissanite®. Our campaigns are focused on driving a consistent message emphasizing the environmentally and socially responsible aspects of our jewels and jewelry, their everlasting beauty, and overall value. Our social media efforts include both owned posts and engagements (our own profiles and activities) as well as paid placement (ads presented to targeted audiences).
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Digital Marketing – Approximately 71% of consumers begin their buying journeys by using a web search to discover new products and services, according to a recent research study by Forrester Research, Inc., a global independent research, data, and advisory services firm. In short, we believe the typical buyer’s journey is a digital one. Digital marketing encompasses the myriad ways we can be a part of that journey – from Search Engine Marketing (keyword buys and ads) to digital display (banner ads and product re-targeting ads) to video pre-roll (ads playing before third-party YouTube videos), and native advertising (long-form content produced in conjunction with digital-media and entertainment outlets). We are using, and continually optimizing, available digital marketing channels and will continue to monitor new forms of paid media as they arise, assessing whether they will be effective in helping us connect with our target audiences.
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Influencer Campaigns – Up to 92% of consumers trust an influencer more than an ad or traditional celebrity endorsement, according to Forbes Magazine and a study from MuseFind Technologies Inc., a leading U.S. influencer marketing authority. This is a clear indicator of what marketers have already come to accept: that people trust other people more than they trust brands. However, we believe there is a caveat: the influencers that a brand partners with must truly be aligned in mindset. We do not believe that we can simply find someone with millions of followers, pay them to post about our brand and product, and expect to see results. Instead, we believe we must find influencers who embody the same mindset as our brand and believe in the products we bring to market. This takes time, and we plan to continue to build our influencer network throughout fiscal 2019.
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· |
Cooperative Marketing – In addition to our programs working directly with influencers, we are also partnering with other brands who have influence with specific segments of our audience. These influencers’ reach and authority allow us to jump start relationships with potential buyers who may not be familiar with Charles & Colvard. For example, based on our research and social media interactions, we have found that a portion of our buyers have military ties. Therefore, we are partnering with Leading Points, a program that reaches active and veteran military service members and their families. Separately, we have also partnered with She Should Run, which is a non-partisan organization dedicated to help women run for public office. We believe that a large segment of this audience is the woman who is highly-motivated and self-purchasing – the same audience that we aim to reach. And, among other cooperative marketing-related partnerships, we are working with Flont, Inc., or Flont, a fine jewelry rental service, and Cartera Commerce, Inc., or Cartera, which is a membership organization that partners with elite-brand companies that use loyalty programs to reward their customers for ongoing and repeat purchase transactions. We believe that, like us, Flont and Cartera are organizations that understand a new approach to marketing luxury items that the Millennial demographics embody. We will continue to seek new cooperative marketing relationships that we believe will create new exposure opportunities for Charles & Colvard.
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Sweepstakes – We believe sweepstakes, especially leveraging social media platforms in partnership with kindred brands, are powerful in acquiring and engaging new audiences. Through the use of sweepstakes in 2017 and the transition period ended June 30, 2018, we increased our email marketing subscribers and social media followers, generated a multitude of user-generated content about our brand and products, and converted new customers. Sweepstakes will be a marketing tactic we intend to expand upon throughout fiscal 2019.
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A Twist on the Traditional TV Channel – Throughout our history, we have utilized TV as a channel to reach our consumers. In 2017, we identified a shift in our audience and how they began to disengage from TV and shift to online and streaming video. We are combining our years of knowledge about video marketing, and the power of seeing our product in motion, with our growing expertise in digital marketing. We believe these efforts will culminate in extensive use of video marketing in the form of informational segments delivered on our social media channels, video-style guides on our website, YouTube and other third-party owned video channels and branded video campaigns, as well as livestreaming video, as we move forward into fiscal 2019.
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Consumer Education – Because we believe education of the consumer is so important to the sell-through of moissanite products, we continue to enhance our website and contribute to third party platforms such as social media sites to share extensive educational information about moissanite, in addition to general background information about our company. But we do not believe our value to the marketplace is only realized in our product. As our goal is to lead a revolution in the jewelry industry, we also have a commitment to providing value through education of the jewelry market by bringing to light the environmental and social impact of the trade as a whole. We plan to continue to create content of value on our own site and social channels and to contribute more to third party platforms, sharing extensive educational information about environmentally and socially responsible, lab-grown moissanite.
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· |
charlesandcolvard.com – Throughout 2017 and the transition period ended June 30, 2018, we significantly enhanced our transactional website to optimize for the mobile consumer and to reduce friction between our brand and the shopper. Programs such as free shipping, a 60-day returns policy, and an enhanced and optimized shopping experience were rolled out. With data collected through web analytics, and through user surveys that reveal how consumers use the site, we are in a continual state of optimizing the buying experience – making it easier for shoppers to browse, sort and compare. We utilize these data to inform the selection of new, leading-edge technologies to further enhance our users’ experience, including technologies provided by such partners as Amazon Pay, Affirm, Inc., and PayPal Holdings, Inc., or PayPal, for financing purchases, Braintree, a service of PayPal, for ease of transfer, and Flow, which is a company that specializes in facilitating cross-border global trade and e-commerce services. Our goal is to remain continually focused on improving our customers’ experience.
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Cross-Border Trade – With 84% of global e-commerce sales predicted to take place outside of Europe and North America by 2020, according to statistics from Statista.com (based on data from Shopify Inc., a global cloud-based, multi-channel commerce platform), we are combining regionalized marketing efforts in new geographies with promotional campaigning to drive international consumers to our charlesandcolvard.com web property. Through the application of market-leading CBT technology, such as building our relationship with Flow, we believe CBT to be a significant opportunity in fiscal 2019 and beyond. For example, Flow is widely considered the next-generation for CBT e-commerce transactions and is known worldwide to be revolutionizing how merchants go global. Flow’s platform helps such global enterprises create a positive shopping experience for their international customers while helping to ensure a complete and accurate record of CBT transactions for the enterprise.
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Marketplaces – As noted previously, a large majority of buyers start their online shopping experience with a web search. In fact, as many as 55% of those searches begin on Amazon, according to BloomReach, Inc., a global content management firm. That number skews even higher within the Millennial demographic in that Amazon is the web search brand Millennials identify as most relevant based on a finding by the Pew Research Center, a renowned nonpartisan fact think tank. Therefore, we have made a point to be prominent on Amazon, achieving Seller-Fulfilled Prime status in 2017, which means we have the option of fulfilling orders with the same benefits of Amazon Prime. This will enable us to be positioned more prominently in Amazon’s search platform and to take advantage of their negotiated shipping rates and service levels that, in turn, will lower our shipping costs. This status is available by Amazon to only those sellers who have a history of fulfilling orders quickly and not running out of stock. We are also prominent on eBay and a multitude of other specialty marketplaces, allowing us to meet our customers where they want to buy.
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Pure-Play E-tailers – Bain & Company, a global management consulting firm, estimates that 28% of total retail sales will become e-commerce centric by 2030. As consumers become more digitally savvy, new businesses have gained traction by tailoring their product, services and experiences to specific consumer preferences. We believe that these pure-play e-tailers offer unique opportunities for Charles & Colvard to feature our gemstones and connect with their loyal audiences. As our fiscal 2019 strategy evolves, we plan to focus on expanding these relationships and forging new partnerships that enable us to reach differentiated audiences.
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Drop Ship Retail – In an effort to smartly expand their assortments, many retailers utilize direct fulfillment from their vendors to their consumers, or drop-ship, as it enables them to offer a more robust assortment online without having to physically take ownership of the goods in their warehouse. These retailers are consistently seeking socially responsible brands to serve the growing demand for conscientious product selection from their audiences. As we have refined charlesandcolvard.com’s post-purchase customer experience to deliver fast shipping and a streamlined returns process, we are leveraging these enhanced processes to support the increasing opportunity among retailers that are incorporating drop-ship as core to their online assortment expansion strategy.
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Trade advertising – Throughout the year ended December 31, 2017 and the transition period ended June 30, 2018, we continued to target the trade with print advertisements featuring moissanite, with specific emphasis on our Forever OneTM moissanite jewels and finished jewelry featuring the Forever OneTM jewel in leading trade publications. We intend to continue to deliver meaningful promotion of Forever OneTM as we further expand this product line into the wholesale distribution segment. In May 2018, we introduced a new grade of moissanite, Moissanite by Charles & Colvard®, which delivers to the trade a price-sensitive moissanite product that competes with other comparable value-based products making their way to market. To further engage the trade, in 2018, we initiated a webinar series in which experts in gemology, jewelry trends and jewelry trade marketing deliver insights to our distributor and retail partners helping them to communicate better with their end-consumers regarding the qualities of moissanite and the drivers underlying the current growing interest in moissanite. Currently, we have three more webinars planned for fiscal 2019, and based on the response to those broadcasts, we may plan for additional webinars going forward. Additionally, we utilize a Partner Portal on our website into which authorized distributor and retail partners can gain secured access to our logos, branding materials, and other marketing-related guidelines.
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Industry associations – We maintain relationships with major jewelry industry organizations and jewelry trade publications as an opportunity to communicate with our peers on a consistent basis through media coverage, trade shows, and charitable events, among others.
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Trade shows – Our attendance at leading jewelry trade shows as a sponsor, an exhibitor, or a participant has helped us extend our outreach to customers. During the year ended December 31, 2017 and the transition period ended June 30, 2018, we attended major domestic and international jewelry industry trade shows including JCK, North America’s largest annual jewelry trade event in Las Vegas, and the Hong Kong Gem and Jewellery Fair. We intend to continue investing in these important industry events in fiscal 2019.
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Cooperative advertising – We sometimes participate in the cooperative advertising programs of our distributor and retail partners, subject to the customer adhering to our branding guidelines and other conditions. In these programs, we subsidize a portion of their marketing costs in order to create awareness of and exposure for our gemstones and jewelry.
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Retail – In order to create awareness and exposure for our gemstones, jewelry, and brands, we sell loose moissanite jewels and finished jewelry featuring moissanite at wholesale prices to nationally recognized and emerging retail customers through a broad range of channels including jewelry chains and department stores. Historically, we also sold loose moissanite jewels and finished jewelry at wholesale prices to television shopping networks. Wholesale orders are received via purchase order and fulfilled from our centralized distribution and fulfillment center. In addition, we have placed loose moissanite jewels and finished jewelry inventory in stores on a consignment basis. We continue to evolve our retail channel strategy as we optimize our historical methods and partners.
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Domestic Manufacturers and Distributors – In order to service the vast number of independent jewelers, jewelry stores, and smaller jewelry chains, we sell our loose moissanite jewels to domestic wholesale distributors and finished jewelry manufacturers at distributor prices, that in turn resell the loose jewels or finished jewelry at a markup to independent jewelers and jewelry stores – whether brick-and-mortar, online, or both. In addition, we have placed loose moissanite jewels and finished jewelry inventory with select domestic distributors on a consignment basis. We continue to evaluate our channel strategy for domestic distributors, which may result in a change to our historical domestic distributor methods and partners.
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International Manufacturers and Distributors – In order to create global awareness and exposure for our gemstones, jewelry, and brands, we sell loose moissanite jewels and finished jewelry featuring moissanite to international wholesale distributors and finished jewelry manufacturers at distributor prices, that in turn set them in mountings and sell them to retailers, sell them through their own e-commerce sites, or resell the loose jewels at a markup to independent jewelers and jewelry stores in their local markets. We currently have more than 15 international wholesale distributors covering portions of Canada, the UK, Western Europe, Australia and New Zealand, Southeast Asia, the Middle East, and China. In addition, we have placed loose moissanite jewels and finished jewelry inventory with select international distributors on a consignment basis. We continue to evaluate our channel strategy for international distributors, which may result in a change to our historical international distributor methods and partners. A portion of our international sales consists of finished jewels sold internationally that may be re-imported to U.S. retailers.
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Description
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Refractive
Index
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Dispersion
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Hardness (1)
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Toughness
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||||||
Charles & Colvard Created Moissanite®
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2.65-2.69
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0.104
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9.25 – 9.5
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Excellent
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||||||
Diamond
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2.42
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0.044
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10
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Good to Excellent (2)
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Ruby
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1.77
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0.018
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9
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Excellent (3)
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||||||
Sapphire
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1.77
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0.018
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9
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Excellent (3)
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Emerald
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1.58
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0.014
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7.50
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Poor to Good
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· |
Growing gem-grade raw SiC crystals;
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Manufacturing rough preforms;
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Faceting and polishing jewels;
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Inspecting, sorting, and grading; and
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Engraving.
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Our exclusive SiC crystal Supply Agreement with Cree, which holds the U.S. patent for micropipe-free silicon carbide material and the related method of manufacture. We believe this core material empowers Charles & Colvard to rise above all other moissanite with an unrivaled level of gemstone clarity.
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Our mature and innovative supply chain, which we believe enables us to seamlessly manage the complex manufacturing process of both our moissanite gemstones and the varied jewelry options we deliver to a global audience.
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Our global distribution network, which we have optimized for timely delivery of everything from singular consumer orders to bulk distribution orders.
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Our significant inventory supply, which we believe positions us to meet the just-in-time needs of our distribution partners. We believe having inventory on the shelf is paramount to delivering for our customers as their demand dictates.
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Over 20 years of innovation and continuous improvement of our moissanite gemstone. With Forever OneTM, we believe that we have achieved a level of perfection that is rarely seen in any gemstone – featuring colorless grades with an innovative cut that we believe reveals optical properties unrivaled by any other jewel. This pinnacle of production is the outcome of continual improvement and artisan craft. Additionally, we believe that with our Moissanite by Charles & Colvard® gemstones we have brought forward a price-conscious alternative to competitive moissanite that we believe exceeds the quality of competitive moissanite – specifically in terms of clarity, as well as in cut and polish. The distinction between Forever OneTM and Moissanite by Charles & Colvard® is made through our applied expertise throughout the design and manufacturing processes and the discerning approach we believe we take to ensure the quality of Forever OneTM remains far above any other offering available today. By closely evaluating clarity, color, and cut, we are able to determine which gemstones meet our exemplary standards for Forever OneTM and those that should bear the Moissanite by Charles & Colvard® name.
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our ability to continue our relationship with Cree in order to sustain our supply of high-quality SiC crystals;
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our ability to differentiate Charles & Colvard Created Moissanite® from competing products making their way to market;
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our ability to understand the consumer market segment and effectively market to them a compelling value proposition that leads to converted customers;
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our continued success in developing and promoting the Charles & Colvard brands, such as Forever OneTM and Moissanite by Charles & Colvard®, which are used in finished jewelry featuring moissanite, resulting in increased interest and demand for moissanite jewelry at the consumer level;
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the continued willingness and ability of our jewelry distributors and other jewelry suppliers, manufacturers, and designers to market and promote Charles & Colvard Created Moissanite® to the retail jewelry trade;
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the continued willingness of distributors, retailers, and others in our distribution channels to purchase loose Charles & Colvard Created Moissanite®, and the continued willingness of manufacturers, designers, and retail jewelers to undertake setting of the loose jewels;
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our continued ability and the ability of manufacturers, designers, and retail jewelers to select jewelry settings that encourage consumer acceptance of and demand for our moissanite jewels and finished jewelry;
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our continued ability and the ability of jewelry manufacturers and retail jewelers to set loose moissanite jewels in finished jewelry with high-quality workmanship;
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our continued ability and the ability of retail jewelers to effectively market and sell finished jewelry featuring moissanite to consumers; and
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our ability to operationally execute the strategy for our Online Channels segment.
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those found in nature, generally through mining techniques;
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synthetic gemstone, which has the same chemical composition and essentially the same physical and optical characteristics of natural gemstone but is created in a lab; and
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simulants, which are similar in appearance to natural gemstone but do not have the same chemical composition, physical properties, or optical characteristics.
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Neal I. Goldman
Chairman of the Board; President of Goldman Capital Management, Inc., an investment advisory firm.
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Anne M. Butler
Chief Executive Officer of Butler Advisors, a consulting firm specializing in strategic and operational advising to private equity, venture capital, and institutional investors on direct selling acquisitions and management.
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Benedetta Casamento
Retail Consultant specializing in finance, business operations, and financial planning and analysis.
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Jaqui Lividini
Chief Executive Officer and Founding Partner of Lividini & Co., a brand strategy company that specializes in brand development and marketplace positioning, engagement marketing, and retail strategy.
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Suzanne Miglucci
President and Chief Executive Officer of Charles & Colvard, Ltd.
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Ollin B. Sykes
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President of Sykes & Company, P.A., a regional accounting firm specializing in accounting, tax, and financial advisory services.
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Our current executive officers are the following:
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Suzanne Miglucci
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President and Chief Executive Officer
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Clint J. Pete
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Chief Financial Officer
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Don O’Connell
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Chief Operating Officer and Senior Vice President, Supply Chain
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· |
our ability to understand the consumer market segment and effectively market to them a compelling value proposition that leads to converted customers;
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our ability to reach consumers through traditional and digital channels in order to gain interest in moissanite jewels and jewelry;
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our continued success in developing and promoting brands for our moissanite jewels and finished jewelry featuring moissanite, resulting in increased interest and demand for moissanite jewelry at the consumer level;
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our ability to operationally execute our Online Channels segment;
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our ability to differentiate Charles & Colvard Created Moissanite® from competing products making their way to market;
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the continued willingness and ability of our jewelry distributors and other jewelry suppliers, manufacturers, and designers to market and promote Charles & Colvard Created Moissanite® to the retail jewelry trade;
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our continued ability and the ability of retail jewelers to effectively market and sell finished jewelry featuring moissanite to consumers;
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our continued ability and the ability of manufacturers, designers, and retail jewelers to select jewelry settings that encourage consumer acceptance of and the demand for our moissanite jewels and finished jewelry; and
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the continued willingness of distributors, retailers, and others in the channel of distribution to purchase loose Charles & Colvard Created Moissanite®, and the continued willingness of manufacturers, designers, and retail jewelers to undertake the setting of the loose moissanite jewels in finished jewelry with high-quality workmanship.
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the adverse effects on U.S.-based companies operating in foreign markets that might result from war; terrorism; changes in diplomatic, trade, or business relationships (including labor disputes); or other political, social, religious, or economic instability;
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the continuing adverse economic effects of any global financial crisis;
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unexpected changes in, or impositions of, legislative or regulatory requirements;
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delays resulting from difficulty in obtaining export licenses;
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tariffs and other trade barriers and restrictions, including the consequences of recent U.S. led tariff actions;
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the burdens of complying with a variety of foreign laws and regulations, including foreign taxation, and other factors beyond our control;
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the potential difficulty of enforcing agreements with foreign customers and suppliers; and
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the complications related to collecting receivables through a foreign country’s legal system.
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Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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High
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Low
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|||||||
Year Ended December 31, 2016:
|
||||||||
First Quarter
|
$
|
1.49
|
$
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0.75
|
||||
Second Quarter
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$
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1.26
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$
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0.93
|
||||
Third Quarter
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$
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1.33
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$
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0.85
|
||||
Fourth Quarter
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$
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1.23
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$
|
0.83
|
||||
Year Ended December 31, 2017:
|
||||||||
First Quarter
|
$
|
1.19
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$
|
0.90
|
||||
Second Quarter
|
$
|
1.01
|
$
|
0.84
|
||||
Third Quarter
|
$
|
0.99
|
$
|
0.81
|
||||
Fourth Quarter
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$
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1.55
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$
|
0.80
|
||||
Transition Period Ended June 30, 2018:
|
||||||||
First Quarter
|
$
|
1.60
|
$
|
1.24
|
||||
Second Quarter
|
$
|
1.55
|
$
|
0.90
|
Transition Period Ended June 30, 2018 Results Compared With
Prior Year Period 2017 Results
|
||||
Transition Period Ended June 30, 2018
(six-month, audited)
|
Prior Year Period 2017
(six-month, unaudited)
|
|||
January 2018 – June 2018
|
January 2017 – June 2017
|
Fiscal Year-End 2017 Results Compared With Fiscal Year-End 2016 Results
|
||||
2017
(twelve-month, audited)
|
2016
(twelve-month, audited)
|
|||
January 2017 – December 2017
|
January 2016 – December 2016
|
· |
Extended Multi-Year Exclusive Supply Agreement with Cree, Inc. – In June, we and Cree, our longstanding supplier of SiC material, entered into an amendment to our exclusive Supply Agreement that extends the term of the Supply Agreement by five years, with a unilateral option for renewal for an additional two-year period for a total of seven years. Cree’s patented process for developing micropipe-free SiC material enables the exclusive production of Charles & Colvard’s premium moissanite product, Forever OneTM. The amendment also allows for us under certain conditions to purchase alternative SiC material whose standards fall outside of Forever OneTM specifications. We believe this provision allows us to remain apprised of emerging moissanite materials and to be proactive with respect to changing product market conditions.
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· |
Executed New Credit Facility with White Oak Commercial Finance, LLC – During June and July we negotiated and entered into a $5.00 million asset-based revolving credit facility with White Oak Commercial Finance, LLC, which replaced our previous asset-based revolving credit facility with a commercial bank. The White Oak Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions, and matures in July 2021. The annual borrowing fees associated with our new White Oak Credit Facility are lower than those in connection with our previous credit facility, and moreover, we believe the borrowing terms and financial covenants underlying the new White Oak Credit Facility are less restrictive than those under our previous credit arrangement. Accordingly, we believe the new White Oak Credit Facility will empower us to be more nimble when executing our strategic plans.
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· |
Released Moissanite by Charles & Colvard® – In May 2018 we introduced Moissanite by Charles & Colvard®, which is a value line of gemstones that offers cost-conscious consumers a competitively-priced option for moissanite jewels.
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· |
Secured Key Retail Partners – We broadened our relationship with Helzberg Diamonds stores with the addition of incremental product line styles. We also expanded our online relationship with Walmart migrating from a third-party position on the Walmart marketplace to that of a first-party Walmart.com strategic partnership. Along with these broader relationships come an expanded moissanite selection and a more prominent positioning of the Charles & Colvard brand. We also forged a relationship with Stein Mart, which we believe positions Charles & Colvard’s moissanite brand on steinmart.com alongside other well-known luxury brand consumer options such as Louis Vuitton, Yves Saint Laurent and Fendi.
|
· |
Developed New Co-Promotional Marketing Relationships – We believe co-promotional marketing relationships are essential for proliferating the Charles & Colvard brand into new and untapped sales channels. We believe that exposure into these innovative marketing channels, which are focused toward Millennials, will make a greater number of consumers aware of the Charles & Colvard brand. During the transition period ended June 30, 2018, we developed relationships with multiple co-promotional companies and customer loyalty platforms such as Flont, which is a jewelry-as-a-service, or JaaS, concept that allows members to regularly refresh their personal jewelry boxes. Flont offers monthly JaaS members four-day jewelry rentals, allowing anyone to have access to and take advantage of high-end designer brand jewelry. Further, we developed a relationship with Cartera, which is a membership organization that partners with elite-brand companies that use loyalty programs to reward their customers for ongoing and repeat purchase transactions. Cartera helps its member customers earn rewards by shopping with their online stores featuring its partners’ product brands. We also developed a co-marketing partner relationship with Leading Points Corporation, or Leading Points, a consumer brand customer-loyalty program developed for products and services delivered into the military exchange distribution channel. Leading Points is a group that helps build brand awareness for its partners’ products and services, which reaches active and veteran military service members and their families. And finally, we partnered with She Should Run, which is a non-partisan organization that provides a network for women considering a future run for political office in the U.S. This is an organization that helps build community and provides resources and growth opportunities for these aspiring political leaders. She Should Run provides women the opportunity to access resources to help them overcome roadblocks that may prevent them from running for political office.
|
· |
Signed New E-Commerce Marketplace Arrangements – In 2018, we executed new arrangements with U.S. domestic and international e-commerce marketplaces: Catch-of-the-Day, which serves the Australian country-wide web-based e-commerce shopping market; and Wish Online Shopping, which is a web-based and mobile e-commerce shopping portal that connects customers directly to global manufacturers. We are currently engaged with Wish Online Shopping, which is an emerging shopping portal that we believe resonates with value-oriented consumers and millennials, for U.S. domestic transactions only, with plans going forward to expand this relationship internationally. Both of these e-commerce marketplaces provide Charles & Colvard an opportunity to leverage established marketplaces to enter new domestic regions and international locations. We believe that these types of established e-commerce marketplaces make it less complicated for U.S. enterprises to enter international markets for the purpose of selling and shipping U.S. products globally.
|
· |
Broadened Media Exposure – In addition to significant exposure in fashion-related print media and other digital-media and entertainment platforms including, among others, Glamour Magazine, Martha Stewart Weddings Magazine, Fashionista Magazine, E! News, and Refinery29, Charles & Colvard’s moissanite was also featured on Megyn Kelly TODAY, a nationally broadcast television show. At the height of the 2018 Winter Olympics television coverage, which was broadcast on the same television network as Megyn Kelly TODAY, Charles & Colvard’s moissanite was featured and gifted to audience members during the live broadcast of that program. We believe this type of media-based advertising drives significant product awareness. In this case we believe the exposure on Megyn Kelly TODAY led to a significant increase in consumer traffic to the charlesandcolvard.com website and contributed to our record-setting order volume and product sales during the 2018 Valentine’s Day shopping period compared to the same shopping period in prior years.
|
· |
Our total consolidated net sales increased by $876,000, or 7%, to $13.16 million in the transition period ended June 30, 2018 from $12.29 million in the six-month period ended June 30, 2017 (unaudited). The increase in consolidated net sales for the transition period ended June 30, 2018 was due primarily to the increased demand for our Forever OneTM gemstones over the six-month period ended June 30, 2017 (unaudited) and higher finished jewelry net sales during the transition period ended June 30, 2018. Online Channels segment net sales during the transition period ended June 30, 2018 of $6.37 million were 45% higher than Online Channels segment net sales during the six months ended June 30, 2017 (unaudited). Improved customer experience and expanded jewelry selections resulted in higher finished jewelry sales and ongoing increased demand for our Forever OneTM gemstones during the transition period ended June 30, 2018 as evidenced through our increased presence on e-commerce outlets including marketplaces and through charlesandcolvard.com within our Online Channels segment. Traditional segment net sales for the transition period ended June 30, 2018 of $6.79 million were 14% lower than Traditional segment net sales for the six months ended June 30, 2017 (unaudited), primarily driven by a decrease in loose jewel sales resulting from a large wholesale customer that had a one-time change in its inventory management practices across vendors. This decrease in loose jewel sales was partially offset by strong finished jewelry sales from our brick-and-mortar customers during the transition period ended June 30, 2018.
|
· |
Operating expenses from continuing operations increased by $288,000, or 5%, to $6.46 million in the transition period ended June 30, 2018 from $6.17 million in the six-month period ended June 30, 2017 (unaudited). Of this increase, sales and marketing expenses increased $165,000, or 4%, to $3.86 million, primarily due to increased digital marketing expenses associated with implementing our sales and marketing strategies, offset partially by a decrease in compensation expenses. General and administrative expenses also increased $127,000, or 5%, to $2.60 million primarily as a result of increased compensation-related expenses and professional services expenses, partially offset by a decrease in bank fees principally associated with our prior Wells Fargo Credit Facility and decreases in business taxes and computer-related expenses.
|
· |
Loss before income taxes from continuing operations increased approximately $650,000 to a loss of $1.59 million for the transition period ended June 30, 2018 from a loss before income taxes from continuing operations of $944,000 for the six months ended June 30, 2017 (unaudited). The increase in loss before income taxes from continuing operations was due primarily to increased sales of finished jewelry during the transition period ended June 30, 2018, which reflect higher material and labor costs, when compared to cost of goods sold in the same unaudited period of 2017, during which period we sold a higher level of loose jewels. The increase in loss before income taxes from continuing operations for the transition period ended June 30, 2018 was also adversely impacted by higher sales and marketing as well as general and administrative expenses when compared to those in the same unaudited period of 2017.
|
· |
We recorded a net loss of $1.28 million in the transition period ended June 30, 2018, compared to a net loss of $962,000 in the six-month period ended June 30, 2017 (unaudited). Net loss per share was $0.06 in the transition period ended June 30, 2018 compared to a net loss per share of $0.05 in the six-month period ended June 30, 2017 (unaudited). The increase in net loss was primarily the result of increased cost of goods sold when compared to these same costs in the six months ended June 30, 2017 (unaudited). We also incurred increased operating expenses in the transition period ended June 30, 2018, compared with those in the six-month period ended June 30, 2017 (unaudited), principally related to higher advertising and digital marketing-related expenses. These increased costs were partially offset by the favorable impact of the federal income tax benefit in connection with changes in the Tax Act relating to the realization of the recoverable portion of the AMT deferred tax credit carryforward being reclassified from a deferred tax asset to that of an income tax receivable in the transition period ended June 30, 2018.
|
· |
We generated negative cash flows from continuing operations of $1.04 million in the transition period ended June 30, 2018, compared to negative cash flows of $911,000 from continuing operations in the six-month period ended June 30, 2017 (unaudited). The primary drivers of our negative cash flow in the transition period ended June 30, 2018 were a net loss of $1.28 million; an increase in inventory of $855,000; an increase in prepaid expenses and other assets of $271,000; a decrease in accounts payable of $295,000 and a decrease in accrued liabilities of $423,000. These factors were partially offset by a decrease in accounts receivable of $1.48 million. In addition, non-cash items totaling $594,000 partially offset the net loss and had a favorable impact on cash flow from continuing operations during the transition period ended June 30, 2018.
|
· |
Cash and cash equivalents at June 30, 2018 were $3.39 million compared to $4.59 million at December 31, 2017. The primary reason for this decrease is the $1.04 million of cash used in operations.
|
· |
Total inventory, including long-term and consignment inventory, was $31.83 million as of June 30, 2018, up from $30.97 million at December 31, 2017. This inventory increase was, in part, due to higher purchases of raw materials and higher levels of work-in-process inventories that were produced to meet anticipated product demand.
|
Six Months Ended June 30,
|
||||||||
2018
|
2017
|
|||||||
(unaudited)
|
||||||||
Net sales
|
$
|
13,163,048
|
$
|
12,287,174
|
||||
Costs and expenses:
|
||||||||
Cost of goods sold
|
8,298,286
|
7,060,701
|
||||||
Sales and marketing
|
3,856,796
|
3,692,188
|
||||||
General and administrative
|
2,601,554
|
2,474,882
|
||||||
Research and development
|
-
|
3,143
|
||||||
Total costs and expenses
|
14,756,636
|
13,230,914
|
||||||
Loss from operations
|
(1,593,588
|
)
|
(943,740
|
)
|
||||
Other expenses:
|
||||||||
Interest expense
|
(293
|
)
|
(92
|
)
|
||||
Loss on foreign currency exchange
|
(5
|
)
|
-
|
|||||
Total other expenses
|
(298
|
)
|
(92
|
)
|
||||
Loss before income taxes
|
(1,593,886
|
)
|
(943,832
|
)
|
||||
Income tax net benefit (expense)
|
318,060
|
(18,595
|
)
|
|||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
Six Months Ended June 30,
|
|
Change
|
||||||||||||||
|
2018
|
2017
|
|
Dollars
|
Percent
|
|||||||||||
(unaudited)
|
||||||||||||||||
Loose jewels
|
$
|
6,999,998
|
$
|
8,672,363
|
$
|
(1,672,365
|
)
|
-19
|
%
|
|||||||
Finished jewelry
|
6,163,050
|
3,614,811
|
2,548,239
|
70
|
%
|
|||||||||||
Total consolidated net sales
|
$
|
13,163,048
|
$
|
12,287,174
|
$
|
875,874
|
7
|
%
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||
2018
|
2017
|
Dollars
|
Percent
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Product line cost of goods sold:
|
||||||||||||||||
Loose jewels
|
$
|
3,640,224
|
$
|
4,403,274
|
$
|
(763,050
|
)
|
-17
|
%
|
|||||||
Finished jewelry
|
3,435,233
|
1,616,767
|
1,818,466
|
112
|
%
|
|||||||||||
Total product line cost of goods sold
|
7,075,457
|
6,020,041
|
1,055,416
|
18
|
%
|
|||||||||||
Non-product line cost of goods sold
|
1,222,829
|
1,040,660
|
182,169
|
18
|
%
|
|||||||||||
Total cost of goods sold
|
$
|
8,298,286
|
$
|
7,060,701
|
$
|
1,237,585
|
18
|
%
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||
|
2018
|
2017
|
Dollars
|
Percent
|
||||||||||||
(unaudited)
|
||||||||||||||||
Sales and marketing
|
$
|
3,856,796
|
$
|
3,692,188
|
$
|
164,608
|
4
|
%
|
Six Months Ended June 30,
|
|
Change
|
||||||||||||||
|
2018 | 2017 |
|
Dollars |
Percent
|
|||||||||||
(unaudited)
|
||||||||||||||||
General and administrative
|
$
|
2,601,554
|
$
|
2,474,882
|
$
|
126,672
|
5
|
%
|
Six Months Ended June 30,
|
Change
|
|||||||||||||||
|
2018
|
|
2017
|
|
Dollars
|
Percent
|
||||||||||
Loss on foreign currency exchange
|
$
|
5
|
$
|
-
|
$
|
5
|
100
|
%
|
Year Ended December 31,
|
||||||||
2017
|
2016
|
|||||||
Net sales
|
$
|
27,032,964
|
$
|
29,168,128
|
||||
Costs and expenses:
|
||||||||
Cost of goods sold
|
15,470,617
|
20,401,439
|
||||||
Sales and marketing
|
7,477,354
|
7,038,277
|
||||||
General and administrative
|
4,689,823
|
5,544,452
|
||||||
Research and development
|
3,714
|
2,848
|
||||||
Loss on abandonment of property and equipment
|
-
|
117,930
|
||||||
Total costs and expenses
|
27,641,508
|
33,104,946
|
||||||
Loss from operations
|
(608,544
|
)
|
(3,936,818
|
)
|
||||
Other income (expense):
|
||||||||
Interest expense
|
(541
|
)
|
(1,737
|
)
|
||||
Gain on insurance claim settlement
|
183,217
|
-
|
||||||
Gain on foreign currency exchange
|
-
|
-
|
||||||
Total other income (expense), net
|
182,676
|
(1,737
|
)
|
|||||
Loss before income taxes from continuing operations
|
(425,868
|
)
|
(3,938,555
|
)
|
||||
Income tax net expense from continuing operations
|
(27,609
|
)
|
(13,480
|
)
|
||||
Net loss from continuing operations
|
(453,477
|
)
|
(3,952,035
|
)
|
||||
Discontinued operations:
|
||||||||
Loss from discontinued operations
|
-
|
(586,124
|
)
|
|||||
Gain on sale of assets from discontinued operations
|
-
|
12,398
|
||||||
Net loss from discontinued operations
|
-
|
(573,726
|
)
|
|||||
Net loss
|
$
|
(453,477
|
)
|
$
|
(4,525,761
|
)
|
Year Ended December 31,
|
|
Change
|
||||||||||||||
|
2017
|
|
2016
|
|
Dollars
|
Percent
|
||||||||||
Loose jewels
|
$
|
16,580,748
|
$
|
21,451,728
|
$
|
(4,870,980
|
)
|
-23
|
%
|
|||||||
Finished jewelry
|
10,452,216
|
7,716,400
|
2,735,816
|
35
|
%
|
|||||||||||
Total consolidated net sales
|
$
|
27,032,964
|
$
|
29,168,128
|
$
|
(2,135,164
|
)
|
-7
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2017
|
2016
|
Dollars
|
Percent
|
|||||||||||||
Product line cost of goods sold:
|
||||||||||||||||
Loose jewels
|
$
|
8,524,843
|
$
|
13,916,749
|
$
|
(5,391,906
|
)
|
-39
|
%
|
|||||||
Finished jewelry
|
5,226,660
|
4,148,788
|
1,077,872
|
26
|
%
|
|||||||||||
Total product line cost of goods sold
|
13,751,503
|
18,065,537
|
(4,314,034
|
)
|
-24
|
%
|
||||||||||
Non-product line cost of goods sold
|
1,719,114
|
2,335,902
|
(616,788
|
)
|
-26
|
%
|
||||||||||
Total cost of goods sold
|
$
|
15,470,617
|
$
|
20,401,439
|
$
|
(4,930,822
|
)
|
-24
|
%
|
Year Ended December 31, |
|
Change
|
||||||||||||||
|
2017
|
|
2016
|
|
Dollars
|
Percent
|
||||||||||
Sales and marketing
|
$
|
7,477,354
|
$
|
7,038,277
|
$
|
439,077
|
6
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2017
|
2016
|
Dollars
|
Percent
|
|||||||||||||
General and administrative
|
$
|
4,689,823
|
$
|
5,544,452
|
$
|
(854,629
|
)
|
-15
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2017
|
2016
|
Dollars
|
Percent
|
|||||||||||||
Loss on abandonment of property and equipment
|
$
|
-
|
$
|
117,930
|
$
|
(117,930
|
)
|
-100
|
%
|
Year Ended December 31,
|
Change
|
|||||||||||||||
2017
|
2016
|
Dollars
|
Percent
|
|||||||||||||
Gain on insurance claim settlement
|
$
|
183,217
|
$
|
-
|
$
|
183,217
|
100
|
%
|
Page
Number
|
|
Report of Independent Registered Public Accounting Firm
|
54
|
Consolidated Balance Sheets as of June 30, 2018, December 31, 2017 and December 31, 2016
|
55
|
Consolidated Statements of Operations for the six months ended June 30, 2018 and 2017 (unaudited) and the years ended December 31, 2017 and 2016
|
56
|
Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2018 and the years ended December 31, 2017 and 2016
|
57
|
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited) and the years ended December 31, 2017 and 2016
|
58
|
Notes to Consolidated Financial Statements
|
59
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
ASSETS
|
||||||||||||
Current assets:
|
||||||||||||
Cash and cash equivalents
|
$
|
3,393,186
|
$
|
4,594,007
|
$
|
7,427,273
|
||||||
Accounts receivable, net
|
1,765,722
|
3,377,451
|
2,794,626
|
|||||||||
Inventory, net
|
10,979,891
|
11,208,658
|
9,770,206
|
|||||||||
Prepaid expenses and other assets
|
916,162
|
969,857
|
682,083
|
|||||||||
Total current assets
|
17,054,961
|
20,149,973
|
20,674,188
|
|||||||||
Long-term assets:
|
||||||||||||
Inventory, net
|
20,848,647
|
19,764,959
|
18,360,211
|
|||||||||
Property and equipment, net
|
1,144,198
|
1,242,200
|
1,391,116
|
|||||||||
Intangible assets, net
|
34,833
|
8,597
|
8,808
|
|||||||||
Other assets
|
389,868
|
64,978
|
71,453
|
|||||||||
Total long-term assets
|
22,417,546
|
21,080,734
|
19,831,588
|
|||||||||
TOTAL ASSETS
|
$
|
39,472,507
|
$
|
41,230,707
|
$
|
40,505,776
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||
Current liabilities:
|
||||||||||||
Accounts payable
|
$
|
4,170,952
|
$
|
4,466,163
|
$
|
3,977,149
|
||||||
Accrued expenses and other liabilities
|
618,945
|
980,800
|
631,107
|
|||||||||
Total current liabilities
|
4,789,897
|
5,446,963
|
4,608,256
|
|||||||||
Long-term liabilities:
|
||||||||||||
Deferred rent
|
393,051
|
463,526
|
594,916
|
|||||||||
Accrued income taxes
|
471,126
|
461,592
|
433,983
|
|||||||||
Total long-term liabilities
|
864,177
|
925,118
|
1,028,899
|
|||||||||
Total liabilities
|
5,654,074
|
6,372,081
|
5,637,155
|
|||||||||
Commitments and contingencies (Note 9)
|
||||||||||||
Shareholders’ equity:
|
||||||||||||
Common stock, no par value; 50,000,000 shares authorized; 21,705,173, 21,580,102 and 21,369,885 shares issued and outstanding at June 30, 2018, December 31, 2017 and December 31, 2016, respectively
|
54,243,816
|
54,243,816
|
54,243,816
|
|||||||||
Additional paid-in capital
|
14,962,071
|
14,726,438
|
14,282,956
|
|||||||||
Accumulated deficit
|
(35,387,454
|
)
|
(34,111,628
|
)
|
(33,658,151
|
)
|
||||||
Total shareholders’ equity
|
33,818,433
|
34,858,626
|
34,868,621
|
|||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
39,472,507
|
$
|
41,230,707
|
$
|
40,505,776
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Net sales
|
$
|
13,163,048
|
$
|
12,287,174
|
$
|
27,032,964
|
$
|
29,168,128
|
||||||||
Costs and expenses:
|
||||||||||||||||
Cost of goods sold
|
8,298,286
|
7,060,701
|
15,470,617
|
20,401,439
|
||||||||||||
Sales and marketing
|
3,856,796
|
3,692,188
|
7,477,354
|
7,038,277
|
||||||||||||
General and administrative
|
2,601,554
|
2,474,882
|
4,689,823
|
5,544,452
|
||||||||||||
Research and development
|
-
|
3,143
|
3,714
|
2,848
|
||||||||||||
Loss on abandonment of property and equipment
|
-
|
-
|
-
|
117,930
|
||||||||||||
Total costs and expenses
|
14,756,636
|
13,230,914
|
27,641,508
|
33,104, 946
|
||||||||||||
Loss from operations
|
(1,593,588
|
)
|
(943,740
|
)
|
(608,544
|
)
|
(3,936,818
|
)
|
||||||||
Other income (expense):
|
||||||||||||||||
Interest expense
|
(293
|
)
|
(92
|
)
|
(541
|
)
|
(1,737
|
)
|
||||||||
Gain on insurance claim settlement
|
-
|
-
|
183,217
|
-
|
||||||||||||
Loss on foreign currency exchange
|
(5
|
)
|
-
|
-
|
-
|
|||||||||||
Total other income (expense), net
|
(298
|
)
|
(92
|
)
|
182,676
|
(1,737
|
)
|
|||||||||
Loss before income taxes from continuing operations
|
(1,593,886
|
)
|
(943,832
|
)
|
(425,868
|
)
|
(3,938,555
|
)
|
||||||||
Income tax benefit (expense) from continuing operations
|
318,060
|
(18,595
|
)
|
(27,609
|
)
|
(13,480
|
)
|
|||||||||
Net loss from continuing operations
|
(1,275,826
|
)
|
(962,427
|
)
|
(453, 477
|
)
|
(3,952,035
|
)
|
||||||||
Discontinued operations:
|
||||||||||||||||
Loss from discontinued operations
|
-
|
-
|
-
|
(586,124
|
)
|
|||||||||||
Gain on sale of assets from discontinued operations
|
-
|
-
|
-
|
12,398
|
||||||||||||
Net loss from discontinued operations
|
-
|
-
|
-
|
(573,726
|
)
|
|||||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
$
|
(453,477
|
)
|
$
|
(4,525,761
|
)
|
||||
Net loss per common share:
|
||||||||||||||||
Basic – continuing operations
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.19
|
)
|
||||
Basic – discontinued operations
|
-
|
-
|
-
|
(0.03
|
)
|
|||||||||||
Basic – total
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.22
|
)
|
||||
Diluted – continuing operations
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.19
|
)
|
||||
Diluted – discontinued operations
|
-
|
-
|
-
|
(0.03
|
)
|
|||||||||||
Diluted – total
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.22
|
)
|
||||
Weighted average number of shares used in computing net loss per common share:
|
||||||||||||||||
Basic
|
21,406,487
|
21,166,799
|
21,193,793
|
20,926,120
|
||||||||||||
Diluted
|
21,406,487
|
21,166,799
|
21,193,793
|
20,926,120
|
||||||||||||
Common Stock
|
||||||||||||||||||||
Number of
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Total
Shareholders’
Equity
|
||||||||||||||||
Balance at December 31, 2015
|
21,111,585
|
$
|
54,240,247
|
$
|
13,280,920
|
$
|
(29,132,390
|
)
|
$
|
38,388,777
|
||||||||||
Stock-based compensation
|
-
|
-
|
1,003,305
|
-
|
1,003,305
|
|||||||||||||||
Issuance of restricted stock
|
255,800
|
-
|
-
|
-
|
-
|
|||||||||||||||
Stock option exercises
|
2,500
|
3,569
|
(1,269
|
)
|
-
|
2,300
|
||||||||||||||
Net loss
|
-
|
-
|
-
|
(4,525,761
|
)
|
(4,525,761
|
)
|
|||||||||||||
Balance at December 31, 2016
|
21,369,885
|
$
|
54,243,816
|
$
|
14,282,956
|
$
|
(33,658,151
|
)
|
$
|
34,868,621
|
||||||||||
Stock-based compensation
|
-
|
-
|
443,482
|
-
|
443,482
|
|||||||||||||||
Issuance of restricted stock
|
210,217
|
-
|
-
|
-
|
-
|
|||||||||||||||
Net loss
|
-
|
-
|
-
|
(453,477
|
)
|
(453,477
|
)
|
|||||||||||||
Balance at December 31, 2017
|
21,580,102
|
$
|
54,243,816
|
$
|
14,726,438
|
$
|
(34,111,628
|
)
|
$
|
34,858,626
|
||||||||||
Stock-based compensation
|
-
|
-
|
235,633
|
-
|
235,633
|
|||||||||||||||
Issuance of restricted stock
|
125,071
|
-
|
-
|
-
|
-
|
|||||||||||||||
Net loss
|
-
|
-
|
-
|
(1,275,826
|
)
|
(1,275,826
|
)
|
|||||||||||||
Balance at June 30, 2018
|
21,705,173
|
$
|
54,243,816
|
$
|
14,962,071
|
$
|
(35,387,454
|
)
|
$
|
33,818,433
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
$
|
(453,477
|
)
|
$
|
(4,525,761
|
)
|
||||
Net loss from discontinued operations
|
-
|
-
|
-
|
(573,726
|
)
|
|||||||||||
Net loss from continuing operations
|
(1,275,826
|
)
|
(962,427
|
)
|
(453,477
|
)
|
(3,952,035
|
)
|
||||||||
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities of continuing operations:
|
||||||||||||||||
Depreciation and amortization
|
229,993
|
214,164
|
422,018
|
557,393
|
||||||||||||
Stock-based compensation
|
235,633
|
206,086
|
443,482
|
959,134
|
||||||||||||
(Recovery of) provision for uncollectible accounts
|
(4,511
|
)
|
29,000
|
28,000
|
(73,300
|
)
|
||||||||||
Provision for (recovery of) sales returns
|
110,390
|
55,000
|
122,000
|
(316,000
|
)
|
|||||||||||
Provision for inventory reserves
|
-
|
47,000
|
598,000
|
200,000
|
||||||||||||
Provision for accounts receivable discounts
|
22,802
|
-
|
-
|
-
|
||||||||||||
Gain on insurance claim settlement
|
-
|
-
|
(183,217
|
)
|
-
|
|||||||||||
Loss on abandonment of property and equipment
|
-
|
-
|
-
|
117,930
|
||||||||||||
Changes in operating assets and liabilities:
|
||||||||||||||||
Accounts receivable
|
1,483,048
|
718,192
|
(732,825
|
)
|
1,447,325
|
|||||||||||
Inventory
|
(854,921
|
)
|
(1,149,660
|
)
|
(3,503,032
|
)
|
3,998,003
|
|||||||||
Prepaid expenses and other assets, net
|
(271,195
|
)
|
42,044
|
(36,250
|
)
|
162,157
|
||||||||||
Accounts payable
|
(295,211
|
)
|
(112,171
|
)
|
489,014
|
654,001
|
||||||||||
Deferred rent
|
(70,475
|
)
|
(62,307
|
)
|
(131,390
|
)
|
(99,656
|
)
|
||||||||
Accrued income taxes
|
9,534
|
18,595
|
27,609
|
13,480
|
||||||||||||
Accrued expenses and other liabilities
|
(361,855
|
)
|
45,948
|
349,693
|
(333,731
|
)
|
||||||||||
Net cash (used in) provided by operating activities of continuing operations
|
(1,042,594
|
)
|
(910,536
|
)
|
(2,560,375
|
)
|
3,334,701
|
|||||||||
Net cash used in operating activities of discontinued operations
|
-
|
-
|
-
|
(1,125,578
|
)
|
|||||||||||
Net cash (used in) provided by operating activities
|
(1,042,594
|
)
|
(910,536
|
)
|
(2,560,375
|
)
|
2,209,123
|
|||||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||
Purchases of property and equipment
|
(130,649
|
)
|
(226,633
|
)
|
(271,390
|
)
|
(421,761
|
)
|
||||||||
Intangible assets
|
(27,578
|
)
|
(993
|
)
|
(1,501
|
)
|
(5,615
|
)
|
||||||||
Proceeds from sale of long-term assets
|
-
|
-
|
-
|
250
|
||||||||||||
Net cash used in investing activities of continuing operations
|
(158,227
|
)
|
(227,626
|
)
|
(272,891
|
)
|
(427,126
|
)
|
||||||||
Net cash provided by investing activities of discontinued operations
|
-
|
-
|
-
|
368,671
|
||||||||||||
Net cash used in investing activities
|
(158,227
|
)
|
(227,626
|
)
|
(272,891
|
)
|
(58,455
|
)
|
||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||
Stock option exercises
|
-
|
-
|
-
|
2,300
|
||||||||||||
Net cash provided by financing activities of continuing operations
|
-
|
-
|
-
|
2,300
|
||||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(1,200,821
|
)
|
(1,138,162
|
)
|
(2,833,266
|
)
|
2,152,968
|
|||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
4,594,007
|
7,427,273
|
7,427,273
|
5,274,305
|
||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
3,393,186
|
$
|
6,289,111
|
$
|
4,594,007
|
$
|
7,427,273
|
||||||||
Supplemental disclosure of cash flow information:
|
||||||||||||||||
Cash paid during the period for interest
|
$
|
293
|
$
|
92
|
$
|
541
|
$
|
1,737
|
1. |
DESCRIPTION OF BUSINESS
|
2. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Six Months
Ended
|
Year Ended December 31,
|
|||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Balance, beginning of period
|
$
|
537,000
|
$
|
415,000
|
$
|
731,000
|
||||||
Additions charged to operations
|
2,462,049
|
3,878,736
|
3,574,297
|
|||||||||
Sales returned
|
(2,351,049
|
)
|
(3,756,736
|
)
|
(3,890,297
|
)
|
||||||
Balance, end of period
|
$
|
648,000
|
$
|
537,000
|
$
|
415,000
|
Six Months Ended
|
Year Ended December 31,
|
|||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Balance, beginning of period
|
$
|
254,000
|
$
|
226,000
|
$
|
1,137,000
|
||||||
(Reductions) additions charged to operations
|
(4,511
|
)
|
28,000
|
(73,300
|
)
|
|||||||
Write-offs, net of recoveries
|
(16,489
|
)
|
-
|
(837,700
|
)
|
|||||||
Balance, end of period
|
$
|
233,000
|
$
|
254,000
|
$
|
226,000
|
Machinery and equipment
|
5 to 12 years
|
Computer hardware
|
3 to 5 years
|
Computer software
|
3 years
|
Furniture and fixtures
|
5 to 10 years
|
Leasehold improvements
|
Shorter of the estimated useful life or the lease term
|
As of June 30, 2018
|
||||||||||||
As
Reported
|
Adjustments
|
Without
Adoption
|
||||||||||
Cash and cash equivalents
|
$
|
3,393,186
|
$
|
-
|
$
|
3,393,186
|
||||||
Accounts receivable, net
|
1,765,722
|
-
|
1,765,722
|
|||||||||
Prepaid expenses and other assets
|
916,162
|
(250,000
|
)
|
666,162
|
||||||||
Total inventory, net
|
31,828,538
|
250,000
|
32,078,538
|
|||||||||
Total other long-term assets
|
1,568,899
|
-
|
1,568,899
|
|||||||||
Total assets
|
$
|
39,472,507
|
$
|
-
|
$
|
39,472,507
|
Accounts payable
|
$
|
4,170,952
|
$
|
-
|
$
|
4,170,952
|
||||||
Accrued expenses and other liabilities
|
618,945
|
-
|
618,945
|
|||||||||
Total long-term liabilities
|
864,177
|
-
|
864,177
|
|||||||||
Total liabilities
|
5,654,074
|
-
|
5,654,074
|
|||||||||
Total shareholders’ equity
|
33,818,433
|
-
|
33,818,433
|
|||||||||
Total liabilities and shareholders’ equity
|
$
|
39,472,507
|
$
|
-
|
$
|
39,472,507
|
Six Months Ended June 30, 2018
|
||||||||||||
As
Reported
|
Adjustments
|
Without
Adoption
|
||||||||||
Net sales
|
$
|
13,163,048
|
$
|
-
|
$
|
13,163,048
|
||||||
Costs of goods sold
|
(8,298,286
|
)
|
-
|
(8,298,286
|
)
|
|||||||
Other costs and expenses
|
(6,458,648
|
)
|
-
|
(6,458,648
|
)
|
|||||||
Income tax benefit
|
318,060
|
-
|
318,060
|
|||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
-
|
$
|
(1,275,826
|
)
|
Six Months Ended June 30, 2018
|
||||||||||||
As
Reported
|
Adjustments
|
Without
Adoption
|
||||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
-
|
$
|
(1,275,826
|
)
|
||||
Adjustments to reconcile net loss to net cash used in operating activities, net
|
594,307
|
-
|
594,307
|
|||||||||
Changes in operating assets and liabilities:
|
||||||||||||
Accounts receivable
|
1,483,048
|
-
|
1,483,048
|
|||||||||
Inventory
|
(854,921
|
)
|
250,000
|
(604,921
|
)
|
|||||||
Prepaid expenses and other assets, net
|
(271,195
|
)
|
(250,000
|
)
|
(521,195
|
)
|
||||||
Accounts payable
|
(295,211
|
)
|
-
|
(295,211
|
)
|
|||||||
Deferred rent
|
(70,475
|
)
|
-
|
(70,475
|
)
|
|||||||
Accrued income taxes
|
9,534
|
-
|
9,534
|
|||||||||
Accrued expenses and other liabilities
|
(361,855
|
)
|
-
|
(361,855
|
)
|
|||||||
Net cash used in operating activities
|
(1,042,594
|
)
|
-
|
(1,042,594
|
)
|
|||||||
Purchases of property and equipment
|
(130,649
|
)
|
-
|
(130,649
|
)
|
|||||||
Intangible assets
|
(27,578
|
)
|
-
|
(27,578
|
)
|
|||||||
Net cash used in investing activities
|
(158,227
|
)
|
-
|
(158,227
|
)
|
|||||||
Net decrease in cash and cash equivalents
|
(1,200,821
|
)
|
-
|
(1,200,821
|
)
|
|||||||
Cash and cash equivalents, beginning of period
|
4,594,007
|
-
|
4,594,007
|
|||||||||
Cash and cash equivalents, end of period
|
$
|
3,393,186
|
$
|
-
|
$
|
3,393,186
|
· |
Dividend yield - Although the Company issued dividends in prior years, a dividend yield of zero is used due to the uncertainty of future dividend payments.
|
· |
Expected volatility - Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration to the historical volatility of its common stock.
|
· |
Risk-free interest rate - The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option.
|
· |
Expected lives - The expected lives of the issued stock options represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term.
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Numerator:
|
||||||||||||||||
Net loss from continuing operations
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
$
|
(453,477
|
)
|
$
|
(3,952,035
|
)
|
||||
Net loss from discontinued operations
|
-
|
-
|
-
|
(573,726
|
)
|
|||||||||||
Net loss
|
$
|
(1,275,826
|
)
|
$
|
(962,427
|
)
|
$
|
(453,477
|
)
|
$
|
(4,525,761
|
)
|
||||
Denominator:
|
||||||||||||||||
Weighted average common shares outstanding:
|
||||||||||||||||
Basic
|
21,406,487
|
21,166,799
|
21,193,793
|
20,926,120
|
||||||||||||
Stock options
|
-
|
-
|
-
|
-
|
||||||||||||
Diluted
|
21,406,487
|
21,166,799
|
21,193,793
|
20,926,120
|
||||||||||||
Net loss per common share:
|
||||||||||||||||
Basic – continuing operations
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.19
|
)
|
||||
Basic – discontinued operations
|
-
|
-
|
-
|
(0.03
|
)
|
|||||||||||
Basic – total
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.22
|
)
|
||||
Diluted – continuing operations
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.19
|
)
|
||||
Diluted – discontinued operations
|
-
|
-
|
-
|
(0.03
|
)
|
|||||||||||
Diluted – total
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.22
|
)
|
3. |
SEGMENT INFORMATION AND GEOGRAPHIC DATA
|
Six Months Ended June 30, 2018
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
5,121,660
|
$
|
1,878,338
|
$
|
6,999,998
|
||||||
Finished jewelry
|
1,672,066
|
4,490,984
|
6,163,050
|
|||||||||
Total
|
$
|
6,793,726
|
$
|
6,369,322
|
$
|
13,163,048
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
2,688,560
|
$
|
951,664
|
$
|
3,640,224
|
||||||
Finished jewelry
|
1,462,371
|
1,972,862
|
3,435,233
|
|||||||||
Total
|
$
|
4,150,931
|
$
|
2,924,526
|
$
|
7,075,457
|
||||||
Product line gross profit
|
||||||||||||
Loose jewels
|
$
|
2,433,100
|
$
|
926,674
|
$
|
3,359,774
|
||||||
Finished jewelry
|
209,695
|
2,518,122
|
2,727,817
|
|||||||||
Total
|
$
|
2,642,795
|
$
|
3,444,796
|
$
|
6,087,591
|
||||||
Operating loss
|
$
|
(1,349,756
|
)
|
$
|
(243,832
|
)
|
$
|
(1,593,588
|
)
|
|||
Depreciation and amortization
|
$
|
170,584
|
$
|
59,409
|
$
|
229,993
|
||||||
Capital expenditures
|
$
|
100,960
|
$
|
29,689
|
$
|
130,649
|
Six Months Ended June 30, 2017
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
7,099,363
|
$
|
1,573,000
|
$
|
8,672,363
|
||||||
Finished jewelry
|
785,326
|
2,829,485
|
3,614,811
|
|||||||||
Total
|
$
|
7,884,689
|
$
|
4,402,485
|
$
|
12,287,174
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
3,669,406
|
$
|
733,868
|
$
|
4,403,274
|
||||||
Finished jewelry
|
514,801
|
1,101,966
|
1,616,767
|
|||||||||
Total
|
$
|
4,184,207
|
$
|
1,835,834
|
$
|
6,020,041
|
||||||
Product line gross profit
|
||||||||||||
Loose jewels
|
$
|
3,429,957
|
$
|
839,132
|
$
|
4,269,089
|
||||||
Finished jewelry
|
270,525
|
1,727,519
|
1,998,044
|
|||||||||
Total
|
$
|
3,700,482
|
$
|
2,566,651
|
$
|
6,267,133
|
||||||
Operating loss
|
$
|
(585,838
|
)
|
$
|
(357,902
|
)
|
$
|
(943,740
|
)
|
|||
Depreciation and amortization
|
$
|
151,625
|
$
|
62,539
|
$
|
214,164
|
||||||
Capital expenditures
|
$
|
223,012
|
$
|
3,621
|
$
|
226,633
|
Year Ended December 31, 2017
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
13,430,776
|
$
|
3,149,972
|
$
|
16,580,748
|
||||||
Finished jewelry
|
2,515,443
|
7,936,773
|
10,452,216
|
|||||||||
Total
|
$
|
15,946,219
|
$
|
11,086,745
|
$
|
27,032,964
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
6,998,485
|
$
|
1,526,358
|
$
|
8,524,843
|
||||||
Finished jewelry
|
1,610,845
|
3,615,815
|
5,226,660
|
|||||||||
Total
|
$
|
8,609,330
|
$
|
5,142,173
|
$
|
13,751,503
|
||||||
Product line gross profit
|
||||||||||||
Loose jewels
|
$
|
6,432,291
|
$
|
1,623,614
|
$
|
8,055,905
|
||||||
Finished jewelry
|
904,598
|
4,320,958
|
5,225,556
|
|||||||||
Total
|
$
|
7,336,889
|
$
|
5,944,572
|
$
|
13,281,461
|
||||||
Operating (loss) income
|
$
|
(836,797
|
)
|
$
|
228,253
|
$
|
(608,544
|
)
|
||||
Depreciation and amortization
|
$
|
300,308
|
$
|
121,710
|
$
|
422,018
|
||||||
Capital expenditures
|
$
|
123,944
|
$
|
147,446
|
$
|
271,390
|
Year Ended December 31, 2016
|
||||||||||||
Traditional
|
Online
Channels
|
Total
|
||||||||||
Net sales
|
||||||||||||
Loose jewels
|
$
|
19,231,534
|
$
|
2,220,194
|
$
|
21,451,728
|
||||||
Finished jewelry
|
1,075,157
|
6,641,243
|
7,716,400
|
|||||||||
Total
|
$
|
20,306,691
|
$
|
8,861,437
|
$
|
29,168,128
|
||||||
Product line cost of goods sold
|
||||||||||||
Loose jewels
|
$
|
13,107,366
|
$
|
809,383
|
$
|
13,916,749
|
||||||
Finished jewelry
|
1,195,640
|
2,953,148
|
4,148,788
|
|||||||||
Total
|
$
|
14,303,006
|
$
|
3,762,531
|
$
|
18,065,537
|
||||||
Product line gross profit (loss)
|
||||||||||||
Loose jewels
|
$
|
6,124,168
|
$
|
1,410,811
|
$
|
7,534,979
|
||||||
Finished jewelry
|
(120,483
|
)
|
3,688,095
|
3,567,612
|
||||||||
Total
|
$
|
6,003,685
|
$
|
5,098,906
|
$
|
11,102,591
|
||||||
Operating loss
|
$
|
(3,089,559
|
)
|
$
|
(847,259
|
)
|
$
|
(3,936,818
|
)
|
|||
Depreciation and amortization
|
$
|
479,517
|
$
|
77,876
|
$
|
557,393
|
||||||
Capital expenditures
|
$
|
158,702
|
$
|
263,059
|
$
|
421,761
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Product line cost of goods sold
|
$
|
7,075,457
|
$
|
6,020,041
|
$
|
13,751,503
|
$
|
18,065,537
|
||||||||
Non-capitalized manufacturing and production control expenses
|
805,400
|
722,818
|
1,352,311
|
1,427,924
|
||||||||||||
Freight out
|
272,790
|
173,071
|
417,074
|
376,726
|
||||||||||||
Inventory valuation allowances
|
-
|
47,000
|
598,000
|
200,000
|
||||||||||||
Other inventory adjustments
|
144,639
|
97,771
|
(648,271
|
)
|
331,252
|
|||||||||||
Cost of goods sold
|
$
|
8,298,286
|
$
|
7,060,701
|
$
|
15,470,617
|
$
|
20,401,439
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
|
2017
|
|
2016
|
|||||||||||
(unaudited)
|
||||||||||||||||
Net sales:
|
||||||||||||||||
United States
|
$
|
12,121,003
|
$
|
11,455,660
|
$
|
25,176,220
|
$
|
26,164,660
|
||||||||
International
|
1,042,045
|
831,514
|
1,856,744
|
3,003,468
|
||||||||||||
Total
|
$
|
13,163,048
|
$
|
12,287,174
|
$
|
27,032,964
|
$
|
29,168,128
|
4. |
FAIR VALUE MEASUREMENTS
|
· |
Level 1 - quoted prices in active markets for identical assets and liabilities;
|
· |
Level 2 - inputs other than Level 1 quoted prices that are directly or indirectly observable; and
|
· |
Level 3 - unobservable inputs that are not corroborated by market data.
|
5. |
INVENTORIES
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Raw materials
|
$
|
5,083,436
|
$
|
4,853,049
|
$
|
3,106,617
|
||||||
Work-in-process
|
10,659,786
|
9,219,383
|
11,048,126
|
|||||||||
Finished goods
|
17,483,773
|
17,896,992
|
15,057,668
|
|||||||||
Finished goods on consignment
|
523,971
|
1,093,752
|
467,778
|
|||||||||
Supplies inventory
|
45,572
|
75,441
|
17,228
|
|||||||||
Less inventory reserves
|
(1,968,000
|
)
|
(2,165,000
|
)
|
(1,567,000
|
) | ||||||
Total inventories
|
$
|
31,828,538
|
$
|
30,973,617
|
$
|
28,130,417
|
Short-term portion
|
10,979,891
|
11,208,658
|
9,770,206
|
|||||||||
Long-term portion
|
20,848,647
|
19,764,959
|
18,360,211
|
|||||||||
Total inventories
|
$
|
31,828,538
|
$
|
30,973,617
|
$
|
28,130,417
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Loose jewels:
|
||||||||||||
Raw materials
|
$
|
4,487,787
|
$
|
4,288,360
|
$
|
2,586,045
|
||||||
Work-in-process
|
9,463,518
|
8,328,719
|
10,589,424
|
|||||||||
Finished goods
|
10,015,822
|
9,487,245
|
9,455,393
|
|||||||||
Finished goods on consignment
|
29,323
|
26,281
|
5,473
|
|||||||||
Total loose jewels
|
23,996,450
|
22,130,605
|
22,636,335
|
|||||||||
Finished jewelry:
|
||||||||||||
Raw materials
|
595,649
|
564,689
|
520,572
|
|||||||||
Work-in-process
|
1,196,268
|
890,664
|
458,702
|
|||||||||
Finished goods
|
5,517,951
|
6,304,747
|
4,081,275
|
|||||||||
Finished goods on consignment
|
476,648
|
1,007,471
|
416,305
|
|||||||||
Total finished jewelry
|
7,786,516
|
8,767,571
|
5,476,854
|
|||||||||
Total supplies inventory
|
45,572
|
75,441
|
17,228
|
|||||||||
Total inventory
|
$
|
31,828,538
|
$
|
30,973,617
|
$
|
28,130,417
|
6. |
PROPERTY AND EQUIPMENT
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Computer software
|
$
|
1,253,894
|
$
|
1,206,465
|
$
|
1,192,922
|
||||||
Machinery and equipment
|
1,048,288
|
1,026,736
|
956,050
|
|||||||||
Computer hardware
|
1,026,987
|
1,009,008
|
874,347
|
|||||||||
Leasehold improvements
|
1,151,659
|
1,126,553
|
1,083,634
|
|||||||||
Furniture and fixtures
|
337,210
|
318,627
|
309,046
|
|||||||||
Total
|
4,818,038
|
4,687,389
|
4,415,999
|
|||||||||
Less accumulated depreciation
|
(3,673,840
|
)
|
(3,445,189
|
)
|
(3,024,883
|
)
|
||||||
Property and equipment, net
|
$
|
1,144,198
|
$
|
1,242,200
|
$
|
1,391,116
|
7. |
INTANGIBLE ASSETS
|
|
Weighted
Average
|
|||||||||||||||
Remaining
|
||||||||||||||||
Amortization
|
||||||||||||||||
December 31,
|
Period | |||||||||||||||
June 30, 2018
|
2017
|
2016
|
(in Years)
|
|||||||||||||
Patents
|
$
|
969,632
|
$
|
958,604
|
$
|
958,604
|
15.0
|
|||||||||
Trademarks
|
73,877
|
57,325
|
55,824
|
9.0
|
||||||||||||
License rights
|
6,718
|
6,718
|
6,718
|
-
|
||||||||||||
Total
|
1,050,227
|
1,022,647
|
1,021,146
|
|||||||||||||
Less accumulated amortization
|
(1,015,394
|
)
|
(1,014,050
|
)
|
(1,012,338
|
)
|
||||||||||
Intangible assets, net
|
$ | 34,833 |
$
|
8,597
|
$
|
8,808
|
8. |
ACCRUED EXPENSES AND OTHER LIABILITIES
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Accrued compensation and related benefits
|
$
|
359,077
|
$
|
652,177
|
$
|
443,547
|
||||||
Accrued cooperative advertising
|
60,784
|
134,018
|
50,000
|
|||||||||
Deferred rent
|
139,558
|
131,389
|
115,307
|
|||||||||
Accrued sales tax
|
17,149
|
20,844
|
6,885
|
|||||||||
Other
|
42,377
|
42,372
|
15,368
|
|||||||||
Accrued expenses and other liabilities
|
$
|
618,945
|
$
|
980,800
|
$
|
631,107
|
9. |
COMMITMENTS AND CONTINGENCIES
|
2019
|
$
|
609,039
|
||
2020
|
625,788
|
|||
2021
|
642,997
|
|||
2022
|
219,723
|
|||
Total
|
$
|
2,097,547
|
10. |
LINE OF CREDIT
|
11. |
SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Employee stock options
|
$
|
142,096
|
$
|
156,339
|
$
|
336,534
|
$
|
383,778
|
||||||||
Consultant stock options
|
-
|
-
|
-
|
170,622
|
||||||||||||
Restricted stock awards
|
93,537
|
49,747
|
106,948
|
448,906
|
||||||||||||
Total
|
$
|
235,633
|
$
|
206,086
|
$
|
443,482
|
$
|
1,003,306
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding at December 31, 2015
|
2,441,077
|
$
|
2.11
|
|||||
Granted
|
591,005
|
$
|
1.14
|
|||||
Exercised
|
(2,500
|
)
|
$
|
0.92
|
||||
Forfeited
|
(449,122
|
)
|
$
|
1.43
|
||||
Expired
|
(445,562
|
)
|
$
|
2.09
|
||||
Outstanding at December 31, 2016
|
2,134,898
|
$
|
1.99
|
|||||
Granted
|
836,369
|
$
|
0.94
|
|||||
Forfeited
|
(103,000
|
)
|
$
|
1.22
|
||||
Expired
|
(491,002
|
)
|
$
|
2.95
|
||||
Outstanding at December 31, 2017
|
2,377,265
|
$
|
1.46
|
|||||
Granted
|
216,157
|
$
|
1.27
|
|||||
Forfeited
|
(173,750
|
)
|
$
|
1.05
|
||||
Expired
|
(31,503
|
)
|
$
|
2.17
|
||||
Outstanding at June 30, 2018
|
2,388,169
|
$
|
1.46
|
Six Months
Ended
|
Year Ended December 31,
|
|||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Dividend yield
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||
Expected volatility
|
62.8
|
%
|
63.4
|
%
|
62.2
|
%
|
||||||
Risk-free interest rate
|
2.76
|
%
|
1.90
|
%
|
1.42
|
%
|
||||||
Expected lives (years)
|
5.4
|
5.5
|
5.6
|
Options Outstanding
|
Options Exercisable
|
Options Vested or Expected to Vest
|
||||||||||||||||||||||||||||||||
Balance
as of
6/30/2018
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
6/30/2018
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
6/30/2018
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||||||
2,388,169
|
7.42
|
$
|
1.46
|
1,914,512
|
7.01
|
$
|
1.54
|
2,260,660
|
7.33
|
$
|
1.48
|
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||||
Unvested at December 31, 2015
|
425,000
|
$
|
1.87
|
|||||
Granted
|
509,250
|
$
|
0.93
|
|||||
Vested
|
(321,400
|
)
|
$
|
2.00
|
||||
Canceled
|
(253,450
|
)
|
$
|
1.18
|
||||
Unvested at December 31, 2016
|
359,400
|
$
|
0.91
|
|||||
Granted
|
420,000
|
$
|
1.11
|
|||||
Vested
|
(214,200
|
)
|
$
|
0.92
|
||||
Canceled
|
(209,783
|
)
|
$
|
0.96
|
||||
Unvested at December 31, 2017
|
355,417
|
$
|
1.11
|
|||||
Granted
|
264,000
|
$
|
1.25
|
|||||
Vested
|
(216,488
|
)
|
$
|
1.11
|
||||
Canceled
|
(138,929
|
)
|
$
|
1.11
|
||||
Unvested at June 30, 2018
|
264,000
|
$
|
1.25
|
12. |
INCOME TAXES
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
2018
|
2017
|
2017
|
2016
|
|||||||||||||
(unaudited)
|
||||||||||||||||
Current:
|
||||||||||||||||
Federal
|
$
|
327,594
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
State
|
(9,534
|
)
|
(18,595
|
)
|
(27,609
|
)
|
(13,480
|
)
|
||||||||
Total current expense
|
318,060
|
(18,595
|
)
|
(27,609
|
)
|
(13,480
|
)
|
|||||||||
Deferred:
|
||||||||||||||||
Federal
|
-
|
-
|
-
|
-
|
||||||||||||
State
|
-
|
-
|
-
|
-
|
||||||||||||
Total deferred expense
|
-
|
-
|
-
|
-
|
||||||||||||
Income tax net expense
|
$
|
318,060
|
$
|
(18,595
|
)
|
$
|
(27,609
|
)
|
$
|
(13,480
|
)
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Reversals and accruals
|
$
|
668,813
|
$
|
686,573
|
$
|
1,053,863
|
||||||
Prepaid expenses
|
(38,944
|
)
|
(28,744
|
)
|
(43,774
|
)
|
||||||
Federal NOL carryforwards
|
5,540,016
|
5,185,438
|
8,530,493
|
|||||||||
State NOL carryforwards
|
714,588
|
681,364
|
615,919
|
|||||||||
Hong Kong NOL carryforwards
|
995,566
|
995,566
|
995,566
|
|||||||||
Federal benefit on state taxes under uncertain tax positions
|
96,144
|
94,142
|
136,969
|
|||||||||
Stock-based compensation
|
412,148
|
422,623
|
342,294
|
|||||||||
Research tax credit
|
235,742
|
434,637
|
434,637
|
|||||||||
Alternative minimum tax
|
23,149
|
350,743
|
348,264
|
|||||||||
Contributions carryforward
|
1,923
|
-
|
35,100
|
|||||||||
Depreciation
|
(159,100
|
)
|
(178,670
|
)
|
(286,608
|
)
|
||||||
Accrued rent
|
121,124
|
138,178
|
216,432
|
|||||||||
Loss on impairment of long-lived assets
|
33,157
|
33,864
|
53,042
|
|||||||||
Valuation allowance
|
(8,644,326
|
)
|
(8,815,714
|
)
|
(12,432,197
|
)
|
||||||
Totals
|
-
|
-
|
-
|
|||||||||
Total deferred income tax assets, net
|
$
|
-
|
$
|
-
|
$
|
-
|
|
Six Months Ended
|
Year Ended December 31,
|
||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Anticipated income tax benefit at statutory rate
|
$
|
334,716
|
$
|
144,795
|
$
|
1,534,176
|
||||||
State income tax expense, net of federal tax effect
|
7,755
|
(54,083
|
)
|
(9,350
|
)
|
|||||||
Federal income tax effect of change in tax rate
|
-
|
(3,729,007
|
)
|
-
|
||||||||
Income tax effect of uncertain tax positions
|
37,671
|
(17,946
|
)
|
(8,896
|
)
|
|||||||
Return to provision adjustments
|
-
|
2,982
|
(23,070
|
)
|
||||||||
Stock-based compensation
|
9,855
|
(36,233
|
)
|
(110,066
|
)
|
|||||||
Other changes in deferred income tax assets, net
|
(243,325
|
)
|
(437
|
)
|
(13,118
|
) | ||||||
Decrease (increase) in valuation allowance
|
171,388
|
3,662,320
|
(1,383,156
|
)
|
||||||||
Income tax net benefit (expense)
|
$
|
318,060
|
$
|
(27,609
|
)
|
$
|
(13,480
|
)
|
Balance at December 31, 2015
|
$
|
519,284
|
||
Increases related to prior fiscal year tax positions
|
13,480
|
|||
Balance at December 31, 2016
|
532,764
|
|||
Increases related to prior fiscal year tax positions
|
27,609
|
|||
Balance at December 31, 2017
|
560,373
|
|||
Decreases related to prior fiscal year tax positions
|
(35,670
|
)
|
||
Balance at June 30, 2018
|
$
|
524,703
|
13. |
DISCONTINUED OPERATIONS
|
Net sales
|
$
|
804,585
|
||
Costs and expenses:
|
||||
Cost of goods sold
|
276,100
|
|||
Sales and marketing
|
940,685
|
|||
General and administrative
|
173,913
|
|||
Interest expense
|
11
|
|||
Total costs and expenses
|
1,390,709
|
|||
Loss from discontinued operations
|
(586,124
|
)
|
||
Other income:
|
||||
Gain on sale of long-term assets
|
12,398
|
|||
Total other income, net
|
12,398
|
|||
Pretax loss from discontinued operations
|
$
|
(573,726
|
)
|
14. |
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
|
December 31,
|
||||||||||||
June 30, 2018
|
2017
|
2016
|
||||||||||
Customer A
|
23
|
%
|
*
|
%
|
*
|
%
|
||||||
Customer B
|
10
|
%
|
18
|
%
|
** |
%
|
||||||
Customer C
|
***
|
%
|
12
|
%
|
16
|
%
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||
|
2018
|
2017
|
2017
|
2016
|
||||||||||||
(unaudited) | ||||||||||||||||
Customer A
|
12
|
%
|
26
|
%
|
21
|
%
|
17
|
%
|
||||||||
Customer B
|
12
|
%
|
*
|
%
|
*
|
%
|
*
|
%
|
||||||||
Customer D
|
** |
%
|
**
|
%
|
** |
%
|
23
|
%
|
||||||||
Customer E
|
***
|
%
|
10
|
%
|
***
|
%
|
***
|
%
|
15. |
EMPLOYEE BENEFIT PLAN
|
16. |
SUBSEQUENT EVENT
|
(i) |
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
|
(ii) |
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
(iii) |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
Exhibit No.
|
Description
|
Asset Purchase Agreement, effective March 4, 2016, by and among Yanbal USA, Inc., Charles & Colvard, Ltd., and Charles & Colvard Direct, LLC (incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2016)
|
|
List of Schedules Omitted from Asset Purchase Agreement included as Exhibit 2.1 above (incorporated herein by reference to Exhibit 2.2 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2016)
|
|
Restated Articles of Incorporation of Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 2004)
|
|
Bylaws of Charles & Colvard, Ltd., as amended and restated, effective May 19, 2011 (incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K, as filed with the SEC on May 24, 2011)
|
|
Specimen Certificate of Common Stock (incorporated herein by reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year ended December 31, 1998)
|
|
Exclusive Supply Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Cree, Inc. and, solely for purposes of Section 6(c) of the Exclusive Supply Agreement, Charles & Colvard Direct, LLC and moissanite.com, LLC (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014)*
|
|
First Amendment to Exclusive Supply Agreement, dated as of June 22, 2018, by and between Charles & Colvard, Ltd. and Cree, Inc. (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 27, 2018)*
|
|
Credit Agreement, dated as of July 13, 2018, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, and White Oak Commercial Finance, LLC (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on July 17, 2018)
|
|
10.4 |
Security Agreement, dated as of July 13, 2018, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, and White Oak Commercial Finance, LLC++
|
Intercreditor Agreement, dated as of July 13, 2018, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, Cree, Inc., and White Oak Commercial Finance, LLC++
|
|
Credit and Security Agreement, dated as of June 25, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 30, 2014)
|
First Amendment to Credit and Security Agreement, dated as of September 16, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014)
|
|
Second Amendment to Credit and Security Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014)
|
|
Third Amendment to Credit and Security Agreement and Other Loan Documents, dated as of September 23, 2016, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, to be known as charlesandcolvard.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016)
|
|
Fourth Amendment to Credit and Security Agreement, dated as of June 22, 2017, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC (formerly known as Moissanite.com, LLC) and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 26, 2017)
|
|
|
Fifth Amendment to Credit and Security Agreement, dated as of April 3, 2018, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC (formerly known as Moissanite.com, LLC) and Wells Fargo Bank, National Association++
|
Intercreditor Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, Cree, Inc., and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014)
|
|
Lease Agreement, dated December 9, 2013, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on December 12, 2013)*
|
|
First Amendment to Lease, dated December 23, 2013, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the year ended December 31, 2013)
|
|
Second Amendment to Lease, dated April 15, 2014, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014)
|
|
Board Compensation Program, effective January 1, 2016 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on September 10, 2015)+
|
|
Board Compensation Program, effective October 1, 2017 (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017)+
|
|
Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 20, 2016)+
|
|
Form of Restricted Stock Award Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.115 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+
|
Form of Employee Incentive Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.116 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+
|
|
Form of Employee Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.118 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+
|
|
Form of Director Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.119 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+
|
|
Form of Director Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2013)+
|
|
Form of Employee Nonqualified Stock Option Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+
|
|
Form of Restricted Stock Award Agreement (Performance-Based) under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+
|
|
Charles & Colvard, Ltd. 2016 Senior Management Equity Incentive Program, effective January 1, 2016 (incorporated herein by reference to Exhibit 10.42 to our Annual Report on Form 10-K for the year ended December 31, 2015)+
|
|
Charles & Colvard, Ltd. 2017 Senior Management Equity Incentive Program, effective January 1, 2017 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on February 24, 2017)+
|
|
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)+
|
|
Charles & Colvard, Ltd. Fiscal 2019 Q1-Q2 Senior Management Equity Incentive Program, effective July 1, 2018 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 29, 2018)+
|
|
Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.109 to our Current Report on Form 8-K, as filed with the SEC on December 10, 2007)+
|
|
Employment Agreement, dated December 1, 2015, by and between Charles & Colvard, Ltd. and Suzanne Miglucci (incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015)+
|
|
Employment Agreement, dated May 23, 2017, by and between Charles & Colvard, Ltd. and Clint J. Pete (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 24, 2017)+
|
|
Employment Agreement, dated May 23, 2017, by and between Charles & Colvard, Ltd. and Don O’Connell (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on May 24, 2017)+
|
|
Subsidiaries of Charles & Colvard, Ltd.++
|
|
Consent of BDO USA, LLP++
|
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 Transition Report on Form 10-KT for the transition period ended June 30, 2018 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.
|
*
|
Asterisks located within the exhibit denote information which has been redacted pursuant to a request for confidential treatment filed with the SEC.
|
+
|
Denotes management contract or compensatory plan or arrangement.
|
++
|
Denotes filed herewith.
|
CHARLES & COLVARD, LTD.
|
||
By:
|
/s/ Suzanne Miglucci
|
|
September 6, 2018
|
Suzanne Miglucci
|
|
President and Chief Executive Officer
|
By:
|
/s/ Suzanne Miglucci
|
|
September 6, 2018
|
Suzanne Miglucci
|
|
Director, President and Chief Executive Officer
|
||
By:
|
/s/ Clint J. Pete
|
|
September 6, 2018
|
Clint J. Pete
|
|
Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)
|
||
By:
|
/s/ Neal I. Goldman
|
|
September 6, 2018
|
Neal I. Goldman
|
|
Chairman of the Board of Directors
|
||
By:
|
/s/ Anne M. Butler
|
|
September 6, 2018
|
Anne M. Butler
|
|
Director
|
||
By:
|
/s/ Benedetta Casamento
|
|
September 6, 2018
|
Benedetta Casamento
|
|
Director
|
||
By:
|
/s/ Jaqui Lividini
|
|
September 6, 2018
|
Jaqui Lividini
|
|
Director
|
||
By:
|
/s/ Ollin B. Sykes
|
|
September 6, 2018
|
Ollin B. Sykes
|
|
Director
|
(a)
|
Accounts;
|
(b)
|
Chattel Paper;
|
(c)
|
Deposit Accounts;
|
(d)
|
Documents;
|
(e)
|
General Intangibles;
|
(f)
|
Goods, including Equipment and Fixtures;
|
(g)
|
Instruments;
|
(h)
|
Inventory;
|
(i)
|
Investment Property;
|
(j)
|
Letters of Credit and Letter-of-Credit Rights;
|
(k) |
Money and other assets of Grantor that now or later come into possession, custody, or control of Lender;
|
(l)
|
all Accessions and Supporting Obligations; and
|
GRANTORS:
|
||
|
||
CHARLES & COLVARD, LTD.
|
||
|
||
By:
|
/s/ Clint J. Pete
|
|
|
||
Name: Clint J. Pete
|
||
|
||
Title: Chief Financial Officer
|
||
|
||
charlesandcolvard.com
|
||
|
||
By:
|
/s/ Clint J. Pete
|
|
|
||
Name: Clint J. Pete
|
||
Title: Manager
|
||
|
||
CHARLES & COLVARD DIRECT, LLC
|
||
|
||
By:
|
/s/ Clint J. Pete
|
|
|
||
Name: Clint J. Pete
|
||
|
||
Title: Manager
|
||
|
||
LENDER:
|
WHITE OAK COMMERCIAL FINANCE, LLC
|
||
|
||
By:
|
/s/ Carlos Acedo
|
|
|
||
Name: Carlos Acedo
|
||
|
||
Title: Vice President
|
1. |
Leased Real Property:
|
2. |
Copyrights, Trademarks, Patents and Licensing Agreements:
|
Trademark
|
Registration
Number
|
Registration
Date
|
Expiration
Date
|
Trademark
Application
|
Application/Serial
Number
|
Application
Date
|
Patent
Description
|
Registration
Number
|
Registration
Date
|
Expiration
Date
|
Patent
Application
|
Application/Serial
Number
|
Application
Date
|
Copyright
|
Registration Number
|
Registration
Date
|
Name of
Document
|
Date of
Document
|
Licensor
|
Term
|
Licensed
Intellectual
Property
|
3. |
Deposit Accounts, Securities Accounts, Commodity Accounts and other Investment Accounts:
|
Name and
Address of Bank
|
Account No.
|
Purpose
|
|
||
|
Name
and
Address
of Broker
or Other
Institution
|
Account No.
|
Purpose
|
Types of
Investments
|
Balance as of
[Date]
|
4. |
Locations of Collateral and Books and Records:
|
Address
|
Owned/Leased/Third Party*
|
Name/Address of Lessor or Third Party, as Applicable
|
*
|
Indicate in this column next to applicable address whether the locations is owned by the Company, leased by the Company or owned and operated by a third party (e.g., warehouse, processor, consignee, etc.)
|
CHARLES & COLVARD, LTD.
|
By:
|
/s/ Clint J. Pete
|
Name: Clint J. Pete
|
|
Title: Chief Financial Officer
|
CHARLESANDCOLVARD.COM, LLC
|
By:
|
/s/ Clint J. Pete
|
|
Name: Clint J. Pete
|
||
Title: Manager
|
CHARLES & COLVARD DIRECT, LLC
|
By:
|
/s/ Clint J. Pete
|
|
Name: Clint J. Pete
|
||
Title: Manager
|
CREE, INC.
|
By:
|
/s/ Cengiz Balkas
|
|
Cengiz Balkas, Senior VP and General Manager – Wolfspeed
|
WHITE OAK COMMERCIAL FINANCE, LLC
|
By:
|
/s/ Carlos Acedo
|
|
Name: Carlos Acedo
|
||
Title: Vice President
|
WELLS FARGO BANK, NATIONAL ASSOCIATION
|
By:
|
/s/ Kathryn Williams
|
|
Kathryn Williams, Authorized Signatory
|
CHARLES & COLVARD, LTD.
|
By:
|
/s/ Clint J. Pete
|
Name: Clint J. Pete
|
||
Title: Chief Financial Officer and Treasurer
|
CHARLES & COLVARD DIRECT, LLC
|
By:
|
/s/ Clint J. Pete
|
Name: Clint J. Pete
|
||
Title: Manager
|
CHARLESANDCOLVARD.COM, LLC
|
By:
|
/s/ Clint J. Pete
|
Name: Clint J. Pete
|
|
Title: Manager
|
Company Name
|
Jurisdiction
|
|
charlesandcolvard.com, LLC
|
North Carolina
|
|
Charles & Colvard (HK) Ltd.
|
Hong Kong SAR
|
1. |
I have reviewed this Transition Report on Form 10-KT for the transition period ended June 30, 2018 of Charles & Colvard, Ltd.;
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
By:
|
/s/ Suzanne Miglucci
|
|
September 6, 2018
|
Suzanne Miglucci
|
|
President and Chief Executive Officer
|
1. |
I have reviewed this Transition Report on Form 10-KT for the transition period ended June 30, 2018 of Charles & Colvard, Ltd.;
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
(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
|
|
September 6, 2018
|
Clint J. Pete
|
|
Chief Financial Officer
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
By:
|
/s/ Suzanne Miglucci
|
|
Suzanne Miglucci
|
||
President and Chief Executive Officer
|
||
September 6, 2018
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
By:
|
/s/ Clint J. Pete
|
|
Clint J. Pete
|
||
Chief Financial Officer
|
||
September 6, 2018
|
Document and Entity Information - USD ($) |
6 Months Ended | ||
---|---|---|---|
Jun. 30, 2018 |
Aug. 30, 2018 |
Dec. 31, 2017 |
|
Document and Entity Information [Abstract] | |||
Entity Registrant Name | CHARLES & COLVARD LTD | ||
Entity Central Index Key | 0001015155 | ||
Current Fiscal Year End Date | --06-30 | ||
Entity Well-known Seasoned Issuer | No | ||
Entity Voluntary Filers | No | ||
Entity Current Reporting Status | Yes | ||
Entity Filer Category | Smaller Reporting Company | ||
Entity Public Float | $ 24,853,779 | ||
Entity Common Stock, Shares Outstanding | 21,598,069 | ||
Document Fiscal Year Focus | 2018 | ||
Document Fiscal Period Focus | FY | ||
Document Type | 10-KT | ||
Amendment Flag | false | ||
Document Period End Date | Jun. 30, 2018 |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares |
Jun. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
---|---|---|---|
Shareholders' equity: | |||
Common stock, par value (in dollars per share) | $ 0 | $ 0 | $ 0 |
Common stock, shares authorized (in shares) | 50,000,000 | 50,000,000 | 50,000,000 |
Common stock, shares issued (in shares) | 21,705,173 | 21,580,102 | 21,369,885 |
Common stock, shares outstanding (in shares) | 21,705,173 | 21,580,102 | 21,369,885 |
DESCRIPTION OF BUSINESS |
6 Months Ended | ||
---|---|---|---|
Jun. 30, 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, and designers, including some of the largest distributors and jewelry manufacturers in the world. Historically, the Company also sold loose moissanite jewels and finished jewelry at wholesale prices to television shopping networks. 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 subsidiaries, charlesandcolvard.com, LLC (formerly Moissanite.com, LLC) and Charles & Colvard Direct, LLC (through March 2016), third-party online marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets. As of September 30, 2016, the Company changed the name of its wholly owned subsidiary Moissanite.com, LLC to charlesandcolvard.com, LLC. In March 2016, the Company divested its direct-to-consumer home party business previously operated through its wholly-owned subsidiary, Charles & Colvard Direct, LLC (dba Lulu Avenue®). The Company and Charles & Colvard Direct, LLC, entered into an asset purchase agreement with Yanbal USA, Inc. (“Yanbal”), under which Yanbal purchased certain assets related to the Company’s direct-to-consumer home party business for $500,000 and assumed certain liabilities related to such assets. A more detailed description of this transaction is included in Note 13, “Discontinued Operations.” The Company presents the operating results of Charles and Colvard Direct, LLC as a discontinued operation. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation – The accompanying consolidated financial statements as of June 30, 2018 and for the six months ended June 30, 2018 and June 30, 2017 (unaudited) and as of and for the years ended December 31, 2017 and December 31, 2016 include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC (formerly Moissanite.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 had no operating activity during the six-month period ended June 30, 2018 and the year ended December 31, 2017. Activity for Charles & Colvard Direct, LLC, for the year ended December 31, 2016, is included in discontinued operations. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 and has had no operating activity since 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 of each year and ending on June 30 of the following calendar year. This change to the fiscal year reporting cycle began July 1, 2018. As a result of the change, the Company had a six-month transition period from January 1, 2018 to June 30, 2018 (the “transition period ended June 30, 2018”). In connection with this change, the Company is filing its audited financial results for the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016 in this Transition Report on Form 10-KT with the U.S. Securities and Exchange Commission (the “SEC”). In addition, the Company’s Consolidated Statements of Operations and Consolidated Statements of Cash Flows include unaudited comparative amounts for the six months ended June 30, 2017. Discontinued Operations – The results of operations for businesses that have been disposed of or classified as held-for-sale are segregated from the results of the Company’s continuing operations and classified as discontinued operations for each period presented in the Company’s Consolidated Statements of Operations. Similarly, any assets and liabilities of such businesses are reclassified from continuing operations and presented as assets or liabilities from discontinued operations for each period presented on the Company’s Consolidated Balance Sheets. Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets, uncertain tax positions, cooperative advertising, and revenue recognition. Actual results could differ materially from those estimates. Reclassifications – Certain amounts in the Company’s consolidated financial statements for the year ended December 31, 2016 have been reclassified to conform to current presentation, primarily amounts described in Note 3, “Segment Information and Geographic Data”, related to changes in the Company’s operating and reportable business segments and amounts presented in Note 8, “Accrued Expenses and Other Liabilities”, relating to the reclassification of certain accrued expenses and other liabilities. These reclassifications had no impact on the Company’s consolidated financial position or consolidated results of operations as of or for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited) and the years ended December 31, 2017 and December 31, 2016. 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 under the Revenue Recognition caption. 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 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. Cash and Cash Equivalents – All highly liquid investments with an original maturity of three months or less from the date of purchase are considered to be cash equivalents. 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 (“FDIC”) insurable limits. The Company has never experienced any losses related to these balances. Non-interest-bearing amounts on deposit in excess of FDIC insurable limits at June 30, 2018, December 31, 2017, and December 31, 2016 approximated $3.11 million, $4.32 million, and $7.04 million, respectively. 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 90 days, though it may offer extended terms with specific customers and on significant orders from time to time. 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 year ended December 31, 2016, the Company wrote off $815,000 in accounts receivable related to one international customer that was past due on its payment arrangement as it determined that the benefits of continued collections efforts did not outweigh the cost of legal proceedings. The Company does not believe its commercial terms were a factor with this customer’s non-payment. The Company’s allowance for doubtful accounts previously included an allowance for this amount that was included in accounts receivable, and therefore, this write-off did not have an impact on net loss for the year ended December 31, 2016. During the transition period ended June 30, 2018 and the year ended December 31, 2017, the Company has not experienced any other significant accounts receivable write-offs related to revenue arrangements with extended payment terms. See Note 14, “Major Customers and Concentration of Credit Risk”, for further discussion of credit risk within trade accounts receivable. Accounts Receivable Reserves – Estimates are used to determine the amount of two reserves against trade accounts receivable. The first reserve is an allowance for sales returns. At the time revenue is recognized, the Company estimates future returns using a historical return rate that is reviewed quarterly with consideration of any contractual return privileges granted to customers, and it reduces sales and trade accounts receivable by this estimated amount. The allowance for sales returns was $648,000, $537,000 and $415,000 at June 30, 2018, December 31, 2017 and December 31, 2016, respectively. The following are reconciliations of the allowance for sales returns balances as of the periods presented:
The second reserve is an allowance for doubtful accounts for estimated losses resulting from the failure of the Company’s customers to make required payments. This allowance reduces trade accounts receivable to an amount expected to be collected. Based on historical percentages of uncollectible accounts by aging category, changes in payment history, and facts and circumstances regarding specific accounts that become known to management when evaluating the adequacy of the allowance for doubtful accounts, the Company determines a percentage based on the age of the receivable that it deems uncollectible. The allowance is then calculated by applying the appropriate percentage to each of the Company’s accounts receivable aging categories, with consideration given to individual customer account activity subsequent to the current period, including cash receipts, in determining the appropriate allowance for doubtful accounts in the current period. Any increases or decreases to this allowance are charged or credited, respectively, as a bad debt expense to general and administrative expenses. The Company generally uses an internal collection effort, which may include its sales personnel as it deems appropriate. After all internal collection efforts have been exhausted, the Company generally writes off the account receivable. Any accounts with significant balances are reviewed separately to determine an appropriate allowance based on the facts and circumstances of the specific account. During the quarter ended September 30, 2016, the Company wrote off $815,000 in accounts receivable related to one international customer that was past due on its payment arrangement, as the Company determined that the benefits of continued collections efforts did not outweigh the costs of legal proceedings. The Company’s allowance for doubtful accounts previously included an allowance for this accounts receivable, and therefore, this write-off did not have an impact on net loss for the year ended December 31, 2016. During its review for the transition period ended June 30, 2018 and the years ended December 31, 2017 and December 31, 2016, the Company determined no additional reserves were necessary for specific accounts. Based on these criteria, management determined that allowances for doubtful accounts receivable of $233,000, $254,000 and $226,000 at June 30, 2018, December 31, 2017 and December 31, 2016, respectively, were required. The following are reconciliations of the allowance for doubtful accounts balances as of the periods presented:
Although the Company believes that its reserves are adequate, if the financial condition of its customers deteriorates, resulting in an impairment of their ability to make payments, or if it underestimates the allowances required, additional allowances may be necessary, which would result in increased expense in the period in which such determination is made. Inventories - 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 based on historical and anticipated levels of sales is classified as long-term on the Company’s Consolidated Balance Sheets. The Company’s classification of its inventory as either current or long-term inventory requires it to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of sales over the next 12 months. Each accounting period, the Company evaluates the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves, which also include significant estimates by management. The Company’s inventory-related valuation allowances are recorded in the aggregate rather than an individual item approach for each obsolescence, rework, and shrinkage valuation allowance. Property and Equipment – Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method as follows:
Intangible Assets – The Company capitalizes costs associated with obtaining or defending patents issued or pending for inventions and license rights related to the manufacture of moissanite jewels. Such costs are amortized over the life of the patent, generally 15 years. The Company also capitalizes licenses it obtains for the use of certain advertising images and external costs incurred for trademarks. Such costs are amortized over the period of the license or estimated useful life of the trademark, respectively. Impairment of Long-Lived Assets – The Company evaluates the recoverability of its long-lived assets by reviewing them for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount exceeds the fair value and is recognized as an operating expense in the period in which the determination is made. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell once the held-for-sale criteria are met. As of June 30, 2018, the Company did not identify any indicators of long-lived asset impairment. In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the useful-life assumption will result in increased depreciation and amortization expense in the period when such determination is made, as well as in subsequent periods. 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 obligations; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract, if any; and (v) recognition of revenue when the Company has satisfied the underlying performance obligations, 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 returns 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 of such purchase 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 June 30, 2018, December 31, 2017 and December 31, 2016, the Company’s refund liabilities balances were $648,000, $537,000 and $415,000, respectively, and are included within accounts receivable, net, in the accompanying Consolidated Balance Sheets. As of June 30, 2018, December 31, 2017 and December 31, 2016, the Company’s returns asset balances were $250,000, $0, and $0, respectively, and are included within prepaid expenses and other assets in the accompanying 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 consolidated financial statements: Condensed Consolidated Balance Sheets
Condensed Consolidated Statements 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
Cost of Goods Sold – Cost of goods sold is primarily composed of inventory sold during the period; inventory written off during the period due to ongoing quality reviews or through customer returns; salaries and payroll-related expenses for personnel involved in preparing and shipping product to customers; an allocation of shared expenses such as rent, utilities, communication expenses, and depreciation related to preparing and shipping product to customers; and outbound freight charges. Advertising Costs – Advertising production costs are expensed as incurred. Media placement costs are expensed the first time the underlying advertising appears. The Company also offers a cooperative advertising program to certain of its distributor and retail partners that reimburses, via a credit towards future purchases, a portion of their marketing costs based on the customers’ net purchases from the Company and is subject to the customer providing documentation of all advertising performed that includes the Company’s products. For the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016, these approximate amounts were $154,000, $36,000, $210,000 and $126,000, respectively, and are included as a component of sales and marketing expenses. Advertising expenses, inclusive of the cooperative advertising program, for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016, were approximately $1.09 million, $855,000, $1.94 million and $2.59 million, respectively. Approximately $56,000 related to discontinued operations was included in total advertising expense for the year ended December 31, 2016. Sales and Marketing – Sales and marketing costs are expensed as incurred. These costs include all expenses of promoting and selling the Company’s products and include such items as the salaries, payroll-related expenses, and travel of sales and marketing personnel; digital marketing; advertising; trade shows; market research; sales commissions; and an allocation of overhead expenses attributable to these activities. Except for an allocation to general and administrative expenses, these costs also include the operating expenses of charlesandcolvard.com, LLC, the Company’s wholly owned operating subsidiary. General and Administrative – General and administrative costs are expensed as incurred. These costs include the salaries and payroll-related expenses of executive, finance, information technology, and administrative personnel; legal, investor relations, and professional fees; general office and administrative expenses; Board of Directors fees; rent; bad debts; and insurance. Research and Development – Research and development costs are expensed as incurred. These costs primarily comprise salary allocations and consultant fees associated with the study of product enhancement and manufacturing process efficiencies. Stock-Based Compensation – The Company recognizes compensation expense for stock-based awards based on estimated fair values on the date of grant. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The fair value of other stock-based compensation awards is determined by the market price of the Company’s common stock on the date of grant. The expense associated with stock-based compensation is recognized on a straight-line basis over the requisite service period of each award. Fair value of stock options using the Black-Scholes-Merton option pricing model is estimated on the date of grant utilizing certain assumptions for dividend yield, expected volatility, risk-free interest rate, and expected lives of the awards, as follows:
The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rates of stock-based awards and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rates, the Company analyzed its historical forfeiture rates, the remaining lives of unvested stock-based awards, and the amount of vested awards as a percentage of total awards outstanding. If the Company’s actual forfeiture rates are materially different from its estimates, or if the Company re-evaluates the forfeiture rates in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period. Income Taxes – Deferred income taxes are recognized for the income tax consequences of “temporary” differences by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the income tax bases of existing assets and liabilities. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more likely than not to be realized. In light of the Tax Cuts and Jobs Act (the “Tax Act”) enacted in December 2017, the Company provisionally recorded its U.S. deferred taxes as of the year ended December 31, 2017, based on the federal corporate income tax rate of 21%. In June 2018, the Company filed its 2017 U.S. corporate income tax return, and in conjunction therewith, finalized its accounting policy with respect to accounting for its deferred income taxes as of and for the transition period ended June 30, 2018. For further discussion of the effects of the Tax Act on our deferred tax assets, see Note 12, “Income Taxes.” Net Loss per Common Share – Basic net loss from continuing and discontinued operations 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 continuing and discontinued 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 and unvested restricted shares. The following table reconciles the differences between the basic and diluted net loss per share presentations:
For the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016, stock options to purchase approximately 2.39 million, 2.16 million, 2.38 million and 2.13 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 transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016, approximately 264,000, 412,000, 355,000 and 359,000, respectively, of restricted shares that have been issued but not yet vested have been excluded from the computation of diluted net loss per common share because the effects of the inclusion of such number of shares would be anti-dilutive to net loss per common share. Recently Adopted/Issued Accounting Pronouncements – In February 2016, as amended in July 2018, 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 process of conducting 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. On June 20, 2018, the FASB issued guidance that is intended to reduce cost and complexity and to improve financial reporting for share-based payments to nonemployees. This new guidance is effective for fiscal years beginning after December 15, 2018. The Company is in the process of conducting its analysis, but currently the Company believes the impact of the adoption of this new guidance is not expected to be material to the Company’s financial statements. |
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. Previously, the Company managed its business through two operating and reportable segments: wholesale distribution transacted through the parent entity, and the direct-to-consumer distribution channel transacted through the Company’s wholly owned operating subsidiary, charlesandcolvard.com, LLC (formerly Moissanite.com, LLC). During the first quarter of 2017, the Company began managing its business through two newly defined 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.” 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 for the periods presented 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 or disclosed in the financial information for each segment. The reconciliations of the Company’s product line cost of goods sold to cost of goods sold, as reported in the consolidated financial statements for the periods presented, are 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 and property and equipment as of June 30, 2018, December 31, 2017 and December 31, 2016 are held and located in the United States. The following presents net sales data by geographic area for the periods presented:
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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 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. As of June 30, 2018, December 31, 2017 and December 31, 2016, no assets were identified for impairment. Level 3 inputs are primarily based on the estimated future cash flows of the asset determined by market inquiries to establish fair market value of used machinery or future revenue expected to be generated with the assistance of patents and trademarks. |
INVENTORIES |
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INVENTORIES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INVENTORIES |
The Company’s total inventories, net of reserves, are as follows as of the dates presented:
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 June 30, 2018, December 31, 2017 and December 31, 2016, work-in-process inventories issued to active production jobs approximated $2.45 million, $2.99 million and $7.18 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. Prior to the expiration of certain patent rights, the Company had the exclusive right in the U.S. through August 2015 and 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 generally 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 continuing operating subsidiary carries no net inventories, and inventory is transferred without intercompany markup from the parent entity as product line cost of goods sold when sold to the end consumer. Prior to March 2016, the Company purchased fashion finished jewelry comprising base metals and non-precious gemstones for sale through Lulu Avenue®, the Company’s former direct-to-consumer home party division of the Company’s wholly owned operating subsidiary, Charles & Colvard Direct, LLC. This finished jewelry was fashion-oriented and subject to styling trends that could change with each catalog season, of which there are generally two each year. The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:
Total net loose jewel inventories at June 30, 2018, December 31, 2017 and December 31, 2016, including inventory on consignment net of reserves, were $24.00 million, $22.13 million and $22.64 million, respectively. Total net finished jewelry inventories at June 30, 2018, December 31, 2017 and December 31, 2016, including inventory on consignment net of reserves and finished jewelry featuring moissanite manufactured by the Company, were $7.79 million, $8.77 million and $5.48 million, respectively. As of June 30, 2018, December 31, 2017 and December 31, 2016, management established an obsolescence reserve of $1.30 million, $1.42 million and $944,000, respectively. Typically, in the jewelry industry, slow-moving or discontinued lines are sold as closeouts or liquidated in alternative sales channels. During the year ended December 31, 2016, management identified an opportunity to sell approximately $6.77 million of legacy loose jewel inventory of less desirable quality. The Company had no bulk sales of such inventory during the transition period ended June 30, 2018 or the year ended December 31, 2017. Regularly, management reviews the legacy loose jewel inventory for any lower of cost or net realizable value and obsolescence issues. Accordingly, based on current demand during the transition period ended June 30, 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. Accordingly, management’s analysis revealed that some of these items were sold during transition period ended June 30, 2018 that resulted in a decrease in the lower of cost or net realizable value reserve on this remaining inventory to approximately $1.29 million as of June 30, 2018 from $1.33 million as of December 31, 2017. This reserve had been increased from $517,000 as of December 31, 2016. As of June 30, 2018, December 31, 2017 and December 31, 2016, 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 $7,000, $91,000 and $427,000, 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 June 30, 2018, December 31, 2017 and December 31, 2016 management established a rework reserve for recut and repairs of $534,000, $557,000 and $454,000, respectively. Loose jewel inventories at June 30, 2018, December 31, 2017 and December 31, 2016 included recut reserves of $418,000, $468,000 and $425,000, respectively. The finished jewelry inventories at June 30, 2018, December 31, 2017 and December 31, 2016 include a repairs reserve of $116,000, $89,000 and $29,000, respectively. As of June 30, 2018, December 31, 2017 and December 31, 2016 management established a shrinkage reserve of $136,000, $191,000 and $169,000, respectively. The loose jewel inventories at June 30, 2018, December 31, 2017 and December 31, 2016 include shrinkage reserves of $48,000, $18,000 and $67,000, respectively. The finished jewelry inventories at June 30, 2018, December 31, 2017 and December 31, 2016 include shrinkage reserves of $88,000, $173,000 and $102,000, respectively. 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 $18,000, $60,000 and $46,000 as of June 30, 2018, December 31, 2017 and December 31, 2016, 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 June 30, 2018, December 31, 2017 and December 31, 2016 include shrinkage reserves of $11,000, $5,000 and $7,000, respectively. The finished jewelry inventories on consignment at June 30, 2018, December 31, 2017 and December 31, 2016 include shrinkage reserves of $7,000, $55,000 and $39,000, respectively. The need for adjustments to inventory reserves is evaluated on a period-by-period basis. |
PROPERTY AND EQUIPMENT |
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PROPERTY AND EQUIPMENT [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PROPERTY AND EQUIPMENT |
Property and equipment consists of the following as of the dates presented:
Depreciation expense for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016 was approximately $229,000, $213,000, $420,000 and $528,000, respectively. Approximately $26,000 related to discontinued operations was included in total depreciation expense for the year ended December 31, 2016. |
INTANGIBLE ASSETS |
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INTANGIBLE ASSETS [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INTANGIBLE ASSETS |
Intangible assets consist of the following as of the dates presented:
Amortization expense for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016 was approximately $1,000, $1,000, $2,000 and $68,000, respectively. Amortization expense on existing intangible assets is estimated to be approximately $3,000 for each of the fiscal years ending June 30, 2019, 2020, 2021, and 2022 and $2,000 for the fiscal year ending June 30, 2023. The remainder of the amortization expense for total intangible assets, net, will be recognized in periods ending after June 30, 2023. Approximately $13,000 related to discontinued operations was included in total amortization expense for the year ended December 31, 2016. |
ACCRUED EXPENSES AND OTHER LIABILITIES |
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ACCRUED EXPENSES AND OTHER LIABILITIES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ACCRUED EXPENSES AND OTHER LIABILITIES |
Total accrued expenses and other liabilities consist of the following as of the dates presented:
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COMMITMENTS AND CONTINGENCIES |
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COMMITMENTS AND CONTINGENCIES [Abstract] | ||||||||||||||||||||||||||||
COMMITMENTS AND CONTINGENCIES |
Lease Commitments On December 9, 2013, the Company entered into a Lease Agreement, as amended on December 23, 2013 and April 15, 2014 (the “Lease Agreement”), for its corporate headquarters, which occupies approximately 36,350 square feet of office, storage, and light manufacturing space. The Company took possession of the leased property on May 23, 2014, once certain improvements to the leased space were completed and did not have access to the property before this date. These improvements and other lease signing and moving incentives offered by the landlord totaled approximately $550,000 and $73,000, respectively, which are being amortized over the life of the lease until October 31, 2021. Included in the Lease Agreement is a seven-month rent abatement period effective June 2014 through December 2014. The Company recognizes rent expense on a straight-line basis, giving consideration to the rent holidays and escalations, the lease signing and moving allowance to be paid to the Company, and the rent abatement. As of June 30, 2018, the Company’s future minimum payments under the operating leases were as follows:
Rent expense for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016 was approximately $260,000, $245,000, $510,000 and $539,000, respectively. Approximately $40,000 related to discontinued operations was included in total rent expense for the year ended December 31, 2016. Purchase Commitments On December 12, 2014, the Company entered into an 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 was scheduled to expire on June 24, 2018, unless extended by the parties. Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement was also amended to (i) provide the Company with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following expiration of the initial term; (ii) establish a process by which Cree may begin producing alternate SiC material based on the Company’s specifications that will give the Company the flexibility to use the materials in a broader variety of its products; and (iii) permit the Company to purchase certain amounts of SiC materials from third parties under limited conditions. The Company’s total purchase commitment under the Supply Agreement until June 2023 is approximately $52.95 million, the full amount of which remains to be purchased as of June 30, 2018. Over the life of the Supply Agreement, as amended, the Company’s future minimum annual purchase commitments of SiC crystals range from approximately $9 million to $12 million each year. During the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016, the Company purchased approximately $4.89 million, $4.42 million, $9.39 million and $8.20 million, respectively, of SiC crystals from Cree. These purchases were pursuant to the terms and conditions of the Supply Agreement prior to the effective date of its amendment as of June 22, 2018. |
LINE OF CREDIT |
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LINE OF CREDIT [Abstract] | |||
LINE OF CREDIT |
On July 13, 2018, the Company and its wholly-owned subsidiary, charlesandcolvard.com, LLC (collectively, the “Borrowers”), obtained a $5.00 million asset-based revolving credit facility (the “White Oak Credit Facility”) from White Oak Commercial Finance, LLC (“White Oak”). The White Oak Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions. The White Oak Credit Facility, which matures on July 13, 2021, is guaranteed by Charles & Colvard Direct, LLC, a wholly-owned subsidiary of the Company (the “Guarantor”). Under the terms of the White Oak Credit Facility, the Borrowers must maintain at least $500,000 in excess availability at all times. The White Oak Credit Facility contains no other financial covenants. Advances under the White Oak Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts receivable and inventory, plus the value of precious metal jewelry components, less reserves. The inclusion of inventory and precious metal jewelry components in the borrowing base was subject to the completion of an inventory appraisal, which was completed subsequent to the execution of the White Oak Credit Facility. Eligible inventory is further limited to 60% of the net borrowing base, while precious metal jewelry components are limited to $500,000. Advances may be either revolving or non-revolving. Non-revolving advances are limited to $1.00 million in aggregate principal amount outstanding and must be repaid on each January 15 (which may be effected by conversion to revolving advances, absent an event of default). There are no other mandatory prepayments or line reductions. The Company may elect to prepay advances in whole or in part at any time without penalty. In addition, the White Oak Credit Facility may be terminated by the Company at any time, subject to a $100,000 fee in the first year of the term of the White Oak Credit Facility, a $50,000 fee in the second year, and no fee thereafter. In connection with the White Oak Credit Facility, the Company will incur a non-refundable origination fee in the amount of $125,000 that is due and payable to White Oak in three installments. The first installment in the amount of $41,667 was paid upon execution of the White Oak Credit Facility on July 13, 2018. The second installment in the amount of $41,667 will be due and payable on July 13, 2019, or the date of termination, whichever is sooner, and the third and final installment in the amount of $41,666 will be due and payable on July 13, 2020, or the date of termination, whichever is sooner. During the first year of the term of the White Oak Credit Facility, revolving advances will accrue interest at a rate equal to one-month LIBOR (reset monthly, and subject to a 1.25% floor) plus 3.75%, and non-revolving advances will accrue interest at such LIBOR rate plus 4.75%. Thereafter, the interest margins will reduce upon the Company’s achievement of a specified fixed charge coverage ratio. However, advances are in all cases subject to a minimum interest rate of 5.50%. Interest is calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate 2% in excess of the rate otherwise applicable. The White Oak 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. White Oak’s security interest in certain SiC materials is subordinate to Cree’s security interest in such materials pursuant to the Company’s Supply Agreement and an Intercreditor Agreement by and among the Borrowers and the Guarantor with White Oak. In addition, White Oak’s security interest in certain tangible personal property of the Company is subordinate to its landlord’s security interest in such tangible personal property. The White Oak Credit Facility is evidenced by a credit agreement, dated as of July 13, 2018 (the “Credit Agreement”), a security agreement, dated as of July 13, 2018 (the “Security Agreement”), and customary ancillary documents. The Credit Agreement, Security Agreement, and ancillary documents contain customary covenants, representations, fees, and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, liens, loans, investments, mergers, acquisitions, divestitures, and affiliate transactions. Events of default under the White Oak Credit Facility include, without limitation, a change in control, an event of default under other indebtedness of the Borrowers or Guarantor in excess of $250,000, a material adverse change in the business of the Borrowers or Guarantor or in their ability to perform their obligations under the White Oak Credit Facility, and other defined circumstances that White Oak believes may impair the prospect of repayment. If an event of default occurs, White Oak is entitled to take enforcement action, including acceleration of amounts due under the White Oak Credit Facility and foreclosure upon collateral. The White Oak Credit Facility contains other customary terms, that include indemnity, collateral monitoring fee, minimum interest charge, expense reimbursement, yield protection, and confidentiality provisions. On July 13, 2018, upon its execution, the Company did not request any advances pursuant to the terms of the White Oak Credit Facility. Prior to obtaining the White Oak Credit Facility, the Company and its wholly owned subsidiaries, Charles & Colvard Direct, LLC, and Moissanite.com, LLC (now charlesandcolvard.com, LLC) (collectively, the “Wells Fargo Borrowers”), had a $10.00 million asset-based revolving credit facility from Wells Fargo Bank, National Association (“Wells Fargo”). This asset-based revolving credit facility (the “Wells Fargo Credit Facility”) was available 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 effective date of the Wells Fargo Credit Facility was June 25, 2014, and it was scheduled to mature on June 25, 2017. Effective June 22, 2017, the Wells Fargo Credit Facility was amended to extend the maturity date to June 25, 2018, the date upon which it matured in accordance with its terms. The Wells Fargo Credit Facility was also amended in June 2017 to reduce the interest rate payable on advances as set forth below and was amended further to include the addition of an EBITDA covenant, whereby the Wells Fargo Borrowers were required to maintain a specified minimum monthly EBITDA through December 2017 if the cash position for the Wells Fargo Borrowers’ demand deposit account maintained at Wells Fargo had fallen below $3.00 million or the Wells Fargo Borrowers had drawn upon the Wells Fargo Credit Facility. In connection with the June 2017 amendment to the Wells Fargo Credit Facility, the Company paid a 3% facility fee to Wells Fargo in the amount of $150,000 that was amortized fully over the term of underlying amendment through and as of June 25, 2018. The Wells Fargo Credit Facility included a $5.00 million sublimit for advances that was supported by a 90% guaranty provided by the U.S. Export-Import Bank. Any advances under the Wells Fargo Credit Facility were limited to a borrowing base, which was computed by applying specified advance rates to the value of the Wells Fargo Borrowers’ eligible accounts receivable and inventory, less reserves. Any advances against inventory were further subject to an initial $3.00 million maximum. During the term of the June 2017 amendment to the Wells Fargo Credit Facility, the Wells Fargo Borrowers were required to maintain a minimum of $1.00 million in excess availability at all times. Any advances would have accrued 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 would have been payable monthly in arrears. Principal outstanding during an event of default, which did not occur during the term of the Wells Fargo Credit Facility, would have accrued interest at a rate of 3% in excess of the above rate. Any advance could have been prepaid in whole or in part at any time and there were no mandatory prepayments or line reductions. The Wells Fargo Credit Facility was secured by a lien on substantially all assets of the Wells Fargo Borrowers, each of which was jointly and severally liable for all obligations thereunder. Wells Fargo’s security interest in certain SiC materials was subordinate to Cree’s security interest in such materials pursuant to the Supply Agreement and an Intercreditor Agreement with Wells Fargo. The Wells Fargo Credit Facility was evidenced by a Credit and Security Agreement, dated as of June 25, 2014, as amended (the “Wells Fargo Credit Agreement”), and customary ancillary documents. The Wells Fargo Credit Agreement contained 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 Wells Fargo Credit Facility included, 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 Wells Fargo Borrowers in excess of $200,000, and (iii) a material adverse change in the ability of the Wells Fargo Borrowers to perform their obligations under the Wells Fargo Credit Agreement or in the Wells Fargo Borrowers’ assets, liabilities, businesses or prospects, or other circumstances that Wells Fargo believed would have impaired the prospect of repayment. If an event of default had occurred, Wells Fargo would have been entitled to take enforcement action, including an acceleration of any amounts due under the Wells Fargo Credit Agreement and foreclosure upon collateral. The Wells Fargo Credit Agreement contained other customary terms, that included indemnity, expense reimbursement, yield protection, and confidentiality provisions. The Company had not borrowed against the Wells Fargo Credit Facility as of June 25, 2018, the date upon which the Wells Fargo Credit Facility matured and was terminated in accordance with its terms. |
SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION |
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SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION |
Common Stock The Company is authorized to issue 50,000,000 shares of common stock, no par value. As of June 30, 2018, December 31, 2017 and December 31, 2016, it had 21,705,173, 21,580,102 and 21,369,885 shares of common stock outstanding, respectively. Holders of common stock are entitled to one vote for each share held. Preferred Stock The Board of Directors is authorized, without further shareholder approval, to issue up to 10,000,000 shares of preferred stock, no par value. The preferred stock may be issued from time to time in one or more series. No shares of preferred stock had been issued as of June 30, 2018. Dividends The Company has paid no cash dividends during the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016. Shelf Registration Statement The Company has an effective shelf registration statement on Form S-3 on file with the SEC which allows it to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million. The Company’s ability to issue equity securities under the shelf registration statement is subject to market conditions. Equity Compensation Plans 2008 Stock Incentive Plan In May 2008, the shareholders of the Company approved the adoption of the Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended on March 31, 2015 and approved by the shareholders of the Company on May 20, 2015 and further amended on March 15, 2016 and approved by the shareholders of the Company on May 18, 2016 (the “2008 Plan”). The 2008 Plan expired (with respect to future grants) on May 26, 2018. The 2008 Plan authorized the Company to grant stock options, stock appreciation rights, restricted stock, and other equity awards to selected employees, directors, and independent contractors. The aggregate number of shares of the Company’s common stock that could be issued pursuant to awards granted under the 2008 Plan were not to exceed the sum of 6,000,000 plus any shares of common stock subject to an award granted under any stock incentive plan maintained by the Company prior to the 2008 Plan (each, a “Prior Plan”) that is forfeited, cancelled, terminated, expires, or lapses for any reason without the issuance of shares pursuant to the award, or shares subject to an award granted under a Prior Plan which shares are forfeited to, or repurchased or reacquired by, the Company. Stock options granted to employees under the 2008 Plan generally vest over four years and have terms of up to 10 years. The vesting schedules and terms of stock options granted to independent contractors vary depending on the specific grant, but the terms are no longer than 10 years. Stock option awards granted to members of the Board of Directors generally vest at the end of one year from the date of the grant. The vesting schedules of restricted stock awards granted to employees or independent contractors vary depending on the specific grant but are generally four years or less. Only stock options and restricted stock had been granted under the 2008 Plan. As of June 30, 2018, December 31, 2017 and December 31, 2016, there were 2,388,169, 2,377,265 and 2,134,898 stock options outstanding under the 2008 Plan, respectively. Stock-Based Compensation The following table summarizes the components of the Company’s stock-based compensation included in net loss for the periods presented:
Due to the Company’s valuation allowance against deferred tax assets as discussed further in Note 12, “Income Taxes”, the income tax benefits for the transition period ended June 30, 2018, the year ended December 31, 2017 and the year ended December 31, 2016 were fully reserved. No stock-based compensation was capitalized as a cost of inventory during the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016. Approximately $44,000 related to discontinued operations was included in total stock-based compensation expense for the year ended December 31, 2016. Stock Options The following is a summary of the stock option activity for the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016:
The weighted average grant date fair value of stock options granted during the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016 was $0.68, $0.53 and $0.63, respectively. The total fair value of stock options that vested during the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016 was approximately $232,000, $400,000 and $780,000, respectively. 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 periods presented:
The following tables summarize information in connection with stock options outstanding at June 30, 2018:
As of June 30, 2018, the unrecognized stock-based compensation expense related to unvested stock options was approximately $262,000, which is expected to be recognized over a weighted average period of approximately 24 months. The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at June 30, 2018 was approximately $104,000. These amounts are before applicable income taxes and represent the closing market price of the Company’s common stock at June 30, 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. These amounts represent the amounts that would have been received by the optionees had these stock options been exercised on those dates. No stock options were exercised during the transition period ended June 30, 2018 and the year ended December 31, 2017. During the year ended December 31, 2016, the aggregate intrinsic value of stock options exercised was approximately $0. Restricted Stock The following is a summary of the restricted stock activity for the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016:
The unvested restricted shares as of June 30, 2018 are all performance-based restricted shares that will vest, subject to achievement of the underlying performance goals on July 31, 2018 and December 31, 2018. As of June 30, 2018, the estimated unrecognized stock-based compensation expense related to these unvested restricted shares subject to the achievement of performance goals was approximately $162,000, all of which is expected to be recognized over a weighted average period of approximately six months. |
INCOME TAXES |
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INCOME TAXES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INCOME TAXES |
The Tax Act, which was signed into law in December 2017, among other things lowered the U.S. corporate income tax rate from 35% to that of 21% effective January 1, 2018. Consequently, the Company wrote down its net deferred tax assets as of December 31, 2017 by approximately $519,000 to reflect the estimated impact of the Tax Act. 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 had substantially completed its provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects as of and for the year ended December 31, 2017. However, the SEC staff issued guidance regarding application of FASB income tax-related guidance in the reporting period that includes December 22, 2017 – the date on which the Tax Act was signed into law – to address situations when a company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company estimated the tax effects related to the impact to deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017, on a provisional basis. In this regard, the Tax Act repeals the corporate alternative minimum tax (“AMT”) regime, including claiming a refund and full realization of recoverable AMT credits. At that time, the Company was not able to make a reasonable estimate with respect to its realization of existing AMT credit carryforwards, and accordingly, continued to apply the income tax-related accounting guidance that was in effect immediately prior to the enactment of the Tax Act. In connection with filing its 2017 U.S. corporate income tax return in June 2018, the Company completed its analysis of the income tax effects of the Tax Act and the effect on its existing AMT deferred tax asset, including the nature, validity, and recoverability of its AMT-related deferred tax credit carryforwards. Upon completion of this analysis, the Company determined that it was able to recognize the underlying tax benefit in the amount of approximately $328,000 relating to the realization of the recoverable portion, and claim an expected refund, of its AMT-related deferred tax credit carryforwards as of June 30, 2018. Accordingly, the Company recorded the expected AMT credit refund as a receivable, net of an anticipated sequestration reduction, and such amount is included with other long-term assets in the accompanying Consolidated Balance Sheets. The Company accounts for income taxes under the liability method. Under the liability method, deferred income taxes are recognized for the income tax consequences of “temporary differences” by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the income tax bases of existing assets and liabilities. Income tax net benefit (expense) for the periods presented comprises the following:
Significant components of the Company’s deferred income tax assets as of the dates presented are as follows:
The following are reconciliations between expected income taxes, computed at the applicable statutory federal income tax rate applied to pretax accounting loss, and the income tax net benefit (expense) for the periods presented:
The income tax rate applied for the federal net operating loss carryforwards as of December 31, 2017 used in the tables above has been adjusted to reflect the appropriate effective income tax rate in 2017. Management does not believe this has a material impact on the consolidated financial statements for the year ended December 31, 2017. In addition, management believes that these adjustments do not have an impact on the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations, or Consolidated Statements of Cash Flows as of or for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited) and the years ended December 31, 2017 and December 31, 2016. The Company’s statutory tax rate as of the transition period ended June 30, 2018 is 22.13% and consists of the federal income tax rate of 21% and a blended state income tax rate of 1.13%, net of the federal benefit. The Company’s statutory tax rate as of December 31, 2017 was 23.25% and consisted of the federal income tax rate of 21% and a blended state income tax rate of 2.25%, net of the federal benefit. 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 June 30, 2018, December 31, 2017 and December 31, 2016, 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, and therefore, the Company maintained a valuation allowance against its deferred tax assets. As of June 30, 2018 and December 31, 2017, the Company had approximately $313,000 and $884,000, respectively, of remaining federal income tax credits, $289,000 of which expire between 2019 and 2021 and the balance without an expiration, which can be carried forward to offset future income taxes. As of June 30, 2018 and December 31, 2017, the Company also had federal tax net operating loss carryforwards of approximately $26.28 million and $24.59 million, respectively, expiring between 2020 and 2037, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $20.24 million and $20.22 million, respectively, expiring between 2023 and 2033; and various other state tax net operating loss carryforwards expiring between 2021 and 2034, which can be used to offset against future state taxable income. As of each of June 30, 2018 and December 31, 2017, there was approximately $6.03 million in net operating loss carryforwards in Hong Kong. In accordance with the Hong Kong tax code, these amounts can be carried forward indefinitely to offset future taxable income in Hong Kong. The Company’s deferred tax assets in Hong Kong were fully reserved with a valuation allowance of $996,000 as of each of June 30, 2018, December 31, 2017, and December 31, 2016, and had been fully reserved in all prior fiscal periods due to the uncertainty of future taxable income in this jurisdiction to utilize the deferred tax assets. Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was re-activated in December 2017, but had no operating activity during the transition period ended June 30, 2018 and the year ended December 31, 2017, previously ceased operations during 2008 and became a dormant entity during 2009. If the Company uses any portion of its deferred tax assets in future periods, the valuation allowance would need to be reversed and may impact the Company’s future operating results. Uncertain Tax Positions The gross liability for income taxes associated with uncertain tax positions at June 30, 2018 and December 31, 2017 was approximately $525,000 and $560,000, respectively. These amounts are shown net of approximately $54,000 and $98,000, respectively, recorded as a direct reduction to the associated deferred tax asset. The gross liability, if recognized, would favorably affect the Company’s effective tax rate. The Company’s policy for recording interest and penalties associated with tax audits is to record such items as a component of the provision for income taxes. The Company accrued approximately $10,000, $28,000 and $13,000 of interest and penalties associated with uncertain tax positions for the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016, respectively. Including the interest and penalties recorded for uncertain tax positions, there is a total of approximately $203,000, $193,000 and $165,000 of interest and penalties included in the accrued income tax liability for uncertain tax positions as of June 30, 2018, December 31, 2017, and December 31, 2016, respectively. To the extent interest and penalties are not ultimately incurred with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. In all significant federal and state jurisdictions where it is required to file income tax returns, the Company has analyzed filing positions for all tax years in which the statute of limitations is open. The only periods subject to examination by the major tax jurisdictions where the Company does business are the tax years ended December 31, 2013 through December 31, 2017. The Company does not believe that the outcome of any examination will have a material impact on its consolidated financial statements and does not expect settlement on any uncertain tax positions within the next 12 months. Beginning with the transition period ended June 30, 2018, the Company’s tax year will conform with its new fiscal accounting period year ending on June 30 of each year. The following table summarizes the activity related to the Company’s gross liability for uncertain tax positions for the period from December 31, 2015 through June 30, 2018:
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DISCONTINUED OPERATIONS |
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DISCONTINUED OPERATIONS [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
DISCONTINUED OPERATIONS |
In March 2016, the Company and Charles & Colvard Direct, LLC (“Direct”) a wholly owned subsidiary of the Company, entered into an asset purchase agreement (the “Purchase Agreement”) with Yanbal, pursuant to which Yanbal agreed to purchase certain assets of Direct (the “Transferred Assets”). The transactions contemplated by the Purchase Agreement closed on March 4, 2016 (the “Closing Date”). The Company made the decision to divest of these assets after careful analysis and the sale of these assets represented a strategic shift that resulted in a significant favorable impact on the Company’s operations and financial results. Pursuant to the terms of the Purchase Agreement, the Transferred Assets included, among other things, (i) an inventory credit usable towards certain inventory as of the Closing Date, (ii) all existing marketing collateral for Direct’s jewelry offered under the Lulu Avenue® trademarks as of the Closing Date, (iii) certain assigned contracts, (iv) style advisor and customer lists, and (v) all intellectual property rights owned by the Company and Direct and used solely in connection with the operation of Direct’s direct-to-consumer home party business for the sale of fashion jewelry and related products and services in the U.S., excluding Lulu Avenue®-related intellectual property. The inventory credit and an exclusive, nontransferable license to use the Lulu Avenue®-related intellectual property that was also granted to Yanbal on the Closing Date expired on July 31, 2016. After the Closing Date, the Company and Direct may no longer engage in the direct-to-consumer home party business and may not solicit style advisors or customers of the direct-to-consumer home party business. The Company had also agreed to provide to Yanbal certain transition services, which services ended August 31, 2016. The purchase price for the Transferred Assets was $500,000 with selling expenses of approximately $131,000, resulting in a net purchase price of approximately $369,000. The Company recorded a liability associated with $35,000 of expense related to certain style advisor incentives and reduced prepaid expenses by $60,000 related to contracts acquired by Yanbal. There were no assets or liabilities related to the Company’s discontinued operations as of June 30, 2018, December 31, 2017 or December 31, 2016. Further, there were no transactions related to the Company’s discontinued operations during the transition period ended June 30, 2018 or during the year ended December 31, 2017. The following table presents the major classes of line items constituting pretax loss from discontinued operations during the year ended December 31, 2016:
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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 |
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 greater than or equal to 10% of total gross accounts receivable as of the dates presented:
* Customer A did not have individual balances that represented 10% or more of total gross accounts receivable as of December 31, 2017 and December 31, 2016. ** Customer B did not have individual balances that represented 10% or more of total gross accounts receivable as of December 31, 2016. *** Customer C did not have individual balances that represented 10% or more of total gross accounts receivable as of June 30, 2018. A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent greater than or equal to 10% of total net sales for the periods presented:
* Customer B did not have net sales that represented 10% or more of total net sales for the six months ended June 30, 2017 (unaudited) or for the years ended December 31, 2017 and December 31, 2016. ** Customer D did not have net sales that represented 10% or more of total net sales for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited) or for the year ended December 31, 2017. *** Customer E did not have net sales that represented 10% or more of total net sales for the transition period ended June 30, 2018 or for the years ended December 31, 2017 and December 31, 2016. The Company records its sales returns allowance at the corporate level based on several factors including historical sales return activity and specific allowances for known customer returns. |
EMPLOYEE BENEFIT PLAN |
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EMPLOYEE BENEFIT PLAN [Abstract] | |||
EMPLOYEE BENEFIT PLAN |
All full-time employees who meet certain length of service requirements are eligible to participate in and receive benefits from the Company’s 401(k) Plan. This plan provides for matching contributions by the Company in such amounts as the Board of Directors may annually determine, as well as a 401(k) option under which eligible participants may defer a portion of their salaries. The Company contributed a total of $44,000, $30,000, $64,000 and $102,000 to this employee benefit plan during the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017 and the year ended December 31, 2016, respectively. |
SUBSEQUENT EVENT |
6 Months Ended | ||
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Jun. 30, 2018 | |||
SUBSEQUENT EVENT [Abstract] | |||
SUBSEQUENT EVENT |
On July 13, 2018, the Company obtained an asset-based revolving credit facility with White Oak Commercial Finance, LLC. A more detailed description of the credit facility is included in Note 10, “Line of Credit”. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of Presentation and Principles of Consolidation | Basis of Presentation and Principles of Consolidation – The accompanying consolidated financial statements as of June 30, 2018 and for the six months ended June 30, 2018 and June 30, 2017 (unaudited) and as of and for the years ended December 31, 2017 and December 31, 2016 include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC (formerly Moissanite.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 had no operating activity during the six-month period ended June 30, 2018 and the year ended December 31, 2017. Activity for Charles & Colvard Direct, LLC, for the year ended December 31, 2016, is included in discontinued operations. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 and has had no operating activity since 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 of each year and ending on June 30 of the following calendar year. This change to the fiscal year reporting cycle began July 1, 2018. As a result of the change, the Company had a six-month transition period from January 1, 2018 to June 30, 2018 (the “transition period ended June 30, 2018”). In connection with this change, the Company is filing its audited financial results for the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016 in this Transition Report on Form 10-KT with the U.S. Securities and Exchange Commission (the “SEC”). In addition, the Company’s Consolidated Statements of Operations and Consolidated Statements of Cash Flows include unaudited comparative amounts for the six months ended June 30, 2017. |
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Discontinued Operations | Discontinued Operations – The results of operations for businesses that have been disposed of or classified as held-for-sale are segregated from the results of the Company’s continuing operations and classified as discontinued operations for each period presented in the Company’s Consolidated Statements of Operations. Similarly, any assets and liabilities of such businesses are reclassified from continuing operations and presented as assets or liabilities from discontinued operations for each period presented on the Company’s Consolidated Balance Sheets. |
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Use of Estimates | Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, 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 Company’s consolidated financial statements for the year ended December 31, 2016 have been reclassified to conform to current presentation, primarily amounts described in Note 3, “Segment Information and Geographic Data”, related to changes in the Company’s operating and reportable business segments and amounts presented in Note 8, “Accrued Expenses and Other Liabilities”, relating to the reclassification of certain accrued expenses and other liabilities. These reclassifications had no impact on the Company’s consolidated financial position or consolidated results of operations as of or for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited) and the years ended December 31, 2017 and December 31, 2016. |
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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 under the Revenue Recognition caption. 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 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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Cash and Cash Equivalents | Cash and Cash Equivalents – All highly liquid investments with an original maturity of three months or less from the date of purchase are considered to be cash equivalents. |
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Concentration of Credit Risk | 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 (“FDIC”) insurable limits. The Company has never experienced any losses related to these balances. Non-interest-bearing amounts on deposit in excess of FDIC insurable limits at June 30, 2018, December 31, 2017, and December 31, 2016 approximated $3.11 million, $4.32 million, and $7.04 million, respectively. 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 90 days, though it may offer extended terms with specific customers and on significant orders from time to time. 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 year ended December 31, 2016, the Company wrote off $815,000 in accounts receivable related to one international customer that was past due on its payment arrangement as it determined that the benefits of continued collections efforts did not outweigh the cost of legal proceedings. The Company does not believe its commercial terms were a factor with this customer’s non-payment. The Company’s allowance for doubtful accounts previously included an allowance for this amount that was included in accounts receivable, and therefore, this write-off did not have an impact on net loss for the year ended December 31, 2016. During the transition period ended June 30, 2018 and the year ended December 31, 2017, the Company has not experienced any other significant accounts receivable write-offs related to revenue arrangements with extended payment terms. See Note 14, “Major Customers and Concentration of Credit Risk”, for further discussion of credit risk within trade accounts receivable. |
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Accounts Receivable Reserves | Accounts Receivable Reserves – Estimates are used to determine the amount of two reserves against trade accounts receivable. The first reserve is an allowance for sales returns. At the time revenue is recognized, the Company estimates future returns using a historical return rate that is reviewed quarterly with consideration of any contractual return privileges granted to customers, and it reduces sales and trade accounts receivable by this estimated amount. The allowance for sales returns was $648,000, $537,000 and $415,000 at June 30, 2018, December 31, 2017 and December 31, 2016, respectively. The following are reconciliations of the allowance for sales returns balances as of the periods presented:
The second reserve is an allowance for doubtful accounts for estimated losses resulting from the failure of the Company’s customers to make required payments. This allowance reduces trade accounts receivable to an amount expected to be collected. Based on historical percentages of uncollectible accounts by aging category, changes in payment history, and facts and circumstances regarding specific accounts that become known to management when evaluating the adequacy of the allowance for doubtful accounts, the Company determines a percentage based on the age of the receivable that it deems uncollectible. The allowance is then calculated by applying the appropriate percentage to each of the Company’s accounts receivable aging categories, with consideration given to individual customer account activity subsequent to the current period, including cash receipts, in determining the appropriate allowance for doubtful accounts in the current period. Any increases or decreases to this allowance are charged or credited, respectively, as a bad debt expense to general and administrative expenses. The Company generally uses an internal collection effort, which may include its sales personnel as it deems appropriate. After all internal collection efforts have been exhausted, the Company generally writes off the account receivable. Any accounts with significant balances are reviewed separately to determine an appropriate allowance based on the facts and circumstances of the specific account. During the quarter ended September 30, 2016, the Company wrote off $815,000 in accounts receivable related to one international customer that was past due on its payment arrangement, as the Company determined that the benefits of continued collections efforts did not outweigh the costs of legal proceedings. The Company’s allowance for doubtful accounts previously included an allowance for this accounts receivable, and therefore, this write-off did not have an impact on net loss for the year ended December 31, 2016. During its review for the transition period ended June 30, 2018 and the years ended December 31, 2017 and December 31, 2016, the Company determined no additional reserves were necessary for specific accounts. Based on these criteria, management determined that allowances for doubtful accounts receivable of $233,000, $254,000 and $226,000 at June 30, 2018, December 31, 2017 and December 31, 2016, respectively, were required. The following are reconciliations of the allowance for doubtful accounts balances as of the periods presented:
Although the Company believes that its reserves are adequate, if the financial condition of its customers deteriorates, resulting in an impairment of their ability to make payments, or if it underestimates the allowances required, additional allowances may be necessary, which would result in increased expense in the period in which such determination is made. |
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Inventories | Inventories - 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 based on historical and anticipated levels of sales is classified as long-term on the Company’s Consolidated Balance Sheets. The Company’s classification of its inventory as either current or long-term inventory requires it to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of sales over the next 12 months. Each accounting period, the Company evaluates the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves, which also include significant estimates by management. The Company’s inventory-related valuation allowances are recorded in the aggregate rather than an individual item approach for each obsolescence, rework, and shrinkage valuation allowance. |
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Property and Equipment | Property and Equipment – Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method as follows:
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Intangible Assets | Intangible Assets – The Company capitalizes costs associated with obtaining or defending patents issued or pending for inventions and license rights related to the manufacture of moissanite jewels. Such costs are amortized over the life of the patent, generally 15 years. The Company also capitalizes licenses it obtains for the use of certain advertising images and external costs incurred for trademarks. Such costs are amortized over the period of the license or estimated useful life of the trademark, respectively. |
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Impairment of Long-Lived Assets | Impairment of Long-Lived Assets – The Company evaluates the recoverability of its long-lived assets by reviewing them for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount exceeds the fair value and is recognized as an operating expense in the period in which the determination is made. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell once the held-for-sale criteria are met. As of June 30, 2018, the Company did not identify any indicators of long-lived asset impairment. In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the useful-life assumption will result in increased depreciation and amortization expense in the period when such determination is made, as well as in subsequent periods. |
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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 obligations; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract, if any; and (v) recognition of revenue when the Company has satisfied the underlying performance obligations, 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 returns 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 of such purchase 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 June 30, 2018, December 31, 2017 and December 31, 2016, the Company’s refund liabilities balances were $648,000, $537,000 and $415,000, respectively, and are included within accounts receivable, net, in the accompanying Consolidated Balance Sheets. As of June 30, 2018, December 31, 2017 and December 31, 2016, the Company’s returns asset balances were $250,000, $0, and $0, respectively, and are included within prepaid expenses and other assets in the accompanying 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 consolidated financial statements: Condensed Consolidated Balance Sheets
Condensed Consolidated Statements 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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Cost of Goods Sold | Cost of Goods Sold – Cost of goods sold is primarily composed of inventory sold during the period; inventory written off during the period due to ongoing quality reviews or through customer returns; salaries and payroll-related expenses for personnel involved in preparing and shipping product to customers; an allocation of shared expenses such as rent, utilities, communication expenses, and depreciation related to preparing and shipping product to customers; and outbound freight charges. |
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Advertising Costs | Advertising Costs – Advertising production costs are expensed as incurred. Media placement costs are expensed the first time the underlying advertising appears. The Company also offers a cooperative advertising program to certain of its distributor and retail partners that reimburses, via a credit towards future purchases, a portion of their marketing costs based on the customers’ net purchases from the Company and is subject to the customer providing documentation of all advertising performed that includes the Company’s products. For the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016, these approximate amounts were $154,000, $36,000, $210,000 and $126,000, respectively, and are included as a component of sales and marketing expenses. Advertising expenses, inclusive of the cooperative advertising program, for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016, were approximately $1.09 million, $855,000, $1.94 million and $2.59 million, respectively. Approximately $56,000 related to discontinued operations was included in total advertising expense for the year ended December 31, 2016. |
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Sales and Marketing | Sales and Marketing – Sales and marketing costs are expensed as incurred. These costs include all expenses of promoting and selling the Company’s products and include such items as the salaries, payroll-related expenses, and travel of sales and marketing personnel; digital marketing; advertising; trade shows; market research; sales commissions; and an allocation of overhead expenses attributable to these activities. Except for an allocation to general and administrative expenses, these costs also include the operating expenses of charlesandcolvard.com, LLC, the Company’s wholly owned operating subsidiary. |
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General and Administrative | General and Administrative – General and administrative costs are expensed as incurred. These costs include the salaries and payroll-related expenses of executive, finance, information technology, and administrative personnel; legal, investor relations, and professional fees; general office and administrative expenses; Board of Directors fees; rent; bad debts; and insurance. |
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Research and Development | Research and Development – Research and development costs are expensed as incurred. These costs primarily comprise salary allocations and consultant fees associated with the study of product enhancement and manufacturing process efficiencies. |
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Stock-Based Compensation | Stock-Based Compensation – The Company recognizes compensation expense for stock-based awards based on estimated fair values on the date of grant. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The fair value of other stock-based compensation awards is determined by the market price of the Company’s common stock on the date of grant. The expense associated with stock-based compensation is recognized on a straight-line basis over the requisite service period of each award. Fair value of stock options using the Black-Scholes-Merton option pricing model is estimated on the date of grant utilizing certain assumptions for dividend yield, expected volatility, risk-free interest rate, and expected lives of the awards, as follows:
The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rates of stock-based awards and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rates, the Company analyzed its historical forfeiture rates, the remaining lives of unvested stock-based awards, and the amount of vested awards as a percentage of total awards outstanding. If the Company’s actual forfeiture rates are materially different from its estimates, or if the Company re-evaluates the forfeiture rates in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period. |
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Income Taxes | Income Taxes – Deferred income taxes are recognized for the income tax consequences of “temporary” differences by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the income tax bases of existing assets and liabilities. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more likely than not to be realized. In light of the Tax Cuts and Jobs Act (the “Tax Act”) enacted in December 2017, the Company provisionally recorded its U.S. deferred taxes as of the year ended December 31, 2017, based on the federal corporate income tax rate of 21%. In June 2018, the Company filed its 2017 U.S. corporate income tax return, and in conjunction therewith, finalized its accounting policy with respect to accounting for its deferred income taxes as of and for the transition period ended June 30, 2018. For further discussion of the effects of the Tax Act on our deferred tax assets, see Note 12, “Income Taxes.” |
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Net Loss per Common Share | Net Loss per Common Share – Basic net loss from continuing and discontinued operations 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 continuing and discontinued 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 and unvested restricted shares. The following table reconciles the differences between the basic and diluted net loss per share presentations:
For the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016, stock options to purchase approximately 2.39 million, 2.16 million, 2.38 million and 2.13 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 transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited), the year ended December 31, 2017, and the year ended December 31, 2016, approximately 264,000, 412,000, 355,000 and 359,000, respectively, of restricted shares that have been issued but not yet vested have been excluded from the computation of diluted net loss per common share because the effects of the inclusion of such number of shares would be anti-dilutive to net loss per common share. |
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Recently Adopted/Issued Accounting Pronouncements | Recently Adopted/Issued Accounting Pronouncements – In February 2016, as amended in July 2018, 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 process of conducting 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. On June 20, 2018, the FASB issued guidance that is intended to reduce cost and complexity and to improve financial reporting for share-based payments to nonemployees. This new guidance is effective for fiscal years beginning after December 15, 2018. The Company is in the process of conducting its analysis, but currently the Company believes the impact of the adoption of this new guidance is not expected to be material to the Company’s financial statements. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reconciliation of Allowance for Sales Returns | The following are reconciliations of the allowance for sales returns balances as of the periods presented:
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Reconciliation of Allowance for Doubtful Accounts | The following are reconciliations of the allowance for doubtful accounts balances as of the periods presented:
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Estimated Useful Life of Property, Plant and Equipment | Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method as follows:
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Impacts on Financial Statements | The following information summarizes the impacts of the adoption of the new revenue recognition accounting standard on the accompanying consolidated financial statements: Condensed Consolidated Balance Sheets
Condensed Consolidated Statements 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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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:
|
SEGMENT INFORMATION AND GEOGRAPHIC DATA (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SEGMENT INFORMATION AND GEOGRAPHIC DATA [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Information by Reportable Segment | Summary financial information by reportable segment for the periods presented is as follows:
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Reconciliation of Product Line Cost of Goods Sold to Cost of Goods Sold as Reported in Consolidated Financial Statements | The reconciliations of the Company’s product line cost of goods sold to cost of goods sold, as reported in the consolidated financial statements for the periods presented, are as follows:
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Net Sales by Geographic Area | The following presents net sales data by geographic area for the periods presented:
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INVENTORIES (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INVENTORIES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventory, Net of Reserves | The Company’s total inventories, net of reserves, are as follows as of the dates presented:
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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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PROPERTY AND EQUIPMENT (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PROPERTY AND EQUIPMENT [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property and Equipment | Property and equipment consists of the following as of the dates presented:
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INTANGIBLE ASSETS (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INTANGIBLE ASSETS [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible Assets | Intangible assets consist of the following as of the dates presented:
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ACCRUED EXPENSES AND OTHER LIABILITIES (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ACCRUED EXPENSES AND OTHER LIABILITIES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued Expenses and Other Liabilities | Total accrued expenses and other liabilities consist of the following as of the dates presented:
|
COMMITMENTS AND CONTINGENCIES (Tables) |
6 Months Ended | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 | ||||||||||||||||||||||||||
COMMITMENTS AND CONTINGENCIES [Abstract] | ||||||||||||||||||||||||||
Future Minimum Payments Under Operating Lease | As of June 30, 2018, the Company’s future minimum payments under the operating leases were as follows:
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SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock Based Compensation | The following table summarizes the components of the Company’s stock-based compensation included in net loss for the periods presented:
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Stock Option Activity | The following is a summary of the stock option activity for the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016:
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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 periods presented:
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Information About Stock Options Outstanding | The following tables summarize information in connection with stock options outstanding at June 30, 2018:
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Restricted Stock Activity | The following is a summary of the restricted stock activity for the transition period ended June 30, 2018 and the years ended December 31, 2017 and 2016:
|
INCOME TAXES (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INCOME TAXES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Tax Net Benefit (Expense) | Income tax net benefit (expense) for the periods presented comprises the following:
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Deferred Income Tax Assets | Significant components of the Company’s deferred income tax assets as of the dates presented are as follows:
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Effective Income Tax Rate Reconciliation | The following are reconciliations between expected income taxes, computed at the applicable statutory federal income tax rate applied to pretax accounting loss, and the income tax net benefit (expense) for the periods presented:
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Gross Liability for Uncertain Tax Positions | The following table summarizes the activity related to the Company’s gross liability for uncertain tax positions for the period from December 31, 2015 through June 30, 2018:
|
DISCONTINUED OPERATIONS (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
DISCONTINUED OPERATIONS [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued Operations | The following table presents the major classes of line items constituting pretax loss from discontinued operations during the year ended December 31, 2016:
|
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Customers That Represent Greater Than or Equal to 10% of Total Net Sales and Receivables | The following is a summary of customers that represent greater than or equal to 10% of total gross accounts receivable as of the dates presented:
* Customer A did not have individual balances that represented 10% or more of total gross accounts receivable as of December 31, 2017 and December 31, 2016. ** Customer B did not have individual balances that represented 10% or more of total gross accounts receivable as of December 31, 2016. *** Customer C did not have individual balances that represented 10% or more of total gross accounts receivable as of June 30, 2018. A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent greater than or equal to 10% of total net sales for the periods presented:
* Customer B did not have net sales that represented 10% or more of total net sales for the six months ended June 30, 2017 (unaudited) or for the years ended December 31, 2017 and December 31, 2016. ** Customer D did not have net sales that represented 10% or more of total net sales for the transition period ended June 30, 2018, the six months ended June 30, 2017 (unaudited) or for the year ended December 31, 2017. *** Customer E did not have net sales that represented 10% or more of total net sales for the transition period ended June 30, 2018 or for the years ended December 31, 2017 and December 31, 2016. |
DESCRIPTION OF BUSINESS (Details) |
1 Months Ended |
---|---|
Mar. 31, 2016
USD ($)
| |
Yanbal USA Inc. [Member] | |
Consideration Transferred [Abstract] | |
Purchase price for transferred assets | $ 500,000 |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Concentration of Credit Risk (Details) - USD ($) |
3 Months Ended | 6 Months Ended | 12 Months Ended | |
---|---|---|---|---|
Sep. 30, 2016 |
Jun. 30, 2018 |
Dec. 31, 2016 |
Dec. 31, 2017 |
|
Concentration of Credit Risk [Abstract] | ||||
Non-interest bearing amounts on deposit in excess of FDIC insurable limits | $ 3,110,000 | $ 7,040,000 | $ 4,320,000 | |
Trade Accounts Receivable [Member] | ||||
Accounts Receivable [Abstract] | ||||
Accounts receivables write-offs | $ 815,000 | $ 815,000 | ||
Trade Accounts Receivable [Member] | Customer Concentration Risk [Member] | Minimum [Member] | ||||
Concentration Credit Risk [Abstract] | ||||
Customer payment term for trade receivables | 30 days | |||
Trade Accounts Receivable [Member] | Customer Concentration Risk [Member] | Maximum [Member] | ||||
Concentration Credit Risk [Abstract] | ||||
Customer payment term for trade receivables | 90 days |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Accounts Receivable Reserves (Details) - USD ($) |
6 Months Ended | 12 Months Ended | |
---|---|---|---|
Jun. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Allowance for Sales Returns [Member] | |||
Movement in Valuation Allowances and Reserves [Roll Forward] | |||
Balance, beginning of period | $ 537,000 | $ 415,000 | $ 731,000 |
Additions charged to operations | 2,462,049 | 3,878,736 | 3,574,297 |
Sales returned | (2,351,049) | (3,756,736) | (3,890,297) |
Balance, end of period | 648,000 | 537,000 | 415,000 |
Allowance for Doubtful Accounts [Member] | |||
Movement in Valuation Allowances and Reserves [Roll Forward] | |||
Balance, beginning of period | 254,000 | 226,000 | 1,137,000 |
(Reductions) additions charged to operations | (4,511) | 28,000 | (73,300) |
Write-offs, net of recoveries | (16,489) | 0 | (837,700) |
Balance, end of period | $ 233,000 | $ 254,000 | $ 226,000 |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Intangible Assets (Details) |
6 Months Ended |
---|---|
Jun. 30, 2018 | |
Patents [Member] | |
Intangible Assets [Abstract] | |
Amortized life of patent | 15 years |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Revenue Recognition (Details) |
6 Months Ended |
---|---|
Jun. 30, 2018 | |
Minimum [Member] | |
Revenue Recognition [Abstract] | |
Number of days for customer to make payment after being invoiced | 30 days |
Absolute right of return for shipments to wholesale customers on consignment terms | 6 months |
Maximum [Member] | |
Revenue Recognition [Abstract] | |
Number of days for customer to make payment after being invoiced | 90 days |
Period for return of jewels and finished jewelry for credit | 30 days |
Absolute right of return for shipments to wholesale customers on consignment terms | 1 year |
Customer payment period on consignment shipment | 60 days |
Online Channels [Member] | Maximum [Member] | |
Revenue Recognition [Abstract] | |
Period for return of jewels and finished jewelry for credit | 60 days |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Returns Asset and Refund Liabilities (Details) - USD ($) $ in Thousands |
Jun. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
---|---|---|---|
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract] | |||
Refund liabilities | $ 648,000 | $ 537,000 | $ 415,000 |
Asset returns | $ 250,000 | $ 0 | $ 0 |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Condensed Consolidated Statements of Operations (Details) - USD ($) |
6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Condensed Consolidated Statement of Operations [Abstract] | ||||
Net sales | $ 13,163,048 | $ 12,287,174 | $ 27,032,964 | $ 29,168,128 |
Costs of goods sold | (8,298,286) | (7,060,701) | (15,470,617) | (20,401,439) |
Other costs and expenses | (6,458,648) | |||
Income tax benefit | 318,060 | (18,595) | (27,609) | (13,480) |
Net loss | (1,275,826) | $ (962,427) | $ (453,477) | $ (4,525,761) |
Adjustments [Member] | ASC 606 [Member] | ||||
Condensed Consolidated Statement of Operations [Abstract] | ||||
Net sales | 0 | |||
Costs of goods sold | 0 | |||
Other costs and expenses | 0 | |||
Income tax benefit | 0 | |||
Net loss | 0 | |||
Without Adoption [Member] | ASC 606 [Member] | ||||
Condensed Consolidated Statement of Operations [Abstract] | ||||
Net sales | 13,163,048 | |||
Costs of goods sold | (8,298,286) | |||
Other costs and expenses | (6,458,648) | |||
Income tax benefit | 318,060 | |||
Net loss | $ (1,275,826) |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Advertising Costs (Details) - USD ($) |
6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Selling and Marketing Expenses [Member] | ||||
Advertising Costs [Abstract] | ||||
Advertising expense | $ 154,000 | $ 36,000 | $ 210,000 | $ 126,000 |
Advertising Expenses [Member] | ||||
Advertising Costs [Abstract] | ||||
Advertising expense | $ 1,090,000 | $ 855,000 | $ 1,940,000 | 2,590,000 |
Advertising Expenses [Member] | Discontinued Operations [Member] | ||||
Advertising Costs [Abstract] | ||||
Advertising expense | $ 56,000 |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Stock-Based Compensation (Details) |
6 Months Ended |
---|---|
Jun. 30, 2018 | |
Stock-Based Compensation [Abstract] | |
Dividend yield | 0.00% |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, Income Taxes (Details) |
6 Months Ended | 12 Months Ended |
---|---|---|
Jun. 30, 2018 |
Dec. 31, 2017 |
|
Income Taxes [Abstract] | ||
Federal statutory income tax rate | 21.00% | 35.00% |
SEGMENT INFORMATION AND GEOGRAPHIC DATA, Data by Geographic Area (Details) - USD ($) |
6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Net sales [Abstract] | ||||
Net sales | $ 13,163,048 | $ 12,287,174 | $ 27,032,964 | $ 29,168,128 |
Continuing Operations [Member] | ||||
Net sales [Abstract] | ||||
Net sales | 13,163,048 | 12,287,174 | 27,032,964 | 29,168,128 |
Reportable Geographical Components [Member] | Continuing Operations [Member] | United States [Member] | ||||
Net sales [Abstract] | ||||
Net sales | 12,121,003 | 11,455,660 | 25,176,220 | 26,164,660 |
Reportable Geographical Components [Member] | Continuing Operations [Member] | International [Member] | ||||
Net sales [Abstract] | ||||
Net sales | $ 1,042,045 | $ 831,514 | $ 1,856,744 | $ 3,003,468 |
INTANGIBLE ASSETS (Details) - USD ($) |
6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Intangible assets [Abstract] | ||||
Intangible assets, gross | $ 1,050,227 | $ 1,022,647 | $ 1,021,146 | |
Less accumulated amortization | (1,015,394) | (1,014,050) | (1,012,338) | |
Intangible assets, net | 34,833 | 8,597 | 8,808 | |
Amortization expense | 1,000 | $ 1,000 | 2,000 | 68,000 |
Estimated amortization expenses [Abstract] | ||||
2019 | 3,000 | |||
2020 | 3,000 | |||
2021 | 3,000 | |||
2022 | 3,000 | |||
2023 | 2,000 | |||
Discontinued Operations [Member] | ||||
Intangible assets [Abstract] | ||||
Amortization expense | 13,000 | |||
Patents [Member] | ||||
Intangible assets [Abstract] | ||||
Intangible assets, gross | $ 969,632 | 958,604 | 958,604 | |
Weighted average amortization period | 15 years | |||
Trademarks [Member] | ||||
Intangible assets [Abstract] | ||||
Intangible assets, gross | $ 73,877 | 57,325 | 55,824 | |
Weighted average amortization period | 9 years | |||
License Rights [Member] | ||||
Intangible assets [Abstract] | ||||
Intangible assets, gross | $ 6,718 | $ 6,718 | $ 6,718 | |
Weighted average amortization period | 0 years |
ACCRUED EXPENSES AND OTHER LIABILITIES (Details) - USD ($) |
Jun. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
---|---|---|---|
ACCRUED EXPENSES AND OTHER LIABILITIES [Abstract] | |||
Accrued compensation and related benefits | $ 359,077 | $ 652,177 | $ 443,547 |
Accrued cooperative advertising | 60,784 | 134,018 | 50,000 |
Deferred rent | 139,558 | 131,389 | 115,307 |
Accrued sales tax | 17,149 | 20,844 | 6,885 |
Other | 42,377 | 42,372 | 15,368 |
Accrued expenses and other liabilities | $ 618,945 | $ 980,800 | $ 631,107 |
SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION, Shareholders' Equity (Details) - USD ($) |
6 Months Ended | 12 Months Ended | |
---|---|---|---|
Jun. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Common Stock [Abstract] | |||
Common stock, shares authorized (in shares) | 50,000,000 | 50,000,000 | 50,000,000 |
Common stock, par value (in dollars per share) | $ 0 | $ 0 | $ 0 |
Common stock, shares outstanding (in shares) | 21,705,173 | 21,580,102 | 21,369,885 |
Common stock voting rights | common stock are entitled to one vote for each share held | ||
Preferred Stock [Abstract] | |||
Preferred stock, shares authorized (in shares) | 10,000,000 | ||
Preferred stock, par value (in dollars per share) | $ 0 | ||
Preferred stock, shares issued (in shares) | 0 | 0 | |
Dividends [Abstract] | |||
Cash dividends | $ 0 | $ 0 | $ 0 |
Maximum [Member] | |||
Shelf Registration Statement [Abstract] | |||
Warrants to purchase shares of common stock or preferred stock | $ 25,000,000 |
INCOME TAXES, Income Tax Net Benefit (Expense) (Details) - USD ($) |
6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
INCOME TAXES [Abstract] | ||||
Federal statutory income tax rate | 21.00% | 35.00% | ||
Tax effect of remeasurement of deferred tax assets | $ 519,000 | |||
Tax benefit of AMT on deferred tax assets carryforwards | $ (328,000) | |||
Current [Abstract] | ||||
Federal | 327,594 | $ 0 | 0 | $ 0 |
State | (9,534) | (18,595) | (27,609) | (13,480) |
Total current expense | 318,060 | (18,595) | (27,609) | (13,480) |
Deferred [Abstract] | ||||
Federal | 0 | 0 | 0 | 0 |
State | 0 | 0 | 0 | 0 |
Total deferred expense | 0 | 0 | 0 | 0 |
Income tax net expense | $ 318,060 | $ (18,595) | $ (27,609) | $ (13,480) |
INCOME TAXES, Deferred Income Tax Assets (Details) - USD ($) |
Jun. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
---|---|---|---|
Deferred income tax assets [Abstract] | |||
Reversals and accruals | $ 668,813 | $ 686,573 | $ 1,053,863 |
Prepaid expenses | (38,944) | (28,744) | (43,774) |
Federal NOL carryforwards | 5,540,016 | 5,185,438 | 8,530,493 |
State NOL carryforwards | 714,588 | 681,364 | 615,919 |
Hong Kong NOL carryforwards | 995,566 | 995,566 | 995,566 |
Federal benefit on state taxes under uncertain tax positions | 96,144 | 94,142 | 136,969 |
Stock-based compensation | 412,148 | 422,623 | 342,294 |
Research tax credit | 235,742 | 434,637 | 434,637 |
Alternative minimum tax | 23,149 | 350,743 | 348,264 |
Contributions carryforward | 1,923 | 0 | 35,100 |
Depreciation | (159,100) | (178,670) | (286,608) |
Accrued rent | 121,124 | 138,178 | 216,432 |
Loss on impairment of long-lived assets | 33,157 | 33,864 | 53,042 |
Valuation allowance | (8,644,326) | (8,815,714) | (12,432,197) |
Totals | 0 | 0 | 0 |
Total deferred income tax assets, net | $ 0 | $ 0 | $ 0 |
INCOME TAXES, Uncertain Tax Positions (Details) - USD ($) |
6 Months Ended | 12 Months Ended | |
---|---|---|---|
Jun. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Unrecognized Tax Benefits, Income Tax Penalties and Interest Expense [Abstract] | |||
Gross liability for income taxes that will impact the company's effective tax rate | $ 525,000 | $ 560,000 | |
Direct reduction to associated deferred tax asset | (54,000) | (98,000) | |
Interest and penalties associated with uncertain tax positions | 10,000 | 28,000 | $ 13,000 |
Interest and penalties included in the accrued income tax liability for uncertain tax positions | 203,000 | 193,000 | 165,000 |
Activities related to gross liability for uncertain tax positions [Roll Forward] | |||
Beginning balance | 560,373 | 532,764 | 519,284 |
Increases related to prior year tax positions | 27,609 | 13,480 | |
Decreases related to prior fiscal year tax positions | (35,670) | ||
Ending balance | $ 524,703 | $ 560,373 | $ 532,764 |
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Details) - Customer Concentration Risk [Member] |
6 Months Ended | 12 Months Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|||||||||||||||||
Accounts Receivable [Member] | Customer A [Member] | ||||||||||||||||||||
Concentration of Credit Risk [Abstract] | ||||||||||||||||||||
Concentration risk, percentage | 23.00% | [1] | [1] | |||||||||||||||||
Accounts Receivable [Member] | Customer B [Member] | ||||||||||||||||||||
Concentration of Credit Risk [Abstract] | ||||||||||||||||||||
Concentration risk, percentage | 10.00% | 18.00% | [2] | |||||||||||||||||
Accounts Receivable [Member] | Customer C [Member] | ||||||||||||||||||||
Concentration of Credit Risk [Abstract] | ||||||||||||||||||||
Concentration risk, percentage | [3] | 12.00% | 16.00% | |||||||||||||||||
Total Net Sales [Member] | Customer A [Member] | ||||||||||||||||||||
Concentration of Credit Risk [Abstract] | ||||||||||||||||||||
Concentration risk, percentage | 12.00% | 26.00% | 21.00% | 17.00% | ||||||||||||||||
Total Net Sales [Member] | Customer B [Member] | ||||||||||||||||||||
Concentration of Credit Risk [Abstract] | ||||||||||||||||||||
Concentration risk, percentage | 12.00% | [4] | [4] | [4] | ||||||||||||||||
Total Net Sales [Member] | Customer D [Member] | ||||||||||||||||||||
Concentration of Credit Risk [Abstract] | ||||||||||||||||||||
Concentration risk, percentage | [5] | [5] | [5] | 23.00% | ||||||||||||||||
Total Net Sales [Member] | Customer E [Member] | ||||||||||||||||||||
Concentration of Credit Risk [Abstract] | ||||||||||||||||||||
Concentration risk, percentage | [6] | 10.00% | [6] | [6] | ||||||||||||||||
|
EMPLOYEE BENEFIT PLAN (Details) - USD ($) |
6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
EMPLOYEE BENEFIT PLAN [Abstract] | ||||
Company contribution, cost recognized | $ 44,000 | $ 30,000 | $ 64,000 | $ 102,000 |
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