10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2015

OR

☐    Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

Commission File Number: 000-23329

Charles & Colvard, Ltd.

(Exact name of registrant as specified in its charter)

North Carolina	56-1928817
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

170 Southport Drive Morrisville, North Carolina	27560
(Address of principal executive offices)	(Zip Code)

(919) 468-0399

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

As of April 27, 2015, there were 20,554,833 shares of the registrant’s common stock, no par value per share, outstanding.

CHARLES & COLVARD, LTD.

FORM 10-Q

For the Quarterly Period Ended March 31, 2015

TABLE OF CONTENTS

		Page Number
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	3
	Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2015 and 2014	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and 2014	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 6.	Exhibits	31
	Signatures	32

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2015 (unaudited)			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	5,234,683		$	4,007,341
Accounts receivable, net		5,124,509			5,510,253
Inventory, net		13,927,427			13,320,639
Prepaid expenses and other assets		809,870			602,850
Total current assets		25,096,489			23,441,083
Long-term assets:
Inventory, net		23,596,889			25,617,990
Property and equipment, net		1,800,466			1,859,355
Intangible assets, net		180,701			216,947
Other assets		271,914			291,022
Total long-term assets		25,849,970			27,985,314
TOTAL ASSETS	$	50,946,459		$	51,426,397
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,857,363		$	3,286,086
Accrued cooperative advertising		57,000			220,000
Accrued expenses and other liabilities		1,056,148			684,577
Total current liabilities		4,970,511			4,190,663
Long-term liabilities:
Accrued expenses and other liabilities		787,212			809,879
Accrued income taxes		410,775			407,682
Total long-term liabilities		1,197,987			1,217,561
Total liabilities		6,168,498			5,408,224
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value		54,045,875			53,949,001
Additional paid-in capital – stock-based compensation		11,970,868			11,628,503
Accumulated deficit		(21,238,782	)		(19,559,331	)
Total shareholders’ equity		44,777,961			46,018,173
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	50,946,459		$	51,426,397

See Notes to Condensed Consolidated Financial Statements.

3

CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended March 31,
	2015			2014
Net sales	$	8,377,064		$	6,067,553
Costs and expenses:
Cost of goods sold		4,843,903			3,663,042
Sales and marketing		2,973,364			2,194,611
General and administrative		2,234,213			1,376,215
Research and development		2,061			1,987
Loss on abandonment of assets		-			2,201
Total costs and expenses		10,053,541			7,238,056
Loss from operations		(1,676,477	)		(1,170,503	)
Other income (expense):
Interest income		11			29
Interest expense		(17	)		(130	)
Gain on sale of long-term assets		125			-
Total other income (expense), net		119			(101	)
Loss before income taxes		(1,676,358	)		(1,170,604	)
Income tax net (expense) benefit		(3,093	)		107,210
Net loss	$	(1,679,451	)	$	(1,063,394	)
Net loss per common share:
Basic	$	(0.08	)	$	(0.05	)
Diluted	$	(0.08	)	$	(0.05	)
Weighted average number of shares used in computing net loss per common share:
Basic		20,107,504			20,197,301
Diluted		20,107,504			20,197,301

See Notes to Condensed Consolidated Financial Statements.

4

CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended March 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,679,451	)	$	(1,063,394	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		218,728			277,798
Stock-based compensation		379,239			376,511
Provision for uncollectible accounts		1,000			-
Provision for sales returns		(579,000	)		(810,600	)
Provision for inventory reserves		204,000			24,000
Provision for deferred income taxes		-			(110,171	)
Loss on abandonment of assets		-			2,201
Gain on sale of long-term assets		(125	)		-
Changes in assets and liabilities:
Accounts receivable		963,744			2,251,972
Inventory		1,210,313			(1,347,239	)
Prepaid expenses and other assets, net		(187,912	)		(21,111	)
Accounts payable		571,277			340,080
Accrued cooperative advertising		(163,000	)		106,356
Accrued income taxes		3,093			2,961
Other accrued liabilities		348,904			(91,051	)
Net cash provided by (used in) operating activities		1,290,810			(61,687	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(117,104	)		(28,325	)
Patent, license rights, and trademark costs		(6,539	)		(7,668	)
Proceeds from sale of long-term assets		175			-
Net cash used in investing activities		(123,468	)		(35,993	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock option exercises		60,000			-
Net cash provided by financing activities		60,000			-
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,227,342			(97,680	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		4,007,341			2,573,405
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	5,234,683		$	2,475,725
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	17		$	130
Cash paid during the period for income taxes	$	-		$	-

See Notes to Condensed Consolidated Financial Statements.

5

CHARLES & COLVARD, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. DESCRIPTION OF BUSINESS

Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation founded in 1995, manufactures, markets, and distributes Charles & Colvard Created Moissanite^® jewels (hereinafter referred to as moissanite or moissanite jewels), finished jewelry featuring moissanite, and fashion finished jewelry for sale in the worldwide jewelry market. Moissanite, also known by its chemical name of silicon carbide (“SiC”), is a rare mineral first discovered in a meteor crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. Leveraging its advantage of being the original and leading worldwide source of created moissanite jewels, the Company’s strategy is to establish itself with reputable, high-quality, and sophisticated brands and to position moissanite as an affordable, luxurious alternative to other gemstones, such as diamond. The Company believes this is possible due to moissanite’s exceptional brilliance, fire, durability, and rarity like no other jewel available on the market. The Company sells loose moissanite jewels and finished jewelry at wholesale to distributors, manufacturers, and retailers and at retail to end consumers through its wholly owned operating subsidiaries Moissanite.com, LLC and Charles & Colvard Direct, LLC.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation - The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2015.

The condensed consolidated financial statements as of and for the three months ended March 31, 2015 and 2014 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of December 31, 2014 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 13, 2015 (the “2014 Annual Report”).

The accompanying condensed consolidated financial statements as of and for the three months ended March 31, 2015 and 2014 include the accounts of the Company and its wholly owned subsidiaries Moissanite.com, LLC, formed in 2011; Charles & Colvard Direct, LLC, formed in 2011; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary that became a dormant entity in the second quarter of 2009 and the operations of which ceased in 2008. All intercompany accounts have been eliminated.

Significant Accounting Policies - In the opinion of the Company’s management, the significant accounting policies used for the three months ended March 31, 2015 are consistent with those used for the year ended December 31, 2014. Accordingly, please refer to the 2014 Annual Report for the Company’s significant accounting policies.

Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets, uncertain tax positions, stock compensation expense, and cooperative advertising. Actual results could differ materially from those estimates.

Reclassifications - Certain amounts in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current year presentation, primarily amounts described in Note 3, “Segment Information and Geographic Data” related to changes in the Company’s reportable segments.

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Recently Adopted/Issued Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board  issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in 2017.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under U.S. GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, U.S. GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. This standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect this ASU will have a material impact on its consolidated financial statements.

All other new and recently issued, but not yet effective, accounting pronouncements have been deemed to be not relevant to the Company and therefore are not expected to have any impact once adopted.

3. 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.

During 2014, the Company began managing its business primarily through the three distribution channels that it uses to sell its product lines, loose jewels and finished jewelry. Accordingly, the Company determined its three operating and reportable segments to be wholesale distribution transacted through the parent entity, and the two direct-to-consumer distribution channels transacted through the Company’s wholly owned operating subsidiaries, Moissanite.com, LLC and Charles & Colvard Direct, LLC.  The accounting policies of these three segments are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies” of this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements in the 2014 Annual Report.

Previously, the Company determined it managed its business through two distribution channels, wholesale distribution and direct-to-consumer.  While the Company has always managed its businesses as three separate operating segments, it previously aggregated the Moissanite.com, LLC and Charles & Colvard Direct, LLC operating segments into a single reportable segment for reporting purposes.  The two wholly owned operating subsidiaries that previously were aggregated under the direct-to-consumer segment are now each being presented as a separate reportable segment.  The Company believes aggregation of the two subsidiaries into one reportable segment for reporting purposes is no longer warranted due to changes in how it sources product and sells directly to consumers, including changes in the management structure, strategic initiatives and changes in sales models, made during the year ended December 31, 2014 for each of the two wholly owned subsidiaries.  Certain amounts for the three months ended March 31, 2014 have been reclassified to conform to the current period presentation as a result of this change in reportable segments.

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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). Product line cost of goods sold is defined as product cost of goods sold in each of the Company’s wholesale distribution and two direct-to-consumer distribution operating segments 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-offs.

The Company allocates certain general and administrative expenses from its parent entity to its two direct-to-consumer distribution segments primarily based on net sales and number of employees. Unallocated expenses, which also include interest and taxes, remain in the parent entity’s wholesale distribution segment.

Summary financial information by reportable segment is as follows:

	Three Months Ended March 31, 2015
	Wholesale			Moissanite.com			Charles & Colvard Direct			Total
Net sales
Loose jewels	$	3,687,893		$	133,266		$	-		$	3,821,159
Finished jewelry		2,224,267			970,660			1,360,978			4,555,905
Total	$	5,912,160		$	1,103,926			1,360,978			8,377,064
Product line cost of goods sold
Loose jewels	$	2,202,103		$	19,071		$	-		$	2,221,174
Finished jewelry		1,227,810			480,360			319,775			2,027,945
Total	$	3,429,913		$	499,431		$	319,775		$	4,249,119
Product line gross profit
Loose jewels	$	1,485,790		$	114,195		$	-		$	1,599,985
Finished jewelry		996,457			490,300			1,041,203			2,527,960
Total	$	2,482,247		$	604,495		$	1,041,203		$	4,127,945
Operating loss	$	(234,485	)		(403,420	)		(1,038,572	)	$	(1,676,477	)
Depreciation and amortization	$	160,640			31,707			26,381		$	218,728
Capital expenditures	$	109,564			533			7,007		$	117,104

	Three Months Ended March 31, 2014
	Wholesale			Moissanite.com			Charles & Colvard Direct			Total
Net sales
Loose jewels	$	3,533,784		$	146,940		$	-		$	3,680,724
Finished jewelry		1,619,831			561,268			205,730			2,386,829
Total	$	5,153,615		$	708,208		$	205,730		$	6,067,553
Product line cost of goods sold
Loose jewels	$	1,775,135		$	22,272		$	-		$	1,797,407
Finished jewelry		1,280,101			294,886			63,262			1,638,249
Total	$	3,055,236		$	317,158		$	63,262		$	3,435,656
Product line gross profit
Loose jewels	$	1,758,649		$	124,668		$	-		$	1,883,317
Finished jewelry		339,730			266,382			142,468			748,580
Total	$	2,098,379		$	391,050		$	142,468		$	2,631,897
Operating loss	$	(124,858	)		(404,771	)		(640,874	)	$	(1,170,503	)
Depreciation and amortization	$	179,673			73,159			24,966		$	277,798
Capital expenditures	$	28,325			-			-		$	28,325

8

	March 31, 2015
	Wholesale		Moissanite.com		Charles & Colvard Direct		Total
Total assets	$	50,746,106		106,794		93,559		$	50,946,459

	December 31, 2014
	Wholesale		Moissanite.com		Charles & Colvard Direct		Total
Total assets	$	51,183,888		128,049		114,460		$	51,426,397

A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:

	Three months ended March 31,
	2015		2014
Product line cost of goods sold	$	4,249,119	$	3,435,656
Non-capitalized manufacturing and production control expenses		147,112		155,023
Freight out		90,734		59,899
Inventory valuation allowances		204,000		24,000
Other inventory adjustments		152,938		(11,536	)
Cost of goods sold	$	4,843,903	$	3,663,042

The Company’s net inventories by product line maintained in the parent entity’s wholesale distribution segment are as follows:

	March 31, 2015		December 31, 2014
Loose jewels
Raw materials	$	5,156,656	$	4,658,692
Work-in-process		5,615,277		5,752,103
Finished goods		20,192,696		21,495,873
Finished goods on consignment		3,585		46,284
Total	$	30,968,214	$	31,952,952
Finished jewelry
Raw materials	$	253,360	$	258,707
Work-in-process		526,334		540,576
Finished goods		5,533,173		5,557,417
Finished goods on consignment		190,184		578,200
Total	$	6,503,051	$	6,934,900

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Supplies inventories of approximately $53,000 and $51,000 at March 31, 2015 and December 31, 2014, respectively, included in finished goods inventories in the condensed consolidated financial statements are omitted from inventories by product line because they are used in both product lines and are not maintained separately.  The Company’s two operating subsidiaries comprising the two direct-to-consumer distribution segments carry no net inventories, and inventory is transferred without intercompany markup from the parent entity’s wholesale distribution segment as product line cost of goods sold when sold to the end consumer.

The Company recognizes sales by geographic area based on the country in which the customer is based. A portion of the Company’s international wholesale distribution segment sales represents products sold internationally that may be re-imported to United States (“U.S.”) retailers. Sales to international end consumers made by the Company’s two direct-to-consumer distribution segments 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. The following presents certain data by geographic area:

	Three Months Ended March 31,
	2015		2014
Net sales
United States	$	7,762,346	$	5,709,033
International		614,718		358,520
Total	$	8,377,064	$	6,067,553

	March 31, 2015		December 31, 2014
Property and equipment, net
United States	$	1,800,466	$	1,859,355
International		-		-
Total	$	1,800,466	$	1,859,355

	March 31, 2015		December 31, 2014
Intangible assets, net
United States	$	31,907	$	39,050
International		148,794		177,897
Total	$	180,701	$	216,947

4. 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:

· Level 1 - quoted prices in active markets for identical assets and liabilities

· Level 2 - inputs other than Level 1 quoted prices that are directly or indirectly observable

· Level 3 - unobservable inputs that are not corroborated by market data

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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 instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, trade accounts receivable, trade accounts payable, and accrued expenses. All instruments are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these 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. 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, license rights, and trademarks.

5. INVENTORIES

The Company’s total inventories, net of reserves, consisted of the following as of March 31, 2015 and December 31, 2014:

	March 31, 2015			December 31, 2014
Raw materials	$	5,410,016		$	4,917,399
Work-in-process		6,141,611			6,292,679
Finished goods		26,890,920			27,985,067
Finished goods on consignment		219,769			677,484
Less inventory reserves		(1,138,000	)		(934,000	)
Total	$	37,524,316		$	38,938,629
Current portion	$	13,927,427		$	13,320,639
Long-term portion		23,596,889			25,617,990
Total	$	37,524,316		$	38,938,629

Inventories are stated at the lower of cost or market on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Any inventory on hand at the measurement date in excess of the Company’s current requirements based on historical and anticipated levels of sales is classified as long-term on the Company’s consolidated balance sheets. The Company’s classification of 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 over the next 12 months.

The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of March 31, 2015 and December 31, 2014, work-in-process inventories issued to active production jobs approximated $1.61 million and $2.05 million, respectively.

The Company’s jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, the majority of jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends nor is obsolescence a significant factor. The Company has very small market penetration in the worldwide jewelry market, and the Company has the exclusive right in the U.S. through mid-2015 and in many other countries through mid-2016 to produce and sell created SiC for use in jewelry applications. In view of the foregoing factors, management has concluded that no excess or obsolete loose jewel inventory reserve requirements existed as of March 31, 2015.

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The Company manufactures finished jewelry featuring moissanite. Relative to loose moissanite jewels, finished jewelry is more fashion oriented and subject to styling trends that could render certain designs obsolete. The majority of the Company’s finished jewelry featuring moissanite is held in inventory for resale and consists of such basic designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company manufactures small individual quantities of designer-inspired moissanite fashion jewelry as part of its sample line that are used in the selling process to its wholesale customers.

In 2011, the Company began purchasing fashion finished jewelry comprised of base metals and non-precious gemstones for sale through Lulu Avenue^®, the direct-to-consumer home party division of its wholly owned operating subsidiary, Charles & Colvard Direct, LLC. This finished jewelry is fashion oriented and subject to styling trends that may change with each catalog season, of which there are several each year. Typically in the jewelry industry, slow-moving or discontinued lines are sold as closeouts or liquidated in alternative sales channels.  The Company reviews the finished jewelry inventory on an ongoing basis for any lower of cost or market and obsolescence issues.  The Company identified certain fashion finished jewelry inventory that could not be sold due to damage or branding issues and established an obsolescence reserve of $429,000 as of March 31, 2015 and $250,000 as of December 31, 2014, for the carrying costs in excess of any estimated scrap values.  As of December 31, 2014, the Company identified $31,000 of finished jewelry featuring moissanite that required an obsolescence reserve.

Periodically, the Company ships finished goods inventory to wholesale 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. Finished goods on consignment at March 31, 2015 and December 31, 2014 are net of shrinkage reserves of $26,000 and $53,000, respectively, to allow for certain loose jewels and finished jewelry on consignment with wholesale 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.

Total net loose jewel inventories at March 31, 2015 and December 31, 2014, including inventory on consignment net of reserves, were $30.97 million and $31.95 million, respectively. The loose jewel inventories at March 31, 2015 and December 31, 2014 include shrinkage reserves of $9,000 and $17,000, respectively, with $8,000 and $17,000 of shrinkage reserves on inventory on consignment at March 31, 2015 and December 31, 2014, respectively. Loose jewel inventories at March 31, 2015 and December 31, 2014 also include recuts reserves of $216,000.

Total net jewelry inventories at March 31, 2015 and December 31, 2014, including inventory on consignment net of reserves, finished jewelry featuring moissanite manufactured by the Company since entering the finished jewelry business in 2010, and fashion finished jewelry purchased by the Company for sale through Lulu Avenue^®, were $6.50 million and $6.93 million, respectively. Jewelry inventories consist primarily of finished goods, a portion of which the Company acquired as part of a January 2009 settlement agreement with a former manufacturer customer to reduce the outstanding receivable to the Company. Due to the lack of a plan to market this inventory at that time, a jewelry inventory reserve was established to reduce the majority of the acquired jewelry inventory value to scrap value, or the amount the Company would expect to obtain by melting the gold in the jewelry and returning to loose-jewel finished goods inventory those jewels that meet grading standards. The scrap reserve established for this acquired inventory at the time of the agreement is adjusted at each reporting period for the market price of gold and has generally declined as the associated jewelry is sold down. At March 31, 2015, the balance decreased to $96,000 from $101,000 at December 31, 2014 as a result of sell down of the inventory during the quarter and change in gold prices. Because the finished jewelry the Company began manufacturing in 2010 after it entered that business was made pursuant to an operational plan to market and sell the inventory, it is not subject to this reserve. The finished jewelry inventories at March 31, 2015 and December 31, 2014 also include shrinkage reserves of $231,000 and $192,000, respectively, including shrinkage reserves of $18,000 and $36,000 on inventory on consignment, respectively; and a repairs reserve of $157,000 and $127,000, respectively.

The need for adjustments to inventory reserves is evaluated on a period-by-period basis.

6. INCOME TAXES

The Company recognized an income tax net expense of approximately $3,000 for the three months ended March 31, 2015 compared to an income tax net benefit of approximately $107,000 for the three months ended March 31, 2014.

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As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. As of March 31, 2014, the Company’s management determined that sufficient positive evidence existed to conclude that it is more likely than not that deferred tax assets of $4.15 million were realizable, and it adjusted its valuation allowance accordingly to reflect the estimated net realizable value.  A valuation allowance remained at March 31, 2014 against certain deferred tax assets relating to state net operating loss carryforwards from the Company’s e-commerce and home party operating subsidiaries due to the timing uncertainty of when the subsidiaries would generate cumulative positive taxable income to utilize the associated deferred tax assets. A valuation allowance also remained at March 31, 2014 against certain deferred tax assets relating to investment loss carryforwards because the Company did not anticipate it would generate sufficient investment income to utilize the carryforwards.

The Company also previously considered various strategic alternatives, resulting in management determining that a valuation allowance was not necessary at that time.  During the three months ended June 30, 2014, the Company’s management determined that such strategic alternatives were no longer in the best interest of the Company.  Accordingly, the Company’s management concluded that the positive evidence was no longer sufficient to offset available negative evidence, primarily as a result of the pre-tax operating losses incurred during the six months ended June 30, 2014, and forecasted to continue through the remainder of 2014.   As a result, the Company’s management concluded that it was uncertain that the Company would have sufficient future taxable income to utilize its deferred tax assets, and therefore, the Company established a valuation allowance against its deferred tax assets during the year which remained as of March 31, 2015.

For the three months ended March 31, 2015, the Company recognized $3,000 of income tax expense for estimated tax, penalties, and interest associated with uncertain tax positions.

For the three months ended March 31, 2014, the Company recognized $110,000 of current period income tax benefit, which represents an effective tax rate of 9.4% on the current period pre-tax book income. The effective tax rate for the three months ended March 31, 2014 differs from the federal statutory rate of 34.0% primarily due to the impact of state income taxes, stock-based compensation expense that is not deductible for tax purposes, and other book-to-tax reconciling items. During the three months ended March 31, 2014, the Company also recognized approximately $3,000 of income tax expense for estimated tax, penalties, and interest associated with uncertain tax positions.

7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

In March 2004, the Company entered into a seven-year lease, for approximately 16,500 square feet of mixed-use space from an unaffiliated third party. In January 2011, the Company amended the lease to extend the term through January 2017 with a one-time option to terminate the lease effective as of July 31, 2014. The Company exercised this right to terminate the lease by giving notice to the lessor prior to October 31, 2013.  The cost to terminate the lease effective July 31, 2014 was approximately $112,000, which the Company paid at the time notice was given to terminate the lease.  This amount reflects all unamortized lease transaction costs, including, without limitation, all rent abated since January 1, 2011, plus two months’ rent at the then-current rental rate.  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 a new 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 will be 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 paid to the Company, and the rent abatement.

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As of March 31, 2015, the Company’s future minimum payments under the operating leases were as follows:

2015	$	417,615
2016		569,138
2017		584,789
2018		600,871
2019		617,395
Thereafter		1,176,330
Total	$	3,966,138

Rent expense for the three months ended March 31, 2015 and 2014 was approximately $128,000 and $31,000, respectively.

Purchase Commitments

On June 6, 1997, the Company entered into an amended and restated exclusive supply agreement with Cree, Inc. (“Cree”). The exclusive supply agreement had an initial term of ten years that was extended in January 2005 to July 2015. In connection with the amended and restated exclusive supply agreement, the Company committed to purchase from Cree a minimum of 50%, by dollar volume, of its raw material SiC crystal requirements. If the Company’s orders required Cree to expand beyond specified production levels, the Company committed to purchase certain minimum quantities. Effective February 8, 2013, the Company entered into an amendment to a prior letter agreement with Cree, which provided a framework for the Company’s purchases of SiC crystals under the amended and restated exclusive supply agreement. Pursuant to this amendment, the Company agreed to purchase at least $4.00 million of SiC crystals in an initial new order. After the initial new order, the Company agreed to issue non-cancellable, quarterly orders that must equal or exceed a set minimum order quantity. The total purchase commitment under the amendment (as subsequently amended) until July 2015, including the initial new order, was dependent upon the grade of the material and ranged between approximately $7.64 million and approximately $18.56 million.

On December 12, 2014, the Company entered into a new exclusive supply agreement with Cree (the “New Supply Agreement”), which superseded and replaced (with respect to materials ordered subsequent to the effective date of the New Supply Agreement) the exclusive supply agreement that was set to expire in 2015.  Under the New 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 New Supply Agreement will expire on June 24, 2018, unless extended by the parties. The Company also has one option to unilaterally extend the term of the agreement for an additional two-year period, subject to certain conditions.  The Company’s total purchase commitment under the New Supply Agreement until June 2018 is dependent upon the size of the SiC material and ranges between approximately $29.6 million and approximately $31.5 million.

During the three months ended March 31, 2015 and 2014, the Company purchased approximately $1.44 million and $2.55 million, respectively, of SiC crystals from Cree.

8. LINE OF CREDIT

On September 20, 2013, the Company obtained a $10,000,000 revolving line of credit (the “Line of Credit”) from PNC Bank, National Association (“PNC Bank”) for general corporate and working capital purposes. The Line of Credit was evidenced by a Committed Line of Credit Note, dated September 20, 2013 (the “Note”), which was set to mature on June 15, 2015.  The interest rate under the Note was the one-month LIBOR rate (adjusted daily) plus 1.50%, calculated on an actual/360 basis.

The Line of Credit was also governed by a loan agreement, dated September 20, 2013, and was guaranteed by Charles & Colvard Direct, LLC, and Moissanite.com, LLC. The Line of Credit was secured by a lien on substantially all assets of the Company and its subsidiaries.

Effective June 25, 2014, the Line of Credit was terminated concurrent with the Company entering into a new banking relationship with Wells Fargo Bank, National Association (“Wells Fargo”).   The Company had not utilized the Line of Credit.  The Company recognized the remaining $19,000 of deferred legal expenses associated with this Line of Credit upon termination.

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On June 25, 2014, the Company and its wholly owned subsidiaries, Charles & Colvard Direct, LLC, and Moissanite.com, LLC (collectively, the “Borrowers”), obtained a $10,000,000 asset-based revolving credit facility (the “Credit Facility”) from Wells Fargo. The Credit Facility will be used for general corporate and working capital purposes, including transaction fees and expenses incurred in connection therewith and the issuance of letters of credit up to a $1,000,000 sublimit. The Credit Facility will mature on June 25, 2017.

The Credit Facility includes a $5,000,000 sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank. Advances under the Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts and inventory, less reserves. Advances against inventory are further subject to an initial $3,000,000 maximum. The Borrowers must maintain a minimum of $1,000,000 in excess availability at all times. There are no other financial covenants.

Each advance accrues interest at a rate equal to Wells Fargo’s 3-month LIBOR rate plus 2.50%, calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate of 3% in excess of the above rate. Any advance may be prepaid in whole or in part at any time. In addition, the maximum line amount may be reduced by the Company in whole or part at any time, subject to a fee equal to 2% of any reduction in the first year after closing, 1% of any reduction in the second year after closing, and 0% thereafter. There are no mandatory prepayments or line reductions.

The Credit Facility is secured by a lien on substantially all assets of the Borrowers, each of which is jointly and severally liable for all obligations thereunder.  Wells Fargo’s security interest in certain SiC materials is subordinate to Cree’s security interest in such materials pursuant to the New Supply Agreement and an Intercreditor Agreement with Wells Fargo.

The Credit Facility is evidenced by a credit and security agreement, dated as of June 25, 2014 and amended as of September 16, 2014 and December 12, 2014 (collectively, the “Credit Agreement”), and customary ancillary documents. The Credit Agreement contains customary covenants, representations and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.

Events of default under the Credit Facility include, without limitation, (1) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (2) an event of default under any other indebtedness of the Borrowers in excess of $200,000, and (3) a material adverse change in the ability of the Borrowers to perform their obligations under the Credit Agreement or in the Borrowers’ assets, liabilities, businesses or prospects, or other circumstances that Wells Fargo believes may impair the prospect of repayment. If an event of default occurs, Wells Fargo is entitled to take enforcement action, including acceleration of amounts due under the Credit Agreement and foreclosure upon collateral.

The Credit Agreement contains other customary terms, including indemnity, expense reimbursement, yield protection, and confidentiality provisions.  Wells Fargo is permitted to assign the Credit Facility.

As of March 31, 2015, the Company had not borrowed against the Credit Facility.

9. STOCK-BASED COMPENSATION

The following table summarizes the components of the Company’s stock-based compensation included in net loss:

	Three Months Ended March 31,
	2015		2014
Employee stock options	$	186,471	$	182,724
Restricted stock awards		176,523		193,787
Consultant stock options		16,245		-
Income tax benefit		-		(67,697	)
Totals	$	379,239	$	308,814

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No stock-based compensation was capitalized as a cost of inventory during the three months ended March 31, 2015 and 2014.

Stock Options - The following is a summary of the stock option activity for the three months ended March 31, 2015:

	Shares			Weighted Average Exercise Price
Outstanding, December 31, 2014		1,665,946		$	2.93
Granted		376,500		$	1.39
Exercised		(50,000	)	$	1.20
Forfeited		(34,684	)	$	4.67
Expired		(9,843	)	$	7.24
Outstanding, March 31, 2015		1,947,919		$	2.63

The weighted average grant-date fair value of stock options granted during the three months ended March 31, 2015 was $0.92. The total fair value of stock options that vested during the three months ended March 31, 2015 was approximately $202,000. The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the three months ended March 31, 2015:

Dividend yield	0.0	%
Expected volatility	72.4	%
Risk-free interest rate	1.61	%
Expected lives (years)	5.75

Although the Company issued dividends in prior years, a dividend yield of zero was used due to the uncertainty of future dividend payments. 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. 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. The expected lives of the stock options represent the estimated period of time until exercise or forfeiture and are based on historical experience of similar awards.

The following table summarizes information about stock options outstanding at March 31, 2015:

Options Outstanding					Options Exercisable						Options Vested or Expected to Vest
Balance as of 3/31/2015	Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 3/31/2015		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 3/31/2015		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
1,947,919		7.61	$	2.63		1,135,660		6.43	$	2.69		1,852,134		7.51	$	2.64

As of March 31, 2015, the unrecognized stock-based compensation expense related to unvested stock options was approximately $1.09 million, which is expected to be recognized over a weighted average period of approximately 22 months.

The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at March 31, 2015 were each approximately $129,000. This amount is before applicable income taxes and represents the closing market price of the Company’s common stock at March 31, 2015 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. This amount represents the amount that would have been received by the optionees had these stock options been exercised on that date. During the three months ended March 31, 2015, the aggregate intrinsic value of stock options exercised was approximately ($2,000).

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Restricted Stock - The following is a summary of the restricted stock activity for the three months ended March 31, 2015:

	Shares			Weighted Average Grant Date Fair Value
Unvested, December 31, 2014		287,006		$	3.29
Granted		122,500		$	1.28
Vested		(62,247	)	$	2.53
Canceled		-		$	-
Unvested, March 31, 2015		347,259		$	2.71

As of March 31, 2015, the unrecognized stock-based compensation expense related to unvested restricted stock was approximately $515,000, which is expected to be recognized over a weighted average period of approximately 12 months.

Dividends - The Company has not paid any cash dividends in the current year through March 31, 2015.

10. NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options that are computed using the treasury stock method. Antidilutive stock awards are comprised of stock options and unvested restricted shares which would have been antidilutive in the application of the treasury stock method in accordance with the “Earnings Per Share” topic of the Financial Accounting Standard Board Accounting Standards Codification.

The following table reconciles the differences between the basic and diluted earnings per share presentations:

	Three Months Ended March 31,
	2015			2014
Numerator:
Net loss	$	(1,679,451	)	$	(1,063,394	)
Denominator:
Weighted average common shares outstanding:
Basic		20,107,504			20,197,301
Stock options		-			-
Diluted		20,107,504			20,197,301
Net loss per common share:
Basic	$	(0.08	)	$	(0.05	)
Diluted	$	(0.08	)	$	(0.05	)

For the three months ended March 31, 2015 and 2014, stock options to purchase approximately 1.95 and 1.25 million shares, respectively, were excluded from the computation of diluted net loss per common share because the exercise price of the stock options was greater than the average market price of the common shares or the effect of inclusion of such amounts would be anti-dilutive to net loss per common share.  For the three months ended March 31, 2015, approximately 347,000 non-vested restricted shares were excluded because the inclusion of such amounts would be anti-dilutive to net loss per common share.

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11. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, and trade accounts receivable. The Company maintains cash and cash equivalents and investments with high-quality financial institutions and invests in low-risk securities, primarily money market funds or long-term U.S. government agency obligations. At times, cash balances may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurable limits of $250,000 per depositor at each financial institution. Amounts on deposit in excess of FDIC insurable limits at March 31, 2015 and December 31, 2014 approximated $4.89 million and $3.70 million, respectively.

Trade receivables potentially subject the Company to credit risk. The Company’s standard wholesale customer payment terms on trade receivables 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 believes its competitors and other vendors in the wholesale jewelry industry have also expanded their use of extended payment terms and, in aggregate, the Company believes that by expanding its use of extended payment terms, it has provided a competitive response in its market and that its net sales have been favorably impacted. The Company is unable to estimate the impact of this program on its net sales, but if it ceased providing extended payment terms in select instances, the Company believes it would not be competitive for some wholesale customers in the marketplace and that its net sales and profits would likely decrease. The Company extends credit to its customers based upon a number of factors, including an evaluation of the customer’s financial condition and credit history, 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. The Company has not experienced any significant accounts receivable write-offs related to revenue arrangements with extended payment terms. The Company‘s allowance for doubtful accounts includes approximately $800,000 related to one customer that has become past due on its payment arrangement.

At times, a portion of the Company’s accounts receivable will be due from customers that have individual balances in excess of 10% of the Company’s total net accounts receivable.  The following is a summary of customers that represent greater than or equal to 10% of total net accounts receivable:

	March 31, 2015			December 31, 2014
Customer A		33	%		28	%
Customer B		16	%		2	%
Customer C		13	%		11	%

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 gross sales:

	Three Months Ended March 31,
	2015			2014
Customer A		24	%		23	%
Customer B		17	%		25	%
Customer C		-3	%		20	%

The Company records its sales return allowance at the corporate level based on several factors including historical sales return activity and specific allowances for known customer returns.  For this disclosure, the Company reports the customer activity without effect of specific sales return allowances.  Customer C returned goods in excess of its purchases during the period; however, these returns did not affect current period revenue as these returns had been specifically reserved as of December 31, 2014.  As these returns were received from Customer C, the Company reduced its sales return allowance related to these returns.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar words, although some forward-looking statements are expressed differently.

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All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. You should be aware that although the forward-looking statements included herein represent management’s current judgment and expectations, our actual results may differ materially from those projected, stated, or implied in these forward-looking statements as a result of many factors including, but not limited to, the following:

· Our future financial performance depends upon increased consumer acceptance, growth of sales of our products, and operational execution of our strategic initiatives.

· We are currently substantially dependent on a limited number of distributors, jewelry manufacturers, and retailers for the sale of our products.

· The execution of our business plans could significantly impact our liquidity.

· Our business and our results of operations could be materially adversely affected as a result of our inability to fulfill orders on a timely basis.

· The financial difficulties or insolvency of one or more of our major customers or their lack of willingness and ability to market our products could adversely affect results.

· We expect to remain dependent upon Cree, Inc., or Cree, for the sole supply of our silicon carbide, or SiC, crystals for the foreseeable future.

· Our President and Chief Executive Officer transition involves significant risks, and our ability to successfully manage this transition and other organizational change could impact our business.

· Our current wholesale customers may potentially perceive us as a competitor in the finished jewelry business.

· We face intense competition in the worldwide jewelry industry.

· Our business and our results of operations could be materially adversely affected as a result of general economic and market conditions, including the current economic environment.

· We are subject to certain risks due to our international distribution channels and vendors.

· Sales of moissanite jewelry could be dependent upon the pricing of precious metals, which is beyond our control.

· Seasonality of our business may adversely affect our net sales and operating income.

· We may not be able to adequately protect our intellectual property, which could harm the value of our products and brands and adversely affect our business.

· A failure of our information technology infrastructure or a failure to protect confidential information of our customers and our network against security breaches could adversely impact our business and operations.

· If we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer.

· Governmental regulation and oversight might adversely impact our operations.

· Some anti-takeover provisions of our charter documents and agreements may delay or prevent a takeover of our company.

Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur except as required by the federal securities laws, and you are urged to review and consider disclosures that we make in the reports that we file with the Securities and Exchange Commission, or SEC, that discuss other factors relevant to our business.

The following discussion is designed to provide a better understanding of our unaudited condensed consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. This information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2014. Historical results and percentage relationships among any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for future periods.

Overview

We manufacture, market, and distribute Charles & Colvard Created Moissanite^® jewels (which we refer to as moissanite or moissanite jewels), finished jewelry featuring moissanite, and fashion finished jewelry for sale in the worldwide jewelry market. Moissanite, also known by its chemical name of silicon carbide, or SiC, is a rare mineral first discovered in a meteor crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. Leveraging our advantage of being the original and leading worldwide source of created moissanite jewels, our strategy is to establish Charles & Colvard with reputable, high-quality, and sophisticated brands and to position moissanite as an affordable, luxurious alternative to other gems, such as diamonds. We believe this is possible due to moissanite’s exceptional brilliance, fire, durability, and rarity like no other jewel available on the market.

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We manage our business primarily by our three distribution channels that we use to sell our product lines, loose jewels and finished jewelry. Accordingly, we determined our three operating and reportable segments to be wholesale distribution transacted through our parent entity, direct-to-consumer e-commerce distribution transacted through our wholly owned operating subsidiary, Moissanite.com, LLC, or Moissanite.com, and direct-to-consumer home party distribution transacted through our wholly owned operating subsidiary, Charles & Colvard Direct, LLC, or Charles & Colvard Direct. We sell our loose moissanite jewels at wholesale to some of the largest distributors and manufacturers in the world, which mount them into fine jewelry to be sold at retail outlets and via the Internet. We also sell loose moissanite jewels and finished jewelry featuring moissanite at wholesale to retailers to be sold to end consumers and, in the third quarter of 2011, we established a direct-to-consumer e-commerce sales channel through Moissanite.com that sells both loose moissanite jewels and finished jewelry featuring moissanite. Additionally, in April 2012 we launched a pilot test of a direct-to-consumer home party sales channel through Charles & Colvard Direct that sells fashion and moissanite finished jewelry. We believe the expansion of our sales channels to the jewelry trade and the end consumer with branded finished moissanite jewelry creates a more compelling consumer value proposition to drive increased demand.

We are continuing to focus on our core business of manufacturing and distributing the loose moissanite jewel and finished jewelry featuring moissanite through wholesale sales channels, because this is currently the primary way we reach consumers. We believe there is opportunity to grow our wholesale business and to capture a larger share of the jewelry market as we execute our strategy to increase consumer awareness of moissanite.

The wholesale finished jewelry business that we launched in 2010 has expanded through select retailers and television shopping networks. We believe there is significant opportunity to further expand our wholesale finished jewelry business through e-commerce, television shopping, and other retailers. We also believe our finished jewelry business, including finished jewelry sold through our direct-to-consumer e-commerce and home party sales channels, allows us to have more control over the end product and enhance our relationships with consumers, as well as provide incremental sales and gross profit dollars due to the higher price points of finished jewelry containing moissanite relative to loose jewels. To that end, we are focusing on the following critical aspects of our strategic plan during 2015:

· Developing brand strategies - Our goal is to build multiple strong brands around the moissanite jewel and finished jewelry collections in attractive and desirable jewelry designs, especially those featuring larger center stones that leverage moissanite’s point of differentiation and value proposition. We believe branding will allow us to increase consumer awareness, which we expect to help drive sales and develop consumer brand recognition and loyalty.

In June 2012, we launched a moissanite jewel with optical properties that are significantly whiter than our standard VG, or Classic Moissanite^TM grade jewels. We are marketing these whiter jewels under the Forever Brilliant^® trademark as a premier brand to differentiate from other grades of our moissanite as well as moissanite sold by potential competitors in the future.

In September 2014, we launched The Survivor Collection^™, a unique jewelry line designed to celebrate breast cancer survivors.   The line features three-stone rings and pendants, two Forever Brilliant^® and one pink moissanite gem to symbolize life before, during, and after cancer.  At the launch, we partnered with The Breast Cancer Research Foundation, as well as the Women Survivors Alliance to promote breast cancer awareness, celebrate breast cancer survivors, and effectively work to find a cure.  The Survivor Collection^™ has launched in over 150 retail locations in the Unites States and Canada, and our direct-to-consumer home party business Lulu Avenue^®.   The collection has a website that shares information including “where to buy” and a vibrant social presence on Facebook, Twitter, and Pinterest.

We expect demand for our Forever Brilliant^® loose jewel and finished jewelry featuring the Forever Brilliant^® jewel to grow, both in our wholesale channel and on our Moissanite.com e-commerce website, and that Forever Brilliant^® will become an increasingly important brand for Charles & Colvard, Ltd. as we execute future branding initiatives. We are also exploring additional product lines and branding strategies that will differentiate our products in the market.

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To amplify our strategy of reaching the widest audience possible via social media and potential design partnerships, we hired a new public relations agency in March 2015 with specific expertise that will focus on an increased social, digital, and blog presence while identifying campaigns to reach specific target customers, including millennials.

We believe our efforts to position Forever Brilliant^® as the whitest and brightest moissanite jewel available anywhere in the world and the introduction of designer finished jewelry brands will help us to build brand recognition and increase consumer awareness of our products. We also expect that this strategy of building brand recognition will help to support revenue streams as our intellectual property rights expire beginning in 2015.

· Expanding our direct-to-consumer e-commerce business - Our direct-to-consumer e-commerce website, Moissanite.com, features an intuitive site design with robust functionality to enhance the customer experience and convert traffic into sales. We continue to expand the website’s jewelry collections and its loose moissanite jewel assortment by featuring a variety of colors and shapes, and we are investing resources in targeted advertising and marketing campaigns. In 2014, we continued fine-tuning such marketing efforts to maximize return on investment, increasing product assortment, and building new site functionality designed to increase sales conversion rates. We believe our direct-to-consumer e-commerce sales channel will not only add to our top-line revenues in a significant manner, but will also play a key role in our campaign to increase overall consumer awareness of moissanite. We also envision e-commerce as a part of a broader effort to establish online connections with consumers that build our brands and our business with retail partners.

· Developing our direct-to-consumer home party business - In October 2012, our direct-to-consumer home party business, Lulu Avenue^®, began to integrate the custom designs of a well-known jewelry designer into the current jewelry line. The first phase of the integration was completed in March 2013. In April 2013, we hired a President of Lulu Avenue^® whose focus is on the scale-up of the sales force, and during 2014 and the first three months of 2015, we continued to invest in finance and sales and customer service personnel to support our back office technology and supply chain efforts of Lulu Avenue^®. Our direct-to-consumer home party sales channel is providing us with significant sales growth and we believe it will play a role in our campaign to increase overall consumer awareness of moissanite.

As we execute our strategy to build and reinvest in our businesses, significant expenses and investment of cash will be required ahead of the revenue streams we expect in the future, and this may result in some unprofitable reporting periods in 2015. Despite this, we have maintained as one of our primary goals to generate positive cash flow to protect our cash position.  During 2014 and the first three months of 2015, we were able to reduce our inventories and aggressively collect on our trade accounts receivable balance from year end and on current year sales. We will continue to monitor our cash burn rate and collection efforts as we grow the business.

Our total consolidated net sales for the three months ended March 31, 2015 of $8.38 million were 38% greater than total consolidated net sales during the three months ended March 31, 2014. Wholesale distribution segment net sales for the three months ended March 31, 2015 of $5.91 million were 15% greater than wholesale distribution segment net sales during the three months ended March 31, 2014. Direct-to-consumer e-commerce distribution segment net sales for the three months ended March 31, 2015 of $1.10 million were 56% greater than direct-to-consumer e-commerce distribution segment net sales during the three months ended March 31, 2014.  Direct-to-consumer home party distribution segment net sales during the three months ended March 31, 2015 of $1.36 million were 562% greater than direct-to-consumer home party distribution segment net sales during the three months ended March 31, 2014.

Loose jewel sales comprised 46% of our total consolidated net sales for the three months ended March 31, 2015 and increased 4% to $3.82 million, compared with $3.68 million in the same period of 2014. Finished jewelry sales for the three months ended March 31, 2015 comprised 54% of our total consolidated net sales and increased 91% to $4.56 million, compared with $2.39 million in the same period of 2014. We expect these increases in sales by product mix to continue as we execute our strategy of developing new wholesale and direct-to-consumer sales channels and expanding our finished jewelry business.

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Operating expenses increased by $1.63 million, or 46%, to $5.21 million for the three months ended March 31, 2015, compared with $3.58 million in the same period of 2014. Of this increase, general and administrative expenses increased $858,000, or 62%, to $2.23 million primarily as a result of the transition of our President and Chief Executive Officer, increased legal expenses associated with the transition, and office-related expense increases. Sales and marketing expenses increased $779,000, or 36%, to $2.97 million, primarily as a result of increased commissions on sales for our home party direct sales business and increased expenses for personnel additions.  As we grow our business, we intend to continue to closely manage our operating expenses by seeking the most cost effective and efficient solutions to our operating requirements. We recorded a net loss of $1.68 million, or $0.08 per diluted share, for the three months ended March 31, 2015, primarily due to higher general and administrative and sales and marketing expenses.  These increases were offset by a greater gross profit resulting from an increase of overall sales through our direct-to-consumer e-commerce and home party sales businesses.

The execution of our strategy to grow our company, with the ultimate goal of increasing consumer awareness and clearly communicating the value proposition of moissanite, is challenging and not without risk. As such, there can be no assurance that future results for each reporting period will exceed past results in sales, operating cash flow, and/or net income due to the challenging business environment in which we operate and our investment in various initiatives to support our growth strategies. However, as we execute our growth strategy and messaging initiatives, we remain committed to our current priorities of generating positive cash flow and strengthening our financial position while both monetizing our existing inventory and manufacturing our Forever Brilliant^® loose jewel and finished jewelry to meet sales demand. We believe the results of these efforts will propel our revenue growth and profitability and further enhance shareholder value in coming years, but we fully recognize the business and economic challenges that we face.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which we prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. “Critical accounting policies and estimates” are defined as those most important to the financial statement presentation and that require the most difficult, subjective, or complex judgments. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions and/or conditions, actual results of operations may materially differ. We have disclosed our critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended December 31, 2014, and that disclosure should be read in conjunction with this Quarterly Report on Form 10-Q.

Results of Operations

The following table sets forth certain consolidated statements of operations data for the three months ended March 31, 2015 and 2014:

	Three Months Ended March 31,
	2015			2014
Net sales	$	8,377,064		$	6,067,553
Costs and expenses:
Cost of goods sold		4,843,903			3,663,042
Sales and marketing		2,973,364			2,194,611
General and administrative		2,234,213			1,376,215
Research and development		2,061			1,987
Loss on abandonment of assets		-			2,201
Total costs and expenses		10,053,541			7,238,056
Loss from operations		(1,676,477	)		(1,170,503	)
Other income (expense):
Interest income		11			29
Interest expense		(17	)		(130	)
Gain on sale of long-term assets		125			-
Total other income (expense), net		119			(101	)
Loss before income taxes		(1,676,358	)		(1,170,604	)
Income tax net (expense) benefit		(3,093	)		107,210
Net loss	$	(1,679,451	)	$	(1,063,394	)

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Consolidated Net Sales

Consolidated net sales for the three months ended March 31, 2015 and 2014 comprise the following:

	Three Months Ended March 31,				Change
	2015		2014		Dollars		Percent
Loose jewels	$	3,821,159	$	3,680,724	$	140,435		4	%
Finished jewelry		4,555,905		2,386,829		2,169,076		91	%
Total consolidated net sales	$	8,377,064	$	6,067,553	$	2,309,511		38	%

Consolidated net sales were $8.38 million for the three months ended March 31, 2015 compared to $6.07 million for the three months ended March 31, 2014, an increase of $2.31 million, or 38%.  The increase in consolidated net sales for the three months ended March 31, 2015 was due primarily to the growth in sales of our direct-to-consumer businesses, Moissanite.com and Lulu Avenue^®, which increased 56% to $1.10 million and 562% to $1.36 million, respectively, compared to the corresponding period of the prior year.  International sales of our wholesale business increased by $256,000, or 71%, to $615,000 for the three months ended March 31, 2015 compared to the corresponding period of the prior year.  We anticipate orders and related sales of loose moissanite jewels and finished jewelry featuring moissanite in both our wholesale distribution segment and our two direct-to-consumer distribution segments will improve as we execute our growth strategies.

Sales of loose jewels represented 46% of total consolidated net sales for the three months ended March 31, 2015, compared to 61% of total consolidated net sales for the corresponding period of the prior year. For the three months ended March 31, 2015, loose jewel sales were $3.82 million compared to $3.68 million for the corresponding period of the prior year, an increase of $140,000, or 4%. The increase for the three months ended March 31, 2015 was primarily due to the prior year decline in sales to our international customers within our wholesale business, generally due to economic and market conditions facing these larger international customers.  We believe the economic and market conditions will continue to improve in our international markets.  As we attempt to expand the China and Hong Kong markets, we have been evaluating each of our current international wholesale distributors, and others, to determine the best long-term partner within these markets, as well as enforcing the collection from one customer with which we are in dispute.   As a result, our sales in these markets may fluctuate significantly each reporting period.

Sales of finished jewelry represented 54% of total consolidated net sales for the three months ended March 31, 2015, compared to 39% of total consolidated net sales for the corresponding period of the prior year. For the three months ended March 31, 2015, finished jewelry sales were $4.56 million compared to $2.39 million for the corresponding period of the prior year, an increase of $2.17 million, or 91%.  This increase was primarily attributable to our ongoing expansion into the finished jewelry business, primarily through the growth of our direct-to-consumer e-commerce and direct-to-consumer home party businesses, which had increased finished jewelry sales of 73% to $971,000 and 562% to $1.16 million, respectively.

United States, or U.S., net sales accounted for approximately 93% of total consolidated net sales for the three months ended March 31, 2015, compared to 94% of total consolidated net sales for the corresponding period of the prior year. U.S. net sales decreased 1% as a percentage of our total consolidated net sales during the three months ended March 31, 2015 from the corresponding period of the prior year primarily as a result of increased sales to our international wholesale distributors, primarily to a new customer that began purchasing our goods after March 31, 2014.  Overall U.S. net sales increased to $7.76 million for the three months ended March 31, 2015 from the corresponding period of the prior year primarily as a result of an increase in finished jewelry sales through our direct-to-consumer businesses, Moissanite.com and Lulu Avenue^®.  The increase in U.S. sales was also attributable to an increase in loose jewel sales to our domestic wholesale customer base resulting from increased sales of our whiter Forever Brilliant^® moissanite jewel and the growth of our wholesale customers’ moissanite finished jewelry lines.

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Our two largest U.S. customers during the three months ended March 31, 2015 accounted for 24% and 17% of total consolidated sales compared to 23% and 25%, respectively, during the same period of 2014.  One U.S. customer accounted for 20% of total consolidated sales during the three months ended March 31, 2014, but did not account for a significant portion of our total consolidated sales during the same period of 2015.  We expect that we will remain dependent on our ability, and that of our largest customers, to maintain and enhance retail programs. A change in or loss of any of these customer or retailer relationships could have a material adverse effect on our results of operations.

International net sales accounted for approximately 7% of total consolidated net sales for the three months ended March 31, 2015, compared to 6% of total consolidated net sales for the corresponding period of the prior year.  International sales increased 71% during the three months ended March 31, 2015, from the corresponding period of the prior year primarily due to the prior year decline in sales to our international customers within our wholesale business, generally due to economic and market conditions that faced our larger international customers.  We believe the economic and market conditions will continue to improve in our international markets.  In addition, as we attempt to expand the China and Hong Kong markets, we have been evaluating each of the distributors in these markets, and others, to determine the best long-term partner within these markets, as well as enforcing the collection from one customer with which we are in dispute.   As a result, our sales in these markets may fluctuate significantly each reporting period.

We did not have an international customer account for more than 10% of total consolidated sales during the three months ended March 31, 2015 or 2014.  A portion of our international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers. Our top three international distributors by sales volume during the three months ended March 31, 2015 were located in Hong Kong, United Arab Emirates, and India.

Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the three months ended March 31, 2015 and 2014 are as follows:

	Three Months Ended March 31,				Change
	2015		2014		Dollars		Percent
Product line cost of goods sold
Loose jewels	$	2,221,174	$	1,797,407	$	423,767		24	%
Finished jewelry		2,027,945		1,638,249		389,696		24	%
Total product line cost of goods sold		4,249,119		3,435,656		813,463		24	%
Non-product line cost of goods sold		594,784		227,386		367,398		162	%
Total cost of goods sold	$	4,843,903	$	3,663,042	$	1,180,861		32	%

Total cost of goods sold was $4.84 million for the three months ended March 31, 2015 compared to $3.66 million for the three months ended March 31, 2014, an increase of $1.18 million, or 32%.  Product line cost of goods sold is defined as product cost of goods sold in each of our wholesale distribution, direct-to-consumer e-commerce distribution, and direct-to-consumer home parties distribution operating segments excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory valuation allowance adjustments; and other inventory adjustments, comprising costs of quality issues, damaged goods, and inventory write-offs.

The increase in cost of goods sold for the three months ended March 31, 2015 compared to the same period in 2014 was primarily due to a $2.31 million increase in overall consolidated sales, including a 91% increase in finished jewelry sales, and an increase in non-product line cost of goods sold of $367,000, or 162%.   The net increase in non-product line cost of goods sold comprises a $180,000 increase in inventory valuation allowances, including inventory shrinkage, recuts, repairs, and scrap reserves, a $164,000 increase in other inventory adjustments which includes $50,000 of royalties on fashion jewelry design work, and a $31,000 increase in freight-out due to more sales volume.  These increases were offset in part by an $8,000 decrease in non-capitalized manufacturing and production control expenses primarily due to increased production volumes.  See Note 3, “Segment Information and Geographic Data,” in the Notes to Condensed Consolidated Financial Statements for further discussion of non-product line cost of goods sold.

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Sales and Marketing

Sales and marketing expenses for the three months ended March 31, 2015 and 2014 are as follows:

	Three Months Ended March 31,						Change
	2015			2014			Dollars			Percent
Sales and marketing		$	2,973,364		$	2,194,611		$	778,753		35	%

Sales and marketing expenses were $2.97 million for the three months ended March 31, 2015 compared to $2.19 million for the three months ended March 31, 2014, an increase of $779,000, or 35%.

The increase in sales and marketing expenses for the three months ended March 31, 2015 compared to the same period in 2014 was primarily due to an increase of $721,000 in net compensation expenses; a $140,000 increase in office-related expenses; and a $136,000 increase in professional services primarily related to operation of our sales platform and fulfillment services for our direct-to-consumer home party business.  These increases were partially offset by a $161,000 net decrease in advertising expenses; a $36,000 decrease in depreciation expense related to the Moissanite.com and Lulu Avenue^® e-commerce websites’ direct sales platforms; and a $21,000 decrease in travel expense due to fewer international sales trips.

Compensation costs for the three months ended March 31, 2015 compared to the same period in 2014 increased primarily as a result of an increase in commissions of $641,000 for sales to specific wholesale customers under which commission plans of sales representatives are based and the increase in sales within our direct-to-consumer home party line of business; a $116,000 increase in salaries and related employee benefits; and a $2,000 increase in bonus expense.  These increases were partially offset by a decrease of $31,000 in stock-based compensation expense and $9,000 in severance expense.

The decrease in advertising expenses for the three months ended March 31, 2015 compared to the same period in 2014 comprises a $287,000 decrease in cooperative advertising, offset in part by an increase in internet marketing of $107,000, a $14,000 increase in agency and other media spending, and an increase of $5,000 in print media expenses to develop and promote brand awareness campaigns.  The decrease in cooperative advertising expenses resulted primarily from the decision of our domestic distributors to not utilize the advertising credits we had accrued within the allowable period, and management’s decision to offer sales discounts to most of our international customers in lieu of cooperative advertising assistance.

General and Administrative

General and administrative expenses for the three months ended March 31, 2015 and 2014 are as follows:

	Three Months Ended March 31,						Change
	2015			2014			Dollars			Percent
General and administrative		$	2,234,213		$	1,376,215		$	857,998		62	%

General and administrative expenses were $2.23 million for the three months ended March 31, 2015 compared to $1.37 million for the three months ended March 31, 2014, an increase of $858,000, or 62%.

The increase in general and administrative expenses for the three months ended March 31, 2015 compared to the same period in 2014 was primarily due to a $442,000 increase in compensation expenses; a $275,000 increase in professional services; an $80,000 increase in office-related expenses; a $21,000 increase in recruiting agency fees; a $20,000 increase in board compensation; a $10,000 increase in depreciation and amortization expense; a $5,000 increase in travel expense; a $4,000 increase in business and franchise taxes; and a $1,000 increase in bad debt expense associated with our allowance for doubtful accounts reserve policy.

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Compensation expenses increased for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to an increase in severance expense of $335,000 associated with the departure of our former President and Chief Executive Officer, an increase in stock-based compensation expense of $64,000, of which $55,000 was related to the transition of our President and Chief Executive Officer, and an increase in salaries and related employee benefits in the aggregate of $43,000, of which $11,000 was related to the transition of our President and Chief Executive Officer.

Professional services increased for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to an increase in legal fees of $245,000, of which approximately $85,000 was related to the transition of our President and Chief Executive Officer; a $25,000 increase in audit and tax services primarily due to the timing of work performed; and an increase of $23,000 in consulting and other professional services, of which approximately $18,000 related to the transition of our President Chief Executive Officer.  These increases were partially offset by a decrease of $18,000 in investor and public relations expenses.

Research and Development

Research and development expenses for the three months ended March 31, 2015 and 2014 are as follows:

	Three Months Ended March 31,						Change
	2015			2014			Dollars			Percent
Research and development		$	2,061		$	1,987		$	74		4	%

Research and development expenses were approximately $2,000 for the three months ended March 31, 2015 compared to approximately $2,000 for the three months ended March 31, 2015, resulting in a slight increase of 4%.

Research and development expenses for the three months ended March 31, 2015 compared to the same period in 2014 stayed approximately the same due to a $1,000 increase in compensation costs and office expenses for time and materials allocated by operations personnel to research and development activities, partially offset by a $1,000 decrease in consulting professional services.

Loss on Abandonment of Assets

Loss on abandonment of assets for the three months ended March 31, 2015 and 2014 are as follows:

	Three Months Ended March 31,						Change
	2015			2014			Dollars				Percent
Loss on abandonment of assets		$	-		$	2,201		$	(2,201	)		-100	%

Loss on abandonment of assets was $0 for the three months ended March 31, 2015 compared to approximately $2,000 for the same period of 2014, a decrease of approximately $2,000, or 100%.

For the three months ended March 31, 2014, we abandoned a trademark with remaining carrying costs of approximately $2,000 after we determined the trademark would no longer be utilized.

Provision for Income Taxes

We recognized an income tax net expense of approximately $3,000 for the three months ended March 31, 2015 compared to an income tax net benefit of approximately $107,000 for the three months ended March 31, 2014.

As of each reporting date, management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. As of March 31, 2014, management determined that sufficient positive evidence existed to conclude that it is more likely than not that deferred tax assets of $4.15 million were realizable, and it adjusted its valuation allowance accordingly to reflect the estimated net realizable value.  A valuation allowance remained at March 31, 2014 against certain deferred tax assets relating to state net operating loss carryforwards from our e-commerce and home party operating subsidiaries due to the timing uncertainty of when the subsidiaries would generate cumulative positive taxable income to utilize the associated deferred tax assets. A valuation allowance also remained at March 31, 2014 against certain deferred tax assets relating to investment loss carryforwards because management did not anticipate it would generate sufficient investment income to utilize the carryforwards.

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We also previously considered various strategic alternatives, resulting in management determining that a valuation allowance was not necessary at that time.  During the three months ended June 30, 2014, management determined that such strategic alternatives were no longer in our best interest.  Accordingly, management concluded that the positive evidence was no longer sufficient to offset available negative evidence, primarily as a result of the pre-tax operating losses incurred during the six months ended June 30, 2014, and forecasted to continue through the remainder of 2014.   As a result, management concluded that it was uncertain that we would have sufficient future taxable income to utilize its deferred tax assets, and therefore, we established a valuation allowance against its deferred tax assets during the year which remained as of March 31, 2015.

For the three months ended March 31, 2015, we recognized $3,000 of income tax expense for estimated tax, penalties, and interest associated with uncertain tax positions.

For the three months ended March 31, 2014, we recognized $110,000 of current period income tax benefit, which represents an effective tax rate of 9.4% on the current period pre-tax book income. The effective tax rate for the three months ended March 31, 2014 differs from the federal statutory rate of 34.0% primarily due to the impact of state income taxes, stock-based compensation expense that is not deductible for tax purposes, and other book-to-tax reconciling items. During the three months ended March 31, 2014, we also recognized approximately $3,000 of income tax expense for estimated tax, penalties, and interest associated with uncertain tax positions.

Liquidity and Capital Resources

We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of March 31, 2015, our principal sources of liquidity were cash and cash equivalents totaling $5.23 million, trade accounts receivable of $5.12 million, and current inventory of $13.93 million, as compared to cash and cash equivalents totaling $4.01 million, trade accounts receivable of $5.51 million, and current inventory of $13.32 million as of December 31, 2014.  As described more fully below, we also have access to a $10 million credit facility.

During the three months ended March 31, 2015, our working capital increased by approximately $876,000 to $20.13 million from $19.25 million at December 31, 2014. As described more fully below, the increase in working capital at March 31, 2015 is primarily attributable to an increase in our cash and cash equivalents due to our increased cash from operations, a greater allocation of inventory to short-term, an increase in prepaid expenses and other assets, and a decrease in accrued cooperative advertising, offset in part by an increase in trade accounts payable, a decrease in trade accounts receivable, and a net increase in accrued expenses and other liabilities.

During the three months ended March 31, 2015, $1.29 million of cash was provided by operations. The primary drivers of positive cash flow were a decrease in inventory of $1.21 million, a decrease in trade accounts receivable of $964,000, an increase in trade accounts payable of $571,000 and an increase in accrued liabilities of $189,000.  These factors were partially offset by our loss of $1.68 million that included $224,000 of non-cash expenses and an increase in prepaid expenses of $188,000.  Accounts receivable decreased primarily as a result of collection efforts during the first three months of 2015 on sales made in the fourth quarter of 2014, offset in part by extended wholesale customer payment terms that we offer from time to time that may not immediately increase liquidity as a result of current-period sales. We believe our competitors and other vendors in the wholesale jewelry industry have also expanded their use of extended payment terms and, in aggregate, we believe that by expanding our use of extended payment terms, we have provided a competitive response in our market and that our net sales have been favorably impacted.  We are unable to estimate the impact of this program on our net sales, but if we ceased providing extended payment terms in select instances, we believe we would not be competitive for some wholesale customers in the marketplace and that our net sales and profits would likely decrease. Generally, we have not experienced any significant accounts receivable write-offs related to revenue arrangements with extended payment terms; however, we have increased our reserves for uncollectible accounts primarily due to one customer with extended terms.  We do not believe the terms are a factor with this customer’s non-payment.  Inventories decreased primarily as a result of sales, offset in part by the purchase of new raw material SiC crystals during the quarter pursuant to our new exclusive supply agreement, or the New Supply Agreement, with Cree, Inc., or Cree, which we entered into on December 12, 2014; purchases of jewelry castings, findings, and other jewelry components; and production of moissanite gemstones.  Prepaid expenses and other assets increased primarily as a result of timing of payment of insurance premiums, and other payments in advance of goods or services received.  Accounts payable increased primarily as a result of the timing of costs incurred but not yet paid as of March 31, 2015 associated with inventory-related purchases and professional services incurred but not yet due under our vendors’ payment terms.

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We manufactured approximately $1.87 million in loose jewels and $1.94 million in finished jewelry, which includes the cost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production, during the three months ended March 31, 2015.  We expect our purchases of precious metals and labor to increase as we increase our finished jewelry business. In addition, from the beginning of 2006 through the first quarter of 2015, the price of gold has increased significantly (approximately 124%), resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry.

Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with our reduced sales during the periods when the purchase commitments were in effect, have resulted in levels of inventories that are higher than we might otherwise maintain. As of March 31, 2015, $23.66 million of our inventories were classified as long-term assets. Loose jewel sales and finished jewelry that we manufacture will utilize both the finished good loose jewels currently on-hand and, as we deplete certain shapes and sizes, our on-hand raw material SiC crystals of $5.16 million and new raw material that we are purchasing from Cree.

In connection with the prior exclusive supply agreement with Cree, or the Cree Exclusive Supply Agreement, which was set to expire in July 2015, we had committed to purchase from Cree a minimum of 50%, by dollar volume, of our raw material SiC crystal requirements. In February 2013, we entered into an amendment to a prior letter agreement with Cree, which provided a framework for our purchases of SiC crystals under the Cree Exclusive Supply Agreement. Pursuant to this amendment, we agreed to purchase at least $4.00 million of SiC crystals in an initial new order. After the initial new order, we agreed to issue non-cancellable, quarterly orders that must equal or exceed a set minimum order quantity. Our total purchase commitment under the amendment (as subsequently amended) until July 2015, including the initial new order, was dependent upon the grade of the material and ranged between approximately $7.64 million and approximately $18.56 million.

On December 12, 2014, we entered into the New Supply Agreement, which superseded and replaced (with respect to materials ordered subsequent to the effective date of the New Supply Agreement) the Cree Exclusive Supply Agreement.  Under the New Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the New Supply Agreement will expire on June 24, 2018, unless extended by the parties. We also have one option to unilaterally extend the term of the agreement for an additional two-year period, subject to certain conditions.  Our total purchase commitment under the New Supply Agreement until June 2018 is dependent upon the size of the SiC material and ranges between approximately $29.6 million and approximately $31.5 million.

During the three months ended March 31, 2015, we purchased approximately $1.44 million of SiC crystals from Cree. We expect to use existing cash and cash equivalents and other working capital, together with future cash expected to be provided by operating activities and, if necessary, our credit facility described below, to finance our purchase commitment under the New Supply Agreement.

We made no income tax payments during the three months ended March 31, 2015. As of March 31, 2015, we had approximately $882,000 of remaining federal income tax credits, $533,000 of which expire between 2018 and 2021 and the balance without an expiration, which can be carried forward to offset future income taxes. As of March 31, 2015, we also had a federal tax net operating loss carryforward of approximately $5.56 million expiring between 2020 and 2033, which can be used to offset against future federal taxable income, a North Carolina tax net operating loss carryforward of approximately $11.12 million expiring between 2023 and 2028, and various other state tax net operating loss carryforwards expiring between 2016 and 2033, which can be used to offset against future state taxable income.

On June 25, 2014, we and our wholly owned subsidiaries, Charles & Colvard Direct and Moissanite.com, collectively referred to as the Borrowers, obtained a $10,000,000 asset-based revolving credit facility, or the Credit Facility, from Wells Fargo. The Credit Facility will be used for general corporate and working capital purposes, including transaction fees and expenses incurred in connection therewith and the issuance of letters of credit up to a $1,000,000 sublimit. The Credit Facility will mature on June 25, 2017.

28

The Credit Facility includes a $5,000,000 sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank. Advances under the Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts and inventory, less reserves. Advances against inventory are further subject to an initial $3,000,000 maximum. We must maintain a minimum of $1,000,000 in excess availability at all times. There are no other financial covenants.

Each advance accrues interest at a rate equal to Wells Fargo’s 3-month LIBOR rate plus 2.50%, calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate of 3% in excess of the above rate. Any advance may be prepaid in whole or in part at any time. In addition, the maximum line amount may be reduced by us in whole or part at any time, subject to a fee equal to 2% of any reduction in the first year after closing, 1% of any reduction in the second year after closing, and 0% thereafter. There are no mandatory prepayments or line reductions.

The Credit Facility is secured by a lien on substantially allassets of the Borrowers, each of which is jointly and severally liable for all obligations thereunder.  Wells Fargo’s security interest in certain SiC materials is subordinate to Cree’s security interest in such materials pursuant to the New Supply Agreement and an Intercreditor Agreement with Wells Fargo.

The Credit Facility is evidenced by a credit and security agreement dated as of June 25, 2014 and amended as of September 16, 2014 and December 12, 2014, or the Credit Agreement, and customary ancillary documents. The Credit Agreement contains customary covenants, representations and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.

Events of default under the Credit Facility include, without limitation, (1) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (2) an event of default under any other indebtedness of the Borrowers in excess of $200,000, and (3) a material adverse change in the ability of the Borrowers to perform their obligations under the Credit Agreement or in the Borrowers’ assets, liabilities, businesses or prospects, or other circumstances that Wells Fargo believes may impair the prospect of repayment. If an event of default occurs, Wells Fargo is entitled to take enforcement action, including acceleration of amounts due under the Credit Agreement and foreclosure upon collateral.

The Credit Agreement contains other customary terms, including indemnity, expense reimbursement, yield protection, and confidentiality provisions.  Wells Fargo is permitted to assign the Credit Facility.

As of March 31, 2015, we had not borrowed against the Credit Facility.

We believe that our existing cash and cash equivalents and other working capital, together with future cash expected to be provided by operating activities, will be sufficient to meet our working capital and capital expenditure needs over the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors, including our rate of sales growth; the expansion of our sales and marketing activities, including the operating capital needs of our wholly owned subsidiaries; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewel business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and risk factors described in more detail in “Risk Factors” in this report and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.  We obtained the Credit Facility to mitigate these risks to our cash and liquidity position.  Also, we may make investments in, or acquisitions of, complementary businesses, which could also require us to seek additional equity or debt financing.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

29

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended March 31, 2015, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which we are a party or to which any of our property is subject.

Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K for the year ended December 31, 2014 various risks that may materially affect our business.   Except as set forth below, there have been no material changes to such risks.

Our President and Chief Executive Officer transition involves significant risks, and our ability to successfully manage this transition and other organizational change could impact our business.  H. Marvin Beasley was appointed as our President and Chief Executive Officer on March 17, 2015. He is in the process of assessing our business and working with senior management to refine our strategy and operations. Leadership transitions can be inherently difficult to manage and may cause uncertainty and decreased productivity among our employees and increase the likelihood of turnover, which could result in significant disruptions to our operations. We could also be adversely affected if we fail to adequately plan for the succession of members of our senior management team should we have additional departures. The presence of a new President and Chief Executive Officer may also impact our relationships with customers and vendors, resulting in loss of business and loss of vendor relationships. The uncertainty inherent in our management transition could also lead to concerns from current and potential third parties with whom we do business, any of which could damage our business prospects. Finally, we continue to execute a number of significant business initiatives. Successfully managing these initiatives, including retention of key employees, is critical to our business success.

30

Item 6. Exhibits

The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:

Exhibit No.	Description
10.1	Board Compensation Program, effective January 1, 2015 (incorporated by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2014)
10.2	Separation of Employment Agreement, dated March 23, 2015, by and between Charles & Colvard, Ltd. and Randall N. McCullough (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)
10.3	Consulting Agreement, dated March 23, 2015, by and between Charles & Colvard, Ltd. and Randall N. McCullough (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)
10.4	Employment Agreement, effective as of March 17, 2015, by and between Charles & Colvard, Ltd. and H. Marvin Beasley (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)
10.5	Form of Restricted Stock Award Agreement (Performance-Based) under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from Charles & Colvard, Ltd.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements.

31

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CHARLES & COLVARD, LTD.
	By:	/s/ H. Marvin Beasley
May 1, 2015		H. Marvin Beasley
		President and Chief Executive Officer
	By:	/s/ Kyle Macemore
May 1, 2015		Kyle Macemore
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer and Chief Accounting Officer)

32

EXHIBIT INDEX

Exhibit No.	Description
10.1	Board Compensation Program, effective January 1, 2015 (incorporated by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2014)
10.2	Separation of Employment Agreement, dated March 23, 2015, by and between Charles & Colvard, Ltd. and Randall N. McCullough (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)
10.3	Consulting Agreement, dated March 23, 2015, by and between Charles & Colvard, Ltd. and Randall N. McCullough (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)
10.4	Employment Agreement, effective as of March 17, 2015, by and between Charles & Colvard, Ltd. and H. Marvin Beasley (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)
10.5	Form of Restricted Stock Award Agreement (Performance-Based) under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from Charles & Colvard, Ltd.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements.

33

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECURITIES AND EXCHANGE ACT OF 1934

RULE 13a-14(a) AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, H. Marvin Beasley, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 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/ H. Marvin Beasley
May 1, 2015		H. Marvin Beasley
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECURITIES AND EXCHANGE ACT OF 1934

RULE 13a-14(a) AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Kyle Macemore, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 of Charles & Colvard, Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ Kyle Macemore
May 1, 2015		Kyle Macemore
		Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Charles & Colvard, Ltd. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, H. Marvin Beasley, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(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.

/s/ H. Marvin Beasley         

H. Marvin Beasley

President and Chief Executive Officer

May 1, 2015

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Charles & Colvard, Ltd. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kyle Macemore, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(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.

/s/ Kyle Macemore          

Kyle Macemore

Senior Vice President and Chief Financial Officer

May 1, 2015

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

SEGMENT INFORMATION AND GEOGRAPHIC DATA, Data by Geographic Area (Details) (USD $)	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Dec. 31, 2014
Net sales [Abstract]
Net sales	$ 8,377,064	$ 6,067,553
Property and Equipment, Net [Member]
Assets by geographical area [Abstract]
Total	1,800,466		1,859,355
Intangible Assets, Net [Member]
Assets by geographical area [Abstract]
Total	180,701		216,947
Reportable Geographical Components [Member] | United States [Member]
Net sales [Abstract]
Net sales	7,762,346	5,709,033
Reportable Geographical Components [Member] | United States [Member] | Property and Equipment, Net [Member]
Assets by geographical area [Abstract]
Total	1,800,466		1,859,355
Reportable Geographical Components [Member] | United States [Member] | Intangible Assets, Net [Member]
Assets by geographical area [Abstract]
Total	31,907		39,050
Reportable Geographical Components [Member] | International [Member]
Net sales [Abstract]
Net sales	614,718	358,520
Reportable Geographical Components [Member] | International [Member] | Property and Equipment, Net [Member]
Assets by geographical area [Abstract]
Total	0		0
Reportable Geographical Components [Member] | International [Member] | Intangible Assets, Net [Member]
Assets by geographical area [Abstract]
Total	$ 148,794		$ 177,897

XML

FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2015

FAIR VALUE MEASUREMENTS [Abstract]

FAIR VALUE MEASUREMENTS

4. 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:

· Level 1 - quoted prices in active markets for identical assets and liabilities

· Level 2 - inputs other than Level 1 quoted prices that are directly or indirectly observable

· Level 3 - unobservable inputs that are not corroborated by market data

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 instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, trade accounts receivable, trade accounts payable, and accrued expenses. All instruments are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these 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. 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, license rights, and trademarks.

XML

LINE OF CREDIT (Details) (USD $)	0 Months Ended		3 Months Ended
	Sep. 20, 2013	Jun. 25, 2014	Mar. 31, 2015
PNC Bank [Member] | Line of Credit Note [Member]
Line of Credit Facility [Line Items]
Revolving line of credit	$ 10,000,000
Line of credit maturity date	Jun. 15, 2015
Line of credit, description of variable rate basis	One-month LIBOR rate
Line of credit, spread on variable rate (in hundredths)	1.50%
Basis for calculation of LIBOR rate (adjusted daily)	actual / 360
Wells Fargo [Member] | Line of Credit [Member]
Line of Credit Facility [Line Items]
Revolving line of credit		10,000,000
Line of credit maturity date		Jun. 25, 2017
Line of credit, description of variable rate basis			Wells Fargo’s 3-month LIBOR rate
Line of credit, spread on variable rate (in hundredths)			2.50%
Basis for calculation of LIBOR rate (adjusted daily)			actual / 360
Legal fees		19,000
Line of credit facility, sublimit for letter of credit		1,000,000
Line of credit facility, sublimit for advances			5,000,000
Percentage of advances, guaranteed by bank (in hundredths)			90.00%
Maximum advances against inventory			3,000,000
Minimum excess availability of inventory at all times required for advances			1,000,000
Interest rate in event of default in excess of standard rate (in hundredths)			3.00%
Prepaid advance fee for reduction in first year after closing (in hundredths)			2.00%
Prepaid advance fee for reduction in Second year after closing (in hundredths)			1.00%
Prepaid advance fee for reduction, thereafter (in hundredths)			0.00%
Number of business day within which guaranteed advances to be repaid			2 days
Maximum indebtedness to be maintained in the event of default to avoid triggering of default terms			200,000
Advances against line of credit			$ 0

XML

COMMITMENTS AND CONTINGENCIES (Details) (USD $)	0 Months Ended		3 Months Ended
	Dec. 12, 2014 Option	Dec. 09, 2013 sqft	Mar. 31, 2015 sqft	Mar. 31, 2014	Dec. 12, 2014	May 23, 2014	Oct. 31, 2013
Lease Commitments [Abstract]
Period of lease			7 years
Land subject to leases (in square feet)		36,350	16,500
Number of months included in costs to terminate lease			2 months
Cost to terminate lease							$ 112,000
Leasehold improvements offered by landlord						550,000
Lease signing and moving incentives offered by landlord						73,000
Period for which rent is abated		7 months
Future minimum payments under operating lease [Abstract]
2015			417,615
2016			569,138
2017			584,789
2018			600,871
2019			617,395
Thereafter			1,176,330
Total			3,966,138
Rent expense			128,000	31,000
Purchase Commitments [Abstract]
Period of exclusive supply agreement	2 years		10 years
Percentage committed to be purchased (in hundredths)	100.00%		50.00%
Number of option to unilaterally extend the term	1
Minimum purchase commitment in initial new order			4,000,000		29,600,000
Maximum purchase commitment in initial new order					31,500,000
Minimum purchase commitment under the amendment			7,640,000
Maximum purchase commitment under amendment			18,560,000
Actual purchases under purchase amendment			$ 1,440,000	$ 2,550,000

XML

STOCK-BASED COMPENSATION (Details) (USD $)	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
Components of the Company's stock based compensation included in net income [Abstract]
Income tax benefit	$ 0	$ (67,697)
Totals	379,239	308,814
Employee Stock Options [Member]
Components of the Company's stock based compensation included in net income [Abstract]
Allocated share-based compensation expense	186,471	182,724
Stock-based compensation capitalized as a cost of inventory	0	0
Shares [Roll Forward]
Outstanding, December 31, 2014	1,665,946
Granted (in shares)	376,500
Exercised (in shares)	(50,000)
Forfeited (in shares)	(34,684)
Expired (in shares)	(9,843)
Outstanding, March 31, 2015	1,947,919
Weighted Average Exercise Price [Roll Forward]
Outstanding, December 31, 2014 (in dollars per share)	$ 2.93
Granted (in dollars per share)	$ 1.39
Exercised (in dollars per share)	$ 1.20
Forfeited (in dollars per share)	$ 4.67
Expired (in dollars per share)	$ 7.24
Outstanding, March 31, 2015 (in dollars per share)	$ 2.63
Fair value of stock options (in dollars per share)	$ 0.92
Fair value of stock options vested	202,000
Weighted average assumptions for stock options [Abstract]
Dividend yield (in hundredths)	0.00%
Expected volatility (in hundredths)	72.40%
Risk-free interest rate (in hundredths)	1.61%
Expected lives	5 years 9 months
Options Outstanding [Abstract]
Balance as of 3/31/2015 (in shares)	1,947,919
Weighted Average Remaining Contractual Life (Years)	7 years 7 months 10 days
Weighted Average Exercise Price (in dollars per share)	$ 2.63
Options Exercisable [Abstract]
Balance as of 3/31/2015 (in shares)	1,135,660
Weighted Average Remaining Contractual Life (Years)	6 years 5 months 5 days
Weighted Average Exercise Price (in dollars per share)	$ 2.69
Options Vested or Expected to Vest [Abstract]
Balance as of 3/31/2015 (in shares)	1,852,134
Weighted Average Remaining Contractual Life (Years)	7 years 6 months 4 days
Weighted Average Exercise Price (in dollars per share)	$ 2.64
Unrecognized stock-based compensation expense related to unvested awards	1,090,000
Total compensation cost not yet recognized, period for recognition	22 months
Aggregate intrinsic value of stock options outstanding	129,000
Aggregate intrinsic value of stock options exercisable	129,000
Aggregate intrinsic value of stock options vested and expected to vest	129,000
Aggregate intrinsic value of stock options exercised	2,000
Restricted Stock [Member]
Components of the Company's stock based compensation included in net income [Abstract]
Allocated share-based compensation expense	176,523	193,787
Options Vested or Expected to Vest [Abstract]
Unrecognized stock-based compensation expense related to unvested awards	515,000
Total compensation cost not yet recognized, period for recognition	12 months
Shares [Roll Forward]
Unvested, December 31, 2014 (in shares)	287,006
Granted (in shares)	122,500
Vested (in shares)	(62,247)
Canceled (in shares)	0
Unvested, March 31, 2015 (in shares)	347,259
Weighted Average Grant Date Fair Value [Roll Forward]
Unvested, December 31, 2014 (in dollars per share)	$ 3.29
Granted (in dollars per share)	$ 1.28
Vested (in dollars per share)	$ 2.53
Canceled (in dollars per share)	$ 0
Unvested, March 31, 2015 (in dollars per share)	$ 2.71
Consultant stock options [Member]
Components of the Company's stock based compensation included in net income [Abstract]
Allocated share-based compensation expense	$ 16,245	$ 0

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NET LOSS PER COMMON SHARE (Details) (USD $)	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
Numerator [Abstract]
Net loss	$ (1,679,451)	$ (1,063,394)
Weighted average common shares outstanding [Abstract]
Basic (in shares)	20,107,504	20,197,301
Stock options (in shares)	0	0
Fully diluted (in shares)	20,107,504	20,197,301
Net loss per common share [Abstract]
Basic (in dollars per share)	$ (0.08)	$ (0.05)
Diluted (in dollars per share)	$ (0.08)	$ (0.05)
Stock Options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Stock options to purchase shares and non vested restricted shares (in shares)	1,950,000	1,250,000
Restricted Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Stock options to purchase shares and non vested restricted shares (in shares)	347,000

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SEGMENT INFORMATION AND GEOGRAPHIC DATA

3 Months Ended

Mar. 31, 2015

SEGMENT INFORMATION AND GEOGRAPHIC DATA [Abstract]

SEGMENT INFORMATION AND GEOGRAPHIC DATA

3. 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.

During 2014, the Company began managing its business primarily through the three distribution channels that it uses to sell its product lines, loose jewels and finished jewelry. Accordingly, the Company determined its three operating and reportable segments to be wholesale distribution transacted through the parent entity, and the two direct-to-consumer distribution channels transacted through the Company’s wholly owned operating subsidiaries, Moissanite.com, LLC and Charles & Colvard Direct, LLC.  The accounting policies of these three segments are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies” of this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements in the 2014 Annual Report.

Previously, the Company determined it managed its business through two distribution channels, wholesale distribution and direct-to-consumer.  While the Company has always managed its businesses as three separate operating segments, it previously aggregated the Moissanite.com, LLC and Charles & Colvard Direct, LLC operating segments into a single reportable segment for reporting purposes.  The two wholly owned operating subsidiaries that previously were aggregated under the direct-to-consumer segment are now each being presented as a separate reportable segment.  The Company believes aggregation of the two subsidiaries into one reportable segment for reporting purposes is no longer warranted due to changes in how it sources product and sells directly to consumers, including changes in the management structure, strategic initiatives and changes in sales models, made during the year ended December 31, 2014 for each of the two wholly owned subsidiaries.  Certain amounts for the three months ended March 31, 2014 have been reclassified to conform to the current period presentation as a result of this change in reportable segments.

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). Product line cost of goods sold is defined as product cost of goods sold in each of the Company’s wholesale distribution and two direct-to-consumer distribution operating segments 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-offs.

The Company allocates certain general and administrative expenses from its parent entity to its two direct-to-consumer distribution segments primarily based on net sales and number of employees. Unallocated expenses, which also include interest and taxes, remain in the parent entity’s wholesale distribution segment.

Summary financial information by reportable segment is as follows:

	Three Months Ended March 31, 2015
	Wholesale			Moissanite.com			Charles & Colvard Direct			Total
Net sales
Loose jewels	$	3,687,893		$	133,266		$	-		$	3,821,159
Finished jewelry		2,224,267			970,660			1,360,978			4,555,905
Total	$	5,912,160		$	1,103,926			1,360,978			8,377,064
Product line cost of goods sold
Loose jewels	$	2,202,103		$	19,071		$	-		$	2,221,174
Finished jewelry		1,227,810			480,360			319,775			2,027,945
Total	$	3,429,913		$	499,431		$	319,775		$	4,249,119
Product line gross profit
Loose jewels	$	1,485,790		$	114,195		$	-		$	1,599,985
Finished jewelry		996,457			490,300			1,041,203			2,527,960
Total	$	2,482,247		$	604,495		$	1,041,203		$	4,127,945
Operating loss	$	(234,485	)		(403,420	)		(1,038,572	)	$	(1,676,477	)
Depreciation and amortization	$	160,640			31,707			26,381		$	218,728
Capital expenditures	$	109,564			533			7,007		$	117,104

	Three Months Ended March 31, 2014
	Wholesale			Moissanite.com			Charles & Colvard Direct			Total
Net sales
Loose jewels	$	3,533,784		$	146,940		$	-		$	3,680,724
Finished jewelry		1,619,831			561,268			205,730			2,386,829
Total	$	5,153,615		$	708,208		$	205,730		$	6,067,553
Product line cost of goods sold
Loose jewels	$	1,775,135		$	22,272		$	-		$	1,797,407
Finished jewelry		1,280,101			294,886			63,262			1,638,249
Total	$	3,055,236		$	317,158		$	63,262		$	3,435,656
Product line gross profit
Loose jewels	$	1,758,649		$	124,668		$	-		$	1,883,317
Finished jewelry		339,730			266,382			142,468			748,580
Total	$	2,098,379		$	391,050		$	142,468		$	2,631,897
Operating loss	$	(124,858	)		(404,771	)		(640,874	)	$	(1,170,503	)
Depreciation and amortization	$	179,673			73,159			24,966		$	277,798
Capital expenditures	$	28,325			-			-		$	28,325

	March 31, 2015
	Wholesale		Moissanite.com		Charles & Colvard Direct		Total
Total assets	$	50,746,106		106,794		93,559		$	50,946,459

	December 31, 2014
	Wholesale		Moissanite.com		Charles & Colvard Direct		Total
Total assets	$	51,183,888		128,049		114,460		$	51,426,397

A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:

	Three months ended March 31,
	2015		2014
Product line cost of goods sold	$	4,249,119	$	3,435,656
Non-capitalized manufacturing and production control expenses		147,112		155,023
Freight out		90,734		59,899
Inventory valuation allowances		204,000		24,000
Other inventory adjustments		152,938		(11,536	)
Cost of goods sold	$	4,843,903	$	3,663,042

The Company’s net inventories by product line maintained in the parent entity’s wholesale distribution segment are as follows:

	March 31, 2015		December 31, 2014
Loose jewels
Raw materials	$	5,156,656	$	4,658,692
Work-in-process		5,615,277		5,752,103
Finished goods		20,192,696		21,495,873
Finished goods on consignment		3,585		46,284
Total	$	30,968,214	$	31,952,952
Finished jewelry
Raw materials	$	253,360	$	258,707
Work-in-process		526,334		540,576
Finished goods		5,533,173		5,557,417
Finished goods on consignment		190,184		578,200
Total	$	6,503,051	$	6,934,900

Supplies inventories of approximately $53,000 and $51,000 at March 31, 2015 and December 31, 2014, respectively, included in finished goods inventories in the condensed consolidated financial statements are omitted from inventories by product line because they are used in both product lines and are not maintained separately.  The Company’s two operating subsidiaries comprising the two direct-to-consumer distribution segments carry no net inventories, and inventory is transferred without intercompany markup from the parent entity’s wholesale distribution segment as product line cost of goods sold when sold to the end consumer.

The Company recognizes sales by geographic area based on the country in which the customer is based. A portion of the Company’s international wholesale distribution segment sales represents products sold internationally that may be re-imported to United States (“U.S.”) retailers. Sales to international end consumers made by the Company’s two direct-to-consumer distribution segments 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. The following presents certain data by geographic area:

	Three Months Ended March 31,
	2015		2014
Net sales
United States	$	7,762,346	$	5,709,033
International		614,718		358,520
Total	$	8,377,064	$	6,067,553

	March 31, 2015		December 31, 2014
Property and equipment, net
United States	$	1,800,466	$	1,859,355
International		-		-
Total	$	1,800,466	$	1,859,355

	March 31, 2015		December 31, 2014
Intangible assets, net
United States	$	31,907	$	39,050
International		148,794		177,897
Total	$	180,701	$	216,947

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MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Details) (USD $)	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Dec. 31, 2014
Concentration Risk [Line Items]
Insurance coverage per depositor at each financial institution	$ 250,000
Interest-bearing amounts on deposit in excess of FDIC insurable limits	4,890,000		3,700,000
Increase in allowance for doubtful accounts	$ 800,000
Minimum [Member]
Concentration Risk [Line Items]
Period of customer payments on trade receivables	30 days
Maximum [Member]
Concentration Risk [Line Items]
Period of customer payments on trade receivables	90 days
Trade Accounts Receivable [Member] | Customer Concentration Risk [Member] | Customer A [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	33.00%	28.00%
Trade Accounts Receivable [Member] | Customer Concentration Risk [Member] | Customer B [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	16.00%	2.00%
Trade Accounts Receivable [Member] | Customer Concentration Risk [Member] | Customer C [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	13.00%	11.00%
Total Gross Sales [Member]
Concentration Risk [Line Items]
Percentage of gross sales used as benchmark (in hundredths)	10.00%
Total Gross Sales [Member] | Customer Concentration Risk [Member] | Customer A [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	24.00%	23.00%
Total Gross Sales [Member] | Customer Concentration Risk [Member] | Customer B [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	17.00%	25.00%
Total Gross Sales [Member] | Customer Concentration Risk [Member] | Customer C [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	(3.00%)	20.00%

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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (USD $)	Mar. 31, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents	$ 5,234,683	$ 4,007,341
Accounts receivable, net	5,124,509	5,510,253
Inventory, net	13,927,427	13,320,639
Prepaid expenses and other assets	809,870	602,850
Total current assets	25,096,489	23,441,083
Long-term assets:
Inventory, net	23,596,889	25,617,990
Property and equipment, net	1,800,466	1,859,355
Intangible assets, net	180,701	216,947
Other assets	271,914	291,022
Total long-term assets	25,849,970	27,985,314
TOTAL ASSETS	50,946,459	51,426,397
Current liabilities:
Accounts payable	3,857,363	3,286,086
Accrued cooperative advertising	57,000	220,000
Accrued expenses and other liabilities	1,056,148	684,577
Total current liabilities	4,970,511	4,190,663
Long-term liabilities:
Accrued expenses and other liabilities	787,212	809,879
Accrued income taxes	410,775	407,682
Total long-term liabilities	1,197,987	1,217,561
Total liabilities	6,168,498	5,408,224
Commitments and contingencies
Shareholders' equity:
Common stock, no par value	54,045,875	53,949,001
Additional paid-in capital - stock-based compensation	11,970,868	11,628,503
Accumulated deficit	(21,238,782)	(19,559,331)
Total shareholders' equity	44,777,961	46,018,173
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 50,946,459	$ 51,426,397

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DESCRIPTION OF BUSINESS

3 Months Ended

Mar. 31, 2015

DESCRIPTION OF BUSINESS [Abstract]

DESCRIPTION OF BUSINESS

1. DESCRIPTION OF BUSINESS

Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation founded in 1995, manufactures, markets, and distributes Charles & Colvard Created Moissanite^® jewels (hereinafter referred to as moissanite or moissanite jewels), finished jewelry featuring moissanite, and fashion finished jewelry for sale in the worldwide jewelry market. Moissanite, also known by its chemical name of silicon carbide (“SiC”), is a rare mineral first discovered in a meteor crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. Leveraging its advantage of being the original and leading worldwide source of created moissanite jewels, the Company’s strategy is to establish itself with reputable, high-quality, and sophisticated brands and to position moissanite as an affordable, luxurious alternative to other gemstones, such as diamond. The Company believes this is possible due to moissanite’s exceptional brilliance, fire, durability, and rarity like no other jewel available on the market. The Company sells loose moissanite jewels and finished jewelry at wholesale to distributors, manufacturers, and retailers and at retail to end consumers through its wholly owned operating subsidiaries Moissanite.com, LLC and Charles & Colvard Direct, LLC.

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NET LOSS PER COMMON SHARE (Tables)

3 Months Ended

Mar. 31, 2015

NET LOSS PER COMMON SHARE [Abstract]

Reconciliation of the differences between the basic and fully diluted earnings per share

The following table reconciles the differences between the basic and diluted earnings per share presentations:

	Three Months Ended March 31,
	2015			2014
Numerator:
Net loss	$	(1,679,451	)	$	(1,063,394	)
Denominator:
Weighted average common shares outstanding:
Basic		20,107,504			20,197,301
Stock options		-			-
Diluted		20,107,504			20,197,301
Net loss per common share:
Basic	$	(0.08	)	$	(0.05	)
Diluted	$	(0.08	)	$	(0.05	)

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SEGMENT INFORMATION AND GEOGRAPHIC DATA (Details) (USD $)	3 Months Ended
	Mar. 31, 2015 Segment	Mar. 31, 2014	Dec. 31, 2014
SEGMENT INFORMATION AND GEOGRAPHIC DATA [Abstract]
Number of operating segments	3
Number of reportable segments	3
Summary information by segment [Abstract]
Net sales	$ 8,377,064	$ 6,067,553
Product line cost of goods sold	4,249,119	3,435,656
Product line gross profit	4,127,945	2,631,897
Operating loss	(1,676,477)	(1,170,503)
Depreciation and amortization	218,728	277,798
Capital expenditures	117,104	28,325
Total assets	50,946,459		51,426,397
Cost of Goods Sold [Abstract]
Cost of goods sold	4,843,903	3,663,042
Inventories, net [Abstract]
Raw materials	5,410,016		4,917,399
Work-in-process	6,141,611		6,292,679
Supplies inventories	53,000		51,000
Loose Jewels [Member]
Summary information by segment [Abstract]
Net sales	3,821,159	3,680,724
Product line cost of goods sold	2,221,174	1,797,407
Product line gross profit	1,599,985	1,883,317
Inventories, net [Abstract]
Raw materials	5,156,656		4,658,692
Work-in-process	5,615,277		5,752,103
Finished goods	20,192,696		21,495,873
Finished goods on consignment	3,585		46,284
Total	30,968,214		31,952,952
Finished Jewelry [Member]
Summary information by segment [Abstract]
Net sales	4,555,905	2,386,829
Product line cost of goods sold	2,027,945	1,638,249
Product line gross profit	2,527,960	748,580
Inventories, net [Abstract]
Raw materials	253,360		258,707
Work-in-process	526,334		540,576
Finished goods	5,533,173		5,557,417
Finished goods on consignment	190,184		578,200
Total	6,503,051		6,934,900
Operating and Reporting Segments [Member] | Wholesale [Member]
Summary information by segment [Abstract]
Net sales	5,912,160	5,153,615
Product line cost of goods sold	3,429,913	3,055,236
Product line gross profit	2,482,247	2,098,379
Operating loss	(234,485)	(124,858)
Depreciation and amortization	160,640	179,673
Capital expenditures	109,564	28,325
Total assets	50,746,106		51,183,888
Operating and Reporting Segments [Member] | Wholesale [Member] | Loose Jewels [Member]
Summary information by segment [Abstract]
Net sales	3,687,893	3,533,784
Product line cost of goods sold	2,202,103	1,775,135
Product line gross profit	1,485,790	1,758,649
Operating and Reporting Segments [Member] | Wholesale [Member] | Finished Jewelry [Member]
Summary information by segment [Abstract]
Net sales	2,224,267	1,619,831
Product line cost of goods sold	1,227,810	1,280,101
Product line gross profit	996,457	339,730
Operating and Reporting Segments [Member] | Moissanite.com [Member]
Summary information by segment [Abstract]
Net sales	1,103,926	708,208
Product line cost of goods sold	499,431	317,158
Product line gross profit	604,495	391,050
Operating loss	(403,420)	(404,771)
Depreciation and amortization	31,707	73,159
Capital expenditures	533	0
Total assets	106,794		128,049
Operating and Reporting Segments [Member] | Moissanite.com [Member] | Loose Jewels [Member]
Summary information by segment [Abstract]
Net sales	133,266	146,940
Product line cost of goods sold	19,071	22,272
Product line gross profit	114,195	124,668
Operating and Reporting Segments [Member] | Moissanite.com [Member] | Finished Jewelry [Member]
Summary information by segment [Abstract]
Net sales	970,660	561,268
Product line cost of goods sold	480,360	294,886
Product line gross profit	490,300	266,382
Operating and Reporting Segments [Member] | Charles & Colvard Direct [Member]
Summary information by segment [Abstract]
Net sales	1,360,978	205,730
Product line cost of goods sold	319,775	63,262
Product line gross profit	1,041,203	142,468
Operating loss	(1,038,572)	(640,874)
Depreciation and amortization	26,381	24,966
Capital expenditures	7,007	0
Total assets	93,559		114,460
Operating and Reporting Segments [Member] | Charles & Colvard Direct [Member] | Loose Jewels [Member]
Summary information by segment [Abstract]
Net sales	0	0
Product line cost of goods sold	0	0
Product line gross profit	0	0
Operating and Reporting Segments [Member] | Charles & Colvard Direct [Member] | Finished Jewelry [Member]
Summary information by segment [Abstract]
Net sales	1,360,978	205,730
Product line cost of goods sold	319,775	63,262
Product line gross profit	1,041,203	142,468
Segment Reconciling Items [Member]
Cost of Goods Sold [Abstract]
Non-capitalized manufacturing and production control expenses	147,112	155,023
Freight out	90,734	59,899
Inventory valuation allowances	204,000	24,000
Other inventory adjustments	$ 152,938	$ (11,536)

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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2015

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract]

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation - The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2015.

The condensed consolidated financial statements as of and for the three months ended March 31, 2015 and 2014 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of December 31, 2014 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 13, 2015 (the “2014 Annual Report”).

The accompanying condensed consolidated financial statements as of and for the three months ended March 31, 2015 and 2014 include the accounts of the Company and its wholly owned subsidiaries Moissanite.com, LLC, formed in 2011; Charles & Colvard Direct, LLC, formed in 2011; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary that became a dormant entity in the second quarter of 2009 and the operations of which ceased in 2008. All intercompany accounts have been eliminated.

Significant Accounting Policies - In the opinion of the Company’s management, the significant accounting policies used for the three months ended March 31, 2015 are consistent with those used for the year ended December 31, 2014. Accordingly, please refer to the 2014 Annual Report for the Company’s significant accounting policies.

Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets, uncertain tax positions, stock compensation expense, and cooperative advertising. Actual results could differ materially from those estimates.

Reclassifications - Certain amounts in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current year presentation, primarily amounts described in Note 3, “Segment Information and Geographic Data” related to changes in the Company’s reportable segments.

Recently Adopted/Issued Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board  issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in 2017.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under U.S. GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, U.S. GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. This standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect this ASU will have a material impact on its consolidated financial statements.

All other new and recently issued, but not yet effective, accounting pronouncements have been deemed to be not relevant to the Company and therefore are not expected to have any impact once adopted.

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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) (USD $)	Mar. 31, 2015	Dec. 31, 2014
Shareholders' equity
Common stock, par value (in dollars per share)	$ 0	$ 0

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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2015

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract]

Basis of Presentation and Principles of Consolidation

Basis of Presentation and Principles of Consolidation - The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2015.

The condensed consolidated financial statements as of and for the three months ended March 31, 2015 and 2014 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of December 31, 2014 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 13, 2015 (the “2014 Annual Report”).

The accompanying condensed consolidated financial statements as of and for the three months ended March 31, 2015 and 2014 include the accounts of the Company and its wholly owned subsidiaries Moissanite.com, LLC, formed in 2011; Charles & Colvard Direct, LLC, formed in 2011; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary that became a dormant entity in the second quarter of 2009 and the operations of which ceased in 2008. All intercompany accounts have been eliminated.

Significant Accounting Policies

Significant Accounting Policies - In the opinion of the Company’s management, the significant accounting policies used for the three months ended March 31, 2015 are consistent with those used for the year ended December 31, 2014. Accordingly, please refer to the 2014 Annual Report for the Company’s significant accounting policies.

Use of Estimates

Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets, uncertain tax positions, stock compensation expense, and cooperative advertising. Actual results could differ materially from those estimates.

Reclassifications

Reclassifications - Certain amounts in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current year presentation, primarily amounts described in Note 3, “Segment Information and Geographic Data” related to changes in the Company’s reportable segments.

Recently Adopted/Issued Accounting Pronouncements

Recently Adopted/Issued Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board  issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in 2017.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under U.S. GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, U.S. GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. This standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect this ASU will have a material impact on its consolidated financial statements.

All other new and recently issued, but not yet effective, accounting pronouncements have been deemed to be not relevant to the Company and therefore are not expected to have any impact once adopted.

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Document and Entity Information	3 Months Ended
	Mar. 31, 2015	Apr. 27, 2015
Document and Entity Information [Abstract]
Entity Registrant Name	CHARLES & COLVARD LTD
Entity Central Index Key	0001015155
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		20,554,833
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2015

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SEGMENT INFORMATION AND GEOGRAPHIC DATA (Tables)

3 Months Ended

Mar. 31, 2015

SEGMENT INFORMATION AND GEOGRAPHIC DATA [Abstract]

Summary information by segment

Summary financial information by reportable segment is as follows:

	Three Months Ended March 31, 2015
	Wholesale			Moissanite.com			Charles & Colvard Direct			Total
Net sales
Loose jewels	$	3,687,893		$	133,266		$	-		$	3,821,159
Finished jewelry		2,224,267			970,660			1,360,978			4,555,905
Total	$	5,912,160		$	1,103,926			1,360,978			8,377,064
Product line cost of goods sold
Loose jewels	$	2,202,103		$	19,071		$	-		$	2,221,174
Finished jewelry		1,227,810			480,360			319,775			2,027,945
Total	$	3,429,913		$	499,431		$	319,775		$	4,249,119
Product line gross profit
Loose jewels	$	1,485,790		$	114,195		$	-		$	1,599,985
Finished jewelry		996,457			490,300			1,041,203			2,527,960
Total	$	2,482,247		$	604,495		$	1,041,203		$	4,127,945
Operating loss	$	(234,485	)		(403,420	)		(1,038,572	)	$	(1,676,477	)
Depreciation and amortization	$	160,640			31,707			26,381		$	218,728
Capital expenditures	$	109,564			533			7,007		$	117,104

	Three Months Ended March 31, 2014
	Wholesale			Moissanite.com			Charles & Colvard Direct			Total
Net sales
Loose jewels	$	3,533,784		$	146,940		$	-		$	3,680,724
Finished jewelry		1,619,831			561,268			205,730			2,386,829
Total	$	5,153,615		$	708,208		$	205,730		$	6,067,553
Product line cost of goods sold
Loose jewels	$	1,775,135		$	22,272		$	-		$	1,797,407
Finished jewelry		1,280,101			294,886			63,262			1,638,249
Total	$	3,055,236		$	317,158		$	63,262		$	3,435,656
Product line gross profit
Loose jewels	$	1,758,649		$	124,668		$	-		$	1,883,317
Finished jewelry		339,730			266,382			142,468			748,580
Total	$	2,098,379		$	391,050		$	142,468		$	2,631,897
Operating loss	$	(124,858	)		(404,771	)		(640,874	)	$	(1,170,503	)
Depreciation and amortization	$	179,673			73,159			24,966		$	277,798
Capital expenditures	$	28,325			-			-		$	28,325

	March 31, 2015
	Wholesale		Moissanite.com		Charles & Colvard Direct		Total
Total assets	$	50,746,106		106,794		93,559		$	50,946,459

	December 31, 2014
	Wholesale		Moissanite.com		Charles & Colvard Direct		Total
Total assets	$	51,183,888		128,049		114,460		$	51,426,397

Schedule of reconciliation of product line cost of goods sold to cost of goods sold as reported in consolidated financial statements

A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:

	Three months ended March 31,
	2015		2014
Product line cost of goods sold	$	4,249,119	$	3,435,656
Non-capitalized manufacturing and production control expenses		147,112		155,023
Freight out		90,734		59,899
Inventory valuation allowances		204,000		24,000
Other inventory adjustments		152,938		(11,536	)
Cost of goods sold	$	4,843,903	$	3,663,042

Schedule of inventories by product line maintained in its wholesale distribution segment

The Company’s net inventories by product line maintained in the parent entity’s wholesale distribution segment are as follows:

	March 31, 2015		December 31, 2014
Loose jewels
Raw materials	$	5,156,656	$	4,658,692
Work-in-process		5,615,277		5,752,103
Finished goods		20,192,696		21,495,873
Finished goods on consignment		3,585		46,284
Total	$	30,968,214	$	31,952,952
Finished jewelry
Raw materials	$	253,360	$	258,707
Work-in-process		526,334		540,576
Finished goods		5,533,173		5,557,417
Finished goods on consignment		190,184		578,200
Total	$	6,503,051	$	6,934,900

Data by geographic area

The following presents certain data by geographic area:

	Three Months Ended March 31,
	2015		2014
Net sales
United States	$	7,762,346	$	5,709,033
International		614,718		358,520
Total	$	8,377,064	$	6,067,553

	March 31, 2015		December 31, 2014
Property and equipment, net
United States	$	1,800,466	$	1,859,355
International		-		-
Total	$	1,800,466	$	1,859,355

	March 31, 2015		December 31, 2014
Intangible assets, net
United States	$	31,907	$	39,050
International		148,794		177,897
Total	$	180,701	$	216,947

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (USD $)	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) [Abstract]
Net sales	$ 8,377,064	$ 6,067,553
Costs and expenses:
Cost of goods sold	4,843,903	3,663,042
Sales and marketing	2,973,364	2,194,611
General and administrative	2,234,213	1,376,215
Research and development	2,061	1,987
Loss on abandonment of assets	0	2,201
Total costs and expenses	10,053,541	7,238,056
Loss from operations	(1,676,477)	(1,170,503)
Other income (expense):
Interest income	11	29
Interest expense	(17)	(130)
Gain on sale of long-term assets	125	0
Total other income (expense), net	119	(101)
Loss before income taxes	(1,676,358)	(1,170,604)
Income tax net (expense) benefit	(3,093)	107,210
Net loss	$ (1,679,451)	$ (1,063,394)
Net loss per common share:
Basic (in dollars per share)	$ (0.08)	$ (0.05)
Diluted (in dollars per share)	$ (0.08)	$ (0.05)
Weighted average number of shares used in computing net loss per common share:
Basic (in shares)	20,107,504	20,197,301
Diluted (in shares)	20,107,504	20,197,301

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COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2015

COMMITMENTS AND CONTINGENCIES [Abstract]

COMMITMENTS AND CONTINGENCIES

7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

In March 2004, the Company entered into a seven-year lease, for approximately 16,500 square feet of mixed-use space from an unaffiliated third party. In January 2011, the Company amended the lease to extend the term through January 2017 with a one-time option to terminate the lease effective as of July 31, 2014. The Company exercised this right to terminate the lease by giving notice to the lessor prior to October 31, 2013.  The cost to terminate the lease effective July 31, 2014 was approximately $112,000, which the Company paid at the time notice was given to terminate the lease.  This amount reflects all unamortized lease transaction costs, including, without limitation, all rent abated since January 1, 2011, plus two months’ rent at the then-current rental rate.  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 a new 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 will be 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 paid to the Company, and the rent abatement.

As of March 31, 2015, the Company’s future minimum payments under the operating leases were as follows:

2015	$	417,615
2016		569,138
2017		584,789
2018		600,871
2019		617,395
Thereafter		1,176,330
Total	$	3,966,138

Rent expense for the three months ended March 31, 2015 and 2014 was approximately $128,000 and $31,000, respectively.

Purchase Commitments

On June 6, 1997, the Company entered into an amended and restated exclusive supply agreement with Cree, Inc. (“Cree”). The exclusive supply agreement had an initial term of ten years that was extended in January 2005 to July 2015. In connection with the amended and restated exclusive supply agreement, the Company committed to purchase from Cree a minimum of 50%, by dollar volume, of its raw material SiC crystal requirements. If the Company’s orders required Cree to expand beyond specified production levels, the Company committed to purchase certain minimum quantities. Effective February 8, 2013, the Company entered into an amendment to a prior letter agreement with Cree, which provided a framework for the Company’s purchases of SiC crystals under the amended and restated exclusive supply agreement. Pursuant to this amendment, the Company agreed to purchase at least $4.00 million of SiC crystals in an initial new order. After the initial new order, the Company agreed to issue non-cancellable, quarterly orders that must equal or exceed a set minimum order quantity. The total purchase commitment under the amendment (as subsequently amended) until July 2015, including the initial new order, was dependent upon the grade of the material and ranged between approximately $7.64 million and approximately $18.56 million.

On December 12, 2014, the Company entered into a new exclusive supply agreement with Cree (the “New Supply Agreement”), which superseded and replaced (with respect to materials ordered subsequent to the effective date of the New Supply Agreement) the exclusive supply agreement that was set to expire in 2015.  Under the New 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 New Supply Agreement will expire on June 24, 2018, unless extended by the parties. The Company also has one option to unilaterally extend the term of the agreement for an additional two-year period, subject to certain conditions.  The Company’s total purchase commitment under the New Supply Agreement until June 2018 is dependent upon the size of the SiC material and ranges between approximately $29.6 million and approximately $31.5 million.

During the three months ended March 31, 2015 and 2014, the Company purchased approximately $1.44 million and $2.55 million, respectively, of SiC crystals from Cree.

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INCOME TAXES

3 Months Ended

Mar. 31, 2015

INCOME TAXES [Abstract]

INCOME TAXES

6. INCOME TAXES

The Company recognized an income tax net expense of approximately $3,000 for the three months ended March 31, 2015 compared to an income tax net benefit of approximately $107,000 for the three months ended March 31, 2014.

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. As of March 31, 2014, the Company’s management determined that sufficient positive evidence existed to conclude that it is more likely than not that deferred tax assets of $4.15 million were realizable, and it adjusted its valuation allowance accordingly to reflect the estimated net realizable value.  A valuation allowance remained at March 31, 2014 against certain deferred tax assets relating to state net operating loss carryforwards from the Company’s e-commerce and home party operating subsidiaries due to the timing uncertainty of when the subsidiaries would generate cumulative positive taxable income to utilize the associated deferred tax assets. A valuation allowance also remained at March 31, 2014 against certain deferred tax assets relating to investment loss carryforwards because the Company did not anticipate it would generate sufficient investment income to utilize the carryforwards.

The Company also previously considered various strategic alternatives, resulting in management determining that a valuation allowance was not necessary at that time.  During the three months ended June 30, 2014, the Company’s management determined that such strategic alternatives were no longer in the best interest of the Company.  Accordingly, the Company’s management concluded that the positive evidence was no longer sufficient to offset available negative evidence, primarily as a result of the pre-tax operating losses incurred during the six months ended June 30, 2014, and forecasted to continue through the remainder of 2014.   As a result, the Company’s management concluded that it was uncertain that the Company would have sufficient future taxable income to utilize its deferred tax assets, and therefore, the Company established a valuation allowance against its deferred tax assets during the year which remained as of March 31, 2015.

For the three months ended March 31, 2015, the Company recognized $3,000 of income tax expense for estimated tax, penalties, and interest associated with uncertain tax positions.

For the three months ended March 31, 2014, the Company recognized $110,000 of current period income tax benefit, which represents an effective tax rate of 9.4% on the current period pre-tax book income. The effective tax rate for the three months ended March 31, 2014 differs from the federal statutory rate of 34.0% primarily due to the impact of state income taxes, stock-based compensation expense that is not deductible for tax purposes, and other book-to-tax reconciling items. During the three months ended March 31, 2014, the Company also recognized approximately $3,000 of income tax expense for estimated tax, penalties, and interest associated with uncertain tax positions.

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MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Tables)

3 Months Ended

Mar. 31, 2015

MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK [Abstract]

Summary of customers that represent greater than or equal to 10% of total gross sales

The following is a summary of customers that represent greater than or equal to 10% of total net accounts receivable:

	March 31, 2015			December 31, 2014
Customer A		33	%		28	%
Customer B		16	%		2	%
Customer C		13	%		11	%

The following is a summary of customers that represent greater than or equal to 10% of total gross sales:

	Three Months Ended March 31,
	2015			2014
Customer A		24	%		23	%
Customer B		17	%		25	%
Customer C		-3	%		20	%

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INVENTORIES (Tables)

3 Months Ended

Mar. 31, 2015

INVENTORIES [Abstract]

Schedule of inventory, net of reserves

The Company’s total inventories, net of reserves, consisted of the following as of March 31, 2015 and December 31, 2014:

	March 31, 2015			December 31, 2014
Raw materials	$	5,410,016		$	4,917,399
Work-in-process		6,141,611			6,292,679
Finished goods		26,890,920			27,985,067
Finished goods on consignment		219,769			677,484
Less inventory reserves		(1,138,000	)		(934,000	)
Total	$	37,524,316		$	38,938,629
Current portion	$	13,927,427		$	13,320,639
Long-term portion		23,596,889			25,617,990
Total	$	37,524,316		$	38,938,629

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NET LOSS PER COMMON SHARE

3 Months Ended

Mar. 31, 2015

NET LOSS PER COMMON SHARE [Abstract]

NET LOSS PER COMMON SHARE

10. NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options that are computed using the treasury stock method. Antidilutive stock awards are comprised of stock options and unvested restricted shares which would have been antidilutive in the application of the treasury stock method in accordance with the “Earnings Per Share” topic of the Financial Accounting Standard Board Accounting Standards Codification.

The following table reconciles the differences between the basic and diluted earnings per share presentations:

	Three Months Ended March 31,
	2015			2014
Numerator:
Net loss	$	(1,679,451	)	$	(1,063,394	)
Denominator:
Weighted average common shares outstanding:
Basic		20,107,504			20,197,301
Stock options		-			-
Diluted		20,107,504			20,197,301
Net loss per common share:
Basic	$	(0.08	)	$	(0.05	)
Diluted	$	(0.08	)	$	(0.05	)

For the three months ended March 31, 2015 and 2014, stock options to purchase approximately 1.95 and 1.25 million shares, respectively, were excluded from the computation of diluted net loss per common share because the exercise price of the stock options was greater than the average market price of the common shares or the effect of inclusion of such amounts would be anti-dilutive to net loss per common share.  For the three months ended March 31, 2015, approximately 347,000 non-vested restricted shares were excluded because the inclusion of such amounts would be anti-dilutive to net loss per common share.

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LINE OF CREDIT

3 Months Ended

Mar. 31, 2015

LINE OF CREDIT [Abstract]

LINE OF CREDIT

8. LINE OF CREDIT

On September 20, 2013, the Company obtained a $10,000,000 revolving line of credit (the “Line of Credit”) from PNC Bank, National Association (“PNC Bank”) for general corporate and working capital purposes. The Line of Credit was evidenced by a Committed Line of Credit Note, dated September 20, 2013 (the “Note”), which was set to mature on June 15, 2015.  The interest rate under the Note was the one-month LIBOR rate (adjusted daily) plus 1.50%, calculated on an actual/360 basis.

The Line of Credit was also governed by a loan agreement, dated September 20, 2013, and was guaranteed by Charles & Colvard Direct, LLC, and Moissanite.com, LLC. The Line of Credit was secured by a lien on substantially all assets of the Company and its subsidiaries.

Effective June 25, 2014, the Line of Credit was terminated concurrent with the Company entering into a new banking relationship with Wells Fargo Bank, National Association (“Wells Fargo”).   The Company had not utilized the Line of Credit.  The Company recognized the remaining $19,000 of deferred legal expenses associated with this Line of Credit upon termination.

On June 25, 2014, the Company and its wholly owned subsidiaries, Charles & Colvard Direct, LLC, and Moissanite.com, LLC (collectively, the “Borrowers”), obtained a $10,000,000 asset-based revolving credit facility (the “Credit Facility”) from Wells Fargo. The Credit Facility will be used for general corporate and working capital purposes, including transaction fees and expenses incurred in connection therewith and the issuance of letters of credit up to a $1,000,000 sublimit. The Credit Facility will mature on June 25, 2017.

The Credit Facility includes a $5,000,000 sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank. Advances under the Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts and inventory, less reserves. Advances against inventory are further subject to an initial $3,000,000 maximum. The Borrowers must maintain a minimum of $1,000,000 in excess availability at all times. There are no other financial covenants.

Each advance accrues interest at a rate equal to Wells Fargo’s 3-month LIBOR rate plus 2.50%, calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate of 3% in excess of the above rate. Any advance may be prepaid in whole or in part at any time. In addition, the maximum line amount may be reduced by the Company in whole or part at any time, subject to a fee equal to 2% of any reduction in the first year after closing, 1% of any reduction in the second year after closing, and 0% thereafter. There are no mandatory prepayments or line reductions.

The Credit Facility is secured by a lien on substantially all assets of the Borrowers, each of which is jointly and severally liable for all obligations thereunder.  Wells Fargo’s security interest in certain SiC materials is subordinate to Cree’s security interest in such materials pursuant to the New Supply Agreement and an Intercreditor Agreement with Wells Fargo.

The Credit Facility is evidenced by a credit and security agreement, dated as of June 25, 2014 and amended as of September 16, 2014 and December 12, 2014 (collectively, the “Credit Agreement”), and customary ancillary documents. The Credit Agreement contains customary covenants, representations and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.

Events of default under the Credit Facility include, without limitation, (1) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (2) an event of default under any other indebtedness of the Borrowers in excess of $200,000, and (3) a material adverse change in the ability of the Borrowers to perform their obligations under the Credit Agreement or in the Borrowers’ assets, liabilities, businesses or prospects, or other circumstances that Wells Fargo believes may impair the prospect of repayment. If an event of default occurs, Wells Fargo is entitled to take enforcement action, including acceleration of amounts due under the Credit Agreement and foreclosure upon collateral.

The Credit Agreement contains other customary terms, including indemnity, expense reimbursement, yield protection, and confidentiality provisions.  Wells Fargo is permitted to assign the Credit Facility.

As of March 31, 2015, the Company had not borrowed against the Credit Facility.

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STOCK-BASED COMPENSATION

3 Months Ended

Mar. 31, 2015

STOCK- BASED COMPENSATION [Abstract]

STOCK- BASED COMPENSATION

9. STOCK-BASED COMPENSATION

The following table summarizes the components of the Company’s stock-based compensation included in net loss:

	Three Months Ended March 31,
	2015		2014
Employee stock options	$	186,471	$	182,724
Restricted stock awards		176,523		193,787
Consultant stock options		16,245		-
Income tax benefit		-		(67,697	)
Totals	$	379,239	$	308,814

No stock-based compensation was capitalized as a cost of inventory during the three months ended March 31, 2015 and 2014.

Stock Options - The following is a summary of the stock option activity for the three months ended March 31, 2015:

	Shares			Weighted Average Exercise Price
Outstanding, December 31, 2014		1,665,946		$	2.93
Granted		376,500		$	1.39
Exercised		(50,000	)	$	1.20
Forfeited		(34,684	)	$	4.67
Expired		(9,843	)	$	7.24
Outstanding, March 31, 2015		1,947,919		$	2.63

The weighted average grant-date fair value of stock options granted during the three months ended March 31, 2015 was $0.92. The total fair value of stock options that vested during the three months ended March 31, 2015 was approximately $202,000. The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the three months ended March 31, 2015:

Dividend yield	0.0	%
Expected volatility	72.4	%
Risk-free interest rate	1.61	%
Expected lives (years)	5.75

Although the Company issued dividends in prior years, a dividend yield of zero was used due to the uncertainty of future dividend payments. 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. 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. The expected lives of the stock options represent the estimated period of time until exercise or forfeiture and are based on historical experience of similar awards.

The following table summarizes information about stock options outstanding at March 31, 2015:

Options Outstanding					Options Exercisable						Options Vested or Expected to Vest
Balance as of 3/31/2015	Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 3/31/2015		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 3/31/2015		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
1,947,919		7.61	$	2.63		1,135,660		6.43	$	2.69		1,852,134		7.51	$	2.64

As of March 31, 2015, the unrecognized stock-based compensation expense related to unvested stock options was approximately $1.09 million, which is expected to be recognized over a weighted average period of approximately 22 months.

The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at March 31, 2015 were each approximately $129,000. This amount is before applicable income taxes and represents the closing market price of the Company’s common stock at March 31, 2015 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. This amount represents the amount that would have been received by the optionees had these stock options been exercised on that date. During the three months ended March 31, 2015, the aggregate intrinsic value of stock options exercised was approximately ($2,000).

Restricted Stock - The following is a summary of the restricted stock activity for the three months ended March 31, 2015:

	Shares			Weighted Average Grant Date Fair Value
Unvested, December 31, 2014		287,006		$	3.29
Granted		122,500		$	1.28
Vested		(62,247	)	$	2.53
Canceled		-		$	-
Unvested, March 31, 2015		347,259		$	2.71

As of March 31, 2015, the unrecognized stock-based compensation expense related to unvested restricted stock was approximately $515,000, which is expected to be recognized over a weighted average period of approximately 12 months.

Dividends - The Company has not paid any cash dividends in the current year through March 31, 2015.

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MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

3 Months Ended

Mar. 31, 2015

MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK [Abstract]

MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

11. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, and trade accounts receivable. The Company maintains cash and cash equivalents and investments with high-quality financial institutions and invests in low-risk securities, primarily money market funds or long-term U.S. government agency obligations. At times, cash balances may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurable limits of $250,000 per depositor at each financial institution. Amounts on deposit in excess of FDIC insurable limits at March 31, 2015 and December 31, 2014 approximated $4.89 million and $3.70 million, respectively.

Trade receivables potentially subject the Company to credit risk. The Company’s standard wholesale customer payment terms on trade receivables 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 believes its competitors and other vendors in the wholesale jewelry industry have also expanded their use of extended payment terms and, in aggregate, the Company believes that by expanding its use of extended payment terms, it has provided a competitive response in its market and that its net sales have been favorably impacted. The Company is unable to estimate the impact of this program on its net sales, but if it ceased providing extended payment terms in select instances, the Company believes it would not be competitive for some wholesale customers in the marketplace and that its net sales and profits would likely decrease. The Company extends credit to its customers based upon a number of factors, including an evaluation of the customer’s financial condition and credit history, 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. The Company has not experienced any significant accounts receivable write-offs related to revenue arrangements with extended payment terms. The Company‘s allowance for doubtful accounts includes approximately $800,000 related to one customer that has become past due on its payment arrangement.

At times, a portion of the Company’s accounts receivable will be due from customers that have individual balances in excess of 10% of the Company’s total net accounts receivable.  The following is a summary of customers that represent greater than or equal to 10% of total net accounts receivable:

	March 31, 2015			December 31, 2014
Customer A		33	%		28	%
Customer B		16	%		2	%
Customer C		13	%		11	%

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 gross sales:

	Three Months Ended March 31,
	2015			2014
Customer A		24	%		23	%
Customer B		17	%		25	%
Customer C		-3	%		20	%

The Company records its sales return allowance at the corporate level based on several factors including historical sales return activity and specific allowances for known customer returns.  For this disclosure, the Company reports the customer activity without effect of specific sales return allowances.  Customer C returned goods in excess of its purchases during the period; however, these returns did not affect current period revenue as these returns had been specifically reserved as of December 31, 2014.  As these returns were received from Customer C, the Company reduced its sales return allowance related to these returns.

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STOCK-BASED COMPENSATION (Tables)

3 Months Ended

Mar. 31, 2015

STOCK- BASED COMPENSATION [Abstract]

Schedule for components of stock based compensation

The following table summarizes the components of the Company’s stock-based compensation included in net loss:

	Three Months Ended March 31,
	2015		2014
Employee stock options	$	186,471	$	182,724
Restricted stock awards		176,523		193,787
Consultant stock options		16,245		-
Income tax benefit		-		(67,697	)
Totals	$	379,239	$	308,814

Summary of the stock option activity

The following is a summary of the stock option activity for the three months ended March 31, 2015:

	Shares			Weighted Average Exercise Price
Outstanding, December 31, 2014		1,665,946		$	2.93
Granted		376,500		$	1.39
Exercised		(50,000	)	$	1.20
Forfeited		(34,684	)	$	4.67
Expired		(9,843	)	$	7.24
Outstanding, March 31, 2015		1,947,919		$	2.63

Weighted average assumptions for stock options granted

The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the three months ended March 31, 2015:

Dividend yield	0.0	%
Expected volatility	72.4	%
Risk-free interest rate	1.61	%
Expected lives (years)	5.75

Information about stock options outstanding

The following table summarizes information about stock options outstanding at March 31, 2015:

Options Outstanding					Options Exercisable						Options Vested or Expected to Vest
Balance as of 3/31/2015	Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 3/31/2015		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 3/31/2015		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
1,947,919		7.61	$	2.63		1,135,660		6.43	$	2.69		1,852,134		7.51	$	2.64

Restricted stock activity

The following is a summary of the restricted stock activity for the three months ended March 31, 2015:

	Shares			Weighted Average Grant Date Fair Value
Unvested, December 31, 2014		287,006		$	3.29
Granted		122,500		$	1.28
Vested		(62,247	)	$	2.53
Canceled		-		$	-
Unvested, March 31, 2015		347,259		$	2.71

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INVENTORIES (Details) (USD $)	3 Months Ended
	Mar. 31, 2015	Dec. 31, 2014
Total inventories, net of reserves [Abstract]
Raw materials	$ 5,410,016	$ 4,917,399
Work-in-process	6,141,611	6,292,679
Finished goods	26,890,920	27,985,067
Finished goods on consignment	219,769	677,484
Less inventory reserves	(1,138,000)	(934,000)
Total	37,524,316	38,938,629
Current portion	13,927,427	13,320,639
Long-term portion	23,596,889	25,617,990
Period considered for classification of long term inventory	12 months
Work-in-process inventories issued to active production jobs	1,610,000	2,050,000
Inventory reserve for obsolescence	429,000	250,000
Carrying value of inventory reserve for obsolescence of moissanite		31,000
Shrinkage reserve for finished goods on consignment	26,000	53,000
Inventory of net loose jewels	30,970,000	31,950,000
Inventory reserve for shrinkage of loose jewels	9,000	17,000
Inventory reserve for shrinkage of loose jewels on consignment	8,000	17,000
Inventory reserve for recuts	216,000	216,000
Inventory of net jewelry	6,500,000	6,930,000
Scrap reserve	96,000	101,000
Inventory reserve for shrinkage of finished jewelry	231,000	192,000
Inventory reserve for shrinkage of finished jewelry on consignment	18,000	36,000
Inventory reserve for shrinkage of finished jewelry on repairs	$ 157,000	$ 127,000

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $)	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (1,679,451)	$ (1,063,394)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	218,728	277,798
Stock-based compensation	379,239	376,511
Provision for uncollectible accounts	1,000	0
Provision for sales returns	(579,000)	(810,600)
Provision for inventory reserves	204,000	24,000
Provision for deferred income taxes	0	(110,171)
Loss on abandonment of assets	0	2,201
Gain on sale of long-term assets	(125)	0
Changes in assets and liabilities:
Accounts receivable	963,744	2,251,972
Inventory	1,210,313	(1,347,239)
Prepaid expenses and other assets, net	(187,912)	(21,111)
Accounts payable	571,277	340,080
Accrued cooperative advertising	(163,000)	106,356
Accrued income taxes	3,093	2,961
Other accrued liabilities	348,904	(91,051)
Net cash provided by (used in) operating activities	1,290,810	(61,687)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(117,104)	(28,325)
Patent, license rights, and trademark costs	(6,539)	(7,668)
Proceeds from sale of long-term assets	175	0
Net cash used in investing activities	(123,468)	(35,993)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock option exercises	60,000	0
Net cash provided by financing activities	60,000	0
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	1,227,342	(97,680)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	4,007,341	2,573,405
CASH AND CASH EQUIVALENTS, END OF PERIOD	5,234,683	2,475,725
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	17	130
Cash paid during the period for income taxes	$ 0	$ 0

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INVENTORIES

3 Months Ended

Mar. 31, 2015

INVENTORIES [Abstract]

INVENTORIES

5. INVENTORIES

The Company’s total inventories, net of reserves, consisted of the following as of March 31, 2015 and December 31, 2014:

	March 31, 2015			December 31, 2014
Raw materials	$	5,410,016		$	4,917,399
Work-in-process		6,141,611			6,292,679
Finished goods		26,890,920			27,985,067
Finished goods on consignment		219,769			677,484
Less inventory reserves		(1,138,000	)		(934,000	)
Total	$	37,524,316		$	38,938,629
Current portion	$	13,927,427		$	13,320,639
Long-term portion		23,596,889			25,617,990
Total	$	37,524,316		$	38,938,629

Inventories are stated at the lower of cost or market on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Any inventory on hand at the measurement date in excess of the Company’s current requirements based on historical and anticipated levels of sales is classified as long-term on the Company’s consolidated balance sheets. The Company’s classification of 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 over the next 12 months.

The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of March 31, 2015 and December 31, 2014, work-in-process inventories issued to active production jobs approximated $1.61 million and $2.05 million, respectively.

The Company’s jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, the majority of jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends nor is obsolescence a significant factor. The Company has very small market penetration in the worldwide jewelry market, and the Company has the exclusive right in the U.S. through mid-2015 and in many other countries through mid-2016 to produce and sell created SiC for use in jewelry applications. In view of the foregoing factors, management has concluded that no excess or obsolete loose jewel inventory reserve requirements existed as of March 31, 2015.

The Company manufactures finished jewelry featuring moissanite. Relative to loose moissanite jewels, finished jewelry is more fashion oriented and subject to styling trends that could render certain designs obsolete. The majority of the Company’s finished jewelry featuring moissanite is held in inventory for resale and consists of such basic designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company manufactures small individual quantities of designer-inspired moissanite fashion jewelry as part of its sample line that are used in the selling process to its wholesale customers.

In 2011, the Company began purchasing fashion finished jewelry comprised of base metals and non-precious gemstones for sale through Lulu Avenue^®, the direct-to-consumer home party division of its wholly owned operating subsidiary, Charles & Colvard Direct, LLC. This finished jewelry is fashion oriented and subject to styling trends that may change with each catalog season, of which there are several each year. Typically in the jewelry industry, slow-moving or discontinued lines are sold as closeouts or liquidated in alternative sales channels.  The Company reviews the finished jewelry inventory on an ongoing basis for any lower of cost or market and obsolescence issues.  The Company identified certain fashion finished jewelry inventory that could not be sold due to damage or branding issues and established an obsolescence reserve of $429,000 as of March 31, 2015 and $250,000 as of December 31, 2014, for the carrying costs in excess of any estimated scrap values.  As of December 31, 2014, the Company identified $31,000 of finished jewelry featuring moissanite that required an obsolescence reserve.

Periodically, the Company ships finished goods inventory to wholesale 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. Finished goods on consignment at March 31, 2015 and December 31, 2014 are net of shrinkage reserves of $26,000 and $53,000, respectively, to allow for certain loose jewels and finished jewelry on consignment with wholesale 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.

Total net loose jewel inventories at March 31, 2015 and December 31, 2014, including inventory on consignment net of reserves, were $30.97 million and $31.95 million, respectively. The loose jewel inventories at March 31, 2015 and December 31, 2014 include shrinkage reserves of $9,000 and $17,000, respectively, with $8,000 and $17,000 of shrinkage reserves on inventory on consignment at March 31, 2015 and December 31, 2014, respectively. Loose jewel inventories at March 31, 2015 and December 31, 2014 also include recuts reserves of $216,000.

Total net jewelry inventories at March 31, 2015 and December 31, 2014, including inventory on consignment net of reserves, finished jewelry featuring moissanite manufactured by the Company since entering the finished jewelry business in 2010, and fashion finished jewelry purchased by the Company for sale through Lulu Avenue^®, were $6.50 million and $6.93 million, respectively. Jewelry inventories consist primarily of finished goods, a portion of which the Company acquired as part of a January 2009 settlement agreement with a former manufacturer customer to reduce the outstanding receivable to the Company. Due to the lack of a plan to market this inventory at that time, a jewelry inventory reserve was established to reduce the majority of the acquired jewelry inventory value to scrap value, or the amount the Company would expect to obtain by melting the gold in the jewelry and returning to loose-jewel finished goods inventory those jewels that meet grading standards. The scrap reserve established for this acquired inventory at the time of the agreement is adjusted at each reporting period for the market price of gold and has generally declined as the associated jewelry is sold down. At March 31, 2015, the balance decreased to $96,000 from $101,000 at December 31, 2014 as a result of sell down of the inventory during the quarter and change in gold prices. Because the finished jewelry the Company began manufacturing in 2010 after it entered that business was made pursuant to an operational plan to market and sell the inventory, it is not subject to this reserve. The finished jewelry inventories at March 31, 2015 and December 31, 2014 also include shrinkage reserves of $231,000 and $192,000, respectively, including shrinkage reserves of $18,000 and $36,000 on inventory on consignment, respectively; and a repairs reserve of $157,000 and $127,000, respectively.

The need for adjustments to inventory reserves is evaluated on a period-by-period basis.

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INCOME TAXES (Details) (USD $)	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
INCOME TAXES [Abstract]
Income tax expense (benefit)	$ 3,093	$ (107,210)
Deferred tax assets		4,150,000
Income tax expense for estimated tax, penalties, and interest for other uncertain tax positions	3,000	3,000
Current period income tax expense (benefit)		$ (110,000)
Effective income tax rate (in hundredths)		9.40%
Federal statutory income tax rate (in hundredths)		34.00%

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COMMITMENTS AND CONTINGENCIES (Tables)

3 Months Ended

Mar. 31, 2015

COMMITMENTS AND CONTINGENCIES [Abstract]

Future minimum payments under operating lease

As of March 31, 2015, the Company’s future minimum payments under the operating leases were as follows:

2015	$	417,615
2016		569,138
2017		584,789
2018		600,871
2019		617,395
Thereafter		1,176,330
Total	$	3,966,138