Exhibit 10.127

REDACTED – OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
IS DENOTED HEREIN BY *****

SETTLEMENT AGREEMENT

THIS SETTLEMENT AGREEMENT (“Agreement”) is effective as of last date signed, by
and between Charles & Colvard, Ltd., a North Carolina corporation (“C&C”) with
offices located at 300 Perimeter Park Drive, Suite A, Morrisville, North
Carolina 27560 and Reeves Park, Inc. (“RP”), a Minnesota Corporation with
offices located at 5050 Lincoln Drive, Suite 470, Edina, MN 55436.

WITNESSETH:

THIS AGREEMENT is intended to settle the outstanding balance due to C&C from RP
and establish a procedure for the transition of certain retailer accounts to C&C
and the return of jewelry from RP to C&C. The approach for completing this
transaction is to deduct from RP’s total receivable balance (i) the interest
paid ***** by RP, (ii) the application of cash collected by C&C from the AR
balance for JC Penney, (iii) the value of a return of Moissanite jewelry from RP
of approximately $4.2MM (iii) the payment by RP of a settlement fee of $*****
and (iv) the forgiveness by C&C of any remaining debt due by RP up to $***** for
any shortfall in the outstanding balance.

NOW, THEREFORE, in consideration of the foregoing premise and the mutual
agreements contained herein, the parties agree as follows:

 

  1. Confirmation of Amount of Indebtedness RP Owes C&C. The balance due from RP
to C&C for outstanding invoices is $5,291,301.15 as of December 23, 2008; which
balance includes interest charges of $*****. In addition, there are outstanding
consignment invoices of $360,461.63 as of December 31, 2008. A complete and
accurate account statement as of such date has been provided to RP.

 

  2. Application of Prior Interest Payments to Indebtedness RP Owes C&C. RP has
previously paid interest of $193,479.67 to C&C and C&C agrees to forgo this
interest and apply this amount to the outstanding balance discussed in Section 1
above; thereby reducing the balance due C&C for outstanding invoices to
$5,097,821.48. *****.

 

  3.

Treatment of Certain Receivables Due to RP From JC Penney. RP will immediately
provide written notice to JC Penney (“JCP”) that RP agrees that JCP should
forward all payments relating to jewelry products with Moissanite stones
delivered to JCP through January 31, 2009 payable to RP directly to C&C. Should
JCP inadvertently send any proceeds to RP that should have gone to C&C under
this Agreement, then RP shall immediately remit such amounts to C&C. Attached as
Exhibit A to this Agreement is a summary of all open amounts due to RP from JCP
as of December 31, 2008 for jewelry items containing Moissanite. The total
amount due to RP from JCP is $*****, of which approximately $***** is in dispute
between JCP and RP [identified separately on Exhibit B *****] and there are
certain other charge backs that will reduce the net payments, namely a

 

CONFIDENTIAL – Charles & Colvard, Ltd.

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REDACTED – OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
IS DENOTED HEREIN BY *****

 

 

***** advertising allowance that JCP will deduct from payments. In addition, C&C
acknowledges *****. The net amount to be paid by JCP to C&C is expected to
approximate $*****, net of any JCP chargebacks, *****, and excluding the
disputed amounts. C&C acknowledges and agrees that RP is entitled to 100% of
payments made by JCP for all non-Moissanite jewelry shipped to JCP and should
C&C receive any such funds it will remit such amounts to RP immediately. C&C
shall advise JCP in writing with a copy to RP that JCP shall make no further
payments to C&C once full payment of any sums owed by RP to C&C pursuant this
Agreement is made. C&C shall have the right to negotiate with JCP in conjunction
with RP on the disputed amounts of approximately $***** and C&C has rights to
any amounts collected on this. C&C will provide RP with bi-monthly accounting of
the amounts received from JCP.

 

  4. C&C Purchase of RP Moissanite Jewelry Inventory and Loose Moissanite
Inventory. C&C will purchase all of RP’s moissanite jewelry inventory at RP’s
cost for labor, moissanite, and diamond(s) and at a price for gold of $*****.
For purposes of this Section 4, “Moissanite jewelry inventory” includes all
jewelry containing Moissanite stones that are in settings. All loose Moissanite
stones shall be credited at the same price that C&C charged RP for the
applicable items. The total amount due RP for the loose stones and Moissanite
jewelry inventory is estimated to be $4,262,468.00 as set out on Exhibit B to
this Agreement. If C&C identifies any miscalculations in Exhibit B, the parties
mutually agree to correct such errors. RP represents and warrants that the
moissanite jewelry inventory represents no less than $4,262,468 of jewelry in
condition to be sold at retail at current market condition. All RP Moissanite
jewelry inventory shall be delivered under this Section 4 to C&C by the close of
business (5 o’clock p.m. Eastern time) Monday, February 16, 2009, except for the
JCP trunk show RP Moissanite jewelry inventory discussed in item 5 and the
consigned items discussed in Section 6 of this Agreement. Each delivery of
jewelry to C&C will be accompanied by a spreadsheet listing the jewelry SKU and
containing at a minimum the following information: jewelry description, jewel
breakout, weight of piece, RP jewel cost, and RP other costs. RP also will
supply C&C with a CD containing available pictures and specifications on all
jewelry; and all jewelry for trunk shows will be tagged and bar coded prior to
delivery to C&C. RP will also simultaneously supply the bar code directory to
C&C. RP shall direct retailers to contact C&C, without any obligation to C&C,
regarding any return of Moissanite jewelry shipped prior to December 31, 2008.

 

  5. Jewelry Inspection. All RP deliveries of Moissanite jewelry inventory sent
to C&C by RP pursuant to this Agreement shall be examined by C&C within 10 days
of its receipt by C&C to determine if there are any missing items. Any missing
items will not be included in the total credit to RP for the jewelry received.
C&C, at its costs and expense, shall, prior to January 12, 2009, inspect the
items of Moissanite that are on site used in JCP trunk shows at RP’s offices in
Minneapolis, Minnesota for quality and piece count. Any missing items will be
identified during the inspection at RP office and will not be included in the
total credit to RP for the jewelry received. All Moissanite items sent to C&C by
RP shall be shipped to C&C FOB RP.

 

2

 

CONFIDENTIAL Charles & Colvard, Ltd.

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REDACTED – OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
IS DENOTED HEREIN BY *****

 

  6. Treatment of RP Inventory On Consignment With Retailers. Exhibit D shows
the Moissanite jewelry inventory that C&C will purchase from RP that is not in
RP’s possession and is on consignment with the indicated retailer. In these
cases, on or before February 1, 2009 RP will supply C&C with a signed statement
from the retailer detailing and confirming the jewelry on consignment by SKU as
of December 31, 2008. RP will also assist C&C in getting a new consignment
agreement complete between C&C and the retailer for such consigned items. If the
retailer(s) and C&C can not reach agreement on terms of sale by February 16,
2009, then RP agrees to arrange to have the items held by the applicable
retailer immediately returned to RP for repurchase by C&C by March 15, 2009 at a
price determined by the applicable provisions set forth in Section 4 of this
Agreement. Assuming C&C reaches an agreement with the retailers, C&C will handle
all invoicing for the sales of such consigned jewelry after December 31, 2008.
Should a retailer inadvertently send any proceeds to RP that should have gone to
C&C under this Agreement, then RP shall immediately remit such amounts to C&C.
Any items that will be returned to C&C must be received by March 15, 2009 to be
included in the calculations under Item 9 of this agreement.

 

  7. Duty of RP to Provide Additional Information Regarding Moissanite RP
Jewelry Inventory. C&C has all rights to reproduce any jewelry styles containing
Moissanite included in the jewelry purchase. RP agrees to provide reasonable
assistance to C&C in order to enable C&C to accomplish the objectives
contemplated by this Section 7.

 

  8. Reimbursement of RP Trunk Show Costs. C&C agrees to reimburse RP for the
actual costs and expenses incurred by RP for those JCP trunk shows conducted in
November and December 2008 for which payment have not been paid to RP by JCP. RP
must provide receipts and evidence of payment in order to get reimbursement from
C&C. Any reimbursements will be applied to the open receivable due to C&C from
RP. RP has until February 16, 2009 to request reimbursement. These expenses are
estimated to be $*****. If C&C requests RP’s assistance in the conduct of JCP
trunk shows in January 2009, C&C agrees to reimburse vendors direct for all out
of pocket expenses incurred by RP in providing such assistance.

 

  9. Summary of settlement balance RP Owes C&C After Implementation of This
Agreement and Forgiveness Debt Calculation. The following table summarizes the
position of the receivable due to C&C as of December 31, 2008 giving
consideration to the items discussed in this Agreement. C&C shall no later than
March 15, 2009 provide RP with a statement setting out the actual calculation.
RP agrees to pay a settlement fee by March 31, 2009, in the amount of $*****.

 

3

 

CONFIDENTIAL Charles & Colvard, Ltd.

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REDACTED – OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
IS DENOTED HEREIN BY *****

 

Balance due to C&C

   $ 5,651,762.78     includes inventory consigned by C&C to RP

Interest previously paid

   $ (193,479.67 )  

JCP Payments, net

   $ (***** )   Estimate based upon schedule b

RP Settlement Payment

   $ (***** )  

Inventory purchase

   $ (4,262,468.00 )   Estimate; actual based on all deliveries

Trunk Show Costs

   $ (***** )   Nov-Dec Estimate; actual based on expenditures           

Forgiveness of Debt

   $ *****     Based upon above estimates.

Upon receipt of payment of $***** from RP and the final calculation above
resulting in forgiveness of debt of no more than $*****, C&C thereupon
automatically releases and discharges RP from any further claims, demands or
liabilities for any amounts due C&C for Moissanite stones that were theretofore
either purchased by RP from C&C, or consigned to RP from C&C. If the forgiveness
of debt calculation above results in a number higher than $***** (other than
from a shortfall of inventory value as represented in section 4), RP must *****.
Under no circumstance will C&C be required to make any cash payments to RP
except for remittance of payments of non-Moissanite jewelry by JCP and
reimbursement of January trunks expenses where C&C is not able to remit to
vendor directly.

 

  10. Vendor Number. The parties acknowledge that C&C may not be set up as a
vendor in JCP’s system in time to run the initial trunk shows through it’s own
vendor number. Nonetheless, by reason of the provisions of Section 3 above
payments for these invoices will be sent directly to C&C and, subject to the
provisions of this Agreement, C&C has all rights to these funds.

 

  11. Time of the Essence. RP and C&C acknowledge time is of the essence for the
performance of the terms of this Agreement and agree to use their best efforts
to complete each such term on a timely basis.

 

  12. Retention of Rights. The parties retain their respective rights under
existing agreements between the parties, until the final remittance of
settlement of the RP receivable to C&C as provided in Section 9 on March 31,
2009, except as specifically modified by this Agreement.

 

  13. Public Announcement. The parties shall mutually agree to the terms of a
press release announcing this Agreement, provided however C&C shall be free to
make such press releases or public filings as may be recommended by its counsel
to insure compliance with all applicable securities laws.

 

  14.

Anti-Money Laundering Covenant. Reeves Park covenants, represents and warrants
that it is fully compliant with the requirements and obligation of a “dealer”
under the Anti-Money Laundering Programs for Dealers in Precious, Metals, Stones
or Jewels regulation of The United States Department of the Treasury. Reeves
Park has in place a anti-money laundering program (“AML

 

4

 

CONFIDENTIAL Charles & Colvard, Ltd.

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REDACTED – OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
IS DENOTED HEREIN BY *****

 

 

Program”) that incorporates policies, procedures and internal controls that
prevent Reeves Park from being used to facilitate money laundering and the
financing of terrorist activities. Reeves Park conducts a periodic testing of
the AML program to ensure that the program is functioning as designed.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as to the
date and year first written above.

 

Charles & Colvard, Ltd.

    Reeves Park  

/s/ Dennis Reed

   

/s/ Klaus Jung

  Dennis Reed     Klaus Jung   President & CMO     President   Date: 1/15/09    
Date: 1/14/09  

 

5

 

CONFIDENTIAL Charles & Colvard, Ltd.

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REDACTED – OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
IS DENOTED HEREIN BY *****

 

Exhibit A – Summary of Open Amounts due Reeves Park by JC Penney

Exhibit B – Spreadsheet for Reeves Park Moissanite Jewelry Inventory and Loose
Moissanite Jewels

Exhibit C – Spreadsheet for Reeve Park Moissanite Jewelry Inventory on
Consignment

 

6

 

CONFIDENTIAL Charles & Colvard, Ltd.

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REDACTED – OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
IS DENOTED HEREIN BY *****

 

Exhibit A

Schedule of JCP Receivables due to RP as of December 31, 2008

*****

 

7

 

CONFIDENTIAL Charles & Colvard, Ltd.

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REDACTED – OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
IS DENOTED HEREIN BY *****

 

Exhibit B

 

*****

   *****    *****    *****    *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

   *****    *****    *****      *****

*****

      *****    *****      *****

*****

      *****    *****      *****       *****    *****    $ 4,262,467.93

 

8

 

CONFIDENTIAL Charles & Colvard, Ltd.

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REDACTED – OMITTED MATERIAL HAS BEEN SEPARATELY FILED WITH THE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
IS DENOTED HEREIN BY *****

 

Exhibit C

*****

 

9

 

CONFIDENTIAL Charles & Colvard, Ltd.