Document:

Exhibit 10.1

 

 

PARTIAL TERMINATION OF AND SIXTH AMENDMENT TO
 AMENDED AND RESTATED MASTER LEASE AGREEMENT
 (LEASE NO. 2)

 

THIS PARTIAL TERMINATION OF AND SIXTH AMENDMENT TO AMENDED AND RESTATED MASTER LEASE AGREEMENT (LEASE NO. 2) (this “Amendment”) is made and entered into as of September 19, 2013, by and among each of the parties identified on the signature pages hereof as a landlord (collectively, “Landlord”) and each of the parties identified on the signature pages hereof as a tenant (jointly and severally, “Tenant”).

 

W  I  T  N  E  S  S  E  T  H:

 

WHEREAS, pursuant to the terms of that certain Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 4, 2009, as amended by that certain Partial Termination of and First Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of November 1, 2009, that certain Partial Termination of and Second Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 1, 2010, that certain Third Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of June 20, 2011, that certain Fourth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of July 22, 2011, and that certain Fifth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 31, 2012 (as so amended, “Amended Lease No. 2”), Landlord leases to Tenant, and Tenant leases from Landlord, the Leased Property (this and other capitalized terms used but not otherwise defined herein having the meanings given such terms in Amended Lease No. 2), all as more particularly described in Amended Lease No. 2;

 

WHEREAS, pursuant to that certain Asset Purchase Agreement, dated as of August 29, 2013, by and among Reliant Hospital Partners, LLC, Senior Housing Properties Trust (“SNH”), Five Star Quality Care, Inc., HRES1 Properties Trust (“HRES1”), FS Commonwealth LLC (“FSC”), FS Patriot LLC (“FSP”) and HSRE-TST III, LLC (the “Sale Agreement”), HRES1 has agreed to sell the Rehabilitation Hospital Properties; and

 

WHEREAS, in connection with the sale of the Rehabilitation Hospital Properties in accordance with the Sale Agreement, Landlord and Tenant wish to amend Amended Lease No. 2 to terminate Amended Lease No. 2 with respect to the Rehabilitation Hospital Properties effective as of the Closing Date (as defined in the Sale Agreement);

 

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree that, effective as of the Closing Date, Amended Lease No. 2 is hereby amended as follows:

 

1.         Partial Termination of Lease.  Amended Lease No. 2 is terminated with respect to the Rehabilitation Hospital Properties and neither Landlord nor Tenant shall have any further rights or liabilities thereunder with respect to the Rehabilitation Hospital Properties from and after the Closing Date, except for those rights and liabilities which by their terms survive the termination of Amended Lease No. 2.  With respect to periods

 

 

from and after the Closing Date, all references in Amended Lease No. 2 to the Rehabilitation Hospital Properties are hereby deleted.

 

2.         Minimum Rent.  Notwithstanding anything in Amended Lease No. 2 to the contrary (including, without limitation, Sections 3.1.1(d) and 4.1.1(b) of Amended Lease No. 2), Minimum Rent is hereby reduced by Nine Million Five Hundred Thousand and No Hundredths Dollars ($9,500,000.00) per annum for the period from and after the Closing Date.

 

3.         Schedule 1.  With respect to periods from and after the Closing Date, Schedule 1 to Amended Lease No. 2 is deleted in its entirety and replaced with Schedule 1 attached hereto.

 

4.         Exhibit A.  With respect to periods from and after the Closing Date, Exhibit A to Amended Lease No. 2 is amended by deleting each of Exhibit A-25 and Exhibit A-26 attached thereto in their respective entireties and replacing each of them with “Intentionally Deleted.”

 

5.         Release of FSC and FSP.  FSC and FSP are hereby released from their obligations and liabilities to Landlord under Amended Lease No. 2 with respect to matters first occurring from and after the Closing Date, except to the extent such obligations and liabilities relate to obligations and liabilities of the Sellers (as defined in the Sale Agreement) under the Sale Agreement.  FSC and FSP agree that all indemnification obligations of Parents (as defined in the Sale Agreement) and Sellers under the Sale Agreement will be the responsibility of FSC and FSP (jointly and severally) other than those that arise solely as a result of a breach of a representation, warranty or covenant caused by SNH or HRES1, which shall be the obligation of the breaching party.

 

6.         Effectiveness.  If the Closing (as defined in the Sale Agreement) does not occur or the Sale Agreement is terminated, this Amendment shall be of no further force or effect.

 

7.         Ratification.  As amended hereby, Amended Lease No. 2 is ratified and confirmed.

 

 

[Remainder of page intentionally left blank;

signature pages follow]

 

- 2 -

 

IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as a sealed instrument as of the date first above written.

 

	
 
    	
LANDLORD:
    
	
 
    	
 
    
	
 
    	
SPTIHS   PROPERTIES TRUST
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
SPTMNR   PROPERTIES TRUST
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
SNH/LTA   PROPERTIES GA LLC
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
SNH/LTA   PROPERTIES TRUST
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
O.F.C.   CORPORATION
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
SNH CHS   PROPERTIES TRUST
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
CCC OF   KENTUCKY TRUST
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    

 

- 3 -

 

	
 
    	
LEISURE PARK   VENTURE LIMITED PARTNERSHIP
    
	
 
    	
 
    
	
 
    	
By:
    	
 
    	
CCC   Leisure Park Corporation,
    
	
 
    	
 
    	
 
    	
its   General Partner
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
CCDE SENIOR   LIVING LLC
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
CCOP SENIOR   LIVING LLC
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
CCC PUEBLO   NORTE TRUST
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
CCC RETIREMENT   COMMUNITIES II, L.P.
    
	
 
    	
 
    
	
 
    	
By:
    	
 
    	
Crestline Ventures LLC,
    
	
 
    	
 
    	
 
    	
its General Partner
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
CCC   INVESTMENTS I, L.L.C.
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
							

 

- 4 -

 

	
 
    	
CCC FINANCING   I TRUST
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
CCC FINANCING   LIMITED, L.P.
    
	
 
    	
 
    
	
 
    	
By:
    	
 
    	
CCC Retirement Trust,
    
	
 
    	
 
    	
 
    	
its General Partner
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
SNH SOMERFORD   PROPERTIES TRUST
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
HRES1   PROPERTIES TRUST
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ David J. Hegarty
    	
 
    
	
 
    	
 
    	
David   J. Hegarty
    
	
 
    	
 
    	
President
    
							

 

- 5 -

 

	
 
    	
TENANT:
    
	
 
    	
 
    
	
 
    	
FIVE STAR QUALITY CARE TRUST
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ Bruce J. Mackey Jr.
    	
 
    
	
 
    	
 
    	
Bruce   J. Mackey Jr.
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
FS TENANT HOLDING COMPANY TRUST
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ Bruce J. Mackey Jr.
    	
 
    
	
 
    	
 
    	
Bruce   J. Mackey Jr.
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
FS COMMONWEALTH LLC
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ Bruce J. Mackey Jr.
    	
 
    
	
 
    	
 
    	
Bruce   J. Mackey Jr.
    
	
 
    	
 
    	
President
    
	
 
    	
 
    	
 
    
	
 
    	
FS PATRIOT LLC
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ Bruce J. Mackey Jr.
    	
 
    
	
 
    	
 
    	
Bruce   J. Mackey Jr.
    
	
 
    	
 
    	
President
    

 

- 6 -

 

Exhibit 10.1

 

SCHEDULE 1

 

PROPERTY-SPECIFIC INFORMATION

 

 

	
Exhibit
    	
Property Address
    	
Base Gross Revenues
    (Calendar Year)
    	
Base Gross Revenues
    (Dollar Amount)
    	
Commencement
   Date
    	
Interest
    Rate
    
	
A-1
    	
Ashton Gables in Riverchase
   2184 Parkway Lake Drive
    Birmingham, AL 35244
    	
2009
    	
$2,121,622
    	
08/01/2008
    	
8%
    
	
A-2
    	
Lakeview Estates
    2634 Valleydale Road
    Birmingham, AL 35244
    	
2009
    	
$2,692,868
    	
08/01/2008
    	
8%
    
	
A-3
    	
Forum at Pueblo Norte
    7090 East Mescal Street
    Scottsdale, AZ 85254
    	
2005
    	
$11,470,312
    	
01/11/2002
    	
10%
    
	
A-4
    	
La Salette Health and
    Rehabilitation Center
    537 East Fulton Street
    Stockton, CA 95204
    	
2005
    	
$7,726,002
    	
12/31/2001
    	
10%
    
	
A-5
    	
Thousand Oaks Health Care   Center
    93 West Avenida de Los Arboles
    Thousand Oaks, CA 91360
    	
2005
    	
$8,087,430
    	
12/31/2001
    	
10%
    
	
A-6
    	
Skyline Ridge   Nursing &
    Rehabilitation Center
    515 Fairview Avenue
    Canon City, CO 81212
    	
2005
    	
$4,104,100
    	
12/31/2001
    	
10%
    
	
A-7
    	
Springs Village Care Center
    110 West Van Buren Street
    Colorado Springs, CO 80907
    	
2005
    	
$4,799,252
    	
12/31/2001
    	
10%
    
	
A-8
    	
Willow Tree Care Center
    2050 South Main Street
    Delta, CO 81416
    	
2005
    	
$4,310,982
    	
12/31/2001
    	
10%
    
	
A-9
    	
Cedars Healthcare Center
    1599 Ingalls Street
    Lakewood, CO 80214
    	
2005
    	
$6,964,007
    	
12/31/2001
    	
10%
    
	
A-10
    	
Millcroft
    255 Possum Park Road
    Newark, DE 19711
    	
2005
    	
$11,410,121
    	
01/11/2002
    	
10%
    
	
A-11
    	
Forwood Manor
    1912 Marsh Road
    Wilmington, DE 19810
    	
2005
    	
$13,446,434
    	
01/11/2002
    	
10%
    
	
A-12
    	
Foulk Manor South
    407 Foulk Road
    Wilmington, DE 19803
    	
2005
    	
$4,430,251
    	
01/11/2002
    	
10%
    
	
A-13
    	
Shipley Manor
    2723 Shipley Road
    Wilmington, DE 19810
    	
2005
    	
$9,333,057
    	
01/11/2002
    	
10%
    
	
A-14
    	
Forum at Deer Creek
    3001 Deer Creek
    Country Club Blvd.
    Deerfield Beach, FL 33442
    	
2005
    	
$12,323,581
    	
01/11/2002
    	
10%
    
	
A-15
    	
Springwood Court
    12780 Kenwood Lane
    Fort Myers, FL 33907
    	
2005
    	
$2,577,612
    	
01/11/2002
    	
10%
    
	
A-16
    	
Fountainview
    111 Executive Center Drive
    West Palm Beach, FL 33401
    	
2005
    	
$7,920,202
    	
01/11/2002
    	
10%
    

 

 

	
Exhibit
    	
Property Address
    	
Base Gross Revenues
    (Calendar Year)
    	
Base Gross Revenues
    (Dollar Amount)
    	
Commencement
   Date
    	
Interest
    Rate
    
	
A-17
    	
Morningside of Athens
    1291 Cedar Shoals Drive
    Athens, GA 30605
    	
2006
    	
$1,560,026
    	
11/19/2004
    	
9%
    
	
A-18
    	
Marsh View Senior Living
    7410 Skidaway Road
    Savannah, GA 31406
    	
2007
    	
$2,108,378
    	
11/01/2006
    	
8.25%
    
	
A-19
    	
Pacific Place
    20937 Kane Avenue
    Pacific Junction, IA 51561
    	
2005
    	
$848,447
    	
12/31/2001
    	
10%
    
	
A-20
    	
West Bridge Care &   Rehabilitation
    1015 West Summit Street
    Winterset, IA 50273
    	
2005
    	
$3,157,928
    	
12/31/2001
    	
10%
    
	
A-21
    	
Meadowood Retirement Community
    2455 Tamarack Trail
    Bloomington, IN 47408
    	
2009
    	
$12,061,814
    	
11/01/2008
    	
8%
    
	
A-22
    	
Woodhaven Care Center
    510 West 7th Street
    Ellinwood, KS 67526
    	
2005
    	
$2,704,674
    	
12/31/2001
    	
10%
    
	
A-23
    	
Lafayette at Country Place
    690 Mason Headley Road
    Lexington, KY 40504
    	
2005
    	
$4,928,052
    	
01/11/2002
    	
10%
    
	
A-24
    	
Lexington Country Place
    700 Mason Headley Road
    Lexington, KY 40504
    	
2005
    	
$8,893,947
    	
01/11/2002
    	
10%
    
	
A-25
    	
Intentionally deleted.

 
    	
N/A
    	
N/A
    	
N/A
    	
N/A
    
	
A-26
    	
Intentionally deleted.

 
    	
N/A
    	
N/A
    	
N/A
    	
N/A
    
	
A-27
    	
HeartFields at Bowie
    7600 Laurel Bowie Road
    Bowie, MD 20715
    	
2005
    	
$2,436,102
    	
10/25/2002
    	
10%
    
	
A-28
    	
HeartFields at Frederick
    1820 Latham Drive
    Frederick, MD 21701
    	
2005
    	
$2,173,971
    	
10/25/2002
    	
10%
    
	
A-29
    	
Intentionally deleted.

 
    	
N/A
    	
N/A
    	
N/A
    	
N/A
    
	
A-30
    	
Intentionally deleted.

 
    	
N/A
    	
N/A
    	
N/A
    	
N/A
    
	
A-31
    	
Morys Haven
    1112 15th Street
    Columbus, NE 68601
    	
2005
    	
$2,440,714
    	
12/31/2001
    	
10%
    
	
A-32
    	
Intentionally deleted.

 
    	
N/A
    	
N/A
    	
N/A
    	
N/A
    
	
A-33
    	
Wedgewood Care Center
    800 Stoeger Drive
    Grand Island, NE 68803
    	
2005
    	
$4,000,565
    	
12/31/2001
    	
10%
    
	
A-34
    	
Intentionally deleted.

 
    	
N/A
    	
N/A
    	
N/A
    	
N/A
    
	
A-35
    	
Crestview Healthcare Center
    1100 West First Street
    Milford, NE 68405
    	
2005
    	
$2,284,407
    	
12/31/2001
    	
10%
    
	
A-36
    	
Utica Community Care Center
    1350 Centennial Avenue
    Utica, NE 68456
    	
2005
    	
$1,950,325
    	
12/31/2001
    	
10%
    
	
A-37
    	
Leisure Park
    1400 Route 70
    Lakewood, NJ 08701
    	
2005
    	
$14,273,446
    	
01/07/2002
    	
10%
    
	
A-38
    	
Franciscan Manor
    71 Darlington Road
    	
2006
    	
$4,151,818
    	
10/31/2005
    	
9%
    

 

 

	
Exhibit
     	
Property    Address
     	
Base    Gross Revenues
    (Calendar Year)
     	
Base    Gross Revenues
    (Dollar Amount)
     	
Commencement
    Date
     	
Interest
    Rate
     
	
 
    	
Patterson   Township

Beaver   Falls, PA  15010
    	
 
    	
 
    	
 
    	
 
    
	
A-39
    	
Mount   Vernon of Elizabeth

145   Broadlawn Drive

Elizabeth,   PA  15037
    	
2006
    	
$2,332,574
    	
10/31/2005
    	
9%
    
	
A-40
    	
Overlook   Green

5250   Meadowgreen Drive

Whitehall,   PA  15236
    	
2006
    	
$3,878,300
    	
10/31/2005
    	
9%
    
	
A-41
    	
Myrtle   Beach Manor

9547   Highway 17 North

Myrtle   Beach, SC  29572
    	
2005
    	
$6,138,714
    	
01/11/2002
    	
10%
    
	
A-42
    	
Morningside   of Anderson

1304   McLees Road

Anderson,   SC  29621
    	
2006
    	
$1,381,775
    	
11/19/2004
    	
9%
    
	
A-43
    	
Heritage   Place at Boerne

120   Crosspoint Drive

Boerne,   TX  78006
    	
2009
    	
$1,469,683
    	
02/07/2008
    	
8%
    
	
A-44
    	
Forum   at Park Lane

7831   Park Lane

Dallas,   TX  75225
    	
2005
    	
$13,620,931
    	
01/11/2002
    	
10%
    
	
A-45
    	
Heritage   Place at Fredericksburg

96   Frederick Road

Fredericksburg,   TX  78624
    	
2009
    	
$1,386,771
    	
02/07/2008
    	
8%
    
	
A-46
    	
Greentree   Health &

Rehabilitation   Center

70   Greentree Road

Clintonville,   WI  54929
    	
2005
    	
$3,038,761
    	
12/31/2001
    	
10%
    
	
A-47
    	
Pine   Manor Health Care Center

Village   of Embarrass

1625   East Main Street

Clintonville,   WI  54929
    	
2005
    	
$4,337,113
    	
12/31/2001
    	
10%
    
	
A-48
    	
ManorPointe   - Oak Creek

Independent   Senior Apartments

and   Meadowmere - Mitchell

Manor -   Oak Creek

700   East Stonegate Drive and

701   East Puetz Road

Oak   Creek, WI  53154
    	
2009
    	
$4,189,440
    	
01/04/2008
    	
8%
    
	
A-49
    	
River   Hills West Healthcare Center

321   Riverside Drive

Pewaukee,   WI  53072
    	
2005
    	
$9,211,765
    	
12/31/2001
    	
10%
    
	
A-50
    	
The   Virginia Health &

Rehabilitation   Center

1451   Cleveland Avenue

Waukesha,   WI  53186
    	
2005
    	
$6,128,045
    	
12/31/2001
    	
10%
    
	
A-51
    	
Reserve at Greenbriar

1005 Elysian Place

Chesapeake, Virginia
    	
2012
    	
$2,508,269
    	
06/20/2011
    	
7.5%
    
	
A-52
    	
Palms at St. Lucie West

501 N.W. Cashmere Boulevard

Port St. Lucie, Florida
    	
2012
    	
$2,903,642
    	
07/22/2011
    	
7.5%
    
	
A-53
    	
Forum at Desert Harbor

13840 North Desert Harbor Drive

Peoria, AZ 85381
    	
2005
    	
$9,830,918
    	
01/11/2002
    	
10.0%
    
	
A-54
    	
Forum at Tucson
   2500 North Rosemont Blvd.

Tucson, AZ 85712
    	
2005
    	
$13,258,998
    	
01/11/2002
    	
10.0%
    

 

 

	
Exhibit
     	
Property    Address
     	
Base    Gross Revenues
    (Calendar Year)
     	
Base    Gross Revenues
    (Dollar Amount)
     	
Commencement
    Date
     	
Interest
    Rate
     
	
A-55
    	
Park Summit at Coral Springs
   8500 Royal Palm Blvd.

Coral Springs, FL 33065
    	
2005
    	
$11,229,677
    	
01/11/2002
    	
10.0%
    
	
A-56
    	
Gables at Winchester
   299 Cambridge Street

Winchester, MA 01890
    	
2005
    	
$6,937,852
    	
01/11/2002
    	
10.0%
    
	
A-57
    	
Forum at Memorial Woods
   777 North Post Oak Road

Houston, TX 77024
    	
2005
    	
$19,734,400
    	
01/11/2002
    	
10.0%Exhibit 10.1

  

 

	Loan Agreement	 

 

THIS LOAN AGREEMENT
(the “Agreement”), is entered into as of September 20, 2013, between CHARLES & COLVARD, LTD., a North
Carolina corporation (the “Borrower”), with an address at 300 Perimeter Park Drive, Suite A, Morrisville, North
Carolina 27560, Attention: Chief Financial Officer and PNC BANK, NATIONAL ASSOCIATION (the “Bank”),
with an address at 134 North Church Street, Rocky Mount, North Carolina 27804.

 

The Borrower and the
Bank, with the intent to be legally bound, agree as follows:

 

1.           Loan. The Bank
has made or may make one or more loans (collectively, the “Loan”) to the Borrower subject to the terms and conditions
and in reliance upon the representations and warranties of the Borrower set forth in this Agreement. The Loan is or will be evidenced
by a promissory note or notes of the Borrower and all renewals, extensions, amendments and restatements thereof (if one or more,
collectively, the “Note”) acceptable to the Bank, which shall set forth the interest rate, repayment and other
provisions, the terms of which are incorporated into this Agreement by reference.

 

2.           Security. The security
for repayment of the Loan shall include but not be limited to the collateral, guaranties and other documents heretofore, contemporaneously
or hereafter executed and delivered to the Bank (the “Security Documents”), which shall secure repayment of
the Loan, the Note and all other loans, advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to
the Bank or to any other direct or indirect subsidiary of The PNC Financial Services Group, Inc., of any kind or nature, present
or future (including any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement
of any insolvency, reorganization or like proceeding relating to the Borrower, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), whether direct or indirect (including those acquired by assignment or participation),
absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, whether or not (i) evidenced
by any note, guaranty or other instrument, (ii) arising under any agreement, instrument or document, (iii) for the payment of money,
(iv) arising by reason of an extension of credit, opening of a letter of credit, loan, equipment lease or guarantee, (v) under
any interest or currency swap, future, option or other interest rate protection or similar agreement, (vi) under or by reason of
any foreign currency transaction, forward, option or other similar transaction providing for the purchase of one currency in exchange
for the sale of another currency, or in any other manner, or (vii) arising out of overdrafts on deposit or other accounts or out
of electronic funds transfers (whether by wire transfer or through automated clearing houses or otherwise) or out of the return
unpaid of, or other failure of the Bank to receive final payment for, any check, item, instrument, payment order or other deposit
or credit to a deposit or other account, or out of the Bank’s non-receipt of or inability to collect funds or otherwise not
being made whole in connection with depository or other similar arrangements; and any amendments, extensions, renewals and increases
of or to any of the foregoing, and all reasonable costs and expenses of the Bank incurred in the documentation, negotiation, modification,
enforcement, collection and otherwise in connection with any of the foregoing, including reasonable attorneys’ fees and expenses
(hereinafter referred to collectively as the “Obligations”). Unless expressly provided to the contrary in documentation
for any other loan or loans, it is the express intent of the Bank and the Borrower that all Obligations including those included
in the Loan be cross-collateralized and cross-defaulted, such that collateral securing any of the Obligations shall secure repayment
of all Obligations and a default under any Obligation shall be a default under all Obligations.

 

This Agreement, the
Addendum, the Note, the Security Documents and all other agreements and documents executed and/or delivered pursuant hereto, as
each may be amended, modified, extended or renewed from time to time, are collectively referred to as the  “Loan Documents.”
Capitalized terms not defined herein shall have the meanings ascribed to them in the Loan Documents.

 

    	 

    	 

    

 

3.            Representations
and Warranties.  The Borrower hereby makes the following representations and warranties, on the date hereof
and on the date of each advance under the Loan Documents until the Obligations are paid in full, and which shall be true and correct
except as otherwise set forth on the Addendum attached hereto and incorporated herein by reference (the  “Addendum”):

 

3.1.       Existence, Power and
Authority.  If not a natural person, the Borrower is duly organized, validly existing and in good standing under
the laws of the State of its incorporation or organization and has the power and authority to own and operate its assets and to
conduct its business as now or proposed to be carried on, and is duly qualified, licensed and in good standing to do business in
all jurisdictions where its ownership of property or the nature of its business requires such qualification or licensing. The Borrower
is duly authorized to execute and deliver the Loan Documents, all necessary action to authorize the execution and delivery of the
Loan Documents has been properly taken, and the Borrower is and will continue to be duly authorized to borrow under this Agreement
and to perform all of the other terms and provisions of the Loan Documents.

 

3.2.        Financial
Statements.  If the Borrower is not a natural person, it has delivered or caused to be delivered to the Bank
its most recent balance sheet, income statement and statement of cash flows, or if the Borrower is a natural person, its personal
financial statement and tax returns (as applicable, the “Historical Financial Statements”). The Historical
Financial Statements are true, complete and accurate in all material respects and fairly present the financial condition, assets
and liabilities, whether accrued, absolute, contingent or otherwise and the results of the Borrower’s operations for the
period specified therein. The Historical Financial Statements have been prepared in accordance with generally accepted accounting
principles (“GAAP”) consistently applied from period to period, subject in the case of interim statements to
normal year-end adjustments and to any comments and notes acceptable to the Bank in its sole discretion.

 

3.3.       No Material Adverse Change.  Since
the date of the most recent Financial Statements (as hereinafter defined), the Borrower has not suffered any damage, destruction
or loss, and no event or condition has occurred or exists, which has resulted or could result in a material adverse change in its
business, assets, operations, condition (financial or otherwise) or results of operation.

 

3.4.       Binding Obligations.  The
Borrower has full power and authority to enter into the transactions provided for in this Agreement and has been duly authorized
to do so by appropriate action of its Board of Directors if the Borrower is a corporation, all its general partners if the Borrower
is a partnership or otherwise as may be required by law, charter, other organizational documents or agreements; and the Loan Documents,
when executed and delivered by the Borrower, will constitute the legal, valid and binding obligations of the Borrower enforceable
in accordance with their terms.

 

3.5.       No Defaults or Violations.  There
does not exist any Event of Default under this Agreement or any default or violation by the Borrower of or under any of the terms,
conditions or obligations of: (i) its partnership agreement if the Borrower is a partnership, its articles or certificate
of incorporation, regulations or bylaws if the Borrower is a corporation or its other organizational documents as applicable; (ii) any
indenture, mortgage, deed of trust, franchise, permit, contract, agreement, or other instrument to which it is a party or by which
it is bound; or (iii) any law, ordinance, regulation, ruling, order, injunction, decree, condition or other requirement applicable
to or imposed upon it by any law, the action of any court or any governmental authority or agency; and the consummation of this
Agreement and the transactions set forth herein will not result in any such default or violation or Event of Default.

 

3.6.       Title to Assets.  The
Borrower has good and marketable title to the assets reflected on the most recent Financial Statements, free and clear of all liens
and encumbrances, except for (i) current taxes and assessments not yet due and payable, (ii) assets disposed of by the Borrower
in the ordinary course of business since the date of the most recent Financial Statements or in accordance with the Loan Documents,
and (iii) those liens or encumbrances, if any, specified in Section 5.2 or on the Addendum.

 

    	-2-

    	 

    

 

3.7.        Litigation.  There
are no actions, suits, proceedings or governmental investigations pending or, to the knowledge of the Borrower, threatened in
writing against the Borrower, which could result in a material adverse change in its business, assets, operations, condition (financial
or otherwise) or results of operations and there is no basis known to the Borrower for any action, suit, proceeding or investigation
which could result in such a material adverse change. All such pending and threatened litigation against the Borrower is listed
on the Addendum.

 

3.8.        Tax Returns.  The
Borrower has filed all returns and reports that are required to be filed by it in connection with any federal, state or local tax,
duty or charge levied, assessed or imposed upon it or its property or withheld by it, including income, unemployment, social security
and similar taxes, and all of such taxes have been either paid or adequate reserve or other provision has been made therefor.

 

3.9.        Employee Benefit Plans.
Each employee benefit plan as to which the Borrower may have any liability complies in all material respects with all applicable
provisions of the Employee Retirement Income Security Act of 1974 (as amended from time to time, “ERISA”), including
minimum funding requirements, and (i) no Prohibited Transaction (as defined under ERISA) has occurred with respect to any such
plan, (ii) no Reportable Event (as defined under Section 4043 of ERISA) has occurred with respect to any such plan which would
cause the Pension Benefit Guaranty Corporation to institute proceedings under Section 4042 of ERISA, (iii) the Borrower has not
withdrawn from any such plan or initiated steps to do so, and (iv) no steps have been taken to terminate any such plan.

 

3.10.      Environmental
Matters. The Borrower is in compliance, in all material respects, with all Environmental Laws (as hereinafter defined),
including, without limitation, all Environmental Laws in jurisdictions in which the Borrower owns or operates, or has owned or
operated, a facility or site, stores Collateral, arranges or has arranged for disposal or treatment of hazardous substances, solid
waste or other waste, accepts or has accepted for transport any hazardous substances, solid waste or other wastes or holds or
has held any interest in real property or otherwise. Except as otherwise disclosed on the Addendum, no litigation or proceeding
arising under, relating to or in connection with any Environmental Law is pending or, to the best of the Borrower’s knowledge,
threatened against the Borrower, any real property which the Borrower holds or has held an interest or any past or present operation
of the Borrower. No release, threatened release or disposal of hazardous waste, solid waste or other wastes is occurring, or to
the best of the Borrower’s knowledge has occurred, on, under or to any real property in which the Borrower holds or has
held any interest or performs or has performed any of its operations, in violation of any Environmental Law. As used in this Section,
“litigation or proceeding” means any demand, claim notice, suit, suit in equity, action, administrative action,
investigation or inquiry whether brought by a governmental authority or other person, and “Environmental Laws”
means all provisions of laws, statutes, ordinances, rules, regulations, permits, licenses, judgments, writs, injunctions,
decrees, orders, awards and standards promulgated by any governmental authority concerning health, safety and protection of, or
regulation of the discharge of substances into, the environment.

 

3.11.     Intellectual Property.
The Borrower owns or is licensed to use all patents, patent rights, trademarks, trade names, service marks, copyrights, intellectual
property, technology, know-how and processes necessary for the conduct of its business as currently conducted that are material
to the condition (financial or otherwise), business or operations of the Borrower.

 

3.12.      Regulatory Matters.
No part of the proceeds of the Loan will be used for “purchasing” or “carrying” any “margin stock”
within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve
System as now and from time to time in effect or for any purpose which violates the provisions of the Regulations of such Board
of Governors.

 

3.13.     Solvency. As
of the date hereof and after giving effect to the transactions contemplated by the Loan Documents, (i) the aggregate value of the
Borrower’s assets will exceed its liabilities (including contingent, subordinated, unmatured and unliquidated liabilities),
(ii) the Borrower will have sufficient cash flow to enable it to pay its debts as they become due, and (iii) the Borrower will
not have unreasonably small capital for the business in which it is engaged.

 

    	-3-

    	 

    

 

3.14.     Disclosure.
None of the Loan Documents contains or will contain any untrue statement of material fact or omits or will omit to state a material
fact necessary in order to make the statements contained in this Agreement or the Loan Documents not misleading. There is no fact
known to the Borrower which materially adversely affects or, so far as the Borrower can now foresee, might materially adversely
affect the business, assets, operations, condition (financial or otherwise) or results of operation of the Borrower and which has
not otherwise been fully set forth in this Agreement or in the Loan Documents.

 

4.           Affirmative Covenants.  The
Borrower agrees that from the date of execution of this Agreement until all Obligations have been paid in full and any commitments
of the Bank to the Borrower have been terminated, the Borrower will:

 

4.1.       Books and Records.
Maintain books and records in accordance with GAAP and give representatives of the Bank access thereto at all reasonable times,
including permission to examine, copy and make abstracts from any of such books and records and such other information as the Bank
may from time to time reasonably request, and the Borrower will make available to the Bank for examination copies of any material
reports, statements and returns which the Borrower may make to or file with any federal, state or local governmental department,
bureau or agency.

 

4.2.        Interim Financial
Statements; Certificate of No Default. Furnish the Bank within 45 days after the end of each fiscal quarter the
Borrower’s Financial Statements for such period, in reasonable detail, certified by an authorized officer of the Borrower
and prepared in accordance with GAAP consistently applied from period to period. The Borrower shall also deliver a certificate
as to its compliance with applicable financial covenants (containing detailed calculations of all financial covenants) for the
period then ended and whether any Event of Default exists, and, if so, the nature thereof and the corrective measures the Borrower
proposes to take. As used in this Agreement, “Financial Statements” means the Borrower’s consolidated
balance sheets, income statements and statements of cash flows for the year, month or quarter together with year-to-date figures
and comparative figures for the corresponding periods of the prior year.

 

4.3.       Annual
Financial Statements. Furnish the Borrower’s Financial Statements to the Bank within 120 days after the end of each
fiscal year. Those Financial Statements will be prepared on an audited basis in accordance with GAAP by an independent certified
public accountant selected by the Borrower and satisfactory to the Bank. The Borrower shall also deliver
a certificate as to its compliance with applicable financial covenants (containing detailed calculations of all financial covenants)
for the period then ended and whether any Event of Default exists, and, if so, the nature thereof and the corrective measures the
Borrower proposes to take.

 

 4.4.        Accounts
Receivable/Accounts Payable; Inventory. If the outstanding principal balance of the line of credit evidenced by that certain
Committed Line of Credit Note, dated as of the date hereof, executed by Borrower in favor of Bank in the face amount of $10,000,000.00
(as the same may be amended, restated, modified, supplemented or replaced from time to time) is greater than zero at any time during
a fiscal quarter of Borrower, , then within 45 days after the end of such fiscal quarter, furnish to the Bank the Borrower’s
detailed schedule of accounts receivable and accounts payable aging analysis and a report of the Borrower’s inventory, as
established by a quarterly cycle count, or by an annual physical count or such other method as may be approved by the Bank.

 

4.5.       Payment of Taxes
and Other Charges. Pay and discharge when due all indebtedness and all taxes, assessments, charges, levies and other liabilities
imposed upon the Borrower, its income, profits, property or business, except those which currently are being contested in good
faith by appropriate proceedings and for which the Borrower shall have set aside adequate reserves or made other adequate provision
with respect thereto acceptable to the Bank in its sole discretion.

 

    	-4-

    	 

    

 

4.6.       Maintenance of
Existence, Operation and Assets. Except as may be permitted by Section 5, do all things necessary to (i) maintain, renew
and keep in full force and effect its organizational existence and all rights, permits and franchises necessary to enable it to
continue its business as currently conducted; (ii) continue in operation in substantially the same manner as at present; (iii)
keep its properties in good operating condition and repair; and (iv) make all necessary and proper repairs, renewals, replacements,
additions and improvements thereto.

 

4.7.       Insurance.
Maintain, with financially sound and reputable insurers, insurance with respect to its property and business against such
casualties and contingencies, of such types and in such amounts, as is customary for established companies engaged in the same
or similar business and similarly situated. In the event of a conflict between the provisions of this Section and the terms of
any Security Documents relating to insurance, the provisions in the Security Documents will control.

 

4.8.       Compliance
with Laws. Comply in all material respects with all laws applicable to the Borrower and to the operation of its business
(including without limitation any statute, ordinance, rule or regulation relating to employment practices, pension benefits or
environmental, occupational and health standards and controls).

 

4.9.       Bank Accounts.
Establish and maintain at the Bank the Borrower’s primary depository accounts.

 

4.10.     Financial Covenants.
Comply with all of the financial and other covenants, if any, set forth on the Addendum.

 

4.11.     Additional Reports.
Provide prompt written notice to the Bank of the occurrence of any of the following (together with a description of the action
which the Borrower proposes to take with respect thereto): (i) any Event of Default or any event, act or condition which, with
the passage of time or the giving of notice, or both, would constitute an Event of Default (a “Default”), (ii) any
litigation filed by or against the Borrower, (iii) any Reportable Event or Prohibited Transaction with respect to any Employee
Benefit Plan(s) (as defined in ERISA) or (iv) any event which might result in a material adverse change in the business, assets,
operations, condition (financial or otherwise) or results of operation of the Borrower.

 

5.           Negative Covenants.  The
Borrower covenants and agrees that from the date of this Agreement until all Obligations have been paid in full and any commitments
of the Bank to the Borrower have been terminated, except as set forth in the Addendum, the Borrower will not, without the Bank’s
prior written consent:

 

5.1.       Indebtedness.
Create, incur, assume or suffer to exist any indebtedness for borrowed money other than: (i) the Loan and any subsequent indebtedness
to the Bank; (ii) open account trade debt incurred in the ordinary course of business and not more than 90 days past due,
(iii) purchase money indebtedness (including capital leases) not in excess of $250,000.00 in the aggregate; (iv) unsecured indebtedness
not in excess of $250,000.00 in the aggregate; and (v) unsecured indebtedness owing to subsidiaries of Borrower.

 

5.2.       Liens and Encumbrances.
Except as provided in Section 3.6, create, assume, incur or permit to exist any mortgage, pledge, encumbrance, security interest,
lien or charge of any kind upon any of its property, now owned or hereafter acquired, or acquire or agree to acquire any kind of
property subject to any conditional sales or other title retention agreement, except: (i) rights of lessors, licensors, lessees,
and licensees under equipment leases; (ii) customary easements and rights of way not materially adversely affecting Borrower’s
use of its property; (iii) customary liens in favor of warehousemen, mechanics, materialmen, workers, repairmen, common carriers,
landlords and other similar liens arising by operation of law or otherwise, not waived in favor of Bank, for amounts that are not
yet due and payable or which are being diligently contested in good faith by Borrower by appropriate proceedings, provided that
in any such case an adequate reserve is being maintained by Borrower in accordance with GAAP for payment of the same; (iv) liens
arising from judgments not constituting an Event of Default; and (v) liens securing purchase money indebtedness permitted pursuant
to Section 5.1. Absent an Event of Default, the Bank will, upon request of Borrower, take such action as are reasonably necessary
to subordinate its lien upon any Collateral purchased or leased from a third party with purchase money indebtedness or pursuant
to a capital lease so long as such indebtedness and leases are permitted pursuant to Section 5.1 of this Agreement.

 

    	-5-

    	 

    

 

5.3.       Guarantees. Guarantee,
endorse or become contingently liable for the obligations of any person, firm, corporation or other entity, except: (i) in connection
with the endorsement and deposit of checks in the ordinary course of business for collection; (ii) guarantees associated with the
Loan, and (iii) ordinary course guarantees of obligations of Borrower’s existing subsidiaries as of the date hereof.

 

5.4.       Loans or Advances.
Purchase or hold beneficially any stock, other securities or evidences of indebtedness of, or make or have outstanding, any loans
or advances to, or otherwise extend credit to, or make any investment or acquire any interest whatsoever in, any other person,
firm, corporation or other entity, except: (i) investments disclosed on the Borrower’s Historical Financial Statements or
acceptable to the Bank in its sole discretion; (ii) loans and advances to directors, officers and employees not in excess of $50,000.00
in the aggregate at any time outstanding during the term of this Loan; and (iii) intercompany advances and investments made from
time to time among Borrower and its existing subsidiaries as of the date hereof in the ordinary course of business.

 

5.5.       Merger or Transfer
of Assets. Liquidate or dissolve, or merge or consolidate with or into any person, firm, corporation or other entity, or
sell, lease, transfer or otherwise dispose of all or any substantial part of its property, assets, operations or business, whether
now owned or hereafter acquired, except: (i) the sale, transfer or distribution of assets of Borrower at fair market value not
in excess of $1,000,000.00 in the aggregate during the term of the Loan; (ii) the sale of inventory or accounts receivable in the
ordinary course of business (and not in connection with a financing or factoring arrangement); (iii) sale or disposition in the
ordinary course of business of cash equivalents; and (iv) the merger of any subsidiary of Borrower in existence as of the date
hereof with and into Borrower, provided that, in the case of any such merger, Borrower shall be the corporation surviving the merger
and all liens in favor of Bank shall continue in full force and effect with the same priority.

 

5.6.       Change in Business
or Control. Make or permit, and cause each Guarantor under the Security Documents not to make or permit, any change in
its form of organization, the nature of its business as carried on as of the date hereof, or, in the case of each Guarantor, any
change in its equity ownership, or, in the case of Borrower, any Change of Control. For purposes hereof, a “Change of Control”
of Borrower shall be deemed to have occurred if (i) any person or group of persons (as defined in Section 13(d) and 14(d)
of the Securities Exchange Act of 1934) together with its affiliates, excluding employee benefit plans of Borrower, becomes, directly
or indirectly, the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934)
of securities of Borrower representing 35% or more of the combined voting power of Borrower’s then outstanding securities;
or (ii) during any 12- month period, as a result of a tender offer or exchange offer for the purchase of securities of Borrower,
or as a result of a proxy contest, merger, consolidation or sale of assets, or as a result of any combination of the foregoing,
individuals who at the beginning of such 12-month period constitute the Borrower’s Board of Directors, plus new directors
whose election by Borrower’s shareholders is approved by a vote of at least two-thirds of the outstanding voting shares of
Borrower, cease for any reason during such 12- month period to constitute at least two-thirds of the members of such Board of Directors;
or (iii) the shareholders of Borrower approve a merger or consolidation of Borrower with any other corporation or entity regardless
of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of Borrower outstanding
immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of
the surviving entity) more than 65% of the combined voting power of the voting securities of Borrower or such surviving entity
outstanding immediately after such merger or consolidation.

 

5.7.       Dividends. Declare
or pay any dividends on or make any distribution with respect to any class of its equity or ownership interest, or purchase, redeem,
retire or otherwise acquire any of its equity, provided, so long as no Event of Default has occurred, or will result on account
of any such dividend or distribution, Borrower may make (i) stock dividends, and (ii) stock purchases and redemptions pursuant
to Borrower’s existing stock buyback program not in excess of $1,000,000.00 in the aggregate during the term of the Loan.

 

    	-6-

    	 

    

 

5.8.       Acquisitions. Make
acquisitions of all or substantially all of the property or assets of any person, firm, corporation or other entity in excess of
$1,000,000.00 in the aggregate during the term of this Loan.

 

5.9.       Subsidiaries. Form
or acquire any subsidiary.

 

6.           Events of Default.  The
occurrence of any of the following will be deemed to be an Event of Default:

 

6.1.       Covenant Default.
The Borrower shall default in the performance of any of the covenants or agreements contained in this Agreement and shall fail
to cure such default within any applicable cure period.

 

6.2.       Breach of Warranty.
Any Financial Statement, representation, warranty or certificate made or furnished by the Borrower to the Bank in connection with
this Agreement shall be false, incorrect or incomplete in any material respect when made.

 

6.3.       Other Default.
The occurrence of an Event of Default as defined in the Note or any of the Loan Documents.

 

Upon the occurrence of an Event of Default,
the Bank will have all rights and remedies specified in the Note and the Loan Documents and all rights and remedies (which are
cumulative and not exclusive) available under applicable law or in equity.

 

7.           Conditions.  The
Bank’s obligation to make any advance under the Loan is subject to the conditions that as of the date of the advance:

 

7.1.       No Event of Default.
No Event of Default or event which with the passage of time, the giving of notice or both would constitute an Event of Default
shall have occurred and be continuing;

 

7.2.       Authorization
Documents. The Bank shall have received certified copies of resolutions of the board of directors, the general partners
or the members or managers of any partnership, corporation or limited liability company that executes this Agreement, the Note
or any of the other Loan Documents; or other proof of authorization satisfactory to the Bank; and

 

7.3.       Receipt of Loan
Documents. The Bank shall have received the Loan Documents and such other instruments and documents which the Bank may
reasonably request in connection with the transactions provided for in this Agreement, which may include an opinion of counsel
in form and substance satisfactory to the Bank for any party executing any of the Loan Documents.

 

8.            Expenses.  The
Borrower agrees to pay the Bank, upon the execution of this Agreement, and otherwise on demand, all reasonable costs and expenses
incurred by the Bank in connection with the preparation, negotiation and delivery of this Agreement and the other Loan Documents,
and any modifications thereto, and the collection of all of the Obligations, including but not limited to enforcement actions,
relating to the Loan, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions or proceedings
arising out of or relating to this Agreement, including reasonable fees and expenses of counsel (which may include costs of in-house
counsel), expenses for auditors, appraisers and environmental consultants, lien searches, recording and filing fees and taxes.

 

9.           Increased Costs.
On written demand, together with written evidence of the justification therefor, the Borrower agrees to pay the Bank all direct
costs incurred and any losses suffered or payments made by the Bank as a consequence of making the Loan by reason of any change
in law or regulation, or the interpretation thereof, imposing any reserve, deposit, allocation of capital or similar requirement
(including without limitation, Regulation D of the Board of Governors of the Federal Reserve System) on the Bank, its holding company
or any of their respective assets.

 

    	-7-

    	 

    

 

10.         Miscellaneous.

 

10.1.     Notices: All
notices, demands, requests, consents, approvals and other communications required or permitted hereunder (“Notices”)
must be in writing and will be effective upon receipt. Notices may be given in any manner to which the parties may separately agree,
including electronic mail. Without limiting the foregoing, first-class mail, facsimile transmission and commercial courier service
are hereby agreed to as acceptable methods for giving Notices. Regardless of the manner in which provided, Notices may be sent
to a party’s address as set forth above or to such other address as any party may give to the other for such purpose in accordance
with this section.

 

10.2.     Preservation of Rights.
No delay or omission on the Bank’s part to exercise any right or power arising hereunder will impair any such right or power
or be considered a waiver of any such right or power, nor will the Bank s action or inaction impair any such right or power. The
Bank’s rights and remedies hereunder are cumulative and not exclusive of any other rights or remedies which the Bank may
have under other agreements, at law or in equity.

 

10.3.     Illegality.
If any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, it shall not affect or
impair the validity, legality and enforceability of the remaining provisions of this Agreement.

 

10.4.     Changes in Writing.
No modification, amendment or waiver of, or consent to any departure by the Borrower from, any provision of this Agreement will
be effective unless made in a writing signed by the party to be charged, and then such waiver or consent shall be effective only
in the specific instance and for the purpose for which given. Notwithstanding the foregoing, the Bank may modify this Agreement
or any of the other Loan Documents for the purposes of completing missing content or correcting erroneous content, without the
need for a written amendment, provided that the Bank shall send a copy of any such modification to the Borrower (which notice may
be given by electronic mail). No notice to or demand on the Borrower will entitle the Borrower to any other or further notice or
demand in the same, similar or other circumstance.

 

10.5.     Entire Agreement.
This Agreement (including the documents and instruments referred to herein) constitutes the entire agreement and supersedes all
other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof.

 

10.6.     Counterparts.
This Agreement may be signed in any number of counterpart copies and by the parties hereto on separate counterparts, but all such
copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement
by facsimile transmission shall be effective as delivery of a manually executed counterpart. Any party so executing this Agreement
by facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not
affect the validity of the counterpart executed by facsimile transmission.

 

10.7.     Successors and Assigns.
This Agreement will be binding upon and inure to the benefit of the Borrower and the Bank and their respective heirs, executors,
administrators, successors and assigns; provided, however, that the Borrower may not assign this Agreement in whole
or in part without the Bank’s prior written consent and the Bank at any time may assign this Agreement in whole or in part.

 

10.8.     Interpretation.
In this Agreement, unless the Bank and the Borrower otherwise agree in writing, the singular includes the plural and the plural
the singular; words importing any gender include the other genders; references to statutes are to be construed as including all
statutory provisions consolidating, amending or replacing the statute referred to; the word “or” shall be deemed to
include “and/or”, the words “including”, “includes” and “include” shall be deemed
to be followed by the words “without limitation”; references to articles, sections (or subdivisions of sections) or
exhibits are to those of this Agreement; and references to agreements and other contractual instruments shall be deemed to include
all subsequent amendments and other modifications to such instruments, but only to the extent such amendments and other modifications
are not prohibited by the terms of this Agreement. Section headings in this Agreement are included for convenience of reference
only and shall not constitute a part of this Agreement for any other purpose. Unless otherwise specified in this Agreement, all
accounting terms shall be interpreted and all accounting determinations shall be made in accordance with GAAP. If this Agreement
is executed by more than one party as Borrower, the obligations of such persons or entities will be joint and several.

 

    	-8-

    	 

    

 

10.9.     No Consequential Damages,
Etc. The Bank will not be responsible for any damages, consequential, incidental, special, punitive or otherwise, that
may be incurred or alleged by any person or entity, including the Borrower and any Guarantor, as a result of this Agreement, the
other Loan Documents, the transactions contemplated hereby or thereby, or the use of the proceeds of the Loan.

 

10.10.   Assignments and Participations.
At any time, without any notice to the Borrower, the Bank may sell, assign, transfer, negotiate, grant participations in, or otherwise
dispose of all or any part of the Bank’s interest in the Loan. Subject to Section 10.11, the Borrower hereby authorizes the
Bank to provide, without any notice to the Borrower, any information concerning the Borrower, including information pertaining
to the Borrower’s financial condition, business operations or general creditworthiness, to any person or entity which may
succeed to or participate in all or any part of the Bank’s interest in the Loan.

 

10.11.   Confidentiality and
Propriety Information. In connection with this Agreement, Bank and Borrower will be providing to each other, whether orally,
in writing or in electronic format, nonpublic, confidential or proprietary information (collectively, "Confidential Information").
 Each of Borrower and Bank agrees (a) to hold the Confidential Information of the other in strict confidence, and (b) not
to disclose or permit any other person or entity access to the Confidential Information of the other party, except for disclosure
or access to a party’s affiliates and its or their employees, officers, directors, agents, representatives, legal counsel
or other third parties that have a need to know such Confidential Information or that provide or may provide ancillary support
relating to the Loan or related transactions between Bank and Borrower and require disclosure or access in the course of employment
or services, or to its external or internal auditors or regulatory authorities, or to any prospective assignee of or participant
in, Bank’s rights or obligations under this Agreement, or any actual or prospective counterparty (or its advisors) to any
swap or derivative transaction related to the Loan.  It is understood and agreed that the obligation to protect such Confidential
Information shall be satisfied if the party receiving such Confidential Information utilizes the same control (but no less than
reasonable) as it does to avoid disclosure of its own confidential and valuable information.  It is also understood and agreed
that no information shall be within the protection of this Agreement where such information: (i) is or becomes publicly available
through no fault of the party to whom such Confidential Information has been disclosed; (ii) is released by the originating party
to anyone without restriction; (iii) is rightly obtained from third parties not, to such receiving party's knowledge, under obligation
of confidentiality; (iv) is required to be disclosed by subpoena or similar process of applicable law or regulations; or (v) to
the extent reasonably necessary after consultation with counsel, a party determines it is necessary to disclose such Confidential
Information in connection with the exercise of any remedies hereunder or under any other Loan Document or any suit, actions or
proceeding relating to this Agreement or any or Loan Document or the enforcement of rights hereunder or thereunder.

 

For the purposes of this Agreement, Confidential
Information of a party shall include, without limitation, any scientific or technical information, design, process, procedure or
improvement and all concepts, documentation, reports, data, data formats, specifications, computer software, source code, object
code, user manuals, financial models, screen displays and formats, software, databases, inventions, knowhow, showhow and trade
secrets, whether or not patentable or copyrightable, whether owned by a party or any third party, together with all memoranda,
analyses, compilations, studies, notes, records, drawings, manuals or other documents or materials which contain or otherwise reflect
any of the foregoing information.

 

    	-9-

    	 

    

 

Each of Borrower and Bank agrees to return
to the other or destroy all Confidential Information of the other upon the termination of this Agreement; provided, however, each
party may retain such limited information for customary archival and audit purposes only for reference with respect to prior dealings
between the parties subject at all times to the continuing terms of this Section 10.11.

 

Each of Borrower and Bank agrees not to
use the other's name or logo in any marketing, advertising or related materials, without the prior written consent of the other
party.  

 

10.12.   Governing Law and Jurisdiction.
This Agreement has been delivered to and accepted by the Bank and will be deemed to be made in the State where the Bank’s
office indicated above is located. This Agreement will be interpreted and the rights
and liabilities of the parties hereto determined in accordance with the laws of the State where the Bank’s office indicated
above is located, excluding its conflict of laws rules. The Borrower hereby irrevocably consents to the exclusive jurisdiction
of any state or federal court in the county or judicial district where the Bank’s office indicated above is located; provided
that nothing contained in this Agreement will prevent the Bank from bringing any action, enforcing any award or judgment or exercising
any rights against the Borrower individually, against any security or against any property of the Borrower within any other county,
state or other foreign or domestic jurisdiction. The Bank and the Borrower agree that the venue provided above is the most convenient
forum for both the Bank and the Borrower. The Borrower waives any objection to venue and any objection based on a more convenient
forum in any action instituted under this Agreement.

 

The Borrower acknowledges that it has
read and understood all the provisions of this Agreement, and has been advised by counsel as necessary or appropriate.

 

WITNESS the due execution hereof
as a document under seal, as of the date first written above.

 

 

	WITNESS / ATTEST:	 	CHARLES & COLVARD, LTD.	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	/s/ Kyle S. Macemore 	 	 By:	/s/ Randall N. McCullough	 
	 	 	 	(SEAL)	 
	Print Name: Kyle S. Macemore	 	 	Randall N. McCullough	 
	Title: Senior Vice President and Chief Financial Officer	 	 	President and Chief Executive Officer	 
	(Include title only if an officer of entity signing to the right)	 	 	 	 

 

 

	 	 	PNC BANK, NATIONAL ASSOCIATION	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 By:	/s/ Giovanni Schiappa	 
	 	 	 	(SEAL)	 
	 	 		Giovanni Schiappa	 
				Senior Vice President	 

 

    	-10-

    	 

    

 

ADDENDUM to that certain Loan Agreement
dated September 20, 2013 between CHARLES & COLVARD, LTD. as the Borrower and PNC Bank, National Association, as the
Bank. Capitalized terms used in this Addendum and not otherwise defined shall have the meanings given them in the Agreement. Section
numbers below refer to the sections of the Agreement.

 

 

 

3.6          Title to Assets. Describe additional liens
and encumbrances below:

 

Liens in favor of the Bank

 

 

 

 

 

 

 

 

 

 

 

 

3.7          Litigation. Describe pending and threatened
litigation, investigations, proceedings, etc. below:

 

None

 

 

 

 

 

 

 

 

 

 

 

 

    	-11-

    	 

    

 

CONTINUATION OF ADDENDUM

 

FINANCIAL COVENANTS

 

(1)           Current Assets/Funded Debt.
The Borrower will maintain as of the end of each fiscal quarter a ratio of Current Assets to Funded Debt of at least 1.50 to
1.00.

 

(2)           Funded Debt/EBITDA. The
Borrower will maintain as of the end of each fiscal quarter, on a rolling four quarter basis, a ratio of Funded Debt to EBITDA
of less than (i) 4.00 to 1.00 beginning on the date hereof through December 31, 2013, and (ii) less than 3.5 to 1.00 from January
1, 2014 through June 30, 2014, and (iii) less than 3.0 to 1.00 at all times after June 30, 2014.

 

(3)           Interest Coverage. The
Borrower will maintain as of the end of each fiscal quarter, on a rolling four quarter basis, an Interest Coverage Ratio of at
least 1.50 to 1.00.

 

As used herein:

 

“Current Assets” means
the aggregate value of each of the following: cash plus investments that could be converted to cash in less than one year
plus accounts receivable plus inventory (determined at the lower of cost of market value, on a first-in, first-out
basis) up to $5,000,000.00.

 

“EBIT” means net income
plus interest expense plus income tax expense plus non-cash portion of any stock compensation.

 

“EBITDA” means net income
plus interest expense plus income tax expense plus depreciation plus amortization plus non-cash
portion of any stock compensation, and adjusted for extraordinary and non-recurring income and expense items.

 

“Funded Debt” means
all indebtedness for borrowed money, including but not limited to capitalized lease obligations, reimbursement obligations in respect
of letters of credit, and guaranties of any such indebtedness.

 

“Interest Coverage Ratio”
means EBIT divided by interest expense.

 

All of the above financial covenants shall
be computed and determined in accordance with GAAP applied on a consistent basis (subject to normal year-end adjustments).

 

    	-12-

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