Risks Related to Ownership of our operations. We are subjectCommon Stock
Our failure to governmental regulationsmaintain compliance with Nasdaq’s continued listing requirements could result in the manufacture and saledelisting of moissanite jewels and finished jewelry.our common stock. Our common stock is currently listed on The Nasdaq Capital Market. In particular, in July 2018 the FTC issued updated guidelines governing the description of lab-grown diamondsorder to maintain this listing, we must satisfy minimum financial and other gemstonesrequirements. On June 12, 2023, we received a notification letter from Nasdaq’s Listing Qualifications Department indicating that require such gemstones to be clearly identified as towe are not in compliance with Nasdaq Listing Rule 5550(a)(2), because the gemstone’s lab-grown origin in any promotionalminimum bid price of our common stock on the Nasdaq Capital Market has closed below $1.00 per share for 30 consecutive business days. The notification letter has no immediate effect on the Nasdaq listing or marketing materials. In addition, the precious metaltrading in our finished jewelrycommon stock. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have 180 calendar days, or until December 11, 2023, to regain compliance with the minimum $1.00 bid price per share requirement. To regain compliance, any time before December 11, 2023, the bid price of our common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. On December 11, 2023, if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market (except for the minimum bid price requirement), and we notify Nasdaq of our intent to cure the deficiency, we may be provided with an additional 180 calendar day compliance period to regain compliance. If we are not eligible for an additional compliance period at that time, Nasdaq will provide us with written notification that our common stock will be subject to requirements, which vary by countrydelisting. Upon such notice, we may appeal Nasdaq’s delisting determination to a Nasdaq hearing panel. There can be no assurance that, if we appeal Nasdaq’s determination, such appeal would be successful.
While we intend to engage in efforts to regain compliance, and by state, such as hallmarking and alloy content. We maythus maintain our listing, there can be under close scrutiny both by governmental agencies and by competitorsno assurance that we will be able to regain compliance during the applicable time periods set forth above. If we fail to continue to meet all applicable listing requirements in the gemstone industry, any of which may challengefuture and Nasdaq determines to delist our promotioncommon stock, the delisting could substantially decrease trading in our common stock and marketingadversely affect the market liquidity of our moissanite jewels and finished jewelry products. While we have a policy to ensure compliance with applicable regulations, if our production or marketing of moissanite jewels and/or finished jewelry is challenged by governmental agencies or competitors, or if regulations are issued that restrictcommon stock; adversely affect our ability to obtain financing on acceptable terms, if at all; and may result in the potential loss of confidence by investors, suppliers, customers, employees, and fewer business development opportunities. Additionally, the market price of our products, our business, resultscommon stock may decline further, and shareholders may lose some or all of operations, and financial condition could be materially adversely affected.their investment.
Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our company.Company. A number of provisions of our articles of incorporation and bylaws impact matters of corporate governance and the rights of shareholders. Certain of these provisions have an anti-takeover effect and may delay or prevent takeover attempts not first approved by our Board of Directors (including takeovers that certain shareholders may deem to be in their best interests). These provisions also could delay or frustrate the removal of incumbent directors or the assumption of control by shareholders. We believe that these provisions are appropriate to protect our interests and the interests of all of our shareholders.
We cannot guarantee that our share repurchase program will be utilized to the full value approved, or that it will enhance long-term stockholder value and repurchases we consummate could increase the volatility of the price of our common stock and could have a negative impact on our available cash balance. Our Board authorized a share repurchase program pursuant to which we may repurchase up to $5.00 million of our common stock through April 29, 2025. The manner, timing and amount of any share repurchases may fluctuate and will be determined based on a variety of factors, including the market price of our common stock, our priorities for the use of cash to support our business operations and plans, general business and market conditions, tax laws, and alternative investment opportunities. The share repurchase program authorization does not obligate us to acquire any specific number or dollar value of shares. Further, our share repurchases could have an impact on our share trading prices, increase the volatility of the price of our common stock, or reduce our available cash balance such that we will be required to seek financing to support our operations. Our share repurchase program may be modified, suspended, or terminated at any time, which may result in a decrease in the trading prices of our common stock. Even if our share repurchase program is fully implemented, it may not enhance long-term stockholder value.
| Item 1B. | Unresolved Staff Comments |
Not applicable.
We currently lease approximately 36,350 square feet of office, retail, storage, and light manufacturing space in the Research Triangle Park, area of North Carolina, from an unaffiliated third-party that is used by both of our current operating and reportable business segments.
The majority of all U.S. personnel, including our executive offices, sales offices, and administrative personnel, as well as our production and productiondistribution facilities are housed in theour current leased space.
There are no material pendingFrom time to time, we may be involved in legal proceedings or subject to whichclaims incident to the ordinary course of business. The outcome of litigation is inherently uncertain, and there can be no assurances that favorable outcomes will be obtained. In addition, regardless of the outcome, such proceedings or claims can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors.
On July 28, 2023, Wolfspeed initiated a confidential arbitration against us for breach of contract claiming damages, plus interest, costs, and attorneys’ fees. Wolfspeed has alleged that the Company failed to satisfy the purchase obligations provided in the Supply Agreement for Fiscal 2023 in the amount of $4.25 million and failed to pay for $3.30 million of SiC crystals Wolfspeed delivered to us. Wolfspeed further alleges that the Company intends to breach our remaining purchase obligations under the Supply Agreement, representing an additional $18.5 million in alleged damages.
While the Company is evaluating Wolfspeed’s claims, we are a party ordispute the amount sought, and we intend to which anyvigorously defend our position, including asserting rights and defenses that the Company may have under the Supply Agreement, at law and in equity. A hearing has not yet been scheduled. The final determinations of our property is subject.liability arising from this matter will only be made following comprehensive investigations, discovery and arbitration processes.
| Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| Period | | Total Number of Shares Purchased | | | Average Price Paid per share | | | Total Number of shares Purchased as Part of Publicly Announced Plans or Programs(1) | | | Approximate
Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |
| April 1, 2023 – April 30, 2023 | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
| May 1, 2023 – May 31, 2023 | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
June 1, 2023 – June 30, 2023 | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
| Total | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
| (1) | On May 5, 2022, we announced that our Board of Directors had approved a share repurchase program to permit us to repurchase up to $5.00 million worth of our issued and outstanding common stock over the three-year period ending April 29, 2025. |
Market for Registrant’s Common Equity
Our common stock is traded on the Nasdaq Capital Market under the symbol “CTHR.” As of August 28, 2020,September 29, 2023, there were 223210 shareholders of record of our common stock.
We did not pay any dividends on our common stock during the fiscal years ended June 30, 20202023 and 2019.2022. We will regularly review and consider the best policies and practices for our company, including the dividend policy. The payment of future dividends will be dependent on the facts and circumstances at the time of that review.
| Item 6. | Selected Financial Data
[Reserved] |
Not applicable.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to provide a better understanding of our 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 Item 1A, “Risk Factors” and our consolidated financial statements and the notes thereto included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for future periods.
Business Overview
Our Mission
At Charles & Colvard, we believe thatLtd., our mission is to provide a more conscious and conflict-free fine jewelry can be accessible, beautiful,experience for our customers. We are dedicated to blazing a more brilliant path forward with our Made, not Mined™ gemstones and conscientious. With innovative technology and sustainable practices, our goal iscommitted to leadcreating fine jewelry with a revolution in the jewelry industry – delivering a brilliant product at extraordinary value balanced with environmental and social responsibility.conscience.
About Charles & Colvard
Charles & Colvard, Ltd., a North Carolina corporation founded in 1995 (which may be referred to as Charles & Colvard, we, us, or our), manufactures, markets is a globally recognized fine jewelry company specializing in lab created gemstones. We manufacture, market, and distributes distribute Charles & Colvard Created Moissanite® (which we refer to as moissanite or moissanite jewels) and in September 2020, we announced our expansion into the lab grown diamond market with the launch of Caydia®, an exclusive brand of premium lab grown diamonds. We offer gemstones and finished jewelry featuring our proprietary moissanite gemstonejewels and premium lab grown diamonds for sale in the worldwide jewelry market. Our unique differentiator, moissanite – The World’s Most Brilliant Gem® – is core to our ambition to create a movement around beautiful, environmentally and socially responsible fine jewelry and fashion jewelry.market. Charles & Colvard is the originatororiginal source of lab-createdcreated moissanite, and in 2015, we debuted Forever One™, our premium moissanite gemstone brand. As an e-commerce and multi-channel destination for fine jewelry featuring lab grown gemstones, we believe that we are leading the way in delivering the premium moissanite brand through technological advances in gemstone manufacturing, cutting, polishing, and setting. By coupling what we believe to be unprecedented lab-created gemstones with responsibly sourced precious metals, we are deliveringaddition of lab grown diamonds is a uniquely positioned product linenatural progression for the conscientious consumer.Charles & Colvard brand.
We sell loose moissanite jewels, lab grown diamonds, and finished jewelry set with these gems through two operating segments: our Online Channels segment, which encompasses our digital properties components, comprisescomprised of our charlesandcolvard.com website,and moissaniteoutlet.com websites, charlesandcolvarddirect.com, e-commerce outlets, including marketplaces, drop-ship customers, and other pure-play, exclusively e-commerce customers; and our Traditional segment, which consists of domestic and international distributors and retail customers. customers, including end-consumers through our first Charles & Colvard Signature Showroom, which opened in October 2022. We report segment information based on the “management” approach. This segment reporting approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of our operating and reportable segments.
We operate in an e-commerce environment characterized by both complexity in global markets and continuingongoing economic pressuresuncertainties in the U.S. and internationally. Our strategy is to build a globally revered and accessible brand of gemstones and finished fine jewelry products set with moissanite and lab grown diamonds. We believe that appealsour goods appeal to a wide consumer audience and leveragesleverage our advantage of being the original and leading worldwide source of moissanite.moissanite and purveyor of premium lab grown diamonds. We believe a direct relationship with consumers is an important component to this strategy, which entails delivering tailored educational content, engaging in interactive dialogue with our audience, and positioning our brand to meet the demands of today’s discerning consumer. A significant component of our strategy in this environment is to focus on our core products, improving the quality and predictability of the delivery of our products and services, and placing those products quickly into the hands of our U.S. and international customers at affordable prices. Moreover, recognizing today that our customers and vendors are resource constrained, we are endeavoring to develop and extend our portfolio of products in a disciplined manner with a focus on domestic markets close to our core capabilities, as well as growing our global marketplace sales. We continue to focus on affordability initiatives. We also expect to continue to innovateinnovating and investinvesting in lab created gemstone technologies to fulfill evolving product requirements for our customers and investinvesting in our people so that we have the technical and production skills necessary to succeed without limiting our ability to build sound financial returnreturns to our investors.
We believe our expanding application of an omni-channel sales strategy across the fine jewelry trade and to the end consumer with accessible gemstones and value branded finished jewelry featuring Charles & Colvard Created Moissanite® and Caydia® lab grown diamonds positions our products at the many touchpoints where consumers are when they are making their buying decisions – thereby continuing to create greater exposure for our brand and increasing consumer demand.
Cybersecurity Event Update
On or about June 28, 2023, we identified a cybersecurity incident that temporarily disrupted the Company’s IT network and resulted in some limited downtime for certain systems. Upon discovery, we took immediate action to activate our incident response and business continuity protocols. We took immediate action to contain the incident and appropriate incident response professionals were engaged to assist in investigating the nature and scope of the event and to further harden the Company’s defenses. Through investigation, we confirmed that this event was related to an apparent ransomware attack involving the unauthorized encryption of some Company files and the deployment of malware.
Our investigation revealed no evidence that any sensitive customer data was compromised as a result of this incident, and our relationship with our customers has not been negatively impacted. We have worked closely with engaged security specialists to assist in the review and assessment of our information technology controls, and, subsequent to June 30, 2023, we implemented recommended strengthening of our access requirements, and improved our unauthorized access detection.
Subsequent to June 30, 2023, we temporarily implemented manual processes to conduct our operations with as little disruption to production as possible. All major systems, including our enterprise resource planning, or ERP, financial systems and affected manufacturing and service operations, were restored as quickly as possible from available backups, and the incident did not have a material impact on the operations of our business operating segments. No payments were made to the ransomware threat actors.
We have incurred costs in the first quarter of the fiscal year ending June 30, 2024, or Fiscal 2024, and expect to continue to incur costs in connection with this incident. In the first quarter of 2024, these costs have been primarily comprised of various third-party consulting services, including forensic experts, restoration experts, legal counsel, and other information technology professional expenses, enhancements to our cybersecurity measures, costs to restore our systems and access our data, and employee-related expenses, including with respect to increased overtime. We expect to incur these and other costs related to this incident in the future.
Additional information on the risks we face related to this event and other potential cybersecurity incidents is included in Part I, Item 1A., “Risk Factors.”
Highlights of the Fiscal Year Ended June 30, 20202023
COVID-19 Update
In March 2020, the novel strain of coronavirus, known as COVID-19, was declared a pandemic by the World Health Organization and declared a national emergency by the U.S. Government, and has negatively affected the U.S. and global economies. In response to this pandemic, federal, state, county, and local governments and public health organizations and authorities around the world have implemented a variety of measures intended to control the spread of the virus, including quarantines, “stay-at-home” orders, travel restrictions, school closures, business limitations and closures, social distancing, and hygiene requirements. These measures have adversely affected workforces, customers, economies, and global supply chains, and resulted in significant travel and transport restrictions – all of which have combined to lead to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. In early 2020 in the Asia Pacific region and during our quarter ended March 31, 2020 globally, the pandemic and related governmental and business responses began to have an adverse effect on our operations, supply chains, distribution channels, and consumer buying behaviors. Cumulatively, these circumstances also impacted the net realizable value and marketability of our legacy inventory, which was subsequently written-off.
The overall impacts of the COVID-19 pandemic include the following:
Across our supply chain, we experienced instances of suppliers temporarily closing their operations, delaying order fulfillment, or limiting their production. Where applicable, we utilized alternative supply arrangements with strategic partners whose businesses were not under stay-at-home orders or whose production came back online. During the quarter ended June 30, 2020, many of our suppliers began returning to normal operating and production levels. However, we and our suppliers remain subject to ongoing changes to governmental closure requirements that may have a long-term impact on our supply chain and ability to produce gemstones and finished jewelry for sale.
In our Online Channels segment, our transactional website charlesandcolvard.com remained open under restricted fulfillment capabilities. However, a quickly rising unemployment rate combined with consumer uncertainty and lack of confidence began reducing website traffic and conversions in March 2020. Beginning in March 2020, we maintained limited shipping functions with support from third-party production and fulfillment partners. We were also able to support only a certain level of active products on marketplaces and drop-ship partner websites such as Macys.com, Helzberg.com, Overstock.com, ShopHQ.com, and more. This ongoing e-commerce presence was restricted to available stock and the limited production capacity of functioning suppliers. During the quarter ended June 30, 2020, we began seeing orders in our transactional website, along with orders in our marketplaces and drop-ship partner websites, increase as consumer confidence strengthened and our operating and shipping functions began to return to normal activity levels. However, until business resumes to pre-pandemic levels across our entire supply chain, our Online Channels segment is expected to continue to be adversely impacted by the pandemic.
In our Traditional segment, brick and mortar customers began closing their stores to foot traffic in March 2020, with tentative plans to re-open on a rolling schedule that may lead into the fall timeframe or later. We also experienced instances of distributors, whose businesses rely on sales into retail organizations, reducing or closing their operations. These adverse effects impacted our ability to maintain significant levels of sales through our wholesale customers. In addition, trade shows and industry events have been preemptively cancelled for the critical production season leading up to the calendar year-end 2020 holiday season. As a result, our selling activities in our Traditional segment were significantly modified, and our ability to convert those activities into sales have been adversely impacted by the pandemic. Consistent with the trends we are experiencing in our Online Channels segment, we have begun seeing business strengthen with our brick and mortar customers as these customers begin to move forward with their re-opening plans following their closures in March 2020, but until business resumes to pre-pandemic levels, our Traditional segment is expected to continue to be adversely impacted by the pandemic.
As global and U.S economic activity slowed in response to the COVID-19 pandemic, we experienced and anticipate ongoing constraints on our cash and working capital, including experiencing potential liquidity challenges. The impact of the pandemic has had – and is expected to continue having – an adverse effect on our operations and financial condition as revenues declined and, despite our cost-saving efforts, many business and operating expenses remained flat or continued to rise. Cash flow scrutiny will be crucial for our business in the months ahead as we anticipate seeing lower revenues resulting in less cash flow, along with delayed accounts receivable collections, as needs grow to step up payables to important suppliers. We continue to focus on being more nimble in managing our inventory levels given the uncertainty in the supply chain, which may also place further demands on working capital.
The COVID-19 pandemic has had a significant adverse impact on our business, results of operations, financial condition, and liquidity during Fiscal 2020. The full extent of the impact of the COVID-19 pandemic on our operational and financial performance is currently uncertain and will depend on many factors outside of our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for consumer and wholesaler products.
We believe that our management has taken – and continues to take – swift and appropriate action designed to hedge against the overall impact that the pandemic may have on our business, to prepare for a potential recessionary environment, and to efficiently manage the business while maintaining adequate liquidity and maximum operating flexibility. We remain focused on three critical areas of wellbeing, including safeguarding the health and safety of our employees, implementing senior managerial changes and streamlining operations while ensuring support of our brand and customers, and maintaining our financial strength and stability. Notwithstanding these challenges, we believe that we further solidified the global Charles & Colvard brand during Fiscal 2020.
Since the onset of the pandemic domestically, we have implemented the following measures:
We deployed a work-from-home option for our employees on March 13, 2020, and effective March 27, 2020, instituted a mandatory work-from-home policy for all, but essential, employees due to mandated stay-at-home orders by the State of North Carolina and local governmental authorities;
We temporarily suspended all hiring of employees starting April 13, 2020 and we furloughed approximately 50% of our employee base at that time, principally within our operations area. While most of our operations employees returned to full-time status as we moved forward with our phased reopening plans during May 2020, these actions materially impacted our productivity;
We extended new benefits to assist employees who participate in our 401(k) plan with additional distribution and new borrowing terms;
We implemented temporary salary and wage reductions for all employees, including a 25% reduction in salary for the President and Chief Executive Officer and a 15% reduction for each of the Chief Financial Officer and Chief Operating Officer. All employee salaries and wages were returned to pre-reduction levels in July 2020;
We reorganized our management and reduced our workforce. Effective June 1, 2020, Suzanne Miglucci, our former President and Chief Executive Officer, resigned and Don O’Connell was appointed as our new President and Chief Executive Officer. At the same time, we enacted a significant reduction-in-force, or RIF, that reduced our active workforce by approximately 25%. Included in the RIF were the elimination of senior-level sales, marketing, information technology, and operations personnel as well as executive-level sales and marketing positions. These RIF actions resulted in our recognition of severance-related expenses during the fourth quarter of Fiscal 2020 in the amount of approximately $427,000. The liability for the unpaid portion of our severance-related accrual in the amount of approximately $338,000 is included in accrued expenses and other liabilities in the accompanying consolidated balance sheet as of June 30, 2020;
We instituted a temporary 50% reduction in fees paid to our Board of Directors, which were also returned to pre-reduction levels in July 2020;
We successfully applied for and received a loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. The loan in the principal amount of $965,000 was disbursed by Newtek Small Business Finance, LLC, a nationally licensed lender under the SBA, on June 18, 2020 pursuant to a Promissory Note issued by us on June 15, 2020. As provided under the CARES Act, we intend to use the proceeds from this loan to enhance cash flow, to help maintain operations and fund current payroll requirements, and to assist us with the reopening phase of our business as we navigate the COVID-19 pandemic recovery efforts. There can be no assurance that such PPP Loan will be forgiven; and
We reduced non-payroll operating expenses, including decreased digital marketing spend and significantly reduced product development investments and travel expenditures.
We are continuing to take the following steps to further address the impact of the COVID-19 pandemic:
We are actively renegotiating contracts with vendors and suppliers to amend commitments to size our supply with current demand and delivery terms with others to reduce our cost of goods and services;
We are negotiating extended payment terms with select partners;
We are continuing to align variable expenses to match current sales trends as we continue to move forward with our phased reopening; and
We are currently continuing to offer the flexibility of a work-from-home option for our employees who are able to perform full-time duties effectively from home as the State of North Carolina continues to reopen through its predetermined phased reopening plan.
During the fiscal year ended June 30, 2020,2023, we delivered on several key initiatives, which we believe leavespositions us well poised for future growth as we move forward into the fiscal year ending June 30, 2021.2024, or Fiscal 2024. These accomplishments in the fiscal year ended June 30, 2020,2023, or Fiscal 2023, include the following:
Digital Marketing Refocus/Redirection. During June 2020, we ceased all top-of-funnel digital marketing campaigns and strictly refocused our digital marketing advertising strategy toward higher-converting, low marketing funnel activities. We believe that targeting consumers with whom we have already engaged and who have expressed interest in our products is a more effective use of our digital advertising spend. We believe this shift in our marketing strategy provides a more rapid financial return on our marketing investment, which is critical to our top line growth during the ongoing COVID-19 pandemic and going forward as we move into Fiscal 2021;
Enhanced Customer Experience. We developed and launched an improved technological e-commerce platform and offered user-friendly consumer services to support an enhanced customer experience. In June 2020 we launched our digital Charles & Colvard Virtual Bridal Ring Consultation program. This is a personal shopping concierge service where we are offering a customized virtual experience designed to simplify the ring buying process for our customers. This new customer support service offers deeper personalization and a more immersive shopping experience for our consumers. With our improved platform we believe that we are driving stronger customer engagement, encouraging repeat buyers, and growing our customer loyalty program, all of which we believe supports our ability to deliver an exemplary worldwide customer service personal shopping experience. We believe that offering this enhanced customer experience is an integral component of our overall marketing strategy. We believe that this enhanced customer interaction featuring a virtual personal shopping experience is important for our brand, but we also believe that it is even more relevant and important to our customers currently during these unprecedented times when social distancing practices remain in place throughout the U.S. and much of the world;
| • | E-Commerce Capabilities. Strengthen our Brand. In spiteearly December 2022, we hosted a multiple-day private press event in New York City that included interviews with editors of numerous fashion and jewelry print and electronic media publications to showcase and promote our brand of fine jewelry. Throughout the adverse impact thatfiscal quarter ended December 31, 2022, our finished jewelry products were featured in multiple national and local print and electronic media publications, such as InStyle, HuffPost, Forbes, AC Magazine, The Knot®, National Jeweler, WRAL, and the COVID-19 pandemic has had onTriangle Business Journal. During the quarter, we also launched local print media public relations campaigns in Midtown Magazine and Raleigh Magazine to promote the opening of our Online Channels segment, Charles & Colvard Signature Showroom. In January 2023, we launched our bridal and fashion jewelry collections on 15- and 30-second commercial advertisement packages on NBC Universal’s Peacock Streaming Service, or Peacock. Peacock is now the streaming home for NBC’s broadcast shows, including the network’s own Peacock Original Broadcasts on Originals Hub, Bravo Hub, NBC Network Hub, Telemundo Hub, WWE Hub, MSNBC Hub, and Hallmark Channel Hub. In mid-January, we participated in the Wedding Venue at Raleigh, North Carolina’s Maxwell Winter Showcase. Charles & Colvard was the premier bridal and anniversary jewelry vendor that participated in this event. Raleigh’s Maxwell events are well known in the Central North Carolina region and offer a setting where a touch of modern elegance meets classic luxury. This event, in particular, provided our collections with a premier setting to showcase our bridal and anniversary fine jewelry brands to the regional retail market. In April 2023 we hosted a private/invite-only Spring Preview in New York City with over 30 editors and influencers from The Knot, NBCU, Today, US Weekly, etc. to showcase new Forever One™ and Caydia® fine jewelry styles;
|
| • | Marketing Strategy to Increase Awareness. In addition to the accomplishments discussed above in “Strengthen Our Brand”, as we move forward into Fiscal 2024, our strategic focus remains centered on the health and growth of our brand on a global scale. We will continue to execute our key strategies with an online presenceongoing commitment to measured spending and generating sustainable earnings improvement. In December 2022, the popularity of our Made, not Mined™ Caydia® lab grown diamonds was the subject of a proprietary news feature broadcast on Spectrum News Channel 1, which is a primary cable news channel network that is broadcast statewide throughout North Carolina. Lastly, and in conjunction with our community outreach programs, during the iconic Canadian department store Hudson’s Bay in May 2020.December year-end holiday season, we sponsored the 29th Annual Jingle Ball at the North Carolina Museum of Natural Sciences, which is hosted by Capital City Clauses, Inc., a federally registered 501(c)(3) nonprofit corporation whose mission is to enrich children’s lives in the Raleigh metropolitan area by providing toy gifting and basic needs to those who are underprivileged and in need during the Christmas holidays and beyond; |
| • | Enhance and Expand Product Assortment. In Fiscal 2023, we took several steps to broaden available selections of finished jewelry, which features our exclusive brand of premium lab grown diamonds, with an expanded Couture Collection assortment of finished jewelry that showcases a combination of mixed cuts of our Caydia® lab grown diamonds and recycled precious metals featuring new designs of rings, earrings, and pendant styles that we believe is the future of Made, not Mined™ fine jewelry. We believe this relationship gives us the abilitycollection showcases a combination of mixed cut gemstones in single designs to marketcreate consumer interest. Also, during Fiscal 2023, we expanded our assortmentOuro Edition of fine jewelry to include Caydia® lab grown diamond fashion pieces. The Ouro Edition is our curation of polished recycled 14 karat gold jewelry pieces with a design focus on geometric shapes. We believe that Ouro – which is Portuguese for gold – will bring a fresh approach to our finished jewelry in modern dimensional styles in yellow gold to bring our fine luxury jewelry to the forefront of modern fashion. In addition, with the launch of our latest lab grown precious gemstones in color, which we announced in October 2022, we are now offering a colorful new dimension of our Made, not Mined™ fine jewelry repertoire featuring lab grown ruby, sapphire, and emerald gemstones. We further offered an expanded assortment of Caydia® lab grown diamonds to include higher total carat weight items adding finished jewelry featuring lab grown diamonds with total carat weights of up to and in some cases exceeding 4.0 carats. Previously, we focused primarily on smaller total carat weight items of finished jewelry featuring our Caydia® lab grown diamonds. In Fiscal 2023 we expanded our bridal and engagement fine jewelry collections of styles featuring Forever One™ moissanite to continue to showcase and promote finished jewelry featuring our core product gemstone. Lastly, we launched 55 styles of our patented Signature Collection engagement ring and wedding band designs featuring Forever One™ moissanite and expanded our Caydia® lab grown diamond Couture Collection to include additional ring, necklace, earring, and bracelet styles; and launched 47 new fine jewelry styles on charlesandcolvard.com across all categories: and |
| • | Broaden our Footprint. In October 2022, we officially opened the first Charles & Colvard Signature Showroom located in our corporate headquarters in North Carolina’s Research Triangle Park. We believe that consumers are responding positively to our patented Signature Collection designs as well as our wide assortment of Forever One™ moissanite and Caydia® lab grown diamond fine jewelry. Also in October 2022, we hosted a private press event for community leaders and influencers, allowing them to experience the new broadcast studio located in our corporate headquarters. This studio is a digital extension of the sales team and a tool that our marketing team utilizes for video content production, live-stream shopping, designer and influencer interviews, and fashion photography. We believe our brick-and-mortar expansion and digital marketing capability will continue to further position and define our brand in what we believe is a rapidly evolving consumer landscape and allow us to compete more effectively and, we believe, increase our market share within the fine jewelry space. In June 2023, we launched charlesandcolvarddirect.com selling loose moissanite gems (Forever One™ and Moissanite by Charles & Colvard® gemstones) to this retailer’s robust digital audience on TheBay.com;specific retailers. In addition, we launched three new dropship partnerships with Moissanite by Charles & Colvard® fine jewelry. |
PresenceAs evidenced by our results for Fiscal 2023, domestic and global inflation and rising interest rates, coupled with Key Brick-and-Mortar Partners. Notwithstandingongoing fears of recession and the adverse effectoverall worsening of macroeconomic conditions that the COVID-19 related closures had on our Traditional segmentwe witnessed during the period these retailers were closed, infiscal year ended June 30, 2023, combined to continue eroding consumer confidence and presenting major challenges for the months priorglobal retail and e-commerce industry. While American consumers continue spending more on consumer goods to the business interruption, we continued to broaden our relationshipkeep up with Helzberg Diamonds stores with the addition of incremental product styleshigher prices, consumers are spending on necessities and expanded case line presence in nearly all doors during the early part of Fiscal 2020.other required goods and services and moving away from spending on luxury items. We expect that consumers will continue to evolve ourfeel pressured financially, particularly throughout the remaining calendar year 2023. We are facing similar challenges to other retailers, including those in the e-commerce space, but particularly those in the luxury product retail channel strategy as these stores reopen and businesses resume to pre-pandemic levels and when we are once again able to optimize our partnership arrangements; and
Corporate Social Responsibility.arena. In these unprecedented times more than ever,addition, we continue to believe that we have the responsibility to be a good corporate citizen, and in practice, to have a business model that helps us be socially accountable to our stakeholders. During Fiscal 2020, we elevated our useseeing ongoing increased costs of responsible precious metals in substantially all the finished jewelry we sourced. We also want to positively impact the communities where we work and live and for the benefit of the world in general – which we intend to continue supporting through philanthropic programs that advocate positive social change. This is evidenced by our participation in a Coronavirus related giving-back program that contributes 40% of net proceeds from one of our top selling finished jewelry items to the Duke University Research Foundation’s Duke Health COVID-19 Research Fund that will help support the development of vaccines and treatments for COVID-19.
The continued spread of COVID-19 has led to ongoing disruption and volatility in the global and U.S. economies, and, depending on future developments, could continue to adversely impact our operations and financial position. Our focus as we move into Fiscal 2021 is centered on the health of our brand on a global scale. As lab-created gemstones are being embraced by emerging generations, we will continue our quest to establish moissanite and our jewelry brand directly with consumers. We will execute on our key strategies with a continued commitment to measured spending and generating sustainable earnings improvement.
As we manage through these challenging and unprecedented times, we plan to remain highly focused on prudently managing the reach of our brand – both domestically and internationally – through select digital marketing initiatives that align with consumer engagement and demand. However, in response to the global economic impact of the COVID-19 pandemic and its effect on consumer confidence and spending levels, we have narrowed our digital advertising spend, toward higher-conversion marketing activities. We believeknown as cost-per-click in the digital advertising world, due to intense competition and pricing pressures in the lab grown gem and finished jewelry space. While management remains focused to take the required steps necessary to mitigate the impact, the Company’s costs that our long-term missioncontinue to increase will ultimately be accomplished through our ability to remain fluidresult in further pressure on its revenues, margins, and shift brand awareness strategies that are sensitive to these ever-changing times.cash flows.
Our MD&A generally discusses Fiscal 20202023 and Fiscal 20192022 items and year-to-year comparisons between Fiscal 20202023 and Fiscal 2019. Discussions of Fiscal 2019 items and year-to-year comparisons between Fiscal 2019 and the fiscal year ended June 30, 2018, or Fiscal 2018, that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results or Operations” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 filed with the SEC on September 6, 2019.2022.
The following table sets forth certain consolidated statements of operations data for the fiscal years ended June 30, 20202023 and 2019:
2022:
| | | Year Ended June 30, | | | Year Ended June 30, | |
| | | 2020 | | | 2019 | | | 2023 | | | 2022 | |
| Net sales | | $ | 29,189,020 | | | $ | 32,244,109 | | | $ | 29,946,234 | | | $ | 43,089,024 | |
| Costs and expenses: | | | | | | | | | | | | |
| Cost of goods sold | | 21,200,207 | | | 17,352,167 | | | 25,212,383 | | | 22,845,702 | |
| Sales and marketing | | 9,443,244 | | | 7,983,506 | | | 13,686,049 | | | 12,421,138 | |
| General and administrative | | 4,861,297 | | | 4,640,810 | | | | 5,023,822 | | | | 4,948,980 | |
| Research and development | | | - | | | | 2,069 | | |
| Total costs and expenses | | | 35,504,748 | | | | 29,978,552 | | | | 43,922,254 | | | | 40,215,820 | |
| (Loss) Income from operations | | (6,315,728 | ) | | 2,265,557 | | | (13,976,020 | ) | | 2,873,204 | |
| Other income (expense): | | | | | | | | | | | | |
| Interest income | | 158,091 | | | 11,022 | | | 297,262 | | | 19,277 | |
| Interest expense | | (884 | ) | | (2,198 | ) | |
| Loss on foreign currency exchange | | (1,829 | ) | | (344 | ) | | | - | | | | (34 | ) |
| Other expense | | | - | | | | (13 | ) | |
| Total other income, net | | | 155,378 | | | | 8,467 | | | | 297,262 | | | | 19,243 | |
| (Loss) Income before income taxes | | (6,160,350 | ) | | 2,274,024 | | | (13,678,758 | ) | | 2,892,447 | |
| Income tax (expense) benefit | | | (1,733 | ) | | | 1,443 | | |
| Income tax expense | | | | (5,902,036 | ) | | | (518,532 | ) |
| Net (loss) income | | $ | (6,162,083 | ) | | $ | 2,275,467 | | | $ | (19,580,794 | ) | | $ | 2,373,915 | |
Consolidated Net Sales
Consolidated net sales for the fiscal years ended June 30, 20202023 and 20192022 comprise the following:
| | | Year Ended June 30, | | | Change | | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | | |
| Finished jewelry | | $ | 23,985,614 | | | $ | 29,712,230 | | | $ | (5,726,616 | ) | | | (19 | ) | % |
| Loose jewels | | | 5,960,620 | | | | 13,376,794 | | | | (7,416,174 | ) | | | (55 | ) | % |
| Total consolidated net sales | | $ | 29,946,234 | | | $ | 43,089,024 | | | $ | (13,142,790 | ) | | | (31 | ) | % |
| | | Year Ended June 30, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Finished jewelry | | $ | 16,777,628 | | | $ | 15,457,343 | | | $ | 1,320,285 | | | | 9 | % |
| Loose jewels | | | 12,411,392 | | | | 16,786,766 | | | | (4,375,374 | ) | | | -26 | % |
| Total consolidated net sales | | $ | 29,189,020 | | | $ | 32,244,109 | | | $ | (3,055,089 | ) | | | -9 | % |
Consolidated net sales were $29.19$29.95 million for the fiscal year ended June 30, 20202023 compared to $32.24$43.09 million for the fiscal year ended June 30, 2019,2022, a decrease of $3.06$13.14 million, or 9%31%. The decrease in consolidatedWe had lower net sales for the fiscal year ended June 30, 2020 compared with consolidated net sales for the prior fiscal year was primarily due to the adverse impacts of the geopolitical unrest in Hong Kong in early 2020 which affected our international distributor market and the global outbreak of the COVID-19 pandemic. This pandemic has continued to negatively affect the U.S. and global economies and has had a significant adverse impact on our worldwide sales and results of operations. Notwithstanding the impact of the COVID-19 pandemic,both operating business segments during the fiscal year ended June 30, 2020, we saw increased seasonal sales for both2023. Overall consumer confidence has continued to show signs of weakening due to general economic uncertainties, coupled with domestic and worldwide inflation, including recessionary fears, and rising interest rates. Notwithstanding the calendar year-end 2022 holiday shopping season and the Valentine’s Day. We also witnessed increasedDay occasion during February 2023 and Mother’s Day during May 2023, these conditions have brought about lower consumer awarenessdemand for our moissanitefinished jewelry products, throughout these holiday periods. Our transactional website, charlesandcolvard.com, was flat compared withwhich resulted in lower net sales in our Online Channels segment during the prior fiscal year due to the strength ofended June 30, 2023. These same general economic conditions also caused weakness in demand during the COVID-19 pandemic. Net sales throughfor moissanite jewels from our cross-border trade, or CBT, platform increased 34% versus the prior fiscal year. Despite the sales pressures we have been experiencing during the COVID-19 pandemic, our results have provided evidence that we had strong finisheddomestic and international distributors, which in turn resulted in lower loose jewel and jewelry product net sales during the fiscal year ended June 30, 20202023 in both our Online Channels segment and Traditional segment.
Sales of finished jewelry represented 57%80% and 48%69% of total consolidated net sales for the fiscal years ended June 30, 20202023 and 2019,2022, respectively. For the fiscal year ended June 30, 2020,2023, finished jewelry sales were $16.78$23.99 million compared to $15.46$29.71 million for the fiscal year ended June 30, 2019, an increase2022, a decrease of $1.32$5.73 million, or 9%19%. This increasedecrease in finished jewelry sales was due primarily to higherlower demand across all of our finished jewelry retail sales in our Online Channels segmentproducts as well asa result of adverse global and domestic general economic conditions and increased sales of Forever One™ and Moissanite by Charles & Colvard® products in our Traditional segment during periods prior to the COVID-19 pandemic. Net sales of our Forever One™finished jewelry and loose jewels represented 81% of total net sales for the fiscal year ended June 30, 2020.competition.
Sales of loose jewels represented 43%20% and 52%31% of total consolidated net sales for the fiscal years ended June 30, 20202023 and 2019,2022, respectively. For the fiscal year ended June 30, 2020,2023, loose jewel sales were $12.41$5.96 million compared to $16.79$13.38 million for the fiscal year ended June 30, 2019,2022, a decrease of $4.38$7.42 million, or 26%55%. The decrease for the fiscal year ended June 30, 20202023 was primarily due to the adverse impact of the COVID-19 pandemic and the resulting impact on consumer confidence and spending. The decrease was also dueprimarily to lower levelssales of loose jewel salesjewels through our distribution network in our Online Channels segment and in particular, lower levelsTraditional segment, as a result of loose jewel sales through the international distribution network in our Traditional segment.global and domestic general adverse macroeconomic conditions and increased competition.
U.S. net sales accounted for approximately 92%97% and 87%95% of total consolidated net sales during the fiscal years ended June 30, 20202023 and 2019,2022, respectively. Notwithstanding the adverse impact of the COVID-19 pandemic, U.S. net sales increased during Fiscal 2020 as a percentage of net sales, principally resulting from the significant decrease in international sales as discussed below. The decrease in U.S. net salesdecreased to $29.06 million during the fiscal year ended June 30, 20202023 compared to $41.14 million during the priorfiscal year was offset somewhat by increasedended June 30, 2022, primarily as a result of decreased sales to U.S. customers during periods prior to the impact of the COVID-19 pandemic in both our Online Channels segment and Traditional segment.segment for the same reasons outlined above.
Our largest U.S. customer during the fiscal years ended June 30, 20202023 and 20192022 accounted for 13% and 14% of total consolidated net sales during each respective period. Our second largestof the fiscal years then ended. Other than our U.S. customer noted above during the fiscal years ended June 30, 20202023 and 2019 accounted for 12% and2022, we had no other customers with sales that represented 10% or more of total consolidated net sales during each respective period.for the periods then ended. We expect that we, along with our customers, will remain dependent on our ability and that of our largest U.S. customers, to maintain and enhance retail and domestic distributorour customer-related 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 8%3% and 13%5% of total consolidated net sales during the fiscal years ended June 30, 20202023 and 2019,2022, respectively. International net sales decreased to $2.37 million, or 44%,$890 thousand during the fiscal year ended June 30, 20202023 compared to $4.26$1.95 million in the fiscal year ended June 30, 2019.2022. International sales decreased during the fiscal year ended June 30, 2023, compared to the prior fiscal year primarily due to lower demand in our international distributor market resulting fromdue to shutdowns in the adverse impactAsia Pacific region and increased competition during the fiscal year ended June 30, 2023, coupled with the strength of the geopolitical unrest in Hong Kong and the COVID-19 pandemic affecting the distributors we serve in the China and Hong Kong markets. Prior to the effects of the COVID-19 pandemic, the lower demand in our international distributor market was offset somewhat by growth in our direct-to-consumer presence internationally, along with an increase in the number of CBT transactions in these periods reflecting increased direct-to-consumer sales from our Online Channels segment in international markets.U.S. dollar against foreign currencies. In light of the effects of ongoing global economic conditions, we continue to evaluate these and other potential distributors in international markets to determine the best long-term partners. As a result, and in light of the impact from the ongoing worldwide pandemic and international trade challenges, we expect that our sales in these markets to continue tomay significantly fluctuate significantly each reporting period.
We did not have an international customer account for 10% or more of total consolidated sales during the fiscal years ended June 30, 20202023 and 2019.2022. A portion of our international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the fiscal years ended June 30, 20202023 and 20192022 are as follows:
| | | Year Ended June 30, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| Product line cost of goods sold: | | | | | | | | | | | | |
| Finished jewelry | | $ | 12,397,091 | | | $ | 13,932,700 | | | $ | (1,535,609 | ) | | | (11 | )% |
| Loose jewels | | | 2,744,977 | | | | 6,169,790 | | | | (3,424,813 | ) | | | (56 | )% |
| Total product line cost of goods sold | | | 15,142,068 | | | | 20,102,490 | | | | (4,960,422 | ) | | | (25 | )% |
| Non-product line cost of goods sold | | | 10,070,315 | | | | 2,743,212 | | | | 7,327,103 | | | | 267 | % |
| Total cost of goods sold | | $ | 25,212,383 | | | $ | 22,845,702 | | | $ | 2,366,681 | | | | 10 | % |
| | | Year Ended June 30, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Product line cost of goods sold: | | | | | | | | | | | | |
| Finished jewelry | | $ | 7,469,790 | | | $ | 6,859,112 | | | $ | 610,678 | | | | 9 | % |
| Loose jewels | | | 6,062,186 | | | | 8,242,830 | | | | (2,180,644 | ) | | | -26 | % |
| Total product line cost of goods sold | | | 13,531,976 | | | | 15,101,942 | | | | (1,569,966 | ) | | | -10 | % |
| Non-product line cost of goods sold | | | 7,668,231 | | | | 2,250,225 | | | | 5,418,006 | | | | 241 | % |
| Total cost of goods sold | | $ | 21,200,207 | | | $ | 17,352,167 | | | $ | 3,848,040 | | | | 22 | % |
Total cost of goods sold was $21.20$25.21 million for the fiscal year ended June 30, 20202023, compared to $17.35$22.85 million for the fiscal year ended June 30, 2019,2022, a net increase of approximately $3.85$2.37 million, or 22%10%. Product line cost of goods sold is defined as product cost of goods sold in each of our Online Channels segment and Traditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory write-offs;write-downs; and other inventory adjustments, comprising costs of quality issues, and damaged goods.
The increase in total cost of goods sold for the fiscal year ended June 30, 20202023, as compared to the fiscal year ended June 30, 20192022 was primarily driven by an increase in non-product line cost of goods sold offset by a write-offdecrease of sales of finished jewelry and loose jewels during the third quarter of Fiscal 2020 of approximately $5.26 million representing the carrying valuefiscal year ended June 30, 2023 in both of our legacyOnline Channels segment and Traditional segment. We experienced lower demand in our Online Channels segment as a result of lower finished jewelry product demand and loose jewel inventory and finished goods inventory set with these legacy gemstones. The legacy material inventory compriseddemand during the fiscal year ended June 30, 2023. Likewise, we saw lower grade raw materials, or boules, work-in-process gemstones, loose finished gemstonesjewel product demand and finished jewelry set with these legacy gemstonesproduct demand in precious metals. The legacy inventory raw materials were purchased and finished gemstone products were produced through the period ended August 2015. These gemstone products and finished jewelry items are known and marketed as our older Forever ClassicTM, Forever Brilliant®, and lower-grade gemstones.
Our primary international gemstone distributors, which historically have been the principal customer base for our legacy gemstone products are located in the Asia Pacific region of the world, primarily in China and Hong Kong. As a result of the ongoing geopolitical unrest in Hong Kong, coupled with the global impact of the COVID-19 pandemic, consumer confidence and spending in this region plummetedTraditional segment throughout Fiscal 2020. As a consequence of this, our marketability of these products suffered a sudden and complete deterioration over this same period.2023.
The net increase in non-product line cost of goods sold for the fiscal year ended June 30, 20202023 comprises an unfavorable net change in inventory write-offsa write-down of approximately $5.47$5.9 million representing the carrying value of a portion of the Company’s non-Forever One™loose jewels inventory. The non-Forever One™material inventory (mainly the classifications for our multiple grade Moissanite by Charles & Colvard® gemstones and lab-grown diamonds) is comprised of raw materials, or boules, work-in-processgemstones, and loose finished gemstones. Certain grades of the Company’s Moissanite by Charles & Colvard® loose gemstones and lab-grown diamonds have seen a market deterioration which started in the quarterly period ended June 30, 2023 due to the recent downward pricing pressure on both mined and lab grown diamonds.These trends in the diamond market have now put considerable pricing pressure on moissanite – for rough and loose gemstones – and due to oversupply of rough and loose gems for lab grown diamonds the net realizable value of such inventory has decreased. Additionally, the net increase includes an approximate $1.1 million increase in other inventory adjustments principally related to Fiscal 2023 cycle book-to-physical inventory adjustments and changes in production standard cost variances compared to those in the fiscal year ended June 30, 2022 and an approximate $549,000 increase in non-capitalized manufacturing production control expenses principally related to the write-offtiming of when work-in-process goods are received into inventory and overhead costs are allocated. These increases was partially offset by a $127,000 decrease in freight out principally from decreased shipments resulting from lower Online Channels segment sales during the carrying costfiscal year ended June 30, 2023 and an approximate $76,000 decrease in inventory write-offs, exclusive of our legacy material inventory of $5.26 million as well as inventory valuation adjustmentsamounts previously mentioned, primarily related to changesdecreases in obsolescence reserves in the fiscal year ended June 30, 2020. The net increase in non-product line cost of goods sold was also related to an approximate $14,000 change in production standard cost variances as2023, compared to the fiscal year ended June 30, 2019 as well as an approximate $1,000 increase in non-capitalized manufacturing and production control expenses principally due to the timing when work-in-process is received into inventory and overhead costs are allocated. These increases in non-product line cost of goods sold were offset in part by an approximate $68,000 decrease in freight outthose in the same period due to lower shipment costs during thecomparable prior fiscal year ended June 30, 2020.year.
For further discussion of non-product line cost of goods sold, see Note 3 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
Sales and Marketing
Sales and marketing expenses for the fiscal years ended June 30, 20202023 and 20192022 are as follows:
| | | Year Ended June 30, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| | | | | | | | | | | | | |
| Sales and marketing | | $ | 9,443,244 | | | $ | 7,983,506 | | | $ | 1,459,738 | | | | 18 | % |
| | | Year Ended June 30, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| | | | | | | | | | | | | |
| Sales and marketing | | $ | 13,686,049 | | | $ | 12,421,138 | | | $ | 1,264,911 | | | | 10 | % |
Sales and marketing expenses were $9.44$13.69 million for the fiscal year ended June 30, 20202023 compared to $7.98$12.42 million for the fiscal year ended June 30, 2019,2022, an increase of approximately $1.46$1.26 million, or 18%10%.
The increase in sales and marketing expenses for the fiscal year ended June 30, 20202023 compared to the fiscal year ended June 30, 20192022 was primarily due to a $1.15 million$513,000 increase in advertising and digital marketing expenses reflecting the activation of funds from our June 2019 underwritten public offering that we deployeddue to expand brand awareness; a $217,000an increase in software-related costs principallytargeted direct-to-consumer top-of-funnel brand awareness campaigns; a $252,000 increase in connection with maintenance agreements as well as other software-related agreements;compensation expenses; a $58,000$242,000 increase in general business and franchise taxes; a $175,000 increase in professional services fees principally comprising consulting services for cybersecurity and merchandise imaging;marketing support in the current year period; a $46,000$28,000 increase in compensation-relatedtelephone-related communications expenses; a $22,000 increase in employee-related recruiting and search fees for new hires; a $15,000 increase in supplies and customer promotional gifts, primarily a “gift with purchase” program associated with the opening of our Signature Showroom in the current fiscal year; a $14,000 increase in software-related costs incurred primarily in connection with new software-related agreements associated with upgraded sales-related operating systems; a $3,000 increase in depreciation and amortization expense principally related to new sales-related systems hardware and software; and a $41,000$3,000 net increase in general office-related expenses, which is primarily related to increased sales and use taxes.expenses. These increases were offset partially offset by a $52,000$2,000 decrease in travel expenses as a result of COVID-19 cost control measures.expenses.
The increase in digital and social media marketing expenses for the fiscal year ended June 30, 20202023 compared to the fiscal year ended June 30, 20192022 was primarily due to a $623,000an $821,000 increase in Internet marketing;digital advertising spend; a $524,000$92,000 increase in outside agency fees; and a $110,000$1,000 increase in print media expenses. These increases were offset partially by a $186,000 decrease in cooperative advertising; and a $9,000 increase$135,000 decrease in promotional expenses, primarily related to sponsorship of a local professional sports team. These increases were partially offset by an $89,000 reduction in trade show expenses resulting from the cancelation of the jewelry industry’s premier annual eventbrand awareness marketing campaign expenditures as a result of fewer promotional activities in the COVID-19 pandemic;current fiscal year; and an $80,000 decrease in expenses relating to our participation in the 2021 JCK Trade Show held in the prior fiscal year for which we did not host a $29,000 reductionbooth in print media advertising. In response to the COVID-19 pandemic, management drastically reduced advertising and digital marketing expenditures beginning in mid-March 2020. In addition, as a result of its digital marketing redirection in June 2020, management further reduced advertising and digital marketing expenditures2022 JCK Trade show held during the last month of Fiscal 2020.current fiscal year.
Compensation expenses for the fiscal year ended June 30, 20202023 compared to the fiscal year ended June 30, 20192022 increased primarily as a result of a $201,000$344,000 increase in salaries (due to fluctuations in headcount throughout the year), commissions, and related employee benefits in the aggregate;aggregate and a $71,000$5,000 increase in severance accrual related to our June 2020 management reorganization and workforce reduction; andseverance-related expenses associated with a $9,000 increase in employee stock-based compensation expense.reduction-in-force during the current fiscal year. These increases were partially offset by cost control measures implemented by management as a result of the COVID-19 pandemic and its effect on our operations that led to a $235,000$62,000 decrease in bonus expense and a $35,000 decrease in employee stock-based compensation expense.
General and Administrative
General and administrative expenses for the fiscal years ended June 30, 20202023 and 20192022 are as follows:
| | | Year Ended June 30, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| | | | | | | | | | | | | |
| General and administrative | | $ | 4,861,297 | | | $ | 4,640,810 | | | $ | 220,487 | | | | 5 | % |
| | | Year Ended June 30, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| | | | | | | | | | | | | |
| General and administrative | | $ | 5,023,822 | | | $ | 4,948,980 | | | $ | 74,842 | | | | 2 | % |
General and administrative expenses were $4.86$5.02 million for the fiscal year ended June 30, 20202023 compared to $4.64$4.95 million for the fiscal year ended June 30, 2019,2022, an increase of approximately $220,000,$75,000, or 5%2%.
The increase in general and administrative expenses for the fiscal year ended June 30, 20202023 compared to the fiscal year ended June 30, 20192022 was primarily due to a $250,000 increase in compensation expenses; a $236,000$199,000 increase in professional services fees; andservices; a $6,000$187,000 increase in equipment-related rental expense. These increases were partially offset bydepreciation and amortization expense related to general office leasehold improvements associated with the lease on our corporate headquarters and business expansion related to the opening of our new Charles & Colvard Signature Showroom also located in our headquarters campus; a $105,000 increase in travel and expense related expenditures as we returned to more traditional business travel patterns following the pandemic; an $84,000 decrease in business franchise taxes and licenses; a $49,000 decrease in board retainer fees as a result of COVID-19 cost control measures; a $48,000 decrease in bank fees as a result of lower credit card sales transactions during the COVID-19 pandemic; a $31,000 decrease in travel expenses as a result of COVID-19 cost control measures; a $24,000 decrease in insurance expenses; an $18,000 decreaseincrease in bad debt expense associated with our allowance for doubtful accounts reserve policy reflecting lower customer accounts receivable balances during the COVID-19 pandemic;policy; an increase of $72,000 in general business taxes and licenses; and a $12,000$21,000 increase in insurance expense, principally related to increased cybersecurity premiums. These increases were partially offset by a $411,000 decrease in general office-related expenses, which iscompensation expenses; a $163,000 decrease in bank fees resulting from the revised fee structure associated with different banking arrangements in place in the current fiscal year versus those in the prior fiscal year; a $14,000 decrease in rent expense, primarily related to lower software maintenance agreement-related expenses;our corporate headquarters operating lease; and a $6,000$4,000 net decrease in allmiscellaneous other general and administrative expenses.
Compensation expenses increaseddecreased for the fiscal year ended June 30, 20202023 compared to the fiscal year ended June 30, 20192022 primarily due to a $282,000 increase$463,000 decrease in severance accrual related to our June 2020 management reorganizationemployee stock-based compensation expense and workforce reduction; a $128,000$169,000 decrease in bonus expense. These decreases were partially offset by a $217,000 net increase in salaries and related employee benefits in the aggregate;aggregate (due to fluctuations in headcount throughout the year), and a $33,000$5,000 increase in employee stock-based compensation expense. These increases were offset in part by cost control measures implemented asseverance-related expenses associated with a result ofreduction-in-force during the COVID-19 pandemic and its effect on our operations that led to a $193,000 decrease in bonus expense.current fiscal year.
Professional services fees increased for the fiscal year ended June 30, 20202023 compared to the fiscal year ended June 30, 20192022 primarily due to a $158,000$118,000 increase in legal fees associated with corporate governance matters; a $38,000$53,000 increase in accounting servicesbroker commissions primarily related to higher annualour stock repurchase program; a $24,000 increase in investor relations fess; and a $4,000 increase in fees associated with audit and tax fees,services.
Interest Income
Interest income for the fiscal years ended June 30, 2023 and 2022 is as well as fees associatedfollows:
| | | Year Ended June 30, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| Interest income | | $ | 297,262 | | | $ | 19,277 | | | $ | 277,985 | | | | * | % |
* Not meaningful
Certain cash balances in excess of operating needs are deposited into and maintained in an interest-bearing account with tax consulting services; a $30,000commercial bank. Accordingly, during the fiscal years ended June 30, 2023 and 2022, we earned interest from cash on deposit in this interest-bearing account. The increase in investor and public relations expenses; andearned interest for the fiscal year ended June 30, 2023 reflects movement of invested funds into a $10,000higher-yield money market fund in late Fiscal 2022, coupled with the overall increase in consulting and other professional services primarilyinterest rates during Fiscal 2023 compared with those in connection with nonrecurring accounting and financial reporting related consulting fees.Fiscal 2022.
Loss on Foreign Currency Exchange
Loss on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the fiscal years ended June 30, 20202023 and 20192022 are as follows:
| | | Year Ended June 30, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Loss on foreign currency exchange | | $ | 1,829 | | | $ | 344 | | | $ | 1,485 | | | | 432 | % |
| | | Year Ended June 30, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| Loss on foreign currency exchange | | $ | - | | | $ | 34 | | | $ | (34 | ) | | | (100 | )% |
During the fiscal year ended June 30, 2020,2022, we had international sales transactions denominated in currencies other than the U.SU.S. dollar that resulted in foreign currency exchange net losses. The increase in these losses for the fiscal years ended June 30, 2020, reflects changesThere were no such international sales transactions denominated in foreign currency fluctuationcurrencies during the fiscal year ended June 30, 2020 compared with the prior fiscal year.2023.
InterestProvision for Income Taxes
Interest income for the fiscal years endedOur statutory tax rate as of June 30, 20202023 is 22.94% and 2019 is as follows:
| | | Year Ended June 30, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Interest income | | $ | 158,091 | | | $ | 11,022 | | | $ | 147,069 | | | | 1,334 | % |
In June 2019, we completed an underwritten public offering of 6,250,000 shares of our common stock, which together with the partial exerciseconsisted of the underwriters’ over-allotment option for an additional 630,500 shares in July 2019, resulted infederal income tax rate of 21.00% and a blended state income tax rate of 1.94%, net proceeds of approximately $9.99 million. The net proceeds from this offering have been deposited into an interest-bearing account with a federally insured commercial bank. Accordingly, during the fullfederal benefit. Our statutory tax rate as of the fiscal year ended June 30, 2020, we earned interest2022 was 22.45% and consisted of the federal income tax rate of 21.00% and a blended state income tax rate of 1.45%, net of the federal benefit. Our effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax accounting arising primarily from cash on deposit in this interest-bearing account.the permanent tax benefits associated with stock-based compensation transactions during the accounting period then ended. Driven by the establishment of the valuation allowance during the fiscal quarter ended March 31, 2023, our effective tax rate for the fiscal year ended June 30, 2023 was a negative 43.15%. For the fiscal year ended June 30, 2022, our effective income tax rate was 17.93%.
Provision for Income Taxes
We recognized a net income tax expense of approximately $1,700 and a net income tax benefit of approximately $1,400$5.90 million for the fiscal years ended June 30, 2020 and 2019, respectively. Our income tax provisions in these periods primarily relate to estimated tax, penalties, and interest associated with uncertain tax positions. During the fiscal year ended June 30, 2019 we recognized2023, compared with a federalnet income tax benefit in the amountexpense of approximately $23,000 that related to$519,000 for the realizationfiscal year ended June 30, 2022.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. Beginning in 2014,During the three months ended March 31, 2023, we determined that due to the worsening global macro-economic conditions and heightened levels of inflation, including fears of recession, coupled with the effects from worldwide political unrest and the ongoing economic impact from the COVID pandemic, the risks associated with these conditions led us to conclude that it was not more likely than not we would have sufficient future taxable income to utilize our deferred tax assets. Additionally, we determined that the positive evidence was no longer sufficient to offset available negative evidence, outweighedprimarily as a result of the positivepre-tax operating losses incurred during the three- and nine-month periods ended March 31, 2023. Consequently, we established a full valuation allowance against our deferred tax assets. WeAs of June 30, 2023, we determined that sufficient negative evidence continued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize our deferred tax assets, and therefore, we maintained a full valuation allowance against its deferred tax assets.
Conversely, as of June 30, 20202022, we determined at that time our expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that included significant management estimates and June 30, 2019.
Our statutory tax rate asassumptions, would continue to be sufficient to result in full utilization of the fiscal year ended June 30, 2020 is 22.11%our remaining federal net operating loss carryforwards and consistscertain of the federal income tax rate of 21% and a blended state income tax rate of 1.11%, net of the federal benefit.
For discussion of the effects of the Tax Cuts and Jobs Act, or the Tax Act, the CARES Act, and the State of North Carolina General Assembly Senate Bill 704: COVID-19 Recovery Act, or the NC COVID-19 Relief Act, on our provision for income taxes and deferred tax assets see Note 12prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of June 30, 2022, to conclude that it was more likely than not deferred tax assets of approximately $5.85 million remained realizable. However, we further determined that sufficient negative evidence continued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize certain of our deferred tax assets. Therefore, we continued to maintain a valuation allowance against the deferred tax assets relating to certain state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of when it would generate positive taxable income to utilize the associated deferred tax assets. In addition, a valuation allowance remained against certain deferred tax assets relating to operating loss carryforwards relating to our consolidated financial statementsdormant subsidiary located in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.Hong Kong.
Certain Operating Metrics
We believe that certain metrics are key to our business, including but not limited to monitoring our average order value, or AOV, average advertising spend per customer, and repeat customers. The following operating metrics, which weprimarily in our transactional website charlesandcolvard.com. We use the AOV computation in part to make strategic digital marketing relatedmarketing-related decisions and to monitor the performance and return on investment of our marketing activities, areactivities. Our AOV is based on financial results and customer-related data for charlesandcolvard.com, LLC, a wholly-ownedour wholly owned subsidiary of Charles & Colvard, Ltd., for the fiscal year ended June 30, 2020:
AOV is estimated to be approximately $1,000, based on charlesandcolvard.com revenue, net of returns, divided by the total number of customer orders.
Average ad spend per new customer is estimated to be approximately $275, based on the total advertising spend focused on charlesandcolvard.com traffic divided by the number of first-time customer orders.
Repeat customers represent approximately 17% of charlesandcolvard.com’s total customer orders, based on customer email addresses.
through which we operate our primary transactional website. Our calculation for AOV is sensitive to several factors, including sales volume and product mix. Therefore, we believe that our AOVthis metric may vary widely going forward as we respond to everever- changing consumer demand and provide the products – that may have widely variable price points – which our audiences are looking for. Likewise, as we continueseeking.
For the fiscal years ended June 30, 2023 and June 30, 2022, our AOV, based on charlesandcolvard.com revenue, net of returns, divided by the total number of customer orders, is estimated to investbe approximately $1,100 in our advertising and marketing communication channels and broaden the underlying content types, notwithstanding the effects of the COVID-19 pandemic, we expect our average ad spend per customer to increase going forward. Finally, as our Loyalty Program is revived, we expect the percentage of people enrolled in our program to continue increasing over time.each year.
The following operating metrics, whichAn additional metric that we use to manage charlesandcolvard.com operations and to also make strategic digital marketing related decisions for our transactional website is period-over-period revenue growth. While we believe this metric is sensitive to many factors and may vary in future periods, we expect to continue to monitor and base our marketing-related investments in part on charlesandcolvard.com revenue growth going forward.
For the performance and return on investment of our marketing activities, are based on financial results and customer-related data forfiscal year ended June 30, 2023, we experienced a 20% year-over-year decline in charlesandcolvard.com LLC,revenue compared to revenue for the fiscal year ended June 30, 2020 compared to the fiscal year ended June 30, 2019:2022.
1% year-over-year growth in charlesandcolvard.com revenue.
2.2% year-over-year growth in social media followers; 5% year-over-year growth in opt-in email subscribers.
For each of the fiscal years ended June 30, 2020 and 2019, gross margin (defined as net sales less product line cost of goods sold) for our Online Channels segment was 58% of Online Channels net sales.
Liquidity and Capital Resources
As the world continues to adapt to the COVID-19 pandemic and its effects on global economics and business operations, the outbreak of the coronavirus and the impact that the COVID-19 pandemic has had on the wider economy has placed unprecedented pressures on U.S. businesses including our own. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets, which, depending on future developments, could adversely impact our capital resources and liquidity in the future.
We remain increasingly focused on potential liquidity issues and debt incurrence capacity. Accordingly, faced with the prospect of significantly declining cash flows, we evaluated the possibility of raising additional capital through loans, debt or access to other capital transactions. In March 2020, the CARES Act was signed into law, which, along with earlier issued Internal Revenue Service, or IRS, guidelines, provides for deferral of certain taxes. The CARES Act, among other things, contains economic relief programs in the form of loans and grants for small businesses. In May 2020, the NC COVID-19 Relief Act was signed into law, which provides for a tax credit towards certain employer contributions to the North Carolina Unemployment Insurance Fund.
Capital Structure and Long-Term Debt
On June 18, 2020, we received the proceeds from the PPP Loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. The PPP Loan in the principal amount of $965,000 was disbursed by the Lender pursuant to a promissory note, or the Promissory Note, issued by us on June 15, 2020.Long-Term Liquidity and Capital Structure
Under the CARES Act and the Promissory Note, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during the 24-week period beginning on the date of first disbursement of the PPP Loan. For purposes of the CARES Act, payroll costs exclude cash compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven amount can be attributable to non-payroll costs. Although we currently believe that our use of the PPP Loan will meet the conditions for forgiveness of the PPP Loan, we cannot assure our future adherence to the forgiveness criteria and that the PPP Loan will be forgiven, in whole or in part.
In April 2020, we also applied for capital relief pursuant to the Economic Injury Disaster Loan Program, or the EIDL Program, also under the CARES Act and administered by the SBA. In June we were notified by the SBA that our EIDL Program application was approved by the SBA. However, due to the limited amount of capital that would have been available to us under the EIDL Program, we did not further pursue those funds.
The CARES Act provides that existing AMT credit carryforwards are now eligible for acceleration and refundable AMT credits are to be completely refunded to companies for taxable years beginning in 2019, or by election, taxable years beginning in 2018. Accordingly, we have elected to have the AMT tax completely refunded and have filed a tentative refund claim for the remaining AMT tax credit. Consequently, the remaining balance of our AMT credit refund in the amount of approximately $270,000 is expected to be completely refundable. Accordingly, the full amount of our AMT credit refund has been classified as current as of June 30, 2020.
We also intend to take advantage of COVID-19 related tax credits for required paid leave provided by us. These eligible tax credits are determined by qualified emergency paid sick and expanded family and medical leave wages pursuant to the Families First Coronavirus Response Act, or FFCRA. Under FFCRA, we have provided employees with paid federal sick and expanded family and medical leave benefits for which we may be reimbursed by the government through payroll tax credits. Qualifying wages for tax credit purposes under FFCRA are those paid to an employee who takes leave under FFCRA for a qualifying reason, up to the applicable per diem and aggregate payment caps. Applicable tax credits also extend to the employer’s share of amounts paid or incurred to maintain a group health plan.
Finally, as permitted by the NC COVID-19 Relief Act, we will receive a tax credit towards our contributions to the North Carolina Unemployment Insurance Fund, which will also serve to further enhance future cash flow.
As a component of our liquidity and capital structure, we have an effective shelf registration statement on Form S-3 on file with the SEC whichthat allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which approximately $13.99 million remains available after giving effect to our June 2019 public offering, including the impact of the partial exercise of the underwriters’ over-allotment option, described below.all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which aremay be in turn, subject to, among other things, the potential disruption and volatility beingthat may be caused by the ongoing COVID-19 pandemic.effects of rising inflation rates and fear of recession. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Financing Activities
Long-Term Financing Activities
In June 2019, accordance with authority granted by our Board of Directors on April 29, 2022, we completed an underwritten public offeringcan repurchase up to approximately $5.00 million in shares outstanding of 6,250,000 newly issued shares ofour common stock at a price toover the public of $1.60 per share, pursuant to our effective shelf registration statement on Form S-3. Net proceeds from the offering were approximately $9.06 million, net of the underwriting discount and fees and expenses.three-year period ending April 29, 2025. Pursuant to the terms of the underwriting agreement entered into in connectionrepurchase authorization, the common stock share repurchases are generally at the discretion of management. As we repurchase our common shares, which have no par value, we report such shares held as treasury stock on the accompanying consolidated balance sheets as of June 30, 2023 and 2022, with this offering, the underwriters were granted a 30-day option to buy up to an additional 937,500purchase price recorded within treasury stock.
During the fiscal years ended June 30, 2023 and 2022, we repurchased 358,116 shares and 30,287 shares, respectively, of our common stock to cover over-allotments. Pursuantfor an aggregate price of $451,815 and $38,164, respectively, pursuant to the partial exercise of the underwriters’ over-allotment option, in July 2019, we issued an additional 630,500 shares of our common stock at a price of $1.60 per share for net proceeds of approximately $932,000, net of the underwriting discount and fees and expenses of approximately $77,000. After giving effect to the partial exercise of the over-allotment option, we sold an aggregate of 6,880,500 shares of our common stock at a price of $1.60 per share with total gross proceeds of approximately $11.01 million, before deducting the underwriting discount and fees and expenses of approximately $1.02 million. During early Fiscal 2020, we began using the aggregate net proceeds of approximately $9.99 million from the offering for marketing and for general corporate and working capital purposes. However, in response to the COVID-19 pandemic and its impact on consumer confidence and spending, management drastically reduced related advertising and digital marketing expenditures in mid-March 2020.repurchase authorization.
As discussed above, on June 18, 2020 we received a PPP Loan in the principal amount of $965,000 from the Lender pursuant to a Promissory Note issued by us on June 15, 2020. The Promissory Note matures June 18, 2022 and may be extended with the consent of the Lender under the provisions of the CARES Act. The Promissory Note bears interest at a fixed rate of 1% per annum. Pursuant to the terms of the Promissory Note, monthly principal and interest payments in the amount of approximately $41,000 will commence on April 1, 2021. For financial reporting purposes as of June 30, 2020, the classification of the current maturity of this long-term debt assumes there will be no principal forgiveness and principal repayment for the full outstanding principal amount of the PPP Loan will be spread in equal monthly installments over the period from April 1, 2021 through the maturity date of the Promissory Note.
We did not provide any collateral or guarantees for the PPP Loan, nor did we pay any facility charge to obtain the PPP Loan. The Promissory Note provides for customary events of default, including, among others, those relating to failure to make payment and breaches of representations. We may prepay the principal of the PPP Loan at any time without incurring any prepayment charges.
Operating Activities and Cash Flows
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of June 30, 2020,2023, our principal sources of liquidity were cash and cash equivalents and restricted cash totaling $14.62$10.45 million, trade accounts receivable of $671,000,$380,000, and net current inventory of $7.44$7.48 million, as compared to cash and cash equivalents totaling $13.00of $15.67 million, trade accounts receivable of $1.96$2.22 million, and net current inventory of $11.91$11.02 million as of June 30, 2019. As described more fully herein, we2022. We also have long-term debt in the amount of $965,000, of which $193,000 is classified as its current maturity as of June 30, 2020, andhad access during Fiscal 2023 to a $5.00 million asset-based revolvingcash collateralized line of credit facility, with White Oak, or the White OakJPMorgan Chase Credit Facility.Facility, that we obtained effective July 9, 2021, as amended July 28, 2022 and amended further effective June 21, 2023, from JPMorgan Chase Bank, N.A., or JPMorgan Chase.
During the fiscal year ended June 30, 2020,2023, our working capital decreased by approximately $5.75$11.55 million to $17.42$17.51 million from $23.17$29.06 million at June 30, 2019.2022. As described more fully below, the decrease in working capital at June 30, 20202023 is primarily attributable to a net decrease in our cash, cash equivalents, and restricted cash, a decrease in our allocation of inventory from long-term to short-term due to a lower expected sell through of inventory on hand in the upcoming period, a decrease in our accounts receivable, an increase in short-term operating lease liabilities resulting from the adoption of the new lease accounting standard as of July 1, 2019, an increaseour accounts payable, a decrease in accruedour prepaid expenses and other liabilities, an increase in accounts payable,assets, and an increase in the current maturity of our long-term debt.short-term operating lease liabilities. These factors were offset partially by an increasea decrease in our cash, cash equivalents, and restricted cash resulting from cash provided by operating and financing activities and an increase in prepaidaccrued expenses and other assets. liabilities.
Cash used for investing activities was principally for construction-in-process expenditures related to our retail expansion program and the completion of the construction of our first Signature Showroom and other leasehold improvements in our corporate office.
Cash used for financing activities is related to repurchases of our common stock pursuant to the terms of an effective stock repurchase authorization.
During the fiscal year ended June 30, 2019,2023, approximately $3.88 million of cash was used by our working capital increased by approximately $10.91 million from $12.27 million at June 30, 2018. As described more fully below, the increase in working capital at June 30, 2019 is primarily attributable to an increase inoperations. The primary drivers of our cash cash equivalentsflows from operations were a net loss in the amount of approximately $19.58 million and restricted cash resulting from cash provided by financing activities from our public offering described above and cash provided by our operations, increasesa decrease in accounts receivable and in our allocation of inventory to short-term from long-term as well as in prepaidaccrued expenses and other assets. The increase in working capital is also attributable to decreases in accounts payable.liabilities of approximately $927,000. These factors were offset partially by increases in accruedthe favorable impact of approximately $12.8 million of non-cash expenses driven by the deferred tax valuation allowance, and other liabilities.
During the
fiscalinventory write-down recorded during the year ended June 30,
2020, approximately $249,000 of cash was provided by our operations. The primary drivers underlying the cash provided by our operating activities were2023; a decrease in accounts receivable of
$1.32$1.77 million; a decrease in prepaid expenses and other assets of
$490,000;$893,000; a decrease in inventory during year ended June 30, 2023 of $755,000; and an increase in accounts payable of
$469,000; and an increase in accrued expenses and other liabilities of $109,000. In addition, non-cash items totaling $6.78 million also had a favorable impact on our cash flow from operations during the fiscal year ended June 30, 2020. These factors were offset partially by the unfavorable effect of our net loss in the amount of $6.16 million and an increase in inventory of approximately $2.76 million resulting from lower quantities of inventory items sold as a result of lower period sales stemming from the impact of the COVID-19 pandemic. During the fiscal year ended June 30, 2019, $917,000 of cash was provided by our operations. The primary drivers of the cash generated by our operations were net income of $2.28 million and an increase in accrued liabilities of $572,000. In addition, non-cash items totaling $1.51 million also had a favorable impact on our cash flow from operations during the fiscal year ended June 30, 2019. These factors were partially offset by an increase in inventory of $2.30 million; a decrease in accounts payable of $799,000; an increase in accounts receivable of $328,000; and an increase in prepaid expenses and other assets of $14,000. The inventory increases during the fiscal years ended June 30, 2020 and 2019 were, in part, due to the purchase of new raw material SiC crystals during each fiscal year then ended pursuant to the Supply Agreement.
During the fiscal year ended June 30, 2020, accountsAccounts receivable decreased principally due to the decreased level of sales on credit during the three months ended June 30, 2023, as compared with the sales during the third and fourth quarters, as a result of the effects that the COVID-19 pandemic and the impact that the global economy had on our Traditional segment customers. Cash collections on sales made during our first and second fiscal quarters, which reflect robust year-end holiday sales, remained strong. During the fiscal year endedperiod leading up to June 30, 2019, accounts receivable increased principally as a result of the increased level of sales during our third and fourth fiscal quarters.
As a result of the COVID-19 pandemic,2022. From time to time, we have offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy customers during the third and fourth quarters of Fiscal 2020. Because of the ongoing impact of the pandemic on the global economy, the extension of these terms may not immediately increase liquidity as a result of ongoing current-period sales, which we expect to continue to be pressured due to the effects of the ongoing COVID-19 pandemic.sales. In addition, we believe our competitors and other vendors in the wholesale jewelry industry have expanded their use of extended payment terms and, in aggregate, we believe that, through our use of extended payment terms, we provide a competitive response in our market during the current global economic environment. We believe that we are unable to estimate the impact of these actions on our net sales, but we believe that if we ceased providing extended payment terms, we believe that we would not be at a competitive disadvantage for some Traditional segment customers in the marketplace during this economic period and that our net sales and profits would likely be adversely impacted.
During the fiscal year ended June 30, 2020,2023, prepaid expenses and other assets increaseddecreased principally as a result of a decrease in the right-of-use asset associated with leasehold improvements in connection with the lease for our corporate headquarters facilities (which for financial reporting purposes is classified with prepaid expenses and other assets in the consolidated statement of cash flows) and the timing of certain vendor payments, principallyprimarily for insurance-related premium expenses, in advance of goods or services received. During the fiscal year ended June 30, 2020,2023, accrued expenses and other liabilities decreased principally due the timing of payments for certain incurred expenses, principally for compensation and related benefits, and a decrease in the operating lease liability associated with the lease for our corporate headquarters facilities. During the fiscal year ended June 30, 2023, accounts payable increased primarily as a result of the timing of paymentpayments for costs associated with inventory-related purchases and professional services incurred and due under our vendors’ payment terms. Likewise, accrued expenses and other liabilities increased principally due to the severance accrual in connection with our June 2020 management reorganization and workforce reduction as well as increases in deferred revenue related to payments received prior to shipment of good from customers. incurred.
During the fiscal year ended June 30, 2019,2022, our working capital decreased by approximately $1.08 million to $29.06 million from $30.14 million at June 30, 2021. As described more fully below, the decrease in working capital at June 30, 2022 is primarily attributable to an increase in our accounts payable, a decrease in our allocation of inventory from long-term to short-term due to a lower expected sell through of inventory on hand in the upcoming period, an increase in our short-term operating lease liabilities; and a net decrease in our cash, cash equivalents, and restricted cash. These factors were offset partially by a decrease in our accrued expenses and other liabilities, increasedan increase in our accounts receivable, and an increase in our prepaid expenses and other assets. Our cash used for investing activities principally due to the timing of paymentsfor construction-in-process expenditures related to our retail expansion program and the construction of our first Signature Showroom and other leasehold improvements in our corporate offices was offset partially by cash provided by net financing activities.
During the fiscal year ended June 30, 2022, approximately $573,000 of cash was provided by our operations. The primary drivers of our cash flows from operations were the favorable effect of net income in the amount of $2.37 million, which also included $1.87 million of non-cash expenses; an increase in accounts payable of $1.63 million; and an increase in prepaid expenses and other assets of $927,000. These factors were offset partially by an increase in inventory of $4.54 million; a decrease in accrued compensationexpenses and related benefits, including year-end bonuses, as well as increasedother liabilities of $1.20 million; an increase in accounts receivable of $484,000; and a decrease in accrued sales and useincome taxes associated with higher current sales levels and additional liabilities for jurisdictions where we have reached sales tax nexus.of $10,000.
We manufactured approximately
$10.64$6.76 million and
$14.09$9.23 million in loose jewels and
$7.82$12.75 million and
$7.66$16.98 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 fiscal years ended June 30,
20202023 and
2019,2022, respectively. We expect our purchases of precious metals and labor to fluctuate in conjunction with the levels of our finished jewelry business. In addition, the price of gold has
increasedfluctuated significantly over the past decade, resulting in higher retail price points for gold jewelry. Because the market
priceprices of gold and other precious metals
isare 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 reduced sales levels during prior periods in which the purchase commitments were in effect, have resulted in levels of inventories that are higher than we might otherwise maintain. As of June 30, 20202023 and 2019, $23.192022, $19.28 million and $21.82$22.49 million, respectively, of our inventories were classified as long-term assets. Loose jewel sales and finished jewelry that we manufacture will utilize both the finished goods loose jewels currently on-hand and, as we deplete certain shapes and sizes, our on-hand raw material SiC crystals of $3.53 million$422,000 and new raw material that we may purchase pursuant to the Supply Agreement.
A more detailed description of our inventories is included in Note 56 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
We made income tax payments of approximately $2,000$5,900 and $6,000$0 during the fiscal years ended June 30, 20202023 and 2019,2022, respectively. As of June 30, 20202023 and 2019,2022, we had approximately $309 and $102,000, respectively, of remaining federal income tax credits all of which expire in 2021 and can be carried forward to offset future income taxes. As of June 30, 2020 and 2019, we also had federal tax net operating loss carryforwards of approximately $23.72$24.76 million and $23.39$16.53 million, respectively, expiring between 20222034 and 2037, or that have no expiration, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $20.12$20.01 million and $20.20$19.77 million, respectively, expiring between 2023 and 2033;2035; and various other state tax net operating loss carryforwards expiring between 20212027 and 2040, which can be used to offset against future state taxable income.
Contractual CommitmentShort-Term Capital Resources
On December 12, 2014, we entered into the Supply Agreement with Cree. Under the 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 Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties. Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of our premium moissanite product, Forever One™ and provided us with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following the expiration of the initial term. In addition, the amendment to the Supply Agreement established a process by which Cree may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Cree has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 2025 is approximately $52.95 million, of which approximately $36.60 million remains to be purchased as of June 30, 2020.
For more information regarding the second amendment to our Supply Agreement, executed on August 26, 2020, see Note 15 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
During the fiscal years ended June 30, 2020 and 2019, we purchased approximately $7.47 million and $8.91 million, respectively, of SiC crystals from Cree. Going forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, together with future cash expected to be provided by operating activities and, if necessary, our White Oak Credit Facility, to finance our purchase commitment under the Supply Agreement, as amended.
Line of Credit
OnEffective July 13, 2018,7, 2021, we andobtained from JPMorgan Chase our wholly owned subsidiary, charlesandcolvard.com, LLC, collectively referred to as the Borrowers, obtained the $5.00 million asset-based revolving White Oakcash collateralized JPMorgan Chase Credit Facility. The White OakJPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions. acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The White OakJPMorgan Chase Credit Facility which matures onis secured by a cash deposit in the amount of $5.05 million held by JPMorgan Chase as collateral for the line of credit facility. Effective July 13, 2021, is28, 2022, the JPMorgan Chase Credit Facility was amended to, among other things, extend the maturity date to July 31, 2023, and append our obligations under the JPMorgan Chase Credit Facility to be guaranteed by our wholly owned subsidiaries, Charles & Colvard Direct, LLC, another of our wholly owned subsidiaries. Undercharlesandcolvard.com, LLC, and moissaniteoutlet.com, LLC. Effective June 21, 2023, the terms of the White OakJPMorgan Chase Credit Facility was amended further to extend the Borrowers must maintain at least $500,000 in excess borrowing availability at all times. The White Oakmaturity date to July 31, 2024.
Each advance under the JPMorgan Chase Credit Facility, contains no other financial covenants.
Advancesas amended, accrues interest at a rate equal to the sum of JPMorgan Chase’s monthly secured overnight financing rate, or the SOFR rate, to which JPMorgan Chase is subject with respect to the adjusted SOFR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum and an unsecured to secured interest rate adjustment of 0.10% per annum. Prior to its amendment on July 31, 2022, each advance under the White OakJPMorgan Chase Credit Facility may be either revolving or non-revolving. During the first year of the term of the White Oak Credit Facility, revolving advanceswould have accrued interest at a rate equal to one-month LIBOR (resetJPMorgan Chase’s monthly and subject to a 1.25% floor) plus 3.75%, and non-revolving advances accrued interest at such LIBOR rate multiplied by a statutory reserve rate for eurocurrency funding to which JPMorgan Chase is subject with respect to the adjusted LIBOR rate as established by the U.S. Federal Reserve Board, plus 4.75%. Thereafter, the interest margins will reduce upon our achievementa margin of a specified fixed charge coverage ratio. However, advances are in all cases subject to a minimum interest rate of 5.50%.1.25% per annum. Interest is calculated monthly on an actual/360360-day basis and payable monthly in arrears. Principal outstanding during an event of default, at JPMorgan Chase’s option, accrues interest at a rate 2%of 3% per annum in excess of the rate otherwise applicable.above rate. Any advance may be prepaid in whole or in part at any time.
WeThe JPMorgan Chase Credit Facility is evidenced by a credit agreement, as amended, between us and JPMorgan Chase, or the JPMorgan Chase Credit Agreement, dated as of June 21, 2023, and customary ancillary documents, in the principal amount not to exceed $5.00 million at any one time outstanding and a line of credit note, or the JPMorgan Chase Line of Credit Note, in which we promise to pay on or before July 31, 2024, the amount of $5.00 million or so much thereof as may be advanced and outstanding. In the event of default, JPMorgan Chase, at its option, may accelerate the maturity of advances outstanding under the JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Agreement and ancillary documents contain customary covenants, representations, fees, debt, contingent obligations, liens, loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, changes in control, as well as indemnity, expense reimbursement, and confidentiality provisions.
In connection with the JPMorgan Chase Credit Facility, effective July 7, 2021, we incurred a non-refundable origination fee in the amount of $10,000 that was paid in full to JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12, 2021. There was no origination fee paid to JPMorgan Chase in connection with the amended JPMorgan Chase Credit Facility, dated July 28, 2022 and June 21, 2023.
Events of default under the JPMorgan Chase Credit Facility include, without limitation, a default, event of default, or event that would constitute a default or event of default (pending giving notice or lapse of time or both), of any provision of the JPMorgan Chase Credit Agreement, the JPMorgan Chase Line of Credit Note, or any other instrument or document executed in connection with the JPMorgan Chase Credit Agreement or with any of our indebtedness, liabilities, and obligations to JPMorgan Chase or would result from the extension of credit to us by JPMorgan Chase.
As of June 30, 2023, we had not borrowed against the White OakJPMorgan Chase Credit Facility.
More detailed descriptions of our JPMorgan Chase Credit Facility are included in Note 11 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
Long-Term Capital Commitments
Contractual Agreement
On December 12, 2014, we entered into the Supply Agreement with Wolfspeed. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Wolfspeed, and Wolfspeed 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 Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties. Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of our premium moissanite product, Forever One™ and provided us with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following the expiration of the initial term. In addition, the amendment to the Supply Agreement established a process by which Wolfspeed may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Wolfspeed has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 2025 is approximately $52.95 million, of which approximately $24.75 million remains to be purchased as of June 30, 2020. As a result of our diminished borrowing base, which is tied2023.
For more information regarding the second amendment to our accounts receivable, our ability to draw down funds from the White Oak Credit Facility is currently restricted.
A more detailed description of the White Oak Credit Facility is included inSupply Agreement, executed on August 26, 2020, see Note 10 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
During the fiscal years ended June 30, 2023 and 2022, we purchased approximately $1.80 million and $6.29 million, respectively, of SiC crystals from Wolfspeed. The Company has made no purchases of SiC crystals during the nine-month period ended June 30, 2023 while in discussions regarding the terms of the Supply Agreement. Such discussions included potential renegotiation of the Supply Agreement, but the parties have not reached an agreement.
43On July 28, 2023, Wolfspeed initiated a confidential arbitration against us for breach of contract claiming damages, plus interest, costs, and attorneys’ fees. Wolfspeed has alleged that the Company failed to satisfy the purchase obligations provided in the Supply Agreement for Fiscal 2023 in the amount of $4.25 million and failed to pay for $3.30 million of SiC crystals Wolfspeed delivered to us. Wolfspeed further alleges that the Company intends to breach our remaining purchase obligations under the Supply Agreement, representing an additional $18.5 million in alleged damages.
While the Company is evaluating Wolfspeed’s claims, we dispute the amount sought, and we intend to vigorously defend our position, including by asserting rights and defenses that the Company may have under the Supply Agreement, at law and in equity. A hearing has not yet been scheduled . The final determinations of liability arising from this matter will only be made following comprehensive investigations, discovery and arbitration processes.
Going forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, together with future cash expected to be provided by operating activities to finance our purchase commitment under the Supply Agreement, as amended.
For more information in connection with the Wolfspeed arbitration matter, see Part I, Item 3, “Legal Proceedings” and Note 10 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
Liquidity and Capital Trends
We believe that our existing cash and cash equivalents and access to other working capital resources, including but not limited to the access to federal government economic relief programs pursuant to the CARES Act, including our existing PPP Loan and the available conditional forgiveness of the PPP Loan in whole or in part, access to available federal and state tax-related considerations, the issuance of equity securities, and future cash expected to be provided by operating activities combined will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.
From a long-term perspective, we believe that our ongoing access to capital markets, including but not limited to the issuance of equity securities or even potential debt securities, coupled with cash provided by operating activities in future periods beyond the next twelve months, will continue to provide us with the necessary liquidity to meet our long-term working capital and capital expenditure requirements.
In connection with our short- and long-term capital resources, we have an effective shelf registration statement on Form S-3 on file with the SEC that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of rising inflation and fears of recession. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Our future capital requirements and the adequacy of available funds will depend on many factors, including the ongoing spreaduncertainty surrounding rising inflation and fears of COVID-19recession that could lead to further disruption and volatility in the global capital markets as well as its impact on our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewels and lab grown diamond business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and the risk factors described in more detail in “Risk Factors” in Part I, Item 1A, of this Annual Report on Form 10-K. Currently, we have the White OakJPMorgan Chase Credit Facility, as amended, through its expiration on July 13, 2021, that31, 2024, which we believe would 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.
Critical Accounting Policies and Estimates
TheOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which we prepared in accordance with accounting principles generally accepted in the United States, of America, or U.S. GAAP. The future effects of the COVID-19 pandemic on our results of operations, cash flows, and financial position continue to remain unclear. The preparation of these 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 including current economic conditions resulting from the COVID-19 pandemic, 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, those actual results of operations may materially differ. The most significant estimates impacting our consolidated financial statements relate to the valuation and classification of inventories, accounts receivable reserves, deferred tax assets, uncertain tax positions, and revenue recognition. We also have other policies that we consider key accounting policies, but these policies typically do not require us to make estimates or judgments that are difficult or subjective.
Valuation and Classification of Inventories
Inventories are stated at the lower of cost or net realizable value on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs.
Any inventory on hand at the measurement date in excess of our current requirements based on historical and anticipated levels of sales is classified as long-term on our Consolidated Balance Sheets. The classification of our inventory as either current or long-term inventory requires us to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of sales over the next 12 months.
Our 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. Our moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms”, that vary depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of June 30, 2020 and 2019, work-in-process inventories issued to active production jobs approximated $1.34 million and $1.23 million, respectively.
Each accounting period we evaluate the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves,inventory write-downs, which also include significant estimates by management.management for obsolescence, shrinkage, and rework. Obsolescence reserves are based on an estimated loss percentage factor, determined by a combination of management’s analysis of current production-related conditions, coupled with historical work-in-process and customer-related obsolescence experience over time for specific product gemstones and finished jewelry affected by these conditions. Shrinkage reserves are based on an estimated loss percentage factor, determined by a combination of management’s analysis of current gemstones in production status and on memo at third-party locations, coupled with historical work-in-process shrinkage-related experience over time for specific product gemstones and jewelry impacted by these conditions. The rework reserves are also based on an estimated loss percentage factor, determined by a combination of management’s analysis of current production-related conditions, coupled with historical work-in-process rework experience over time for specific previously finished gemstones affected by these conditions.
See Note 2 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K under the Inventories caption for a further description of our inventories accounting policy and see Note 5 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for more detailed information relating to our accounting for inventory-related reserves.
Revenue Recognition
Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve this principle, we perform the following five steps: (i) identification of a contract with a customer; (ii) identification of any separate performance obligations; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when we have satisfied the underlying performance obligations. We recognize substantially all of our revenue at a point in time when control of our goods has passed to the customer with the exception of consigned goods. We consider our performance obligation related to the shipment of goods satisfied at the time this control is transferred. We also have a variable consideration element related to most of our contracts in the form of product return rights. At the time revenue is recognized, an allowance for estimated returns is established and any change in the allowance for returns is charged against net sales in the current period. For our Traditional segment customers, (excluding those of charlesandcolvard.com), the returns policy generally allows for the return of jewels and finished jewelry with a valid reason for credit within 30 days of shipment, except for returns during the COVID-19 pandemic during which weshipment. Customers on both our charlesandcolvard.com and moissaniteoutlet.com websites may also generally extended the return period for an additional 30 days. Our charlesandcolvard.com customers may return purchases for any reason within 6030 days, respectively, of the shipment date in accordance with our returns policypolicies as disclosed on theour charlesandcolvard.com website.and moissaniteoutlet.com websites. Periodically, we ship loose jewel goods and finished goods to Traditional segment customers on consignment terms. Under these consignment terms, the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year. Our Online Channels segment and Traditional segment customers are generally required to make payments on consignment shipments within 30 to 60 days upon the customer informing us that such inventory will be kept by the customer. Accordingly, we do not recognize revenue on these consignment transactions until the earlier of (i) the customer informing us that the inventory will be kept by the customer; (ii) the expiration of the right of returns period; or (iii) the customer informing us that the inventory has been sold.
See Note 2 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K under the Revenue Recognition caption for additional information regarding the underlying required disclosures arising from contracts with customers as well as a more detailed description of our revenue recognition accounting policy.
Accounts Receivable Reserves
Estimates are used to determine the amount of two reserves against trade accounts receivable. The first reserve is an allowance for sales returns. At the time revenue is recognized, we estimate future returns using a historical return rate that is reviewed quarterly with consideration of any contractual return privileges granted to customers including any current extenuating economic conditions resulting from the COVID-19 pandemic, and we reduce sales and trade accounts receivable by this estimated amount. Our allowance for sales returns was $704,000 and $746,000 at June 30, 2020 and 2019, respectively.
The second reserve is an allowance for doubtfuluncollectible accounts for the measurement of estimated credit losses resulting from the failure of our customers to make required payments. This allowance reduces trade accounts receivable to an amount expected to be collected. Based We use a current expected credit losses model whereby we estimate credit losses expected over the life of our pool of exposures based on historical percentages of uncollectible accounts, by aging category, changes in payment history, and facts and circumstances, including any current extenuating economic conditions, resulting from the COVID-19 pandemic, regarding specific accounts that become known to, managementor forecasted by, us to be uncollectible when evaluating the adequacy of the allowance for doubtful accounts, weuncollectible accounts. We determine a credit loss percentage based on the age of the receivable that we deem uncollectible.uncollectible related to potential credit losses. We record an allowance for such credit losses, which includes a provision for expected losses based on historical write-offs, adjusted for current conditions as deemed necessary, reasonable and supportable forecasts about future conditions, and a specific reserve for accounts deemed at risk. The allowance is then calculated by applying the appropriate percentage to each of our estimate for accounts receivable aging categories, with consideration given to individual customer account activity subsequent toas of the current period, including cash receipts, in determining the appropriate allowance for doubtful accountsbalance sheet date that ultimately will not be collected. Any changes in the current period. Any increases or decreases to this allowance are charged or credited, respectively, as a bad debt expense to generalreflected in the results of operations in the period in which the change occurs. We write-off accounts receivable and administrative expenses. the related allowance recorded previously when it becomes probable, based upon customer facts and circumstances, that such amounts will not be collected. We generally use an internal collection effort,efforts, which may include our sales personnel as we deemdeemed appropriate. After all internal collection efforts have been exhausted, we generally write offwrite-off the underlying account receivable.
Not applicable.