On December 12, 2014, the Company entered into an exclusive supply agreement (the “Supply Agreement”) with Cree, Inc. (“Cree”). Under the Supply Agreement, subject to certain terms and conditions, the Company agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of the Company’s required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties.
Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement was also amended to (i)(i) provide the Company with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following expiration of the initial term; (ii)(ii) establish a process by which Cree may begin producing alternate SiC material based on the Company’s specifications that will give the Company the flexibility to use the materials in a broader variety of its products; and (iii)(iii) permit the Company to purchase certain amounts of SiC materials from third parties under limited conditions.
On July 13, 2018, the Company and its wholly-owned subsidiary, charlesandcolvard.com, LLC (collectively, the “Borrowers”), obtained a $5.00 million asset-based revolving credit facility (the “White Oak Credit Facility”) from White Oak. The White Oak Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions. The White Oak Credit Facility, which matures on July 13, 2021, is guaranteed by Charles & Colvard Direct, LLC, a wholly-owned subsidiary of the Company. Under the terms of the White Oak Credit Facility, the Borrowers must maintain at least $500,000 in excess availability at all times. The White Oak Credit Facility contains no other financial covenants.
No stock-based compensation was capitalized as a cost of inventory during the three and six months ended December 31, 20192020 and 2018.2019.
The following is a summary of the stock option activity for the six months ended December 31, 2019:2020:
The total fair value of stock options that vested during the six months ended December 31, 20192020 was approximately $185,000.$613,000.
The following table summarizes information about stock options outstanding at December 31, 2019:2020:
Trade receivables potentially subject the Company to credit risk. Payment terms on trade receivables for the Company’s Traditional segment customers are generally between 30 and 90 days, though it may offer extended terms with specific customers and on significant orders from time to time. The Company extends credit to its customers based upon a number of factors, including an evaluation of the customer’s financial condition and credit history that is verified through trade association reference services, the customer’s payment history with the Company, the customer’s reputation in the trade, and/or an evaluation of the Company’s opportunity to introduce its moissanite jewels or finished jewelry featuring moissanite to new or expanded markets. Collateral is not generally required from customers. The need for an allowance for doubtful accounts is determined based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
At times, a portion of the Company’s accounts receivable will be due from customers that have individual balances of 10% or more of the Company’s total gross accounts receivable.
The following is a summary of customers that represent 10% or more of total gross accounts receivable as of the dates presented:
A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent greater than10% or equal to 10%more of total net sales for the periods presented:
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar words, although some forward-looking statements are expressed differently.
All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. You should be aware that although the forward-looking statements included herein represent management’s current judgment and expectations, our actual results may differ materially from those projected, stated, or implied in these forward-looking statements as a result of many factors including, but not limited to, the following:
Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our company.
| 1. | Our business, financial condition and results of operations could continue to be adversely affected by an ongoing COVID-19 pandemic and related global economic conditions; |
| 2. | Our future financial performance depends upon increased consumer acceptance, growth of sales of our products, and operational execution of our strategic initiatives; |
| 3. | The execution of our business plans could significantly impact our liquidity; |
| 4. | Our business and our results of operations could be materially adversely affected as a result of general and economic conditions; |
| 5. | The financial difficulties or insolvency of one or more of our major customers or their lack of willingness and ability to market our products could adversely affect results; |
| 6. | We face intense competition in the worldwide gemstone and jewelry industry; |
| 7. | We are subject to certain risks due to our international operations, distribution channels and vendors; |
| 8. | Our business and our results of operations could be materially adversely affected as a result of our inability to fulfill orders on a timely basis; |
| 9. | We are currently dependent on a limited number of distributor and retail partners in our Traditional segment for the sale of our products; |
| 10. | We rely on assumptions, estimates, and data to calculate certain of our key metrics and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business; |
| 11. | We may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation; |
| 12. | Seasonality of our business may adversely affect our net sales and operating income; |
| 13. | Our operations could be disrupted by natural disasters; |
| 14. | Our loan, pursuant to the Paycheck Protection Program, or the PPP Loan, under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or the SBA, may not be forgiven or may subject us to challenges and investigations regarding qualification for the loan; |
| 15. | We may not be able to adequately protect our intellectual property, which could harm the value of our products and brands and adversely affect our business; |
| 16. | Negative or inaccurate information on social media could adversely impact our brand and reputation; |
| 17. | Sales of moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control; |
| 18. | Our current customers may potentially perceive us as a competitor in the finished jewelry business; |
| 19. | Our failure to maintain compliance with The Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock; |
| 20. | We depend on an exclusive supply agreement, or the Supply Agreement, with Cree, Inc., or Cree, for substantially all of our silicon carbide, or SiC, crystals, the raw materials we use to produce moissanite jewels; if our supply of high-quality SiC crystals is interrupted, our business may be materially harmed; |
| 21. | If the e-commerce opportunity changes dramatically or if e-commerce technology or providers change their models, our results of operations may be adversely affected; |
| 22. | A failure of our information technology infrastructure or a failure to protect confidential information of our customers and our network against security breaches could adversely impact our business and operations; |
| 23. | If we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer; |
| 24. | Governmental regulation and oversight might adversely impact our operations; and |
| 25. | Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our company. |
Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur except as required by the federal securities laws, and you are urged to review and consider disclosures that we make in the reports that we file with the Securities and Exchange Commission, or SEC, that discuss other factors relevant to our business.
The following discussion is designed to provide a better understanding of our unaudited condensed consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. This information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019,2020, or the 20192020 Annual Report. Historical results and percentage relationships related to any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for future periods.
Overview
Our Mission
At Charles & Colvard, Ltd., we believe luxury can be both beautiful and conscientious. With innovative technology and sustainable practices, our goalmission is to lead a revolution inredefine the definition of real within the jewelry industry – delivering a brilliant product at extraordinary value balanced with environmental and social responsibility.for consumers everywhere. We believe fine jewelry can be accessible, beautiful, and conscientious.
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 lab created gemstone company specializing in fine jewelry. We manufacture, market, and distributesdistribute Charles & Colvard Created Moissanite® (which we refer to as moissanite or moissanite jewels) and on September 14, 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 fine jewelry market. OurCharles & Colvard is the original source of created 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 the addition of lab grown diamonds is a natural progression for the Charles & Colvard brand.
One of our unique differentiator,differentiators, 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. Charles & Colvard is the originator of lab-created moissanite, and weWe 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 gemstonesmoissanite jewels with responsibly-sourcedresponsibly sourced precious metals, we are delivering a uniquely-positioneduniquely positioned product line for the conscientious consumer. Our Caydia™ lab grown diamonds are hand selected by our Gemological Institute of America, or GIA, certified gemologists to meet Charles & Colvard’s uncompromising standards and validated by independent third-party experts. Our Caydia™ lab grown diamonds are available currently in E, F, and G color grades (based on the GIA’s color grading scale) with a minimum clarity in accordance with the GIA’s VS1 clarity classification along with excellent cut, polish, and symmetry. All of our Caydia™ lab grown diamonds are set with responsibly sourced precious metals.
Our strategy is to build a globally revered brand of lab created gemstones and finished jewelry that appealsappeal to a wide consumer audience andaudience. We believe this strategy leverages our advantageadvantages of being the original and leading worldwide source of moissanite.Charles & Colvard Created Moissanite® and offering a curated assortment of jewelry featuring Caydia™ lab grown diamonds, which we believe offers an ideal combination of quality and value. We believe a direct relationship with consumers is important to this strategy, which entails delivering tailored educational content, engaging in dialogue with our audience, and positioning our brand to meet the demands of today’s discerning consumer. In June 2019, we successfully completed an underwritten public offering
COVID-19 Update
The Year Aheadglobal outbreak of the coronavirus disease 2019, or COVID-19, was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place” and quarantine restrictions, and created significant disruption of the financial markets. Certain countries and jurisdictions, including some geographic areas of the U.S., have begun to return to significantly more stringent social, business, and travel-related restrictions due to the dramatic increase in new and variant strains of COVID-19 cases. Even in the absence of legal restrictions, businesses and individuals may voluntarily continue to limit in-person interactions and practice social distancing, and such behaviors may continue beyond the formal end of the pandemic. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location. We have taken measures to protect the health and safety of our employees, work with our customers and suppliers to minimize disruptions, reduce our expenses, and support our community in addressing the challenges posed by this ongoing COVID-19 pandemic. The pandemic continues to present unprecedented business challenges, and we have experienced impacts on our business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, delays in supplier deliveries, impacts of travel restrictions, access to some customer locations, the effects to net revenue related to reduced demand and store closures, and the impacts of remote work and adjusted work schedules.
The impact of the COVID-19 pandemic on the global and domestic economy is currently not fully known. Our focus foroperations have, to date, been operating under applicable governmental orders that have restricted activities in an effort to prevent further outbreak of COVID-19. As such, we are conducting business with certain modifications, including having non-operational personnel working remotely where applicable; limiting site access to necessary employees and critical third parties; enhancing the cleaning and disinfection of equipment and common areas, including engaging third-party specialists to disinfect personal workspaces; and issuing a quarantine policy regarding employees with COVID-19 symptoms or potential exposure, among other things. We continue to actively monitor the situation and may take further actions that alter our business operations including any that may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers, vendors, communities and other stakeholders.
Despite these challenges, our efforts, especially with regard to product fulfillment and supply chain management, helped to partially mitigate the disruptions caused by the COVID-19 pandemic on our operations in the second quarter of our fiscal year ending June 30, 2020,2021, or Fiscal 2021. In addition, strong net sales performance in our Online Channels segment during the calendar year-end 2020 holiday season and an overall reduction in costs and operating expenses resulting from cost-savings initiatives implemented by us have helped to offset the adverse impacts of the COVID-19 pandemic on our financial results in our second fiscal quarter. However, the ultimate impact of the COVID-19 pandemic on our operations and financial performance in Fiscal 2021 and future periods, including our ability to execute our business plan and strategic initiatives in the expected timeframe, remains uncertain and will depend on future developments, including the duration and recent increased spread of the coronavirus disease and related actions taken by the U.S. Government, state and local government officials, and international governments to prevent and manage disease spread, including the global roll-out of COVID-19 vaccines, all of which are uncertain and cannot be predicted. The long-term impacts of the COVID-19 pandemic on global consumer buying behaviors, which impacts demand for our products and services, are also difficult to predict.
For additional risks to the Company related to the COVID-19 pandemic, see “Part II, Item 1A. Risk Factors”, contained in our 2020 Annual Report.
Fiscal 2021 Financial Trends
Currently, our financial outlook for Fiscal 2021 is subject to various risks and uncertainties and is based on assumptions that we believe in good faith are reasonable, but which may be materially different from actual results. The full extent of the impact of the COVID-19 pandemic on our operational and financial performance remains uncertain and continues to depend on many factors outside of our control, including, without limitation: the timing, extent, trajectory and duration of the pandemic particularly in light of the recent dramatic increases in new and variant strains of COVID-19 cases in the U.S. to the extent such outbreak would impact the local geographic region in which our business principally operates; the development and availability of effective treatments and the long-term effects of the recently implemented global vaccine rollout; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for consumer products. We expect the COVID-19 pandemic will continue to have an adverse impact on our business, results of operations, financial condition, and liquidity during Fiscal 2021. Due to the potentially significant impact on our operations of the COVID-19 pandemic, including governmental responses to prevent further outbreak of COVID-19, current period results are not necessarily indicative of expected performance for other interim periods or our full Fiscal 2021. We expect the COVID-19 pandemic will continue to have an adverse impact on our business, results of operations, financial condition, and liquidity during Fiscal 2021.
As we manage through these challenging times, our strategic focus for Fiscal 2021 remains centered on the expansion of Charles & Colvard’s brand on a global scale. Asscale and to continue increasing the size of our business through top-line disciplined growth by leveraging existing resources. We believe that lab-created gemstones, including our premier moissanite products, Forever One™ and Moissanite by Charles & Colvard® and our lab grown diamond product line, Caydia™, are now being embraced by emerging generations, weworldwide markets. We also believe that our ability to establishelevate our own lab-created gemstones - including both moissanite jewels and lab grown diamonds - and the Charles & Colvard jewelry brand directly with consumers is key to our future success and ability to fuelcontinue fueling our growth. We willintend to elevate the Charles & Colvard name by making it synonymous with quality, value, and price. Notwithstanding the global challenges we face in Fiscal 2021, we plan to execute on our key strategies with a continuedan ongoing commitment to spending judiciously and generating sustainable earnings improvement.
We remain highly focused during Fiscal 2020 on increasing the reach ofdiscuss our brand – both domestically and internationally – and we are expanding our digital marketing initiatives on a global scale. Over the past two years, we have been directing our digital advertising spend to convert consumers whom we believed were already familiar with the Charles & Colvard brand or to customers for whom we had evidence were searching for the term moissanite. Therefore, in order to garner the attention of consumers not yet familiar with our brand but interested in the ethical appeal of lab-created gemstones or a value-priced bridal option that competes well with diamond, we have begun investing more resources and paying more attention to the new and hopefully soon-to-be-converted Charles & Colvard customer. We believe that work is done best through awareness strategies such as mobile social ads, influencer marketing programs, and strategic paid media placements.
We believe conditions in the current market indicate that it is critical to drive awareness and proliferate our brand at this decisive time when the competitive landscape is becoming more crowded. With the financial resources of our recent capital raise, we believe that we will now have the ability to expand our domestic footprint while building a digital presence in emerging international regions.
Our key strategies for Fiscal 2020 are as follows:
Expansion2021 in Part II, Item 7, “Management’s Discussion and Analysis of Brand Awareness. We plan to utilize digital advertising channelsFinancial Condition and other marketing strategies such as influencer marketing programs involving brand advocates to drive messaging to larger markets by wayResults of large social media followings, and Over-the-Top, or OTT, advertising platforms that include subscription video-on-demand, or SVOD, services like Netflix and Hulu. Through these channels, we believe that we will find new and compelling ways to engage the target consumer that is not yet familiar with our brand. We plan to expand our brand footprint on a global scale – engaging the consumer everywhere she shops.
International Sales Reach. We intend to balance our omni-channel sales strategy with regional-specific marketing programs, online channels growth initiatives, and relationships with select retail and distribution partners. We believe that expanded product offerings will ensure a variety of goods to meet the demands of today’s discerning consumers. We also plan to deploy distribution channels, marketing programs, and geographically-aligned curations to attract consumers and drive regional sales. Additionally, we expect cross-border trade promotions to remain a key strategy that we believe will drive global customers to Charles & Colvard’s corporate transactional site where we can offer the most comprehensive and brand-immersive experience.
Product Evolution. We believe being responsive to customer preferences has played a pivotal role in the rise of our Online Channels segment as the high-growth component of our business. We employ what we believe to be an agile product development philosophy that ensures a swift and fluid stream of new finished jewelry and gemstones that are responsive to customer demand. As we expand our reach to international locations – and as our Millennial and Gen-Z audiences mature – we plan to listen intently to market demand, measure carefully the costs and opportunities for our business, and strive to deliver the products that are responsive to our audiences’ choices.
Enhanced Customer Experience. We plan to evolve our technology platform and services to support a continually-enhanced customer experience. We intend to use analytics to make data-driven decisions that offer deeper personalization and more immersive shopping experiences. We plan to drive customer engagement, encourage repeat buyers, and grow our customer loyalty program, all of which we believe will support our ability to deliver an exemplary worldwide customer service experience.
Corporate Social Responsibility. We 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 the fiscal year ended June 30, 2019, or Fiscal 2019, we elevated our use of recycled precious metals in approximately 95% of all the finished jewelry we sourced. Going forward, we are working toward utilizing only recycled precious metalsOperations”, contained in our production lines. We also plan to carefully measure the environmental impact of our business operations with a goal toward improving our overall environmental footprint. We also want to positively impact the communities where we work and live – which we intend to continue supporting through philanthropic programs that advocate positive social change. We plan to create a higher level of transparency regarding these corporate social responsibility practices so that our customers and stakeholders will be able to track our efforts and hold us accountable to be an even better corporate citizen.
Fiscal 2020 – Second Quarter Highlights
In the three months ended December 31, 2019, we continued activating funds raised in our June 2019 underwritten public offering with the intent of expanding our brand’s awareness with consumers. We are investing these funds toward a blended strategy of what we refer to as mid- and top-of-funnel digital marketing strategies such as social media advertising campaigns, programmatic media programs, and influencer marketing engagements. Through these digital marketing channels, we believe that we will increase our opportunity to engage new targeted consumers that are not yet familiar with our brand. We believe as these new consumers embark on their customer journey with Charles & Colvard, there will be a natural time lag between their first exposure with our brand and conversion to a purchasing customer.
During the second quarter of Fiscal 2020, we began to see results of these efforts start to materialize in the form of online customer traffic and sales orders placed through our own transactional website, charlesandcolvard.com, as well as meaningful increases in these activities across our omni-channel sales outlets including drop-ship partners such as Macys.com, Helzberg.com and Overstock.com, and through marketplaces such as Amazon.com. We believe these overall increases across our Online Channels segment confirm an increase in awareness of the Charles & Colvard brand and continues to validate our omni-channel sales strategy. Across our Online Channels segment, we generated more than a 10% growth in sales over the prior year quarter.
During the holiday season, new entrants into the lab-created gemstone space and fierce competition in the global jewelry marketplace introduced an expanded environment of competitive search term bids and advertisements vying for those consumers looking for lab-created gemstones and ethically-sourced jewelry options. We are continuing to evolve our consumer targeting strategies that leverage data-informed advertising techniques to find new opportunities to promote our brand and break away from the competitive fray. In our Traditional segment, we delivered robust results from the brick-and-mortar sector, which were offset by sales headwinds in our international distributor sector, resulting in an overall decline of our Traditional segment by approximately 2% over the prior year quarter. Ongoing pressures from international trade sanctions, which we expect to continue for the foreseeable future, are a key contributor to the decline we saw in our Traditional segment during the second quarter of Fiscal 2020.
Our own e-commerce website, charlesandcolvard.com, delivered a 12% revenue increase over the year-ago quarter and has grown to represent more than 50% of all Online Channels segment sales. In addition, our marketplaces and drop-ship retail businesses continued to see significant growth in net sales volume over the year-ago quarter. Combined with the remaining Online Channels segment customers, our Online Channels segment net sales grew 12% compared with the comparable quarter of Fiscal 2019. Online Channels represented 57% of all revenue in the second quarter of Fiscal 2020. Finished jewelry sales represented more than half of our total sales in the second quarter of Fiscal 2020, growing 24% over the year-ago quarter.Annual Report.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which we prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. “Critical accounting policies and estimates” are defined as those most important to the financial statement presentation and that require the most difficult, subjective, or complex judgments. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions and/or conditions, including the impact of the COVID-19 pandemic and the related responses, those actual results of operations may materially differ. We have disclosed our critical accounting policies and estimates in our 20192020 Annual Report, and that disclosure should be read in conjunction with this Quarterly Report on Form 10-Q. Except as set forth below, there have been no significant changes in our critical accounting policies and estimates during the first six months of Fiscal 2020.2021.
For a discussion regarding our adoption of the new lease accounting standard effective July 1, 2019,related to the measurement and disclosure of credit losses on financial instruments, see Note 2 to our condensedcondensed consolidated financial statements in Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.10-Q.
Results of Operations
The following table sets forth certain consolidated statements of operations data for the three and six months ended December 31, 20192020 and 2018:2019:
| | | Three Months Ended December 31, | | | Six Months Ended December 31, | | | Three Months Ended December 31, | | | Six Months Ended December 31, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Net sales | | $ | 10,659,090 | | | $ | 10,139,461 | | | $ | 18,267,511 | | | $ | 16,734,167 | | | $ | 12,146,790 | | | $ | 10,659,090 | | | $ | 20,073,083 | | | $ | 18,267,511 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of goods sold | | 5,530,514 | | | 5,346,207 | | | 9,407,138 | | | 8,959,956 | | | 6,167,708 | | | 5,530,514 | | | 10,363,763 | | | 9,407,138 | |
| Sales and marketing | | 3,160,965 | | | 2,346,893 | | | 5,390,556 | | | 3,988,017 | | | 2,480,571 | | | 3,160,965 | | | 4,128,503 | | | 5,390,556 | |
| General and administrative | | 1,203,686 | | | 1,250,181 | | | 2,553,187 | | | 2,474,956 | | | | 977,528 | | | | 1,203,686 | | | | 2,185,564 | | | | 2,553,187 | |
| Research and development | | | - | | | | 1,422 | | | | - | | | | 1,422 | | |
| Total costs and expenses | | | 9,895,165 | | | | 8,944,703 | | | | 17,350,881 | | | | 15,424,351 | | | | 9,625,807 | | | | 9,895,165 | | | | 16,677,830 | | | | 17,350,881 | |
| Income from operations | | 763,925 | | | 1,194,758 | | | 916,630 | | | 1,309,816 | | | 2,520,983 | | | 763,925 | | | 3,395,253 | | | 916,630 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | 45,379 | | | - | | | 106,758 | | | - | | | 1,126 | | | 45,379 | | | 4,586 | | | 106,758 | |
| Interest expense | | (277 | ) | | (352 | ) | | (419 | ) | | (698 | ) | | (2,466 | ) | | (277 | ) | | (4,905 | ) | | (419 | ) |
| Loss on foreign currency exchange | | (314 | ) | | (74 | ) | | (853 | ) | | (102 | ) | | | (72 | ) | | | (314 | ) | | | (603 | ) | | | (853 | ) |
| Other expense | | | - | | | | - | | | | - | | | | (13 | ) | |
| Total other income (expense), net | | | 44,788 | | | | (426 | ) | | | 105,486 | | | | (813 | ) | |
| Total other (expense) income, net | | | | (1,412 | ) | | | 44,788 | | | | (922 | ) | | | 105,486 | |
| Income before income taxes | | 808,713 | | | 1,194,332 | | | 1,022,116 | | | 1,309,003 | | | 2,519,571 | | | 808,713 | | | 3,394,331 | | | 1,022,116 | |
| Income tax benefit (expense) | | | 5,337 | | | | (4,767 | ) | | | (747 | ) | | | (9,534 | ) | |
| Income tax (expense) benefit | | | | (494 | ) | | | 5,337 | | | | (988 | ) | | | (747 | ) |
| Net income | | $ | 814,050 | | | $ | 1,189,565 | | | $ | 1,021,369 | | | $ | 1,299,469 | | | $ | 2,519,077 | | | $ | 814,050 | | | $ | 3,393,343 | | | $ | 1,021,369 | |
Consolidated Net Sales
Consolidated net sales for the three and six months ended December 31, 20192020 and 20182019 comprise the following:
| | Three Months Ended December 31, | | Change | | Six Months Ended December 31, | | Change | | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | 2019 | | 2018 | | Dollars | | | Percent | | 2019 | | 2018 | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Finished jewelry | | $ | 6,438,347 | | | $ | 5,197,256 | | | $ | 1,241,091 | | | 24 | % | | $ | 10,296,342 | | | $ | 7,751,893 | | | $ | 2,544,449 | | | 33 | % | | $ | 8,265,197 | | | $ | 6,438,347 | | | $ | 1,826,850 | | | 28 | % | | $ | 12,600,534 | | | $ | 10,296,342 | | | $ | 2,304,192 | | | 22 | % |
| Loose jewels | | | 4,220,743 | | | | 4,942,205 | | | | (721,462 | ) | | -15 | % | | | 7,971,169 | | | | 8,982,274 | | | | (1,011,105 | ) | | -11 | % | | | 3,881,593 | | | | 4,220,743 | | | | (339,150 | ) | | -8 | % | | | 7,472,549 | | | | 7,971,169 | | | | (498,620 | ) | | -6 | % |
| Total consolidated net sales | | $ | 10,659,090 | | | $ | 10,139,461 | | | $ | 519,629 | | | 5 | % | | $ | 18,267,511 | | | $ | 16,734,167 | | | $ | 1,533,344 | | | 9 | % | | $ | 12,146,790 | | | $ | 10,659,090 | | | $ | 1,487,700 | | | 14 | % | | $ | 20,073,083 | | | $ | 18,267,511 | | | $ | 1,805,572 | | | 10 | % |
Consolidated net sales were $12.15 million for the three months ended December 31, 2020 compared to $10.66 million for the three months ended December 31, 2019, compared to $10.14an increase of approximately $1.49 million, or 14%. Consolidated net sales were $20.07 million for the threesix months ended December 31, 2018, an increase of approximately $520,000, or 5%. Consolidated net sales were2020 compared to $18.27 million for the six months ended December 31, 2019, compared to $16.73 million for the six months ended December 31, 2018, an increase of approximately $1.53$1.81 million, or 9%10%. The increase in consolidated net sales for the three and six months ended December 31, 20192020 was due primarily to strong calendar year-end holiday sales and increased consumer awareness and strong demand for our moissanite gemstonesjewels, lab grown diamonds, and jewelry.finished jewelry featuring both moissanite and lab grown diamonds. These increases resulted in higher finished jewelry product net sales during the three and six months ended December 31, 20192020 in our Online Channels segment and Traditional segment. The increases in our Online Channels segment net sales in the three and six months ended December 31, 2019 and in our Traditional segment net sales in the six months ended December 31, 20192020 were partially offset by lower net sales in our Traditional segment driven by lower loose jewels sales and decreased international sales during the three and six months ended December 31, 2019.2020.
Sales of finished jewelry represented 60%68% and 56%63% of total consolidated net sales for the three and six months ended December 31, 2019,2020, respectively, compared to 51%60% and 46%56%, respectively, of total consolidated net sales for the corresponding periods of the prior year. For the three months ended December 31, 2019,2020, finished jewelry sales were $6.44$8.27 million compared to $5.20$6.44 million for the corresponding period of the prior year, an increase of approximately $1.24$1.83 million, or 24%28%. For the six months ended December 31, 2019,2020, finished jewelry sales were $10.30$12.60 million compared to $7.75$10.30 million for the corresponding period of the prior fiscal year, an increase of approximately $2.54$2.30 million, or 33%22%. The increase in finished jewelry sales for the three- and six-month periods ended December 31, 20192020 was due primarily to higher finished jewelry sales of Forever One™ and Moissanite by Charles & Colvard® in our Online Channels segment as well as in our Traditional segment.
Sales of loose jewels represented 40%32% and 44%37% of total consolidated net sales for the three and six months ended December 31, 2019,2020, respectively, compared to 49%40% and 54%44%, respectively, of total consolidated net sales for the corresponding periods of the prior fiscal year. For the three months ended December 31, 2019,2020, loose jewel sales were $4.22$3.88 million compared to $4.94$4.22 million for the corresponding period of the prior year, a decrease of $721,000,$339,000, or 15%8%. For the six months ended December 31, 2019,2020, loose jewel sales were $7.97$7.47 million compared to $8.98$7.97 million for the corresponding period of the prior fiscal year, a decrease of $1.01 million,$500,000, or 11%6%. The decrease in loose jewels sales for the six monthsthree- and six-month periods ended December 31, 20192020 was primarily due to lower levels of loose jewel sales in our Online Channels segment and principally through the international distributiondistributor network in our Traditional segment.
U.S. net sales accounted for approximately 90%94% of total consolidated net sales for each of the three- and six-month periods ended December 31, 2019,2020, compared to 87% and 88%90% of total consolidated net sales for each of the corresponding periods respectively, of the prior year. U.S. net sales increased to $9.64$11.39 million, or 9%18%, during the three months ended December 31, 20192020 from the corresponding period of the prior fiscal year. U.S. net sales increased to $16.41$18.89 million, or 12%15%, during the six months ended December 31, 20192020 from the corresponding period of the prior year. U.S. net sales increased during the three and six months ended December 31, 20192020 primarily as a result of increased sales to U.S. customers in both our Online Channels segment and Traditional segment, partially offset by a decrease in our international distribution network in our Traditional segment.
Our largest U.S. customer during the three and six months ended December 31, 2020 accounted for 14% and 12% of total consolidated net sales during each respective period. This same customer was also one of our two largest U.S. customers during the three and six months ended December 31, 2019 eachwhen this customer accounted for 13% of total consolidated net sales during each of the respective period. These same two customers were our largestthree- and six-month periods. Our second largest U.S. customer during the six months ended December 31, 2020 accounted for 10% of total consolidated net sales during the period then ended. This same customer was also one of our two largest U.S. customers during the three and six months ended December 31, 2018. Our largest U.S.2019, when this customer during the three and six months ended December 31, 2018 accounted for 15% and 14%, respectively,13% of total consolidated net sales during each of the respective period. Our second largest U.S. customer during the threethree- and six months ended December 31, 2018 accounted for 13% and 11% of total consolidated net sales during each respective period.six-month periods. We expect that we will remain dependent on our ability, and that of our largest customers, to maintain and enhance retail programs. A change in or loss of any of these customer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately 10%6% of total consolidated net sales for each of the three- and six-month periods ended December 31, 2019,2020, respectively, compared to 13% and 12%10% of total consolidated net sales for each of the corresponding periods respectively, of the prior year. International net sales decreased 20%25% and 9%36% during the three and six months ended December 31, 2019,2020, respectively, from the corresponding periods of the prior fiscal year principally as a result of lower demand in our international distributor market, which was partially offset by growth in our direct-to-consumer presence internationally while also seeing an increase in the number of cross-border trade, or CBT, transactions in these periods reflecting increasedsolid direct-to-consumer sales from our Online Channels segment in international markets. Based on current levelsIn light of demand for loose jewels in these international markets and the potential adverse impacteffects of unsettled tariffs and ongoing political unrest in the Hong Kong market,global economic conditions, we continue to evaluate these and other potential distributors in these international markets to determine the best long-term partners. Additionally, we anticipate the need to further develop our direct-to-consumer presence, which would require marketing and e-commerce investments to drive expected growth in these regions. As a result, and in light of the ongoing worldwide pandemic and international trade challenges, we expect our sales in these markets mayto continue to fluctuate significantly each reporting period.
We did not have an international customer account for 10% or more of total consolidated sales during the three and six months ended December 31, 20192020 or 2018.2019. 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 three and six months ended December 31, 20192020 and 20182019 are as follows:
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2019 | | | 2018 | | | Dollars | | | Percent | | | 2019 | | | 2018 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Product line cost of goods sold: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Finished jewelry | | $ | 2,964,114 | | | $ | 2,471,628 | | | $ | 492,486 | | | 20 | % | | $ | 4,667,024 | | | $ | 3,527,667 | | | $ | 1,139,357 | | | 32 | % | | $ | 4,002,146 | | | $ | 2,964,114 | | | $ | 1,038,032 | | | 35 | % | | $ | 5,756,435 | | | $ | 4,667,024 | | | $ | 1,089,411 | | | 23 | % |
| Loose jewels | | | 2,081,654 | | | | 2,470,414 | | | | (388,760 | ) | | -16 | % | | | 3,881,106 | | | | 4,519,178 | | | | (638,072 | ) | | -14 | % | | | 1,805,603 | | | | 2,081,654 | | | | (276,051 | ) | | -13 | % | | | 3,549,525 | | | | 3,881,106 | | | | (331,581 | ) | | -9 | % |
| Total product line cost of goods sold | | 5,045,768 | | | 4,942,042 | | | 103,726 | | | 2 | % | | 8,548,130 | | | 8,046,845 | | | 501,285 | | | 6 | % | | 5,807,749 | | | 5,045,768 | | | 761,981 | | | 15 | % | | 9,305,960 | | | 8,548,130 | | | 757,830 | | | 9 | % |
| Non-product line cost of goods sold | | | 484,746 | | | | 404,165 | | | | 80,581 | | | 20 | % | | | 859,008 | | | | 913,111 | | | | (54,103 | ) | | -6 | % | | | 359,959 | | | | 484,746 | | | | (124,787 | ) | | -26 | % | | | 1,057,803 | | | | 859,008 | | | | 198,795 | | | 23 | % |
| Total cost of goods sold | | $ | 5,530,514 | | | $ | 5,346,207 | | | $ | 184,307 | | | 3 | % | | $ | 9,407,138 | | | $ | 8,959,956 | | | $ | 447,182 | | | 5 | % | | $ | 6,167,708 | | | $ | 5,530,514 | | | $ | 637,194 | | | 12 | % | | $ | 10,363,763 | | | $ | 9,407,138 | | | $ | 956,625 | | | 10 | % |
Total cost of goods sold was $6.17 million for the three months ended December 31, 2020 compared to $5.53 million for the three months ended December 31, 2019, compared to $5.35 million for the three months ended December 31, 2018, a net increase of approximately $184,000,$637,000, or 3%12%. Total cost of goods sold was $10.36 million for the six months ended December 31, 2020 compared to $9.41 million for the six months ended December 31, 2019, compared to $8.96 million for the six months ended December 31, 2018, an increase of approximately $447,000,$957,000, or 5%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 valuation allowance adjustments;write-offs; and other inventory adjustments, comprising costs of quality issues, and damaged goods, and inventory write-downs.goods.
The increase in cost of goods sold for the three months ended December 31, 20192020 compared to the same period in 20182019 was primarily driven by the increased sales of finished jewelry, saleswhich reflect higher material and labor costs, in both our Online Channels segment and Traditional segment as a result of strong salesdemand during the calendar year-end 20192020 holiday season. Our finished jewelry products cost more to produce due to higher material and labor costs when compared to the production of loose jewels.
The net increasedecrease in non-product line cost of goods sold comprises an unfavorable $123,000 change in inventory valuation allowances primarily related to increases in obsolescence reserves infor the three months ended December 31, 2019; and2020, comprises a favorable $167,000 change in other inventory adjustments principally relating to positive changes in production standard cost variances compared to the three months ended December 31, 2019. The net decrease in non-product line cost of goods sold was also related to an approximate $120,000 increase$101,000 change in inventory valuation adjustments primarily related to favorable changes in obsolescence reserves in the current period compared to those in the comparable prior year period as well as an approximate $32,000 decrease in non-capitalized manufacturing and production control expenses.expenses principally due to the timing when work-in-process is received into inventory and overhead costs are allocated. These increasesdecreases in non-product line cost of goods sold were offset in part by an approximately $100,000 favorable changeapproximate $175,000 increase in other inventory adjustments related to unfavorable production standard cost variancesfreight out from increased shipments resulting from Online Channels segment sales growth during the three monthsquarter ended December 31, 2018 that were not repeated in the current year period and an approximate $62,000 decrease in freight out during the three months ended December 31, 2019 due to lower shipment costs during the period as a result of more favorable pricing arrangements with our shipping and delivery vendors.2020.
The increase in cost of goods sold for the six months ended December 31, 20192020 compared to the same period in 20182019 was also primarily driven by the increased finished jewelry sales in both our Online Channels segment and Traditional segment as a result of strong sales during the calendar year-end 20192020 holiday season.
The net decreaseincrease in non-product line cost of goods sold for the six months ended December 31, 2020, comprises an approximate $285,000 favorableunfavorable $116,000 change in other inventory adjustments principally related to unfavorableadverse changes in production standard cost variances compared to the six months ended December 31, 2019. The net increase in non-product line cost of goods sold was also related to an approximate $220,000 increase in freight out from increased shipments resulting from Online Channels segment sales growth during the six months ended December 31, 2018 that2020. These increases in non-product line cost of goods sold were not repeatedoffset in the current year period; and an approximate $30,000 decrease in freight out during the six months ended December 31, 2019 due to lower shipment costs during the period as a result of more favorable pricing arrangements with our shipping and delivery vendors. These decreases were partially offsetpart by an approximate $164,000 increase$93,000 decrease 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; andallocated as wells as an unfavorable $97,000approximate $44,000 change in inventory valuation allowances primarily related to increasesfavorable changes in obsolescence reserves in the six months ended December 31, 2019.2020, compared to those in the comparable prior year period.
For additional disclosure relating to non-product line cost of goods sold, see Note 3 to our condensedcondensed consolidated financial statements in Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.10-Q.
Sales and Marketing
Sales and marketing expenses for the three and six months ended December 31, 20192020 and 20182019 are as follows:
| | Three Months Ended December 31, | | Change | | Six Months Ended December 31, | | Change | |
| | 2019 | | 2018 | | Dollars | | | Percent | | 2019 | | 2018 | | Dollars | | | Percent | |
| Sales and marketing | | $ | 3,160,965 | | | $ | 2,346,893 | | | $ | 814,072 | | | | 35 | % | | $ | 5,390,556 | | | $ | 3,988,017 | | | $ | 1,402,539 | | | | 35 | % |
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Sales and marketing | | $ | 2,480,571 | | | $ | 3,160,965 | | | $ | (680,394 | ) | | | -22 | % | | $ | 4,128,503 | | | $ | 5,390,556 | | | $ | (1,262,053 | ) | | | -23 | % |
Sales and marketing expenses were $2.48 million for the three months ended December 31, 2020 compared to $3.16 million for the three months ended December 31, 2019, compared to $2.35 million for the three months ended December 31, 2018, an increasea decrease of approximately $814,000,$680,000, or 35%22%. Sales and marketing expenses were $4.13 million for the six months ended December 31, 2020 compared to $5.39 million for the six months ended December 31, 2019, compared to $3.99 million for the six months ended December 31, 2018, an increasea decrease of approximately $1.40$1.26 million, or 35%23%.
The increasedecrease in sales and marketing expenses for the three months ended December 31, 20192020 compared to the same period in 20182019 was primarily due to a $685,000 increase$418,000 decrease in compensation-related expenses; a $321,000 decrease in advertising and digital marketing expenses; a $14,000 decrease in travel expenses reflecting the activationas a result of funds from our underwritten public offering that we are deploying to expand brand awareness;COVID-19 cost-control measures; and a $120,000 increase$6,000 decrease in software-related costs principallycompared with those incurred in connectionthe prior year associated with upgraded operating system maintenance agreements as well as other software-related agreements; and an $82,000 increase in compensation-related expenses.agreements. These increasesdecreases were partially offset by a $40,000 decrease in professional services fees; a $20,000 decrease$51,000 increase in general office-related expenses which is primarily relateddue to lower software maintenance agreement-related expenses;increased credit card transaction fees associated with a $10,000 decreasehigher level of online sales; a $26,000 increase in depreciation and amortization;amortization principally associated with the capitalization of costs relating to information technology-related upgrades; and a $3,000$2,000 increase in professional services principally comprising non-recurring consulting information technology services.
Compensation expenses for the three months ended December 31, 2020 compared to the same period in 2019 decreased primarily due to a $337,000 decrease in travel expenses.salaries, commissions, and related employee benefits in the aggregate; a $67,000 decrease in bonus expense; and a $14,000 decrease in employee stock-based compensation expense. All three of these compensation-related expense decreases reflect our June 2020 management reorganization and workforce reduction.
The increasedecrease in advertising and digital marketing expenses for the three months ended December 31, 20192020 compared to the same period in 2018 was primarily due to2019 comprises a $486,000 increase$148,000 decrease in Internet marketing; a $136,000 increase$98,000 decrease in outside agency fees; a $36,000 increase$55,000 decrease in cooperative advertising; and a $27,000 increase in promotional expenses, primarily related to video production costs by bringing these capabilities in-house.
Compensation expenses for the three months ended December 31, 2019 compared to the same period in 2018 increased primarily as a result of an $85,000 increase in salaries, commissions, and related employee benefits in the aggregate and a $4,000 increase in employee stock-based compensation expense. These increases were partially offset by a $7,000$20,000 decrease in bonus expense.promotion-related expenses.
The increasedecrease in sales and marketing expenses for the six months ended December 31, 20192020 compared to the same period in 20182019 was primarily due to an $819,000 decrease in compensation-related expenses; a $1.08 million increase$457,000 decrease in advertising and digital marketing expenses reflecting the activation of funds from our underwritten public offering that we are deploying to expand brand awareness;expenses; a $166,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements; a $126,000 increase in compensation-related expense; a $23,000 increase$56,000 decrease in professional services fees principally comprising non-recurring consulting services for cybersecurity and merchandising imaging;imaging in the prior year period; and a $13,000$21,000 decrease in travel expenses as a result of COVID-19 cost-control measures. These decreases were partially offset by a $49,000 increase in general office-related expenses, which are principally related to higher credit card transaction fees from increased online sales levels; a $30,000 increase in depreciation and amortization expense relating to capitalized costs associated with information technology-related upgrades; and a $4,000$12,000 increase in general office-relatedsoftware-related costs principally in connection with maintenance agreements as well as other software-related agreements.
Compensation expenses which are principallyfor the six months ended December 31, 2020 compared to the same period in 2019 decreased primarily as a result of a $655,000 decrease in salaries, commissions, and related to higher credit card transaction fees from increased sales levels.employee benefits in the aggregate; a $114,000 decrease in bonus expense; and a $52,000 decrease in employee stock-based compensation expense. All three of these compensation-related expense decreases reflect our June 2020 management reorganization and workforce reduction. These increasesdecreases were partially offset by a $9,000 decrease$2,000 increase in travel expenses.employee-related severance costs.
The increasedecrease in advertising and digital marketing expenses for the six months ended December 31, 20192020 compared to the same period in 20182019 comprises a $688,000 increase$190,000 decrease in Internet marketing; a $154,000 increase$174,000 decrease in cooperative advertising; a $153,000 increasean $88,000 decrease in outside agency fees; and an $87,000 increase$8,000 decrease in promotional expenses, primarily related to video production costs by bringing these capabilities in-house.print media expenses. These increasesdecreases were partially offset by a $2,000 net decrease$3,000 increase in miscellaneous other general advertising and digital marketingpromotion-related expenses.
Compensation expenses for the six months ended December 31, 2019 compared to the same period in 2018 increased primarily as a result of a $117,000 increase in salaries, commissions, and related employee benefits in the aggregate and a $21,000 increase in employee stock-based compensation expense. These increases were partially offset by a $6,000 decrease in bonus expense and a $6,000 decrease in severance expense.
General and Administrative
General and administrative expenses for the three and six months ended December 31, 20192020 and 20182019 are as follows:
| | Three Months Ended
December 31, | | Change | | Six Months Ended December 31, | | Change | |
| | 2019 | | 2018 | | Dollars | | | Percent | | 2019 | | 2018 | | Dollars | | | Percent | |
| General and administrative | | $ | 1,203,686 | | | $ | 1,250,181 | | | $ | (46,495 | ) | | | -4 | % | | $ | 2,553,187 | | | $ | 2,474,956 | | | $ | 78,231 | | | | 3 | % |
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| General and administrative | | $ | 977,528 | | | $ | 1,203,686 | | | $ | (226,158 | ) | | | -19 | % | | $ | 2,185,564 | | | $ | 2,553,187 | | | $ | (367,623 | ) | | | -14 | % |
General and administrative expenses were $978,000 for the three months ended December 31, 2020 compared to $1.20 million for the three months ended December 31, 2019, compared to $1.25 million for the three months ended December 31, 2018, a decrease of approximately $46,000,$226,000, or 4%19%. General and administrative expenses were $2.19 million for the six months ended December 31, 2020 compared to $2.55 million for the six months ended December 31, 2019, compared to $2.47 million for the six months ended December 31, 2018, an increasea decrease of approximately $78,000,$368,000, or 3%14%.
The decrease in general and administrative expenses for the three months ended December 31, 20192020 compared to the same period in 20182019 was primarily due to a $40,000 decrease in business franchise taxes and licenses; a $26,000$118,000 decrease in professional services fees; a $16,000services; an $83,000 decrease in insurance expenses; a $9,000 decrease in board retainer fees as a result of the resignation of a director; a $2,000 decrease in depreciation and amortization expense; and a $4,000 net decrease in all other general and administrative expenses. These decreases were partially offset by a $26,000 increase in compensation expenses; and a $13,000 increase in expenses related to our underwritten public offering; a $10,000 increase$45,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve policypolicy. These decreases were partially offset by a $7,000 increase in insurance expenses, principally related to higher renewal premiums; a $3,000 increase in depreciation and reflecting our current increased sales level; andamortization expense; a $2,000 increase in travelequipment-related rental expense; a $2,000 increase in business taxes and licenses; and a $6,000 net increase in miscellaneous other general and administrative expenses.
Professional services fees decreased for the three months ended December 31, 20192020 compared to the same period in 20182019 primarily due to a $73,000 decrease of $40,000in legal fees resulting from non-recurring non-capitalized fees incurred in connection with our underwritten public offering and corporate governance matters in the prior year; a $30,000 decrease in investor relations fees; a $12,000 decrease in accounting services also principally related to non-recurring fees associated with our underwritten public offering in the prior year; and a $3,000 decrease in consulting and other professional services primarily in connection with an accounting and financial reporting related project and a decrease of $3,000 in legal fees. These decreases were partially offset by a $10,000 increase in investor and public relations expenses and a $7,000 increase in accounting and audit fees.services.
Compensation expenses increaseddecreased for the three months ended December 31, 20192020 compared to the same period in 2018 primarily2019 principally due to a $33,000 increase in bonus expense and a $26,000 increase$39,000 decrease in salaries and related employee benefits in the aggregate. These increases were offsetaggregate; a $22,000 decrease in part bybonus expense; and a $33,000$22,000 decrease in employee stock-based compensation expense. All three of these compensation-related expense decreases reflect our June 2020 management reorganization and workforce reduction.
The increasedecrease in general and administrative expenses for the six months ended December 31, 20192020 compared to the same period in 20182019 was primarily due to a $195,000 increase$247,000 decrease in professional services; a $197,000 decrease in compensation expensesexpenses; and a $32,000 increase$9,000 decrease in professional services fees.Board retainer fees as a result of the resignation of a former Director in September 2019. These increasesdecreases were partially offset by a $55,000 decrease in business franchise taxes and licenses; a $20,000 decrease$24,000 increase in insurance expenses; a $19,000 decrease in expenses principally related to the timing of our annual meeting and shareholder communications due to the change in our fiscal year-end for which the costs were incurred in the prior fiscal year; an $18,000 decreasehigher renewal premiums; a $16,000 increase in bad debt expense associated with our allowance for doubtful accounts reserve policy; a $10,000 decrease$14,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements; an $8,000 increase in travel-related expenses; a $7,000 increase in bank fees; a $9,000 decrease in board retainer feescharges as a result of the resignation oftransaction fees associated with increased online transactions; a director;$6,000 increase in business taxes and licenses; a $4,000 decreaseincrease in equipment-related rental expense; a $4,000 increase in depreciation and amortization expense; a $3,000 decrease in general office-related expenses; a $1,000 decrease in travel expenses; a $1,000 decrease in equipment-related rental expense; and a $9,000$2,000 net decreaseincrease in allmiscellaneous other general and administrative expenses.
Professional services fees increaseddecreased for the six months ended December 31, 20192020 compared to the same period in 20182019 primarily due to a $58,000 increase in accounting services related to higher annual audit and tax fees, as well as fees associated with domestic and international tax consulting services; a $32,000 increase$159,000 decrease in legal fees resulting from non-recurring non-capitalized fees associatedincurred in connection with our underwritten public offering and corporate governance matters;matters in the prior year; a $45,000 decrease in accounting services also principally related to non-recurring fees associated with our underwritten public offering in the prior year; a $33,000 decrease in investor relations fees; and a $16,000 increase in investor and public relations expenses. These increases were partially offset by a $74,000$10,000 decrease in consulting and other professional services primarily in connection with an accounting and financial reporting related project.services.
Compensation expenses increaseddecreased for the six months ended December 31, 20192020 compared to the same period in 2018 primarily2019 principally due to a $71,000 increase$93,000 decrease in salaries and related employee benefits in the aggregate; a $68,000 increase$55,000 decrease in employee stock-based compensation expense; and a $56,000 increase$49,000 decrease in bonus expense.
Loss on Foreign Currency Exchange
Losses on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the threethese compensation-related expense decreases reflect our June 2020 management reorganization and six months ended December 31, 2019 and 2018 are as follows:workforce reduction.
| | Three Months Ended December 31, | | Change | | Six Months Ended December 31, | | Change | |
| | 2019 | | 2018 | | Dollars | | | Percent | | 2019 | | 2018 | | Dollars | | | Percent | |
| Loss on foreign currency exchange | | $ | 314 | | | $ | 74 | | | $ | 240 | | | | * | % | | $ | 853 | | | $ | 102 | | | $ | 751 | | | | * | % |
* Not Meaningful
During the three and six months ended December 31, 2019 and 2018, we had international sales transactions denominated in currencies other than the U.S dollar that resulted in foreign currency exchange net losses. The increase in these losses reflects the increased direct-to-consumer sales from our Online segment in international markets during the three and six months ended December 31, 2019 compared with the same periods in the prior fiscal year.
Interest Income
Interest income for the three and six months ended December 31, 20192020 and 20182019 is as follows:
| | | | | Three Months Ended December 31, | | | | Change | | | Six Months Ended December 31, | | | | Change | |
| | | | | 2019 | | | | 2018 | | | | Dollars | | | | Percent | | | | 2019 | | | | 2018 | | | | Dollars | | | | Percent | |
| Interest income | | | $ | 45,379 | | | $ | - | | | $ | 45,379 | | | | 100 | % | | $ | 106,758 | | | $ | - | | | $ | 106,758 | | | | 100 | % |
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Interest income | | $ | 1,126 | | | $ | 45,379 | | | $ | (44,253 | ) | | | -98 | % | | $ | 4,586 | | | $ | 106,758 | | | $ | (102,172 | ) | | | -96 | % |
In June 2019, we completed an underwritten public offering of 6,250,000 shares of our common stock, which together with the partial exercise of the underwriters’ overallotment option for an additional 630,500 shares in July 2019, resulted in net proceeds of approximately $9.99 million. The net proceeds from this offering, have beenalong with excess operating cash, are deposited into and maintained in an interest-bearing account with a federally-insuredfederally insured commercial bank. Accordingly, during the three and six months ended December 31, 2020 and 2019, we earned interest from cash on deposit in this interest-bearing account. The decrease in earned interest reflects adverse changes in interest rate fluctuations during the first half of Fiscal 2021 compared with the first half of Fiscal 2020.
Interest Expense
Interest expense for the three and six months ended December 31, 2020 and 2019 is as follows:
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Interest expense | | $ | 2,466 | | | $ | 277 | | | $ | 2,189 | | | | 790 | % | | $ | 4,905 | | | $ | 419 | | | $ | 4,486 | | | | 1,071 | % |
On June 18, 2020, we received the proceeds from our Paycheck Protection Program Loan, or the PPP Loan, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or SBA. The PPP Loan in the principal amount of $965,000 was disbursed by Newtek Small Business Finance, LLC, or the Lender, pursuant to a promissory note, or the Promissory Note, dated June 15, 2020. We had no such interest-bearing amounts on depositaccounted for the Promissory Note as debt within the accompanying consolidated financial statements. Accordingly, during the three and six months ended December 31, 2018.2020, we incurred interest on the Promissory Note. We had no debt during the comparable periods in the prior fiscal year.
Loss on Foreign Currency Exchange
Losses on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the three and six months ended December 31, 2020 and 2019 are as follows:
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Loss on foreign currency exchange | | $ | 72 | | | $ | 314 | | | $ | (242 | ) | | | -77 | % | | $ | 603 | | | $ | 853 | | | $ | (250 | ) | | | -29 | % |
During the three and six months ended December 31, 2020 and 2019, we had international sales transactions denominated in currencies other than the U.S dollar that resulted in foreign currency exchange net losses. The decrease in these losses reflects the lower level of international sales during the three and six months ended December 31, 2020 compared with the same periods in the prior year.
Provision for Income Taxes
We recognized aincome tax net expense of $500 and income tax net benefit of approximately $5,000 and a net income tax expense of $5,000 for the three-month periods ended December 31, 20192020 and 2018,2019, respectively. We recognized a net income tax net expense of approximately $1,000 and $10,000$1,000 for the six-month periods ended December 31, 20192020 and 2018,2019, respectively. Income tax provisions in these periods primarily relate to estimated taxes, penalties, and interest associated with uncertain tax positions.
As of each reporting date, we considermanagement considers new evidence, both positive and negative, that could impact ourits view with regard to future realization of deferred tax assets. Beginning in 2014, wemanagement determined that negative evidence outweighed the positive evidence and established a full valuation allowance against itsour deferred tax assets, which we have continued to maintainassets. We maintained a full valuation allowance against our deferred taxes as of December 31, 20192020 and June 30, 2019.2020.
Liquidity and Capital Resources
The impact of the COVID-19 pandemic on the global and domestic economy is currently not fully known. With the dramatic increase in new and variant strains of COVID-19 infection levels around the world, many geographical regions, including some parts of the U.S., are reimposing tighter social and business restrictions in an effort to prevent further outbreak of COVID-19. Accordingly, the world continues to adapt to the ongoing COVID-19 pandemic and its adverse effects on global economics and business operations. The impact of the COVID-19 pandemic continues to place unprecedented pressures on global and U.S. businesses including our own. The ongoing spread of the coronavirus disease continues to lead to business disruption and volatility in the global capital markets, which, depending on future developments, including the success of the global vaccine efforts to control the spread of the underlying virus, could further adversely impact our capital resources and liquidity in the future. We requireremain increasingly focused on the COVID-19 pandemic and are continually evaluating its potential effect on our business and liquidity and capital resources.
Capital Structure and Long-Term Debt
As disclosed above, on June 18, 2020, we received the proceeds from our PPP Loan, pursuant to 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 the Promissory Note, dated June 15, 2020.
Under the CARES Act and the Promissory Note, loan forgiveness is available, subject to certain conditions, 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 fundnon-payroll costs. Although we currently believe that our operating expensesuse of the PPP Loan will meet the conditions for forgiveness for a portion of the PPP Loan, we cannot assure our future adherence to the forgiveness criteria and working capital requirements, including outlaysthat the PPP Loan will be forgiven, in whole or in part.
The CARES Act provides that existing AMT credit carryforwards are now eligible for capital expenditures. Asacceleration 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 elected to have the AMT tax completely refunded and filed a refund claim for the remaining AMT tax credit. The full amount of December 31, 2019,the remaining balance of our principal sourcesAMT credit refund in the amount of liquidity were cash, cash equivalents,approximately $272,000 was refunded by the Internal Revenue Service in October 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 restricted cash totaling $13.34 million, trade accounts receivable, net,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 $3.09 million, and net current inventory of $10.70 million, as comparedamounts paid or incurred to cash, cash equivalents, and restricted cash totaling $13.01 million, trade accounts receivable, net, of $1.96 million, and net current inventory of $11.91 million as of June 30, 2019. As described more fully below, we also have access to our $5.00 million asset-based revolving credit facility with White Oak, or the White Oak Credit Facility.maintain a group health plan.
WeThe Consolidated Appropriations Act, 2021, or the Act, which is the latest federal stimulus relief bill for the COVID-19 pandemic, was signed into law on December 27, 2020. Notably, this legislation provides that employers who received a PPP loan may also qualify for the Employee Retention Credit, or ERC, once certain shutdown-related gross receipts decline eligibility hurdles are met. Previously, pursuant to the CARES Act, taxpayers that received a PPP loan were not eligible for the ERC and this change is retroactive to March 27, 2020. While we have had minimal short-term shutdowns related to the COVID-19 pandemic such that we have not utilized this aid, if future shutdowns are mandated and more extensive, we may be eligible to claim the ERC.
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 which 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. 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.conditions, which are in turn, subject to the disruption and volatility being caused by the ongoing COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.
OnFinancing Activities
In June 11, 2019, we completed an underwritten public offering of 6,250,000 newly issued shares of common stock, at a price to 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. Pursuant to the terms of the underwriting agreement entered into in connection with this offering, the underwriters were granted a 30-day option to buy up to an additional 937,500 shares of our common stock to cover over-allotments. Pursuant to the partial exercise of the underwriters’ over-allotment option, onin July 3, 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 $76,000.$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. We have begunEarly during 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. We will continue to monitor and adjust our advertising and digital marketing and professional services expenditure levels to correspond to the e-commerce market disruption and volatility being caused by the ongoing COVID-19 pandemic. However, we plan to maintain these reduced advertising and digital marketing expenditure levels for the foreseeable future.
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 dated 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 December 31, 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 December 31, 2020, our principal sources of liquidity were cash, cash equivalents and restricted cash totaling $16.87 million, trade accounts receivable of $3.06 million, and net current inventory of $12.07 million, as compared to cash and cash equivalents totaling $14.62 million, trade accounts receivable of $671,000, and net current inventory of $7.44 million as of June 30, 2020. As described more fully herein, we also have long-term debt in the amount of $965,000, of which $579,000 is classified as its current maturity as of December 31, 2020, and access to a $5.00 million asset-based revolving credit facility with White Oak, or the White Oak Credit Facility.
During the six months ended December 31, 2019,2020, our working capital decreasedincreased by approximately $1.61$9.94 million to $21.56$27.36 million from $23.17$17.42 million at June 30, 2019.2020. As described more fully below, the decreaseincrease in working capital at December 31, 20192020 is primarily attributable to an increase in accounts payable, a decrease in our allocation of inventory from long-term to short-term, an increase in short-term operating lease liabilities resulting from the adoption of the new accounting standard as of July 1, 2019, and an increase in accrued expenses and other liabilities. These factors were offset partially by an increase inour accounts receivable, an increase in prepaid expenses and other assets, and an increase in our cash, cash equivalents, and restricted cash resulting from cash provided by financing activities.our operations, a decrease in our accounts payable, an increase in our prepaid expenses and other assets, and a decrease in our short-term operating lease liabilities. These factors were offset partially by an increase in the current maturity of our long-term debt and an increase in our accrued expenses and other liabilities.
During the six months ended December 31, 2019,2020, approximately $238,000$2.41 million of cash was usedprovided by our operations. The primary drivers of our use of cash flows from operations were an increase in inventory of $2.21 million to meet expected requirements for the calendar year-end holiday and Valentine’s Day selling seasons; an increase in accounts receivable of $1.45 million; and an increase in prepaid expenses and other assets of $197,000. These factors were offset partially by the favorable effect of net income in the amount of $1.02$3.39 million; a decrease in inventory of $1.86 million; a decrease in prepaid expenses and other assets of $62,000; and an increase in accrued expenses and other liabilitiesincome taxes in the amount of $76,000; and an increase in accounts payable of $1.45 million.$1,000. In addition, the net effect of the changes in combined non-cash items included in net income totaling $1.07$1.25 million also favorably impacted net cash used inprovided by operating activities during the six months ended December 31, 2019.2020. These factors were offset partially by an increase in accounts receivable of $3.07 million; a decrease in accounts payable of $816,000; and a decrease in accrued expenses and other liabilities of $274,000.
Accounts receivable increased principally due to the increased level of sales during the six-month period leading up tosix months ended December 31, 20192020 as compared with the sales during the period leading up to June 30, 2019. We did not offer any2020. As a result of the COVID-19 pandemic, we offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy customers during the six months ended December 31, 2019; however, we may offerfirst half of Fiscal 2021 and second half of Fiscal 2020. Because of the ongoing impact of the pandemic on the global economy, the extension of these terms from time to time, which may not immediately increase liquidity as a result of ongoing current-period sales. Wesales, which we expect to continue to be pressured due to the effects of the ongoing COVID-19 pandemic. 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 andduring the current global economic environment. We believe that our net sales have been favorably impacted. Wewe are unable to estimate the impact of this programthese actions on our net sales, but we believe that if we ceased providing extended payment terms, in select instances, we believe 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 decrease.be adversely impacted.
We manufactured approximately $5.86$6.36 million in finished jewelry and $6.85$3.76 million in loose jewels, which includes the cost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production, during the six months ended December 31, 2019.2020. We expect our purchases of precious metals and labor to increase as we increase our finished jewelry business. In addition, the price of gold has increased significantly over the past decade, and more significantly over the last 12 months, resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry.
Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with 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 December 31, 20192020 and June 30, 2019, $25.102020, $16.59 million and $21.82$23.19 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 $3.73$2.06 million and new raw material that we are purchasingpurchase pursuant to the Supply Agreement.
Our inventory principally comprises the following two types33
AOur more detailed description of our inventories is included in Note 5 to our condensedcondensed consolidated financial statements in Part I, Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.10-Q.
As of December 31, 2020, we had approximately $309 of remaining federal income tax credits that expire in 2021 and can be carried forward to offset future income taxes. As of December 31, 2020, we also had a federal tax net operating loss carryforward of approximately $23.72 million expiring between 2022 and 2037, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $20.12 million expiring between 2023 and 2033; and various other state tax net operating loss carryforwards expiring between 2021 and 2040, which can be used to offset against future state taxable income.
Contractual Commitment
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 to provideprovided 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 was amended further to establishestablished 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 20232025 is approximately $52.95 million, of which approximately $39.00$35.57 million remains to be purchased as of December 31, 2019.2020.
During the six months ended December 31, 2019,2020, we purchased approximately $4.98$1.03 million of SiC crystals from Cree.Cree pursuant to the terms of the Supply Agreement, as amended. 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.
AsLine of December 31, 2019, we had approximately $102,000 of remaining federal income tax credits that expire between 2020 and 2021 and all of which can be carried forward to offset future income taxes. As of December 31, 2019, we also had a federal tax net operating loss carryforward of approximately $23.39 million expiring between 2030 and 2037, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $20.20 million expiring between 2023 and 2033; and various other state tax net operating loss carryforwards expiring between 2021 and 2034, which can be used to offset against future state taxable income.Credit
On July 13, 2018, we and our wholly-owned subsidiary, charlesandcolvard.com, LLC, collectively referred to as the Borrowers, obtained the $5.00 million asset-based revolving White Oak Credit Facility. The White Oak Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions. The White Oak Credit Facility, which matures on July 13, 2021, is guaranteed by Charles & Colvard Direct, LLC, another of our wholly-owned subsidiaries. Under the terms of the White Oak Credit Facility, the Borrowers must maintain at least $500,000 in excess borrowing availability at all times. The White Oak Credit Facility contains no other financial covenants.
Advances under the White Oak Credit Facility may be either revolving or non-revolving. During the first year of the term of the White Oak Credit Facility, revolving advances accrued interest at a rate equal to one-month LIBOR (reset monthly, and subject to a 1.25% floor) plus 3.75%, and non-revolving advances accrued interest at such LIBOR rate plus 4.75%. Thereafter, the interest margins will reduce upon our achievement of a specified fixed charge coverage ratio. However, advances are in all cases subject to a minimum interest rate of 5.50%. Interest is calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate 2% in excess of the rate otherwise applicable.
As of December 31, 2019,2020, we had not borrowed against the White Oak Credit Facility. As a result of our diminished borrowing base as of December 31, 2020, which is tied to our accounts receivable, our ability to draw down funds from the White Oak Credit Facility may from time to time be restricted.
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, together withand 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.
Our future capital requirements and the adequacy of available funds will depend on many factors, includingthe ongoing spread of COVID-19 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 diamonds 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 II, Item 1A of this Quarterly Report on Form 10-Q,, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019,2020, and in Part I, Item 1A of our 20192020 Annual Report.Report on Form 10-K. Currently, we have the White Oak Credit Facility through its expiration on July 13, 2021, that 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.
As of December 31, 2020, we had not borrowed against the White Oak Credit Facility.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended December 31, 2019,2020, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
There are no material pending legal proceedings to which we are a party or to which any of our property is subject.
We discuss in our Annual Report on Form 10-K for the fiscal year ended June 30, 20192020 and our Quarterly Report on Form 10-Q for the quarter September 30, 2020 various risks that may materially affect our business. There have been no material changes to such risks, except as set forth below.
We face intense competition in the worldwide jewelry industry. The jewelry industry is highly competitive and we compete with numerous other jewelry products. In addition, we face competition from mined diamonds, lab-created (synthetic) diamonds, other moissanite products, and simulants. A substantial number of companies supply products to the jewelry industry, many of whom we believe have greater financial resources than we do. Competitors could develop new or improved technologies, including those for lab-grown diamonds, that may render the price point for moissanite noncompetitive, which could have an adverse effect on our business, results of operations, and financial condition.
We have previously relied on our patent rights and other intellectual property rights to maintain our competitive position. Our current U.S. product and method patents for moissanite jewels expired in 2015 and most of our patents in foreign jurisdictions expired in 2016 with only one in Mexico remaining (which expires in 2021). However, we have certain trademarks and pending trademark applications that support our moissanite branding strategy. Additionally, we have certain pending and issued design patents that we believe, if approved, will differentiate our products in the gemstone and jewelry industry. Notwithstanding the foregoing, since the expiration of our patents we have noted new providers of moissanite and competitive products entering the market. However, as we experienced ourselves, achieving the capacity to consistently produce a high-quality moissanite product at mass scale requires a careful balance of SiC-specific faceting skills and a well-tuned global supply chain.
In addition, today’s consumers demand transparency from and high visibility into the brands they choose to align with and purchase from. As our pending patent rights and other pending intellectual property rights are approved, we will continue to rely on these patents and our carefully-executed brand awareness and digital marketing campaigns to build our consumer relationships and maintain our competitive position going forward. We are dedicating significant resources to digital advertising through services such as Google AdWords. The effectiveness and cost of our digital advertising has varied over time and may vary in the future due to competition for key search terms, changes in search engine use, and changes in the search algorithms used by major search engines. If our digital marketing campaign is not sufficiently effective, we are unable to successfully build strong brands for our moissanite jewels and finished jewelry featuring moissanite, or competition grows faster than expected, we may not have commercially meaningful protection for our products or a commercial advantage against our competitors or their competitive products or processes, which may have a material adverse effect on our business, results of operations, and financial condition.
We are subject to certain risks due to our international operations, distribution channels and vendors. We have continued to expand our direct international sales operations, with international net sales accounting for approximately 13% and 10% of total consolidated net sales during Fiscal 2019 and the six-month period ended December 31, 2019, respectively. We also currently have numerous international wholesale distributors and retail sales channels covering portions of Canada, the UK, Western Europe, Australia and New Zealand, Southeast Asia, the Middle East, and the Greater China Region. In addition, we use certain companies based outside the U.S. to facet our moissanite jewels and to manufacture finished jewelry. We plan to continue to increase marketing and sales efforts and anticipate expanding our direct international sales in addition to continuing to serve international distributors. Any international expansion plans we choose to undertake will increase the complexity of our business, require attention from management and other personnel and cause additional strain on our operations, financial resources and our internal financial control and reporting functions. Further, our expansion efforts may be unsuccessful as we have limited experience selling our products in certain international markets and in conforming to the local cultures, standards or policies necessary to successfully compete in those markets. In addition, we may have to compete with retailers that have more experience with local markets. Our ability to expand and succeed internationally may also be limited by the demand for our products, the ability to successfully transact in foreign currencies, the ability of our brand to resonate with consumers globally and the adoption of online or Internet commerce in these markets. Different privacy, censorship and liability standards and regulations, and different intellectual property laws in foreign countries may also prohibit expansion into such markets or cause our business and results of operations to suffer. Through our planned international expansion and our continued reliance on development of foreign markets and use of foreign vendors, we are subject to the risks of conducting business outside of the U.S.
These risks include the following:risks.
the adverse effects on U.S.-based companies operating in foreign markets that might result from war; terrorism; changes in diplomatic, trade, or business relationships (including labor disputes); or other political, social, religious, or economic instability;
an outbreak of a contagious disease, such as coronavirus, which may cause us or our distributors, vendors and/or customers to temporarily suspend our or their respective operations in the affected city or country;
the continuing adverse economic effects of any global financial crisis;
unexpected changes in,On January 29, 2021, we entered into a third amendment, or impositions of, legislative or regulatory requirements;
delays resulting from difficulty in obtaining export licenses;
international regulatory requirements, tariffs and other trade barriers and restrictions, including the consequences of U.S. led tariff actions;
the burdens of complying with a variety of foreign laws and regulations, including foreign taxation and varying consumer and data protection laws, and other factors beyond our control, and the risks of non-compliance;
longer payment cycles and greater difficulty in collecting accounts receivable;
our reliance on third-party carriers for product shipmentsLease Amendment, to our customers;
risklease agreement, or Lease Agreement, with SBP Office Owner, L.P., successor-in-interest to Southport Business Park Limited Partnership, relating to space leased by us for our corporate headquarters at 170 Southport Drive, Morrisville, North Carolina 27560. The Lease Amendment, among other things, (i) extends the base term of theftthe Lease Agreement from November 1, 2021 through October 31, 2026, or the Extension Period; (ii) sets forth the minimum monthly rents, including a specified rent abatement, during the Extension Period; (iii) provides for an allowance by the landlord to reimburse us for certain direct costs we incur for improvements to the leased real property; and (iv) provided there is no outstanding uncured event of default under the Lease Agreement, gives us the option to extend the term of the Lease Agreement beyond October 31, 2026 for one additional five-year period, in each case on the terms and subject to the conditions set forth therein. During the Extension Period, our products during shipment;
limited payment, shipping and insurance options for us and our customers;
difficulties in obtaining export, import or other business licensing requirements;
customs and import processes, costs or restrictions;
the potential difficulty of enforcing agreements with foreign customers and suppliers; and
the complications relatedminimum monthly rent payments range from approximately $71,000 to collecting receivables through a foreign country’s legal or banking system.
The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K: