UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 20202021
OR
☐Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission File Number: 000-23329
(Exact name of registrant as specified in its charter)
North Carolina
| | 56-1928817
|
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
170 Southport Drive
Morrisville, North Carolina | | 27560
|
(Address of principal executive offices) | | (Zip Code) |
(919) 468-0399
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value per share
| CTHR
| The Nasdaq Stock Market LLC
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | | Accelerated filer | ☐ |
Non-accelerated filer
| ☒ |
| Smaller reporting company | ☒
|
| | | Emerging growth company | ☐
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 30, 2020,29, 2021, there were 28,965,66030,414,952 shares of the registrant’s common stock, no par value per share, outstanding.
CHARLES & COLVARD, LTD.
FORM 10-Q
For the Quarterly Period Ended September 30, 20202021
|
| Page Number |
PART I – FINANCIAL INFORMATION |
Item 1. | Financial Statements | |
| | 1 |
| | 2 |
| | 3 |
| | 4 |
| | 5 |
Item 2. | | 1920 |
Item 3. | | 3132 |
Item 4. | | 3133 |
|
PART II – OTHER INFORMATION |
Item 1. | | 3233 |
Item 1A. | | 3233 |
Item 6. | | 3534 |
| | 3635 |
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements |
CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED
BALANCE SHEETS
| | September 30, 2020 (unaudited) | | June 30, 2020 | | | September 30, 2021 (unaudited) | | | June 30, 2021 | |
ASSETS | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | | $ | 13,756,695 | | | $ | 13,993,032 | | | $ | 14,116,632 | | | $ | 21,302,317 | |
Restricted cash | | | 105,014 | | | | 624,202 | | | | 5,050,000 | | | | 144,634 | |
Accounts receivable, net | | | 1,625,515 | | | | 670,718 | | | | 2,671,701 | | | | 1,662,074 | |
Inventory, net | | | 8,975,998 | | | | 7,443,257 | | | | 12,043,187 | | | | 11,450,141 | |
Note receivable | | | | 250,000 | | | | 250,000 | |
Prepaid expenses and other assets | | | 1,260,322 | | | | 1,177,860 | | | | 1,427,801 | | | | 952,065 | |
Total current assets | | | 25,723,544 | | | | 23,909,069 | | | | 35,559,321 | | | | 35,761,231 | |
Long-term assets: | | | | | | | | | | | | | | | | |
Inventory, net | | | 20,748,762 | | | | 23,190,702 | | | | 19,571,239 | | | | 17,722,579 | |
Property and equipment, net | | | 969,635 | | | | 999,061 | | | | 1,151,725 | | | | 875,897 | |
Intangible assets, net | | | 180,722 | | | | 170,151 | | | | 207,739 | | | | 209,658 | |
Operating lease right-of-use assets | | | 475,113 | | | | 584,143 | | | | 3,779,395 | | | | 3,952,146 | |
Deferred income taxes, net
| | | | 6,228,672
| | | | 6,350,830
| |
Other assets | | | 50,109 | | | | 51,461 | | | | 49,658 | | | | 49,658 | |
Total long-term assets | | | 22,424,341 | | | | 24,995,518 | | | | 30,988,428 | | | | 29,160,768 | |
TOTAL ASSETS | | $ | 48,147,885 | | | $ | 48,904,587 | | | $ | 66,547,749 | | | $ | 64,921,999 | |
|
| | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| | | | | | | | | | | | | | | |
Current liabilities: |
| | | | | | | | | | | | | | | |
Accounts payable |
| $ | 2,582,538 | | | $ | 3,748,235 | | | $ | 3,752,907 | | | $ | 2,774,373 | |
Operating lease liabilities |
| | 626,763 | | | | 622,493 | | | | 612,988 | | | | 566,083 | |
Current maturity of long-term debt |
| | 386,000 | | | | 193,000 | | |
Accrued expenses and other liabilities |
| | 1,496,755 | | | | 1,922,332 | | | | 1,700,577 | | | | 2,281,807 | |
Total current liabilities |
| | 5,092,056 | | | | 6,486,060 | | | | 6,066,472 | | | | 5,622,263 | |
Long-term liabilities: |
| | | | | | | | | | | | | | | |
Long-term debt |
| | 579,000 | | | | 772,000 | | |
Noncurrent operating lease liabilities |
| | 51,190 | | | | 203,003 | | | | 3,418,110 | | | | 3,600,842 | |
Accrued income taxes |
| | 8,441 | | | | 7,947 | | | | 10,349 | | | | 9,878 | |
Total long-term liabilities |
| | 638,631 | | | | 982,950 | | | | 3,428,459 | | | | 3,610,720 | |
Total liabilities |
| | 5,730,687 | | | | 7,469,010 | | | | 9,494,931 | | | | 9,232,983 | |
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
| | | 0 | | | | 0 | |
Shareholders’ equity: |
|
|
|
|
|
|
|
| | | | | | | | |
Common stock, no par value; 50,000,000 shares authorized; 28,965,660 and 28,949,410 shares issued and outstanding at September 30, 2020 and June 30, 2020, respectively | | | 54,342,864 |
|
|
| 54,342,864 | | |
Common stock, 0 par value; 50,000,000 shares authorized; 30,339,457 and 29,913,095 shares issued and outstanding at September 30, 2021 and June 30, 2021, respectively | | | | 56,454,221 | | | | 56,057,109 | |
Additional paid-in capital | | | 25,987,520 | | | | 25,880,165 | | | | 25,748,258 | | | | 25,608,593 | |
Accumulated deficit | | | (37,913,186 | ) | | | (38,787,452 | ) | | | (25,149,661 | ) | | | (25,976,686 | ) |
Total shareholders’ equity | | | 42,417,198 | | | | 41,435,577 | | | | 57,052,818 | | | | 55,689,016 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 48,147,885 | | | $ | 48,904,587 | | | $ | 66,547,749 | | | $ | 64,921,999 | |
See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONSOPERATIONS(unaudited)
| | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2020 | | 2019 | | | 2021
| | | 2020
| |
Net sales | | $ | 7,926,293 | | | $ | 7,608,421 | | | $ | 10,280,311 | | | $ | 7,926,293 | |
Costs and expenses: | | | | | | | | | | | | | | |
Cost of goods sold | | 4,196,055 | | | 3,876,624 | | | | 5,016,550 | | | | 4,196,055 | |
Sales and marketing | | 1,647,933 | | | 2,229,591 | | | | 2,730,153 | | | | 1,647,933 | |
General and administrative | | | 1,208,035 | | | | 1,349,501 | | | | 1,584,275 | | | | 1,208,035 | |
Total costs and expenses | | | 7,052,023 | | | | 7,455,716 | | | | 9,330,978 | | | | 7,052,023 | |
Income from operations | | 874,270 | | | 152,705 | | | | 949,333 | | | | 874,270 | |
Other income (expense): | | | | | | | | | | | | | | |
Interest income | | 3,459 | | | 61,379 | | | | 355 | | | | 3,459 | |
Interest expense | | (2,439 | ) | | (142 | ) | | | 0 | | | | (2,439 | ) |
Loss on foreign currency exchange | | | (530 | ) | | | (538 | ) | | | (34 | ) | | | (530 | ) |
Total other income (expense), net | | | 490 | | | | 60,699 | | | | 321 | | | | 490 | |
Income before income taxes | | 874,760 | | | 213,404 | | | | 949,654 | | | | 874,760 | |
Income tax expense | | | (494 | ) | | | (6,085 | ) | | | (122,629 | ) | | | (494 | ) |
Net Income | | $ | 874,266 | | | $ | 207,319 | | | $ | 827,025 | | | $ | 874,266 | |
| | | | | | | | | | | | | | |
Net income per common share: | | | | | | | | | | | | | | |
Basic | | $ | 0.03 | | | $ | 0.01 | | | $ | 0.03 | | | $ | 0.03 | |
Diluted | | $ | 0.03 | | | $ | 0.01 | | | $
| 0.03 | | | $
| 0.03 | |
| | | | | | | | | | | | | | |
Weighted average number of shares used in computing net income per common share: | | | | | | | | | | | | | | |
Basic | | 28,786,910 | | | 28,563,688 | | | | 29,971,178 | | | | 28,786,910 | |
Diluted | | 28,839,897 | | | 29,222,936 | | | | 31,097,540 | | | | 28,839,897 | |
See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(unaudited)
| | Three Months Ended September 30, 2020 | | | Three Months Ended September 30, 2021 | |
| | Common Stock | | | | | | | | | | | | Common Stock | | | Additional | | | | | | Total | |
| | Number of Shares | | | Amount | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Total Shareholders’ Equity | | | Number of Shares | | | Amount | | | Paid-in Capital | | | Accumulated Deficit | | | Shareholders’ Equity | |
Balance at June 30, 2020 | | 28,949,410 | | | $ | 54,342,864 | | | $ | 25,880,165 | | | $ | (38,787,452 | ) | | $ | 41,435,577 | | |
Balance at June 30, 2021 | | | | 29,913,095 | | | $ | 56,057,109 | | | $ | 25,608,593 | | | $ | (25,976,686 | ) | | $ | 55,689,016 | |
Stock-based compensation | | - | | | - | | | 107,355 | | | - | | | 107,355 | | | | - | | | | 0 | | | | 279,407 | | | | 0 | | | | 279,407 | |
Issuance of restricted stock | | 178,750 | | | - | | | - | | | - | | | - | | | | 242,725 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
Retirement of restricted stock | | (162,500 | ) | | - | | | - | | | - | | | - | | |
Stock option exercises
| | | | 183,637 | | | | 397,112 | | | | (139,742 | ) | | | 0 | | | | 257,370 | |
Net income | | | - | | | | - | | | | - | | | | 874,266 | | | | 874,266 | | | | - | | | | 0 | | | | 0 | | | | 827,025 | | | | 827,025 | |
Balance at September 30, 2020 | | | 28,965,660 | | | $ | 54,342,864 | | | $ | 25,987,520 | | | $ | (37,913,186 | ) | | $ | 42,417,198 | | |
Balance at September 30, 2021 | | | | 30,339,457 | | | $ | 56,454,221 | | | $ | 25,748,258 | | | $ | (25,149,661 | ) | | $ | 57,052,818 | |
| | Three Months Ended September 30, 2019 | | | Three Months Ended September 30, 2020 | |
| | Common Stock | | | | | | | | | | | | Common Stock | | | Additional
| | | | | | Total | |
| | Number of Shares | | | Amount | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Total Shareholders’ Equity | | | Number of Shares | | | Amount | | | Paid-in Capital | | | Accumulated Deficit | | | Shareholders’ Equity | |
Balance at June 30, 2019 | | 28,027,569 | | | $ | 54,342,864 | | | $ | 24,488,147 | | | $ | (33,111,987 | ) | | $ | 45,719,024 | | |
Issuance of common stock, net of offering costs | | 630,500 | | | - | | | 932,480 | | | - | | | 932,480 | | |
Balance at June 30, 2020 | | | | 28,949,410 | | | $ | 54,342,864 | | | $ | 25,880,165 | | | $ | (38,787,452 | ) | | $ | 41,435,577 | |
Stock-based compensation | | - | | | - | | | 212,380 | | | - | | | 212,380 | | | | - | | | | 0 | | | | 107,355 | | | | 0 | | | | 107,355 | |
Issuance of restricted stock | | 325,000 | | | - | | | - | | | - | | | - | | | | 178,750 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
Retirement of restricted stock | | (1,159 | ) | | - | | | - | | | - | | | - | | | | (162,500 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
Net income | | | - | | | | - | | | | - | | | | 207,319 | | | | 207,319 | | | | - | | | | 0 | | | | 0 | | | | 874,266 | | | | 874,266 | |
Balance at September 30, 2019 | | | 28,981,910 | | | $ | 54,342,864 | | | $ | 25,633,007 | | | $ | (32,904,668 | ) | | $ | 47,071,203 | | |
Balance at September 30, 2020 | | | | 28,965,660 | | | $ | 54,342,864 | | | $ | 25,987,520 | | | $ | (37,913,186 | ) | | $ | 42,417,198 | |
See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2020 | | | 2019 | | | 2021
| | | 2020
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income | | $ | 874,266 | | | $ | 207,319 | | | $ | 827,025 | | | $ | 874,266 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | | | | | | | |
Depreciation and amortization | | 132,456 | | | 124,637 | | | | 124,212 | | | | 132,456 | |
Stock-based compensation | | 107,355 | | | 212,380 | | | | 279,407 | | | | 107,355 | |
Provision for (Recovery of) uncollectible accounts | | 32,514 | | | (28,000 | ) | |
Provision for (Recovery of) sales returns | | 96,000 | | | (31,000 | ) | |
Provision for uncollectible accounts | | | | 32,000 | | | | 32,514 | |
Provision for sales returns | | | | 27,000 | | | | 96,000 | |
Inventory write-off | | 80,000 | | | 23,000 | | | | 232,000 | | | | 80,000 | |
Provision for accounts receivable discounts | | 1,688 | | | 12,476 | | | | 16,419 | | | | 1,688 | |
Deferred income taxes
| | | | 122,158
| | | | 0
| |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | |
Accounts receivable | | (1,084,999 | ) | | 8,382 | | | | (1,085,046 | ) | | | (1,084,999 | ) |
Inventory | | 829,199 | | | (2,254,855 | ) | | | (2,673,706 | ) | | | 829,199 | |
Prepaid expenses and other assets, net | | 27,920 | | | (417,147 | ) | | | (302,985 | ) | | | 27,920 | |
Accounts payable | | (1,165,697 | ) | | 1,048,990 | | | | 978,534 | | | | (1,165,697 | ) |
Accrued income taxes | | 494 | | | 6,085 | | | | 471 | | | | 494 | |
Accrued expenses and other liabilities | | | (573,120 | ) | | | (135,743 | ) | | | | | | | (573,120 | ) |
Net cash used in operating activities | | | (641,924 | ) | | | (1,223,476 | ) | | | (2,139,568 | ) | | | (641,924 | ) |
| | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | |
Purchases of property and equipment | | (101,459 | ) | | (111,317 | ) | | | (398,121 | ) | | | (101,459 | ) |
Payments for intangible assets | | | (12,142 | ) | | | (4,322 | ) | | | 0 | | | | (12,142 | ) |
Net cash used in investing activities | | | (113,601 | ) | | | (115,639 | ) | | | (398,121 | ) | | | (113,601 | ) |
| | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | |
Issuance of common stock, net of offering costs | | | - | | | | 932,480 | | |
Stock option exercises | | | | 257,370 | | | | 0 | |
Net cash provided by financing activities | | | - | | | | 932,480 | | | | 257,370 | | | | 0 | |
| | | | | | | | | | | | | | |
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | | (755,525 | ) | | (406,635 | ) | | | (2,280,319 | ) | | | (755,525 | ) |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD | | | 14,617,234 | | | | 13,006,545 | | | | 21,446,951 | | | | 14,617,234 | |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD | | $ | 13,861,709 | | | $ | 12,599,910 | | | $ | 19,166,632 | | | $ | 13,861,709 | |
| | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | |
Cash paid during the period for interest | | $ | 2,439 | | | $ | 142 | | | $ | 0 | | | $ | 2,439 | |
Cash paid during the period for income taxes | | $ | 3,350 | | | $ | 2,050 | | | $ | 0 | | | $ | 3,350 | |
See Notes to Condensed Consolidated Financial Statements. | | | | | | | |
See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. | DESCRIPTION OF BUSINESS |
Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation, was founded in 1995. The Company manufactures, markets, and distributes Charles & Colvard Created Moissanite® (hereinafter referred to as moissanite or moissanite jewels) and finished jewelry featuring moissanite, including Forever One™, ourthe Company’s premium moissanite gemstone brand, for sale in the worldwide fine jewelry market. The Company also markets and distributes Caydia™® lab grown diamonds and finished jewelry featuring lab grown diamonds for sale in the worldwide fine jewelry market. Moissanite, also known by its chemical name silicon carbide (“SiC”), is a rare mineral first discovered in a meteorite crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. Lab grown diamonds are also grown using technology that replicates the natural diamond growing process. The only differentiation between that of a lab grown diamond and a mined diamond is its origin. The result is a man-made diamond that is chemically, physically, and optically the same as those grown beneath the earth’s surface.
The Company sells loose moissanite jewels, loose lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds at wholesale prices to distributors, manufacturers, retailers, and designers, including some of the largest distributors and jewelry manufacturers in the world. The Company’s finished jewelry and loose moissanite jewels and lab grown diamonds that are mounted into fine jewelry by other manufacturers are sold at retail outlets and via the Internet. The Company sells at retail prices to end-consumers through its wholly owned operating subsidiary, charlesandcolvard.com, LLC, third-party online marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets. The Company also sells at discount retail prices to end-consumers on its own transactional website, moissaniteoutlet.com, through charlesandcolvard.com, LLC.
2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation – The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three months ended September 30, 20202021 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2021.2022.
The condensed consolidated financial statements as of September 30, 2021 and for the three months ended September 30, 20202021 and 20192020 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of June 30, 20202021 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes contained in Item 8 of the Company’s Annual Report on Form 10-K (the “2020“2021 Annual Report”) for the fiscal year ended June 30, 20202021 filed with the SEC on September 4, 2020.3, 2021.
The accompanying condensed consolidated financial statements as of and for the three months ended September 30, 20202021 and 2019,2020, and as of the fiscal year ended June 30, 2020,2021, include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC; Charles & Colvard Direct, LLC; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was entered into dormancy as of September 30, 2020 following its re-activation in December 2017. Charles & Colvard Direct, LLC, had no operating activity during the three-month period ended September 30, 2020 or 2019. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 and has had no operating activity since 2008. Charles & Colvard Direct, LLC, had no operating activity during the three-month periods ended September 30, 2021 or 2020. All intercompany accounts have been eliminated.
Significant Accounting Policies – In the opinion of the Company’s management, except as discussed below, the Company’s significant accounting policies used for the three months ended September 30, 2020,2021, are consistent with those used for the fiscal year ended June 30, 2020.2021. Accordingly, please refer to Note 2 to the Consolidated Financial Statements in the 20202021 Annual Report for the Company’s significant accounting policies.
Use of Estimates – The future effects of the COVID-19 pandemic on the Company’s results of operations, cash flows, and financial position continue to remain unclear. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As future events and their effects, including the impact of the COVID-19 pandemic and the related responses, cannot be fully determined with precision, actual results of operations, cash flow, and financial position could differ significantly from estimates. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets, uncertain tax positions,stock-based compensation, and revenue recognition. Actual results could differ materially from those estimates.
Reclassifications – Certain amountsChanges in estimates are reflected in the Company’s condensed consolidated financial statements for the quarter ended September 30, 2019 have been reclassified to conform to current presentation related to certain customer credit balances that were reclassified from accounts payable to accrued expenses and other liabilities in the amount of approximately $142,000. These reclassifications had no impact onperiod in which the Company’s condensed consolidated financial position or condensed consolidated results of operations as of or for the quarterly periods ended September 30, 2020 and 2019.change in estimate occurs.
Cash and Cash Equivalents – All highly liquid investments with an original maturity of three months or less from the date of purchase are considered to be cash equivalents.
Restricted Cash – In accordance with the terms of the Company’s cash collateralized $5.00 million credit facility from JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), which expires by its terms on July 31, 2022, the Company is required to keep $5.05 million in a cash deposit account held by JPMorgan Chase. Such amount is held as security for the Company’s credit facility from JPMorgan Chase. Accordingly, this cash deposit held by JPMorgan Chase is classified as restricted cash for financial reporting purposes on the Company’s condensed consolidated balance sheets. For additional information regarding the Company’s cash collateralized credit facility, see Note 10, “Debt.”
In accordance with cash management process requirements relatingrelated to the Company’s asset-based revolving credit facility from White Oak Commercial Finance, LLC (“White Oak”), which the Company had in place prior to obtaining the JPMorgan Chase Credit Facility, there arewere access and usage restrictions on certain cash deposit balances for periods of up to two business days during which time such deposits arewere held by White Oak for the benefit of the Company. During the period these cash deposits arewere held by White Oak, such amounts arewere classified as restricted cash for reporting purposes on the Company’s condensed consolidated balance sheets. In the event that the Company has an outstanding balance on its revolving credit facility from White Oak, restricted cash balances held by White Oak would be applied to reduce such outstanding amounts.
The Company has full access to its cash balances without restriction following the period of time such cash is held by White Oak. For additional information regarding the Company’s prior asset-based revolving credit facility, see Note 10, “Debt.”
The reconciliation of cash, cash equivalents, and restricted cash, as presented on the Condensed Consolidated Statements of Cash Flows, consist of the following as of the dates presented:
| | September 30, 2020 | | June 30, 2020 | | | September 30, 2021
| | | June 30, 2021
| |
Cash and cash equivalents | | $ | 13,756,695 | | | $ | 13,993,032 | | | $ | 14,116,632 | | | $ | 21,302,317 | |
Restricted cash | | | 105,014 | | | | 624,202 | | | | 5,050,000 | | | | 144,634 | |
Total cash, cash equivalents, and restricted cash | | $ | 13,861,709 | | | $ | 14,617,234 | | | $ | 19,166,632 | | | $ | 21,446,951 | |
Recently Adopted/Issued Accounting Pronouncements–Effective July 1, 2020,2021, the Company adopted the new accounting standard related to the measurement and disclosure of credit losses on financial instruments. The newthat provides guidance includes a current expected credit loss (“CECL”) model that requires an entity to estimate credit losses expected over the life of an exposure or pool of exposures based on historical information, current conditions, and supportable forecasts at the time the asset is recognized and is measured at each reporting period. The new guidance principally aligns the Company’s accounting for its trade accounts receivable with the economics of extending credit and improves its financial reporting by requiring timelier recording of related credit losses.
The adoption of the new accounting standard did not have a material impact on the Company’s financial position or results of operations and the Company did not record a cumulative-effect adjustment to retained earnings. The Company amended its allowance for credit losses policy, as set forth below, for the implementationsimplification of the new accounting standard.
The Company records an allowance for credit losses, which includes a provision for expected losses based on historical write-offs, adjusted for current conditions as deemed necessary, and a specific reserve for accounts deemed at risk. The allowance is the Company’s estimate for accounts receivable as of the balance sheet date that ultimately will not be collected. Any changes in the allowance are reflected in the results of operations in the period in which the change occurs. The Company writes-off accounts receivable when it becomes probable, based upon customer facts and circumstances, that such amounts will not be collected.
Effective July 1, 2020, the Company also adopted the new accounting standard in connection with accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The new standard provides guidance to determine the accounting for fees paid in connection with a cloud computing arrangement that may include a software license. The adoption of this new accounting standard did not have a material impact on the Company’s financial position or results of operations.
In December 2019, the FASB issued guidance on simplifying the accounting for income taxes that is intended to reduce the complexity while maintaining or improving the usefulness of tax disclosure information in an entity’s financial statements. The new guidance is effective for fiscal years beginning after December 15, 2020. The Company does not expect theresulting impact of the new guidance todid not have a material impact toon the Company’s condensed consolidated financial statements.
In March 2020, and as updated in January 2021, in response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), the FASB issued new guidance to ease the burden in accounting for or recognizing the effects of referenced interest rate reform on financial reporting. The new guidance is effective as of March 12, 2020 through December 31, 2022. As described in more detail in Note 10, “Debt”, borrowings under the Company’s new line of credit are based on a rate equal to the one-month LIBOR. As of September 30, 2020,2021, the Company had not0t borrowed against its line of credit, and therefore, is not subject to recognizing or disclosing any effect of referenced rate reform as of its quarterly period ended September 30, 2020.2021.
3. | SEGMENT INFORMATION AND GEOGRAPHIC DATA |
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by the chief operating decision makermanagement for making operating decisions and assessing performance as the source of the Company’s operating and reportable segments.
The Company manages its business through two2 operating and reportable segments based on its distribution channels to sell its product lines, loose jewels and finished jewelry: its “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, moissaniteoutlet.com, third-party online marketplaces, drop-ship retail, and other pure-play, exclusively e-commerce outlets; and its “Traditional” segment, which consists of wholesale and retail customers. The accounting policies of the Online Channels segment and Traditional segment are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies” of this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements in the 20202021 Annual Report.
The Company evaluates the financial performance of its segments based on net sales; product line gross profit, or the excess of product line sales over product line cost of goods sold; and operating income. The Company’s product line cost of goods sold is defined as product cost of goods sold, excluding non-capitalized expenses from the Company’s manufacturing and production control departments, comprising personnel costs, depreciation, leases, utilities, and corporate overhead allocations; freight out; inventory write-offs;write-downs; and other inventory adjustments, comprising costs of quality issues, and damaged goods.
The Company allocates certain general and administrative expenses between its Online Channels segment and its Traditional segment based on net sales and number of employees to arrive at segment operating income. Unallocated expenses remain in its Traditional segment.
Summary financial information by reportable segment is as follows:
| | Three Months Ended September 30, 2020 | | | Three Months Ended September 30, 2021 | |
| | Online Channels | | Traditional | | Total | | | Online Channels | | | Traditional | | | Total | |
Net sales | | | | | | | | | | | | | | | | |
Finished jewelry | | $ | 3,623,462 | | | $ | 711,876 | | | $ | 4,335,338 | | | $ | 4,486,958 | | | $ | 1,199,329 | | | $ | 5,686,287 | |
Loose jewels | | | 841,833 | | | | 2,749,122 | | | | 3,590,955 | | | | 882,847 | | | | 3,711,177 | | | | 4,594,024 | |
Total | | $ | 4,465,295 | | | $ | 3,460,998 | | | $ | 7,926,293 | | | $ | 5,369,805 | | | $ | 4,910,506 | | | $ | 10,280,311 | |
| | | | | | | | | | | | | | | | | | | | | |
Product line cost of goods sold | | | | | | | | | | | | | | | | | | | | | |
Finished jewelry | | $ | 1,333,383 | | | $ | 420,906 | | | $ | 1,754,289 | | | $ | 1,711,224 | | | $ | 623,258 | | | $ | 2,334,482 | |
Loose jewels | | | 312,689 | | | | 1,431,233 | | | | 1,743,922 | | | | 314,105 | | | | 1,745,341 | | | | 2,059,446 | |
Total | | $ | 1,646,072 | | | $ | 1,852,139 | | | $ | 3,498,211 | | | $ | 2,025,329 | | | $ | 2,368,599 | | | $ | 4,393,928 | |
| | | | | | | | | | | | | | | | | | | | | |
Product line gross profit | | | | | | | | | | | | | | | | | | | | | |
Finished jewelry | | $ | 2,290,079 | | | $ | 290,970 | | | $ | 2,581,049 | | | $ | 2,775,734 | | | $ | 576,071 | | | $ | 3,351,805 | |
Loose jewels | | | 529,144 | | | | 1,317,889 | | | | 1,847,033 | | | | 568,742 | | | | 1,965,836 | | | | 2,534,578 | |
Total | | $ | 2,819,223 | | | $ | 1,608,859 | | | $ | 4,428,082 | | | $ | 3,344,476 | | | $ | 2,541,907 | | | $ | 5,886,383 | |
| | | | | | | | | | | | | | | | | | | | | |
Operating income | | $ | 774,665 | | | $ | 99,605 | | | $ | 874,270 | | | $ | 321,671 | | | $ | 627,662 | | | $ | 949,333 | |
| | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 54,352 | | | $ | 78,103 | | | $ | 132,456 | | | $ | 67,702 | | | $ | 56,510 | | | $ | 124,212 | |
| | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 59,250 | | | $ | 42,209 | | | $ | 101,459 | | | $ | 59,260 | | | $ | 338,861 | | | $ | 398,121 | |
| | Three Months Ended September 30, 2019 | |
| | Online Channels | | | Traditional | | | Total | |
Net sales | | | | | | | | | |
Finished jewelry | | $ | 2,977,348 | | | $ | 880,647 | | | $ | 3,857,995 | |
Loose jewels | | | 728,282 | | | | 3,022,144 | | | | 3,750,426 | |
Total | | $ | 3,705,630 | | | $ | 3,902,791 | | | $ | 7,608,421 | |
| | | | | | | | | | | | |
Product line cost of goods sold | | | | | | | | | | | | |
Finished jewelry | | $ | 1,212,873 | | | $ | 490,037 | | | $ | 1,702,910 | |
Loose jewels | | | 265,194 | | | | 1,534,258 | | | | 1,799,452 | |
Total | | $ | 1,478,067 | | | $ | 2,024,295 | | | $ | 3,502,362 | |
| | | | | | | | | | | | |
Product line gross profit | | | | | | | | | | | | |
Finished jewelry | | $ | 1,764,475 | | | $ | 390,610 | | | $ | 2,155,085 | |
Loose jewels | | | 463,088 | | | | 1,487,886 | | | | 1,950,974 | |
Total | | $ | 2,227,563 | | | $ | 1,878,496 | | | $ | 4,106,059 | |
| | | | | | | | | | | | |
Operating income | | $ | 45,665 | | | $ | 107,040 | | | $ | 152,705 | |
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 49,250 | | | $ | 75,387 | | | $ | 124,637 | |
| | | | | | | | | | | | |
Capital expenditures | | $ | 73,725 | | | $ | 37,592 | | | $ | 111,317 | |
| | Three Months Ended September 30, 2020 | |
| | Online Channels | | | Traditional | | | Total | |
Net sales | | | | | | | | | |
Finished jewelry | | $ | 3,623,462 | | | $ | 711,876 | | | $ | 4,335,338 | |
Loose jewels | | | 841,833 | | | | 2,749,122 | | | | 3,590,955 | |
Total | | $ | 4,465,295 | | | $ | 3,460,998 | | | $ | 7,926,293 | |
| | | | | | | | | | | | |
Product line cost of goods sold | | | | | | | | | | | | |
Finished jewelry | | $ | 1,333,383 | | | $ | 420,906 | | | $ | 1,754,289 | |
Loose jewels | | | 312,689 | | | | 1,431,233 | | | | 1,743,922 | |
Total | | $ | 1,646,072 | | | $ | 1,852,139 | | | $ | 3,498,211 | |
| | | | | | | | | | | | |
Product line gross profit | | | | | | | | | | | | |
Finished jewelry | | $ | 2,290,079 | | | $ | 290,970 | | | $ | 2,581,049 | |
Loose jewels | | | 529,144 | | | | 1,317,889 | | | | 1,847,033 | |
Total | | $ | 2,819,223 | | | $ | 1,608,859 | | | $ | 4,428,082 | |
| | | | | | | | | | | | |
Operating income
| | $ | 774,665 | | | $ | 99,605 | | | $ | 874,270 | |
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 54,352 | | | $ | 78,103 | | | $ | 132,456 | |
| | | | | | | | | | | | |
Capital expenditures | | $ | 59,250 | | | $ | 42,209 | | | $ | 101,459 | |
The Company does not allocate any assets to the reportable segments, and, therefore, no asset information is reported to the chief operating decision maker or disclosed in the financial information for each segment.
A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:
| | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2020 | | 2019 | | | 2021
| | | 2020
| |
Product line cost of goods sold | | $ | 3,498,211 | | | $ | 3,502,362 | | | $ | 4,393,928 | | | $ | 3,498,211 | |
Non-capitalized manufacturing and production control expenses | | 329,406 | | | 389,877 | | | | 342,401 | | | | 329,406 | |
Freight out | | 175,338 | | | 131,119 | | | | 217,506 | | | | 175,338 | |
Inventory write-off | | 80,000 | | | 23,000 | | | | 232,000 | | | | 80,000 | |
Other inventory adjustments | | | 113,100 | | | | (169,734 | ) | | | (169,285 | ) | | | 113,100 | |
Cost of goods sold | | $ | 4,196,055 | | | $ | 3,876,624 | | | $ | 5,016,550 | | | $ | 4,196,055 | |
The Company recognizes sales by geographic area based on the country in which the customer is based. Sales to international end consumers made through the Company’s transactional website,websites, charlesandcolvard.com and moissaniteoutlet.com, are included in international sales for financial reporting purposes. A portion of the Company’s Traditional segment sales made to international wholesale distributors represents products sold internationally that may be re-imported to U.S. retailers.
All intangible assets, as well as property and equipment, as of September 30, 2020 and June 30, 2020, are held and located in the United States.
The following presents net sales data by geographic area:
| Three Months Ended September 30, | | Three Months Ended September 30, | |
| 2020 | | 2019 | | 2021
| | 2020
| |
Net sales: | | | | | | | | |
United States | | $ | 7,499,720 | | | $ | 6,763,876 | | | $ | 9,824,730 | | | $ | 7,499,720 | |
International | | | 426,573 | | | | 844,545 | | | | 455,581 | | | | 426,573 | |
Total | | $ | 7,926,293 | | | $ | 7,608,421 | | | $ | 10,280,311 | | | $ | 7,926,293 | |
4. | FAIR VALUE MEASUREMENTS |
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy consists of three levels based on the reliability of inputs, as follows:
Level 1. Quoted prices in active markets for identical assets and liabilities;
Level 2. Inputs other than Level 1 quoted prices that are directly or indirectly observable; and
Level 3. Unobservable inputs that are not corroborated by market data.
The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The financial instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, notes receivable, trade accounts receivable, and trade accounts payable. All financial instruments, including but not limited to the note receivable, are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these financial instruments.
Assets that are measured at fair value on a non-recurring basis include property and equipment, leasehold improvements, and intangible assets comprising patents, license rights, and trademarks. These items are recognized at fair value when they are considered to be impaired. For the three months ended September 30, 2021 and 2020, and 2019, no0 impairment was recorded.
The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:
| | September 30, 2020 | | June 30, 2020 | | | September 30, 2021
| | | June 30, 2021
| |
Finished jewelry: | | | | | | | | | | | |
Raw materials | | $ | 903,745 | | | $ | 821,536 | | | $ | 1,681,561 | | | $ | 1,476,514 | |
Work-in-process | | 1,535,064 | | | 602,390 | | | | 2,034,428 | | | | 779,593 | |
Finished goods | | 6,565,932 | | | 6,019,985 | | | | 9,993,963 | | | | 8,025,816 | |
Finished goods on consignment | | | 2,222,092 | | | | 2,297,907 | | | | 2,131,244 | | | | 2,050,372 | |
Total finished jewelry | | $ | 11,226,833 | | | $ | 9,741,818 | | | $ | 15,841,196 | | | $ | 12,332,295 | |
Loose jewels: | | | | | | | | | | | | | | |
Raw materials | | $ | 2,314,759 | | | $ | 3,526,399 | | | $ | 1,683,330 | | | $ | 1,775,505 | |
Work-in-process | | 10,212,689 | | | 10,453,586 | | | | 9,058,183 | | | | 9,893,443 | |
Finished goods | | 5,682,606 | | | 6,619,487 | | | | 4,783,702 | | | | 4,942,192 | |
Finished goods on consignment | | | 205,675 | | | | 204,635 | | | | 169,879 | | | | 154,968 | |
Total loose jewels | | | 18,415,729 | | | | 20,804,107 | | | | 15,695,094 | | | | 16,766,108 | |
Total supplies inventory | | | 82,198 | | | | 88,034 | | | | 78,136 | | | | 74,317 | |
Total inventory | | $ | 29,724,760 | | | $ | 30,633,959 | | | $ | 31,614,426 | | | $ | 29,172,720 | |
As of the dates presented, the Company’s total inventories, net of reserves, are classified as follows:
| | September 30, 2020 | | June 30, 2020 | | | September 30, 2021
| | | June 30, 2021
| |
Short-term portion | | $ | 8,975,998 | | | $ | 7,443,257 | | | $ | 12,043,187 | | | $ | 11,450,141 | |
Long-term portion | | | 20,748,762 | | | | 23,190,702 | | | | 19,571,239 | | | | 17,722,579 | |
Total | | $ | 29,724,760 | | | $ | 30,633,959 | | | $ | 31,614,426 | | | $ | 29,172,720 | |
The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of September 30, 20202021 and June 30, 2020,2021, work-in-process inventories issued to active production jobs approximated $2.51$2.95 million and $1.34$2.23 million, respectively.
The Company’s moissanite and lab grown diamond jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, the majority of jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends, and product obsolescence is closely monitored and reviewed by management as of and for each financial reporting period.
The Company manufactures finished jewelry featuring moissanite and lab grown diamonds. Relative to loose moissanite jewels and lab grown diamonds, finished jewelry is more fashion-oriented and subject to styling trends that could render certain designs obsolete over time. The majority of the Company’s finished jewelry featuring moissanite and lab grown diamonds is held in inventory for resale and largely consists of such core designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company generally holds smaller quantities of designer-inspired and trend moissanite fashion jewelry that is available for resale through retail companies and through its Online Channels segment. The Company also carries a limited amount of inventory as part of its sample line that is usedthe Company uses in the selling process to its customers.
The Company’s continuing operating subsidiaries carry no net inventories, and inventory is transferred without intercompany markup from the parent entity as product line cost of goods sold when sold to the end consumer.
The Company’s inventories are stated at the lower of cost or net realizable value on an average cost basis. Each accounting period the Company evaluates the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves, which also include significant estimates by management. management, including the effect of market factors and sales trends. Changes to the Company’s inventory reserves and allowances are accounted for in the current accounting period in which a change in such reserves and allowances is observed and deemed appropriate, including changes in management’s estimates used in the process to determine such reserves and valuation allowances.allowances.
6. | RETURNS ASSET AND REFUND LIABILITIESNOTE RECEIVABLE |
In connection with its revenue recognition accounting policy,March 2021, the Company providesentered into a $250,000 convertible promissory note agreement (the “Convertible Promissory Note”) with an unrelated third-party strategic marketing partner. The Convertible Promissory Note is unsecured and matures on March 5, 2022 (the “Maturity Date”). The Company has accounted for the Convertible Promissory Note as a returns asset accountcurrent note receivable within the accompanying consolidated financial statements. Interest is accrued at a simple rate of 0.14% per annum and will accrue until the Convertible Promissory Note is converted in accordance with the conversion privileges contained within the Convertible Promissory Note or is repaid. Principal outstanding during an event of default accrues interest at the rate of 5% per annum. Accrued and unpaid interest on the Convertible Promissory Note is classified as a refund liabilities account to record the effects of its estimated product returns and sales returns allowance. The Company’s returnscurrent asset and refund liabilities are updated at the end of each financial reporting period and the effect of such changes are accounted forincluded in the period in which such changes occur.
The Company estimates anticipated product returns in the form of a refund liability based on historical return percentages and current period sales levels. The Company also accrues a related returns asset for goods expected to be returned in salable condition, less any expected costs to recover such goods, including return shipping costs that the Company may incur. As of September 30, 2020 and June 30, 2020, the Company’s refund liabilities balances were $800,000 and $704,000, respectively, and are included as allowances for sales returns within accounts receivable, net, in the accompanying condensed consolidated balance sheets. As of September 30, 2020 and June 30, 2020, the Company’s returns asset balances were $319,000 and $289,000, respectively, and are included within prepaid expenses and other assets in the accompanying condensed consolidated balance sheets.financial statements.
Subject to the borrower’s completion of a specified equity financing transaction (an “Equity Financing”) on or prior to the Maturity Date, the unpaid principal amount, including accrued and unpaid interest, automatically converts into equity units of the most senior class of equity securities issued to investors in the Equity Financing at the lesser of 80% of the per unit price of the units purchased by investors or the price equal to $33,500,000 divided by the aggregate number of outstanding units of the borrower immediately prior to the closing of the financing. Unless converted as provided in the Convertible Promissory Note, the principal amount, including accrued and unpaid interest, will, on the Maturity Date, at the Company’s option either (i) become due and payable to the Company, or (ii) convert into equity units at the specified conversion price in accordance with the terms of the Convertible Promissory Note.
7. | ACCRUED EXPENSES AND OTHER LIABILITIES |
Accrued expenses and other liabilities, current, consist of the following as of the dates presented:
| | September 30, 2020 | | June 30, 2020 | | | September 30, 2021
| | | June 30, 2021
| |
Accrued sales tax
| | | $ | 658,863 | | | $ | 555,547 | |
Deferred revenue | | $ | 414,525 | | | $ | 794,740 | | | | 559,150 | | | | 774,891 | |
Accrued compensation and related benefits | | 406,587 | | | 395,006 | | | | 303,675 | | | | 866,705 | |
Accrued sales tax | | 358,339 | | | 295,651 | | |
Accrued severance | | 211,157 | | | 338,355 | | |
Accrued cooperative advertising | | 106,146 | | | 89,517 | | | | 80,681 | | | | 68,185 | |
Accrued income taxes
| | | | 16,478
| | | | 16,478
| |
Other | | | 1 | | | | 9,063 | | | | 81,730 | | | | 1 | |
Total accrued expenses and other liabilities | | $ | 1,496,755 | | | $ | 1,922,332 | | | $ | 1,700,577 | | | $ | 2,281,807 | |
The Company recognized anFor the three months ended September 30, 2021, the Company’s statutory tax rate was 22.24% and consisted of the federal income tax rate of 21% and a blended state income tax rate of 1.24%, net expense for estimated tax, penalties, and interest associated with uncertain tax positions of approximately $500 and $6,100 forthe federal benefit. For the three months ended September 30, 2020, the Company’s statutory tax rate was 22.11% and 2019, respectively.consisted of the federal income tax rate of 21% and a blended state income tax rate of 1.11%, net of the federal benefit. The Company’s effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax accounting arising primarily from the permanent tax benefits associated with stock compensation transactions during the quarter. For the three months ended September 30, 2021, the Company’s effective tax rate was 12.91%.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. As of June 30, 2021, cumulative positive taxable income over the last three tax years had been generated in the U.S., as compared to the negative evidence of cumulative losses in previous years. The Company’s management also determined that its expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that included significant management estimates and assumptions, would be sufficient to result in full utilization of the Company’s federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, the Company’s management determined that sufficient positive evidence existed as of June 30, 2021, to conclude that it was more likely than not deferred tax assets of approximately $6.35 million would be realizable, and it reduced the Company’s valuation allowance accordingly.
Accordingly, the Company recognized a net income tax expense of approximately $123,000 for the three months ended September 30, 2020 and2021, compared with a net income tax expense of $500 for the three months ended September 30, 2020. With the reduction of its valuation allowance during the fiscal year ended June 30, 2020,2021, the Company recognized deferred income tax expense during the three months ended September 30, 2021 in the amount of approximately $122,000. Included in its tax provision, the Company records estimated taxes, penalties, and interest associated with uncertain tax positions as income tax expense and recognized such expense related to these items of approximately $500 for each of the three months ended September 30, 2021 and 2020.
As of September 30, 2021, the Company’s management determined that its expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant management estimates and assumptions, would continue to be sufficient to result in full utilization of the Company’s remaining federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, the Company’s management determined that sufficient positive evidence existed as of September 30, 2021, to conclude that it is more likely than not deferred tax assets of approximately $6.23 million remain realizable. Conversely, the Company’s management further determined that sufficient negative evidence continued to exist to conclude it was uncertain that the Company would have sufficient future taxable income to utilize certain of its deferred tax assets. Therefore, the Company continued to maintain a full valuation allowance against itsthe deferred tax assets asrelating to certain state net operating loss carryforwards from the Company’s e-commerce subsidiary due to the timing uncertainty of September 30, 2020 and June 30, 2020.when it will generate positive taxable income to utilize the associated deferred tax assets. In addition, a valuation allowance remains against certain deferred tax assets relating to operating loss carryforwards relating to the Company’s dormant subsidiary located in Hong Kong.
9. | COMMITMENTS AND CONTINGENCIES |
Lease Arrangements
On December 9, 2013, the Company entered into a Lease Agreement, as amended on December 23, 2013, and April 15, 2014, and January 29, 2021 (the “Lease Agreement”), for its corporate headquarters, which occupies approximately 36,350 square feet of office, storage and light manufacturing space and is classified as an operating lease for financial reporting purposes. The expiration date of the base term of the Lease Agreement expires onin effect as of September 30, 2021 is October 31, 20212026 and the terms of the Lease Agreement contain no early termination provisions. Provided there is no outstanding uncured event of default under the Lease Agreement, the Company has two optionsan option to extend the lease term for a period of five years under each option.years. The Company’s option to extend the term of the Lease Agreement must be exercised in writing on or before 270 days prior to expiration of the then-current term. If the options are exercised, the monthly minimum rent for each of the extended terms will be adjusted to the then prevailing fair market rate.
The Company took possession of the leased property on May 23, 2014, once certain improvements to the leased space were completed and did not have access to the property before this date. TheseUpon execution of the third amendment to the Lease Agreement (the “Lease Amendment”) on January 29, 2021, the Lease Amendment included a rent abatement in the amount of approximately $214,000, which is reflected in the rent payments used in the calculation of the right-of-use (“ROU”) asset and lease liability once remeasured upon the execution of the Lease Amendment to extend the lease term. The Lease Amendment also included an allowance for leasehold improvements and other lease related incentives offered by the landlord totaledin an amount not to exceed approximately $623,000, of which approximately $393,000 was unamortized as of July 1, 2019, the effective date upon which$545,000. Once such costs have been incurred, the Company adoptedwill be reimbursed for qualified costs by the currentlandlord and the Company will reduce the remaining ROU asset and lease accounting standard.liability by the amount of the reimbursement. Such reductions of the ROU asset and lease liability will be recognized prospectively by the Company over the remaining term of the lease.
The Company has no other material operating leases and is not party to leases that would qualify for classification as a finance lease, variable lease, or short-term lease.
As of September 30, 2020,2021, the Company’s balance sheet classifications of its leases are as follows:
Operating Leases: | | | |
Noncurrent operating lease ROU assets | | $ | 475,113 | |
| | | | |
Current operating lease liabilities | | $ | 626,763 | |
Noncurrent operating lease liabilities | | | 51,190 | |
Total operating lease liabilities | | $ | 677,953 | |
Operating Leases: | | | |
Noncurrent operating lease ROU assets | | $ | 3,779,395 | |
| | | | |
Current operating lease liabilities | | $ | 612,988 | |
Noncurrent operating lease liabilities | | | 3,418,110 | |
Total operating lease liabilities | | $ | 4,031,098 | |
The Company’s total operating lease cost for the three months ended September 30, 20202021 and 20192020 was approximately $202,000 and $131,000, and $137,000, respectively.
As of September 30, 2020,2021, the Company’s estimated incremental borrowing rate used and assumed discount rate with respect to operating leases was 7.14%2.81% and the remaining operating lease term was 1.085.08 years.
As of September 30, 2020,2021, the Company’s remaining future payments under operating leases for each fiscal year ending June 30 are as follows:
2021 | | $ | 482,615 | | |
2022 | | | 219,723 | | | $ | 410,799 | |
2023
| | | | 869,742 | |
2024
| | | | 893,660 | |
2025
| | | | 918,236 | |
2026
| | | | 943,487 | |
2027
| | | | 317,327 | |
Total lease payments | | 702,338 | | | | 4,353,251 | |
Less: imputed interest | | | 24,385 | | | | 322,153 | |
Present value of lease payments | | 677,953 | | | | 4,031,098 | |
Less: current lease obligations | | | 626,763 | | | | 612,988 | |
Total long-term lease obligations | | $ | 51,190 | | | $ | 3,418,110 | |
The Company makes cash payments for amounts included in the measurement of its lease liabilities. During the three months ended September 30, 20202021 and 2019,2020, cash paid for operating leases was approximately $162,000 and $170,000, and $164,000, respectively, and, except forrespectively. Upon the execution of the Lease Amendment, the Company recorded additional ROU assets recorded upon adoptionin the amount of the current lease accounting standard as of July 1, 2019, there were no new ROU assetsapproximately $3.9 million obtained in exchange for newthe additional operating lease liabilities.liability during the fiscal year ended June 30, 2021.
On December 12, 2014, the Company entered into an exclusive supply agreement (the “Supply Agreement”) with Cree, Inc., now known as Wolfspeed, Inc. (“Cree”Wolfspeed”). Under the Supply Agreement, subject to certain terms and conditions, the Company agreed to exclusively purchase from Cree,Wolfspeed, and CreeWolfspeed 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) provide the Company with one1 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) establish a process by which CreeWolfspeed 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) permit the Company to purchase certain amounts of SiC materials from third parties under limited conditions.
Effective June 30, 2020, the Supply Agreement was further amended to extend the expiration date to June 29, 2025, which may be extended again by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i)(i) spread the Company’s 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)(ii) establish a process by which CreeWolfspeed has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii)(iii) permit the Company to purchase revised amounts of SiC materials from third parties under limited conditions.
The Company’s total purchase commitment under the Supply Agreement, as amended, until June 2025 is approximately $52.95 million, of which approximately $36.60$31.35 million remains to be purchased as of September 30, 2020.2021. Over the life of the Supply Agreement, as amended, the Company’s future minimum annual purchase commitments of SiC crystals range from approximately $4$4.00 million to $10$10.00 million each year.
During the three months ended September 30, 2020,2021, the Company did not purchasepurchased approximately $1.50 million of SiC crystals from CreeWolfspeed pursuant to the terms of the Supply Agreement, as amended. During the three months ended September 30, 2019,2020, the Company purchased approximately $2.49 million ofdid 0t purchase SiC crystals from Cree.Wolfspeed pursuant to the terms of the Supply Agreement, as amended.
COVID-19 Update
The global 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 orderscontinues to “shelter-in-place” and quarantine restrictions, and created significant disruption of the financial markets. Certain jurisdictions have begun re-opening only to return to restrictions due to increases in new COVID-19 cases. Evenpresent unprecedented business challenges 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.Company’s fiscal year ending June 30, 2022 (“Fiscal 2022”). The Company’s management has taken measures to protect the health and safety of the Company’s employees, work with its customers and suppliers to minimize disruptions, reduce the Company’sits expenses, and support its community in addressing the challenges posed by thisthe ongoing COVID-19 pandemic.
The pandemic continues to present unprecedented business challenges, and the Company has experienced impacts on its business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, including using accelerated payments in some cases to the Company’s suppliers that are due by their terms in future periods and the Company expects to continue accelerating payments to certain suppliers through at least a portion of Fiscal 2022. The Company is also seeing a sharp increase in international freight costs, with limited availability and long delays causing disruption in the global supply chain. Accordingly, the Company’s management is taking steps where possible to mitigate such potential delays in supplier deliveries impactsby accelerating orders and increasing order quantities.
Following the government mandated shut down during the early days of travel restrictions, access to some locations, the effects on net revenue related to reduced demand and store closures, and the impacts of remotepandemic, work and adjusted work schedules.
Despite these challenges,in the Company’s efforts, especiallyproduction and distribution facilities has continued throughout the remainder of the pandemic, consistent with regardguidance from federal, state, and local officials to product fulfillmentminimize the spread of COVID-19. The Company’s management continues to take actions to equip its employees with personal protective equipment, establish minimum staffing and supply chain, helpedsocial distancing policies, sanitize workspaces more frequently, adopt alternate work schedules, and institute other measures aimed to partially mitigatesustain production and related services while minimizing the disruptions caused bytransmission of COVID-19, including measures to facilitate the provision of vaccines to the Company’s employees in line with state and local guidelines. In addition, the Company has maintained a flexible teleworking policy for its employees who can meet customer commitments remotely, and a portion of the Company’s workforce continues teleworking.
Although the COVID-19 pandemic did not have a significant adverse impact on the Company’s operationsfinancial results in the first quarter of its fiscal year ending Juneended September 30, 2021, or Fiscal 2021. However, the ultimate impact of the COVID-19 pandemic on the Company’s operations and financial performance in Fiscal 2021, and future periods, including management’s ability to execute its business plan and strategic initiatives in the expected timeframe,timeframes, remains uncertain and will depend on future pandemic related developments, including the duration and spread of the pandemic, any potential subsequent waves of COVID-19 pandemicand its variant viral infections, the effectiveness, distribution and acceptance of COVID-19 vaccines, and related actions taken by the U.S. Government, state and local government officials, and international governmentsactions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. The long-term impactsCompany cannot at this time predict the full impact of the COVID-19 pandemic, on global consumer buying behaviors, which impacts demand forbut the Company’s products and services, are also difficult to predict.management believes there is a risk that the COVID-19 pandemic could adversely impact the Company’s business, financial condition, results of operations and/or cash flows in Fiscal 2022.
Line of Credit
Effective July 7,2021, the Company obtained from JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) a $5.00 million cash collateralized line of credit facility (the “JPMorgan Chase Credit Facility”). The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The JPMorgan Chase Credit Facility is secured by a cash deposit in the amount of $5.05 million held by JPMorgan Chase as collateral for the line of credit facility.
Each advance accrues interest at a rate equal to JPMorgan Chase’s monthly LIBOR rate multiplied by a statutory reserve rate for eurocurrency funding to which JPMorgan Chase is subject with respect to the adjusted LIBOR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum. Interest is calculated monthly on an actual/360 day basis and payable monthly in arrears. Principal outstanding during an event of default, at JPMorgan Chase’s option, accrues interest at a rate of 3% per annum in excess of the above rate. Any advance may be prepaid in whole or in part without penalty at any time.
As of September 30, 2021, the Company had 0t borrowed against the JPMorgan Chase Credit Facility.
Prior to obtaining the JPMorgan Chase Credit Facility, the Company and its wholly owned subsidiary, charlesandcolvard.com, LLC (collectively, the “Borrowers”), had a $5.00 million asset-based revolving credit facility (the “White Oak Credit Facility”) from White Oak Commercial Finance, LLC (“White Oak”), which was terminated by the Company in accordance with its terms as of July 9, 2021. The effective date of the White Oak Credit Facility was July 13, 2018, and it was scheduled to mature on July 13, 2021.
Available advances could have been in the form of either revolving or non-revolving. During the first year of the term of the White Oak Credit Facility, any revolving advances would have accrued interest at a rate equal to one-month LIBOR (reset monthly, and subject to a 1.25% floor) plus 3.75%, and any non-revolving advances would have accrued interest at such LIBOR rate plus 4.75%. Thereafter, the interest margins would have been reduced upon the Company’s achievement of a specified fixed charge coverage ratio during the period of any outstanding advances. However, any advances were in all cases subject to a minimum interest rate of 5.50% and interest would have been calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default, which did not occur during the term of the White Oak Credit Facility, would have accrued interest at a rate 2% in excess of the rate that would have been otherwise applicable.
The Company had 0t borrowed against the White Oak Credit Facility as of July 9, 2021, the date upon which the White Oak Credit Facility was terminated by the Company in accordance with its terms.
Paycheck Protection Program Loan
TheOn June 18, 2020, the Company received the proceeds from a loan pursuant to the Paycheck Protection Program under the CARESCoronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as administered by the U.S. Small Business Administration (the “SBA”). The loan in the principal amount of $965,000$965,000 (the “PPP Loan”) was disbursed by Newtek Small Business Finance, LLC, (the “Lender”), a nationally licensed lender under the SBA, on June 18, 2020Lender pursuant to a promissory note issued by the Company (the “Promissory Note”) on June 15, 2020. TheDuring the period of time that the principal under the Promissory Note was outstanding, the Company accounted for the Promissory Note as debt within the accompanying consolidated financial statements.
ThePursuant to its terms, the Promissory Note matureswas scheduled to mature on June 18, 2022 and may be extended2022. However, on June 14,2021, in accordance with the consent of the Lender under theapplicable provisions of the CARES Act. TheAct the Company filed its PPP Loan forgiveness application with the Lender for forgiveness of the full amount of the PPP Loan proceeds and the related accrued and unpaid interest. Effective June 23, 2021, the Company’s PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000 and the related accrued and unpaid interest. Accordingly, the full amount of the gain in connection with the extinguishment of this debt was recognized in the fiscal year ended June 30, 2021.
In accordance with the terms of the Promissory Note, bearsduring the period of time the principal of the PPP Loan was outstanding, interest was accrued by the Company at a fixed rate of 1% per annum. PursuantIn connection with the Company’s PPP Loan forgiveness, the SBA also approved forgiveness of accrued interest amounts that would have been otherwise payable by the Company to the termsLender. Accordingly, the benefit from the forgiveness of the Promissory Note, monthly principal andinception to-date interest paymentsexpense in the amount of approximately $41,000 will commence$9,000 was recognized and included within the gain on April 1,extinguishment of debt in the consolidated statement of operations for the fiscal year ended June 30, 2021. For financial reporting purposes,
The Company has 0 outstanding debt as of September 30, 2020, the classification of the current maturity of long-term debt assumes there will be no principal forgiveness, as allowed under certain conditions by the agreement, and principal repayment for the full outstanding principal amount of the PPP Loan is assumed to be spread in equal monthly installments over the period from April 1, 2021 through the maturity date of the Promissory Note.2021.
As of the dates presented, the Company’s total long-term debt is classified as follows:
| | September 30, 2020 | | | June 30, 2020 | |
Current maturity of long-term debt | | $ | 386,000 | | | $ | 193,000 | |
Long-term debt, net | | | 579,000 | | | | 772,000 | |
Total long-term debt | | $ | 965,000 | | | $ | 965,000 | |
Line of Credit
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.
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 the Company’s 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 September 30, 2020, the Company had not borrowed against the White Oak Credit Facility.
11. | SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION |
Stock-Based Compensation
The following table summarizes the components of the Company’s stock-based compensation included in net income for the periods presented:
| Three Months Ended September 30, | | | Three Months Ended September 30,
| |
| 2020 | | 2019 | | | 2021
| | | 2020
| |
Employee stock options | | $ | 91,040 | | | $ | 63,876 | | | $ | 69,565 | | | $ | 91,040 | |
Restricted stock awards | | | 16,315 | | | | 148,504 | | | | 209,842 | | | | 16,315 | |
Totals | | $ | 107,355 | | | $ | 212,380 | | | $ | 279,407 | | | $ | 107,355 | |
NoNaN stock-based compensation was capitalized as a cost of inventory during the three months ended September 30, 20202021 or 2019.2020.
Stock Options –The following is a summary of the stock option activity for the three months ended September 30, 2020:2021:
| | Shares | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | |
Outstanding, June 30, 2020 | | 2,809,095 | | | $ | 1.19 | | |
Outstanding, June 30, 2021 | | | | 2,235,286 | | | $ | 1.24 | |
Granted | | 90,000 | | | $ | 0.73 | | | | 72,500 | | | $ | 2.67 | |
Exercised | | | | (183,637 | ) | | $ | 1.40 | |
Forfeited | | | | (14,584 | ) | | $ | 0.89 | |
Expired | | | (56,000 | ) | | $ | 1.90 | | | | (49,079 | ) | | $ | 1.27 | |
Outstanding, September 30, 2020 | | | 2,843,095 | | | $ | 1.16 | | |
Outstanding, September 30, 2021 | | | | 2,060,486 | | | $ | 1.28 | |
The total fair value of stock options that vested during the three months ended September 30, 20202021 was approximately $490,000.$38,000.
The following table summarizes information about stock options outstanding at September 30, 2020:2021:
Options Outstanding | Options Outstanding | | Options Exercisable | | Options Vested or Expected to Vest | | Options Outstanding | | | Options Exercisable | | | Options Vested or Expected to Vest | |
Balance as of 9/30/2020 | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Balance as of 9/30/2020 | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Balance as of 9/30/2020 | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | |
Balance as of 9/30/2021
| | Balance as of 9/30/2021
| | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Balance as of 9/30/2021
| | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Balance as of 9/30/2021
| | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | |
| | 2,843,095 | | | 5.94 | | | $ | 1.16 | | | 2,381,458 | | | 5.29 | | | $ | 1.19 | | | 2,772,524 | | | 5.86 | | | $ | 1.17 | | 2,060,486 | | | 6.35 | | | $ | 1.28 | | | 1,525,774 | | | 5.42 | | | $ | 1.30 | | | 1,988,851 | | | 6.26 | | | $ | 1.28 | |
As of September 30, 2020,2021, the unrecognized stock-based compensation expense related to unvested stock options was approximately $135,000,$208,000, which is expected to be recognized over a weighted average period of approximately 2125 months.
The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at September 30, 20202021 was approximately $115,000. This amount is$1.53 million. These amounts are before applicable income taxes and represents the closing market price of the Company’s common stock at September 30, 20202021 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. This amount representsThese values represent the amount that would have been received by the optionees had these stock options been exercised on that date. NoDuring the three months ended September 30, 2021, the aggregate intrinsic value of stock options exercised was approximately $255,000 and the total tax benefit associated with the stock options that were exercised was approximately $240,000. NaN stock options were exercised during the three months ended September 30, 2020 and 2019..
Restricted Stock –The following is a summary of the restricted stock activity for the three months ended September 30, 2020:2021:
| | Shares | | | Weighted Average Grant Date Fair Value | |
Unvested, June 30, 2020 | | | 162,500 | | | $ | 1.57 | |
Granted | | | 178,750 | | | $ | 0.72 | |
Canceled | | | (162,500 | ) | | $ | 1.57 | |
Unvested, September 30, 2020 | | | 178,750 | | | $ | 0.72 | |
| | Shares | | | Weighted Average Grant Date Fair Value | |
Unvested, June 30, 2021 | | | 178,750 | | | $ | 0.72 | |
Granted | | | 242,725 | | | $ | 2.75 | |
Vested
| | | (242,725 | ) | | $ | 1.25 | |
Unvested, September 30, 2021 | | | 178,750 | | | $ | 2.75 | |
The unvested restricted shares as of September 30, 20202021 are all performance-based restricted shares that are scheduled to vest, subject to achievement of the underlying performance goals, in July 2021.2022. As of September 30, 2020,2021, the estimated unrecognized stock-based compensation expense related to unvested restricted shares subject to achievement of performance goals was approximately $112,000,$468,000, all of which is expected to be recognized over a weighted average period of approximately ten months.months.
Dividends
The Company has paid no0 cash dividends during the current fiscal year through September 30, 2020.2021.
12. | NET INCOME PER COMMON SHARE |
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods. Diluted net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and unvested restricted shares that are computed using the treasury stock method. Anti-dilutive stock awards consist of stock options that would have been anti-dilutive in the application of the treasury stock method.
The following table reconciles the differences between the basic and diluted net income per share presentations:
| | Three Months Ended September 30,
| |
| | 2021
| | | 2020
| |
Numerator: | | | | | | |
Net income
| | $ | 827,025 | | | $ | 874,266 | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | | 29,971,178 | | | | 28,786,910 | |
Effect of dilutive securities | | | 1,126,362 | | | | 52,987 | |
Diluted | | | 31,097,540 | | | | 28,839,897 | |
| | | | | | | | |
Net income per common share: | | | | | | | | |
Basic | | $ | 0.03 | | | $ | 0.03 | |
Diluted | | $ | 0.03 | | | $ | 0.03 | |
| | Three Months Ended September 30, | |
| | 2020 | | | 2019 | |
Numerator: | | | | | | |
Net income | | $ | 874,266 | | | $ | 207,319 | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | | 28,786,910 | | | | 28,563,688 | |
Effect of dilutive securities | | | 52,987 | | | | 659,248 | |
Diluted | | | 28,839,897 | | | | 29,222,936 | |
| | | | | | | | |
Net income per common share: | | | | | | | | |
Basic | | $ | 0.03 | | | $ | 0.01 | |
Diluted | | $ | 0.03 | | | $ | 0.01 | |
For the three months ended September 30, 20202021 and 2019,2020, stock options to purchase approximately 2.79 million934,000 and 1.992.79 million shares, respectively, were excluded from the computation of diluted net income per common share because the exercise price of the stock options was greater than the average market price of the common shares or the effect of inclusion of such amounts would be anti-dilutive to net income per common share. Approximately 179,000 and 325,000 shares of unvested restricted stock are excluded from the computation of diluted net income per common share as of each of September 30, 20202021 and 2019, respectively,2020, because the shares are performance-based and the underlying conditions have not been met as of the periods presented and the effectspresented.
13. | MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash on deposit and cash equivalents held with one bankbanks and trade accounts receivable. AtThe Company places cash deposits with federally insured financial institutions and maintains its cash at banks and financial institutions it considers to be of high credit quality. However, the Company’s cash deposits may at times cash and cash equivalents balances may exceed the Federal Deposit Insurance Corporation (“FDIC”)Corporation’s insurable limits. The Company’s money market fund investment account (recognized as cash and cash equivalents) is invested with what the Company believes toAccordingly, balances in excess of federally insured limitations may not be a high-quality issuer.insured. The Company has nevernot experienced any losses relatedon these accounts, and management believes that the Company is not exposed to these balances. Non-interest-bearing amountssignificant risks on deposit in excess of FDIC insurable limits at September 30, 2020 and June 30, 2020 approximated $2.77 million and $2.01 million, respectively. Interest-bearing amounts on deposit in excess of FDIC insurable limits at September 30, 2020 and June 30, 2020 approximated $10.64 million and $11.64 million, respectively.such accounts.
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.
For additional information regarding the Company’s measurement and disclosure of credit losses on financial assets, including trade accounts receivable, see Note 4, “Fair Value Measurements.”
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:
| | September 30, 2020 | | June 30, 2020 | | | September 30, 2021
| | | June 30, 2021
| |
Customer A | | 26 | % | | 26 | % | |
| 31 | %
| | | 30 | %
|
Customer B | | 17 | % | | 14 | % | |
| 24 | %
| | | 22
| %
|
Customer C | | 11 | % | | 13 | % | |
| 12
| %
| | | *0 | %
|
Customer D | | 11 | % | | * | % | |
| 0 **
| %
| | | 14 | %
|
* | Customer C did not have individual balances that represented 10% or more of total gross accounts receivable as of June 30, 2021. |
** | Customer D did not have individual balances that represented 10% or more of total gross accounts receivable as of JuneSeptember 30, 2020.2021. |
A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent 10% or more of total net sales for the periods presented:
| Three Months Ended September 30, | | | Three Months Ended September 30, | |
| 2020 | | 2019 | | | 2021
| | | 2020
| |
Customer A
| | | | 14 | % | | | *0 | % |
Customer B | | 14 | % | 13 | % | | | 19 | % | | | 14 | % |
Customer A | | * | % | 14 | % | |
| Customer A did not have net sales that represented 10% or more of total net sales for the three months ended September 30, 2020. |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “intend,” “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:
| 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 economic and economicmarket conditions; |
| 4. | We face intense competition in the worldwide gemstone and jewelry industry; |
| 5. | 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; |
| 6. | We are subject to certain risks due to our international operations, distribution channels and vendors; |
| 7. | 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; |
| 8. | We are currently dependent on a limited number of distributor and retail partners in our Traditional segment for the sale of our products; |
| 9. | We may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation; |
| 10. | Seasonality of our business may adversely affect our net sales and operating income; |
| 11. | Our operations could be disrupted by natural disasters; |
| 12. | Sales of moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control; |
| 13. | Our current customers may potentially perceive us as a competitor in the finished jewelry business; |
| 14. | We depend on a single supplier 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; |
| 15. | 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; |
| 16. | Governmental regulation and oversight might adversely impact our operations; |
| 17. | The execution of our business plans could significantly impact our liquidity; |
| 18. | 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; |
| 6.19. | We face intense competition in the worldwide gemstoneNegative or inaccurate information on social media could adversely impact our brand and jewelry industry;reputation; |
| 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; |
| 10.20. | 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; |
| 11.21. | Our failureWe may not be able to maintain compliance with The Nasdaq Stock Market’s continued listing requirementsadequately protect our intellectual property, which could result inharm the delistingvalue of our common stock;products and brands and adversely affect our business; |
| 12.22. | WeIf we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation;suffer; |
| 13. | Seasonality of our business may adversely affect our net sales and operating income; |
| 14. | Our operations could be disrupted by natural disasters; |
| 15.23. | 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, was forgiven in full and may not be forgiven or may subject us to challenges and investigations regarding qualificationreview for compliance with applicable SBA requirements for six years from the loan;date the loan was forgiven; |
| 16. | 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; |
| 17. | Negative or inaccurate information on social media could adversely impact our brand and reputation; |
| 18. | Sales of moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control; |
| 19. | Our current customers may potentially perceive us as a competitor in the finished jewelry business; |
| 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.company; and |
| 25. | Our failure to maintain compliance with The Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock. |
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, 2020,2021, or the 20202021 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.periods.
Overview
Our Mission
At Charles & Colvard, Ltd., our mission is to redefine the definition of real within the jewelry industry and for consumers everywhere. We believe fine jewelry can be accessible, beautiful, and conscientious.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), is a globally recognized lab created gemstonefine jewelry company specializing in fine jewelry.lab created gemstones. We manufacture, market, and distribute Charles & Colvard Created Moissanite® (which we refer to as moissanite or moissanite jewels) and onin 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 jewels and premium lab grown diamonds for sale in the worldwide fine jewelry market. Charles & Colvard is the original source of created moissanite, and in 2015, we debuted Forever One™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.brand.
One of our unique differentiators, moissanite – The World’s Most Brilliant Gem® – is core to our ambition to create a movement around environmentally and socially responsible fine jewelry. We believe that we are leading the way in delivering the premium moissanite brand through technological advances in gemstone manufacturing, cutting, polishing, and setting. By coupling what we believe to be unprecedented moissanite jewels with responsibly sourced precious metals, we are delivering a uniquely 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 sourcedmostly recycled precious metals.
Our strategy is to build a globally revered brand of lab created gemstones and finished jewelry that appealappeals to a wide consumer audience. We believe this strategy leverages our advantages of being the original and leading worldwide source of Charles & Colvard Created Moissanite® and offering a curated assortment of jewelry featuring Caydia™® lab grown diamonds, which together we believe offers an ideal combination of quality and value. We also 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.consumer.
COVID-19 Update
The global 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. Governmentcontinues to present unprecedented business challenges 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 jurisdictions have begun re-opening only to return to restrictions due to increases in new 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.Fiscal 2022. 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 thisthe ongoing COVID-19 pandemic. The pandemic continues to present unprecedented business challenges, and we
We have experienced impacts on our business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, including using accelerated payments in some cases to our suppliers that are due by their terms in future periods and we expect to continue accelerating payments to certain suppliers through at least a portion of Fiscal 2022. We are also seeing a sharp increase in international freight costs, with limited availability and long delays causing disruption in the global supply chain. According to reports regarding international import and export traffic, shipping container shortages and delays are expected to last into calendar year 2022. Accordingly, we are taking steps where possible to mitigate such potential delays in supplier deliveries impactsby accelerating orders and increasing order quantities.
Following the government mandated shut down during the early days of travel restrictions, accessthe pandemic, work in our production and distribution facilities has continued throughout the remainder of the pandemic, consistent with guidance from federal, state and local officials to some locations,minimize the effectsspread of COVID-19. We continue to net revenuetake actions to equip employees with personal protective equipment, establish minimum staffing and social distancing policies, sanitize workspaces more frequently, adopt alternate work schedules, and institute other measures aimed to sustain production and related services while minimizing the transmission of COVID-19, including measures to reduced demandfacilitate the provision of vaccines to our employees in line with state and store closures,local guidelines. In addition, we have maintained a flexible teleworking policy for our employees who can meet customer commitments remotely, and the impactsa portion of remote work and adjusted work schedules.our workforce continues teleworking.
Despite these challenges, our efforts, especially with regard to product fulfillment and supply chain, helped to partially mitigate the disruptions caused byAlthough the COVID-19 pandemic on our operations in the first quarter of our fiscal year ending June 30, 2021, or Fiscal 2021. In addition, strong net sales performance in our Online Channels segment and an overall reduction in costs and expenses resulting from cost-savings initiatives implemented by usdid not have helped to offset the impacts of the COVID-19 pandemica significant adverse impact on our financial results in our first quarter. However,the quarter ended September 30, 2021, 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,timeframes, remains uncertain and will depend on future pandemic related developments, including the duration and spread of the pandemic, any potential subsequent waves of COVID-19 pandemicand its variant viral infections, the effectiveness, distribution and acceptance of COVID-19 vaccines, and related actions taken by the U.S. Government, state and local government officials, and international governmentsactions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. The long-term impactsWe cannot at this time predict the full impact of the COVID-19 pandemic, on global consumer buying behaviors, which impacts demand forbut we believe the risk exists that the COVID-19 pandemic could adversely impact our products and services, are also difficult to predict.business, financial condition, results of operations and/or cash flows in the fiscal year ending June 30, 2022, or Fiscal 2022.
For additional risks to the Company related to the COVID-19 pandemic, see “Part II,I, Item 1A. Risk Factors”, contained in our 20202021 Annual Report.
Fiscal 20212022 Financial TrendsOutlook
Currently, 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, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for consumer 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.
As we continue to manage through these challenging times, our strategic focusinitiatives during Fiscal 2022 are designed to drive expansion and help us remain on a strong trajectory toward our goal for Fiscaltop line growth. We look to further position and articulate our brand in what we believe is a rapidly evolving consumer landscape and intend to meet the consumer’s current appetite for digital content. We believe that our plans to expand these digital capabilities will create additional platforms and innovative portals to showcase our brand and elevate its awareness. In addition to growing our online brand presence, in September 2021 is centeredwe began construction on the expansion ofour first Charles & Colvard’sColvard Signature Showroom, which we believe will complement and expand our omnichannel brand strategy in the fine jewelry space. This first retail showroom, which we plan to open during Fiscal 2022, will be featured in our corporate headquarters in North Carolina’s Research Triangle Park and allow us to showcase our exclusive Signature Collection designs as well as a wide assortment of Forever One™ moissanite and Caydia® lab grown diamond fine jewelry for those consumers who want to see and feel our products in person. During Fiscal 2022 we will be expanding our content production capabilities by constructing an innovative broadcast studio at our corporate headquarters, which will provide us a platform to live-stream broadcasts on a global scaleour websites and to increase the sizethrough other online media channels, including those of our business through top-line disciplined growth by leveraging existing resources.partners. We believe this capability will provide another sales channel for our direct-to-consumer business and allow more personal interaction with our online consumer base. In August, we attended and had an exhibition booth at the JCK Trade Show in Las Vegas, Nevada, that lab-created gemstones, includingallowed us to feature a collection of our own lab grown diamond product line, Caydia™, which we introduced in September 2020, are now being embraced by emerging generations. We also believe that our ability to elevate our own lab-created gemstones - including both moissanite jewelsfine jewelry and lab grown diamonds -created gemstones. The JCK Trade Fair is among the most significant domestic trade events representing the jewelry industry and is attended by jewelry retailers, manufacturers, designers, and other industry influencers who create the Charles & Colvardjewelry business and drive it forward. This August trade show was the first such in-person JCK event held for the jewelry industry since before the onset of the COVID-19 pandemic. This opportunity provided the jewelry industry with re-entry into the live market space following the impact of the pandemic. It also allowed us to present our brand directly with consumers is keyand gemstone product lines to our future success and ability to fuel our growth. We intend to elevatea broad range of leaders in the Charles & Colvard name by making it synonymous with quality, value, and price. We plan to execute on our key strategies with an ongoing commitment to spending judiciously and generating sustainable earnings improvement.jewelry industry.
We discuss our strategic outlook and key strategies for Fiscal 20212022 in Part I, Item 1, “Business” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our 20202021 Annual Report.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 future effects of the COVID-19 pandemic on our results of operations, cash flows, and financial position remain unclear. 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. The most significant estimates impacting our consolidated financial statements relate to the valuation and classification of inventories, accounts receivable reserves, deferred tax assets, stock-based compensation, and revenue recognition. We also have other policies that we consider key accounting policies, but these policies typically do not require us to make estimates or judgments that are difficult or subjective.
We have disclosed our critical accounting policies and estimates in our 20202021 Annual Report, and that disclosure should be read in conjunction with this Quarterly Report on Form 10-Q. Except as set forth below, thereThere have been no significant changes in our critical accounting policies and estimates during the first three months of Fiscal 2021.2022
For a discussion regarding our adoption of the new accounting standard related to the measurement and disclosure of credit losses on financial instruments, see Note 2 to our condensed consolidated financial statements in Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q..
Results of Operations
The following table sets forth certain consolidated statements of operations data for the three months ended September 30, 20202021 and 2019:2020:
| | Three Months Ended September 30, | |
| | 2021 | | | 2020 | |
Net sales | | $ | 10,280,311 | | | $ | 7,926,293 | |
Costs and expenses: | | | | | | | | |
Cost of goods sold | | | 5,016,550 | | | | 4,196,055 | |
Sales and marketing | | | 2,730,153 | | | | 1,647,933 | |
General and administrative | | | 1,584,275 | | | | 1,208,035 | |
Total costs and expenses | | | 9,330,978 | | | | 7,052,023 | |
Income from operations | | | 949,333 | | | | 874,270 | |
Other income (expense): | | | | | | | | |
Interest income | | | 355 | | | | 3,459 | |
Interest expense | | | - | | | | (2,439 | ) |
Loss on foreign currency exchange | | | (34 | ) | | | (530 | ) |
Total other income (expense), net | | | 321 | | | | 490 | |
Income before income taxes | | | 949,654 | | | | 874,760 | |
Income tax expense | | | (122,629 | ) | | | (494 | ) |
Net income | | $ | 827,025 | | | $ | 874,266 | |
| | Three Months Ended September 30, | |
| | 2020 | | | 2019 | |
Net sales | | $ | 7,926,293 | | | $ | 7,608,421 | |
Costs and expenses: | | | | | | | | |
Cost of goods sold | | | 4,196,055 | | | | 3,876,624 | |
Sales and marketing | | | 1,647,933 | | | | 2,229,591 | |
General and administrative | | | 1,208,035 | | | | 1,349,501 | |
Total costs and expenses | | | 7,052,023 | | | | 7,455,716 | |
Income from operations | | | 874,270 | | | | 152,705 | |
Other income (expense): | | | | | | | | |
Interest income | | | 3,459 | | | | 61,379 | |
Interest expense | | | (2,439 | ) | | | (142 | ) |
Loss on foreign currency exchange | | | (530 | ) | | | (538 | ) |
Total other income (expense), net | | | 490 | | | | 60,669 | |
Income before income taxes | | | 874,760 | | | | 213,404 | |
Income tax expense | | | (494 | ) | | | (6,085 | ) |
Net income | | $ | 874,266 | | | $ | 207,319 | |
Consolidated Net Sales
Consolidated net sales for the three months ended September 30, 20202021 and 20192020 comprise the following:
| | Three Months Ended September 30, | | | Change | |
| | 2021 | | | 2020 | | | Dollars | | | Percent | |
Finished jewelry | | $ | 5,686,287 | | | $ | 4,335,338 | | | $ | 1,350,949 | | | | 31 | % |
Loose jewels | | | 4,594,024 | | | | 3,590,955 | | | | 1,003,069 | | | | 28 | % |
Total consolidated net sales | | $ | 10,280,311 | | | $ | 7,926,293 | | | $ | 2,354,018 | | | | 30 | % |
| | Three Months Ended September 30, | | | Change | |
| | 2020 | | | 2019 | | | Dollars | | | Percent | |
Finished jewelry | | $ | 4,335,338 | | | $ | 3,857,995 | | | $ | 477,343 | | | | 12 | % |
Loose jewels | | | 3,590,955 | | | | 3,750,426 | | | | (159,471 | ) | | | -4 | % |
Total consolidated net sales | | $ | 7,926,293 | | | $ | 7,608,421 | | | $ | 317,872 | | | | 4 | % |
Consolidated net sales were $10.28 million for the three months ended September 30, 2021 compared to $7.93 million for the three months ended September 30, 2020, compared to $7.61an increase of approximately $2.35 million, or 30%. The increase in consolidated net sales for the three months ended September 30, 2019, an increase of approximately $318,000, or 4%. The COVID-19 pandemic has continued to negatively affect the U.S. and global economies and has had a significant adverse impact on our worldwide sales and results of operations during the period since the initial outbreak of the underlying coronavirus. Net sales through our cross-border trade, or CBT, platform were flat compared with the prior year fiscal quarter, which we believe is also2021 was due to the strength of worldwideincreased consumer awareness and ongoing strong demand for our productsmoissanite jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds. These increases resulted in spitehigher finished jewelry product net sales during the three months ended September 30, 2021 in our Online Channels segment and Traditional segment. As consumer confidence has strengthened and with traditional brick-and-mortar stores now having re-opened following their being shut down during much of the COVID-19 pandemic.comparable prior year period, net sales during the three months ended September 30, 2021, in our Traditional segment increased over this period driven by stronger loose jewel sales in our distributor network.
Sales of finished jewelry represented 55% of total consolidated net sales for the three months ended September 30, 2020, compared to 51%2021, which was consistent with 55% of total consolidated net sales for the corresponding period of the prior year. For the three months ended September 30, 2020,2021, finished jewelry sales were $4.34$5.69 million compared to $3.86$4.34 million for the corresponding period of the prior year, an increase of approximately $477,000,$1.35 million, or 12%31%. This increase in finished jewelry sales was due primarily to higher finished jewelry sales of Forever One™ and , Moissanite by Charles & Colvard®, and Signature Collectionin our Online Channels segment which increased $646,000, or 22%, from the prior year fiscal quarter.as well as in our Traditional segment.
Sales of loose jewels represented 45% of total consolidated net sales for the three months ended September 30,
2020, compared to 49%2021, which was consistent with 45% of total consolidated net sales for the corresponding period of the prior year. For the three months ended September 30,
2020,2021, loose jewel sales were
$3.59$4.59 million compared to
$3.75$3.59 million for the corresponding period of the prior year,
a decreasean increase of approximately
$159,000,$1.00 million, or
4%28%. The
decreaseincrease for the three months ended September 30,
20202021 was primarily
due to a
lower levelsresult of higher sales of loose
jewel sales principallyjewels through
the international distribution network in our
Traditional segment. This decrease of loose jewel sales in our Traditional segment was partially offset by an increase of loose jewel sales in our Online Channels segment, which increased $114,000, or 16%, from the prior year fiscal quarter.domestic distributors.
U.S. net sales accounted for approximately 95%96% of total consolidated net sales for the three-month period ended September 30, 2020,2021, compared with 89%95% for the three-month period ended September 30, 2019.2020. U.S. net sales increased to $7.50$9.82 million, or 11%31%, in the three months ended September 30, 20202021 compared to $6.76$7.50 million in the comparable quarter of 20192020 as a result of increased sales to U.S. customers in both our Online Channels segment and Traditional segment.
Our largest U.S. customer during the
three months ended
September 30,
2021 and 2020 accounted for
19% and 14%
, respectively, of total consolidated net sales.
This same customer was our second largest U.S. customer during the three months ended September 30, 2019 and accounted for 13% of total consolidated net sales during the period then ended. Our largest U.S. customer during the three-month period ended September 30,
20192021, accounted for 14% of total consolidated net sales during the period
then ended.ended September 30, 2020. Other than our U.S. customers noted above during the three-month periods ended September 30,
20202021 and
2019,2020, we had no other customers with sales that represented 10% or more of total consolidated net sales for the periods then ended. We expect that we, along with our customers, will remain dependent on our ability to maintain and enhance our customer-related programs. A change in or loss of any of these customer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately
5%4% and
11%5% of total consolidated net sales during the quarters ended September 30,
20202021 and
2019,2020, respectively. International net sales
decreasedincreased to
$427,000,$456,000, or
49%7%, during the first quarter of Fiscal
20212022 compared to
$845,000$427,000 in the first quarter of the year ended June 30,
2020,2021, or Fiscal
2020. 2021. International sales
decreasedincreased due to
lowerhigher demand in our international distributor market
which was partially offset bycoupled with growth in our direct-to-consumer presence internationally reflecting solid direct-to-consumer sales from our Online Channels segment in international markets. In light of the effects of ongoing global economic conditions
and as the world continues to recover from the COVID-19 pandemic, we continue to evaluate these and other potential distributors in international markets to determine the best long-term partners. As a result, and in light of the ongoing worldwide pandemic and international trade challenges, we expect our sales in these markets
to continue tomay fluctuate significantly each reporting period.
We did not have an international customer account for 10% or more of total consolidated sales during the three months ended September 30, 20202021 or 2019.2020. 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
Our total cost of goods sold for the three months ended September 30, 20202021 and 20192020 are as follows:
| Three Months Ended September 30, | | Change | | | Three Months Ended September 30, | | Change | |
| 2020 | | 2019 | | Dollars | | Percent | | | 2021 | | 2020 | | Dollars | | Percent | |
Product line cost of goods sold: | | | | | | | | | | | | | | | | | |
Finished jewelry | | $ | 1,754,289 | | | $ | 1,702,910 | | | $ | 51,379 | | | 3 | % | | $ | 2,334,482 | | | $ | 1,754,289 | | | $ | 580,193 | | | | 33 | % |
Loose jewels | | | 1,743,922 | | | | 1,799,452 | | | | (55,530 | ) | | -3 | % | | | 2,059,446 | | | | 1,743,922 | | | | 315,524 | | | | 18 | % |
Total product line cost of goods sold | | 3,498,211 | | | 3,502,362 | | | 4,151 | | | 0 | % | | | 4,393,928 | | | | 3,498,211 | | | | 895,717 | | | | 26 | % |
Non-product line cost of goods sold | | | 697,844 | | | | 374,262 | | | | 323,582 | | | 86 | % | | | 622,622 | | | | 697,844 | | | | (75,222 | ) | | | (11 | )% |
Total cost of goods sold | | $ | 4,196,055 | | | $ | 3,876,624 | | | $ | 319,431 | | | 8 | % | | $ | 5,016,550 | | | $ | 4,196,055 | | | $ | 820,495 | | | | 20 | % |
Total cost of goods sold was $5.02 million for the three months ended September 30, 2021 compared to $4.20 million for the three months ended September 30, 2020, compared to $3.88 million for the three months ended September 30, 2019, an increase of approximately $319,000,$820,000, or 8%20%. Product line cost of goods sold is defined as product cost of goods sold in each of our Online Channels segment and Traditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory write-offs; and other inventory adjustments, comprising costs of quality issues, and damaged goods.
The increase in total cost of goods sold for the three months ended
September 30,
20202021 compared to the same period in
20192020 was primarily due to increased sales of finished jewelry
and loose jewels during the three months ended September 30,
2020,2021, which reflect higher material and labor
costs. Our finished jewelry products cost more to produce due to higher materialcosts, in both our Online Channels segment and
labor costs when compared toTraditional segment as a result of strong product demand during the
production of loose jewels.quarter.
The net increasedecrease in non-product line cost of goods sold for the three months ended September 30, 2020,2021, comprises an unfavorable $283,000a $282,000 lower change in other inventory adjustments principally relating to adversefavorable changes in production standard cost variances compared to the three months ended September 30, 2019. The2020. This net increasedecrease in non-product line cost of goods sold was alsooffset in part related to an approximate $57,000$152,000 change in inventory valuation adjustments primarily related to adverse changes in obsolescenceshrinkage and rework reserves, as well as an approximate $44,000$42,000 increase in freight out from increased shipments resulting from Online Channels segment sales growth during the quarter ended September 30, 2020. These increases in non-product line cost of goods sold were offset in part by2021 as well as an approximate $60,000 decrease$13,000 increase in non-capitalized manufacturing and production control expenses principally due to the timing when work-in-process is received into inventory and overhead costs are allocated.
24For additional disclosure relating to non-product line cost of goods sold, see Note 3 to our condensed consolidated financial statements in Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.
Sales and Marketing
Sales and marketing expenses for the three months ended
September 30,
20202021 and
20192021 are as follows:
| Three Months Ended September 30, | | Change | |
| 2020 | | 2019 | | Dollars | | Percent | |
Sales and marketing | | $ | 1,647,933 | | | $ | 2,229,591 | | | $ | (581,658 | ) | | | -26 | % |
| | Three Months Ended September 30, | | | Change | |
| | 2021 | | | 2020 | | | Dollars | | | Percent | |
Sales and marketing | | $ | 2,730,153 | | | $ | 1,647,933 | | | $ | 1,082,220 | | | | 66 | % |
Sales and marketing expenses were $2.73 million for the three months ended September 30, 2021 compared to $1.65 million for the three months ended September 30, 2020, compared to $2.23 million for the three months ended September 30, 2019, a decreasean increase of approximately $582,000,$1.08 million, or 26%66%.
The decreaseincrease in sales and marketing expenses for the three months ended September 30, 20202021 compared to the same period in 20192020 was primarily due to a $401,000 decrease in compensation expenses; a $136,000 decrease$794,000 increase in advertising and digital marketing expenses; a $58,000 decrease$113,000 increase in professional services principally comprising non-recurring consulting services for cybersecurity and merchandising imaging in the prior year period;compensation expenses; a $6,000 decrease in travel expenses as a result of COVID-19 cost-control measures; and a $3,000 decrease$61,000 increase in general office-related expenses. These decreases were partially offset by an $18,000expenses, which are principally related to higher credit card transaction fees from increased online sales levels and increased rent expense, related to our corporate headquarters operating lease amendment that was executed in January 2021; a $48,000 increase in software-related costs incurred primarily in connection with new software-related agreements associated with upgraded operating and cybersecurity systems; a $35,000 increase in professional services principally comprising non-recurring consulting services for cybersecurity and merchandising imaging in the current year period; a $19,000 increase in depreciation and amortization expense relating to capitalized costs associated with information technology-related upgrades; and a $4,000$12,000 increase in other miscellaneous advertisingtravel expenses as we returned to more normal business travel patterns following cut-backs relating to the COVID-19 pandemic and digital marketing expenses.related cost-control measures in prior year periods.
The decrease in compensation expenses for the three months ended September 30, 2020 compared to the same period in 2019 was primarily due to a $319,000 decrease in salaries, commissions, and related employee benefits in the aggregate reflecting our June 2020 management reorganization and workforce reduction; a $46,000 decrease in bonus expense; and a $38,000 decrease in employee stock-based compensation expense. These decreases were partially offset by a $2,000 increase in employee-related severance costs.
The decrease in advertising and digital marketing expenses for the three months ended September 30, 20202021 compared to the same period in 20192020 comprises a $118,000 decrease$731,000 increase in digital advertising spend; a $38,000 increase in expenses relating to our participation in the 2021 JCK Trade Show; a $15,000 increase in cooperative advertising; $43,000 decrease in Internet marketing; and an $8,000 decreasea $7,000 increase in print media expenses.expenses; and a $3,000 increase in outside agency fees. The comparable prior year period advertising and digital marketing expenses were lower due to cost reductions we imposed in response to the COVID-19 pandemic.
The increase in compensation expenses for the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to a $75,000 increase in salaries, commissions, and related employee benefits in the aggregate; a $36,000 increase in employee stock-based compensation expense; and a $4,000 increase in bonus expense. The increases in employee stock-based compensation and bonus expenses reflect improved operating results that impact these performance-based compensation-related benefits. These
decreasesincreases were partially offset by a
$23,000 increase$2,000 decrease in
promotion-related expenses and a $10,000 increase in outside agency fees.employee-related severance costs from the prior year.
General and Administrative
General and administrative expenses for the three months ended September 30, 20202021 and 20192020 are as follows:
| Three Months Ended September 30, | | Change | |
| 2020 | | 2019 | | Dollars | | Percent | |
General and administrative | | $ | 1,208,035 | | | $ | 1,349,501 | | | $ | (141,466 | ) | | | -10 | % |
| | Three Months Ended September 30, | | | Change | |
| | 2021 | | | 2020 | | | Dollars | | | Percent | |
General and administrative | | $ | 1,584,275 | | | $ | 1,208,035 | | | $ | 376,240 | | | | 31 | % |
General and administrative expenses were $1.58 million for the three months ended September 30, 2021 compared to $1.21 million for the three months ended September 30, 2020, compared to $1.35 million for the three months ended September 30, 2019, a decreasean increase of approximately $141,000,$376,000, or 10%31%.
The
decreaseincrease in general and administrative expenses for the three months ended September 30,
20202021 compared to the same period in
20192020 was primarily due to a
$129,000 decrease$295,000 increase in compensation expenses; a $62,000 increase in professional services; a
$115,000 decrease$25,000 increase in
compensation expenses;travel-related expenditures; a $23,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; and a
$9,000 decrease$10,000 increase in
Board retainer fees as a result of the resignation of a former Director in September 2019. insurance expenses principally related to higher renewal premiums. These
decreasesincreases were partially offset by a
$61,000 increase$23,000 decrease in depreciation and amortization expense, principally related to fully-depreciated assets when compared to those in prior periods; a $13,000 decrease in business taxes and licenses; a $1,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve policy;
a $17,000 increase in insurance expenses, principally related to higher renewal premiums; an $8,000 increase in travel expense; a $5,000 increase in bank charges as a result of transaction fees associated with increased online transactions; a $4,000 increase in business taxes and
licenses; a $2,000
increase in equipment-related rental expense; a $2,000 increase in depreciation and amortization expense; and a $13,000 net
increasedecrease in miscellaneous other general and administrative expenses.
Professional services expenses decreased for the three months ended September 30, 2020 compared to the same period in 2019 primarily due to an $86,000 decrease in 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 $33,000 decrease in accounting services also principally related to non-recurring fees associated with our underwritten public offering in the prior year; a $7,000 decrease in consulting and other professional services; and a $3,000 decrease in investor relations fees.
The
decreaseincrease in compensation expenses for the three months ended September 30,
20202021 compared to the same period in
20192020 comprises a
$55,000 decrease$171,000 increase in
salariesbonus expense and
related employee benefits in the aggregate resulting from our June 2020 management reorganization and workforce reduction; a
$33,000 decrease$124,000 increase in employee stock-based compensation
expense; and a $27,000 decreaseexpense. The increases in bonus
expense.and employee stock-based compensation expenses reflect improved operating results that impact these performance-based compensation-related benefits.
The net increase in miscellaneous other general and administrativeProfessional services expenses increased for the three months ended September 30, 20202021 compared to the same period in 2019 comprises2020 primarily due to a $10,000$35,000 increase in software maintenance agreement-related expensesfees associated with audit and tax services, principally related to a discrete income tax-related project; a $27,000 increase in legal fees associated with corporate governance matters; and a $3,000$19,000 net increase in office-relatedconsulting and other miscellaneous generalprofessional services principally related to a benefits consulting arrangement in the current year period. These increases were partially offset by a $19,000 decrease in investor relations fees resulting from the migration in-house for certain investor relation services during the current year.
Interest Income
Interest income for the three months ended September 30, 2021 and administrative expenses.2020 is as follows:
| | Three Months Ended September 30, | | | Change | |
| | 2021 | | | 2020 | | | Dollars | | | Percent | |
Interest income | | $ | 355 | | | $ | 3,459 | | | $ | (3,104 | ) | | | (90 | )% |
Certain cash balances in excess of operating needs are deposited into and maintained in an interest-bearing account with a federally insured commercial bank. Accordingly, during the three months ended September 30, 2021 and 2020, we earned interest from cash on deposit in this interest-bearing account. The decrease in earned interest reflects adverse changes in interest rates during Fiscal 2022 compared with Fiscal 2021.
Interest Expense
Interest expense for the three months ended September 30, 2021 and 2020 is as follows:
| | Three Months Ended September 30, | | | Change | |
| | 2021 | | | 2020 | | | Dollars | | | Percent | |
Interest expense | | $ | - | | | $ | 2,439 | | | $ | (2,439 | ) | | | (100 | )% |
In accordance with the terms of the Promissory Note, during the period of time the principal of the PPP Loan was outstanding, we accrued interest at a fixed rate of 1% per annum. Our accrual for interest expense associated with the PPP Loan began June 18, 2020, the date we received the proceeds for the PPP Loan from our Lender, through June 23, 2021, the date our PPP Loan was forgiven by the U.S. Small Business Administration, or the SBA.
We had no outstanding debt during the three months ended September 30, 2021.
Loss on Foreign Currency Exchange
Loss on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the three months ended September 30, 20202021 and 20192020 are as follows:
| Three Months Ended September 30, | | Change | |
| 2020 | | 2019 | | Dollars | | | Percent | |
Loss on foreign currency exchange | | $ | 530 | | | $ | 538 | | | $ | (8 | ) | | | -1 | % |
| | Three Months Ended September 30, | | | Change | |
| | 2021 | | | 2020 | | | Dollars | | | Percent | |
Loss on foreign currency exchange | | $ | 34 | | | $ | 530 | | | $ | (496 | ) | | | (94 | )% |
During the three months ended September 30,
2021 and 2020, we had international sales transactions denominated in currencies other than the
U.SU.S. dollar that resulted in foreign currency exchange net losses. The decrease in these losses reflects the lower level of international sales
denominated in foreign currencies during the three months ended September 30,
20202021 compared with the same period in the prior
year, whichyear.
Provision for Income Taxes
For the three months ended September 30, 2021, our statutory tax rate was partially offset by favorable changes in foreign currency fluctuation during22.24% and consisted of the first quarterfederal income tax rate of Fiscal 2021 compared with21% and a blended state income tax rate of 1.24%, net of the first quarter of Fiscal 2020.
Interest Income
Interest income forfederal benefit. For the three months ended September 30, 2020, our statutory tax rate was 22.11% and 2019 is as follows:
| Three Months Ended September 30, | | Change | |
| 2020 | | 2019 | | Dollars | | | Percent | |
Interest income | | $ | 3,459 | | | $ | 61,379 | | | $ | (57,290 | ) | | | -94 | % |
In June 2019, we completed an underwritten public offering of 6,250,000 shares of our common stock, which together with the partial exerciseconsisted of the underwriters’ overallotment option for an additional 630,500 sharesfederal income tax rate of 21% and a blended state income tax rate of 1.11%, net of the federal benefit. Our effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in July 2019, resulted in net proceeds of approximately $9.99 million. The net proceedsbook and tax accounting arising primarily from this offering, alongthe permanent tax benefits associated with excess operating cash, are deposited into and maintained in an interest-bearing account with a federally-insured commercial bank. Accordingly,stock compensation transactions during the quarter. For the three months ended September 30, 2020 and 2019, we earned interest from cash on deposit in this interest-bearing account. The decrease in earned interest reflects adverse changes in interest2021, our effective tax rate fluctuations during the first quarter of Fiscal 2021 compared with the first quarter of Fiscal 2020.was 12.91%.
Provision for Income Taxes
We recognized income tax net expense of approximately $500 and $6,100 for the three months ended September 30, 2020 and 2019, respectively. Income tax provisions in these periods primarily relate to estimated tax, penalties, and interest associated with uncertain tax positions.
As of each reporting date, management considerswe consider new evidence, both positive and negative, that could impact itsour view with regard to future realization of deferred tax assets. BeginningAs of June 30, 2021, cumulative positive taxable income over the last three tax years had been generated in 2014, managementthe U.S., as compared to the negative evidence of cumulative losses in previous years. We also determined that our expectation of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that included significant management estimates and assumptions, would be sufficient to result in full utilization of our federal net operating loss carryforwards and certain of our deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of June 30, 2021, to conclude that it was more likely than not deferred tax assets of approximately $6.35 million would be realizable, and we reduced our valuation allowance accordingly.
Accordingly, we recognized a net income tax expense of approximately $123,000 for the three months ended September 30, 2021, compared with a net income tax expense of $500 for the three months ended September 30, 2020. With the reduction of our valuation allowance during the fiscal year ended June 30, 2021, we recognized deferred income tax expense during the three months ended September 30, 2021 in the amount of approximately $122,000. Included in our tax provision, we record estimated taxes, penalties, and interest associated with uncertain tax positions as income tax expense and recognized such expense related to these items of approximately $500 for each of the three months ended September 30, 2021 and 2020.
As of September 30, 2021, we determined that our expectation of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant management estimates and assumptions, would continue to be sufficient to result in full utilization of our remaining federal net operating loss carryforwards and certain of our deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of September 30, 2021, to conclude that it is more likely than not deferred tax assets of approximately $6.23 million remain realizable. Conversely, we further determined that sufficient negative evidence outweighed positive evidence and established a full valuation allowance againstcontinued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize certain of our deferred tax assets. We maintainedTherefore, we continued to maintain a full valuation allowance against the deferred tax assets relating to certain state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of when we will generate positive taxable income to utilize the associated deferred taxes as of September 30, 2020 and June 30, 2020.tax assets. In addition, a valuation allowance remains against certain deferred tax assets relating to operating loss carryforwards relating to our dormant subsidiary located in Hong Kong.
Liquidity and Capital Resources
While some areasThe full impact of the world and parts of the U.S. are lifting social and business restrictions following the worldwide lockdowns related to the COVID-19 pandemic other geographical regions ofon the worldglobal and some sections of the U.S. are beginning to see a rise in COVID-19 infection levels. Accordingly,domestic economy remains uncertain and the world continues to adaptadapting to the ongoing COVID-19 pandemic and evolving viral variants and its adverse effects on global economics and worldwide 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 COVID-19 continues to lead to business disruption and volatility in the global capital markets, which, depending Depending on future developments, andincluding the success of the global vaccine efforts to control the spread of the underlying virus and evolving variants, the pandemic could furthermaterially adversely impact our capital resources and liquidity in the future. We remain 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
On June 18, 2020, we received the proceeds from the 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.
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 non-payroll costs. Although we currently believe that our use of the PPP Loan will meet the conditions for forgiveness of the PPP Loan, we cannot assure our future adherence to the forgiveness criteria and that the PPP Loan will be forgiven, in whole or in part.
The CARES Act provides that existing AMT credit carryforwards are now eligible for acceleration and refundable AMT credits are to be completely refunded to companies for taxable years beginning in 2019, or by election, taxable years beginning in 2018. Accordingly, we elected to have the AMT tax completely refunded and filed a refund claim for the remaining AMT tax credit. The full amount of the remaining balance of our AMT credit refund in the amount of approximately $272,000 was refunded by the Internal Revenue Service in October 2020. Accordingly, the full amount of our AMT credit refund has been classified as current as of September 30, 2020.
We also intend to take advantage of COVID-19 related tax credits for required paid leave provided by us. These eligible tax credits are determined by qualified emergency paid sick and expanded family and medical leave wages pursuant to the Families First Coronavirus Response Act, or FFCRA. Under FFCRA, we have provided employees with paid federal sick and expanded family and medical leave benefits for which we may be reimbursed by the government through payroll tax credits. Qualifying wages for tax credit purposes under FFCRA are those paid to an employee who takes leave under FFCRA for a qualifying reason, up to the applicable per diem and aggregate payment caps. Applicable tax credits also extend to the employer’s share of amounts paid or incurred to maintain a group health plan.
Finally, as permitted by the NC COVID-19 Relief Act, we will receive a tax credit towards our contributions to the North Carolina Unemployment Insurance Fund, which will also serve to further enhance future cash flow.
As a component of our liquidity and capital structure, we have an effective shelf registration statement on Form S-3 on file with the SEC whichthat allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which approximately $13.99 million remains available after giving effect to our June 2019 public offering, including the impact of the partial exercise of the underwriters’ over-allotment option, described below.all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which aremay be in turn, subject to, among other things, the potential disruption and volatility beingthat may be caused by ongoing effects of the ongoing COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Financing Activities
In June 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, in July 2019, we issued an additional 630,500 shares of our common stock at a price of $1.60 per share for net proceeds of approximately $932,000, net of the underwriting discount and fees and expenses of approximately $77,000. After giving effect to the partial exercise of the over-allotment option, we sold an aggregate of 6,880,500 shares of our common stock at a price of $1.60 per share with total gross proceeds of approximately $11.01 million, before deducting the underwriting discount and fees and expenses of approximately $1.02 million. Early 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 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 purposeshave no outstanding debt as of September 30, 2020, the classification2021.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | CHARLES & COLVARD, LTD. |
| | |
| By: | /s/ /s/ Don O’Connell
|
November 5, 2020 4, 2021 | | Don O’Connell |
| | President and Chief Executive Officer |
| | |
| By: | /s/ /s/ Clint J. Pete
|
November 5, 2020 4, 2021 | | Clint J. Pete |
| | Chief Financial Officer |
| | (Principal Financial Officer and Chief Accounting Officer) |