UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(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, ~~2020~~2021

☐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

Charles & Colvard, Ltd.

(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 ~~28,965,660~~30,414,952 shares of the registrant’s common stock, no par value per share, outstanding.

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.

Table of Contents

CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~OPERATIONS

(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.

Table of Contents

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.

Table of Contents

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	)		(717,057	)		(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.

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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™, ~~our~~the 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, ~~2020~~2021 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, ~~2020~~2021 and ~~2019~~2020 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of June 30, ~~2020~~2021 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, ~~2020~~2021 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, ~~2020~~2021 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 ~~2020~~2021 Annual Report for the Company’s significant accounting policies.

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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 amounts~~Changes 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 on~~period 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 ~~relating~~related 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 ~~are~~were access and usage restrictions on certain cash deposit balances for periods of up to two business days during which time such deposits ~~are~~were held by White Oak for the benefit of the Company. During the period these cash deposits ~~are~~were held by White Oak, such amounts ~~are~~were 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 new~~that 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 ~~implementation~~simplification of ~~the new accounting standard.~~

~~Table of Contents~~

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 the~~resulting 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 ~~not~~0t 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.

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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 maker~~management for making operating decisions and assessing performance as the source of the Company’s operating and reportable segments.

The Company manages its business through ~~two~~2 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 ~~2020~~2021 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.

~~Table of Contents~~

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

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	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

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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.

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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, no~~0 impairment was recorded.

~~See Note 2, “Basis~~

Table of ~~Presentation and Significant Accounting Policies”,~~ ~~Recently Adopted/Issued Accounting Pronouncements~~, for further discussion related to credit risk within trade accounts receivable in accordance with the new accounting standard for the measurement and disclosure of credit losses on financial instruments.Contents

5.	INVENTORIES

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, ~~2020~~2021 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.

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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 used~~the 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 LIABILITIES~~NOTE RECEIVABLE

In ~~connection with its revenue recognition accounting policy,~~March 2021, the Company ~~provides~~entered 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 account~~current 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 returns~~current asset and ~~refund liabilities are updated at the end of each financial reporting period and the effect of such changes are accounted for~~included 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

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8.	INCOME TAXES

~~The Company recognized an~~

For 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 for~~the 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%.

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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 and~~2021, 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 ~~its~~the 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 on~~in effect as of September 30, 2021 is October 31, ~~2021~~2026 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 options~~an 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. ~~These~~Upon 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 ~~totaled~~in 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 ~~adopted~~will be reimbursed for qualified costs by the ~~current~~landlord 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.

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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, ~~2020~~2021 and ~~2019~~2020 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 ~~1.08~~5.08 years.

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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, ~~2020~~2021 and ~~2019,~~2020, cash paid for operating leases was approximately $162,000 and $170,000, ~~and $164,000, respectively, and, except for~~respectively. Upon the execution of the Lease Amendment, the Company recorded additional ROU assets ~~recorded upon adoption~~in the amount of ~~the current lease accounting standard as of July 1, 2019, there were no new ROU assets~~approximately $3.9 million obtained in exchange for ~~new~~the additional operating lease ~~liabilities.~~liability during the fiscal year ended June 30, 2021.

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Purchase Commitments

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 ~~Cree~~Wolfspeed 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 ~~one~~1 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 ~~Cree~~Wolfspeed 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 ~~Cree~~Wolfspeed 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 purchase~~purchased approximately $1.50 million of SiC crystals from ~~Cree~~Wolfspeed 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 of~~did 0t purchase SiC crystals from ~~Cree.~~Wolfspeed pursuant to the terms of the Supply Agreement, as amended.

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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’s~~its expenses, and support its community in addressing the challenges posed by ~~this~~the 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 ~~impacts~~by 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 remote~~pandemic, work ~~and adjusted work schedules.~~

~~Despite these challenges,~~in the Company’s ~~efforts, especially~~production and distribution facilities has continued throughout the remainder of the pandemic, consistent with ~~regard~~guidance from federal, state, and local officials to ~~product fulfillment~~minimize 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, helped~~social distancing policies, sanitize workspaces more frequently, adopt alternate work schedules, and institute other measures aimed to ~~partially mitigate~~sustain production and related services while minimizing the ~~disruptions caused by~~transmission 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 ~~operations~~financial results in the ~~first~~ quarter ~~of its fiscal year ending June~~ended 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 ~~pandemic~~and 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 governments~~actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. The ~~long-term impacts~~Company cannot at this time predict the full impact of the COVID-19 pandemic, ~~on global consumer buying behaviors, which impacts demand for~~but 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.

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10.

DEBT

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

~~The~~

On June 18, 2020, the Company received the proceeds from a loan pursuant to the Paycheck Protection Program under the ~~CARES~~Coronavirus 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, 2020~~Lender pursuant to a promissory note issued by the Company (the “Promissory Note”) on June 15, 2020. ~~The~~During 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.

~~The~~Pursuant to its terms, the Promissory Note ~~matures~~was scheduled to mature on June 18, ~~2022 and may be extended~~2022. However, on June 14,2021, in accordance with ~~the consent of the Lender under the~~applicable provisions of the CARES ~~Act. The~~Act 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, ~~bears~~during 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. ~~Pursuant~~In 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 ~~terms~~Lender. Accordingly, the benefit from the forgiveness of the ~~Promissory Note, monthly principal and~~inception to-date interest ~~payments~~expense 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

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~~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, ~~2020~~2021 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, ~~2020~~2021 was approximately ~~$490,000.~~$38,000.

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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

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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, ~~2020~~2021 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, ~~2020~~2021 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 represents~~These 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, ~~2020~~2021 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.

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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.

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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, ~~2020~~2021 and ~~2019,~~2020, stock options to purchase approximately ~~2.79 million~~934,000 and ~~1.99~~2.79 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, ~~2020~~2021 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 effects~~presented.

Table of ~~the inclusion of such shares would be anti-dilutive to net income per common share.~~Contents

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 bank~~banks 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 to~~Accordingly, balances in excess of federally insured limitations may not be ~~a high-quality issuer.~~insured. The Company has ~~never~~not experienced ~~any~~ losses ~~related~~on these accounts, and management believes that the Company is not exposed to ~~these balances. Non-interest-bearing amounts~~significant 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.”

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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 ~~June~~September 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.

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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:

If 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;

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 ~~2020~~2021 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.

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 gemstone~~fine 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 sourced~~mostly recycled precious metals.

Our strategy is to build a globally revered brand of lab created gemstones and finished jewelry that ~~appeal~~appeals 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.

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~~continues 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 ~~this~~the 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 ~~impacts~~by accelerating orders and increasing order quantities.

Following the government mandated shut down during the early days of ~~travel restrictions, access~~the 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 ~~effects~~spread of COVID-19. We continue to ~~net revenue~~take 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 demand~~facilitate 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 impacts~~a 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 by~~Although 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 pandemic~~a 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 ~~pandemic~~and 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 governments~~actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. ~~The long-term impacts~~We cannot at this time predict the full impact of the COVID-19 pandemic, ~~on global consumer buying behaviors, which impacts demand for~~but 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 ~~2020~~2021 Annual Report.

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 ~~focus~~initiatives during Fiscal 2022 are designed to drive expansion and help us remain on a strong trajectory toward our goal for ~~Fiscal~~top 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 centered~~we began construction on ~~the expansion of~~our first Charles & ~~Colvard’s~~Colvard 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 scale~~our websites and ~~to increase the size~~through 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, including~~allowed 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 jewels~~fine 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 & Colvard~~jewelry 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 key~~and gemstone product lines to ~~our future success and ability to fuel our growth. We intend to elevate~~a 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 ~~2021~~2022 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 ~~2020~~2021 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 ~~2020~~2021 Annual Report, and that disclosure should be read in conjunction with this Quarterly Report on Form 10-Q. ~~Except as set forth below, there~~There 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, ~~2020~~2021 and ~~2019:~~2020:

Income from operations

Other income (expense):

Income before income taxes

Consolidated Net Sales

Consolidated net sales for the three months ended September 30, ~~2020~~2021 and ~~2019~~2020 comprise the following:

Total consolidated net sales

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 $7.61~~an 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 worldwide~~increased consumer awareness and ongoing strong demand for our ~~products~~moissanite jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds. These increases resulted in ~~spite~~higher 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 decrease~~an increase of approximately ~~$159,000,~~$1.00 million, or 4%28%. The ~~decrease~~increase for the three months ended September 30, ~~2020~~2021 was primarily ~~due to~~ a ~~lower levels~~result of higher sales of loose ~~jewel sales principally~~jewels 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, ~~2020~~2021 compared to ~~$6.76~~$7.50 million in the comparable quarter of ~~2019~~2020 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, ~~2019~~2021, 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, ~~2020~~2021 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.

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International net sales accounted for approximately 5%4% and ~~11%~~5% of total consolidated net sales during the quarters ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. International net sales ~~decreased~~increased to ~~$427,000,~~$456,000, or ~~49%~~7%, during the first quarter of Fiscal ~~2021~~2022 compared to ~~$845,000~~$427,000 in the first quarter of the year ended June 30, ~~2020,~~2021, or Fiscal ~~2020.~~ 2021. International sales ~~decreased~~increased due to ~~lower~~higher demand in our international distributor market ~~which was partially offset by~~coupled 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 to~~may 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, ~~2020~~2021 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, ~~2020~~2021 and ~~2019~~2020 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	%

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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, ~~2020~~2021 compared to the same period in ~~2019~~2020 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 material~~costs, in both our Online Channels segment and ~~labor costs when compared to~~Traditional segment as a result of strong product demand during the ~~production of loose jewels.~~quarter.

The net ~~increase~~decrease in non-product line cost of goods sold for the three months ended September 30, ~~2020,~~2021, comprises ~~an unfavorable $283,000~~a $282,000 lower change in other inventory adjustments principally relating to ~~adverse~~favorable changes in production standard cost variances compared to the three months ended September 30, ~~2019. The~~2020. This net ~~increase~~decrease in non-product line cost of goods sold was ~~also~~offset in part related to an approximate ~~$57,000~~$152,000 change in inventory valuation adjustments primarily related to adverse changes in ~~obsolescence~~shrinkage 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 by~~2021 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.

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Sales and Marketing

Sales and marketing expenses for the three months ended September 30, ~~2020~~2021 and ~~2019~~2021 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 decrease~~an increase of approximately ~~$582,000,~~$1.08 million, or ~~26%~~66%.

The ~~decrease~~increase in sales and marketing expenses for the three months ended September 30, ~~2020~~2021 compared to the same period in ~~2019~~2020 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 $18,000~~expenses, 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 advertising~~travel 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, ~~2020~~2021 compared to the same period in ~~2019~~2020 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 decrease~~a $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.

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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 ~~decreases~~increases 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, ~~2020~~2021 and ~~2019~~2020 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 decrease~~an increase of approximately ~~$141,000,~~$376,000, or ~~10%~~31%.

The ~~decrease~~increase in general and administrative expenses for the three months ended September 30, ~~2020~~2021 compared to the same period in ~~2019~~2020 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 ~~decreases~~increases 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 ~~increase~~decrease in miscellaneous other general and administrative expenses.

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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 ~~decrease~~increase in compensation expenses for the three months ended September 30, ~~2020~~2021 compared to the same period in ~~2019~~2020 comprises a ~~$55,000 decrease~~$171,000 increase in ~~salaries~~bonus 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 decrease~~expense. 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 administrative~~Professional services expenses increased for the three months ended September 30, ~~2020~~2021 compared to the same period in ~~2019 comprises~~2020 primarily due to a ~~$10,000~~$35,000 increase in ~~software maintenance agreement-related expenses~~fees 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-related~~consulting and other ~~miscellaneous general~~professional 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.

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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, ~~2020~~2021 and ~~2019~~2020 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.S~~U.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, ~~2020~~2021 compared with the same period in the prior ~~year, which~~year.

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 during~~22.24% and consisted of the ~~first quarter~~federal income tax rate of ~~Fiscal 2021 compared with~~21% and a blended state income tax rate of 1.24%, net of the ~~first quarter of Fiscal 2020.~~

~~Interest Income~~

~~Interest income for~~federal 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 exercise~~consisted of the ~~underwriters’ overallotment option for an additional 630,500 shares~~federal 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 proceeds~~book and tax accounting arising primarily from ~~this offering, along~~the 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 interest~~2021, our effective tax rate ~~fluctuations during the first quarter of Fiscal 2021 compared with the first quarter of Fiscal 2020.~~was 12.91%.

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~~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 considers~~we consider new evidence, both positive and negative, that could impact ~~its~~our view with regard to future realization of deferred tax assets. ~~Beginning~~As of June 30, 2021, cumulative positive taxable income over the last three tax years had been generated in ~~2014, management~~the 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 against~~continued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize certain of our deferred tax assets. ~~We maintained~~Therefore, 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 areas~~The 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 of~~on the ~~world~~global 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 adapt~~adapting 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, ~~and~~including the success of the global vaccine efforts to control the spread of the underlying virus and evolving variants, the pandemic could ~~further~~materially 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.

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Finally, as permitted by the NC COVID-19 Relief Act, we will receive a tax credit towards our contributions to the North Carolina Unemployment Insurance Fund, which will also serve to further enhance future cash flow.

As a component of our liquidity and capital structure, we have an effective shelf registration statement on Form S-3 on file with the SEC ~~which~~that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which 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 ~~are~~may be in turn, subject to, among other things, the potential disruption and volatility ~~being~~that 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 classification~~2021.

Table of the current maturity of this long-term debt assumes there will be no principal forgiveness and principal repayment for the full outstanding principal amount of the PPP Loan will be spread in equal monthly installments over the period from April 1, 2021 through the maturity date of the Promissory Note.Contents

We did not provide any collateral or guarantees for the PPP Loan, nor did we pay any facility charge to obtain the PPP Loan. The Promissory Note provides for customary events of default, including, among others, those relating to failure to make payment and breaches of representations. We may prepay the principal of the PPP Loan at any time without incurring any prepayment charges.

Operating Activities and Cash Flows

We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of September 30, ~~2020,~~2021, our principal sources of liquidity were cash, cash equivalents and restricted cash totaling ~~$13.86~~$19.17 million, trade accounts receivable, net, of ~~$1.63~~$2.67 million, and net current inventory of ~~$8.98~~$12.04 million, as compared to cash and cash equivalents totaling ~~$14.62~~$21.45 million, trade accounts receivable, net, of ~~$671,000,~~$1.66 million, and net current inventory of ~~$7.44~~$11.45 million as of June 30, ~~2020.~~2021. As described more fully herein, we also have ~~long-term debt in the amount of $965,000, of which $386,000 is classified as its current maturity as of September 30, 2020, and~~ access to a $5.00 million ~~asset-based revolving~~cash collateralized line of credit facility with ~~White Oak,~~JPMorgan Chase Bank, N.A., or ~~the White Oak Credit Facility.~~JPMorgan Chase.

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During the three months ended September 30, ~~2020,~~2021, our working capital ~~increased~~ decreased by approximately ~~$3.2 million~~$646,000 to ~~$20.63~~$29.49 million from ~~$17.42~~$30.14 million at June 30, ~~2020.~~2021. As described more fully below, the ~~increase~~decrease in working capital at September 30, ~~2020~~2021 is primarily attributable to a decrease in our cash, cash equivalents, and restricted cash, principally resulting from cash used in our operations, an increase in our accounts payable, and an increase in our short-term operating lease liabilities. These factors were offset partially by an increase in our accounts receivable, an increase in our allocation of inventory from long-term to short-term ~~decrease~~due to a higher expected sell through of inventory on hand in ~~our accounts payable, an increase in our accounts receivable,~~the upcoming period, a decrease in our accrued expenses and other liabilities, and an increase in our prepaid expenses and other assets. These factors were offset partially by a decrease in our cash, cash equivalents, and restricted cash resulting from cash used in our operations, an increase in the current maturity of our long-term debt, and an increase in our short-term operating lease liabilities.

During the three months ended September 30, ~~2020,~~2021, approximately ~~$642,000~~$2.14 million of cash was used by our operations. The primary drivers of our use of cash were ~~a decrease~~an increase in ~~accounts payable~~inventory of ~~$1.17~~$2.67 million; an increase in accounts receivable of ~~$1.08~~$1.09 million; ~~and~~ a decrease in accrued expenses and other liabilities of ~~$573,000.~~$717,000; and an increase in prepaid expenses and other assets of $303,000. These factors were offset partially by the favorable effect of net income in the amount of ~~$874,000; a decrease in inventory~~$827,000, which was net of ~~$829,000; and a decrease in prepaid expenses and other assets of $28,000. In addition, the net effect of the changes in combined~~ non-cash items ~~totaling $450,000 also favorably impacted~~that reduced net ~~cash used~~income in ~~operating activities during~~ the ~~three months ended September 30, 2020.~~amount of $833,000; and an increase in accounts payable of $979,000.

Accounts receivable increased principally due to the increased level of sales during the three months ended September 30, ~~2020~~2021, as compared with the sales during the period leading up to June 30, ~~2020. As a result~~2021. Throughout the course of the COVID-19 pandemic, from time to time we have offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy ~~customers during the first fiscal quarter of Fiscal 2021 and second half of Fiscal 2020.~~customers. Because of the ongoing impact of the pandemic on the global economy, the extension of these terms may not immediately increase liquidity as a result of ongoing current-period sales, which we expect tomay continue to be pressured due to the effects of the ongoing ~~COVID-19~~ pandemic. In addition, we believe our competitors and other vendors in the wholesale jewelry industry have expanded their use of extended payment terms and, in aggregate, we believe that, through our use of extended payment terms, we provide a competitive response in our market during the current global economic environment. We believe that we are unable to estimate the impact of these actions on our net sales, but we believe that if we ceased providing extended payment terms, we would be at a competitive disadvantage for some Traditional segment customers in the marketplace during this economic period and that our net sales and profits would likely be adversely impacted.

We manufactured approximately ~~$2.21~~$4.43 million in finished jewelry and ~~$1.68~~$2.43 million in loose jewels, which includes the cost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production, during the three months ended September 30, ~~2020.~~2021. We expect our purchases of precious metals and labor to increase as we increase our finished jewelry business. In addition, the price of gold has ~~increased~~fluctuated significantly over the past decade, ~~and more significantly over the past several months,~~ resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry.

Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with reduced sales levels during prior periods in which the purchase commitments were in effect, have resulted in levels of inventories that are higher than we might otherwise maintain. As of September 30, ~~2020 and June 30, 2020, $20.75~~2021, $19.57 million ~~and $23.19 million, respectively,~~ of our inventories were classified as long-term assets. Loose jewel sales and finished jewelry that we manufacture will utilize both the finished goods loose jewels currently on-hand and, as we deplete certain shapes and sizes, our on-hand raw material SiC crystals of ~~$2.31~~$1.68 million and new raw material that we purchase pursuant to the Supply Agreement.

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Our more detailed description of our inventories is included in Note 5 to our condensed consolidated financial statements in Part I, Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.

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As of September 30, ~~2020, we had approximately $309~~2021, all of our remaining federal income tax credits ~~that expire in 2021~~had expired or been utilized, and ~~can~~therefore, are not available to be carried forward to offset future income taxes. As of September 30, ~~2020,~~2021, we also had a federal tax net operating loss carryforward of approximately ~~$23.72~~$19.00 million expiring between ~~2022~~2034 and 2037, or that have no expiration, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately ~~$20.12~~$19.87 million expiring between 2023 and ~~2033;~~2035; and various other state tax net operating loss carryforwards expiring between ~~2021~~2023 and 2040, which can be used to offset against future state taxable income.

Contractual Commitment

On December 12, 2014, we entered into the Supply Agreement with ~~Cree.~~Cree, Inc., now known as Wolfspeed, Inc., or Wolfspeed. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from ~~Cree,~~Wolfspeed, and ~~Cree~~Wolfspeed agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties. Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of the raw materials used in our premium moissanite product, Forever One™ and provided us with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following the expiration of the initial term. In addition, the amendment to the Supply Agreement established a process by which ~~Cree~~Wolfspeed may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which ~~Cree~~Wolfspeed has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 2025 is approximately $52.95 million, of which approximately ~~$36.60~~$31.35 million remains to be purchased as of September 30, ~~2020.~~2021.

During the three months ended September 30, 2021, we purchased approximately $1.50 million of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended. During the three months ended September 30, 2020, ~~in accordance with~~we did not purchase SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended ~~we made no purchases of SiC crystals from Cree.~~. Going forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, together with future cash expected to be provided by our operating activities ~~and, if necessary, our White Oak Credit Facility,~~ to ~~finance our purchase commitment under~~make purchases in accordance with the terms of the Supply Agreement, as ~~amended.~~amended.

Line of Credit

OnEffective July ~~13, 2018,~~7, 2021, we ~~and~~obtained from JPMorgan Chase our ~~wholly-owned subsidiary, charlesandcolvard.com, LLC, collectively referred to as the Borrowers, obtained the~~ $5.00 million ~~asset-based revolving White Oak~~cash collateralized line of credit facility, or the JPMorgan Chase Credit Facility. The ~~White Oak~~JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted ~~acquisitions.~~ acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The 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 London Interbank Offered Rate, or LIBOR, 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 at any time.

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As of September 30, 2021, we had not borrowed against the JPMorgan Chase Credit Facility.

Prior to obtaining the JPMorgan Chase Credit Facility, we and our wholly owned subsidiary, charlesandcolvard.com, LLC, collectively referred to as the Borrowers, had a $5.00 million asset-based revolving credit facility, or the White Oak Credit Facility, from White Oak Commercial Finance, LLC, or White Oak, which we terminated 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.

The White Oak Credit Facility ~~which matures on July 13, 2021, is~~was available for general corporate and working capital purposes, including permitted acquisitions and was guaranteed by ~~Charles & Colvard Direct, LLC, another of our wholly-owned subsidiaries.~~the Borrowers. Under the terms of the White Oak Credit Facility, the Borrowers ~~must~~were required to maintain at least $500,000 in excess ~~borrowing~~ availability at all times. The White Oak Credit Facility ~~contains~~contained no other financial covenants.

Advances under the White Oak Credit Facility ~~may be~~could have been 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 ~~will reduce~~would have been reduced upon our achievement of a specified fixed charge coverage ratio. However, any advances ~~are~~were in all cases subject to a minimum interest rate of 5.50%. Interest iswould have been calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default, ~~accrues~~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.

~~As of September 30, 2020, we~~We had not borrowed against the White Oak Credit ~~Facility. As a result of our diminished borrowing base~~Facility as of ~~September 30, 2020,~~July 9, 2021, the date upon which ~~is tied to our accounts receivable, our ability to draw down funds from~~we terminated the White Oak Credit Facility ~~is currently restricted.~~in accordance with its terms.

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Liquidity and Capital Trends

Notwithstanding the adverse impact that the COVID-19 pandemic has had on the global economy and on our own business operations, we believe that it has not materially adversely impacted our liquidity position and we continue to generate operating cash flows to meet our short-term liquidity needs. We further believe that our existing cash, ~~and~~ cash equivalents, and restricted cash and access to other working capital resources, including but not limited to, the access to federal government economic relief programs pursuant to the CARES Act, including our existing PPP Loan and the available conditional forgiveness of the PPP Loan in whole or in part, access to available federal and state tax-related considerations, the issuance of equity securities, and future cash expected to be provided by operating activities combined will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.

Our future capital requirements and the adequacy of available funds will depend on many factors, including the ongoing spread of COVID-19 and duration of the underlying pandemic that could lead to further disruption and volatility in the global capital markets as well as its impact on our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewels and lab grown diamonds business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and the risk factors described in more detail in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our ~~2020~~2021 Annual Report on Form 10-K. ~~Currently, we have the White Oak Credit Facility through its expiration on July 13, 2021, that we believe would mitigate these risks to our cash and liquidity position. Also, we~~We may make investments in, or acquisitions of, complementary businesses, which could also require us to seek additional equity or debt financing.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting despite the fact that our corporate employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of COVID-19 on our internal control over financial reporting to minimize the impact on its design and operating effectiveness. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended September 30, ~~2020,~~2021, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

There are no material pending legal proceedings to which we are a party or to which any of our property is subject.

Item 1A.

Risk Factors

We discuss in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2020~~2021 and our Quarterly Report on Form 10-Q for the quarter September 30, ~~2020~~2021 various risks that may materially affect our business. There have been no material changes to such ~~risks, except as set forth below.~~risks.

~~Our future financial performance depends upon increased consumer acceptance, growth of sales of our products, and operational execution of our strategic initiatives.~~ We believe that most consumers are not generally aware of the existence and attributes of moissanite jewels and lab grown diamonds and that the consumer market for moissanite jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds remains in the early stages of development. The degree of future market acceptance and demand is subject to a significant amount of uncertainty. Our future financial performance will depend, in part, upon greater consumer acceptance of moissanite jewels and lab grown diamonds as ethically-sourced, affordable, luxurious alternative to other gemstones, such as a mined diamond, and our ability to develop brands and execute strategic initiatives, in particular, our Online Channels segment, to grow our sales and operating income. As we execute our strategy to build and reinvest in our business, significant expenses and investment of cash will be required going forward and this may adversely affect our operating income. If we are unable to execute and achieve desired revenue levels, we may adjust our strategic initiatives in response to the results of our investments.

In addition, consumer acceptance may be affected by retail jewelers’ and jewelry manufacturers’ acceptance of moissanite jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds. The quality, design, and workmanship of the jewelry settings, whether manufactured by us or other manufacturers, could affect both consumers’ perception and acceptance of our products and costs incurred by returns and markdowns. Additionally, as other competitors enter the market, the lower quality of competitors’ gemstones could negatively impact consumer perception of moissanite jewels and lab grown diamonds, and in turn, acceptance of our jewels.

~~Thus, our future financial performance may be affected by:~~

•

~~Our continued success in developing and promoting the Charles & Colvard brands, such as~~ ~~Forever One~~^TM, ~~Moissanite by Charles & Colvard~~^®~~, and~~ ~~Caydia™, all of which are used in finished jewelry featuring moissanite and lab grown diamonds, resulting in increased interest and demand for moissanite jewelry at the consumer level;~~

•

~~Our ability to differentiate~~ ~~Charles & Colvard Created Moissanite~~^®~~and~~ ~~Caydia™ from competing products, including competitive moissanite and the rapidly emerging lab grown diamond industry;~~

~~The ability to operationally execute our digital marketing strategy for our Online Channels segment;~~

Our continued ability and the ability of manufacturers, designers, and retail jewelers to select jewelry settings that encourage consumer acceptance of and demand for our moissanite jewels, lab grown diamonds, and finished jewelry;

~~The ability to understand our consumer market segment and effectively market to them a compelling value proposition that leads to converted customers;~~

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~~Our ability to continue our relationship with Cree in order to sustain our supply of high-quality SiC crystals;~~

•

~~The continued willingness and ability of our jewelry distributors and other jewelry suppliers, manufacturers, and designers to market and promote~~ ~~Charles & Colvard Created Moissanite~~^® ~~to the retail jewelry trade;~~

•

~~The continued willingness of distributors, retailers, and others in our distribution channels to purchase loose~~ ~~Forever One~~^TM, ~~Charles & Colvard Created Moissanite~~^®~~, and the continued willingness of manufacturers, designers, and retail jewelers to undertake setting of the loose jewels;~~

~~Our continued ability and the ability of jewelry manufacturers and retail jewelers to set loose moissanite jewels and lab grown diamonds in finished jewelry with high-quality workmanship; and~~

~~Our continued ability and the ability of retail jewelers to effectively market and sell finished jewelry featuring moissanite to consumers.~~

~~We face intense competition in the worldwide jewelry industry.~~ The jewelry industry is highly competitive and we compete with numerous other jewelry products. In addition, we face competition from mined diamonds, lab-created (synthetic) diamonds, other lab grown diamonds, other moissanite products, and simulants. A substantial number of companies supply products to the jewelry industry, many of whom we believe have greater financial resources than we do. Competitors could develop new or improved technologies, including those for lab grown diamonds, that may render the price point for our moissanite and our lab grown diamonds noncompetitive, which could have an adverse effect on our business, results of operations, and financial condition.

~~With the launch of our~~ ~~Caydia~~™ product line, we believe that our entry into the lab grown diamond market could be a potential threat to - and increase competition for - our core moissanite products. While our moissanite gemstones and finished jewelry set with moissanite generally have different price points than those from our ~~Caydia~~™ product line, any cannibalization of moissanite product sales resulting from sales of our lab-created diamonds could have an adverse impact on sales of our moissanite jewels and finished jewelry set with moissanite.

We have previously relied on our patent rights and other intellectual property rights to maintain our competitive position. Our U.S. product and method patents for moissanite jewels expired in 2015 and most of our patents in foreign jurisdictions expired in 2016 with only one in Mexico remaining (which expires in 2021). However, we have certain trademarks and pending trademark applications that support our moissanite branding strategy. Additionally, we have certain issued and pending design patents that we believe, if approved, will differentiate our products in the gemstone and jewelry industry. Notwithstanding the foregoing, since the expiration of our patents we have noted new providers of moissanite and competitive products entering the market. However, as we experienced ourselves, achieving the capacity to consistently produce a high-quality moissanite product at mass scale requires a careful balance of SiC-specific faceting skills and a well-tuned global supply chain. As our pending patent rights and other pending intellectual property rights are approved, we will continue to rely on these patents and our carefully-executed brand awareness and digital marketing campaigns to build our consumer relationships and maintain our competitive position going forward. If, however, we are unable to successfully build strong brands for our moissanite jewels, lab grown diamonds, and finished jewelry featuring moissanite and lab grown diamonds or competition grows faster than expected, we may not have commercially meaningful protection for our products or a commercial advantage against our competitors or their competitive products or processes, which may have a material adverse effect on our business, results of operations, and financial condition.

~~Sales of moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control.~~ Any increases in the market price of precious metals (primarily gold) could affect the pricing and sales of jewelry incorporating moissanite jewels and lab grown diamonds. The majority of price increases in precious metals are passed on to the end consumer in the form of higher prices for finished jewelry. These higher prices could have a negative impact on the sell-through of moissanite and lab grown diamond jewelry at the retail level. From 2006 through 2020, the price of gold has increased significantly, resulting in higher retail price points for gold jewelry. Accordingly, higher gold prices could have an adverse impact on both sales of moissanite and lab grown diamond finished jewelry and the jewelry industry as a whole.

~~Table of Contents~~

~~Our current customers may potentially perceive us as a competitor in the finished jewelry business.~~ As described above, we are currently dependent on a limited number of customers, including distributors and retailers, for the sale of our products in the Traditional segment. Our design, manufacture, and marketing of finished jewelry featuring moissanite and lab grown diamonds for sale to distributors and retailers may result in some of these current customers perceiving us as a competitor, despite our efforts to use primarily non-conflicting sales channels. In response, these customers may choose to reduce their orders for our products. This reduction in orders could occur faster than our sales growth in this business, which could materially and adversely affect our business, results of operations, and financial condition.

~~Table of Contents~~

Item 6.

Exhibits

The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:

Exhibit No.		Description

~~31.1~~10.1		Charles & Colvard, Ltd. Fiscal 2022 Senior Management Equity Incentive Program, effective July 1, 2021 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on September 15, 2021)+

31.1		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

~~101~~101.INS		~~The following materials from Charles & Colvard, Ltd.’s Quarterly Report on Form 10-Q for~~Inline XBRL Instance Document – the ~~quarterly period ended September 30, 2020 formatted~~instance document does not appear in the Interactive Data File because its XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Changestags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase document

104		Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document contained in ~~Shareholders’ Equity; (iv) Condensed Consolidated Statements of Cash Flow; and (v) Notes to Condensed Consolidated Financial Statements.~~Exhibit 101

+		Denotes management contract or compensatory plan or arrangement

Table of Contents

SIGNATURES

~~SIGNATURES~~

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)

3635

		Page Number
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, ~~2020~~2021 (unaudited) and June 30, ~~2020~~2021	1
	Condensed Consolidated Statements of Operations (unaudited) for the three months ended September 30, ~~2020~~2021 and ~~2019~~2020	2
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the three months ended September 30, ~~2020~~2021 and ~~2019~~2020	3
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended September 30, ~~2020~~2021 and ~~2019~~2020	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1920
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3132
Item 4.	Controls and Procedures	3133

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	3233
Item 1A.	Risk Factors	3233
Item 6.	Exhibits	3534
	Signatures	3635

	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