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:
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.
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 fine jewelry company specializing in lab growncreated gemstones. We manufacture, market, and distribute Charles & Colvard Created Moissanite® (which we refer to as moissanite or moissanite jewels) and in September 2020, we announced our expansion into the lab grown diamond market with the launch of Caydia®, an exclusive brand of premium lab grown diamonds. We offer gemstones and finished jewelry featuring our proprietary moissanite 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™, 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.
For additional risks to the Company related to the COVID-19 pandemic, see “Part I, Item 1A. Risk Factors”, contained in our 20212022 Annual Report.
The following table sets forth certain consolidated statements of operations data for the three and nine months ended March 31,September 30, 2022 and 2021:
24
U.S. net sales accounted for approximately 96% and 95% of total consolidated net sales for the three and nine monthsthree-month period ended March 31,September 30, 2022, respectively, compared to 95% and 94% of total consolidated net saleswith 96% for the corresponding periods in the prior year.three-month period ended September 30, 2021. U.S. net sales increased $422,000,decreased to $7.10 million, or 5%28%, duringin the three months ended March 31,September 30, 2022 fromcompared to $9.82 million in the corresponding periodcomparable quarter of the prior fiscal year. U.S. net sales increased $4.38 million, or 16%, during the nine months ended March 31, 2022 from the corresponding period of the prior year. U.S. net sales increased during the three and nine months ended March 31, 2022 primarily2021 as a result of increaseddecreased sales to U.S. customers in our Online ChannelsTraditional segment.
Our largest U.S. customer during the three and nine months ended March 31,September 30, 2022 accounted for 13% and 14% of total consolidated net sales during each respective period. This same customer was our second largest customer during the three and nine months ended March 31,September 30, 2021 when this customerand accounted for 15%17% and 13%14% of total consolidated net sales during each of the respective three- and nine-month periods.periods then ended. Our second largest U.S. customer during the three and nine months ended March 31,September 30, 2021 accounted for 13% and 11%19% of total consolidated net sales during each of the respective three- and nine-month periods. Other than ourperiod then ended. We did not have another U.S. customers noted above during the three- and nine-month periods ended March 31, 2022 and 2021, we had no other customers with sales that representedcustomer account for 10% or more of total consolidated net sales forduring the periods then ended.three months ended September 30, 2022 or 2021. We expect that we, along with our customers, will remain dependent on our ability to maintain and enhance our customer-related programs. A change in or loss of any of these customer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately 4% and 5%4% of total consolidated net sales forduring the threequarters ended September 30, 2022 and nine months ended March 31, 2022, respectively, compared to 5% and 6% of total consolidated net sales for the corresponding periods of the prior year.2021, respectively. International net sales decreased 23% and 6%to $279,000, or 39%, during the three and nine months ended March 31, 2022, respectively, fromfirst quarter of Fiscal 2023 compared to $456,000 in the corresponding periodsfirst quarter of the prior fiscal year ended June 30, 2022, or Fiscal 2022. International sales decreased due to somewhat lower demand in our international distributor market due to shutdowns in the Asia Pacific region during the current period, coupled with a slight increase in demand in our direct-to-consumer international sales from our Online Channels segment in international markets.the strength of the U.S. dollar against foreign currencies. In light of the effects of ongoing global economiceconomic conditions, and as the world continues to adapt to 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 that our sales in these markets 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 and nine months ended March 31,September 30, 2022 or 2021. 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
CostOur total cost of goods sold for the three and nine months ended March 31,September 30, 2022 and 2021 are as follows:
| | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | | | Three Months Ended September 30, | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | 2021 | | Dollars | | Percent | |
| Product line cost of goods sold: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Finished jewelry | | $ | 3,709,864 | | | $ | 3,051,936 | | | $ | 657,928 | | | 22 | % | | $ | 10,748,323 | | | $ | 8,808,372 | | | $ | 1,939,951 | | | 22 | % | | $ | 2,606,699 | | | $ | 2,334,482 | | | $ | 272,217 | | | 12 | % |
| Loose jewels | | | 1,013,986 | | | | 1,468,338 | | | | (454,352 | ) | | (31 | )% | | | 4,507,997 | | | | 5,017,863 | | | | (509,866 | ) | | (10 | )% | | | 825,623 | | | | 2,059,446 | | | | (1,233,823 | ) | | (60 | )% |
| Total product line cost of goods sold | | 4,723,850 | | | 4,520,274 | | | 203,576 | | | 5 | % | | 15,256,320 | | | 13,826,235 | | | 1,430,085 | | | 10 | % | | 3,432,322 | | | 4,393,928 | | | (961,606 | ) | | (22 | )% |
| Non-product line cost of goods sold | | | 572,680 | | | | 573,178 | | | | (498 | ) | | 0 | % | | | 2,090,706 | | | | 1,630,980 | | | | 459,726 | | | 28 | % | | | 653,688 | | | | 622,622 | | | | 31,066 | | | 5 | % |
| Total cost of goods sold | | $ | 5,296,530 | | | $ | 5,093,452 | | | $ | 203,078 | | | 4 | % | | $ | 17,347,026 | | | $ | 15,457,215 | | | $ | 1,889,811 | | | 12 | % | | $ | 4,086,010 | | | $ | 5,016,550 | | | $ | (930,540 | ) | | (19 | )% |
Total cost of goods sold was $5.30$4.09 million for the three months ended March 31,September 30, 2022 compared to $5.09$5.02 million for the three months ended March 31,September 30, 2021, a net increasedecrease of approximately $203,000,$931,000, or 4%. Total cost of goods sold was $17.35 million for the nine months ended March 31, 2022 compared to $15.46 million for the nine months ended March 31, 2021, an increase of approximately $1.89 million, or 12%19%. 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 increasedecrease in total product line cost of goods sold for the three and nine months ended March 31,September 30, 2022 compared to the same period in 2021 was primarily driven by increaseddue to decreased sales of finished jewelry, which reflect higher material and labor costs,loose jewels during the three months ended September 30, 2022 in our Online ChannelsTraditional segment as a result of stronglower product demand during the calendar year-end 2021 holiday season and Valentine’s Day season. Our finished jewelry products cost more to produce due to higher material and labor costs when compared to the production of loose jewels.quarter.
The non-product line cost of goods sold for the three months ended March 31, 2022 compared to the same period in 2021 was flat.
The net increase in non-product line cost of goods sold for the ninethree months ended March 31,September 30, 2022, comprises an approximate $293,000$58,000 increase in freight out principally from increased shipments resulting from Online Channels segment sales growth during the nine months ended March 31, 2022, as well as a reflection of the rising costs of freightfuel and shipping overall during the period; an approximate $104,000 increase in inventory write-offs primarily related to increases in obsolescence reserves in the first three months of the nine month-period ended March 31, 2022, compared to those in the comparable prior year period; and an approximate $121,000$35,000 increase in non-capitalized manufacturing production control expenses principally related to the timing of when work-in-process goods are received into inventory and overhead costs are allocated. These increases were partially offset byallocated; and a $58,000 decrease$51,000 increase in other inventory adjustments principally related to changes in production standard cost variances compared to those in the nine-month period ended March 31, 2021.first three months of Fiscal 2022. These increases were partially offset by an approximate $113,000 decrease in inventory write-offs in the first three months of the Fiscal 2022, compared to those in the comparable prior year period.
For additional disclosure relating to non-product line cost of goods sold, see Note 3 to our condensed consolidated financial statements in Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.
Sales and Marketing
Sales and marketing expenses for the three and nine months ended March 31,September 30, 2022 and 2021 are as follows:
| | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
| Sales and marketing | | $ | 2,932,587 | | | $ | 2,211,350 | | | $ | 721,237 | | | | 33 | % | | $ | 9,741,774 | | | $ | 6,339,854 | | | $ | 3,401,920 | | | | 54 | % |
|
| Three Months Ended September 30, |
|
| Change | |
|
| 2022 | | | 2021 |
|
| Dollars | | | Percent | |
| Sales and marketing |
| $ | 3,107,946 | | | $ | 2,730,153 |
|
| $ | 377,793 | | | | 14 | % |
Sales and marketing expenses were $2.93$3.11 million for the three months ended March 31,September 30, 2022 compared to $2.21$2.73 million for the three months ended March 31,September 30, 2021, an increase of approximately $721,000,$378,000, or 33%. Sales and marketing expenses were $9.74 million for the nine months ended March 31, 2022 compared to $6.34 million for the nine months ended March 31, 2021, an increase of approximately $3.40 million, or 54%14%.
The increase in sales and marketing expenses for the three months ended March 31,September 30, 2022 compared to the same period in 2021 was primarily due to a $543,000$162,000 increase in advertising and digital marketing expenses; an $80,000 increase in compensation expenses; a $63,000$58,000 increase in professional services principally comprising consulting services for marketing support in the current year period; a $59,000$41,000 increase in bank fees expenses, which are principally related to higher credit card transaction fees from increased online sales levels;and payment platform fees; a $46,000$37,000 increase in compensation expenses;general business taxes; and a $35,000$7,000 increase in software-related costs incurred primarily in connection withemployee-related recruiting and search fees for new software-related agreements associated with upgraded operating and cybersecurity systems; an $8,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; and a $6,000 increase in travel expenses as we returned to more traditional business travel patterns following cut-backs relating to the COVID-19 pandemic and related cost-control measures in the prior year period.hires. These increases were offset partially by an $18,000a $6,000 decrease in recruitingtravel expenses; and employment agency fees, a $10,000 decrease in depreciation and amortization expense relating to capitalized costs associated with information technology-related upgrades, and an $11,000$1,000 net decrease in general office-related expenses.
The increase in advertising and digital marketing expenses for the three months ended March 31, 2022 compared to the same period in 2021 comprises a $360,000 increase in digital advertising spend; a $34,000 increase in cooperative advertising; a $149,000 increase in brand awareness marketing campaigns; and a $6,000 increase in outside agency fees. These increases were offset partially by a $6,000 decrease in print media expenses. During 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.
Compensation expenses for the three months ended March 31, 2022 compared to the same period in 2021 increased primarily due to an $8,000 increase in salaries, commissions, and related employee benefits in the aggregate; a $27,000 increase in bonus expense; and an $11,000 increase in employee stock-based compensation expense. The increases in bonus and employee stock-based compensation expenses reflect the impact of our performance-based bonus plans and stock compensation-related benefits.
The increase in sales and marketing expenses for the nine months ended March 31,September 30, 2022 compared to the same period in 2021 was primarily due to a $2.75 million increase in advertising and digital marketing expenses; a $191,000 increase in compensation expenses; a $170,000 increase in professional services principally comprising consulting services for marketing support in the current year period; a $140,000 increase in bank fees expenses, which are principally related to higher credit card transaction fees from increased online sales levels; an $80,000 increase in software-related costs incurred primarily in connection with new software-related agreements associated with upgraded sales-related operating and cybersecurity systems; a $51,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; a $31,000 increase in travel expenses as we returned to more traditional business travel patterns following cut-backs relating to the COVID-19 pandemic and related cost-control measures in the prior year period; and a $9,000 increase in depreciation and amortization expense relating to capitalized costs associated with information technology-related upgrades. These increases were offset partially by an $18,000 decrease in recruiting and employment agency fees and a $1,000 net decrease in general office-related expenses.
The increase in advertising and digital marketing expenses for the nine months ended March 31, 2022 compared to the same period in 2021 comprises a $2.20 million$94,000 increase in digital advertising spend; a $245,000$78,000 increase in cooperative advertising; a $137,000 increase in expenses relating to our participation in the 2021 JCK Trade Show (the JCK Trade Show organization did not hold an event in the prior year due to restrictions related to the COVID-19 pandemic); a $129,000$80,000 increase in brand awareness marketing campaign expenditures in the current year period; a $23,000$37,000 increase in production related to photoshoots; and a $21,000 increase in outside agency fees. These increases were offset partially by a $133,000 decrease in expenses relating to our participation in the 2022 JCK Trade Show held in the prior year quarter in which we did not host a booth at for the 2023 JCK Trade show; a $14,000 decrease in print media expenses; and a $16,000$1,000 decrease in other general expenses.
The increase in outside agency fees.
Compensationcompensation expenses for the ninethree months ended March 31,September 30, 2022 compared to the same period in 2021 increasedwas primarily asdue to a result of a $94,000$76,000 increase in salaries, commissions, and related employee benefits in the aggregate; a $57,000 increase in employee stock-based compensation expense; and a $42,000$20,000 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 increases were partially offset by a $2,000$16,000 decrease in employee-related severance costs from the prior year.employee stock-based compensation expense.
General and Administrative
General and administrative expenses for the three and nine months ended March 31,September 30, 2022 and 2021 are as follows:
| | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
| General and administrative | | $ | 1,106,850 | | | $ | 1,092,683 | | | $ | 14,167 | | | | 1 | % | | $ | 3,880,684 | | | $ | 3,278,246 | | | $ | 602,438 | | | | 18 | % |
|
| Three Months Ended September 30, |
|
| Change | |
|
| 2022 |
|
| 2021 |
|
| Dollars | |
| Percent | |
| General and administrative |
| $ | 1,413,476 |
|
| $ | 1,584,275 |
|
| $ | (170,799 | ) |
|
| (11 | )% |
General and administrative expenses were $1.11$1.41 million for the three months ended March 31,September 30, 2022 compared to $1.09$1.58 million for the three months ended March 31,September 30, 2021, an increasea decrease of approximately $14,000,$171,000, or 1%. General and administrative expenses were $3.88 million for the nine months ended March 31, 2021 compared to $3.28 million for the nine months ended March 31, 2022, an increase of approximately $602,000, or 18%11%.
The
increasedecrease in general and administrative expenses for the three months ended
March 31,September 30, 2022 compared to the same period in 2021 was primarily due to a
$97,000 increase$224,000 decrease in compensation expenses; a
$28,000 increase$70,000 decrease in
housing allowances and travel-related expenditures as we returnedbank fees due to
more normal business travel patterns following cut-backs relating to the COVID-19 pandemicfee structure of different banking arrangements in place in the priorcurrent period versus those in the year
period;ago quarter; a $12,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; and a $26,000 increase in insurance expenses principally related to higher renewal premiums. These increases were partially offset by a $74,000 $32,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve
policy in connection with thepolicy; a $14,000 decrease in
accounts receivable, compared with the prior period;professional services; and a $7,000 net decrease in miscellaneous other general and administrative expenses. These decreases were partially offset by a $117,000 increase in general business taxes and licenses; a $33,000
decreaseincrease in
bank-related fees principally in connection with the Company’s prior credit facility that was terminated in accordance with its terms in July 2021;travel-related expenditures; a
$24,000 decrease$14,000 increase in depreciation and amortization
expense, principally related to fully depreciated assets when compared to thoseexpense; and a $12,000 increase in
prior periods; and an $18,000 decrease in professional services.software-related costs.
The increasedecrease in compensation expenses for the three months ended March 31,September 30, 2022 compared to the same period in 2021 compriseswas primarily due to a $93,000 increase$167,000 decrease in employee stock-based compensation expense, which reflects improved operating results that impact our performance-based compensation-related benefits,expense; and a $28,000$155,000 decrease in bonus expense. These decreases were partially offset by a $98,000 net increase in salaries and related employee benefits. These increases were partially offset by a $24,000 decrease in bonus expense.
Professional services feesexpenses decreased for the three months ended March 31,September 30, 2022 compared to the same period in 2021 primarily due to a $44,000$24,000 decrease in legal fees associated with corporate governance mattersmatters; a $8,000 decrease in the prior year period,investor relations fees; and a $14,000 net$1,000 decrease in consultingfees associated with audit and other professional services in the current year period.tax services. These decreases were partially offset by a $40,000$10,000 increase in fees associatedconsulting and other professional services primarily in connection with audit and tax services, principally related to a discrete income tax-related project.
The increase in general and administrative expenses for the nine months ended March 31, 2022 compared to the nine-month period ended March 31, 2021 was primarily due to a $481,000 increase in compensation expenses; a $95,000 increase in housing allowances and travel-related expenditures as we returned to more normal business travel patterns following cut-backs relating to the COVID-19 pandemicaccounting department support in the prior year period; a $67,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; a $39,000 increase in employee-related recruiting and search fees for new hires; a $47,000 increase in insurance expenses principally related to higher renewal premiums; a $29,000 increase in professional services;current period and a $9,000 increase in business taxes and licenses. These increases were partially offset by a $70,000 decrease in depreciation and amortization expense, principallybroker commissions related to fully depreciated assets when compared to those in prior periods; a $67,000 decrease in bank-related fees principally in connection with the Company’s prior credit facility that was terminated in accordance with its terms in July 2021; and a $28,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve policy in connection with the decrease in accounts receivable, compared with the prior period.
Compensation expenses increased for the nine months ended March 31, 2022 compared to the same period in 2021 primarily due to a $307,000 increase in employee stock-based compensation expense; a $158,000 increase in bonus expense; and a $16,000 net increase in salaries and related employee benefits in the aggregate. The increases in employee stock-based compensation and bonus expenses reflect improved operating results that impact these performance-based compensation-related benefits.
Professional services fees increased for the nine months ended March 31, 2022 compared to the nine-month period ended March 31, 2021 primarily due to a $78,000 increase in fees associated with audit and tax services, principally related to a discrete income tax-related project. This increase was partially offset by a $6,000 net decrease in consulting and other professional services; and a $43,000 decrease in legal fees associated with corporate governance matters.stock repurchase program.
Interest Income
Interest income for the three and nine months ended March 31,September 30, 2022 and 2021 is as follows:
| | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
| Interest income | | $ | 1,120 | | | $ | 540 | | | $ | 580 | | | | 107 | % | | $ | 1,964 | | | $ | 5,126 | | | $ | (3,162 | ) | | | (62 | )% |
| | | Three Months Ended September 30, | | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | |
| Interest income | | $ | 40,201 | | | $ | 355 | | | $ | 39,846 | | | | * | % |
* Not meaningful
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 and nine months ended March 31,September 30, 2022 and 2021, we earned interest from cash on deposit in this interest-bearing account. The decreaseincrease in earned interest for the nine monthsquarterly period ended March 31,September 30, 2022 reflects adverse changesmovement of invested funds into a higher-yield money market fund in late Fiscal 2022, coupled with the overall increase in interest rates during the first quarter of Fiscal 20222023 compared with Fiscal 2021.
Interest Expense
Interest expense for the three and nine months ended March 31, 2022 and 2021 is as follows:
| | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
| Interest expense | | $ | - | | | $ | 2,412 | | | $ | (2,412 | ) | | | (100 | )% | | $ | - | | | $ | 7,318 | | | $ | (7,318 | ) | | | (100 | )% |
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, including the related accrued and unpaid interest, was forgiven by the U.S. Small Business Administration.
We had no outstanding debt during the nine months ended March 31, 2022.
Loss on Foreign Currency Exchange
Loss on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the three and nine months ended March 31,September 30, 2022 and 2021 are as follows:
| | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
| Loss on foreign currency exchange | | $ | - | | | $ | - | | | $ | - | | | | - | % | | $ | 34 | | | $ | 603 | | | $ | (569 | ) | | | (94 | )% |
| | | Three Months Ended September 30, | | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | |
| Loss on foreign currency exchange | | $ | - | | | $ | 34 | | | $ | (34 | ) | | | (100 | )% |
During the three and nine months ended March 31,September 30, 2022 and 2021, we had international sales transactions denominated in currencies other than the U.S. dollar that resulted in foreign currency exchange net losses. The net decrease in these losses reflects the lower level of international sales denominated in foreign currencies during the three and nine months ended March 31,September 30, 2022 compared with the same period in the prior year, coupled with fluctuations in foreign currency exchange rates during the nine months ended March 31, 2022.year.
Provision for Income Taxes
For eachthe three months ended September 30, 2022, our statutory tax rate was 22.98% and consisted of the threefederal income tax rate of 21% and ninea blended state income tax rate of 1.98%, net of the federal benefit. For the three months ended March 31, 2022,September 30, 2021, our 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 of the federal benefit. For each of the three and nine months ended March 31, 2021, our statutory tax rate was 22.11% and consisted of the 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 book and tax accounting arising primarily from the permanent tax benefits associated with stock-basedstock compensation transactions during the quarter. For the ninethree months ended March 31,September 30, 2022 and 2021, our effective tax rate was 17.20%.25.39% and 12.91%, respectively.
We recognized a net income tax benefit of approximately $303,000 for the quarter ended September 30, 2022, compared with a net income tax expense of approximately $123,000 for the quarter ended September 30, 2021.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. As of JuneSeptember 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. We also determined that our expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that included significant management estimates and assumptions, would be sufficient to result in full utilization of our federal net operating loss carryforwards and certain of the 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 $78,000 and $485,000 for the three and nine months ended March 31, 2022, respectively, compared with a net income tax expense of approximately $500 and $1,000 for the three and nine months ended March 31, 2021, respectively. With the reduction of our valuation allowance during the fiscal year ended June 30, 2021, we recognized deferred income tax expense during the three and nine months ended March 31, 2022 in the amount of approximately $78,000 and $483,000, respectively. 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 March 31, 2022 and 2021, respectively, and approximately $1,500 for each of the nine months ended March 31, 2022 and 2021, respectively.
As of March 31, 2022, we determined that our 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 our remaining federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of March 31,September 30, 2022, to conclude that it is more likely than not deferred tax assets of approximately $5.87$6.15 million remain realizable. Conversely, we further determined that sufficient negative evidence continued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize certain of our deferred tax assets. Therefore, we continued to maintain a valuation allowance against the deferred tax assets relating to certain state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of when we 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 our dormant subsidiary located in Hong Kong.
Liquidity and Capital Resources
The full impact of the COVID-19 pandemic on the global and domestic economy remains uncertain and the world continues adapting to the ongoing 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. Depending on future developments, including the success of the global vaccine efforts to control the spread of the underlying virus and evolving variants and sub-variants, the pandemic could 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.resources.
Capital Structure and Long-Term Debt
AsShort-Term Liquidity and Capital Structure
The Consolidated Appropriations Act, 2021, provides that employers who received a component ofPaycheck Protection Program (“PPP”) loan may also qualify for the Employee Retention Credit, or ERC. Previously, pursuant to the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, taxpayers that received a PPP loan were not eligible for the ERC and this change is retroactive to March 27, 2020. We believe that we may qualify for certain employer-related tax benefits pursuant to the ERC and are currently working with an independent third-party tax credit firm to amend our liquidityapplicable federal payroll tax returns for such benefit. Any benefit received in connection with available ERC credits will be recognized in the period such credits are received.
Long-Term Liquidity and capital structure, weCapital Structure
We have an effective shelf registration statement on Form S-3 on file with the SEC that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of the COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Our weighted average shares outstanding on a diluted basis were 31.27 million shares for each of the three and nine months ended March 31, 2022, compared to 30.53 million shares and 29.67 million shares for the three and nine months ended March 31, 2021, respectively. The increases in our weighted average shares outstanding in the current year periods were driven by an increase in option exercises since the prior year periods presented herein.Debt
We hadhave no short- or long-term outstanding debt as of March 31,September 30, 2022.
Financing Activities
Long-Term Financing Activities
In accordance with authority granted by our Board of Directors on April 29, 2022, we can repurchase up to $5.00 million in shares outstanding of our common stock over the three-year period ending April 29, 2025. Pursuant to the terms of the repurchase authorization, the common stock share repurchases are generally at the discretion of management. As we repurchase our common shares, which have no par value, we report such shares held as treasury stock on our condensed consolidated balance sheets, with the purchase price recorded within treasury stock.
During the three-month period ended September 30, 2022, we repurchased approximately 358,000 shares of our common stock for an aggregate price of approximately $452,000 pursuant to the repurchase authorization. We repurchased no shares of our common stock during the three-month period ended September 30, 2021.
Operating Activities and Cash Flows
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of
March 31,September 30, 2022, our principal sources of liquidity were cash
and cash equivalents
and restricted cash totaling
$21.91$11.57 million, trade accounts receivable of
$1.57$1.56 million, and net current inventory of
$13.44$12.09 million, as compared to cash
and cash equivalents
and restricted cash totaling
$21.45$15.67 million, trade accounts receivable of
$1.66$2.22 million, and net current inventory of
$11.45$11.02 million as of June 30,
2021. As described more fully herein, we2022. We also
havehad access
during the three-month period ended September 30, 2022 to a $5.00 million cash collateralized line of credit facility,
with or the JPMorgan Chase Credit Facility, that we obtained effective July 9, 2021, as amended July 28, 2022, from JPMorgan Chase Bank, N.A., or JPMorgan Chase.
During the ninethree months ended March 31,September 30, 2022, our working capital increaseddecreased by approximately $2.32$4.13 million to $32.46$24.93 million from $30.14$29.06 million at June 30, 2021.2022. As described more fully below, the increasedecrease in working capital at March 31,September 30, 2022 is primarily attributable to an increase in our accounts payable, a decrease in our accounts receivables, an increase in our short-term operating lease liabilities, the classification of the note receivable as noncurrent as of September 30, 2022 as compared to current as of June 30, 2022, and a net decrease in our cash, cash equivalents, and restricted cash. These factors were offset partially by a decrease in our accrued expenses and other liabilities, an increase in our allocation of inventory from long-term to short-term due to a higher expected sell through of inventory on hand in the upcoming period, and an increase in our prepaid expenses and other assets, a decrease in our accrued expenses and other liabilities, and a net increase in our cash, cash equivalents, and restricted cash. These factors were offset partially by an increase in our accounts payable, a decrease in our accounts receivable, and an increase in our short-term operating lease liabilities.assets. Our cash used for investing activities were principally for construction in-processconstruction-in-process expenditures related to our retail expansion program and the construction of our first Charles & Colvard Signature Showroom or Signature Showroom, and other leasehold improvements in our corporate offices was offset byoffices. Our cash provided by financing and operating activities.used for Financing Activities were principally for our share repurchase program.
In accordance with the terms of the lease agreement for our corporate headquarters, or Lease Agreement, and the location for our first Signature Showroom, the Lease Agreement includes an allowance for leasehold improvements offered by the landlord in an amount not to exceed approximately $545,000. During the three months ended March 31, 2022, we were reimbursed approximately $506,000 by the landlord for qualified leasehold improvements in accordance with the terms of the Lease Amendment. This reimbursement by the landlord reduced the remaining ROU asset by the same amount and will be recognized prospectively over the remaining term of the lease.
For more detailed information about the allowance for leasehold improvements contained within the Lease Agreement, see Note 9 to our condensed consolidated financial statements in Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.
During the nine months ended March 31,September 30, 2022, approximately $1.10$3.67 million of cash was providedused by our operating activities.operations. The primary drivers of our use of cash flow from operations were an increase in inventory of $3.17 million to build inventory for the favorable effect ofupcoming calendar year-end holiday season; a net incomeloss in the amount of $2.33 million, which also included $1.74 million of non-cash expenses; an increase in accounts payable of $356,000;approximately $890,000; a decrease in accounts receivableaccrued expenses and other liabilities of $92,000; a decrease$599,000; and an increase in prepaid expenses and other assets of $641,000; and an increase in accrued income taxes of $1,400.$37,000. These factors were offset partially by an increasea decrease in inventoryaccounts receivable of $3.56 million;$695,000; and an increase in accrued expenses and other liabilitiesaccounts payable of $504,000.$317,000.
Accounts receivable decreased principally due to collection effortsthe decreased level of sales during the three months ended September 30, 2022, as compared with the sales during the period leading up to ensure customers made timely payments. Throughout the course of the COVID-19 pandemic and through the current period ended March 31, 2022, fromJune 30, 2022. From time to time, we have offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy 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 may continue to be pressured due to the effects of the ongoing 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 $13.86$2.83 million and $2.43 million in loose jewels and $4.97 million and $4.43 million in finished jewelry, which includes the cost of the loose jewels and the purchase price of precious metals and cost of labor and overhead in connection with jewelry production, and $6.93 million in loose jewels, which includes the purchase of raw materials and labor in connection with gemstone production, during the ninethree months ended March 31, 2022.September 30, 2022 and 2021, respectively. 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 fluctuated significantly over the past decade, resulting in higher retail price points for gold jewelry. Because the market priceprices of gold and other precious metals isare beyond our control, upward price trends could 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 March 31,September 30, 2022 $19.06and June 30, 2022, $24.48 million and $22.49 million 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 $1.69$1.99 million and new raw material that we purchase pursuant to the Supply Agreement.
With our investment in the lab grown diamond product line in recent periods, the level of our lab grown diamond inventory, which has a higher carrying value, has increased to support the business and expected product sales. This has contributed to the growth in our overall inventory levels compared with prior periods.
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.
As of March 31,September 30, 2022, all of our remaining federal income tax credits had expired or been utilized, and therefore, are not available to be carried forward to offset future income taxes. As of March 31,September 30, 2022, we also had a federal tax net operating loss carryforward of approximately $19.00$16.53 million expiring between 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 $19.87$19.77 million expiring between 2023 and 2035; and various other state tax net operating loss carryforwards expiring between 2023 and 2040, which can be used to offset against future state taxable income.
Short-Term Capital Resources
Line of Credit
Effective July 7, 2021, we obtained from JPMorgan Chase our $5.00 million cash collateralized 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. Effective July 28, 2022, the JPMorgan Chase Credit Facility was amended to, among other things, extend the maturity date to July 31, 2023, and append our obligations under the JPMorgan Chase Credit Facility to be guaranteed by our wholly owned subsidiaries, Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC, and moissaniteoutlet.com, LLC.
Each advance under the JPMorgan Chase Credit Facility, as amended, accrues interest at a rate equal to the sum of JPMorgan Chase’s monthly secured overnight financing rate, or the SOFR rate, to which JPMorgan Chase is subject with respect to the adjusted SOFR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum and an unsecured to secured interest rate adjustment of 0.10% per annum. Prior to its amendment, each advance under the JPMorgan Chase Credit Facility would have accrued 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 at any time.
As of September 30, 2022, we had not borrowed against the JPMorgan Chase Credit Facility.
Long-Term Capital Commitments
Contractual CommitmentAgreement
On December 12, 2014, we entered into the Supply Agreement with 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 Wolfspeed, and Wolfspeed agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties. Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of the raw materials used in our premium moissanite product, Forever One™One™ and provided us with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following the expiration of the initial term. In addition, the amendment to the Supply Agreement established a process by which Wolfspeed may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Wolfspeed has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 2025 is approximately $52.95 million, of which approximately $28.35$24.75 million remains to be purchased as of March 31,September 30, 2022.
During the ninethree months ended March 31,September 30, 2022 and 2021, we purchased approximately $4.49$1.80 million and $2.28$1.50 million, respectively, of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended. Going forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the potential issuance of equity securities, together with future cash expected to be provided by operating activities to finance our purchase commitment under the Supply Agreement, as amended.
Line of Credit
Effective July 7, 2021, we obtained from JPMorgan Chase our $5.00 million cash collateralized line of credit facility, or 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, which is scheduled to mature on July 31, 2022, 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.
As of March 31, 2022, 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 was available for general corporate and working capital purposes, including permitted acquisitions and was guaranteed by the Borrowers. Under the terms of the White Oak Credit Facility, the Borrowers were required to maintain at least $500,000 in excess availability at all times. The White Oak Credit Facility contained no other financial covenants.
Advances under the White Oak Credit Facility 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 would have been reduced upon our achievement of a specified fixed charge coverage ratio. However, any advances were in all cases subject to a minimum interest rate of 5.50%. 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.
We had not borrowed against the White Oak Credit Facility as of July 9, 2021, the date upon which we terminated the White Oak Credit Facility in accordance with its terms.
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 issuance of equity securities, and future cash expected to be provided by operating activities combined will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.
From a long-term perspective, we believe that our ongoing access to capital markets, including but not limited to the issuance of equity securities or even potential debt securities, coupled with cash provided by operating activities in future periods beyond the next twelve months, will continue to provide us with the necessary liquidity to meet our long-term working capital and capital expenditure requirements.
In connection with our short- and long-term capital resources, we have an effective shelf registration statement on Form S-3 on file with the SEC that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of the COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Our future capital requirements and the adequacy of available funds will depend on many factors, including the ongoing spread ofuncertainty surrounding 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 diamondsdiamond business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and the risk factors described in more detail in “Risk Factors” in Part II, Item 1A, of this Quarterly Report on Form 10-Q in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2021 and December 31, 2021, and in Part I, Item 1A, of our 20212022 Annual Report on Form 10-K. 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.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended March 31,September 30, 2022, 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.reporting.
PART II – OTHER INFORMATION
There are no material pending legal proceedings to which we are a party or to which any of our property is subject.
We discuss in our Annual Report on Form 10-K for the fiscal year ended June 30, 20212022 and our Quarterly Report on Form 10-Q for the quarter ended December 31, 2021September 30, 2022 various risks that may materially affect our business. There have been no material changes to such risks, except as set forth below.risks.
Our information technology, or IT, infrastructure, and our network may be impacted by a cyber-attack or other security incident as a result of the rise of cybersecurity events. Our business operations rely on the secure processing, storage, and transmission of certain confidential, sensitive, proprietary, and other information, as well as personal information about our customers and employees. Cyber-attacks, including those associated with the current conflict in Eastern Europe, are rapidly evolving as cyber criminals have become increasingly sophisticated and carry out direct large-scale, complex, and automated attacks against companies or through their vendors.Breaches of our technology systems, whether from circumvention of security systems, denial-of-service attacks or other cyber-attacks, hacking, “phishing” attacks, computer viruses, ransomware or malware, employee or insider error, malfeasance, social engineering, vendor software supply chain compromises, physical breaches or other actions, have and may result in manipulation or corruption of sensitive data, material interruptions or malfunctions in our websites, applications, data processing and certain products and services, or disruption of other business operations. Furthermore, any such breaches could compromise the confidentiality and integrity of material information held by us (including information about our business, employees, or customers), as well as sensitive information, the disclosure of which could lead to identity theft. Breaches of our product services that rely on technology and internet connectivity can expose us to product and other liability risk and reputational harm. Measures that we take to avoid, detect, mitigate, or recover from material incidents, may be insufficient, circumvented, or may become ineffective.
We are not able to anticipate or prevent all such cyber-attacks and, to the extent a cyber-attack or other security incident results in a breach of the above-described information, it could disrupt our business operations, harm our reputation, compel us to comply with applicable data breach notification laws, subject us to litigation, regulatory investigation, or otherwise subject us to liability under laws, regulations and contractual obligations. This could result in increased costs to us and result in significant legal and financial exposure and/or reputational harm.
We have invested and continue to invest in risk management and information security and data privacy measures in order to protect our systems and data, including employee training, organizational investments, incident response plans, table-top exercises, and technical defenses. The cost and operational consequences of implementing, maintaining, and enhancing data or system protection measures could increase significantly to overcome intense, complex, and sophisticated global cyber threats.
In addition, we and certain of our third-party vendors receive and store certain information associated with our sales operations and other aspects of our business. In connection with our e-commerce business, we rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information.Our disclosure controls and procedures address cybersecurity and include elements intended to ensure that there is an analysis of potential disclosure obligations arising from security breaches. We also maintain compliance programs to address the potential applicability of restrictions against trading while in possession of material, nonpublic information generally and in connection with a cybersecurity breach. The breakdown in existing controls and procedures around our cybersecurity environment may prevent us from detecting, reporting or responding to cyber incidents in a timely manner and could have a material adverse effect on our financial position and value of our Company’s stock. Despite our implementation of security measures, our IT systems and e-commerce business are vulnerable to damages from computer viruses, natural disasters, unauthorized access, cyber-attack, and other similar disruptions.| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Constantly evolving privacy regulatory regimes are creating new legal compliance challenges. Domestic and international privacy and data security laws are complex and changing rapidly. There are a varietyIssuer Purchases of laws and regulations, including regulation by federal government agencies, including the Federal Trade Commission, or FTC, and state and local agencies. In addition to federal laws such as §5 of the Federal Trade Commission Act, the Gramm-Leach-Bliley Act, and the Fair Credit Reporting Act, certain states have also enacted laws regulating companies’ collection, use, and disclosure of personal information and requiring the implementation of reasonable data security measures. Various laws across states and U.S. territories also require businesses to notify affected individuals, governmental entities, and/or credit reporting agencies of certain security breaches affecting personal information. International privacy laws, including in Canada and the European Union, pose further challenges. These domestic and international laws are not consistent, and compliance with these laws in the event of a widespread data breach would be complex and costly.Equity Securities
| Period | | Total Number of Shares Purchased | | | Average Price Paid per share | | | Total Number of shares Purchased as Part of Publicly Announced Plans or Programs(1) | | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |
| July 1, 2022 – July 31, 2022 | | | 124,053 | | | $ | 1.30 | | | | 154,340 | | | $ | 4,800,995 | |
| August 1, 2022 – August 31, 2022 | | | 127,080 | | | $ | 1.32 | | | | 281,420 | | | $ | 4,633,303 | |
| September 1, 2022 – September 30, 2022 | | | 106,983 | | | $ | 1.15 | | | | 388,403 | | | $ | 4,510,021 | |
| Total | | | 358,116 | | | $ | 1.26 | | | | 388,403 | | | $ | 4,510,021 | |
In addition, privacy advocates and industry groups have regularly proposed, and may propose in the future, self-regulatory standards by which we are legally or contractually bound. If we fail to comply with these obligations or standards, we may face substantial liability or fines.
Despite our efforts to comply with all applicable data protection laws and regulations, any actual or perceived non-compliance could result in litigation and proceedings against us by governmental entities, customers, or others, fines and civil or criminal penalties, limited ability or inability to operate our business, offer services, or market our business in certain jurisdictions, negative publicity and harm to our brand and reputation, and reduced overall demand for our products and services. Such occurrences could adversely affect our business, financial condition, and results of operations.
| (1) | On May 5, 2022, we announced that our Board of Directors had approved a share repurchase program to permit us to repurchase up to $5.00 million worth of our issued and outstanding common stock over the three-year period ending April 29, 2025. |
Environmental, social, and governance matters may impact our business, reputation, financial condition, and results of operations. Increasingly, companies are being measured by their performance on a variety of environmental, social, and governance, or ESG, matters, which are considered to contribute to the long-term sustainability of companies’ performance. Recently, many investors, including large institutional investors, have publicly emphasized the importance of ESG measures to their investment decisions.
Our assessments on ESG matters include, among others, the Company’s efforts and impacts, including impacts associated with our suppliers or other business partners, on environmentally and socially responsible fine jewelry, climate change, diversity, ethics, and compliance with applicable regulations.
There can be no certainty that we will manage such ESG matters successfully, or that we will successfully meet investors’ expectations as to our proper role, or our own ESG goals and values. This could lead to risk of litigation or reputational damage relating to our ESG policies or performance. Further, our decisions regarding ESG matters may not be consistent with our short-term financial expectations and may not ultimately produce the long-term benefits that we expect, in which case our business, reputation, financial condition, and operating results may be adversely impacted.
The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
| Exhibit No. |
| Description |
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| Line of Credit Note, dated as of July 28, 2022, by Charles & Colvard, Ltd., to JPMorgan Chase Bank, N.A. (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on August 2, 2022) |
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| 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 |
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| 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 |
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| 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 |
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| 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 |
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| 101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase document |
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| 104 |
| Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document contained in Exhibit 101 |
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.
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| CHARLES & COLVARD, LTD. |
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| By: | /s/ Don O’Connell |
May 5,November 3, 2022
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| Don O’Connell |
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| President and Chief Executive Officer |
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| By: | /s/ Clint J. Pete |
May 5,November 3, 2022
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| Clint J. Pete |
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| Chief Financial Officer |
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| (Principal Financial Officer and Chief Accounting Officer) |