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:
| 5.4. | 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; |
| 6.5. | Constantly evolving privacy regulatory regimes are creating new legal compliance challenges; challenges; |
| 7.6. | We are subject to certain risks due to our international operations, distribution channels and vendors; |
| 7. | Our business and our results of operations could be materially adversely affected as a result of our inability to fulfill orders on a timely basis; |
| 9.8. | We are currently dependent on a limited number of distributor and retail partners in our Traditional segment for the sale of our products; |
| 10.9. | We may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation; |
| 11.10. | Seasonality of our business may adversely affect our net sales and operating income; |
| 11. | The effects of COVID-19 and other potential future public health crises, epidemics, pandemics or similar events on our business, operating results, and cash flows are uncertain; |
| 12. | Our operations could be disrupted by natural disasters; |
| 13. | Sales of moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control; |
| 14. | Our current customers may potentially perceive us as a competitor in the finished jewelry business; |
| 15. | We depend on a single supplier for substantially all of our silicon carbide, or SiC, crystals, the raw materials we use to produce moissanite jewels; if our supply of high-quality SiC crystals is interrupted, our business may be materially harmed; |
| 16. | If the e-commerce opportunity changes dramatically or if e-commerce technology or providers change their models, our results of operations may be adversely affected; |
| 17. | Governmental regulation and oversight might adversely impact our operations; |
| 18. | The execution of our business plans could significantly impact our liquidity; |
| 19. | The financial difficulties or insolvency of one or more of our major customers or their lack of willingness and ability to market our products could adversely affect results; |
| 20. | Negative or inaccurate information on social media could adversely impact our brand and reputation; |
| 21. | We rely on assumptions, estimates, and data to calculate certain of our key metrics and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business; |
| 22. | We may not be able to adequately protect our intellectual property, which could harm the value of our products and brands and adversely affect our business;business; |
| 23. | Environmental, social, and governance matters may impact our business, reputation, financial condition, and results of operations; |
| 24. | If we fail to evaluate,, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer; |
| 25. | Our loan, pursuantfailure to the Paycheck Protection Program, or the PPP Loan, under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or the SBA, was forgiven in full and may be subject to review formaintain compliance with applicable SBAThe Nasdaq Stock market’s continued listing requirements for six years fromcould result in the date the loan was forgiven;delisting of our common stock; |
| 26. | Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our Company; and |
| 27. | Our failureWe cannot guarantee that our share repurchase program will be utilized to maintain compliance with The Nasdaq Stock Market’s continued listing requirementsthe full value approved, or that it will enhance long-term stockholder value and repurchases we consummate could result inincrease the delistingvolatility of the price of our common stock.stock and could have a negative impact on our available cash balance. |
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, 2021,2022, or the 20212022 Annual Report. Historical results and percentage relationships related to any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for future periods.
Overview
Our Mission
At Charles & Colvard, Ltd., our mission is to redefine the definition of real within the jewelry industryprovide a more conscious and for consumers everywhere. We believeconflict-free fine jewelry can be accessible, beautiful,experience for our customers. We are dedicated to blazing a more brilliant path forward with our Made, Not Mined™ gemstones and conscientious.committed to creating fine jewelry with a conscience.
About Charles & Colvard
Charles & Colvard, Ltd., a North Carolina corporation founded in 1995 (which may be referred to as Charles & Colvard, we, us, or our), 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.
One of our unique differentiators,We sell loose 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 byand finished jewelry set with these gems through two operating segments: our Gemological InstituteOnline Channels segment, which encompasses our digital properties components, comprised of America, or GIA, certified gemologists to meet our charlesandcolvard.com and moissaniteoutlet.com websites, e-commerce outlets, including marketplaces, drop-ship customers, and other pure-play, exclusively e-commerce customers; and our Traditional segment, which consists of domestic and international distributors and retail customers, including end-consumers through our first Charles & Colvard’s uncompromising standards and validated by independent third-party experts. Our CaydiaColvard Signature Showroom® lab grown diamonds are available currently, which opened in E, F, and G color grades (basedOctober 2022. We report segment information based on the GIA’s color grading scale) with a minimum clarity in accordance with“management” approach. This segment reporting approach designates the GIA’s VS1 clarity classification along with excellent polishinternal reporting used by management for making operating decisions and symmetry. Allassessing performance as the source of our Caydia® lab grown diamonds are set with mostly recycled precious metals.operating and reportable segments.
We operate in an e-commerce environment characterized by both complexity in global markets and ongoing economic uncertainties in the U.S. and internationally. Our strategy is to build a globally revered and accessible brand of lab grown gemstones and finished fine jewelry products set with moissanite and lab grown diamonds. We believe that appealsour goods appeal to a wide consumer audience. We believe this strategy leveragesaudience and leverage our advantagesadvantage of being the original and leading worldwide source of Charles & Colvard Created Moissanite®moissanite and offering a curated assortmentpurveyor of jewelry featuring Caydia®premium lab grown diamonds, which together we believe offers an ideal combination of quality and value.diamonds. We also believe a direct relationship with consumers is an important component to this strategy, which entails delivering tailored educational content, engaging in interactive dialogue with our audience, and positioning our brand to meet the demands of today’s discerning consumer.A significant component of our strategy in this environment is to focus on our core products, improving the quality and predictability of the delivery of our products and services, and placing those products quickly into the hands of our U.S. and international customers at affordable prices. Moreover, recognizing today that our customers and vendors are resource constrained, we are endeavoring to develop and extend our portfolio of products in a disciplined manner with a focus on domestic markets close to our core capabilities, as well as growing our global marketplace sales. We continue to focus on affordability initiatives. We also expect to continue innovating and investing in lab created gemstone technologies to fulfill evolving product requirements for our customers and investing in our people so that we have the technical and production skills necessary to succeed without limiting our ability to build sound financial returns to our investors.
We believe our expanding application of an omni-channel sales strategy across the fine jewelry trade and to the end consumer with accessible gemstones and value branded finished jewelry featuring Charles & Colvard Created Moissanite® and Caydia® lab grown diamonds positions our products at the many touchpoints where consumers are when they are making their buying decisions – thereby continuing to create greater exposure for our brand and increasing consumer demand.
COVID-19Fiscal 2023 Financial Outlook
Our strategic goals for the fiscal year ending June 30, 2023, or Fiscal 2023, are centered on continuing to expand Charles & Colvard’s brand on a global scale and to increase the size of our business through top-line growth. As lab-created gemstones are being embraced by emerging generations, we believe our ability to establish moissanite and our lab grown diamonds along with the Charles & Colvard brand directly with conscious consumers is key to our future success and ability to fuel our growth. We plan to continue executing our key Fiscal 2023 strategies with an ongoing commitment to spending judiciously with the long-term plan to generate sustainable earnings.
In January 2023, we launched our bridal and fashion jewelry collections on 15- and 30-second commercial advertisement packages on NBC Universal’s Peacock Streaming Service, or Peacock. Peacock is now the streaming home for NBC’s broadcast shows, including the network’s own Peacock Original Broadcasts on Originals Hub, Bravo Hub, NBC Network Hub, Telemundo Hub, WWE Hub, MSNBC Hub, and Hallmark Channel Hub. In mid-January, we participated in the Wedding Venue at Raleigh, North Carolina’s, Maxwell Winter Showcase. Charles & Colvard was the premier bridal and anniversary jewelry vendor that participated in this event. Raleigh’s Maxwell events are well known in the Central North Carolina region and offer a setting where a touch of modern elegance meets classic luxury. This event, in particular, provided our collections with a premier setting to showcase our bridal and anniversary fine jewelry brands to the regional retail market. Finally, in January, we launched an assortment of our Moissanite by Charles & Colvard® bridal and fashion jewelry dropship products on Longaberger.com. This marketplace platform is the portal home for products and collectibles known for their artisanal quality and legacy brands. Longaberger.com offers a wide range of home and lifestyle products made in America and abroad that are hand-selected by their team of marketing experts.
In celebration of the February 2023 Valentine’s season, we partnered with Glo de Vie, a local Med Spa located in Raleigh, North Carolina, to host a Valentine’s Day Glow for Love event in our Charles & Colvard Signature Showroom located on our corporate headquarters campus in North Carolina’s Research Triangle Park. This event enabled our marketing team to bring our collections of bridal and fashion jewelry to local consumers in time to contribute to our successful 2023 Valentine’s Day season sales. We also enjoyed successful sale programs for Valentine’s Day on our own online marketplaces – charlesandcolvard.com and moissaniteoutlet.com. Other events during February included our participation as an exhibitor in the NYNOW Winter Show that was held in New York City in early February. We believe that these NYNOW events bring together an exciting kaleidoscope of culture that includes the styles from Manhattan’s uptown sophistication along with its downtown edge. We also believe that these NYNOW events bring together all things stylish – from hip and sleek to artisan-made quality products and are known for presenting the next bestseller items to hit the retail market. Finally, in February we were a proud sponsor for the 2023 Carolina Hurricanes Stadium Series’ Day-to-Day Event Guide, which was published in the February edition of Raleigh Magazine. This event, which took place the weekend of February 17 – 19, 2023, brought Carolina Hurricanes fans and tourists to the Raleigh area. This sponsorship in turn exposed our products to a new set of potential consumers.
In summary, during the quarter, we launched 55 styles of our patented Signature Collection engagement ring and wedding band designs featuring Forever One™ moissanite and expanded our Caydia® lab grown diamond Couture Collection to include additional ring, necklace, earring, and bracelet styles. We also expanded our Created Color line of products featuring our Caydia® lab grown diamond collections. Throughout the fiscal quarter ended March 31, 2023, our finished jewelry products were featured in multiple national and local print and electronic media publications, such as The evolving COVID-19 pandemic continuesKnot®, AC Magazine, Insider.com, Yahoo!, Byrdie.com, and Brides Magazine.
As evidenced by our results for the first nine months of Fiscal 2023, domestic and global inflation and rising interest rates, coupled with ongoing fears of recession and the overall worsening of macro-economic conditions that we witnessed during the quarter ended March 31, 2023, combine to continue eroding consumer confidence and presenting major challenges for the global retail and e-commerce industry. While American consumers continue spending more on consumer goods to keep up with higher prices, consumers are spending on necessities and other required goods and services and moving away from spending on luxury items. We expect that consumers will continue to feel pressured financially, particularly throughout the calendar year 2023. We are facing similar challenges to other retailers, including those in the e-commerce space, but particularly those in the luxury product retail arena. In addition, we continue seeing ongoing increased costs of digital advertising spend, known as cost-per-click in the digital advertising world, due to intense competition and pricing pressures in the lab grown gem and finished jewelry space. While management remains focused to take the required steps necessary to mitigate the impact, the Company’s costs that continue to increase will result in further pressure on its revenues, margins, and cash flows.
Inflation
Heightened levels of inflation and the worsening of macro-economic conditions present unprecedented worldwide economica risk for us, our suppliers, and business challenges.the stability of the broader retail and e-commerce industry. During the first nine months of the fiscal year ending June 30, 2022, or Fiscal 2022,2023, we have experienced impacts on our business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, including at times using accelerated payments to our suppliers that are due by their terms in future periods. We expect to continue accelerating payments to certain suppliers through at least the fourth quarter of Fiscal 2022. Moreover, we are also continuing to see a sharp increase in internationallabor and domestic freight costs, with limited availability and long delays causing disruption in the global supply chain. Accordingly, we are taking steps where possible to mitigate such potential delays in supplier deliveries by accelerating orders and increasing order quantities. We have also taken measures to protect the health and safety of our employees, work with our customersoverhead rates and suppliers to minimize disruptions,have signaled inflation related cost pressures, which have flowed and support our community in addressing the challenges posed by the ongoing COVID-19 pandemic and its evolving viral variants.
Following the government mandated shut down during the early days of the pandemic, work in our production and distribution facilities has continued throughout the pandemic, consistent with guidance from federal, state and local officials to minimize the spread of COVID-19. Wewe expect will continue to take actionsflow through to equip employees with personal protective equipment, establish minimum staffingour costs and social distancing policies, sanitize workspaces, 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 encourage all employees to be fully vaccinated and to provide evidence of vaccination status in line with state and local guidelines. In addition,pricing. While we have maintained a flexible teleworking policy for our employees who can meet customer commitments remotely, and a portion of our workforce continues teleworking.
Although the COVID-19 pandemic did not have a significantseen adverse impact from inflation on our financial results duringin the first nine monthmonths of Fiscal 2023, if inflation remains at current levels for an extended period, ended March 31,or increases further, and we are unable to successfully mitigate the impact, our costs are likely to continue to increase, resulting in further pressure on our revenues, margins, and cash flows. In addition, inflation and the increases in the cost of borrowing from rising interest rates could constrain the overall purchasing power of our customers for our products and services, in particular in the near term to the extent inflation assumptions are less than current inflationary pressures. We remain committed to our ongoing efforts to increase the efficiency of our operations and improve the cost competitiveness and affordability of our products and services, which may, in part, offset cost increases and the adverse effects from inflation.
We discuss our strategic outlook, key strategies, and general economic and market conditions for Fiscal 2023 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 2022 theAnnual Report.
COVID-19
The ultimate impact of COVID-19 on our operations and financial performance in future periods, including ourmanagement’s ability to execute ourits strategic initiatives in the expected timeframes, remains uncertain and will depend on future pandemic related developments, including the duration of the pandemic, any potential subsequent waves of COVID-19 and its variant viral infections, the effectiveness, distribution and acceptance of COVID-19 vaccines, and boosters, and related government actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. We cannot at this time predict the full impact of the COVID-19 pandemic, but we believe the risk existsanticipate that the COVID-19 pandemic including changes in consumer-level spending as a result of the pandemic, could adverselywill continue to impact our business, financial condition, results of operations, and/orand cash flows in Fiscal 2022.2023.
For additional risks to the Company related to the COVID-19 pandemic, see “Part I, Item 1A. Risk Factors”, contained in our 2021 Annual Report.
Fiscal 2022 Financial Outlook
Our key strategic initiatives during Fiscal 2022 have been designed to increase brand awareness and to drive expansion of our favorable brand equity. As we enter the fourth quarter of Fiscal 2022, we believe that we remain on a strong trajectory toward accomplishing our goal for continued and sustained top line growth and remain poised to broaden our consumer reach and maximize product value through our brand- and performance-based marketing strategy. During the first half of Fiscal 2022, we made significant investments to strengthen the Charles & Colvard brand through our marketing strategy, which included brand marketing campaigns across multiple digital platforms, social media outlets, earned media, and media placements as well as placements with key consumer-based influencers. We believe that to continue the growth of our business, we must continue to acquire new customers and retain existing customers in a cost-effective manner.
During the quarter ended March 31, 2022, we made significant progress on our first Charles & Colvard Signature Showroom, which we believe will complement and expand our omnichannel brand strategy in the fine jewelry space. This showroom, which we expect to open during the fourth quarter of Fiscal 2022, will be the first location of our retail showroom expansion program and is located in our corporate headquarters in North Carolina’s Research Triangle Park. We believe that our retail showroom expansion program will allow us to develop a nationwide footprint to showcase our patented Signature Collection designs as well as a wide assortment of Forever One™ moissanite and Caydia® lab grown diamond fine jewelry. We also expect to begin streaming live content during the fourth quarter of Fiscal 2022 from the newly constructed innovative broadcast studio in our corporate headquarters. The studio will be a digital extension of the sales team and a tool that our marketing team will utilize for video content production, live-stream shopping, designer and influencer interviews, and fashion photography. We believe this digital marketing capability will continue to further position and define our brand in what we believe is a rapidly evolving consumer landscape and better meet the consumer’s current appetite for digital content. We believe these capabilities will provide incremental sales channels for our direct-to-consumer business and allow us to compete more effectively and to increase our market share within the fine jewelry space by engaging with consumers wherever they are shopping. We continually develop and scale our investment in dynamic marketing strategies to optimize our messaging and advertising spend across multiple channels in an effort to drive strategic customer acquisition and to increase fine jewelry sales from new customers and repeat orders from existing customers.
Also during the quarter ended March 31, 2022, we hosted a social media platform-based engagement ring sweepstakes program that was designed to promote our “Made not Mined” marketing campaign. The engagement ring that was given away featured our Forever One™ moissanite gemstones. Also, during the quarter we launched our Signature Star Series line of finished jewelry featuring Caydia® lab grown diamonds set in unisex fine fashion jewelry styles and expanded our Moissanite by Charles & Colvard product styles with our dropship business partners. As a result of our brand awareness expansion programs, we received positive press coverage during the quarter for our fashion jewelry product lines on several major online shopping and fashion-related websites, such as Vogue.com, Brides.com, TheKnot.com, WWD.com, MensHealth.com, and Byrdie.com. We also received finished jewelry related press coverage on national online news outlet websites, such as CNN.com and NewsBreak.com. Lastly, during the quarter ended March 31, 2002, we curated an assortment of fine fashion jewelry featuring our Forever One™ moissanite gemstones and Caydia®lab grown diamonds that are being used for the filming of the upcoming seasons of the ABC television network’s series of The Bachelor and The Bachelorette.
While we are in the early stages of expanding our geographic footprint, we believe these strategies will combine to help drive future and sustained growth and to present our brand and gemstone product lines to a broader range of consumers in the fine jewelry space. We further believe that we remain well-positioned to meet current marketing-level trends within the jewelry industry, where consumers are increasingly more aware of the products they purchase and seek brands that stand for sustainability and social and environmental responsibility.
We discuss our strategic outlook and key strategies for Fiscal 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 2021 Annual Report.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which we prepared in accordance with accounting principles generally accepted in the United States, 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 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 20212022 Annual Report, and that disclosure should be read in conjunction with this Quarterly Report on Form 10-Q. There have been no significant changes in our critical accounting policies and estimates during the first nine months of Fiscal 20222023.
Results of Operations
The following table sets forth certain consolidated statements of operations data for the three and nine months ended March 31, 20222023 and 2021:2022:
| | | Three Months Ended March 31, | | | Nine Months Ended March 31, | | | Three Months Ended March 31, | | | Nine Months Ended March 31, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Net sales | | $ | 9,751,835 | | | $ | 9,436,056 | | | $ | 33,785,281 | | | $ | 29,509,140 | | | $ | 6,641,799 | | | $ | 9,751,835 | | | $ | 24,382,003 | | | $ | 33,785,281 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of goods sold | | 5,296,530 | | | 5,093,452 | | | 17,347,026 | | | 15,457,215 | | | 4,493,125 | | | 5,296,530 | | | 14,650,910 | | | 17,347,026 | |
| Sales and marketing | | 2,932,587 | | | 2,211,350 | | | 9,741,774 | | | 6,339,854 | | | 3,267,436 | | | 2,932,587 | | | 10,715,066 | | | 9,741,774 | |
| General and administrative | | | 1,106,850 | | | | 1,092,683 | | | | 3,880,684 | | | | 3,278,246 | | | | 1,053,357 | | | | 1,106,850 | | | | 3,654,788 | | | | 3,880,684 | |
| Total costs and expenses | | | 9,335,967 | | | | 8,397,485 | | | | 30,969,484 | | | | 25,075,315 | | | | 8,813,918 | | | | 9,335,967 | | | | 29,020,764 | | | | 30,969,484 | |
| Income from operations | | 415,868 | | | 1,038,571 | | | 2,815,797 | | | 4,433,825 | | |
| (Loss) Income from operations | | | (2,172,119 | ) | | 415,868 | | | (4,638,761 | ) | | 2,815,797 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | 1,120 | | | 540 | | | 1,964 | | | 5,126 | | | 69,159 | | | 1,120 | | | 168,935 | | | 1,964 | |
| Interest expense | | - | | | (2,412 | ) | | - | | | (7,318 | ) | |
| Loss on foreign currency exchange | | | - | | | | - | | | | (34 | ) | | | (603 | ) | | | - | | | | - | | | | - | | | | (34 | ) |
| Total other income (expense), net | | | 1,120 | | | | (1,872 | ) | | | 1,930 | | | | (2,795 | ) | | | 69,159 | | | | 1,120 | | | | 168,935 | | | | 1,930 | |
| Income before income taxes | | 416,988 | | | 1,036,699 | | | 2,817,727 | | | 4,431,030 | | |
| (Loss) Income before income taxes | | | (2,102,960 | ) | | 416,988 | | | (4,469,826 | ) | | 2,817,727 | |
| Income tax expense | | | (78,480 | ) | | | (472 | ) | | | (484,582 | ) | | | (1,460 | ) | | | (6,293,048 | ) | | | (78,480 | ) | | | (5,858,155 | ) | | | (484,582 | ) |
| Net income | | $ | 338,508 | | | $ | 1,036,227 | | | $ | 2,333,145 | | | $ | 4,429,570 | | |
| Net (loss) income | | | $ | (8,396,008 | ) | | $ | 338,508 | | | $ | (10,327,981 | ) | | $ | 2,333,145 | |
Consolidated Net Sales
Consolidated net sales for the three and nine months ended March 31, 20222023 and 20212022 comprise the following:
| | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2023 | | | 2022 | | | Dollars | | | Percent | | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| Finished jewelry | | $ | 7,420,591 | | | $ | 6,219,892 | | | $ | 1,200,699 | | | 19 | % | | $ | 23,646,044 | | | $ | 18,820,428 | | | $ | 4,825,616 | | | 26 | % | | $ | 5,321,301 | | | $ | 7,420,591 | | | $ | (2,099,290 | ) | | (28 | )% | | $ | 19,297,915 | | | $ | 23,646,044 | | | $ | (4,348,129 | ) | | (18 | )% |
| Loose jewels | | | 2,331,244 | | | | 3,216,164 | | | | (884,920 | ) | | (28 | )% | | | 10,139,237 | | | | 10,688,712 | | | | (549,475 | ) | | (5 | )% | | | 1,320,498 | | | | 2,331,244 | | | | (1,010,746 | ) | | (43 | )% | | | 5,084,088 | | | | 10,139,237 | | | | (5,055,149 | ) | | (50 | )% |
| Total consolidated net sales | | $ | 9,751,835 | | | $ | 9,436,056 | | | $ | 315,779 | | | 3 | % | | $ | 33,785,281 | | | $ | 29,509,140 | | | $ | 4,276,141 | | | 14 | % | | $ | 6,641,799 | | | $ | 9,751,835 | | | $ | (3,110,036 | ) | | (32 | )% | | $ | 24,382,003 | | | $ | 33,785,281 | | | $ | (9,403,278 | ) | | (28 | )% |
Consolidated net sales were $6.64 million for the three months ended March 31, 2023 compared to $9.75 million for the three months ended March 31, 2022, compared to $9.44a decrease of $3.11 million, or 32%. Consolidated net sales were $24.38 million for the threenine months ended March 31, 2021, an increase of $316,000, or 3%. Consolidated net sales were2023 compared to $33.79 million for the nine months ended March 31, 2022, compared to $29.51 million for the nine months ended March 31, 2021, an increasea decrease of $4.28$9.40 million, or 14%28%. The increase in consolidatedWe had lower net sales for the three months ended March 31, 2022 was due to strong Valentine’s Day salesin both operating business segments during February 2022. The increase in consolidated net sales for the nine-month period ended March 31, 2022 was the result of our strong third quarter sales coupled with robust calendar year-end holiday sales during our fiscal quarter ended December 31, 2021. These higher sales for the three- and nine-month periods ended March 31, 2023. Overall consumer confidence has continued to show signs of weakening due to general economic uncertainties, coupled with domestic and worldwide inflation, including recessionary fears, and rising interest rates. Notwithstanding the calendar year-end 2022 were also related to increasedholiday shopping season and the Valentine’s Day occasion during February 2023, these conditions have brought about lower consumer awareness and ongoing strong demand for our moissanite jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds. These increasesproducts, which resulted in higher finished jewelry productlower net sales in our Online Channels segment during the three and nine months ended March 31, 20222023. These same general economic conditions also caused weakness in demand for moissanite jewels from our Online Channels segmentdomestic distributors, which in turn resulted in lower loose jewel and Traditional segment. The increases in our Online Channels segmentjewelry product net sales induring the three monthsthree- and nine-month periods ended March 31, 2022 were partially offset by lower net sales2023 in our Traditional segment driven by lower loose jewels sales and decreased international sales during the three months ended March 31, 2022.segment.
Sales of finished jewelry represented 76%80% and 70%79% of total consolidated net sales for the three and nine months ended March 31, 2022,2023, respectively, compared to 66%76% and 64%70%, respectively, of total consolidated net sales for the corresponding periods of the prior year. For the three months ended March 31, 2022,2023, finished jewelry sales were $7.42$5.32 million compared to $6.22$7.42 million for the corresponding period of the prior year, an increasea decrease of approximately $1.20$2.10 million, or 19%28%. For the nine months ended March 31, 2022,2023, finished jewelry sales were $23.65$19.30 million compared to $18.82$23.65 million for the corresponding period of the prior year, an increasea decrease of approximately $4.83$4.35 million, or 26%18%. The increaseThese decreases in finished jewelry sales for the three- and nine-month periods ended March 31, 2022 was2023 were due primarily to higherlower demand across all of our finished jewelry salesproducts as a result of Forever One™adverse global and Moissanite by Charles & Colvard® in our Online Channels segment as well as in our Traditional segmentand higher finished jewelry sales of Caydia® lab grown diamond jewelry in our Online Channels segment.domestic general economic conditions.
Sales of loose jewels represented 24%20% and 30%21% of total consolidated net sales for the three and nine months ended March 31, 2022,2023, respectively, compared to 34%24% and 36%30%, respectively, of total consolidated net sales for the corresponding periods of the prior year. For the three months ended March 31, 2022,2023, loose jewel sales were $2.33$1.32 million compared to $3.22$2.33 million for the corresponding period of the prior year, a decrease of $885,000,$1.01 million, or 28%43%. For the nine months ended March 31, 2022,2023, sales of loose jewels were $10.14$5.08 million compared to $10.69$10.14 million for the corresponding period of the prior year, a decrease of $549,000,$5.06 million, or 5%50%. The decrease in sales of loose jewels for the three-monththree- and nine-month periods ended March 31, 20222023 was principally due primarily to a lower levelsales of salesloose jewels through theour distribution network in our Online Channels segment and Traditional segment.segment, as a result of global and domestic general adverse macroeconomic conditions.
U.S. net sales accounted for approximately 96%99% and 95%97% of total consolidated net sales for the three and nine months ended March 31, 2022,2023, respectively, compared to 95%96% and 94%95% of total consolidated net sales for the corresponding periods in the prior year. U.S. net sales increased $422,000,decreased $2.85 million, or 5%30%, during the three months ended March 31, 20222023 from the corresponding period of the prior fiscal year. U.S. net sales increased $4.38decreased $8.61 million, or 16%27%, during the nine months ended March 31, 20222023 from the corresponding period of the prior year. U.S. net sales increaseddecreased during the three and nine months ended March 31, 20222023 primarily as a result of increaseddecreased sales to U.S. customers in both our Online Channels segment.segment and Traditional segment for the same reasons outlined above.
Our largest U.S. customer during the three and nine months ended March 31, 20222023 accounted for 13% and 14% of total consolidated net sales during each respective period. This same customer was our largest customer during the three and nine months ended March 31, 20212022 when this customer accounted for 15% and 13% of total consolidated net sales during each of the respective three- and nine-month periods. Our second largest U.S. customer during the three and nine months ended March 31, 2021 accounted for 13% and 11%15% of total consolidated net sales during each of the respective three- and nine-month periods. Other than our U.S. customerscustomer noted above during the three- and nine-month periods ended March 31, 20222023 and 2021,2022, we had no other customers with sales that represented 10% or more of total consolidated net sales for the periods then ended. We expect that we, along with our customers, will remain dependent on our ability to maintain and enhance our customer-related programs. A change in or loss of any of these customer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately 4%1% and 5%3% of total consolidated net sales for the three and nine months ended March 31, 2022,2023, respectively, compared to 5%4% and 6%5% of total consolidated net sales for the corresponding periods of the prior year. International net sales decreased 23%73% and 6%51% during the three and nine months ended March 31, 2022,2023, respectively, from the corresponding periods of the prior fiscal year due to somewhat lower demand in our international distributor market due to shutdowns in the Asia Pacific region during the nine-month period ended March 31, 2023, 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 economic 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 impact from 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, 20222023 or 2021.2022. A portion of our international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the three and nine months ended March 31, 20222023 and 20212022 are as follows:
| | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2023 | | | 2022 | | | Dollars | | | Percent | | | 2023 | | | 2022 | | | 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 | % | | $ | 2,840,321 | | | $ | 3,709,864 | | | $ | (869,543 | ) | | (23 | )% | | $ | 9,632,352 | | | $ | 10,748,323 | | | $ | (1,115,971 | ) | | (10 | )% |
| Loose jewels | | | 1,013,986 | | | | 1,468,338 | | | | (454,352 | ) | | (31 | )% | | | 4,507,997 | | | | 5,017,863 | | | | (509,866 | ) | | (10 | )% | | | 645,259 | | | | 1,013,986 | | | | (368,727 | ) | | (36 | )% | | | 2,342,133 | | | | 4,507,997 | | | | (2,165,864 | ) | | (48 | )% |
| 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 | % | | 3,485,580 | | | 4,723,850 | | | (1,238,270 | ) | | (26 | )% | | 11,974,485 | | | 15,256,320 | | | (3,281,835 | ) | | (22 | )% |
| Non-product line cost of goods sold | | | 572,680 | | | | 573,178 | | | | (498 | ) | | 0 | % | | | 2,090,706 | | | | 1,630,980 | | | | 459,726 | | | 28 | % | | | 1,007,545 | | | | 572,680 | | | | 434,865 | | | 76 | % | | | 2,676,425 | | | | 2,090,706 | | | | 585,719 | | | 28 | % |
| Total cost of goods sold | | $ | 5,296,530 | | | $ | 5,093,452 | | | $ | 203,078 | | | 4 | % | | $ | 17,347,026 | | | $ | 15,457,215 | | | $ | 1,889,811 | | | 12 | % | | $ | 4,493,125 | | | $ | 5,296,530 | | | $ | (803,405 | ) | | (15 | )% | | $ | 14,650,910 | | | $ | 17,347,026 | | | $ | (2,696,116 | ) | | (16 | )% |
Total cost of goods sold was $4.49 million for the three months ended March 31, 2023 compared to $5.30 million for the three months ended March 31, 2022, compared to $5.09 million for the three months ended March 31, 2021, a net increasedecrease of approximately $203,000,$803,000, or 4%15%. Total cost of goods sold was $14.65 million for the nine months ended March 31, 2023 compared to $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 increasea net decrease of approximately $1.89$2.70 million, or 12%16%. Product line cost of goods sold is defined as product cost of goods sold in each of our Online Channels segment and Traditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory write-offs;write-downs; and other inventory adjustments, comprising costs of quality issues, and damaged goods.
The increasedecrease in total product line cost of goods sold for the three and nine months ended March 31, 20222023 compared to the same period in 20212022 was primarily driven by increasedthe decreased sales of finished jewelry which reflect higher material and labor costs,loose jewels during the three- and nine-months ended March 31, 2023 in both of our Online Channels segment and Traditional segment. We experienced lower demand in our Online Channels segment as a result of stronglower finished jewelry 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 tonine-month period. Likewise, we saw lower loose jewel product demand in our Traditional segment throughout the production of loose jewels.nine-month period ended March 31, 2023.
The net increase in 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 net2023, comprises a $400,000 increase in non-product line cost of goods sold for the nine months ended March 31, 2022, comprises an approximate $293,000 increase in freight outother inventory adjustments 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 freight overall during the period; an approximate $104,000 increase in inventory write-offs primarily related to increaseschanges in obsolescence reserves in the first three months of the nine month-period ended March 31, 2022,production standard cost variances compared to those in the comparable priorperiod of the fiscal year period;ended June 30, 2022, or Fiscal 2022, and an approximate $121,000$112,000 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 by a $58,000an approximate $77,000 decrease in freight out principally from decreased shipping volume during the three-month period.
The net increase in non-product line cost of goods sold for the nine months ended March 31, 2023, comprises an approximate $417,000 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 and an approximate $408,000 increase in other inventory adjustments principally related to changes in production standard cost variances compared to those in the first nine months of Fiscal 2022. These increases were partially offset by an approximate $113,000 decrease in inventory write-downs during the first nine months of the Fiscal 2023, compared to those in the comparable prior year period, and an approximate $126,000 decrease in freight out principally from decreased shipping volume during the nine-month period ended March 31, 2021.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, 20222023 and 20212022 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 March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| Sales and marketing | | $ | 3,267,436 | | | $ | 2,932,587 | | | $ | 334,849 | | | | 11 | % | | $ | 10,715,066 | | | $ | 9,741,774 | | | $ | 973,292 | | | | 10 | % |
Sales and marketing expenses were $3.27 million for the three months ended March 31, 2023 compared to $2.93 million for the three months ended March 31, 2022, compared to $2.21 million for the three months ended March 31, 2021, an increase of approximately $721,000,$335,000, or 33%11%. Sales and marketing expenses were $10.72 million for the nine months ended March 31, 2023 compared to $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,$973,000, or 54%10%.
The net increase in sales and marketing expenses for the three months ended March 31, 20222023 compared to the same period in 20212022 was primarily due to a $543,000$274,000 net increase in advertising and digital marketing expenses; a $63,000$75,000 increase in general business taxes; a $30,000 increase in compensation expenses; a $9,000 increase in telephone-related communications expenses; a $6,000 increase in professional services principally comprising consulting services for marketing support in the current year period; a $59,000$4,000 increase in insurance expense related to increased premiums; and a $1,000 increase in travel expenses. These increases were offset partially by a $53,000 decrease in bank fees,fee expenses, which are principally related to higherlower credit card transaction fees from increased online sales levels; a $46,000 increase in compensation expenses; a $35,000 increaseand payment platform fees; and an $11,000 decrease in software-related costs incurred primarily in connection with new software-related agreementsproducts associated with upgraded sales-related operating and cybersecurity systems; an $8,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendmentsystems 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 measureswere installed in the prior year period. These increases were offset partially by an $18,000 decrease in recruiting 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 net decrease in general office-related expenses.
The increase in advertising and digital marketing expenses for the three months ended March 31, 20222023 compared to the same period in 2021 comprises2022 was primarily due to a $360,000$332,000 increase in digital advertising spend; a $34,000$27,000 increase in cooperative advertising;advertising in connection with a $149,000 increase in brand awareness marketing campaigns; andhigher number of cooperative advertising arrangements; a $6,000$21,000 increase in outside agency fees.fees; and a $14,000 increase in print media expenses. These increases were offset partially by a $6,000$120,000 decrease in print media expenses. Duringbrand awareness marketing campaign expenditures as a result of fewer promotional activities in the comparable priorcurrent year period, advertising and digital marketing expenses were lower due to cost reductions we imposed in response to the COVID-19 pandemic.period.
Compensation expenses for the three months ended March 31, 20222023 compared to the same period in 20212022 increased primarily due to an $8,000a $126,000 net increase in salaries, commissions, and related employee benefits in the aggregate;aggregate and a $27,000$5,000 increase in severance-related expenses associated with a reduction-in-force during the current year period. These increases were partially offset by a $95,000 decrease in bonus expense;expense and an $11,000 increasea $6,000 decrease 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, 20222023 compared to the same period in 20212022 was primarily due to a $2.75 million$420,000 increase in advertising and digital marketing expenses; a $191,000$196,000 increase in compensation expenses; a $170,000$193,000 increase in general business taxes; an $88,000 increase in professional services principally comprising consulting services for marketing support in the current year period; a $140,000an $18,000 increase in bank fees expenses, which are principally related to higher credit card transaction fees from increased online sales levels; an $80,000telephone-related communications expenses; a $16,000 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$13,000 increase in rent expense, primarilysupplies related to our corporate headquarters operating lease amendment that was executed in January 2021;the Signature Showroom during the current year period; a $31,000$13,000 increase in travelbank fees expenses, as we returnedwhich are principally related to more traditional business travel patterns following cut-backs relating to the COVID-19 pandemichigher credit card transaction and related cost-control measurespayment platform fees; a $7,000 increase in the prior year period;employee-related recruiting and search fees for new hires; a $9,000$7,000 increase in depreciation and amortization expense relatingprincipally related to capitalized costs associated with information technology-related upgrades.new sales-related systems hardware and software; and a $4,000 net increase in general office-related expenses. These increases were offset partially by an $18,000a $2,000 decrease in recruiting and employment agency fees and a $1,000 net decrease in general office-relatedtravel expenses.
The increase in advertising and digital marketing expenses for the nine months ended March 31, 20222023 compared to the same period in 20212022 comprises a $2.20 million$604,000 increase in digital advertising spend;spend and a $245,000$61,000 increase in cooperative advertising;outside agency fees. These increases were offset partially by a $137,000 increase$111,000 decrease in expenses relating to our participation in the 2021 JCK Trade Show (the JCK Trade Show organization did not hold an eventheld in the prior year due to restrictions related toperiod for which we did not host a booth in the COVID-19 pandemic);2022 JCK Trade show held during the current year period; a $129,000 increase$67,000 decrease in cooperative advertising; a $56,000 decrease in brand awareness marketing campaign expenditures as a result of fewer promotional activities in the current year period; a $23,000 increaseand an $11,000 decrease in print media expenses; and a $16,000 increase in outside agency fees.expenses.
Compensation expenses for the nine months ended March 31, 20222023 compared to the same period in 20212022 increased primarily as a result of a $94,000$324,000 increase in salaries, commissions, and related employee benefits in the aggregate;aggregate and a $57,000$5,000 increase in employee stock-based compensation expense; andseverance-related expenses associated with a $42,000 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.reduction-in-force during the current year period. These increases were partially offset by a $2,000$106,000 decrease in employee-related severance costs from the prior year.bonus expense and a $27,000 decrease in employee stock-based compensation expense.
General and Administrative
General and administrative expenses for the three and nine months ended March 31, 20222023 and 20212022 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 March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| General and administrative | | $ | 1,053,357 | | | $ | 1,106,850 | | | $ | (53,493 | ) | | | (5 | )% | | $ | 3,654,788 | | | $ | 3,880,684 | | | $ | (225,896 | ) | | | (6 | )% |
General and administrative expenses were $1.05 million for the three months ended March 31, 2023 compared to $1.11 million for the three months ended March 31, 2022, compared to $1.09 million for the three months ended March 31, 2021, an increasea decrease of approximately $14,000,$53,000, or 1%5%. General and administrative expenses were $3.65 million for the nine months ended March 31, 2023 compared to $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 increasea decrease of approximately $602,000,$226,000, or 18%6%.
The increasenet decrease in general and administrative expenses for the three months ended March 31, 20222023 compared to the same period in 20212022 was primarily due to a $97,000 increase$147,000 decrease in compensation expenses; a $28,000 increasean $11,000 decrease in housing allowancesgeneral business taxes and travel-related expenditures as we returned to more normal business travel patterns following cut-backs relating to the COVID-19 pandemic in the prior year period; a $12,000 increaselicenses; and an $8,000 decrease in rent expense, primarily related to our corporate headquarters operating lease. These decreases were partially offset by a $62,000 increase in depreciation and amortization expense related to general office leasehold improvements associated with the lease amendment that was executedon our corporate headquarters and business expansion related to the opening of our new Charles & Colvard Signature Showroom also located in January 2021;our headquarters campus; a $20,000 increase in travel and expense-related expenditures as we returned to more traditional business travel patterns; a $26,000$15,000 increase in professional services; an $8,000 increase in insurance expensesexpense, principally related to higher renewal premiums.increased premiums; and an $8,000 increase in bad debt expense associated with our allowance for doubtful accounts reserve policy.
The decrease in compensation expenses for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to a $146,000 decrease in employee stock-based compensation expense and a $53,000 decrease in bonus expense. These decreases were partially offset by a $49,000 net increase in salaries and related employee benefits in the aggregate and a $3,000 increase in severance-related expenses associated with a reduction-in-force during the current year period.
Professional services fees increased for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to a $24,000 increase in investor relations fees and a $23,000 increase in legal fees principally associated with the above-referenced reduction-in-force. These increases were partially offset by a
$74,000$32,000 decrease in fees associated with audit and tax services, principally related to a tax-related consulting project in the prior year period.
The net decrease in general and administrative expenses for the nine months ended March 31, 2023 compared to the nine-month period ended March 31, 2022 was primarily due to a $396,000 decrease in compensation expenses; a $146,000 decrease in bank fees resulting from the revised fee structure associated with different banking arrangements in place in the current period versus those in the year ago period; a $44,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve policy in connection with thepolicy; and a $5,000 decrease in accounts receivable, compared with the prior period;rent expense, primarily related to our corporate headquarters operating lease. These decreases were partially offset by a $33,000 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; a $24,000 decrease$131,000 increase in depreciation and amortization expense related to general office leasehold improvements associated with the lease on our corporate headquarters and business expansion related to the opening of our new Charles & Colvard Signature Showroom also located in our headquarters campus; a $97,000 increase in general business taxes and licenses; an $83,000 increase in travel and expense related expenditures as we returned to more traditional business travel patterns; a $30,000 increase in professional services; a $23,000 increase in insurance expense, principally related to fully depreciated assets when compared to those in prior periods;increased premiums; and an $18,000 decrease in professional services.
Thea $1,000 net increase in compensationmiscellaneous other general and administrative expenses.
Compensation expenses decreased for the threenine months ended March 31, 20222023 compared to the same period in 2021 comprises2022 principally due to a $93,000 increase$420,000 decrease in employee stock-based compensation expense which reflects improved operating results that impact our performance-based compensation-related benefits, and a $28,000$222,000 decrease in bonus expense. These decreases were partially offset by a $242,000 net increase in salaries and related employee benefits.benefits in the aggregate and a $4,000 increase in severance-related expenses associated with a reduction-in-force during the current year period.
Professional services fees increased for the nine months ended March 31, 2023 compared to the nine-month period ended March 31, 2022 primarily due to a $38,000 increase in broker commissions primarily related to our stock repurchase program and a $5,000 increase in legal fees associated with corporate governance matters. These increases were partially offset by a $24,000$13,000 decrease in bonus expense.
Professional services fees decreased for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to a $44,000 decrease in legal fees associated with corporate governance matters in the prior year period, and a $14,000 net decrease in consulting and other professional services in the current year period. These decreases were partially offset by a $40,000 increase in fees associated 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 pandemicconsulting project 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; 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, principally 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.
Interest Income
Interest income for the three and nine months ended March 31, 20222023 and 20212022 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 March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| Interest income | | $ | 69,159 | | | $ | 1,120 | | | $ | 68,039 | | | | * | % | | $ | 168,935 | | | $ | 1,964 | | | $ | 166,971 | | | | * | % |
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 threethree- and nine monthsnine-month periods ended March 31, 20222023 and 2021,2022, we earned interest from cash on deposit in this interest-bearing account. The decreaseincrease in earned interest for the nine months ended March 31, 2022 reflects adverse changes in interest rates during Fiscal 2022 compared with Fiscal 2021.
Interest Expense
Interest expense for the three and nine months ended March 31, 2023 reflects movement of invested funds into a higher-yield money market fund in late Fiscal 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 associatedcoupled 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 unpaidoverall increase in interest was forgiven by the U.S. Small Business Administration.
We had no outstanding debtrates during the first nine months ended March 31,of Fiscal 2023 compared with the same period in Fiscal 2022.
Loss on Foreign Currency Exchange
LossLosses 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, 20222023 and 20212022 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 March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| Loss on foreign currency exchange | | $ | - | | | $ | - | | | $ | - | | | | - | % | | $ | - | | | $ | 34 | | | $ | (34 | ) | | | (100 | )% |
During the three and nine months ended March 31, 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 decrease in these losses reflects the lower level ofThere were no such international sales transactions denominated in foreign currencies during the nine-month period ended March 31, 2023.
Provision for Income Taxes
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. During the three months ended March 31, 2023, we determined that due to the worsening global macro-economic conditions and heightened levels of inflation, including fears of recession, coupled with the effects from worldwide political unrest and the ongoing economic impact from the COVID pandemic, the risks associated with these conditions led management to conclude that it was not more likely than not we would have sufficient future taxable income to utilize our deferred tax assets. Additionally, we determined that the positive evidence was no longer sufficient to offset available negative evidence, primarily as a result of the pre-tax operating losses incurred during the nine-month period ended March 31, 2023. Consequently, we established a full valuation allowance against the deferred tax assets, resulting in an income tax expense of approximately $6.29 million and $5.86 million for the three and nine months ended March 31, 2023, respectively. We recognized an income tax expense of approximately $78,000 and $485,000 for the three and nine months ended March 31, 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.respectively.
Provision for Income Taxes
For each of the three and nine months ended March 31, 2022, 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-based compensation transactions during the quarter. Driven by the establishment of the valuation allowance during the quarter ended March 31, 2023, our effective tax rate for the nine month-period then ended was a negative 131.06%. For the nine months ended March 31, 2022, our effective tax rate was 17.20%.
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 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. 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, 2022, to conclude that it is more likely than not deferred tax assets of approximately $5.87 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
Our business depends on consumer demand for our products and could be adversely impacted by unfavorable general economic conditions, declines in consumer confidence and consumer disposable income, rising energy and fuel prices, increasing freight costs, rising inflation rates, recession and fears of recession, consumer debt levels, increased interest rates, and higher tax rates. The full impacteffect of the COVID-19 pandemicthese factors on the global and domestic economy remains uncertain anduncertain. In addition, the world continues adapting to the ongoing pandemic and evolving viral variants and its adverse effects on global economics and worldwide business operations. Thefull impact of the ongoing COVID-19 pandemic continues to place unprecedented pressures on global and U.S. businesses including our own.business remains uncertain as well at this time. Accordingly, w Depending on future developments, including the success of the global vaccine efforts to control the spread of the underlying virus and evolving variants, the pandemic could materially adversely impact our capital resources and liquidity in the future. Wee remain increasingly focused on the general macroeconomic conditions outlined herein as well as on the COVID-19 pandemic andpandemic. We are continually evaluating itstheir potential effect on our business and liquidity and capital 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, or PPP, loan may also qualify for the Employee Retention Credit, or ERC. Previously, pursuant to the Coronavirus Aid, Relief, and Economic Security Act, or 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 macroeconomic effects of the COVID-19 pandemic. AnyAccordingly, any capital raise is not assured and these conditions may not beadversely affect our ability to raise capital under the shelf registration statement, if at terms that would be acceptable to us.all.
Our weighted average shares outstandingAs previously disclosed, on December 19, 2022, we received notice from Nasdaq’s Listing Qualifications Department indicating that we were not in compliance with Nasdaq’s listing requirements because the minimum bid price of our common stock on The Nasdaq Capital Market had closed below $1.00 per share for 30 consecutive business days. In accordance with the Nasdaq’s listing requirements, we had 180 calendar days, or until June 19, 2023, to regain compliance with the minimum $1.00 bid price per share requirement.
On April 20, 2023, we received a diluted basis were 31.27 million sharesletter from the Nasdaq Listing Qualifications Department notifying us that the minimum bid price of our common stock was $1.00 per share or greater for each ofat least the threelast 10 consecutive business days. Accordingly, we have regained compliance with the Nasdaq minimum bid price requirement 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.matter is now closed.
Debt
We hadhave no short- or long-term outstanding debt as of March 31, 2022.2023.
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 nine-month period ended March 31, 2023, we repurchased 358,116 shares of our common stock for an aggregate price of $451,815 pursuant to the repurchase authorization. We repurchased no shares of our common stock during the three-month period ended March 31, 2023.
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, 2022,2023, our principal sources of liquidity were cash and cash equivalents and restricted cash totaling $21.91of $10.91 million, trade accounts receivable of $1.57$934,000, and net current inventory of $7.89 million, as compared to cash and cash equivalents of $15.67 million, trade accounts receivable of $2.22 million, and net current inventory of $13.44 million, as compared to cash, cash equivalents, and restricted cash totaling $21.45 million, trade accounts receivable of $1.66 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 nine-month period ended March 31, 2023 to a $5.00 million cash collateralized line of credit facility, withor 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 nine months ended March 31, 2022,2023, our working capital increaseddecreased by approximately $2.32$8.52 million to $32.46$20.54 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, 20222023 is primarily attributable to an increasea net decrease in our cash, cash equivalents, and restricted cash, a decrease in our allocation of inventory from long-term to short-term due to a higherlower expected sell through of inventory on hand in the upcoming period, an increasea decrease in our accounts receivable, a decrease 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 accountsthe classification of the note receivable as noncurrent as of March 31, 2023 as compared to current as of June 30, 2022, and an increase in our short-term operating lease liabilities. These factors were offset partially by a decrease in our accounts payable and a decrease in our accrued expenses and other liabilities. 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 ourthe corporate offices at our headquarters campus. Our cash used for financing activities was offset by cash provided by financing and operating activities.
In accordance with the terms of the lease agreementprincipally 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.share repurchase program.
During the nine months ended March 31, 2022,2023, approximately $1.10$3.83 million of cash was providedused by our operating activities.operations. The primary drivers of our use of cash flow from operations were the favorable effect ofa net incomeloss in the amount of $2.33 million, which also included $1.74 million of non-cash expenses; an increaseapproximately $10.33 million; a decrease in accounts payable of $356,000;$1.28 million; and a decrease in accrued expenses and other liabilities of $981,000. These factors were offset partially by the favorable impact of approximately $6.58 million of non-cash expenses driven by the deferred tax valuation allowance recorded during the quarter ended March 31, 2023, a decrease in accounts receivable of $92,000;$1.25 million; a decrease in prepaid expenses and other assets of $641,000;$757,000; and an increase in accrued income taxes of $1,400. These factors were offset partially by an increasea decrease in inventory of $3.56 million; and an increase in accrued expenses and other liabilities of $504,000.$181,000.
Accounts receivable decreased principally due to collection efforts to ensure customers made timely payments. Throughout the coursedecreased level of sales on credit during the COVID-19 pandemic and through the current periodthree months ended March 31, 2022, from2023, as compared with the sales during the period leading up to June 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$10.57 million in finished jewelry and $5.88 million in loose jewels, 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 gemstonejewelry production,, during the nine months ended March 31, 2022.2023. 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, 2023 and June 30, 2022, $19.06$25.44 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 million$812,000 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, 2022,2023, 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, 2022,2023, we also had a federal tax net operating loss carryforward of approximately $19.00$16.53 million expiring between 2034 and 2037,2038, 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 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
33Effective 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.
TableEach advance under the JPMorgan Chase Credit Facility, as amended, accrues interest at a rate equal to the sum of ContentsJPMorgan 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 March 31, 2023, we had not borrowed against the JPMorgan Chase Credit Facility.
Long-Term Contractual Commitment
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™ 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, 2022.2023.
During the nine months ended March 31,
20222023 and
2021,2022, we purchased approximately
$4.49$1.80 million and
$2.28$4.49 million, respectively, of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended.
We have made no purchases of SiC crystals from Wolfspeed during the six-month period ended March 31, 2023 while currently in discussions regarding the purchase commitment terms of the Supply Agreement. 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
our operating activities
to
finance our purchase commitment undermake purchases in accordance with the terms of 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. As outlined above under the caption, Long-Term Liquidity and Capital Structure, 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 macroeconomic effects of the COVID-19 pandemic. Accordingly, any capital raise is not assured and these conditions may adversely affect our ability to raise capital under the shelf registration statement, if at all.
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, 2022,2023, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
There are no material pending legal proceedings to which we are a party or to which any of our property is subject.
We discuss in our Annual Report on Form 10-K for the fiscal year ended June 30, 20212022 and our Quarterly ReportReports on Form 10-Q for the quarterquarters ended September 30, 2022 and December 31, 20212022 various risks that may materially affect our business. There have been no material changes to such risks, except as set forth below.
Our information technology,The effects of COVID-19 and other potential future public health crises, epidemics, pandemics or IT, infrastructure,similar events on our business, operating results, and our network maycash flows are uncertain. We could be
negatively impacted by
a cyber-attackthe widespread outbreak of an illness or other
security incident as a result of the rise of cybersecurity events.communicable disease, or any other public health crisis that results in economic and trade disruptions. Our business operations rely on the secure processing, storage,During Fiscal 2023, our performance has been affected by supply chain disruptions and
transmission of certain confidential, sensitive, proprietary, and other information,delays, as well as
personal information about our customers and employees. Cyber-attacks, including thoselabor challenges associated with
the current conflictemployee absences, travel restrictions, quarantine restrictions, remote work, and adjusted work schedules. The impact of COVID-19 on our operational and financial performance 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 offuture periods, including 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 aboutability to execute our business employees,plans in the expected timeframe, remains uncertain and will depend on future COVID-19-related developments, including the impact of COVID-19 infection or customers), as well as sensitive information,potential new variants or subvariants, the disclosureeffectiveness and adoption of which could leadCOVID-19 vaccines and therapeutics, supplier impacts and related government actions to identity theft. Breachesprevent and manage disease spread, including the implementation of our product services that relyany federal, state, local or foreign COVID-19-related controls. The long-term impacts of COVID-19 on technologyconsumer shopping and internet connectivity can expose us tospending patterns, including product and other liability risk and reputational harm. Measurescommodity priorities affected by general economic conditions 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.
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 variety 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.
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 overallimpact demand for our products and services. Such occurrencesservices and our business also are difficult to predict, but could negatively affect our future results and performance.
Our failure to maintain compliance with Nasdaq’s continued listing requirements could result in the delisting of our common stock. Our common stock is currently listed on The Nasdaq Capital Market. In order to maintain this listing, we must satisfy minimum financial and other requirements. On three separate occasions in the past five years, including on one occasion in Fiscal 2023, we have received notification letters from Nasdaq indicating that we were not in compliance with listing requirements because the minimum bid price of our common stock closed below $1.00 per share for 30 consecutive business days. However, Nasdaq subsequently notified us that we had regained compliance with the minimum bid price requirement. If we fail to satisfy all applicable Nasdaq listing requirements in the future, we may take actions to regain compliance, but we can provide no assurance that any such action would prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements. If we fail to continue to meet all applicable listing requirements in the future and Nasdaq determines to delist our common stock, the delisting could substantially decrease trading in our common stock and adversely affect the market liquidity of our common stock; adversely affect our ability to obtain financing on acceptable terms, if at all, and may result in the potential loss of confidence by investors, suppliers, customers, employees, and fewer business financial condition,development opportunities. Additionally, the market price of our common stock may decline further and resultsshareholders may lose some or all of operations.their investment.
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.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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.Issuer Purchases of Equity Securities
| Period | | Total Number of Shares Purchased | | | Average Price Paid per share | | | Total Number of shares Purchased as Part of Publicly Announced Plans or Programs(1) | | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |
| January 1, 2023 – January 31, 2023 | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
| February 1, 2023 – February 28, 2023 | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
March 1, 2023 – March 31, 2023 | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
| Total | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
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.(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. |
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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| | 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 |
| | |
| | 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 |
| | |
| | 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 |
| | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| 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.
| | | CHARLES & COLVARD, LTD. |
| | | |
| | By: | /s/ Don O’Connell | |
May 5, 20224, 2023 | | Don O’Connell |
| | | President and Chief Executive Officer |
| | | |
| | By: | /s/ Clint J. Pete | |
May 5, 20224, 2023 | | Clint J. Pete |
| | | Chief Financial Officer |
| | | (Principal Financial Officer and Chief Accounting Officer) |