UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

(Mark One)
☒  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2017June 30, 2021

OR

☐ Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

Commission File Number: 000-23329


Charles & Colvard, Ltd.
(Exact name of registrant as specified in its charter)


North Carolina 56-1928817
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

170 Southport Drive
Morrisville, North Carolina
 
 
27560
(Address of principal executive offices) (Zip Code)

(919) 468-0399
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par value per shareCTHRThe Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐        No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes ☐        No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒        No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒        No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
☐
Accelerated filer
☐
    
Non-accelerated filer☐ (Do not check if a smaller reporting company)
☒
Smaller reporting company
☒
    
  Emerging growth company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of its effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐        No ☒

As of June 30, 2017,December 31, 2020, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant was $17,068,461$31,375,932 based on the closing sales price as reported on The Nasdaq Capital Market.

As of March 2, 2018,August 27, 2021, there were 21,575,67329,913,095 shares of the registrant’s common stock, no par value per share, outstanding.

DOCUMENT INCORPORATED BY REFERENCE

None.Certain portions of the Proxy Statement for the registrant’s 2021 Annual Meeting of Shareholders to be held on November 18, 2021 are incorporated by reference into Part III of this Annual Report on Form 10-K.

CHARLES & COLVARD, LTD.

FORM 10-K
For the Fiscal Year Ended December 31, 2017June 30, 2021

TABLE OF CONTENTS



Page
Number
PART I  
Item 1.
1
2
Item 1A.
17
20
Item 1B.
24
31
Item 2.
24
31
Item 3.
24
31
Item 4.
24
31
   
PART II  
Item 5.
25
31
Item 6.
25
31
Item 7.
26
32
Item 7A.
40
51
Item 8.
41
52
Item 9.
68
84
Item 9A.
68
84
Item 9B.
85
69Item 9C.
85
   
PART III  
Item 10.
70
85
Item 11.
73
85
Item 12.
81
85
Item 13.
83
85
Item 14.
84
85
   
PART IV  
Item 15.
85
86
Item 16.
88
89
   
SIGNATURES
  

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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, (1) our dependence onbusiness, financial condition and results of operations could continue to be adversely affected by an ongoing COVID-19 pandemic and related global economic conditions; (2) our future financial performance depends upon increased consumer awareness, acceptance, and growth of sales of our products, resulting fromand operational execution of our strategic initiatives; (3) our business and our results of operations could be materially adversely affected as a result of general and economic conditions; (4) we face intense competition in the impact of the executionworldwide gemstone and jewelry industry; (5) a failure of our information technology infrastructure or a failure to protect confidential information of our customers and our network against security breaches could adversely impact our business plans onand operations; (6) we are subject to certain risks due to our liquidity;international operations, distribution channels and vendors; (7) our abilitybusiness and our results of operations could be materially adversely affected as a result of our inability to fulfill orders on a timely basis; the financial condition of our major customers and their willingness and ability to market our products; dependence(8) we are currently dependent on a limited number of customers; dependence ondistributor and retail partners in our exclusive supply agreement with Cree, Inc.,Traditional segment for the sole supplysale of the raw material; intense competition in the worldwide jewelry industry; our ability to maintain compliance with the continued listing requirements of The Nasdaq Stock Market LLC, or Nasdaq; our current customers’ potential perception of us as a competitor in the finished jewelry business;products; (9) we may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation; general economic(10) seasonality of our business may adversely affect our net sales and market conditions, including the current economic environment; the impactoperating income; (11) our operations could be disrupted by natural disasters; (12) sales of natural disasters on our operations;moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control; (13) our current customers may potentially perceive us as a competitor in the potentialfinished jewelry business; (14) we depend  on an exclusive supply agreement, or the Supply Agreement, with Cree, Inc., or Cree, for substantially all of our silicon carbide, or SiC, crystals, the raw materials we use to produce moissanite jewels; if our supply of high-quality SiC crystals is interrupted, our business may be materially harmed; (15) if the e-commerce opportunity changes dramatically or if e-commerce technology or providers change their models, our results of operations may be adversely affected; (16) governmental regulation and oversight might adversely impact our operations; (17) the execution of seasonalityour business plans could significantly impact our liquidity; (18) the financial difficulties or insolvency of one or more of our major customers or their lack of willingness and ability to market our products could adversely affect results; (19) negative or inaccurate information on social media could adversely impact our brand and reputation; (20) we rely on assumptions, estimates, and data to calculate certain of our key metrics and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business; the potential adverse effect of recent U.S. tax legislation; the impact of significant changes in e-commerce opportunities, technology, or models; our ability(21) we may not be able to adequately protect our intellectual property;property, which could harm the risk of a failurevalue of our information technology infrastructureproducts and brands and adversely affect our business; (22) if we fail to protect confidential information and prevent security breaches; risks of conducting business in foreign countries; the potential adverse impact of negative or inaccurate social media commentary; the failure to evaluate, implement, and integrate strategic opportunities; possible adverse effects of governmental regulationacquisition or disposition opportunities successfully, our business may suffer; (23) our loan, pursuant to the Paycheck Protection Program, or the PPP Loan, under the Coronavirus Aid, Relief, and oversight;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 for compliance with applicable SBA requirements for six years from the impact ofdate the loan was forgiven; (24) some anti-takeover provisions included inof our charter documents may delay or prevent a takeover of our company; and (25) our failure to maintain compliance with The Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock, in addition to the other risks and uncertainties described in more detail in “Risk Factors” in Part I, Item 1A, of this Annual Report on Form 10-K. Forward-lookingForward-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.

PART I

Item 1.
Business

Overview

Our Mission

At Charles & Colvard, we believe luxury can be both beautiful and conscientious. With innovative technology and sustainable practices,Ltd., our goalmission is to lead a revolution inredefine the definition of real within the jewelry industry – delivering a brilliant product at extraordinary value balanced with environmental and social responsibility.for consumers everywhere. We believe fine jewelry can be accessible, beautiful, and conscientious.

About Charles & Colvard

Charles & Colvard, Ltd., a North Carolina corporation founded in 1995 (which may be referred to as Charles & Colvard, we, us, or our), manufactures, marketsis a globally recognized fine jewelry company specializing in lab created gemstones. We manufacture, market, and distributesdistribute 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 gemstonejewels and premium lab grown diamonds for sale in the worldwide fine jewelry market. OurCharles & Colvard is the original source of created moissanite, and in 2015, we debuted Forever One™, our premium moissanite gemstone brand. As an e-commerce and multi-channel destination for fine jewelry featuring lab grown gemstones, we believe that the addition of lab grown diamonds is a natural progression for the Charles & Colvard brand.

One of our unique differentiator,differentiators, moissanite – The World’s Most Brilliant Gem® – is core to our ambition to create a movement around beautiful, environmentally and socially responsible fine jewelry. Charles & Colvard is the original creator of lab-created moissanite, and weWe believe that we are leading the way in delivering the most pure form of this gemstonepremium moissanite brand through technological advances in gemstone manufacturing, cutting, polishing, and setting. By coupling what we believe to be unprecedented moissanite jewels with responsibly sourced precious metals, we are delivering a uniquely positioned product line for the conscientious consumer. Our Caydia® lab grown diamonds are hand selected by our Gemological Institute of America, or GIA, certified gemologists to meet Charles & Colvard’s uncompromising standards and validated by independent third-party experts. Our Caydia® lab grown diamonds are available currently in E, F, and G color grades (based on the GIA’s color grading scale) with a minimum clarity in accordance with the GIA’s VS1 clarity classification along with excellent polish and symmetry. All of our Caydia® lab grown diamonds are set with mostly recycled precious metals.
Our strategy is to build a globally revered brand of lab created gemstones and finished jewelry that appealsappeal to a wide consumer audience andaudience. We believe this strategy leverages our advantageadvantages of being the original and leading worldwide source of created moissanite.Charles & Colvard Created Moissanite® and offering a curated assortment of jewelry featuring Caydia® lab grown diamonds, which together we believe offers an ideal combination of quality and value. We also believe a direct relationship with consumers is important to this strategy, which entails delivering tailored educational content, engaging in dialogue with our audience, and positioning our brand to meet the discerning needsdemands of today’s discerning consumer. We sell loose moissanite jewels and finished jewelry through two operating segments: our Online Channels segment, which comprises our charlesandcolvard.com website, e-commerce outlets, including marketplaces such as Amazon and eBay, and drop-ship customers, such as Overstock.com, and other pure-play, exclusively e-commerce customers, such as Gemvara; and our Traditional segment, which consists of wholesale, retail, and television customers. For more information about our operating segments, see Note 3, “Segment Information and Geographic Data”, in the Notes to the Consolidated Financial Statements.

We believe our expanding application of an omni-channel sales strategy across the jewelry trade and to the end consumer with accessible lab created gemstones and value branded finished jewelry featuring moissanite positions Charles & Colvard moissanite and lab grown diamonds positions our goods at the many touchpoints where consumers are when they are making their buying decisions – thereby creating greater exposure for our brand and increasing consumer demand.

In February 2016, we made the strategic decision to explore a potential divestitureWe sell loose moissanite jewels, lab grown diamonds, and finished jewelry set with these gems through two operating segments: our Online Channels segment, which encompasses our digital properties components, comprised of our direct-to-consumer home party business previously operated throughcharlesandcolvard.com and moissaniteoutlet.com websites, e-commerce outlets, including marketplaces, drop-ship customers, and other pure-play, exclusively e-commerce customers; and our Charles & Colvard Direct, LLC (dba Lulu Avenue®) subsidiary. After careful analysis Traditional segment, which consists of domestic and international distributors and retail customers.

We report segment information based on the “management” approach. This segment reporting approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of our core competencies, go-to-market strategies,operating and intentreportable segments. For more information about our operating segments, see Note 3 to advance toward profitability, the management teamour consolidated financial statements in Item 8, “Financial Statements and Board of Directors determined a divestitureSupplementary Data”, of this distribution channel to be in our best interest and our shareholders’ best interest. On March 4, 2016, we and Charles & Colvard Direct, LLC entered into an asset purchase agreement with Yanbal USA, Inc., or Yanbal, under which Yanbal purchased certain assets related to our direct-to-consumer home party business for $500,000 and assumed certain liabilities related to such assets. A more detailed description of this transaction is included in Note 13, “Discontinued Operations”, in the Notes to the Consolidated Financial Statements.Annual Report on Form 10-K.

Our Market Opportunity

As a result of the COVID-19 pandemic, we have witnessed a shift in e-commerce shopping, and we have seen this change in consumer behavior continue through June 2021. According to Forbes.coman Adobe Digital Economy Index Report, from Adobe Analytics, as of the quarter ended March 31, 2021, global e-commerce and McKinsey & Company, by 2020online retail spending in the U.S. have surged over the past year, with year-over-year growth of 39% and 49%, respectively. We believe that there is evidence to suggest that many brick-and-mortar retail stores have migrated sales to online platforms this past year. In their same Adobe Digital Economy Index Report, as of March 31, 2021, Adobe Analytics is projecting that global onlinee-commerce sales are on pace to hit $4.2 trillion for calendar year-end 2021.

By 2025, the value of the worldwide fashion jewelry market is expected to drive $45approximately $300 billion in worldwide sales – representing 15% of the global jewelry market – and global online fine jewelry is projected to represent a staggering $30 billion of the global jewelry market. Concurrently, according to the Wall Street Journal, the lab-created gemstone opportunity is expecteda November 2020 report from Statista, a global provider of retail market and consumer driven data. We continue to reach an $8 billion market size. We believe thisthat the convergence of the online fine jewelry shopper andconsumer, coupled with the emergence of lab-created gemstones, asis a solution for the ethically minded consumer that continues to the underserved, ethically-minded value consumer shapespresent what we believe is a bright and sizeable future opportunity for the Charles & Colvard and jewelry designed with our exceptional gemstone.brand.

Our Strategic DirectionOutlook

As consumers have shiftedThe COVID-19 pandemic continues to significant levelspresent business challenges in 2021 and we expect those challenges to continue into our fiscal year ending June 30, 2022, or Fiscal 2022. The full extent of online shopping and buying, in particular, the Millennial generation, we have had to transform our go-to-market strategy in a relatively short period. Our historical business was thatultimate impact of a gemstone manufacturer, and as such, we created gemstones, and leveraged our distributor networks as the primary method for delivering our goods to market. That meant relyingCOVID-19 pandemic on our network partnersoperational and financial performance remains uncertain and continues to generate interestdepend on many factors outside of our control, including, without limitation: the timing, extent, trajectory and salesduration of the pandemic; the development and availability of effective treatments and the long-term impacts of the global vaccine rollout; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for consumer products. Due to the potentially significant impact on our operations as a result of the COVID-19 pandemic, including governmental responses to prevent further outbreak of the virus, coupled with the severity of its evolving variants, current period results are not necessarily indicative of expected performance for our gemstone, while they were doingfull Fiscal 2022. We anticipate that the same for other gemstonesCOVID-19 pandemic could continue to have an adverse impact on our business, results of operations, and jewelry across the industry. Consequently, we believe there was a substantial lack of market awareness for moissanite.financial condition during Fiscal 2022.

In orderAdditional risks to address these issues, we began building a new leadership teamthe Company related to the COVID-19 pandemic are included in December 2015. This team increased the focus on the importance of a direct connection with the consumer, and over the course of the last two years began implementing new strategies to strike a dialogue with this audience.

In October 2016, we re-launched Charles & Colvard with the intent to position both Charles & Colvard and its innovative moissanite product – Forever OneTM – as a premium gemstone and jewelry brand. During this pivotal time, we launched the charlesandcolvard.com web site as our primary storefront, established our brand across key social media properties, and began a significant digital marketing campaign to gain exposure, build brand awareness, and begin the journey of establishing a lifetime relationship with consumers that are seeking an alternative luxury brand that aligns with their buying preferences.
2017 was a year of growth and optimization of our branding initiatives. We progressed the business from our 2016 re-launch, and focused on driving consumer awareness while making calculated marketing and sales investments as we engaged new channel partners and forged inroads into new markets. Over the course of the year, we executed our strategic plan with new innovations in our Forever OneTM product line and finished jewelry offerings. We invested in key retail and wholesale partnerships, as evidenced by our brick-and-mortar expansion into nearly all Helzberg Diamonds stores. We explored new channels, applying our e-commerce expertise as we rolled-out our inaugural presence on Tmall® in China, and achieving authorized Seller-Fulfilled Prime status on Amazon.com. We believe that we have improved the customer experience with our brand by taking such actions as offering free shipping and introducing a 60-day free returns policy. We also believe that we were able to amplify our global marketing efforts as we advanced toward profitability.Part I, Item 1A. “Risk Factors.” A more detailed description of our achievementsthe actions we have taken, and are taking, in 2017response to the COVID-19 pandemic is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our strategystrategic focus for 2018Fiscal 2022 is to focuscentered on growth and marketthe continued expansion across channels and geographies. As competitive moissanite makes its way to market, there is no more important time than now to confirmof Charles & Colvard’s leadership position as the premier worldwide moissanite providerbrand on a global scale and to furtherincrease 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 the Charles & Colvard brand directly with consumers is key to our presence in emerging markets.  Ourfuture success and ability to fuel our growth. We will execute on our key strategies for 2018 are:

·
Drive organic revenue growth in the U.S. and maintain attractive margins – We plan to continue engaging our target customers through creative and progressive marketing campaigns and leverage technology to ensure efficiencies in our marketing, sales and customer service functions.

·
Expand our gemstone and jewelry offerings to serve a broad range of customers – We plan to continue innovating our moissanite gemstone offerings and further enhance our jewelry offerings to include unique, curated collections and new styles at multiple price points that will appeal to a broad audience.

·
Target the global market opportunity through continued brand building, focused channel expansion and world-class customer service – We plan to diversify and expand our global customer base in a low-risk manner by introducing our brand in select markets via cross-border trade initiatives and through established marketplaces.

·
Balance growth-oriented investments to generate sustainable earnings improvement – We plan to maintain financial flexibility and use data-driven business decisions to balance investments in future growth with consistent near-term financial performance.
with a continued commitment to spending judiciously and generating sustainable earnings improvement.

Our Guiding Principleskey strategic goals for Fiscal 2022 are as follows:

One
Expansion of Brand Presence. We plan to continue focusing on conversion-based advertising campaigns by way of capitalizing on our existing digital platform and transactional website, charlesandcolvard.com. We believe that we also have the most critical factorsability to utilize new technological functionality to engage our social media audience on Facebook, Instagram, and YouTube, among others, by showcasing our products in implementingreal time through available existing online video streaming and live stream broadcasting platforms. In furtherance of our strategiesbrand presence, we expect to continue our quest to reach all customers where they shop. To accomplish this, we plan to explore opportunities to develop retail showrooms in order to display and achieving success isshowcase the styles in our team of employees.exclusive Signature Collection, which will allow those consumers – who want to see, touch, and feel our jewelry in person – an opportunity to engage with our products. We carefully develop, support and reward our team members, making sure they know our fundamental mission, which is to lead a revolution in the jewelry industry – delivering a brilliant product at an extraordinary value balanced with environmental and social responsibility. We have set forth Guiding Principles that set the tone for everything we do – from structuring our interactions with partners, customers and shareholders to the way we operate our business, and the products we bring to market. Followingbelieve these initiatives are the principlesnatural progression of our omnichannel marketing strategy and that guidethese programs will continue to expand our actions:brand presence, increase customer engagement, expand our product offerings, and bolster our top-line growth. We believe that the expansion of our brand presence is a key factor in achieving our overall success in Fiscal 2022.

·
Catalyze – Build positive momentum with customers and influencers by being thoughtful and trustworthy in every interaction.

·
Innovate – Disrupt the jewelry industry through use of technology – in gemstone and jewelry design, business processes and engagement with our audience.

·
Aspire – Be socially conscious, economically informed and environmentally responsible. Build a sustainable business and give back through community acts.

·
Obsess – Think like a consumer, act like a friend. Constantly seek ways to reduce friction between the brand and our audience.

·
Achieve – Focus attention on the interdependent successes of individual, brand and shareholder.

·
Enrich – Promote personal growth and the ability to affect positive change in the business by cultivating a culture of critical thinking and creativity.
3

•
Enhanced Customer Engagement. We plan to further develop and expand our existing content production capabilities by building a broadcast studio in our Research Triangle Park, North Carolina, headquarters. We expect a new studio will provide the setting for live streaming capability on our website as well as other social media broadcast channels. We believe a key element of accomplishing this goal during Fiscal 2022 is our arrangement with and the implementation of Bambuser, a leading live streaming global platform with innovative hosting and broadcasting capabilities. This innovative technology will allow us to host live shows and broadcast events for special initiatives and introducing new product collections. We’re excited to join Bambuser’s list of brands such as LVMH, a leading global luxury products group that includes its Louis Vuitton®, Moët & Chandon©, and Hennessy® family of brands. In addition, Bambuser’s list of participating associates also includes such well-known consumer brands as Clarins®, Samsung©, and Adidas®. We expect this relationship to add a new sales channel opportunity for our direct-to-consumer business and encourage personal interaction with our online customer base, while also providing a platform to explore and engage celebrity and social media influencers. 

Our Audience

•
Product Development. We intend to explore product development opportunities during Fiscal 2022 to bring forward new product offerings that align with our exclusive brand and core values, just as we did in our fiscal year ended June 30, 2021, or Fiscal 2021, with Caydia®, our premium brand of lab grown diamonds. We plan to develop and move forward with new proprietary product offerings, styles, and collections as well as an increased breadth of product categories to further meet the needs of existing and new customers. We expect to also continue focusing on the use of recycled metals and employing sustainable practices in order to serve today’s environmentally aware and conscientious consumer.

Our consumer audience is in transition. Historically,
Disciplined Growth. We remain aware of the ongoing challenges and economic uncertainties facing the U.S. and global economies as a result of the COVID-19 pandemic. However, we intend to continue developing and expanding our audience has been largely comprised of Baby Boomers and Generation X – which we consider an older set of consumers driven by a traditional style of jewelry. Today, our market research and buying habit analytics indicate that, regardless of demographic, our audience appearstechnological capabilities to be driven by three distinct motivating factors: (1) Beauty – the innate brilliancemake informed data-driven decisions across all areas of our gemstonebusiness and marketing platforms. Consistent with the planned expansion of the Charles & Colvard brand, we also intend to continue exploring strategic alliance relationships with businesses in the retail and fine jewelry selection; (2) Value – the “bang for the buck” possible with moissanite, and the ability to buy luxury items while saving money for the more important things in life; and (3) Conscientiousness – having a positive impact on the world by buying from brands that are environmentally and socially responsible.

Our marketing programs are driven by this understanding of our audience and their motivating factors. Their mindset drives the segmented messages we deliver, defines the partners and kindred brands we select and co-promote with, and determines the channels in which we engage with our audience.

While these common motivating factors transcend demographics,industry where we believe that we would be able to capitalize on existing market synergies and likeminded product brands to help us achieve desired market growth. In the meantime, we plan to continue building an organic growth strategy through a dedication to our existing core product market and providing ongoing exemplary customer service. We will continue to engage with our shareholder base to help create value for our shareholders. To accomplish our long-term strategy for growth, we intend to continue focusing on disciplined growth opportunities that are seeing distinct trends that lend themselves to highly targeted marketing programs. Most distinctly, we have discovered – what we refer to as the conscientiousness factor – emanating from the Millennialboth complementary and burgeoning Generation Z demographics. We believe that today’s younger consumers are sociallyaccretive in pursuit of our plans for long-term shareholder value and ethically wired. They appear to proactively seek out goods and services that align with their core principles and become devoted and vocal advocates of brands that embody ‘green’ practices. This consumer group is our fastest growing online channels demographic.growth.

In summary, we believe our beautiful, high value, ethically-sourced product aligns directly with the principles and purchasing requirements of our primary target – the Millennial audience. However, we believe that we also appeal to a broader range of demographics for whom we can deliver tailored promotional programs that speak to their distinct motivating factors.

Marketing to the Online Channels Segment

Driven by knowledge of our changing audience, we adjusted our strategy and marketing tactics throughout 2017 and proactively engaged the consumer through a multi-channel digital marketing strategy. Our goal is to continue growing our direct relationship with the consumer, which we believe will drive interest across all of our selling channels. Our approach for marketing directly to the consumer includes the following online programs:

·
Social Media – To reinforce and support our position as the leading source of ethically-sourced, lab-created moissanite, our marketing team manages several social media initiatives that target current and future jewelry consumers to support the promotion and sale of Charles & Colvard Created Moissanite®. Our campaigns are focused on driving a consistent message emphasizing the environmentally and socially responsible aspects of our jewels, their everlasting beauty, and overall value. Our social media efforts include both owned posts and engagements (our own profiles and activities) as well as paid placement (ads presented to targeted audiences).

·
Digital Marketing – According to a recent research study by Forrester Research, Inc., a global independent research, data, and advisory services firm, 71% of consumers begin their buying journeys by using a web search to discover new products and services. In short, the typical buyer’s journey is a digital one. Digital marketing encompasses the myriad ways we can be a part of that journey – from Search Engine Marketing (keyword buys and ads) to digital display (banner ads and product re-targeting ads) to video pre-roll (ads playing before third-party YouTube videos), and native advertising (long-form content produced in conjunction with editorial outlets such as Refinery29®). We are using, and continually optimizing, available digital marketing channels and will continue to monitor new forms of paid media as they arise, assessing whether they will be effective in helping us connect with our target audiences.

·
Influencer Campaigns – According to Forbes Magazine and a study from MuseFind Technologies Inc., a leading U.S. influencer marketing authority, up to 92% of consumers trust an influencer more than an ad or traditional celebrity endorsement. This is a clear indicator of what marketers have already come to accept: that people trust other people more than they trust brands. However, we believe there is a caveat: the influencers that a brand partners with must truly be aligned in mindset. We do not believe that we can simply find someone with millions of followers, pay them to post about our brand and product, and expect to see results. Instead, we believe we must find influencers who embody the same mindset as our brand and believe in the products we bring to market. This takes time, and we plan to continue to build our influencer network throughout 2018.
·
Sweepstakes – We believe sweepstakes, especially leveraging social media platforms in partnership with kindred brands, are powerful in acquiring and engaging new audiences. Through the use of sweepstakes in 2017, we increased our email marketing subscribers and social media followers, generated a multitude of user-generated content about our brand and products, and converted new customers. Sweepstakes will be a marketing tactic we intend to expand upon throughout 2018.

·
A Twist on the Traditional TV Channel – Throughout our history, we have utilized TV as a channel to reach our consumers. In 2017, we identified a shift in our audience and how they began to disengage from TV and shift to online and streaming video. We are combining our years of knowledge about video marketing, and the power of seeing our product in motion, with our growing expertise in digital marketing. These efforts are expected to culminate in extensive use of video marketing and livestream video in 2018.

·
Consumer Education – Because we believe education of the consumer is so important to the sell-through of moissanite products, we continue to enhance our website and contribute to third party platforms such as social media sites to share extensive educational information about moissanite, in addition to general background information about our company. But we do not believe our value to the marketplace is only realized in our product. As our goal is to lead a revolution in the jewelry industry, we also have a commitment to providing value through education of the jewelry market by bringing to light the environmental and social impact of the trade as a whole. We plan to continue to create content of value on our own site and social channels and to contribute more to third party platforms, sharing extensive educational information about environmentally and socially responsible, lab-grown moissanite.

Distributing to the Online Channels Segment

Driven by continuously updated knowledge of our audience, through e-commerce and web analytics as well as research through social media and customer service channels, we proactively engage our consumers through a multi-channel digital marketing strategy. Our goal is to continue growing our direct relationship with the consumer, which we believe will drive interest across all of our selling channels.

Our approach for marketing directly to the consumer in our Online Channels segment includes the following types of communication channels: (i) organic social media; (ii) paid advertising (including, but not limited to, search engine marketing, display ads, video ads, and social media advertising); (iii) email; (iv) public relations; (v) product and style influencers; (vi) digital content creators; and (vii) our own website. In addition, our marketing approach comprises the following types of content types: (i) photography; (ii) videos; (iii) interactive immersive experiences (including but not limited to, online personal concierge shopping assistance and streaming live broadcast events and video shopping opportunities); and (iv) user-generated content.

Equally as important to us as marketing to our direct consumer audience is movingencouraging our customers to move through the process of engaging with our brand – and eventually converting them into a lifetime Charles & Colvard customer. Throughout the aboveour marketing tactics, we employ calls to action that drive the consumer to the many placesvirtual and actual locations where they can view our products, initiate, and complete their purchase.purchases. We utilize a centralized distribution and fulfillment facility in Morrisville,Research Triangle Park, North Carolina, to fulfill online channelsOnline Channels segment orders.

Following are our primaryprincipal online transactional channels:

·
charlesandcolvard.com – In 2017, we significantly enhanced our transactional web site to optimize for the mobile consumer and to reduce friction between our brand and the consumer. Programs such as free shipping, a 60-day return policy, and an enhanced and optimized shopping experience were rolled out in time for the 2017 holiday season.
charlesandcolvard.com. We believe that we continue to enhance our primary transactional website to optimize the platform for the online mobile consumer – whether shopping on a computer at home or a mobile device – and to improve our customers’ experiences. Programs such as free shipping, a 60-day returns policy, and an enhanced and personalized shopping experience have been and will continue to be improved and rolled out over time. With data collected through web analytics, and through user surveys that reveal how consumers use the site, we are in a continual state of optimizing the buying experience – making it easier for shoppers to browse, sort and compare. Through the use of partners such as Affirm, Inc., and PayPal Holdings, Inc., or PayPal, for financing purchases, Braintree, a service of PayPal, for ease of transfer, and cross-border trade, or CBT, services, we are in a continual state of optimizing the buying experience – making it easier for shoppers to browse, sort, and compare. Where possible, we utilize these data to inform the selection of new, innovative technologies to further enhance our users’ experience, including technologies provided by such partners as Amazon Pay, Affirm, Inc., and PayPal Holdings, Inc., or PayPal, for financing purchases, Braintree, a service of PayPal, for ease of transfer, and Flow Commerce, Inc., or Flow, which is a company that specializes in facilitating cross-border global trade and e-commerce services. Our goal is to remain continually focused on improving our customers’ experience.

moissaniteoutlet.com. On March 16, 2021, we launched our secondary direct-to-consumer website, moissaniteoutlet.com, which is a product disposition channel that we believe complements our global positioning and dominance in the moissanite gemstone market. Our website, moissaniteoutlet.com, is an e-commerce shopping destination that caters to the opportunistic and bargain-seeking consumer base for our moissanite products. We believe this new online property allows us to monetize substantially all our raw material and finished goods inventory, thus minimizing product shrinkage and waste. As a unique online shopping destination with a very different product offering strategy, we believe moissaniteoutlet.com rounds out our product offerings with quality discounted jewelry products allowing us to serve a broader range of demographics and consumers. Our product assortment on moissaniteoutlet.com includes moissanite rings, earrings, pendants, and bracelets, as well as jewelry set with colored moissanite, and other lab created colored gemstones. From time to time, we plan to continue featuring daily pricing deals and flash product sales on moissaniteoutlet.com to encourage consumers to take advantage of favorable pricing opportunities.

Cross-Border Trade. Through the ongoing application of cross-border trade, or CBT, technology, such as building our relationship with Flow, we believe CBT continues being a significant opportunity in Fiscal 2022 and beyond. We believe that Flow’s technological platform helps such global enterprises create a positive and localized shopping experience for their international customers while helping to provide a complete and accurate record of CBT transactions for the enterprise.


·•
MarketplacesMarketplaces. – As noted previously,We continue seeing a large majority of buyers start their online shopping experience withutilizing a worldwide web search. AccordingIn fact, according to BloomReach, Inc.jumpshot®, a global content management and digital intelligence firm as many as 55%that tracks marketplace data, more than 50% of those web searches begincontinue to originate on Amazon. That number skewscontinues skewing even higher within the Millennial demographic –in that Amazon is the web search brand Millennials continue to identify as most relevant based on a finding by the Pew Research Center, a renowned nonpartisan factfact-based think tank, Amazon is the brand Millennials identify as most relevant.tank. Therefore, we have made a point to bemaintain a prominent presence on Amazon, achieving Seller-Fulfilled Prime status, in 2017, which means we have the option of fulfilling orders with the same benefits of Amazon Prime. This willcontinues to enable us to be positioned more prominently in Amazon’s search platform and to take advantage of their negotiated shipping rates and service levels that, in turn, will lowerlowers our overall shipping costs. This status is available by Amazon to only those sellers who have a history of fulfilling orders quickly and not running outmaintaining appropriate levels of stock. Our marketplace relationship with Amazon includes, in addition to domestic websites, international locations, including websites in the U.K., Europe, Australia, and Japan. We are also prominentcontinue to have a market presence on eBay and a multitude of other specialty marketplaces, allowing us to meet our customers when and where they want to buy. As the world and its economy is beginning to recover from the pandemic, our goal remains to continue optimizing our presence on these marketplaces and to continue expanding into new untapped regions and platforms where we have identified cost-effective opportunities.

Pure-Play E-tailers. FTI Consulting, a global business advisory firm, continues to project that at least 25% of total retail sales will become e-commerce centric by 2030. As consumers continue maintaining an online shopping presence and become more digitally savvy, new businesses have gained traction by tailoring their product, services, and experiences to specific consumer preferences. We believe that these pure-play e-tailers offer unique opportunities for Charles & Colvard to feature our gemstones and connect with their loyal audiences.

5
Drop Ship Retail. In an effort to expand their product offerings and assortments, many retailers utilize direct fulfillment from their vendors to their consumers, or drop-ship, as it enables them to offer a more robust assortment online without having to physically take ownership of the goods in their warehouse. These retailers often seek socially and environmentally responsible brands to serve the demand for conscientious product selection from their audiences. Since we began direct-to-consumer drop-shipping products in 2013, we have refined our digital information technology and operations capabilities to support these partnering arrangements in multiple ways, including fully integrated electronic data interchange, or EDI, solutions for inventory management, order processing, and invoicing. Operationally, we continue maintaining in-stock rates and leveraging our centralized distribution and fulfillment facility to meet partner service-level agreements, or SLAs, for shipments and returns. We plan to continue seeking new and strategic alliance relationships as well as optimizing existing arrangements throughout Fiscal 2022 and beyond.
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Pure-Play E-tailers – Bain & Company, a global management consulting firm, estimates that 28% of total retail sales will become e-commerce centric by 2030. As consumers become more digitally savvy, new businesses have gained traction by tailoring their product, services and experiences to specific consumer preferences. We believe that these pure-play e-tailers offer unique opportunities for Charles & Colvard to feature our gemstones and connect with their loyal audiences. As our 2018 strategy evolves, we plan to focus on expanding these relationships and forging new partnerships that enable us to reach differentiated audiences.

·
Drop Ship Retail – Retailers are consistently seeking socially responsible brands to serve the growing demand for conscientious product selection from their audiences. In an effort to smartly expand their assortment, they utilize drop-ship as it enables them to offer a more robust assortment online without having to physically take ownership of the goods in their warehouse. As we have refined charlesandcolvard.com’s post-purchase customer experience to deliver fast shipping and a streamlined return process, we are leveraging these enhanced processes to support the increasing opportunity among retailers that are incorporating drop-ship as core to their online assortment expansion strategy.

·
Cross-Border Trade – According to statistics from Statista.com (based on data from Shopify Inc., a global cloud-based, multi-channel commerce platform), with 84% of global e-commerce sales predicted to take place outside of Europe and North America by 2020, we anticipate combining regionalized marketing efforts in new geographies with promotional campaigning to drive international consumers to our charlesandcolvard.com web property. Through the application of market-leading CBT technology, we believe CBT to be a significant opportunity in 2018 and beyond.

MarketingDistributing to the Traditional Channels Segment

The Traditional Channels segment is our legacy channelsegment – representingrepresented by such outlets as distributor partners,manufacturers, distributors, and brick-and-mortar retail, and traditional television shopping. Theseretailers. Going forward, these market channels remain important avenues for Charles & Colvard to drive product to market and be present in the many places the consumer takes theirhis or her shopping journey.

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Trade advertising – In 2017, we continued to target the trade with print advertisements featuring moissanite, with specific emphasis on our Forever OneTM moissanite jewels and finished jewelry featuring the Forever OneTM jewel in leading trade publications. We intend to continue to deliver meaningful promotion of Forever OneTM as we further expand this product line into the wholesale distribution segment.

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Industry associations – We maintain relationships with major jewelry industry organizations and jewelry trade publications as an opportunity to communicate with our peers on a consistent basis through media coverage, trade shows, and charitable events, among others.

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Trade shows – Our attendance at leading jewelry trade shows as a sponsor, an exhibitor, or a participant has helped us extend our outreach to customers. In 2017, we attended major domestic and international jewelry industry trade shows including JCK, North America’s largest annual jewelry trade event in Las Vegas, and the Hong Kong Gem and Jewellery Fair. We intend to continue investing in these important industry events in 2018.

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Cooperative advertising – We sometimes participate in the cooperative advertising programs of our distributor and retail partners, subject to the customer adhering to our branding guidelines and other conditions. In these programs, we subsidize a portion of theirOur approach for marketing costs in order to create awareness of and exposure for our gemstones and jewelry.

Distributing to customers and strategic partners within our Traditional segment includes the Traditional Channels Segmentfollowing types of communication channels: (i) trade advertising; (ii) industry associations; (iii) trade shows; and (iv) cooperative advertising.

We utilize a centralized distribution and fulfillment facility in Morrisville,Research Triangle Park, North Carolina, to fill bulk orders to manufacturer, distributor, and retail customers.

·
Retail – In order to create awareness and exposure for our gemstones, jewelry, and brands, we sell loose moissanite jewels and finished jewelry featuring moissanite at wholesale prices to nationally recognized and emerging retail customers through a broad range of channels including jewelry chains, television shopping networks, and department stores. Wholesale orders are received via purchase order and filled from our centralized distribution and fulfillment center.  In addition, we have placed loose moissanite jewels and finished jewelry inventory in stores on a consignment basis. We continue to evolve our retail channel strategy as we optimize our historical methods and partners.
Retail. In order to create awareness and exposure for our gemstones, jewelry, and brands, we sell loose moissanite jewels and finished jewelry featuring moissanite at wholesale prices to nationally recognized and emerging retail customers through a broad range of channels including jewelry chains and department stores. Wholesale orders are received by way of purchase orders and fulfilled from our centralized fulfillment center. In many cases, we have placed loose moissanite jewels and finished jewelry inventory in stores on a consignment basis. Under this consignment model, in accordance with our revenue recognition accounting policy, we recognize the revenue for these transactions after the retail partner has sold an item to a consumer or other contractual conditions are met. In other cases, a retailer purchases the goods, or a portion of the goods, under what we call an asset purchase model. Under our asset model, we recognize the sale and related revenue upon transfer of the goods to the retailer. Due to the maturity of certain retail relationships, we have migrated select brick-and mortar partners to a blended asset and consignment model account structure, which affords us more favorable customer payment terms that result in more favorable cash flow. We will continue to evolve our retail channel strategy as we optimize our methods and partnering arrangements.

Domestic Manufacturers and Distributors. In order to service the vast number of independent jewelers, jewelry stores, and smaller jewelry chains, we sell our loose moissanite jewels and finished jewelry to domestic wholesale distributors and finished jewelry manufacturers at distributor prices, that in turn resell the loose jewels or finished jewelry at a markup to independent jewelers and jewelry stores – whether brick-and-mortar, online, or both. In limited circumstances, we have placed loose moissanite jewels and finished jewelry inventory with select domestic distributors on a consignment basis. We continue to evaluate our channel strategy for domestic distributors, which may result in a change to our historical domestic distributor methods and partners.

International Manufacturers and Distributors. In order to create global awareness and exposure for our lab created gemstones, jewelry, and brands, we sell loose moissanite and lab created diamond gems, as well as finished jewelry featuring these gemstones, to international wholesale distributors and finished jewelry manufacturers at distributor prices, that in turn sell the actual loose jewels or set the loose jewels in mountings and sell the finished jewelry to brick-and-mortar and online retailers. We currently have numerous international wholesale distributors based in Australia, Canada, Hong Kong, India, Japan, the Netherlands, Singapore, and South Africa. Some of these distributors typically sell into neighboring countries and the extended geographic regions where they may be located. Additionally, from time to time, we have placed loose moissanite jewels and finished jewelry inventory with select international distributors on a consignment basis. Notwithstanding the impact of the ongoing worldwide pandemic, we continue to evaluate our channel strategy for international distributors, which may result in a change to our historical international distributor methods and strategic partners. A portion of our international sales consists of finished jewels sold internationally that may be re-imported to U.S. retailers.

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Domestic Manufacturers and Distributors – In order to service the vast number of independent jewelers, jewelry stores, and smaller jewelry chains, we sell our loose moissanite jewels to domestic wholesale distributors and finished jewelry manufacturers at distributor prices, that in turn set them in mountings and sell them to retailers, sell them through their own e-commerce sites, or resell the loose jewels at a markup to independent jewelers and jewelry stores – whether brick-and-mortar, online, or both. In addition, we have placed loose moissanite jewels and finished jewelry inventory with select domestic distributors on a consignment basis. We continue to evaluate our channel strategy for domestic distributors, which may result in a change to our historical domestic distributor methods and partners.

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International Manufacturers and Distributors – In order to create global awareness and exposure for our gemstones, jewelry, and brands, we sell loose moissanite jewels and finished jewelry featuring moissanite to international wholesale distributors and finished jewelry manufacturers at distributor prices, that in turn set them in mountings and sell them to retailers, sell them through their own e-commerce sites, or resell the loose jewels at a markup to independent jewelers and jewelry stores in their local markets. We currently have more than 15 international wholesale distributors covering portions of Canada, the UK, Western Europe, Australia and New Zealand, Southeast Asia, the Middle East, and China. In addition, we have placed loose moissanite jewels and finished jewelry inventory with select international distributors on a consignment basis. We continue to evaluate our channel strategy for international distributors, which may result in a change to our historical international distributor methods and partners. A portion of our international sales consists of finished jewels sold internationally that may be re-imported to U.S. retailers.

For a discussion of our largest customers for 2017the fiscal years ended June 30, 2021 and 2016,2020, see Note 14 “Major Customersto our consolidated financial statements in Item 8, “Financial Statements and ConcentrationSupplementary Data”, of Credit Risk”, in the Notes to the Consolidated Financial Statements.this Annual Report on Form 10-K.

Seasonality

Sales in the retail jewelry industry are typically seasonal due to increased consumer purchases during the calendar year-end holiday season.season and during other holiday periods such as Valentine’s Day, St. Patrick’s Day, and Mother’s Day. Because historically we have primarily sold our loose moissanite jewels and finished jewelry featuring moissanite, and now more recently sell gemstones and finished jewelry featuring our premium lab grown diamonds, at wholesale pricing to distributors, manufacturers, and retailers, our sales to support the holiday season have largely taken place during the third and beginning of the fourth calendar quarters, depending on the sales channel and the level of advanced planning and production our customers undertook. However, the effect of seasonality on our business is also impacted by the timing of orders we receive to support new or expanded distribution and the level of current inventory positions held by our customers. In recent years, excluding one-time sales events from time to time throughout the year, we have experiencedexperience a higher degree of seasonality in the fourth calendar quarter than we have experienced in prior years primarily as a result of the increased calendar year-end holiday season sales to end consumers through our growing direct-to-consumer e-commerce website, charlesandcolvard.com and as a result of increased sales through our Online Channels segment.segment. In future periods, as direct to consumer sales of our finished jewelry featuring both moissanite and lab grown diamonds increase to retailers and directly to consumers,– both in dollars and as a percentage of total sales – we anticipate a seasonality trend more typical with the retail jewelry industry, and these factors may significantly affect our results of operations in a given quarter.

Change in Fiscal Year-End

On January 30, 2018, our Board of Directors approved a change in our fiscal year from a fiscal year beginning on January 1 and ending on December 31 of each year to a fiscal year beginning on July 1 and ending on June 30 of each year. This change in our fiscal year-end enables management to shift its annual planning and budgeting process away from the holiday season, so that management’s focus during that time is on revenue-generating opportunities with customers. This change to the fiscal year reporting cycle will begin July 1, 2018. As a result of the change, we will have a six-month transition period from January 1, 2018 to June 30, 2018. During this period, we plan to file our results for the three-month period ending March 31, 2018 in our Quarterly Report on Form 10-Q for the quarter ending March 31, 2018 and to file a transition report with our results for the six-month period ending June 30, 2018 on Form 10-KT with the SEC.
Moissanite

Over 120 years ago, Nobel Prize-winning chemist, Henri Moissan, Ph.D., first discovered the extremely rare mineral silicon carbide, or SiC in a meteorite crater in Arizona. Over a century after the discovery of SiC, and after years of experimentation, researchers from the Research Triangle Park in North Carolina developed and patented a thermal growing process for creating pure SiC crystals in a controlled laboratory environment. This long-sought-after breakthrough made possible the world’s first lab-created moissanite gemstone – posthumously named after its discoverer. With hardness rivaling any mineral on earth, and optical properties exceeding all mined and created gemstones, we believe moissanite is a brilliant new type of jewel that is free from environmental and ethical issues, and capable of disrupting traditional definitions of fine jewelry.

Naturally-occurringNaturally occurring moissanite is generally very small in size, dark green or black in color, and not a commercially viable source of gemstone material. Therefore, in order to create high quality moissanite material in desirable colors and across a range of carat sizes that will appeal to a consumer audience, we expect only lab-grown SiC crystals to provide a sustainable source of moissanite for gemstones. In addition to carat size, important characteristics of a gemstone are beauty, durability, and rarity. The beauty of a colorless or near-colorless and colorless gemstone is characterized by its color, brilliance, and fire. The brilliance of a gemstone is measured by its refractive index, or the extent to which, when coupled with the facet design, the gemstone reflects light. The fire of a gemstone, or the breaking of light rays into spectral colors, is measured by its dispersion. Durability is determined by a gemstone’s hardness, or resistance to scratching and toughness, or resistance to chipping or cleaving. Rarity is the availability or perceived availability of a gemstone.

Moissanite jewels have a unique combination of brilliance, fire, durability, and rarity.

The following table compares the physical properties of moissanite jewels with other fine gemstone materials, including lab grown diamonds:

Description 
Refractive
Index
  Dispersion  
Hardness (1)
 Toughness
Charles & Colvard Created Moissanite®
  2.65-2.69   0.104   9.25 – 9.5 
Excellent
Diamond (including mined and lab grown diamonds)
  2.42   0.044   10 
Good to
Excellent (2)
Ruby
  1.77   0.018   9 
Excellent (3)
Sapphire
  1.77   0.018   9 
Excellent (3)
Emerald
  1.58   0.014   7.50 
Poor to Good

(1) For purposes of this table, “hardness” is based on the Mohs Scale, which is a relative scale only. Quantitative comparisons of different gemstone materials cannot be made directly using the Mohs Scale. Moissanite jewels, while harder than all other known gemstones, are approximately one-half as hard as diamond.
(2) In cleavage direction, toughness is “good”.
(3) Except twinned stones

Sources: Gemological Institute of America, Gem Reference Guide for GIA Colored Stones, Gem Identification and Colored Stone Grading Courses 32-35, 65-82, 87-90 (1995); Cornelius S. Hurlburt, Jr. & Robert C. Kammerling, Gemology 320-324 (2d Ed. 1991); Kirk-Othmer, Encyclopedia of Chemical Technology 524-541 (5th Ed. 2004); Institution of Electrical Engineers, Properties of Silicon Carbide (Gary L. Harris, Ed., 1995); Robert Webster, Gems: Their Sources, Descriptions and Identification, 889-940 (5th Ed. 1994); W. von Muench, Silicon Carbide in Landolt-Börnstein - Numerical Data and Functional Relationships in Science and Technology, New Series, Group III, Vol. 17C, pp. 403-416 and 585-592 (M. Schultz and H. Weiss, Eds., 1984); Kurt Nassau, Shane F. McClure, Shane Ellen & James E. Shigley, Synthetic Moissanite: A New Diamond Substitute, Gems & Gemology, Winter 1997, 260-275; Kurt Nassau. Moissanite: A New Synthetic Gemstone Material, Journal of Gemology, 425-438 (1999); Mindat.org (a project of the Hudson Institute of Technology), “Moissanite” (https://www.mindat.org); and Wikipedia.org, “Moissanite” (https://en.wikipedia.org/wiki/Moissanite).

Moissanite’s beauty is objectively derived from its refractive index, which is higher than any other gemstone, including diamond. And its hardness is greater than all minerals, and all known gemstone materials with the exception of diamond. As a result, moissanite jewels, like diamond, can be cut with sharp, well-defined, and highly polished facets that accentuate their brilliance and fire. The cutting specifications (facet arrangement and proportions) for moissanite jewels are different than any other gemstone and designed to maximize the brilliance and fire of the raw material.

We evaluate the finished jewelsgems to exacting standards with automated video-imaging equipment using internal and specially trained quality control personnel.independent third-party certified gemologists. Due to the rare natural occurrence of moissanite and both the proprietary and technical limitations in producing mass quantities of gem-grade moissanite, we believe that moissanite is among the rarest of jewels.

Lab Grown Diamond

Lab grown diamond materials have been synthesized since the early 1940s and eventually made their way into industrial applications during the next decade. Originally, this process was used mainly for producing diamond products used in industrial applications such as for diamond-tipped drill bits and commercial-grade abrasives as well as products used for unique specialized surgical equipment within the medical field. In 1955, scientists discovered a way to duplicate the conditions in a laboratory setting under which diamonds naturally develop. Inside a high-pressure cell, carbon atoms are subjected to intense heat and pressure, until the atoms grow and crystalize on seed crystals as a man-made diamond. More recently, an advanced technological method for creating diamonds, known as chemical vapor deposition, or CVD, mimics the method of natural diamond formations. CVD uses extreme pressure and a heated mixture of methane and hydrogen to produce gemstone quality lab grown diamonds that are used in the fine jewelry industry. Lab grown diamonds are cut and polished in the same manner as natural diamonds, producing identically optical, physical, and chemical properties as their mined diamond counterpart. The gemstone physical properties table set forth above denotes the range of physical attributes that are consistent for both mined and lab grown diamonds.

Many misconceptions exist surrounding lab grown diamonds. The following table comparesmost-asked question we receive regarding lab gown diamonds is whether or not lab grown diamonds are considered to be real diamonds. In response to this question, we unequivocally believe that lab grown diamonds are 100% real. We contend that the main difference between lab grown diamonds and those that are mined is simply the origin of the diamond itself. The critical characteristics of a diamond, those being its appearance, its chemical composition, and its physical properties of moissanite jewels with other fine gemstone materials:are exactly the same in both a diamond that is mined versus one that is grown in a laboratory. A lab grown diamond can only be distinguished from natural diamonds using specialized equipment that can detect the minor differences in trace elements and crystal growth.

Description 
Refractive
Index
  Dispersion  
Hardness (1)
 Toughness
Charles & Colvard Created Moissanite®
  
2.65-2.69
   
0.104
   
9.25 – 9.5
 Excellent
Diamond  
2.42
   
0.044
   
10
 
Good to Excellent (2)
Ruby  
1.77
   
0.018
   
9
 
Excellent (3)
Sapphire  
1.77
   
0.018
   
9
 
Excellent (3)
Emerald  
1.58
   
0.014
   
7.50
 Poor to Good

(1) For purposes of this table, “hardness” is based on the Mohs Scale, which is a relative scale only. Quantitative comparisons of different gemstone materials cannot be made directly using the Mohs Scale. Moissanite jewels, while harder than all other known gemstones, are approximately one-half as hard as diamond.
(2) In cleavage direction, toughness is “good”
(3) Except twinned stones

Sources: Gemological Institute of America, Gem Reference Guide for GIA Colored Stones, Gem Identification and Colored Stone Grading Courses 32-35, 65-82, 87-90 (1995); Cornelius S. Hurlburt, Jr. & Robert C. Kammerling, Gemology 320-324 (2d Ed. 1991); Kirk-Othmer, Encyclopedia of Chemical Technology 524-541 (5th Ed. 2004); Institution Of Electrical Engineers, Properties of Silicon Carbide (Gary L. Harris, Ed., 1995); Robert Webster, Gems: Their Sources, Descriptions and Identification 889-940 (5th Ed. 1994); W. von Muench, “Silicon Carbide” in Landolt-Börnstein Numerical Data and Functional Relationships in Science and Technology, New Series, Group III, Vol. 17C, pp. 403-416 and 585-592 (M. Schultz and H. Weiss, Eds., 1984); Kurt Nassau, Shane F. McClure, Shane Elen & James E. Shigley, “Synthetic Moissanite: A New Diamond Substitute”, Gems & Gemology, Winter 1997, 260-275; Kurt Nassau. “Moissanite: A New Synthetic Gemstone Material”, Journal of Gemmology, 425-438 (1999); Mindat.org, “Moissanite” (https://www.mindat.org/min-2743.html); and Wikipedia, “Moissanite” (https://en.wikipedia.org/wiki/Moissanite).

Products and Product Development

Moissanite jewelsJewels

Historically, Charles & Colvard primarily sold near-colorlesslegacy moissanite jewels including Forever ClassicTM™ and Forever Brilliant®. We continue to offer these products in a variety of shapes including round, square brilliant, princess, cushion, radiant, pear, marquise, heart, and oval, among others, in sizes ranging from approximately 1.3 to 12 millimeters (approximately 0.008 to 5.3 carats). In 2015, we announced availability of our premier product, the first colorless moissanite jewel, Forever OneTM™, which grades from colorless (D-E-F) to near-colorless (G-H-I) using the Gemological Institute of America’sGIA’s color grading scale. Our limited launch was met with great enthusiasm from channel partners and consumers. In response to this demand, we continue to expand our Forever OneTM™ product line with additional shapes and sizes. Today, we offer Forever OneTM™ in 1427 cuts, and a multitude of sizes ranging from melee accent stones as small as .0050.002 carats to gemstones up to 6.13 carats, and our recently-released Exoticsline of products that are as large as 15.55 carats diamond equivalent weight, (“DEW”)or DEW.

In May 2018, we announced the availability of a new grade of gemstone, Moissanite by Charles & Colvard®. We believe that, with the exception of our own colorless moissanite jewel, Forever One™, our latest gemstone is a cut above other moissanite on the market. The distinction between Forever One™ and Moissanite by Charles & Colvard® is made through our applied expertise throughout the design and manufacturing process summarized below and described in more detail in “Manufacturing and Quality Assurance”. We believe that due to the discerning approach we take to ensure the quality of Forever One™, it remains far above any other offering available today. By closely evaluating clarity, color, and cut, we are able to determine which gemstones meet our exemplary standards for Forever One™, and those that fit within one of the classifications for our multiple grade Moissanite by Charles & Colvard® gemstones.

Our manufacturing process starts with SiC material primarily manufactured by Cree through its patented process. This proprietary growing process creates a SiC material that is nearly free of micropipes – a type of inclusion sometimes found in lab-grown SiC material. However, based on the terms of the amended Supply Agreement with our strategic partner, we are permitted to purchase certain amounts of SiC materials from third parties under limited conditions. Either way, the SiC material comes to us as a boule, or a formed mass, that has the atomic structure of a single crystal. After beginning our manufacturing process, each boule is carefully inspected by our certified gemologists to ensure it meets our minimum standards for Charles & Colvard Created Moissanite® gemstones, including those for clarity and color grades. The products that meet appropriate minimum quality standards move forward on the journey to become our Charles & Colvard Created Moissanite® gemstones. From this point, as the product continues to move through our manufacturing process, it is subjected to further processing steps, such as cutting, faceting, and finishing. At the end of our manufacturing process, it’s the clarity and color designation, coupled with further inspection by our certified gemologists regarding the quality levels of the cutting, faceting, and finishing processes, that will ultimately determine if the product becomes one of our premier Forever One™ gemstones or one our multiple grade Moissanite by Charles & Colvard® gemstones.

Moissanite finished jewelryFinished Jewelry

We began selling finished jewelry featuring moissanite in 2010. Our core designs includeincluded stud earrings, solitaire and three-stone rings, pendants, and bracelets. We are now selling an expanded selection of fashion-oriented, designer-inspired moissanite jewelry that we offer as an expansion to the core line of jewelry. The primary ingredientscomponents of our moissanite finished jewelry are loose moissanite jewels that we have on hand as part of our finished goods inventory, white, yellow, and rose gold settings, sterling silverprecious metal settings, and labor to mount the jewels into the settings.

In addition, we historically purchased fashion finished jewelry comprising base metals and non-precious gemstones for sale through Lulu Avenue®. This finished jewelry was fashion oriented and subject to styling trends that could change with each catalog season. The majoritySource of this finished jewelry was custom designed for us. We made limited purchases of fashion finished jewelry after the divestiture of our direct-to-consumer home party business on March 4, 2016.
Source ofMoissanite Raw Material

Our moissanite jewels are made from gem-grade SiC crystals. Our soleprimary supplier of SiC crystals is Cree, Inc., or Cree with which we have certain exclusive supply rights for SiC crystals to be used for gemstone applications. In addition, based on the terms of the Supply Agreement with Cree, as amended, described below, we are permitted to purchase certain amounts of SiC materials from third parties under limited conditions. We source the metals used for our finished jewelry, including white, yellow, and rose gold, platinum, tantalum, and sterling silver, from a number of domestic and international manufacturers located in the U.S, U.S., China, India, Mexico, Hong Kong, Vietnam, or Hong Kong.Portugal. In line with our goal of providing socially and ethically-sourcedethically sourced products, we require suppliers to adhere to our stringent supplier guidelines, as well as to certify that their gold isand tantalum are coming from conflict free sources and that all precious metals supplied to us are responsibly sourced.

Exclusive Supply Agreement with Cree

On December 12, 2014, we entered into a newan exclusive supply agreement with Cree, or the Supply Agreement, which superseded and replaced our prior agreement with Cree. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement willwas scheduled to expire on June 24, 2018. Effective June 22, 2018, unless extended by the parties. Accordingly, we are reviewing various alternativesSupply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement was also amended to (i) provide us with respect to our purchase of SiC material, including whether to exercise our unilateralone option, subject to certain conditions, to renewunilaterally extend the term of the Supply Agreement for an additional two-year period.period following expiration of the initial term; (ii) establish a process by which Cree may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products; and (iii) 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 written agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Cree has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions.

We believe that our Supply Agreement with Cree, which holds the U.S. patent for micropipe-free silicon carbide material and the related method of manufacture, provides us a superior quality core material above all other moissanite and one that possesses an unrivaled level of gemstone clarity. We also believe that the terms and conditions contained within the amended Supply Agreement are overall more favorable when compared with those in the Supply Agreement prior to the amendments. Our total purchase commitment under the Supply Agreement, as amended, until June 20182025 is dependent uponapproximately $52.95 million, of which approximately $32.85 remains to be purchased as of June 30, 2021.

For more information regarding the size of the SiC material and ranges between approximately $29.60 million and approximately $31.50 million. As of December 31, 2017,second amendment to our remaining purchase commitment through June 2018 under the Supply Agreement, rangesexecuted on August 26, 2020, see Note 10 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

Lab Grown Diamonds

On September 14, 2020, we announced our expansion into the lab grown diamond product market with the launch of Caydia®, an exclusive brand of premium lab grown diamonds. Our Caydia® lab grown diamonds are hand selected by our GIA certified gemologists to meet Charles & Colvard’s standards and validated by independent third-party experts. Our Caydia® lab grown diamonds are available currently in E, F, and G color grades (based on the GIA’s color grading scale) with a minimum clarity in accordance with the GIA’s VS1 clarity classification along with excellent cut, polish, and symmetry. All of our Caydia® lab grown diamonds are set with responsibly sourced precious metals.

Lab Grown Diamond Finished Jewelry

We began offering finished jewelry featuring our Caydia® premium lab grown diamonds in September 2020. In addition to our core designs that include stud earrings, solitaire and multiple-gemstone rings, pendants, and bracelets, we are also selling a curated assortment of designer inspired luxury fashion finished jewelry featuring our Caydia® premium lab grown diamonds. The primary components of our Caydia® lab grown diamond finished jewelry are loose lab grown diamond jewels that we have either (i) purchased and have on hand from approximately $5.15 milliona core select group of lab grown diamond suppliers, manufacturers, and finishers or (ii) purchase directly from the same select group of lab grown diamond suppliers, manufacturers, and finishers for assembly with responsibly sourced precious metal settings that includes the cost of labor to approximately $7.05 million.mount the lab grown diamond jewels into the settings.

Sources of Lab Grown Diamond Raw Material

Our premium lab grown diamonds are made by third-party manufacturers from what we believe is the most technologically advanced method for laboratory created gemstone quality diamonds used in the fine jewelry industry. We purchase our lab grown diamonds from established domestic suppliers that comprises a supply chain, which we believe has proven to meet our rigid and quality certified standards and timelines to meet our inventory supply needs. We source the metals used for finished jewelry set with our Caydia® lab grown diamonds, including white, yellow, and rose gold, platinum, tantalum, and sterling silver, from a number of domestic and international manufacturers located in the U.S., China, India, Mexico, Hong Kong, Vietnam, or Portugal. In line with our goal of providing socially and ethically sourced products, we require suppliers to adhere to our stringent supplier guidelines, as well as to certify that their gold and tantalum are coming from conflict free sources and that all precious metals supplied to us are responsibly sourced.

Intellectual Property

We held a number of U.S. product and method patents for moissanite jewels that expired during 2015, under which we had broad, exclusive rights to manufacture, use, and sell moissanite jewels in the U.S. We held these same patents in 25 foreign jurisdictions, primarily across Asia and Europe, that expired in the third quarter of 2016, and will expirewith one remaining in Mexico that expired in Fiscal 2021. In addition, we have certain trademarks and pending trademark applications that support our moissanite branding strategy. Additionally, we have certain issued design patents that we believe will differentiate our products in the gemstone and jewelry industry. Since the expiration of our patents, we have noted new providers of moissanite entering the market. We know how challenging it is to create high-quality moissanite and anticipate it will take emerging providers significant time and investment to bring meaningful and competitive products to market. As we experienced ourselves, we anticipate it will take these new providers significant time to evolve from producing low-end moissanite to delivering high-quality gemstones in the colorless or near-colorless range. Achievingachieving the capacity to consistently produce a high-quality moissanite product at mass scale requires a careful balance of silicon carbide-specificSiC-specific faceting skills and a well-tuned global supply chain. Therefore, in the foreseeable future, we do not anticipate significant direct moissanite competition in our superior quality gemstone ranges in the foreseeable future.with consistent production volumes.

Our success and our ability to compete successfully depends in part upon our proprietary technology. In addition to our remaining internationaldesign patents, we rely on trade secret laws and employee, consultant, and customer confidentiality agreements to protect certain aspects of our technology. We currently are not subject to any claims that our products or processes infringe on the proprietary rights of third parties. At the present time, we are also dependent on Cree’s technology for the production of SiC crystals.

Manufacturing and Quality Assurance

Moissanite jewelsJewels

The production of Charles & Colvard Created Moissanite® jewels is an elaborate process developed over a number of years of collaborative research and development, acquired and learned knowledge from scientists, and considerable investment expense.
Following are the key steps involved in the manufacturing processes of our moissanite jewels:

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Growing gem-grade raw SiC crystals;

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Manufacturing rough preforms;

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Faceting and polishing jewels;

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Inspecting, sorting, and grading; and

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Engraving.

Growing gem-grade rawGem-Grade Raw SiC crystals –Crystals. SiC crystal growth suitable for gem-grade usage at commercial quantities is proprietary both in design and in operational methodology. Cree has grown the majority of our SiC crystals in accordance with the terms of the Supply Agreement. We routinely evaluate the yield and quality of saleable moissanite jewels from SiC crystals. The yield of saleable jewels from each crystal is one of the most significant factors affecting the volume and cost of moissanite jewels available for sale. Yield is dependent on the quality of the crystals, and variations in crystal quality can adversely affect our gross margin percentage.

Manufacturing rough preforms –Rough Preforms. We have made considerable investment in the design, development, and customization of a proprietary manufacturing process that includes equipment, software, and procedures to maximize raw material yield. The result is production of intermediary shapes, called “preforms,” that vary depending upon the size and shape of the desired finished jewel. We continueCurrently, we are not spending research and development funds in connection with these processes. However, when potential technology aligns with our production business model, we intend to explore and potentially invest in such research and development resources to improve raw material yield, including studying alternate preform shapes and cutting technologies, due to the dramatic effect such an improvement could have on our gross margin percentage.

Faceting and polishing jewels –Polishing Jewels. Each preform is faceted and polished by our independent third-party gem-cutters to create what we believe to be our uniquely faceted Revolutionary Cut™ gemstones based on master designs with multiple quality control measures built into the process. Gem-cutter training is a regimented program involving several months of progressive hands-on bench training. As we continue to expand the assortment of Forever One™, we will continue the process of certifying additional cutters to ensure sufficient scalability of our production capabilities to meet anticipated demand for this premium finished jewel.

Inspecting, sorting,Sorting, and grading –Grading. Similar to other gemstones, each faceted moissanite jewel greater than 2.53.5 millimeters in size is individually graded against established master standards using our specially trained personnel. Additionally, as part of our overall quality assurance program, a representative sample from each batch of jewels is submitted to an image analyzer to ensure critical angles and other attributes designed to maximize moissanite’s optical properties are consistently maintained. This phase of manufacturing is relatively labor-intensive and requires skills not readily available in the general work force. In the future, we may elect to outsource certain portions of this stage of the manufacturing process to independent third parties that we will require to adhere to our rigorous quality control and monitoring standards.

EngravingEngraving. – For moissanite gemstones overthat are four millimeters and larger in size, with certain exceptions Charles & Colvard laser inscribes an identifying code on the girdle of each gemstone.Forever One™ and Moissanite by Charles & Colvard® gemstone that includes the Charles & Colvard Floret logo. This identifier matches a grading standard and is an important element in protecting the integrity of Charles & Colvard Created Moissanite® and ensuring the customer an authentic Charles & Colvard gemstone.

Moissanite Finished jewelryJewelry

Our line of finished jewelry featuring moissanite is developed by a team of industry experts integrating our moissanite jewels into many forms of jewelry, generally made of precious metals, either designed or purchased by us utilizing a core group of suppliers, manufacturers, and finishers. In addition to our Limited Lifetime Warranty offered on our moissanite jewels, we provide a 12-monthtwelve-month Limited Warranty on all finished jewelry featuring our moissanite.moissanite, and on jewelry designs that do not contain our moissanite gemstones, such as men’s wedding bands.

Our prior line of fashion finished jewelry, comprised of base metals and non-precious gemstones for sale through Lulu Avenue®, was either designed exclusively for us and manufactured to our specifications or purchased from a core group of suppliers and manufacturers. We made limited purchases of fashion finished jewelry after the divestiture of our direct-to-consumer home party business on March 4, 2016.
All procured finished jewelry components are sourced from our approved suppliers, and each finished jewelry item is jobbed and/or tracked by stock keeping unit, (“SKU”),or SKU, utilizing our enterprise resource planning system. The components of moissanite finished jewelry comprised in each job are then manufactured into finished jewelry by assemblers either in the U.S. or internationally in China, India, Mexico, Hong Kong, Vietnam, or Hong Kong.Portugal. We are continuously working with our existing manufacturing partners, as well as identifying new manufacturing partners, to expand our assortments and efficiencies.

All finished jewelry produced by Charles & Colvard undergoes a multi-point inspection process. A representative sampling of manufactured finished jewelry items undergoes stone and metals testing to ensure that the items for sale are of the quality that we strive to maintain. Also, in line with our goal of providing socially and ethically-sourcedethically sourced products, we require suppliers of our gold and tantalum to certify that the gold and tantalum is coming from conflict free sources and that all precious metals supplied to us are responsibly sourced. If required by government ordinance or requested by a customer, we facilitate the inspection of our finished jewelry by internationally recognized testing facilities to comply with legal requirements and to ensure consumer confidence.

Lab Grown Diamonds

To ensure a premium lab grown diamond product standard, the quality assurance process for our purchased Caydia® gemstones, which are 0.5 Carat Total Weight, or CTW, and above, are individually hand selected by our GIA certified gemologists to meet our strict and uncompromising quality standards. The product quality and gemstone physical characteristics of each lab grown diamond we purchase are also validated by independent third-party gemology experts. Each lab grown diamond is accompanied by an official document that contains a unique prescribed and registered serial number that denotes such certification of qualification and authenticity.

Lab Grown Diamond Finished Jewelry

Our line of finished jewelry featuring our Caydia® lab grown diamonds is developed by a team of industry experts integrating our premium lab grown diamonds into many forms of jewelry, generally made of responsibly sourced precious metals, either designed or purchased by us utilizing a core group of suppliers, manufacturers, and finishers. We provide a twelve-month Limited Warranty on all finished jewelry featuring our Caydia® lab grown diamonds.

All procured finished jewelry components featuring our Caydia® lab grown diamonds are sourced from our approved suppliers, and each finished jewelry item is jobbed and/or tracked by stock keeping unit, or SKU, utilizing our enterprise resource planning system. The components of our Caydia® lab grown diamonds finished jewelry comprised in each job are then manufactured into finished jewelry by assemblers either in the U.S. or internationally in China, India, Mexico, Hong Kong, Vietnam, or Portugal. We are continuously working with our existing manufacturing partners, as well as identifying new manufacturing partners, to expand our assortments and efficiencies.

All finished jewelry featuring our Caydia® lab grown diamonds produced by Charles & Colvard undergoes a multi-point inspection process. A representative sampling of manufactured finished jewelry items undergoes stone and metals testing to ensure that the items for sale are of the quality that we strive to maintain. Also, in line with our goal of providing socially and ethically sourced products, we require suppliers of our gold and tantalum to certify that the gold and tantalum is coming from conflict free sources and that all precious metals supplied to us are responsibly sourced. If required by government ordinance or requested by a customer, we facilitate the inspection of our finished jewelry by internationally recognized testing facilities to comply with legal requirements and to ensure consumer confidence.

Each finished jewelry product we sell, which is set with our Caydia® gemstones, is inspected by our in-house GIA certified gemologists and quality assurance specialists prior to shipment to the end-consumer from our own fulfillment center in Research Triangle Park, North Carolina. The registered certificate of authenticity accompanies each Caydia® gemstone or finished jewelry set with Caydia® lab grown diamonds when shipped to the end consumer. All of our Caydia® lab grown diamonds are set with mostly recycled precious metals.

Working Capital Practices

Our primary source of working capital is cash on hand and cash generated by our operations. As global and U.S economic activity continues evolving in response to the ongoing COVID-19 pandemic, the risk of constraints on our cash and working capital, including experiencing potential liquidity challenges, remains in the forefront of our working capital management practices. Despite our cost-saving efforts, many business and operating expenses have remained flat or continued to rise. Cash flow management will remain crucial for our business in the months ahead and we intend to monitor fluctuations in our revenues that could impact our ongoing cash flow from operations. We expect to remain proactive in managing our inventory levels given the uncertainty in the worldwide supply chain, which may also place further demands on our level of working capital. Because we have a quarterly minimum purchase commitmentcommitments under the Supply Agreement, we may be required to purchase SiC materials in excess of our immediate needs from time to time, which may result in inventories that are higher than we might otherwise maintain.

We have an effective shelf registration statement on Form S-3 on file with the SEC that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period.  Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of the COVID-19 pandemic.

In June 2019, we completed an underwritten public offering of 6,250,000 shares of our common stock at a price of $1.60 per share, which, together with the partial exercise of the underwriters’ over-allotment option for an additional 630,500 shares in July, resulted in aggregate net proceeds of approximately $9.99 million, net of the underwriting discount and fees and expenses.

Payment terms on trade receivables for our Traditional segment customers are generally between 30 and 12090 days, though we may offer extended terms with specific customers and on significant orders from time to time. We extend credit to our customers based upon a number of factors, including an evaluation of the customer’s financial condition and credit history that is verified through trade association reference services, the customer’s payment history with us, the customer’s reputation in the trade, and/or an evaluation of the customer’s opportunity to introduce our moissanite jewels and lab grown diamonds or finished jewelry featuring both moissanite and lab grown diamonds to new or expanded markets.

Our returnreturns policy for certain customers inconsumers on our Online Channels segmentcharlesandcolvard.com and moissaniteoutlet.com websites provides for the return of purchases for any reason generally within 60 days and 30 days, respectively, of the shipment in accordance with our warranty policy as disclosed on the charlesandcolvard.com website.date. Our returnreturns policy for all other customers in our Online Channels segment (excluding those of charlesandcolvard.com) and those in our Traditional segment allows for the return of moissanite jewels, lab grown diamonds, and finished jewelry for credit generally within 30 days of shipment if returned for a valid reason. We have established an allowance for returns based on our historical return rate, which takes into account any contractual return privileges granted to our customers. Periodically, we ship loose jewel goods,gemstones and finished jewelry goods, and finished goods inventory to Traditional segment customers on consignment terms. Under these terms, the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year.

Competition

As competitive moissanite makes its wayand lab grown diamonds expand and grow their global market presence, we believe that it is important to market, there is no more important time than now to confirmaffirm Charles & Colvard’s leadership position as a provider of the premier worldwide moissanite provider andgemstone as well as an exclusive brand of premium lab grown diamonds. Moving forward, we believe that we are well positioned to further establish our presence for both of our product lines in the worldwide emerging markets. We also believe our leadership position in these global markets is a product of over 20more than 25 years of moissanite innovation and as a purveyor of fine jewelry.

Accordingly, we believe our competitive advantage is bolstered by the following strengths:


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Our exclusive SiC crystal supply agreement with Cree, which holds the U.S. patent for micropipe-free silicon carbide material and the related method of manufacture. We believe this core material empowers Charles & Colvard to rise above all other moissanite with an unrivaled level of gemstone clarity.

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Our mature supply chain, which we believe enables us to seamlessly manage the complex manufacturing process of bothWith our moissanite gemstones and the varied jewelry options we deliver to a global audience.

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Our global distribution network, which we have optimized for timely delivery of everything from singular consumer orders to bulk distribution orders.
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Our significant inventory supply, which we believe positions us to meet the just-in-time needs of our distribution partners. We believe having inventory on the shelf is paramount to delivering for our customers as their demand dictates.

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Over 20 years of innovation and continuous improvement of our moissanite gemstone. With Forever OneTM™, gemstones, we believe that we have achieved a level of perfection that is rarely seen in any gemstone – featuring colorless grades with an innovative cut that we believe reveals optical properties unrivaled by any other jewel. This pinnacle of our legacy production process is the outcomeresult of continual improvement and a demonstration of our artisan craft.craftsmanship. Additionally, we believe that with our Moissanite by Charles & Colvard® gemstones we have brought forward a price-conscious alternative to competitive moissanite that we believe exceeds the quality of competitive moissanite – specifically in terms of clarity, as well as in cut and polish. The distinction between Forever One™ and Moissanite by Charles & Colvard® is made through our applied expertise throughout the design and manufacturing processes and the discerning approach we believe we take to ensure the quality of Forever One™ remains above any other offering available today. By closely evaluating clarity, color, and cut, we are able to determine which gemstones meet our exemplary standards for Forever One™ and those that should bear the Moissanite by Charles & Colvard® name.


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With our success in developing and promoting Caydia®, our exclusive brand of lab grown diamonds, since September 2020 we believe that we have been able to demonstrate that we are able to successfully integrate and market these premium gems into fine jewelry finished products.

With an exclusive SiC crystal Supply Agreement with Cree, which holds the U.S. patent for micropipe-free silicon carbide material and the related method of manufacture, we believe this core raw material empowers Charles & Colvard at a level that allows us to rise above all other moissanite products with an unrivaled level of gemstone clarity.

With our mature and innovative supply chain, while we have experienced instances of suppliers temporarily closing their operations, delaying order fulfillment needs or limiting their production as a result of the impact of the COVID-19 pandemic, we utilized alternative supply arrangements with partners whose businesses were able to successfully navigate the impact of the ongoing pandemic. Accordingly, we believe that we have remained able to seamlessly manage the complex manufacturing process of our moissanite gemstones, meet the marketing demand and distribution needs of our lab grown diamond product line, and the varied finished jewelry options featuring both of these lab created gemstones we deliver to a global audience.


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With management’s vast experience in the worldwide fine jewelry industry, we likewise believe that we have been able to build a creative and dependable supply chain for our Caydia® product line. We believe this approach that was built on these many years of experience has proven to be successful as we continue building our brand and expanding this line of fine jewelry set with our exclusive brand of lab grown diamonds.

With an established direct-to-consumer e-commerce presence on our own mature transactional website, charlesandcolvard.com, coupled with the roll-out this fiscal year of our secondary transactional website, moissaniteoutlet.com, we believe we are able to leverage established consumer-driven online communication channels directly with our target audiences. We also believe that we have developed an innovative in-house digital marketing capacity to support both of our online digital marketing properties.

With an established global distribution network encompassing our own ability and that of our retail business partners, and notwithstanding the ongoing impact of the COVID-19 pandemic, we continue to believe that we have optimized this network for timely delivery of our products from unique consumer orders to bulk distribution orders.

With our significant inventory and an established supply chain, we believe we are positioned to meet the just-in-time needs of our distribution partners. We believe having inventory quantities on the shelf is paramount to meeting the challenging delivery requirements of our customers. As we continue to balance our response to the COVID-19 pandemic, we expect to effectively manage our inventory levels given the potential uncertainty in consumer demand and in our supply chain.

With our above strengths outlined, it is also important to note that our future competitive success is reliant, in part, on the following:


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our ability to continue our relationship with CreeOur continued success in order to sustain our supplydeveloping and promoting the Charles & Colvard brands, such as Forever One™, Moissanite by Charles & Colvard®, and Caydia®, all of high-quality SiC crystals;which are used in finished fine jewelry featuring moissanite and lab grown diamonds, resulting in increased interest and demand for moissanite and lab grown diamond jewelry at the consumer level;


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ourOur ability to differentiate Charles & Colvard Created Moissanite® and Caydia®from competing gemstone products, making their way to market;including competitive moissanite and the rapidly emerging lab-created diamond industry;

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

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our ability to understand the consumer market segment and effectively market to them a compelling value proposition that leads to converted customers;
Our continued ability and the ability of manufacturers, designers, and retail jewelry partners to select jewelry settings that promote and encourage consumer acceptance of and demand for our jewels and finished jewelry featuring moissanite and lab grown diamonds;

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our continued success in developing and promoting brands for our moissanite jewels and finished jewelry featuring moissanite, resulting in increased interest and demand for moissanite jewelry at the consumer level;
The ability to understand our consumer market segment and effectively sell a compelling value proposition to that market, which leads successfully to converted customers;

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


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


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

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

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

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our continued ability and the ability of jewelry manufacturers and retail jewelers to set loose moissanite jewels in finished jewelry with high-quality workmanship;

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our continued ability and the ability of retail jewelers to effectively market and sell finished jewelry featuring moissanite, including finished jewelry to consumers; and

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our ability to operationally execute the strategy for our Online Channels segment.

Competitive Gemstones and Jewelry

Gemstone materials can be grouped into three types:

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natural gemstone, which is found in nature;
Those found in nature, generally through mining techniques;

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synthetic gemstone, which has the same chemical composition and essentially the same physical and optical characteristics of natural gemstone but is created in a lab;
Synthetic gemstones, which have the same chemical composition and essentially the same physical and optical characteristics of natural gemstones but are created or grown in a laboratory; and

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simulated or substitute material, which is similar in appearance to natural gemstone but does not have the same chemical composition, physical properties, or optical characteristics.
Simulants, which are similar in appearance to natural gemstones but do not have the same chemical composition, physical properties, or optical characteristics.

Moissanite is a rare, naturally occurring mineral. Our lab-created gemstones, Charles & Colvard Created Moissanite®, are considered a synthetic version of the naturally occurring moissanite mineral. Our exclusive brand of premium lab grown diamonds, Caydia®, are also considered a synthetic version of a natural diamond that is mined.

Our moissanite jewels and lab grown diamonds compete with fine gemstones such as ruby, sapphire, emerald, and tanzanite as well as with mined natural synthetic, and treated diamonds as a synthetic gemstone.diamonds. We may also face competition from synthetic diamonds, synthetic diamond films, and other sources of synthetic moissanite not presently available in qualities, sizes, and volumes suitable for use as gemstones. Some suppliers of diamonds, including lab grown diamonds, and other fine gemstones, as well as the suppliers of other synthetic and simulatedlab-created gemstones, may have substantially greater financial, technical, manufacturing, and marketing resources and greater access to distribution channels than we do.
We believe A Diamond Is Forever® (which is a registered trademark of the De Beers Group of Companies) is one of the greatest marketing achievements, ever. Not only did the campaign persuade nearly four full generations that a diamond was the only true way to express love, but apparently it even made it taboo to spend less than three months’ salary to achieve what we believe is an artificially inflated value based on a throttled supply chain. Further, we believe it put marketing of any clear gemstone at a disadvantage due to people’s natural tendency to compare. However, as Millennials have entered the jewelry market with a new mindset of economic awareness, environmental responsibility and social consciousness, we believe the market opportunity has evolved. We believe moissanite – and specifically, Charles & Colvard – is primed to take advantage of the market in which people are actively looking for an alternative to diamond.

Competing with diamond

The worldwide market for large, uncut, high-quality natural diamonds is significantly consolidated and controlled by De Beers (headquartered in South Africa), Alrosa (Russia), Rio Tinto (Australia), and BHP (Canada). These companies have a major impact on the worldwide supply and pricing of natural diamonds at both the wholesale and retail levels. Diamond producers may undertake additional marketing or other activities designed to protect the diamond jewelry market against sales erosion from consumer acceptance of moissanite jewels. However, there are signs that the diamond industry is under pressure, with the De Beers Group of Companies recently reporting that the average price of goods sold to trade clients (consolidated sales) was $162 per carat. This is 13% lower than the average price achieved in 2016. We believe these indicators show a change in consumer confidence in the diamond trade.

We may also face competition from treated and synthetic diamonds. Treated diamonds, which are natural diamonds with imperfections or flaws that have been altered in some manner to enhance their appearance, have been available in the jewelry industry for the past several decades and are generally less expensive than diamonds of similar size, cut, and color that have not been altered. Synthetic diamonds are also available in the marketplace and are produced for jewelry applications available to consumers.

We have seen a recent emergence of new manufacturers of lab-grown diamonds that offer a product directly competitive with natural diamond; however, they are priced below that of natural diamond, and therefore compete with Charles & Colvard CreatedOther Moissanite®. Although we believe that colorless gemstone-quality synthetic and treated diamonds cannot presently be produced at prices competitive with those currently offered for our moissanite jewels, there can be no assurance that such competitive prices cannot be achieved in the future by the producers of any natural, synthetic or treated diamonds. The primary producers of synthetic diamonds used for industrial applications are Element Six (a member of the De Beers Group of Companies) and Sumitomo Electric Industries. There are also a number of Russian producers of synthetic diamonds for industrial uses. In addition, companies such as Diamonex (a Morgan Technical Ceramics Company) and Scio Diamond Technology Corporation are synthesizing diamonds in limited quantities, limited carat sizes, and in limited ranges of color. Synthetic diamond films can be grown at commercially viable prices in thicknesses that can be applied to various surfaces such as other synthetic materials.

Competing with other moissanite producers Producers

Although we believe that our moissanite jewels have a leadership market position, we are beginning to face competition from other companies that develop competing SiC material. These products are emerging primarily from Far Eastern countries and are making their way into the U.S. market. Our ongoing research of the competitive landscape has identified competing moissanite, primarily in the “E-F” and below color range, according to the Gemological Institute of America’sGIA’s grading scale. However, we have not yet identified competing moissanite that exhibits a consistent level of color, cut, clarity orand polish that is competitive with the quality of our Charles & Colvard Created MoissaniteForever One®™. gemstone.

We also have not identified newcompetitive sources that have exhibited the ability to supply a consistent and high volume of quality moissanite substantial enough to address the considerable consumption needs of distributors and retailers that serve the jewelry trade. Achieving the capacity to consistently produce a high-quality moissanite product at mass scale requires a careful balance of SiC-specific faceting skills and a well-tuned global supply chain. Therefore,

However, we are seeing a grade of moissanite material reaching the market that exhibits a lower color rating and/or lesser cut, clarity and polish standard compared to our Forever One™ gemstone. This inferior product is coming to market at competitive price points, and we have subsequently been experiencing downward pricing pressures from price-sensitive purchasing channels. In 2018, we entered this market with a value line of moissanite to compete directly with these lower grade moissanite products. Our product line, known as Moissanite by Charles & Colvard®, is a competitively priced line of gemstones that is fashioned from the same core material as our other created moissanite products. Finished gemstones that do not anticipate direct moissanite competition inmeet our superior quality gemstone rangesgrading standards for Forever One™ – but do meet our specifications for gemstones worthy of carrying the foreseeable future.Charles & Colvard name – are offered to the market at a value priced option. For the fiscal year ended June 30, 2021, approximately 15% of our revenue was generated from Moissanite by Charles & Colvard® gemstones and finished jewelry – we believe this percentage of revenue is validating the market for this value-priced product line.

1416
Competing with Lab-Grown Diamonds

Lab-created diamond material has been synthesized since the early 1940s and made its way into industrial processes by the 1950s. Common applications such as diamond-tipped drill bits and abrasive processes led the way, followed by uses in solid-state electronics. In more recent years, lab grown diamonds have become accepted as a form of gemstone with companies such as Diamond Foundry, Pure Grown Diamonds and Lab Diamonds Direct gaining notoriety in the market.

Consumer demand is driving the charge behind this recent adoption of lab grown gemstones in the modern global luxury fashion jewelry space. Today’s discerning consumer is seeking ethically sourced options, better price points, and authenticity in the brands they choose to engage. We believe the recent rise in interest for the lab created diamond has created an increased interest in the moissanite gemstone market. With the launch of our Caydia® product line, an exclusive brand of premium lab grown diamonds, we believe that our entry into the lab grown diamond market could be a potential threat to - and increase competition for - our core moissanite products. While our moissanite gemstones and finished jewelry set with moissanite generally have different price points than those with lab grown diamonds, including our Caydia® product line, any cannibalization of moissanite product sales resulting from sales of our lab grown diamonds could have an adverse impact on sales of our moissanite jewels and finished jewelry set with moissanite.

Since our entry into the lab grown diamond space, we have experienced growing traffic and interest in Charles & Colvard from the ongoing attention around lab-created gemstones. We may face future price point and consumer related demand pressures from the lab grown diamond industry. However, with current moissanite pricing averaging between 5% and 10% of mined diamond gemstones and between 20% and 25% of lab grown diamonds, we believe that for the foreseeable future we will continue to be able to serve and thrive in this segment of the market.

Competing with simulants and syntheticsMined Diamonds

WeThe worldwide market for large, uncut, high-quality mined diamonds is significantly consolidated and controlled by the De Beers Group of Companies, or De Beers (headquartered in South Africa), Alrosa Group (Russia), Rio Tinto Limited (Australia), and BHP Group Limited (Australia). These companies have a major impact on the worldwide supply and pricing of mined diamonds at both the wholesale and retail levels. While moissanite trades at a fraction of the cost of mined diamonds, diamond producers may undertake additional marketing or other activities designed to protect the mined diamond jewelry market against sales erosion from consumer acceptance of competing goods such as moissanite jewels.

Competing with Simulants

While moissanite is a synthetic gemstone (a lab-created version of the naturally occurring SiC mineral), we may also, to a lesser degree, face competition from existing diamond simulants and other syntheticsimulant gemstones, including cubic zirconia.zirconia and man-made crystals. Producers and sellers of these products may see the markets for these products being eroded by the market penetration of our moissanite jewels. We believe that the substantially lower price of these products is the primary basis upon which they will compete with our moissanite jewels; however, they are not considered fine gemstone or jewelry products.

Competing in the finished jewelry spaceFinished Jewelry Space

The global fine jewelry market competition is fierce. Such well-known jewelry designers and manufacturers as David Yurman, Tacori, Harry Winston, Tiffany & Co.James Allen®, Brilliant Earth, LLC, and Pandora,Blue Nile Inc., among others, have a variety of jewelry collections featuring diamond and other precious and semi-precious gemstones, and enjoy strong brand recognition and a loyal consumer following. These companies also have greater financial resources than we do to develop and market their products.

We intend to expand our market share and compete with these well-known brands primarily on the basis of the combination of quality, design, and value, as moissanite is the highest quality, affordable alternative available to more expensive gemstones such as diamond. We believe that focusing on the clear advantages in moissanite’s retail price points, especially in the one-carat and larger sizes, will provide a key point of differentiation and value proposition to the end consumer who may not have had the opportunity to previously purchase fine jewelry due to limitations in discretionary spending income.

In addition, we believe that the Charles & Colvard Created Moissanite® brand, in addition to other brands for bothsuite, including moissanite jewels includingsuch as Forever OneTM™and Moissanite by Charles & Colvard®, andalong with moissanite finished jewelry that we are developing pursuant to our marketing programs, mayas well as the line of finished jewelry featuring our Caydia® lab grown diamonds all combine to create what we believe is a long-term competitive advantage for our products as we buildcontinue building brand recognition. We endeavor to partner with recognized designers and jewelry companies, in addition to developing our own proprietary brands of finished jewelry. While our finished jewelry business is still developing, our goal is to build multiple strong brands sought after by the end consumer. We propose to focus our marketing efforts on emphasizing our attractive designs, coupled with moissanite’s exceptional brilliance, fire, durability, and rarity, to establish moissanite as a primary consumer choice in fine jewelry.

Our design, manufacture and marketing of finished jewelry featuring moissanite under exclusive brands for sale at wholesale pricing to distributors and retailers and at retail to end consumers through our charlesandcolvard.com and other online channelOnline Channels outlets may result in some of our current wholesale customers perceiving us as a competitor, despite our efforts to use primarily non-conflicting sales channels. As we continue to develop our finished jewelry business, we intend to increase distribution through new and existing channels similarly to how many other companies have executed cross-channel marketing and distribution strategies. Due to the size of the finished jewelry market, we believe that such sales channels can co-exist, with the overall end result being increased consumer and brand awareness of moissanite products and a corresponding increased demand for not only our products, but those of our distributor and manufacturer customers as well.

Competing with Lab Grown Diamond Retailers

Our primary competitors in the lab grown diamond retail market are James Allen®, VRAI by Diamond Foundry, Clean Origin LLC, and Brilliant Earth, LLC. Our offerings are curated to remove the complexity from the diamond buying process by selling only what we believe to be higher quality lab grown diamonds set in our finished jewelry products. Many of these competitors offer a wider quality grade range of lab grown diamonds which are sold separately from those set with lab grown diamonds in finished jewelry. We believe that our pricing strategy remains competitive based on the quality of the Caydia® lab grown diamonds that we offer and sell.

Government Regulation

We are subject to governmental regulations in the manufacture and sale of moissanite jewels and finished jewelry. In particular, in July 2018 the Federal Trade Commission, or FTC, has issued regulations andupdated guidelines governing the marketingdescription of synthetic gemstoneslab-grown diamonds and other gemstones similar to diamond that require such gemstones to be clearly identified as to the gemstone’s lab-grown origin in any promotional or marketing materials. In addition, the precious metal in our finished jewelry may be subject to requirements, which vary by country and by state, such as hallmarking and alloy content. While we have a policy to ensure compliance with applicable regulations, if our actions are found to be in violation of FTC or other governmental regulations, we may be required to suspend marketing of our products and could incur significant expenses in developing new marketing strategies and materials that would not violate FTCgovernmental regulations.
Research and Development

We invested approximately $3,700 in research and development during 2017 compared to $2,800 in 2016 primarily for the study of product enhancement and manufacturing process efficiencies.

EmployeesHuman Resources Capital

As of March 5, 2018,August 27, 2021, we had a total of 7651 employees, 69all of whom were full-time and sevennone of whom were part-time. None of our employees are represented by a labor union. We believe that our employee relations are good.

Directors and Executive Officers of Charles & Colvard, Ltd.

The members of our current Board of Directors are the following:

Neal I. Goldman
Chairman of the Board;Board of Directors of Charles & Colvard, Ltd.; President of Goldman Capital Management, Inc., an investment advisory firm.

Anne M. Butler
Chief Executive Officer of Butler Advisors,advisors, a consulting firm specializing in strategic and operational advising to private equity, venture capital, and institutional investors on direct selling acquisitionsacquisition and management.

Benedetta Casamento
Retail Consultant.Consultant specializing in finance, business operations, and financial planning and analysis.

Jaqui Lividini
Chief Executive Officer and Founding Partner of Lividini & Co., a brand strategy company that specializes in brand development and marketplace positioning, engagement marketing, and retail strategy.

Suzanne MiglucciDon O’Connell
President and Chief Executive Officer of Charles & Colvard, Ltd.

Ollin B. Sykes
President of Sykes & Company,Company. P.A., a regional accounting firm specializing in accounting, tax, and financial advisory services.

Our current executive officers are the following:

Suzanne Miglucci
Don O’Connell
President and Chief Executive Officer

Clint J. Pete
Chief Financial Officer

Don O’Connell
Chief Operating Officer and Senior Vice President, Supply Chain
Available Information

Our corporate information is accessible through our investor relations website at https://www.charlesandcolvard.com.ir.charlesandcolvard.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available, free of charge, access on our website to all reports we file with, or furnish to, the SEC, including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. A copy of this Annual Report on Form 10-K and our other reports are available without charge upon written request to Investor Relations, Charles & Colvard, Ltd., 170 Southport Drive, Morrisville, North Carolina 27560.

Item 1A.
Risk Factors

We operate in a dynamic and rapidly changing business environment that involves substantial risk and uncertainty, and these risks may change over time. The following discussion addresses some of the risks and uncertainties that could cause, or contribute to causing, actual results to differ materially from expectations. In evaluating our business, you should pay particular attention to the descriptions of risks and uncertainties described below. If any of these risks actually occur, our business, financial condition, or results of operations could be materially and adversely affected.

Risks Related to our Operations

The COVID-19 pandemic and related global economic impacts have adversely affected our business and are expected to continue to adversely affect our business, financial condition, and results of operations. The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economy. In response to this pandemic, federal, state, county and local governments and public health organizations and authorities around the world have implemented a variety of measures intended to control the spread of the virus including quarantines, “stay-at-home” orders, travel restrictions, school closures, business limitations and closures, social distancing, and hygiene requirements. While some of these measures have been lifted or eased in certain jurisdictions, other jurisdictions have seen increases in new COVID-19 cases, resulting in restrictions being reinstated or new restrictions being imposed. There continues to be considerable uncertainty regarding such measures and potential future measures. These measures have adversely affected workforces, customers, economies, and global supply chains, and resulted in significant travel and transport restrictions. It has also disrupted the normal operations of many businesses, including ours.

In response to the COVID-19 pandemic, we implemented measures aimed at limiting its spread for the health and safety of our employees, customers, and the communities in which we live and work as well as in accordance with orders and decrees of governmental agencies. These measures included closures of physical offices, employee furloughs, reductions in force, increased social distancing mandates, remote working and prohibiting non-essential travel. Many of these actions remain in effect to varying degrees although we may implement new or revise existing requirements as circumstances require. The actions and reactions to voluntary and involuntary requirements have been highly disruptive to our business and may continue to be disruptive. As physical offices are allowed to reopen, the rules and regulations for reopening will likely increase in complexity, making compliance more difficult. Furthermore, if employees perceive the protocols and requirements we implement to create a safe and effective work environment to be inadequate, overly burdensome or no longer necessary, employees may choose to leave, productivity may decline or we may experience employee absenteeism, unrest, slowdowns, stoppages or other demands, we may fail to timely meet customer demand or fulfill orders, the costs to maintain or implement protective measures or deliver our products may increase, and we may be subject to increased litigation, including occupational safety and condition claims.

Additionally, a segment of our employees continues to work remotely as a result of the pandemic. Remote working arrangements could increase operational risks, including risks associated with information technology and systems, including service interruptions, misappropriation of data, or breaches of security, any of which could have a material adverse effect on our business. Working outside of the typical work environment may also introduce additional complexity or inefficiency into our normal processes for key areas like the preparation of financial statements or marketing and sales, which could negatively impact our business.

The COVID-19 pandemic has also significantly increased economic uncertainty and has led to continued disruption and volatility in the global capital markets, which could increase the cost of capital and adversely impact access to capital. While unlikely to be drawn upon given our current liquidity position, to maintain this position we have access to our new $5.00 million cash secured credit facility with JPMorgan Chase Bank, N.A., which we entered into in July 2021, or we could incur other indebtedness through the issuance of debt securities. An increase in our outstanding indebtedness will result in additional interest expense. We may also seek to conserve cash by delaying capital expenditures, which could negatively impact our operations.

The pandemic has also interfered with general commercial activity related to our supply chain, including our raw material and components sources. We experienced instances of suppliers temporarily closing their operations, delaying order fulfillment, or limiting their production, impacting our supply chain and ability to produce finished goods and deliver them to our customers. In our Online Channels segment, our primary transactional website, charlesandcolvard.com, has remained open and shipped products to our consumers throughout the pandemic, but in the early months of the shutdown at the beginning of the pandemic during our fiscal quarter ended June 30, 2020, was restricted to available stock, the limited production capacity of then-functioning suppliers, and shipping restrictions. Since that period of time, with the change in worldwide consumer shopping habits during the pandemic and throughout our fiscal year ended June 30, 2021, charlesandcolvard.com has demonstrated strong sales performance, which we believe is consistent with the growth in global e-commerce sales. While we expect consumer shopping patterns to continue to change, there is no guarantee that these global online buying habits will continue at the same level or at the same rate of year-over-year growth. In our Traditional segment, our brick-and-mortar customers began closing their stores to foot traffic in March 2020 and the re-opening of these stores has been measured and has resulted in a weakening of the retail sector throughout much of our fiscal year ended June 30, 2021. We have also experienced instances of our distributor network reducing or closing their operations during certain phases of the pandemic, impacting our ability to maintain significant levels of sales through our wholesale sales customers. While we have seen somewhat of a strengthening in these sectors during the fiscal year ended June 30, 2021, there is no assurance this growth will continue in future financial reporting periods. In addition, jewelry and gemstone trade shows, jewelry industry events, and finished jewelry product demonstrations have begun to be re-scheduled in time for the critical production season leading up to the calendar year-end 2021 holiday season. However, with recent increases in new COVID-19 cases in many jurisdictions and regions around the world, this pattern could result in business and travel restrictions being reinstated or new restrictions being imposed. There is no guarantee that this pattern of a return to industry-related events will continue and there is considerable uncertainty regarding such measures and the potential adverse impact that such future measures could have on these events and on the retail jewelry industry as a whole. As a result, our selling activities and our ability to convert those activities into sales have been, and we expect may continue to be, adversely impacted by the pandemic. While we have seen business strengthen in both our Online Channels segment and Traditional segment during the fiscal year ended June 30, 2021, our business, financial condition, and results of operations are expected to continue to be adversely affected by the COVID-19 pandemic until business resumes – and the U.S. and global economies return – to pre-pandemic levels.

The extent to which the COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments that are uncertain and that we are not able to predict at this time. These factors include: the severity, duration and scope of the pandemic and the governmental, business, individual and other actions taken in response thereto; the effect on our suppliers and distributors, and disruptions to the global supply chain; the impact on economic activity; the extent and duration of the impact on Traditional segment partner confidence and order placements; the effect on consumer demand and purchasing behavior as pandemic-related restrictions are curtailed or lifted, remote working declines and discretionary spending patterns shift and our ability to timely and effectively respond to any resulting decreases or increases in demand; the effect of any closures or other changes in operations of our and our suppliers’ and distributors’ facilities; the health of and the effect on our employees and our ability to meet staffing needs in our manufacturing and distribution facility and other critical functions, particularly if employees become ill, are quarantined as a result of exposure or are reluctant to show up for work; our ability to sell our products worldwide and provide customer support, including as a result of travel restrictions, work from home requirements and arrangements and other restrictions or changes in behavior or preferences for interactions; data privacy and cybersecurity risks from new or expanded use of remote working; the impact of remote working arrangements on our financial reporting systems and internal control over financial reporting; restrictions or disruptions to transportation, including reduced availability of ground, sea or air transport; the ability of our distributors, retailers, third party customers and consumers to pay for our products; the effect of the fair value measurement of certain assets or liabilities; the effect on our ability to access capital on favorable terms and continue to meet our liquidity needs; and the diversion of management as they focus on the short- and long-term ramifications of the pandemic. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession that has occurred or may continue for the foreseeable future. The COVID-19 pandemic could also exacerbate or trigger other risks discussed in this Annual Report on Form 10-K, any of which could have a material and adverse effect on our business, results of operations, and financial condition. Additionally, any comparisons of our financial results for the financial reporting periods of our fiscal year ended June 30, 2021 (or future financial reporting periods) to previous financial reporting periods may not be a useful means by which to evaluate the health of our business and our results of operations because of the pandemic’s broad and significant but non-uniform impact to our business.

We continue to monitor the pandemic, have actively implemented updated policies and procedures to address the current business and economic environment, and may adjust our current policies and procedures as more information and guidance become available to address the ongoing and evolving situation. We cannot at this time predict the full impact of the COVID-19 pandemic, but we anticipate that the COVID-19 pandemic is likely to continue to impact our business, financial condition, results of operations and/or cash flows in the fiscal year ending June 30, 2022.

Our future financial performance depends upon increased consumer acceptance, growth of sales of our products, and operational execution of our strategic initiatives. We believe that most consumers are not generally aware of the existence and attributes of moissanite jewels and lab grown diamonds and that the consumer market for moissanite jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds remains in the early stages of development. Total moissanite jewelry retail sales have historically been less than 1% of the total jewelry market. The degree of future market acceptance and demand is subject to a significant amount of uncertainty. Our future financial performance will depend, in part, upon greater consumer acceptance of moissanite jewels and lab grown diamonds as an ethically-sourced,ethically sourced, affordable, luxurious alternative to other gemstones, such as a mined diamond, and our ability to develop brands and execute strategic initiatives, in particular, our Online Channels segment, to grow our sales and operating income. As we execute our strategy to build and reinvest in our business, significant expenses and investment of cash will be required ahead of the revenue streams we expect in the future,going forward and this may adversely affect our operating income. If we are unable to execute and achieve desired revenue levels, we may adjust our strategic initiatives in response to the results of our investments.

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

Thus, our future financial performance may be affected by:


·•
ourOur ability to understanddevelop and promote the consumer market segmentCharles & Colvard brands, such as Forever One™, Moissanite by Charles & Colvard®, and effectively market to them a compelling value proposition that leads to converted customers;
·
our ability to reach consumers through traditional and digital channelsCaydia®, all of which are used in order to gain interest in moissanite jewels and jewelry;
·
our continued success in developing and promoting brands for our moissanite jewels and finished jewelry featuring moissanite resultingand lab grown diamonds, which may in increasedpart drive interest and demand for moissanite jewelry at the consumer level;


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ourOur ability to differentiate Charles & Colvard Created Moissanite®and Caydia®from competing products, making their way to market;including competitive moissanite and the rapidly emerging lab grown diamond industry;

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

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

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

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


·•
theThe continued willingness and ability of our jewelry distributors and other jewelry suppliers, manufacturers, and designers to market and promote Charles & Colvard Created Moissanite® and Caydia®to the retail jewelry trade;


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theThe continued willingness of distributors, retailers, and others in the channel ofour distribution channels to purchase looseForever One™, Charles & Colvard Created Moissanite®, and theCaydia® as well as their continued willingness of manufacturers, designers, and retail jewelers to undertake setting of the loose jewels;

·
our
Our continued ability and the ability of jewelry manufacturers and retail jewelers to set loose moissanite jewels and lab grown diamonds in finished jewelry with high-quality workmanship; and the ability of manufacturers, designers, and retail jewelers to select jewelry settings that encourage consumer acceptance of and demand for our moissanite jewels and finished jewelry;
·
our continued ability and the ability of jewelry manufacturers and retail jewelers to set loose moissanite jewels in finished jewelry with high-quality workmanship;
·
our continued ability and the ability of retail jewelers to effectively market and sell finished jewelry featuring moissanite to consumers; and
·
our ability to operationally execute our Online Channels segment.

The execution
Our continued ability and the ability of our business plans could significantly impact our liquidity.  The execution of our business plansretail jewelers to expand our Online Channels segmenteffectively market and to create required inventory of our Forever OneTM jewels requires significant investments, which may reduce our cash position. Should we fail to execute on our business plans, we could see delays in the return of cash from our investments, resulting in a liquidity shortfall. Under the $10.00 million asset-based revolving credit facility, or the Credit Facility, that we obtained from Wells Fargo Bank, National Association, or Wells Fargo, on June 25, 2014, failure to meet one or more of the following covenants could restrict our ability to draw or make further draws on the Credit Facility: (i) failure to conduct our business as conducted on the date we obtained the Credit Facility; (ii) failure to make required payments to third parties; and (iii) failure to comply with the other covenants and defaults contained in the Credit Facility, including a covenant to maintain at least $1.00 million in excess availability (as defined under the Credit Facility) and a covenant that required us to maintain a specified minimum monthly EBITDA through December 2017 if the cash position for our demand deposit account maintained at Wells Fargo falls below $3.00 million or we draw upon the Credit Facility. If we are not able to take advances against the Credit Facility, our cash and cash equivalents and other working capital may be insufficient to meet our working capital and capital expenditure needs. In addition, the Credit Facility matures on June 25, 2018, and there is no guarantee for extension or renewal.

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. As sales of our loose moissanite jewels increase, including our Forever OneTM jewel, availability of certain shapes and sizes may be at risk. In addition, finished jewelry has a large variety of styles of which we maintain on-hand stock for such core designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets; and made-to-order under strict deadlines for certain wholesale and direct-to-consumer e-commerce outlets. We must adequately maintain relationships, forecast demand, and operate within the lead times of third parties that facet and/or enhance the jewels and manufacture the finished jewelry setting to ensure adequate on-hand quantities and/or the shipment of customer orders in a timely manner as we transition certain customers from Forever Brilliant® to Forever OneTM. In addition, we are currently dependent upon certain vendors for all of the faceting of our loose jewels. If any or all of these vendors were to cancel their arrangements with us, we could experience a disruption in our operations and incur additional costs to procure faceting services from a replacement vendor. The inability to fulfill orders on a timely basis and within promised customer deadlines could result in a cancellation of the orders and loss of customer goodwill that could materially and adversely affect our business, results of operations, and financial condition.

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. We are subject to a concentration of credit risk amongst our major customers (some of whom are distributors), and a default by any of these customers on their debts to us could have a material adverse effect on our financial position. Future sales and our ability to collect accounts receivable depend, in part, on the financial strength of our customers and our distributors’ willingness and ability to successfully market our products. We estimate an allowance for accounts for which collectability is at risk and this allowance adversely impacts profitability. In the event customers experience greater than anticipated financial difficulties, insolvency, or difficulty marketing products, we expect profitability to be adversely impacted by our failure to collect accounts receivable in excess of the estimated allowance. In these circumstances, we may demand the return of product sold to such customers, resulting in an increase in inventory and a reduction in accounts receivable. While general economic conditions have improved in recent periods, given uncertainty in the current economic environment, constrained access to capital, the impact of inflation on our currency, or general market contractions may heighten our exposure to customer default and generate lower than expected distributor sales.

We are currently substantially dependent on a limited number of distributors, jewelry manufacturers, and retailers for the sale of our products. A significant portion of the moissanite jewels andsell finished jewelry featuring moissanite that we sell are distributed through a limited number of distributors, manufacturers, and retailers and, therefore, we are substantially dependent upon these companies for distribution of our products. During 2017, our three largest customers, which are loose jewel and finished jewelry distributors, collectively accounted for approximately 38% of net sales. As we continuelab grown diamonds to build our finished jewelry business, we anticipate in the near term that a significant portion of the moissanite jewels and finished jewelry featuring moissanite that we sell will continue to be to a limited number of manufacturers, distributors, and retailers.consumers.

We expect to remain dependent upon the Supply Agreement with Cree for the sole supply of our SiC crystals for the foreseeable future. If we are unable to obtain sufficient, high-quality SiC crystals from Cree and we have a significant increase in demand for our moissanite jewels, then we may not be able to meet that demand. Cree has certain proprietary rights relating to its process for growing large single crystals of SiC and its process for growing colorless and near-colorless SiC crystals. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement will expire on June 24, 2018, unless extended by the parties. Accordingly, we are reviewing various alternatives with respect to our purchase of SiC material, including whether to exercise our unilateral option, subject to certain conditions, to renew the Supply Agreement for an additional two-year period. Our total purchase commitment under the Supply Agreement until June 2018 is dependent upon the size of the SiC material and ranges between approximately $29.60 million and approximately $31.50 million. However, there can be no assurance that Cree will be able to continue to produce and supply us with SiC crystals of sufficient quality, sizes, and volumes that we desire or that we will successfully negotiate future purchase commitments at acceptable prices that enable us to manage our inventories and raw material costs effectively.
We face intense competition in the worldwide jewelry industry. The jewelry industry is highly competitive and we compete with numerous other jewelry products. In addition, we face competition from treated diamonds, synthetic diamonds, lab-grown diamonds, other moissanite jewels, and companies developing other synthetic jewelry technologies. A substantial number of companies supply products to the jewelry industry, many of whom we believe have greater financial resources than we do. Competitors could develop new or improved technologies that may render the price point for moissanite noncompetitive, which could have an adverse effect on our business, results of operations, and financial condition.

In addition, we have previously relied on our patent rights and other intellectual property rights to maintain our competitive position. Our current U.S. product and method patents for moissanite jewels expired in 2015 and most of our patents in foreign jurisdictions expired in 2016 with only Mexico remaining (which expires in 2021). As a result, we anticipate new providers of moissanite will enter the market. However, because the process of creating high-quality moissanite is challenging, we believe it will take emerging providers significant time and investment to bring meaningful and competitive products to market. As we experienced ourselves, we anticipate it will take these new providers significant time to evolve from producing low-end moissanite to delivering high-quality gemstones in the colorless or near-colorless range. Achieving the capacity to consistently produce a high-quality moissanite product at mass scale requires a careful balance of SiC-specific faceting skills and a well-tuned global supply chain. Therefore, we do not anticipate direct moissanite competition in our superior quality gemstone ranges for the foreseeable future. If, however, we are unable to successfully build strong brands for our moissanite jewels and finished jewelry featuring moissanite or competition grows faster than expected, we may not have commercially meaningful protection for our products or a commercial advantage against our competitors or their competitive products or processes, which may have a material adverse effect on our business, results of operations, and financial condition.

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. In the past, we have received a notification letter 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 Nasdaq’s listing requirements in the future, we expect to 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 our common stock is delisted from Nasdaq, 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, and employees and fewer business development opportunities. Additionally, the market price of our common stock may decline further and shareholders may lose some or all of their investment.

Our current customers may potentially perceive us as a competitor in the finished jewelry business. As described above, we are currently dependent on a limited number of customers, including distributors, jewelry manufacturers, and retailers for the sale of our products. Our design, manufacture, and marketing of finished jewelry featuring moissanite under exclusive brands for sale to distributors and retailers may result in some of these current customers perceiving us as a competitor, despite our efforts to use primarily non-conflicting sales channels. In response, these customers may choose to reduce their orders for our products. This reduction in orders could occur faster than our sales growth in this business, which could materially and adversely affect our business, results of operations, and financial condition.
We may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation.  Part of our strategy for success is to establish Charles & Colvard with reputable, high-quality, and sophisticated brands. The achievement of this goal depends in large part on our ability to provide customers with high-quality moissanite and finished jewelry featuring moissanite. Although we take measures to ensure that we sell only the best quality products, we may face quality control challenges, which could impact our competitive advantage. There can be no assurance we will be able to detect and resolve all quality control issues prior to shipment of products to our distributors, manufacturers, retailers, and end consumers. Failure to do so could result in lost revenue, lost customers, significant warranty and other expenses, and harm to our reputation.

Our business and our results of operations could be materially adversely affected as a result of general economic and market conditions. Our business, including our sales volumes and overall profitability, could be adversely impacted by disruptions in global financial markets, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increased unemployment rates, and uncertainty about economic stability.stability including the increased risk of global trade tensions. We are unable to predict the likely duration and severity of the effects of these disruptions in the financial markets and the adverse global economic conditions, and if economic conditions deteriorate, our business and results of operations could be materially and adversely affected. The consequences of such adverse effects could include interruptions or delays in our suppliers’ performance of our contracts, reductions and delays in customer purchases, delays in or the inability of customers to obtain financing to purchase our products, and bankruptcy of customers and/or suppliers.

Luxury products, such as fine jewelry, are discretionary purchases for consumers. Recessionary economic cycles, higher interest rates, higher fuel and energy costs, inflation, levels of unemployment, conditions in the residential real estate and mortgage markets, access to credit, consumer debt levels, unsettled financial markets, and other economic factors that may affect consumer spending or buying habits could materially and adversely affect demand for our products. In addition, volatility in the financial markets has had and may continue to have a negative impact on consumer spending patterns. A reduction in consumer spending or disposable income may affect us more significantly than companies in other industries and could have a material adverse effect on our business, results of operations, and financial condition.

Our operationsWe face intense competition in the worldwide jewelry industry. The jewelry industry is highly competitive and we compete with numerous other jewelry products. In addition, we face competition from mined diamonds, lab-created (synthetic) diamonds, other lab grown diamonds, other moissanite products, and simulants. A substantial number of companies supply products to the jewelry industry, many of whom we believe have greater financial resources than we do. Competitors could be disrupted by natural disasters. We conduct substantially all ofdevelop new or improved technologies, including those for lab grown diamonds, that may render the price point for our activities, including executive management, manufacturing, packaging,moissanite and distribution activities, at one North Carolina location.  Although we have taken precautions to safeguard our facility, including obtaining business interruption insurance, any future natural disaster, such as a hurricane, flood or fire, could significantly disrupt our operations and delay or prevent product shipment during the time required to repair, rebuild or replace our facility,lab grown diamonds noncompetitive, which could be lengthy and result in significant expenses. Furthermore, the insurance coverage we maintain may not be adequate to cover our losses in any particular case or continue to be available at commercially reasonable rates and terms. In addition, the vendors that perform all of the faceting of our loose moissanite jewels are located in regions that are susceptible to tsunamis, flooding, and other natural disasters that may cause a disruption in our vendors’ operations for sustained periods and the loss or damage of our work-in-process inventories located at such vendors’ facilities. Damage or destruction that interrupts our ability to deliver our products could impair our relationships with our customers. Prolonged disruption of our services as a result of a natural disaster may result in product delivery delays, order cancellations, and loss of substantial revenue, which could materially and adversely affecthave an adverse effect on our business, results of operations, and financial condition.

With the launch of our SalesCaydia® product line, we believe that our entry into the lab grown diamond market could be a potential threat to - and increase competition for - our core moissanite products. While our moissanite gemstones and finished jewelry set with moissanite generally have different price points than those of our Caydia® product line, any cannibalization of moissanite jewelry could be dependent upon the pricing of precious metals, which is beyond our control. Any increases in the market price of precious metals (primarily gold) could affect the pricing andproduct sales resulting from sales of jewelry incorporating moissanite jewels, including jewelry manufactured by us. The majority of price increases in precious metals are passed on to the end consumer in the form of higher prices for finished jewelry. These higher pricesour lab-created diamonds could have a negativean adverse impact on the sell-through of moissanite jewelry at the retail level. From the beginning of 2006 through 2017, the price of gold has increased significantly, resulting in higher retail price points for gold jewelry. This has had a negative impact on both sales of moissanite jewelry and the jewelry industry as a whole.

Seasonality of our business may adversely affect our net sales and operating income. Sales in the retail jewelry industry are typically seasonal due to increased consumer purchases during the holiday season. Because historically we have primarily sold our loose moissanite jewels and finished jewelry featuring moissanite at wholesale pricing to distributors, manufacturers, and retailers,set with moissanite.

We have previously relied on our sales to support the holiday season have largely taken place during the third and beginning of the fourth calendar quarters, depending on the sales channel and the level of advance planning and production our customers undertook. As sales of our finished jewelry featuring moissanite to retailers and directly to consumers increase, both in dollars and as a percentage of total sales, our results for the three months ending December 31 may depend upon the general level of retail sales during the holiday season as well as general economic conditionspatent rights and other factors beyond our control. In anticipation of increased sales activities during the three months ending December 31, we may incur significant additional expenses, including higher inventory of finished jewelry in the second half of the calendar year.
On January 30, 2018, our Board of Directors approved a change in our fiscal year from a fiscal year beginning on January 1 and ending on December 31 of each year to a fiscal year beginning on July 1 and ending on June 30 of each year. This change to the fiscal year reporting cycle will begin July 1, 2018. In recent years, excluding one-time sales events, we have experienced a higher degree of seasonality in the three months ending December 31 than we have experienced in prior years primarily as a result of the holiday season sales to end consumers through our Online Channels segment and as a result of increased sales through our Traditional segment. Our quarterly results of operations may continue to fluctuate as a result of a number of factors, including seasonal cycles, the timing of new product introductions, the timing of orders by our customers, and the mix of product sales demand, and these factors may significantly affect our results of operations in a given quarter.

Recent U.S. tax legislation may adversely affect our financial condition, results of operations, and cash flows.
Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures, and revising the rules governing net operating losses (which may adversely impact the value of our net deferred tax assets) and foreign tax credits. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementation regulations by the U.S. Department of the Treasury and Internal Revenue Service, any of which could materially affect the impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.

While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors to determine the full impact of this legislation on us. See Note 12, “Income Taxes,” in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K for additional information about our deferred tax assets and our provisional analysis of the income tax effects of this new legislation.

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.  As we adopt e-commerce as one of our primary selling channels, our business model becomes more reliant on third-party platforms to achieve success. Should our products, product listings, or business not meet the requirements of certain third-party transactional channels such as marketplaces, comparison shopping engines, or social commerce sites, it may affect our ability to meet our revenue targets. Additionally, Amazon, eBay, Jet, Walmart.com, Gemvara, or other desirable e-commerce platforms may decide to make significant changes to their respective business models, policies, systems, or plans, and those changes could impair or inhibit our ability to sell our products through those channels. Further, a significant change in consumer online behavior or introduction of new or disruptive technology could adversely affect overall e-commerce trends and diminish the value of investments we have made in select online channels. Any of these results could cause a significant reduction in our revenue and have a material adverse effect on our results of operations.

We may not be able to adequately protect our intellectual property which could harm the value ofrights to maintain our products and brands and adversely affect our business. We rely primarily on patent, copyright, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We hadcompetitive position. Our U.S. product and method patents for moissanite jewels which expired in August 2015 under which we believed that we had broad, exclusive rights to manufacture, use, and sell moissanite jewels in the U.S. We had these samemost of our patents in 25 foreign jurisdictions primarily across Asia and Europeexpired in 2016 with only one in Mexico that expired in 2021. Since the third quarterexpiration of 2016,our product and will expire in Mexico in 2021. However,method patents we have noted new providers of moissanite and competitive products entering the market. As our pending patent expirations could enable competitorsrights and other businessespending intellectual property rights are approved, we will continue to duplicaterely on these patents and market a similar productour carefully executed brand awareness and enter the marketplace. Without patent protection,digital marketing campaigns to build our consumer relationships and maintain our competitive position going forward. If, however, we must rely primarily onare unable to successfully build strong brands for our branding strategymoissanite jewels, lab grown diamonds, and the Supply Agreement under which Cree supplies SiC crystals exclusively to us, as well as confidentiality procedures, to protect our proprietary rights, which mayfinished jewelry featuring moissanite and lab grown diamonds or competition grows faster than expected, we may not be sufficient. In addition, at the present time, we are dependent on Cree’s technologyhave commercially meaningful protection for the production of SiC crystals. There can be no assurance that any patents issued to or licensed by or to us will provide any significant commercial protection, that we will have sufficient resources to protect our respective patents and proprietary rights, that any additional patents will be issued in the future, or that any existing or future patents will be upheld by a court should we seek to enforce our rights against an infringer. At this point, we cannot reasonably estimate the impact these patent expirations will have on our future results of operations.
The existence of valid patents does not prevent other companies from independently developing competing technologies. Existing producers of SiC crystals or others may refine existing processes for growing SiC crystals or develop new technologies for growing large single crystals of SiC or colorless SiC crystals in a manner that does not infringe any patents issued to or licensed by or to us. Accordingly, existing and potential competitors may be able to develop products that are competitive with or superior to our products and such competition couldor a commercial advantage against our competitors or their competitive products or processes, which may have a material adverse effect on our business, results of operations, and financial condition.

In addition, we have certain trademarks and pending trademark applications that support our moissanite branding strategy, and we use certain brand names for which we do not currently have proprietary rights. The success of our growth strategy may depend on our continued ability to use our existing brand names in order to increase consumer awareness and further develop strong brands around our moissanite jewels and finished jewelry collections. We cannot assure that any future trademark or other registrations will be issued for pending or future applications or that we will be able to obtain licenses or other contractual rights to use brand names that may infringe the proprietary rights of third parties. We also cannot assure that any registered or unregistered trademarks or other intellectual property or contractual rights will be enforceable or provide adequate protection of our proprietary rights. Our inability to secure proprietary protection with respect to our brands could have a material adverse effect on our business, results of operations, and financial condition.

We also cannot be certain that our products and brand names do not or will not infringe valid patents, trademarks, and other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Litigation to determine the validity of any third party’s claims could result in significant expense and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. In the event of an adverse result of any such litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses for, and pay royalties on the use of, the technology subject to the litigation. We have no assurance that we would be successful in such development or that any such license would be available on commercially reasonable terms.

A failure of our information technology, or IT, infrastructure or a failure to protect confidential information of our customers and our network against security breaches could adversely impact our business and operations. We rely upon the capacity, reliability, and security of our IT infrastructure and our ability to expand and continually update this infrastructure in response to the changing needs of our business related to the deployment, integration, and management of new technology. For example, we implementedregularly implement new IT systems and update payment gateways that support our Online Channels segment. As we implement and integrate new systems, as well as retire and de-integrate existing systems, the IT operating environment following such changes may not perform as expected. We also face the challenge of supporting our older systems and implementing necessary upgrades. If we experience a problem with the functioning of an important IT system or a security breach of our IT systems, the resulting disruptions could have an adverse effect on our business.

In addition, we and certain of our third-party vendors receive and store personal 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, including credit card numbers. 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. An increasing number of websites and Internet companies have reported breaches of their security. Any such compromise of our security could damage our reputation, business, and brand and expose us to a risk of loss or litigation and possible liability, which could substantially harm our business and results of operations. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations, damage our computers or those of our customers, or otherwise damage our reputation and business. These issues are likely to become more difficult as we expand the number of countries in which our e-commerce website operates. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches.

For example, in 2016, the European Union, or EU,E.U., Parliament approved the new EUE.U. data protection legal framework known as the General Data Protection Regulation, or GDPR. The GDPR, will replace existing regulations and will becomewhich became effective in May 2018, replaced previously existing regulations and thereby extendingextended the scope of EUE.U. data protection law to all non-EUnon-E.U. companies processing data of EUE.U. residents. The GDPR contains numerous requirements and changes from existing EUprior E.U. law, including more robust obligations on data processors, greater rights for data subjects, and heavier documentation requirements for data protection compliance programs. programs. The GDPR also imposes strict rules on the transfer of personal data out of the E.U., including to the U.S., and recent legal developments in Europe have created complexity and uncertainty regarding such transfers of personal data from the E.U. to the U.S. For example, in July 2020, the Court of Justice of the European Union, or the CJEU, invalidated the E.U.-U.S. Privacy Shield framework, or Privacy Shield, one of the mechanisms used to legitimize the transfer of personal data from the E.U. to the U.S. The CJEU decision also drew into question the long-term viability of an alternative means of data transfer, the standard contractual clauses, for transfers of personal data from the E.U. to the U.S. While we were not self-certified under the Privacy Shield, this CJEU decision may lead to increased scrutiny on data transfers from the E.U. to the U.S. generally and increase our costs of compliance with data privacy legislation. The costs of compliance with, and other burdens and any penalties imposed by, such international and domestic laws, regulations and policies could have a material adverse impact on our results of operations.

We are subject to certain risks due to our international operations, distribution channels and vendors. We have continued to expand our direct international sales operations, with international net sales accounting for approximately 5% of total consolidated net sales during Fiscal 2021. We also currently have more than 15numerous international wholesale distributors and retail sales channels covering portions of Canada, the UK,U.K., Western Europe, Australia and New Zealand, Southeast Asia, the Middle East, and China.the Greater China Region. In addition, we use certain companies based outside the U.S. to facet our moissanite jewels and to manufacture finished jewelry. DueWe plan to continue to increase marketing and sales efforts and anticipate expanding our direct international sales in addition to continuing to serve international distributors. Any international expansion plans we choose to undertake will increase the complexity of our business, require attention from management and other personnel and cause additional strain on our operations, financial resources and our internal financial control and reporting functions. Further, our expansion efforts may be unsuccessful as we have limited experience selling our products in certain international markets and in conforming to the local cultures, standards or policies necessary to successfully compete in those markets. In addition, we may have to compete with retailers that have more experience with local markets. Our ability to expand and succeed internationally may also be limited by the demand for our products, the ability to successfully transact in foreign currencies, the ability of our brand to resonate with consumers globally and the adoption of online or Internet commerce in these markets. Different privacy, censorship and liability standards and regulations, and different intellectual property laws in foreign countries may also prohibit expansion into such markets or cause our business and results of operations to suffer. Through our planned international expansion and our continued reliance on development of foreign markets and use of foreign vendors, we are subject to the risks of conducting business outside of the U.S.

These risks include the following:

·
the adverse effects on U.S.-based companies operating in foreign markets that might result from war; terrorism; changes in diplomatic, trade, or business relationships;
the adverse effects on U.S.-based companies operating in foreign markets that might result from war; terrorism; changes in diplomatic, trade, or business relationships (including labor disputes); or other political, social, religious, or economic instability;
·
the continuing adverse economic effects of any global financial crisis;
·
unexpected changes in, or impositions of, legislative or regulatory requirements;
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delays resulting from difficulty in obtaining export licenses;
·
tariffs and other trade barriers and restrictions;
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the burdens of complying with a variety of foreign laws and other factors beyond our control;
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the potential difficulty of enforcing agreements with foreign customers and suppliers; and
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the complications related to collecting receivables through a foreign country’s legal system.

an outbreak of a contagious disease, such as COVID-19, which may cause us or our distributors, vendors, and/or customers to temporarily suspend our or their respective operations in the affected city or country;

the continuing adverse economic effects of any global financial crisis;

unexpected changes in, or impositions of, legislative or regulatory requirements;

delays resulting from difficulty in obtaining export licenses;

international regulatory requirements, tariffs and other trade barriers and restrictions, including the consequences of U.S. led tariff actions;

the burdens of complying with a variety of foreign laws and regulations, including foreign taxation and varying consumer and data protection laws, and other factors beyond our control, and the risks of non-compliance;

longer payment cycles and greater difficulty in collecting accounts receivable;

our reliance on third-party carriers for product shipments to our customers;

risk of theft of our products during shipment;

limited payment, shipping and insurance options for us and our customers;

difficulties in obtaining export, import or other business licensing requirements;

customs and import processes, costs or restrictions;

the potential difficulty of enforcing agreements with foreign customers and suppliers; and

the complications related to collecting accounts receivable through a foreign country’s legal or banking system.

In particular, there is currently significant uncertainty about the future relationship between the U.S. and various other countries, with respect to trade policies, treaties, government regulations, and tariffs. For example, the recent imposition of tariffs and/or increase in tariffs on various products by the U.S. and other countries, including China and Canada, have introduced greater uncertainty with respect to trade policies and government regulations affecting trade between the U.S. and other countries, and new and/or increased tariffs have subjected, and may in the future subject, us to additional costs and expenditure of resources. Major developments in trade relations, including the imposition of new or increased tariffs by the U.S. and/or other countries, and any emerging nationalist trends in specific countries could alter the trade environment and consumer purchasing behavior which, in turn, could have a material effect on our financial condition and results of operations. While the U.S. and China signed a “phase one” trade deal in 2020, to reduce planned increases to tariffs, concerns over the stability of bilateral trade relations continue to exist, and in some cases, have heightened in 2021. In addition, the U.K.’s exit from the European Union in January 2020, known as Brexit, and the ongoing negotiations of the future trading relationship between the U.K. and the European Union have yet to be completely finalized. Accordingly, the ultimate outcome and long-term impacts for the U.K. or Europe remain uncertain. Ongoing changes and uncertainties related to Brexit continue to subject us to heightened risks in that region, including disruptions to trade and free movement of goods, services and people to and from the U.K., disruptions to the workforce of our business partners, increased foreign exchange volatility with respect to the British pound and additional legal, political and economic uncertainty. If these actions impacting our international distribution and sales channels result in increased costs for us or our international partners, such changes could result in higher costs to us, adversely affecting our operations, particularly as we expand our international presence.

Additionally, while substantially all of our foreign transactions are denominated in U.S. dollars, foreign currency fluctuations could impact demand for our products or the ability of our foreign suppliers to continue to perform. Further, some of our foreign distributors operate relatively small businesses and may not have the financial stability to assure their continuing presence in their markets. There can be no assurance that the foregoing factors will not adversely affect our operations in the future or require us to modify our anticipated business practices.

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. As sales of our loose moissanite and lab grown diamond gems increase, including our Forever One™, Moissanite by Charles & Colvard®, and Caydia® gemstones, availability of certain shapes and sizes may be at risk. In addition, finished jewelry has a large variety of styles of which we maintain on-hand stock for such core designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets; and made-to-order under strict deadlines for certain wholesale and direct-to-consumer e-commerce outlets. We must adequately maintain relationships, forecast material and product demand, and operate within the lead times of third parties that facet jewels and manufacture finished jewelry settings to ensure adequate on-hand quantities and meet shipment requirements for customer orders in a timely manner. In addition, we are currently dependent upon certain vendors for most of the faceting of our loose gems. If any or all of these vendors were to cancel their arrangements with us, we could experience a disruption in our operations and incur additional costs to procure faceting services from a replacement vendor. The inability to fulfill orders on a timely basis and within promised customer deadlines could result in a cancellation of the orders and loss of customer goodwill that could materially and adversely affect our business, results of operations, and financial condition. In addition, the COVID-19 pandemic has caused, and may continue to cause, us or our distributors, vendors, and/or customers to temporarily suspend our or their respective operations and have an adverse impact on our ability to fulfill orders on a timely basis.

We are currently dependent on a limited number of distributor and retail partners in our Traditional segment for the sale of our products. A significant portion of the moissanite jewels and finished jewelry featuring moissanite that we sell are distributed through a limited number of distributors and retail partners in our Traditional segment, and therefore, we are dependent upon these companies for distribution of our products. Our three largest customers collectively accounted for approximately 31% and 33% of our net sales during the fiscal years ended June 30, 2021 and 2020, respectively. As we continue to build our finished jewelry business, we anticipate in the near term that a significant portion of the moissanite jewels and finished jewelry featuring moissanite that we sell through our Traditional segment will continue to be to a limited number of distributors and retailers.

We may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation.  Part of our strategy for success is to align Charles & Colvard with reputable, high-quality, and sophisticated strategic partners. The achievement of this goal depends in large part on our ability to provide customers with high-quality moissanite and finished jewelry featuring moissanite. Although we take measures to ensure that we sell only the best quality products, we may face quality control challenges, which could impact our competitive advantage. There can be no assurance we will be able to detect and resolve all quality control issues prior to shipment of products to our distributors, manufacturers, retailers, and end consumers. Failure to do so could result in lost revenue, lost customers, significant warranty and other expenses, and harm to our reputation.

Seasonality of our business may adversely affect our net sales and operating income. Sales in the retail jewelry industry are typically seasonal due to increased consumer purchases during the calendar year-end holiday season. Because historically we have primarily sold our loose moissanite jewels and finished jewelry featuring moissanite at wholesale pricing to distributors, manufacturers, and retailers, our sales to support the holiday season have largely taken place during the third and beginning of the fourth calendar quarters, depending on the sales channel and the level of advance planning and production our customers undertook. As sales of our finished jewelry featuring moissanite to retailers and directly to consumers increase, both in dollars and as a percentage of total sales, our results for the three months in the calendar quarter ending December 31 of each year may depend upon the general level of retail sales during the holiday season as well as general economic conditions and other factors beyond our control. In anticipation of increased sales activities during the three months in the calendar quarter ending December 31 of each year, we may incur significant additional expenses and increases in our finished jewelry inventory levels to support expected sales in the second half of the calendar year.

In recent years, we have experienced a higher degree of seasonality in the three months ending December 31 than we have experienced in prior years primarily as a result of the calendar year-end holiday season sales to end consumers through our Online Channels segment and as a result of increased sales through our brick-and-mortar retailers within our Traditional segment. Our quarterly results of operations may continue to fluctuate as a result of a number of factors, including seasonal cycles, the timing of new product introductions, the timing of orders by our customers, and the mix of product sales demand, and these factors may significantly affect our results of operations in a given quarter.

Our operations could be disrupted by natural disasters. We conduct substantially all of our activities, including executive management, manufacturing, packaging, and distribution activities, at one North Carolina location.  Although we have taken precautions to safeguard our facility, including obtaining business interruption insurance, any future natural disaster, such as a hurricane, flood or fire, could significantly disrupt our operations and delay or prevent product shipment during the time required to repair, rebuild or replace our facility, which could be lengthy and result in significant expenses. Furthermore, the insurance coverage we maintain may not be adequate to cover our losses in any particular case or continue to be available at commercially reasonable rates and terms. In addition, the vendors that perform some of the faceting of our loose moissanite jewels are located in regions that are susceptible to tsunamis, flooding, and other natural disasters that may cause a disruption in our vendors’ operations for sustained periods and the loss or damage of our work-in-process inventories located at such vendors’ facilities. Damage or destruction that interrupts our ability to deliver our products could impair our relationships with our customers. Prolonged disruption of our services as a result of a natural disaster may result in product delivery delays, order cancellations, and loss of substantial revenue, which could materially and adversely affect our business, results of operations, and financial condition.

Sales of moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control. Any increases in the market price of precious metals (primarily gold) could affect the pricing and sales of jewelry incorporating moissanite jewels and lab grown diamonds. The majority of price increases in precious metals are passed on to the end consumer in the form of higher prices for finished jewelry. These higher prices could have a negative impact on the sell-through of moissanite and lab grown diamond jewelry at the retail level. From 2007 through 2021, the price of gold has increased significantly, resulting in higher retail price points for gold jewelry. Accordingly, higher gold prices could have an adverse impact on both sales of moissanite and lab grown diamond finished jewelry and the jewelry industry as a whole.

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

We depend on a single supplier for substantially all of our 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.We are party to an exclusive supply agreement with Cree, which we depend on for the provision of substantially all of the SiC material we use to produce moissanite jewels. Under the terms and conditions of the Supply Agreement, we agreed to purchase from Cree, and Cree agreed to supply, all of our required SiC material, subject to terms and conditions that allow us to purchase certain amounts of SiC materials from third parties under limited conditions. The Supply Agreement is set to expire in 2025, but may be further extended upon mutual agreement of the parties to the Supply Agreement.  If our supply of high-quality SiC crystals is interrupted, then we may not be able to meet demand for moissanite jewels and our business may be materially and adversely affected. Cree has certain proprietary rights relating to its process for growing large single crystals of SiC and its process for growing colorless and near-colorless SiC crystals. There is no guaranty that we would be able to obtain similar quality SiC crystals from another provider. There can be no assurance that Cree will be able to continue to produce and supply us with SiC crystals of sufficient quality, sizes, and volumes that we desire or that we will be able to continue to negotiate future purchase commitments at acceptable prices that enable us to manage our inventories and raw material costs effectively.

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. As e-commerce emerges as one of our primary selling channels, our business model becomes more reliant on third-party platforms to achieve success. Should our products, product listings, or business not meet the requirements of certain third-party transactional channels such as marketplaces, comparison shopping engines, or social commerce sites, it may affect our ability to meet our revenue targets. Additionally, Amazon.com, Inc., eBay Inc., Walmart.com, Gemvara, a Berkshire Hathaway Inc. Company, or other desirable e-commerce platforms may decide to make significant changes to their respective business models, policies, systems, or plans, and those changes could impair or inhibit our ability to sell our products through those channels. Further, a significant change in consumer online behavior or the introduction of new or disruptive technology could adversely affect overall e-commerce trends and diminish the value of investments we have made in select online channels. Any of these results could cause a significant reduction in our revenue and have a material adverse effect on our results of operations.

Governmental regulation and oversight might adversely impact our operations. We are subject to governmental regulations in the manufacture and sale of moissanite jewels and finished jewelry. In particular, in July 2018 the FTC issued updated guidelines governing the description of lab-grown diamonds and other gemstones that require such gemstones to be clearly identified as to the gemstone’s lab-grown origin in any promotional or marketing materials. In addition, the precious metal in our finished jewelry may be subject to requirements, which vary by country and by state, such as hallmarking and alloy content. We may be under close scrutiny both by governmental agencies and by competitors in the gemstone industry, any of which may challenge our promotion and marketing of our moissanite jewels and finished jewelry products. While we have a policy to ensure compliance with applicable regulations, if our production or marketing of moissanite jewels and/or finished jewelry is challenged by governmental agencies or competitors, or if regulations are issued that restrict our ability to market our products, our business, results of operations, and financial condition could be materially adversely affected.

Risks Related to our Financial Position

The execution of our business plans could significantly impact our liquidity.  The execution of our business plans to expand our Online Channels segment and global market opportunities, as well as to create required inventory of our Forever One™, Moissanite by Charles & Colvard®, and Caydia® gemstones, requires significant investment of our resources, which may reduce our cash position. Should we fail to execute on our business plans, we could see delays in the return of cash from our investments, resulting in a decrease in our liquidity. Under our $5.00 million cash collateralized line of credit facility, or the JPMorgan Chase Credit Facility, that we obtained from JPMorgan Chase Bank, N.A., effective July 7, 2021, failure to comply with the covenants and defaults contained in the JPMorgan Chase Credit Facility or any other instrument or document executed in connection with the JPMorgan Chase Credit Facility could restrict our ability to draw on such facility. In addition, we currently 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. Further,
if we would be unable to access the capital markets or issue equity securities on terms that are acceptable to us or at all, our cash, cash equivalents, and restricted cash and other working capital may be constrained to meet our working capital and capital expenditure needs. Given our current liquidity position, it is unlikely that we would not be able to draw on the JPMorgan Chase Credit Facility, which matures on July 31, 2022. There is no guarantee of extension or renewal in connection with the terms and conditions of the JPMorgan Chase Credit Facility.

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.We are subject to a concentration of credit risk amongst our major customers (some of whom are distributors), and a default by any of these customers on their amounts owed to us could have a material adverse effect on our financial position. Future sales and our ability to collect accounts receivable depend, in part, on the financial strength of our customers and our distributors’ willingness and ability to successfully market our products. We estimate an allowance for accounts for which collectability is at risk and this allowance adversely impacts profitability. In the event customers experience greater than anticipated financial difficulties, insolvency, or difficulty marketing products, we expect profitability to be further adversely impacted by our failure to collect accounts receivable in excess of the amount due, net of the estimated allowance. In these circumstances, we may demand the return of product sold to such customers, resulting in an increase in inventory and a reduction in accounts receivable. Uncertainty in the current economic environment, as a result of the COVID-19 pandemic, constrained access to capital, the impact of inflation on our currency, and general market contractions has heightened, and may continue to heighten, our exposure to customer default and generate lower than expected distributor sales.

Negative or inaccurate information on social media could adversely affect our brand and reputation. We are actively using various forms of digital and social media outreach to accomplish greater awareness of our brand and the value proposition we offer. These social media platforms and other forms of Internet-based communications allow access not only by us, but by any individual, to a broad audience of consumers and other interested persons. Consumers value readily available information concerning goods that they have or plan to purchase; however, they may act on such information without further investigation or authentication. Many social media platforms, including those relating to recruiting and placement activities, immediately publish the content of their participants’ posts, often without filters or checks on accuracy of the content posted. While we actively monitor social media sites, we may be unable to quickly and effectively respond to or correct inaccurate and/or unfavorable information posted on social media platforms.  Any such information may harm our reputation or brand, which could in turn materially and adversely affect our business, results of operations, and financial condition.

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. We believe that certain metrics are key to our business, including but not limited to average order value, or AOV, and revenue growth for charlesandcolvard.com, our primary transactional website. As both the industry in which we operate and our business continue to evolve, so too might the metrics by which we evaluate our business. While the calculation of these metrics is based on what we believe to be reasonable estimates, our internal tools are not independently verified by a third party and may have a number of limitations and, furthermore, our methodologies for tracking these metrics may change over time. We continue to improve upon our tools and methodologies to capture data and believe that our current metrics are accurate; however, the improvement of our tools and methodologies could cause inconsistency between current data and previously reported data, which could confuse investors or lead to questions about the integrity of our data. In addition, if the internal tools we use to track these metrics under-count or over-count performance or contain algorithm or other technical errors, the data we report may not be accurate. Accordingly, you should not place undue reliance on these metrics.

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. We rely primarily on patent, copyright, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We held U.S. product and method patents for moissanite jewels, which expired in 2015, under which we believed that we had broad, exclusive rights to manufacture, use, and sell moissanite jewels in the U.S. We had these same patents in 25 foreign jurisdictions primarily across Asia and Europe that expired in 2016 and one in Mexico that expired in 2021. However, our product and method patent expirations have enabled competitors and other businesses to duplicate and market a similar product and enter the marketplace. Without patent protection, we must rely primarily on our branding strategy and the Supply Agreement under which Cree supplies SiC crystals exclusively to us, as well as confidentiality procedures, to protect our proprietary rights, which may or may not be sufficient. In addition, at the present time, we are primarily dependent on Cree’s technology for the production of SiC crystals. There can be no assurance that any patents issued to or licensed by or to us will provide any significant commercial protection, that we will have sufficient resources to protect our respective patents and proprietary rights, that any additional patents will be issued in the future, or that any existing or future patents will be upheld by a court should we seek to enforce our rights against an infringer.

The existence of valid patents does not prevent other companies from independently developing competing technologies. Existing producers of SiC crystals or others may refine existing processes for growing SiC crystals or develop new technologies for growing large single crystals of SiC or colorless SiC crystals in a manner that does not infringe any patents issued to or licensed by or to us. Accordingly, existing and potential competitors have been able to develop products that are competitive with or superior to certain of our products, and such competition could have a material adverse effect on our business, results of operations, and financial condition.

In addition, we have certain trademarks and pending trademark applications that support our moissanite and lab grown diamond branding strategy. The success of our growth strategy may depend on our continued ability to use our existing brand names in order to increase consumer awareness and further develop strong brands around our moissanite jewels and finished jewelry collections. We cannot assure that any future trademark or other registrations will be issued for pending or future applications or that we will be able to obtain licenses or other contractual rights to use brand names that may infringe the proprietary rights of third parties. We also cannot assure that any registered or unregistered trademarks or other intellectual property or contractual rights will be enforceable or provide adequate protection of our proprietary rights. Our inability to secure proprietary protection with respect to our brands could have a material adverse effect on our business, results of operations, and financial condition.

We also cannot be certain that our products and brand names do not or will not infringe valid patents, trademarks, and other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Litigation to determine the validity of any third party’s claims could result in significant expense and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. In the event of an adverse result of any such litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses for, and pay royalties on the use of, the technology subject to the litigation. We have no assurance that we would be successful in such development or that any such license would be available on commercially reasonable terms.

If we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer. From time to time, we evaluate strategic opportunities available to us for product, technology, or business acquisitions or dispositions. If we choose to make acquisitions or dispositions, we face certain risks, such as failure of an acquired business to meet our performance expectations, failure to recognize cost savings from a disposition, diversion of management attention, retention of management and existing customers of our current and any acquired business, and difficulty in integrating or separating a business’s operations, personnel, and financial and operating systems. We may not be able to successfully address these risks or any other problems that arise from future acquisitions or dispositions. Any failure to successfully evaluate strategic opportunities and address risks or other problems that arise related to any acquisition or disposition could adversely affect our business, results of operations, and financial condition.
Governmental regulationOur PPP Loan eligibility and oversight might adversely impactforgiveness remains subject to review for compliance with applicable SBA requirements. On June 18, 2020, we received the proceeds from a loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. Our loan in the principal amount of $965,000, or the PPP Loan, was disbursed by Newtek Small Business Finance, LLC, or the Lender, a nationally licensed lender under the SBA, pursuant to the Promissory Note issued by us on June 15, 2020. Pursuant to Section 1106 of the CARES Act, on June 14, 2021, we applied for forgiveness of our operations. WePPP Loan. On June 23, 2021, we were granted forgiveness by the SBA for the full principal amount of the PPP Loan.

In accordance with applicable eligibility requirements to receive the PPP Loan and for compliance with the forgiveness requirements of Section 7(a)(36) and Section 7A of the Small Business Act, we must retain all records relating to our PPP Loan for a period of six years from the date the loan was forgiven. During this period, our PPP Loan eligibility and loan forgiveness application are subject to governmentalreview and audit by the SBA. While we made our certification for loan eligibility in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan and that our receipt of the PPP Loan was consistent with the broad objectives of the Paycheck Protection Program of the CARES Act, the certification described above did not contain any objective criteria and is subject to interpretation. If, despite our good faith belief that we satisfied all eligibility requirements for the PPP Loan, we are found to have been ineligible to receive the PPP Loan or in violation of any of the laws or regulations that apply to us in connection with the manufacture and sale of moissanite jewels and finished jewelry. In particular,PPP Loan, including the FTC has issued regulations and guidelines governing the marketing of synthetic gemstones and other gemstones similar to diamond that require such gemstones to be clearly identified in any promotional or marketing materials. In addition, the precious metal in our finished jewelryFalse Claims Act, we may be subject to requirements,penalties, including significant civil, criminal, and administrative penalties and could be required to repay the PPP Loan. Now that we have applied for and have been granted forgiveness of our PPP Loan by the SBA, we were also required to make certain certifications in connection with that application for forgiveness, which vary by countryare subject to audit and by state, such as hallmarking and alloy content. We may be under close scrutiny bothreview by governmental agenciesentities and could subject us to significant penalties and liabilities if found to be inaccurate. A review or audit by competitors in the gemstone industry, anySBA or other government entity or claims under the False Claims Act could consume significant financial and management resources. Any of which may challenge our promotion and marketing of our moissanite jewels and finished jewelry products. While we have a policy to ensure compliance with applicable regulations, if our production or marketing of moissanite jewels and/or finished jewelry is challenged by governmental agencies or competitors, or if regulations are issued that restrict our ability to market our products,these events could harm our business, results of operations and financial condition could be materially adversely affected.condition.

Risks Related to Ownership of our Common Stock

Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our company. A number of provisions of our articles of incorporation and bylaws impact matters of corporate governance and the rights of shareholders. Certain of these provisions have an anti-takeover effect and may delay or prevent takeover attempts not first approved by our Board of Directors (including takeovers that certain shareholders may deem to be in their best interests). These provisions also could delay or frustrate the removal of incumbent directors or the assumption of control by shareholders. We believe that these provisions are appropriate to protect our interests and the interests of all of our shareholders.

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 2021, 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 in all instances we had regained compliance with the minimum bid price requirement. If we fail to satisfy Nasdaq’s listing requirements in the future, we expect to 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 our common stock is delisted from Nasdaq, 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, and employees and fewer business development opportunities. Additionally, the market price of our common stock may decline further and shareholders may lose some or all of their investment.

Item 1B.
Unresolved Staff Comments

Not applicable.

Item 2.
Properties

We currently lease approximately 36,350 square feet of office, storage, and light manufacturing space in the Research Triangle Park, area of North Carolina, from an unaffiliated third-party that is used by both of our current operating and reportable business segments.

The majority of all U.S. personnel, including our executive offices, sales offices, and administrative personnel, as well as our production and productiondistribution facilities are housed in theour current leased space.

Item 3.
Legal Proceedings

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

Item 4.
Mine Safety Disclosures

Not applicable.
PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Registrant’s Common Equity

Our common stock is traded on the Nasdaq Capital Market under the symbol “CTHR.” At the opening of business on November 3, 2017, shares of the Company’s common stock were transferred, at the Company’s request, from the Nasdaq Global Select Market to the Nasdaq Capital Market. The following table presents, for the periods indicated, the high and low sales prices of our common stock, as reported by the Nasdaq Global Select Market or Nasdaq Capital Market, as applicable. As of March 2, 2018,August 27, 2021, there were 243231 shareholders of record of our common stock.

  High  Low 
Year Ended December 31, 2016:      
First Quarter 
$
1.49
  
$
0.75
 
Second Quarter 
$
1.26
  
$
0.93
 
Third Quarter 
$
1.33
  
$
0.85
 
Fourth Quarter 
$
1.23
  
$
0.83
 
Year Ended December 31, 2017:        
First Quarter 
$
1.19
  
$
0.90
 
Second Quarter 
$
1.01
  
$
0.84
 
Third Quarter 
$
0.99
  
$
0.81
 
Fourth Quarter 
$
1.55
  
$
0.80
 

We did not pay any dividends on our common stock during 2017 or 2016.the fiscal years ended June 30, 2021 and 2020. We will regularly review and consider the best policies and practices for our company, including the dividend policy. The payment of future dividends will be dependent on the facts and circumstances at the time of that reviewreview.

Item 6.
Selected Financial Data

Not applicable.

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussionManagement’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to provide a better understanding of our 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 Item 1A, “Risk Factors” and our consolidated financial statements and the notes thereto included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for future periods.

Business Overview

Our Mission

At Charles & Colvard, we believe luxury can be both beautiful and conscientious. With innovative technology and sustainable practices,Ltd., our goalmission is to lead a revolution inredefine the definition of real within the jewelry industry – delivering a brilliant product at extraordinary value balanced with environmental and social responsibility.for consumers everywhere. We believe fine jewelry can be accessible, beautiful, and conscientious.

About Charles & Colvard

Charles & Colvard, Ltd., a North Carolina corporation founded in 1995 manufactures, markets(which may be referred to as Charles & Colvard, we, us, or our) is a globally recognized fine jewelry company specializing in lab created gemstones. We manufacture, market, and distributesdistribute 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 itsour proprietary moissanite gemstonejewels and premium lab grown diamonds for sale in the worldwide fine jewelry market. Our unique differentiator: moissanite – The World’s Most Brilliant Gem® –Charles & Colvard is core to our ambition to create a movement around beautiful, environmentally and socially responsible fine jewelry. We are the original creatorsource of lab-createdcreated 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 we are leading the wayaddition of lab grown diamonds is a natural progression for the Charles & Colvard brand.

We sell loose moissanite jewels, lab grown diamonds, and finished jewelry set with these gems through two operating segments: our Online Channels segment, which encompasses our digital properties components, comprised of 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. We report segment information based on the “management” approach. This segment reporting approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of our operating and reportable segments.

We operate in deliveringan e-commerce environment characterized by both complexity in global markets and ongoing economic uncertainties in the most pure form of this gemstone through technological advances in manufacturing, cutting, polishingU.S. and setting.
internationally. Our strategy is to build a globally revered and accessible brand of gemstones and finished fine jewelry products set with moissanite and lab grown diamonds. We believe that appealsour goods appeal to a wide consumer audience and leverage our advantage of being the original and leading worldwide source of created moissanite.moissanite and purveyor of premium lab grown diamonds. We 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 discerning needsdemands 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 sell loose moissanite jewelscontinue to focus on affordability initiatives. We also expect to continue innovating and finished jewelry through two business operating segments:investing in lab created gemstone technologies to fulfill evolving product requirements for our Online Channels segment, which comprisescustomers and investing in our charlesandcolvard.com website, e-commerce outlets, including marketplaces such as Amazonpeople so that we have the technical and eBay, and drop-ship customers, such as Overstock.com, and other pure-play, exclusively e-commerce customers, such as Gemvara; andproduction skills necessary to succeed without limiting our Traditional segment, which consistsability 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 moissanite positions Charles & Colvard goodsCreated Moissanite® and Caydia® lab grown diamonds positions our products at the many touchpoints where consumers are when they are making their buying decisions – thereby creatingcontinuing to create greater exposure for our brand and increasing consumer demand.

COVID-19

In February 2016, we madeMarch 2020, the strategic decisionnovel strain of coronavirus, known as COVID-19, was declared a pandemic by the World Health Organization and declared a national emergency by the U.S. Government, and has continued to explorenegatively affect the U.S. and global economies. In response to the pandemic, federal, state, county and local governments, and public health organizations and authorities around the world have implemented a variety of measures intended to control the spread of the virus including quarantines, “stay-at-home” orders, travel restrictions, school closures, business limitations and closures, social distancing, and hygiene requirements. While some of these measures have been lifted or eased in certain jurisdictions, other jurisdictions have seen increases in new COVID-19 cases, resulting in restrictions being reinstated or new restrictions being imposed. There continues to be considerable uncertainty regarding such measures and potential divestiturefuture measures.

We have continued taking measures to protect the health and safety of our direct-to-consumer home partyemployees, including updating our return-to-work policies, as necessary, working with our customers and suppliers to minimize disruptions, and supporting our community in addressing the challenges posed by this ongoing global pandemic. During Fiscal 2021, we experienced impacts in our business previously operated throughrelated to COVID-19, primarily in continued increased coronavirus-related costs, interruptions in supplier deliveries, impacts of travel and delivery restrictions, site access and quarantine restrictions, and the impacts of remote work and adjusted work schedules.

The COVID-19 pandemic continues to present business challenges and we expect these to continue into Fiscal 2022. We have executed plans to reintroduce employees to the workplace as vaccine rates increase and COVID-19 cases decrease. Although, in light of the recent increase in infections due to evolving viral variants, we have not yet returned to pre-pandemic workforce levels in our Charles & Colvard Direct, LLC (dba Lulu Avenue®) subsidiary. After careful analysisworkplace, and we are experiencing stabilization of employee attendance in our operations and distribution facilities and throughout our supply chain. A segment of our core competencies, go-to-market strategies,corporate staff continues working a blend of remote and intentin-person work schedules and we are taking measures to advance toward profitability,facilitate the management teamprovision of vaccines to our employees in line with state and Boardlocal guidelines. We also continue working with our customers and suppliers to minimize disruptions, including at times accelerating payments to key suppliers that are due by their terms in future periods. We expect to continue accelerating payments to our suppliers in some cases into Fiscal 2022.

Although the COVID-19 pandemic did not have a significant adverse impact on our financial results in Fiscal 2021, the ultimate impact of DirectorsCOVID-19 on our operations and financial performance in future periods, including our ability to execute our 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 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 anticipate that the COVID-19 pandemic is likely to continue to impact our business, financial condition, results of operations and/or cash flows in the fiscal year ending June 30, 2022.

At the onset of the pandemic, we successfully applied for and received the proceeds from a PPP Loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. Our PPP Loan in the principal amount of $965,000 was disbursed by our Lender pursuant to a Promissory Note issued by us on June 15, 2020. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000. The full amount of the gain in connection with the extinguishment of the underlying debt, including the forgiveness of accrued and unpaid interest in the amount of approximately $9,000, was recognized in the fiscal year ended June 30, 2021.

We took advantage of available COVID-19 related payroll tax credits for certain wages and paid leave provided by us during the pandemic. A portion of these eligible tax credits are determined by qualified emergency paid sick and expanded family and medical leave wages pursuant to the Families First Coronavirus Response Act, or FFCRA, which had positive impact on our cash from operations in Fiscal 2021. In addition, the Consolidated Appropriations Act, 2021, provides that employers who received a divestiture ofPPP loan may also qualify for the Employee Retention Credit (the “ERC”). Previously, pursuant to the CARES Act, taxpayers that received a PPP loan were not eligible for the ERC and this distribution channelchange is retroactive to be inMarch 27, 2020. We believe that we qualify for certain employer-related tax benefits pursuant to the ERC and expect to amend our best interest andapplicable federal payroll tax returns for such benefit. Further, as permitted by the NC COVID-19 Relief Act, we expect to receive an incremental tax credit towards our shareholders’ best interest. On March 4, 2016,contributions to the North Carolina Unemployment Insurance Fund. Accordingly, we and Charles & Colvard Direct, LLC entered into an asset purchase agreement with Yanbal USA, Inc., or Yanbal, under which Yanbal purchased certain assetswill recognize any payroll tax credits related to our direct-to-consumer home party business for $500,000these federal and assumed certain liabilities related to such assets. A more detailed description of this transaction is included in Note 13, “Discontinued Operations,”state legislative actions in the Notes to the Consolidated Financial Statements. Weperiod such benefits are now presenting the operating results of Charles and Colvard Direct, LLC as a discontinued operation.received.
2017 was a year of growth and optimization of our branding initiative. We progressed the business from our 2016 re-launch, and focused on driving consumer awareness while making calculated marketing and sales investments as we engaged new channel partners and forged inroads into new markets. Over the course of the year, we executed against our strategic plan to deliver the following outcomes:

·
Innovated the Forever OneTM product line – In 2017, we invested resources into the continued expansion of the Forever OneTM offering. We announced the availability of Exotic Gemstones – a selection of grand loose gemstones that range from six carats to 15.5 carats DEW. We also introduced new gemstones in coveted shapes including heart, marquis and trillion, bringing Charles & Colvard’s breadth of Forever OneTM to 14 cuts. In addition, we released Forever OneTM melee accent gemstones that are used to enhance jewelry products such as rings, earrings and pendants. With Forever OneTM representing 84% of our total net revenue, we believe we have achieved critical mass in the establishment of this gemstone as the industry’s leading moissanite option.
·
Expanded our finished jewelry line – We expanded our product line and introduced new jewelry options in fashion, fine, and bridal jewelry. This breadth is important as we expand our footprint beyond bridal and work toward building a relationship with our consumers that transcends a lifetime of commemorative moments.
·
Invest in key retail and wholesale partnerships – We leveraged significant groundwork laid with existing partners whose brands and customers align with ours to amplify our reach into these established markets. A key accomplishment for 2017 was our expanded footprint with Helzberg Diamonds stores. Growing from our initial test of 50 stores in 2016, we celebrated a full year of brick-and-mortar success with Helzberg with an expansion into nearly all doors – a testament to the significant performance of our product in their stores. This is an important relationship for Charles & Colvard as we position ourselves in varied consumer-facing outlets to serve the consumer who wants to touch and see moissanite to validate their purchase.
·
Explore new traditional and non-traditional sales channels – We secured new inroads in previously unexplored channels as green field opportunities that we believe will open new and innovative inroads to the consumer.
·
Convey e-commerce learning to new channels – We leveraged our experience and significant underpinnings in e-commerce to expand our footprint into new channels and regions. We exemplified this goal with the launch of Charles & Colvard jewelry on Alibaba’s Tmall® marketplace in China. We will continue to explore optimal audiences and outlets for our products as we evolve this strategy in 2018.
·
Evolve our customer service function – We continually improved our customer service function throughout 2017, including a new 60-day return policy, and free shipping and returns. Coupled with substantial improvements in our charlesandcolvard.com shopping and mobile experiences, we made significant strides in our customer’s experience.
·
Amplify our global marketing efforts – We continue to carefully measure the return on our marketing investments, and focus our efforts on profitable endeavors that drive interest in the Charles & Colvard brand, pull consumers to our many sales and educational outlets, and drive conversions. Digital marketing is a complicated endeavor, and we believe it is imperative to leverage analytics and technology to support smart marketing investments. We will take our learnings and successes from 2017, and apply them to our 2018 organic and international growth plans.
·
Advance toward profitability – In 2017, we made calculated investments in our growth while continually striving to reach profitability, which culminated in profitable financial results for the fourth quarter of 2017. These efforts solidified the management team’s understanding of what it takes to make Charles & Colvard a profitable business, as well as set a baseline for the investments required to achieve sustainable top-line growth.
AsCurrently, we continueare conducting business with certain modifications. In accordance with recent Centers for Disease Control and Prevention, or CDC, and the North Carolina Department of Health and Human Services, or the NCDHHS, guidelines related to execute our strategy to buildmaximizing protection from the spread and reinvest in our businesses, significant expenses and investment of cash will be required aheadinfection of the revenue streamsDelta variant of COVID-19, we expect in the future. While this has resulted in some unprofitable reporting periods during 2016are requiring all employees, contractors, and 2017, we will continuevisitors to analyze each investment decision with the intent to grow our businesswear masks and practice physical distancing while maintaining our goalonsite, regardless of achieving positive financial results and cash flows.vaccination status. We believe that we willour employees and contractors continue to generateplay a critical role in our COVID-19 prevention and mitigation efforts for the Company as well as for our community at large.

Recent modifications to our COVID-19 return-to-work policy include but are not limited to the following: all employees, contractors, and visitors are encouraged to clean and sanitize all work surfaces, including personal office or cubicle areas; office common areas will be cleaned nightly, and floors and carpets will be cleaned as necessary; and currently, we are not mandating that employees, contractors, and visitors receive the COVID-19 vaccine or that non-fully vaccinated individuals provide evidence of negative COVID-19 test results in order to enter our facilities.

At this time, and until further notice, the following precautionary steps and procedures within our policy remain in place. Prior to entry to our facilities, all employees, contractors, and visitors (regardless of vaccination status) are required to comply with the following: complete a COVID-19 symptom screening questionnaire; properly wear a mask; take a thermal body temperature scan; and practice social distancing at all times within the facility, including designated common areas. We are supplying all employees, contractors, and visitors with face masks and latex gloves for their personal use, and we have accessestablished a designated quarantine room to sufficientisolate any employee, contractor, or visitor who may be experiencing COVID-19-like symptoms while in our facilities. Given our office’s square footage, we intend to continue to observe recommended governmental guidelines related to occupancy and capacity restrictions.

Regardless of vaccination status, any employees, contractors, or visitors presenting with symptoms of COVID-19 or who have tested positive for the COVID-19 virus may only return to our facilities once ten days have passed since symptoms of COVID-19 first appeared, at least 24 hours have passed with no fever (without the use of fever-reducing medications), and any other COVID-19 symptoms (i.e., loss of taste or smell) continue improving. Employees, contractors, or visitors who may have been exposed to COVID-19, but remain asymptomatic, are able to return to work after receiving a negative COVID-19 test result three-to-five days following a known exposure or 14 days since the last contact with an individual who was presumed to have or had COVID-19.

Our current return-to-work policy is tentative and subject to change based on federal, state, or local governmental guidance as well as the evolution of the pandemic itself. Going forward, we plan to continue monitoring the development and progression of COVID-19 and its variant infections in our state and local geographical area. If we believe such policy changes are warranted, we intend to consider and plan to take appropriate actions at that time.

As global and U.S economic activity continues evolving in response to the ongoing COVID-19 pandemic, the risk of constraints on our cash and working capital, including experiencing potential liquidity challenges, remains in the forefront of our working capital management practices. Despite our cost-saving efforts, many business and operating expenses have remained flat or continued to fundrise. Cash flow management will remain crucial for our business in the months ahead and we intend to monitor fluctuations in our revenues that could impact our ongoing cash flow from operations We continue to focus on being more nimble in managing our inventory levels given the uncertainty in the supply chain, which may also place further demands on working capital.

Our outlook remains subject to the various risks and uncertainties in connection with the pandemic and is based on assumptions that management believes in good faith are reasonable, but which may be materially different from actual results. Currently, we believe there are multiple factors that could cause actual results to differ materially from the forward-looking statements in this Form 10-K, including our strategic goals for Fiscal 2022 set forth in Our Strategic Outlook, included in Part I, Item 1, “Business”, of this Annual Report on Form 10-K. These factors include, but are not limited to: our ability to face the challenges posed by the COVID-19 pandemic and implementation of any such related response plans; fluctuations in COVID-19 cases in the U.S. and the extent that geography of outbreak primarily matches the regions in which we and our principal business partners operate; the resiliency and potential adverse impacts on our various consumer end-use markets; the potential negative impact of the COVID-19 pandemic on our ability to continue producing and supplying finished goods and related services at normal levels or at all; the duration, impact and severity of the impact of the COVID-19 pandemic on our operations, including the markets in which we do business, our suppliers, customers or other business partners as we executewell as our plansemployees; the economic impact of government responses to expandthe pandemic; the performance of the U.S. economy, including the impact on the economy of the COVID-19 pandemic and growgovernmental orders restricting activities imposed to prevent further outbreak of viral infections; and the business.resulting economic events beyond our control.

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We believe that our management has taken – and continues to take – swift and appropriate action designed to hedge against the overall impact that the pandemic may have on our business, to prepare for a potential recessionary environment, and to efficiently manage the business while maintaining adequate liquidity and maximum operating flexibility. We remain focused on three critical areas of wellbeing, including safeguarding the health and safety of our employees, streamlining operations while ensuring support of our brand and customers, and maintaining our financial strength and stability as we move forward into Fiscal 2022.

Highlights of the Fiscal Year Ended June 30, 2021

During the fiscal year ended June 30, 2021, we delivered on several key initiatives, which we believe leaves us well poised for future growth as we move forward into the fiscal year ending June 30, 2022. These accomplishments in fiscal year ended June 30, 2021, include the following:

Expansion of Digital Presence. During Fiscal 2021, we remained focused on our digital marketing advertising strategy that includes a high-conversion consumer targeting plan coupled with lower marketing funnel activities. We believe that the success we’ve seen targeting consumers with whom we have already engaged – and who have expressed interest in our products – continues to be a more effective use of our digital advertising spend and provides a more immediate return on our marketing investment. We believe this strategy is critical to our top line growth as we move forward into Fiscal 2022. In addition, during Fiscal 2021, we expanded our presence on available social media channels such as TikTok, and rolled out new social media programming shows on Facebook Live and Instagram Live. In March 2021, we launched moissaniteoutlet.com, which is a product disposition channel that we believe complements our global positioning and dominance in the moissanite gemstone market. Our website, moissaniteoutlet.com, is an e-commerce shopping destination that caters to the opportunistic and bargain-seeking consumer base for our moissanite products;

Enhanced Customer Experience. This fiscal year we expanded our virtual consultation services that we introduced last year, by adding additional expert jewelry consultants to our team that provides us with broader availability to make it easier for consumers to schedule personal consultive services. This is a personal shopping concierge service where we offer a customized virtual experience designed to simplify the ring buying process for our customers. This customer support service offers deeper personalization and a more immersive shopping experience for our consumers. We also launched our Macy’s in-store program in Fiscal 2021 to reach and service more customers who are seeking to see, touch, and feel our products when shopping. As consumers are returning to in-store shopping, we believe this is a critical component of our omnichannel marketing strategy, which places our products where the customer is actually shopping. Lastly, in September we upgraded the online shopping experience on charlesandcolvard.com, our primary transactional website. These online modifications provide new and improved functionality as well as a new look and feel to our website. We believe that offering these ongoing enhanced customer experiences, particularly those featuring virtual personal shopping opportunities, are important for the growth of our brand. We also believe that these options remain relevant and important to our customers when social distancing practices are – and will likely remain – in place throughout the U.S. and much of the world;


•
Product Development. In Fiscal 2021, we expanded our patented Signature Collection of Forever One™ moissanite jewelry assortment to include emerald, elongated cushion, and radiant cut gemstones. Previously, these gems and unique cuts were not available in our Signature Collection line of products. In September 2020 we launched Caydia®, an exclusive brand of premium lab grown diamonds and jewelry. We believe our premium lab grown diamonds provide us access to serve a broader and completely new segment of the gemstone audience and customer base that is predisposed to shopping for a real diamond. Throughout Fiscal 2021, we continued to expand our Caydia® lab grown diamond jewelry assortment with new styles as well as additional gemstone cuts. Currently, our exclusive brand of Caydia® lab grown diamonds are available in round, oval, cushion, emerald, and princess cuts; and

Disciplined Growth. We capitalized on the change in the global consumer behavior and buying habits that developed during the past year as shoppers turned to online shopping and e-commerce purchasing opportunities as the world evolved and learned to live with the restrictions imposed by the COVID-19 pandemic. We achieved stability and improved technical access to our shopping platforms, which resulted in a strong shopping foundation that supports our omnichannel marketing strategy. We also developed and initiated a new strategic relationship and business partnership with JPMorgan Chase Bank, N.A., that includes a new $5.00 million cash collateralized line of credit facility that may be used for general corporate and working capital purposes. We believe this new commercial banking and financial relationship provides a foundation for us to solidify our strategic and financial objectives and is a basis for us to expand our financial capabilities going forward.

As we move forward into Fiscal 2022, our strategic focus remains centered on the health and growth of our brand on a global scale. We will continue to execute on our key strategies with an ongoing commitment to measured spending and generating sustainable earnings improvement.
Further, as we continue managing through these challenging and unprecedented times, we plan to remain highly focused on prudently developing the reach of our brand – both domestically and internationally – through select digital marketing initiatives that align with consumer engagement and demand. We continue to believe that our long-term mission will ultimately be accomplished through our ability to remain fluid and shift brand awareness strategies that are sensitive and responsive to these ever-changing times.

Our MD&A generally discusses Fiscal 2021 and Fiscal 2020 items and year-to-year comparisons between Fiscal 2021 and Fiscal 2020. Discussions of Fiscal 2020 items and year-to-year comparisons between Fiscal 2020 and the fiscal year ended June 30, 2019, or Fiscal 2019, that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results or Operations” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 filed with the SEC on September 4, 2020.

Results of Operations

The following table sets forth certain consolidated statements of operations data for the fiscal years ended June 30, 2021 and 2020:

  Year Ended June 30, 
  2021  2020 
Net sales $39,235,839  $29,189,020 
Costs and expenses:        
Cost of goods sold  20,809,690   21,200,207 
Sales and marketing  8,476,716   9,443,244 
General and administrative  4,441,441   4,861,297 
Total costs and expenses  33,727,847   35,504,748 
Income (Loss) from operations  5,507,992   (6,315,728)
Other income (expense):        
Gain on extinguishment of debt  974,328   - 
Interest income  5,581   158,091 
Interest expense  (8,953)
  (884)
Loss on foreign currency exchange  (603)
  (1,829)
Total other income (expense), net  970,353   155,378 
Income (Loss) before income taxes  6,478,345   (6,160,350)
Income tax benefit (expense)  6,332,421   (1,733)
Net income (loss) $12,810,766  $(6,162,083)

Consolidated Net Sales

Consolidated net sales for the fiscal years ended June 30, 2021 and 2020 comprise the following:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Finished jewelry $24,401,546  $16,777,628  $7,623,918   45%
Loose jewels  14,834,293   12,411,392   2,422,901   20%
Total consolidated net sales $39,235,839  $29,189,020  $10,046,819   34%

Consolidated net sales were $39.24 million for the fiscal year ended June 30, 2021 compared to $29.19 million for the fiscal year ended June 30, 2020, an increase of $10.05 million, or 34%. In addition to the adverse impact that the COVID-19 pandemic had on consolidated net sales for the fiscal year ended June 30, 2020, the increase in consolidated net sales for the fiscal year ended June 30, 2021 compared with consolidated net sales for the prior fiscal year was also principally due to robust calendar year-end holiday sales during our fiscal quarter ended December 31, 2020, coupled with strong February Valentine’s Day sales and March St. Patrick’s Day sales during our fiscal quarter ended March 31, 2021. These higher sales for Fiscal 2021 were also related to increased consumer awareness and ongoing strong demand for our moissanite jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds. These increases resulted in higher finished jewelry product net sales during the fiscal year ended June 30, 2021 in both our Online Channels segment and Traditional segment. One of the most profound changes in consumer buying habits over the past fiscal year was the shift to digital channels shopping from the more traditional brick-and-mortar platforms. We believe the COVID-19 pandemic accelerated this shift toward e-commerce, as consumers worldwide became more reliant on the digital channel while in isolation. Accordingly, we saw strong increases in our Online Channels segment net sales in the fiscal year ended June 30, 2021. As consumer confidence strengthened during the second half of Fiscal 2021, net sales in our Traditional segment increased over this period driven by stronger loose jewel sales in our distributor network. However, these increased loose jewel net sales in our Traditional segment were offset in part due to lower international sales during the fiscal year ended June 30, 2021.

Sales of finished jewelry represented 62% and 57% of total consolidated net sales for the fiscal years ended June 30, 2021 and 2020, respectively. For the fiscal year ended December 31, 2017June 30, 2021, finished jewelry sales were $24.40 million compared to $16.78 million for the fiscal year ended June 30, 2020, an increase of $27.03$7.62 million, or 45%. This increase in finished jewelry sales was due primarily to higher finished jewelry sales of Moissanite by Charles & Colvard® and our Signature Collection line of products in our Online Channels segment as well as in our Traditional segment. Net sales of our Moissanite by Charles & Colvard®and our Signature Collection finished jewelry and loose jewels represented 15% and 9%, respectively, of total net sales for the fiscal year ended June 30, 2021, compared to that of 11% and 7%, respectively, for the prior fiscal year.

Sales of loose jewels represented 38% and 43% of total consolidated net sales for the fiscal years ended June 30, 2021 and 2020, respectively. For the fiscal year ended June 30, 2021, loose jewel sales were 7%$14.83 million compared to $12.41 million for the fiscal year ended June 30, 2020, an increase of $2.42 million, or 20%. The increase for the fiscal year ended June 30, 2021 was primarily a result of higher sales of loose jewels through our domestic distributors. However, these increased loose jewel sales were offset somewhat by lower thansales of loose jewels through the international distribution network in our Traditional segment.

U.S. net sales accounted for approximately 95% and 92% of total consolidated net sales during the fiscal years ended June 30, 2021 and 2020, respectively. U.S. net sales increased during the fiscal year ended December 31, 2016. June 30, 2021 principally as a result of increased sales to U.S. customers in both our Online Channels segment and Traditional segment.

Our largest U.S. customer during the fiscal years ended June 30, 2021 and 2020 accounted for 13% of total consolidated net sales during each of the respective periods then ended. Likewise, our second largest U.S. customer during the fiscal years ended June 30, 2021 and 2020 accounted for 12% of total consolidated net sales during each of the respective periods. It should be noted that our largest and second largest customers in Fiscal 2021 were our second largest and largest customers, respectively, in Fiscal 2020. We expect that we will remain dependent on our ability, and that of our largest customers, to maintain and enhance retail and wholesale programs. A change in or loss of any of these customers or retailer relationships could have a material adverse effect on our results of operations.

International net sales accounted for approximately 5% and 8% of total consolidated net sales during the fiscal years ended June 30, 2021 and 2020, respectively. International net sales decreased to $2.01 million, or 15%, during the fiscal year ended June 30, 2021 compared to $2.37 million in the fiscal year ended June 30, 2020. International sales decreased during the fiscal year ended June 30, 2021, compared to the prior fiscal year primarily as a result of lower demand in our international distributor market, which was partially offset by growth in our direct-to-consumer presence internationally reflecting solid direct-to-consumer sales from our Online Channels segment in international markets. In light of the effects of ongoing global economic conditions and as the world continues to recover from the COVID-19 pandemic, we continue to evaluate these and other potential distributors in international markets to determine the best long-term partners. As a result, and in light of the ongoing worldwide pandemic and international trade challenges, we expect our sales in these markets to continue to fluctuate significantly each reporting period.

We did not have an international customer account for 10% or more of total consolidated sales during the fiscal years ended June 30, 2021 and 2020. A portion of our international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers.

Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the fiscal years ended June 30, 2021 and 2020 are as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Product line cost of goods sold:            
Finished jewelry $11,272,012  $7,469,790  $3,802,222   51%
Loose jewels  6,857,755   6,062,186   795,569   13%
Total product line cost of goods sold  18,129,767   13,531,976   
4,597,791
   34%
Non-product line cost of goods sold  2,679,923   7,668,231   (4,988,308)  (65)%
Total cost of goods sold $20,809,690  $21,200,207  $(390,517)  (2)%

Total cost of goods sold was $20.81 million for the fiscal year ended June 30, 2021 compared to $21.20 million for the fiscal year ended June 30, 2020, a net decrease of approximately $391,000, or 2%. Product line cost of goods sold is defined as product cost of goods sold in each of our Online Channels segment and Traditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory write-offs; and other inventory adjustments, comprising costs of quality issues, and damaged goods.

The decrease in consolidated net salestotal cost of goods sold for the fiscal year ended December 31, 2017, was due principallyJune 30, 2021 as compared to the sale, in a single transaction,fiscal year ended June 30, 2020 was driven primarily by the prior year write-off during the first quarter of 2016ended March 31, 2020, of approximately $6.77$5.26 million representing the carrying value of our legacy gemstoneloose jewel inventory and finished goods inventory set with these legacy gemstones. This decrease in cost of goods sold for the fiscal year ended June 30, 2021, was offset in part by higher cost of goods sold principally driven by increased sales of finished jewelry, which reflect higher material and labor costs, in both our Online Channels segment and Traditional segment as a result of strong product demand during the year.

The net decrease in non-product line cost of goods sold for the fiscal year ended June 30, 2021 comprises a $5.71 million lower change in inventory valuation adjustments principally related to the prior fiscal year’s write-off of the carrying cost of the Company’s legacy material inventory of $5.26 million during the quarter ended March 31, 2020, as well as other inventory valuation adjustments related to changes in obsolescence reserves in the fiscal year ended June 30, 2021, compared to those in the prior fiscal year. This decrease in non-product line cost of goods sold was offset in part by a $503,000 increase in freight out principally from increased shipments resulting from substantial Online Channels segment sales growth during the fiscal year ended June 30, 2021; a $147,000 increase in non-capitalized manufacturing and production control expenses in the current year principally due to the timing when work-in-process goods are received into inventory and applicable overhead costs are allocated; and an approximate $76,000 change in other inventory adjustments primarily relating to adverse changes in production standard cost variances compared to those during the fiscal year ended June 30, 2020.

For further discussion of non-product line cost of goods sold, see Note 3 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

Sales and Marketing

Sales and marketing expenses for the fiscal years ended June 30, 2021 and 2020 are as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
             
Sales and marketing $8,476,716  $9,443,244  $(966,528)  (10)%

Sales and marketing expenses were $8.48 million for the fiscal year ended June 30, 2021 compared to $9.44 million for the fiscal year ended June 30, 2020, a decrease of approximately $967,000, or 10%.

The decrease in sales and marketing expenses for the Legacy Inventory Sale,fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 was primarily due to a $1.31 million decrease in compensation-related expenses; a $164,000 decrease in professional services fees principally comprising non-recurring consulting services for cybersecurity and merchandising imaging incurred in the prior year; a $26,000 decrease in travel expenses as a result of COVID-19 cost-control measures; and a $1,000 net decrease in miscellaneous other general sales and marketing expenses. These decreases were partially offset by a $282,000 increase in advertising and digital marketing expenses; an $84,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements; an $83,000 increase in general office-related expenses, which are principally related to higher credit card transaction fees from increased online sales levels; a $69,000 increase in depreciation and amortization expense relating to capitalized costs associated with information technology-related upgrades; and a $17,000 increase in employment-related recruiting fees.

Compensation expenses for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 decreased primarily as a result of a $1.25 million decrease in salaries, commissions, and related employee benefits in the aggregate as a result of our efforts to reduce inventories. ThisJune 2020 management reorganization and workforce reduction; a $76,000 decrease in consolidated net sales for the year ended December 31, 2017, was offset partially by increased demand for our Forever OneTM gemstones overemployee-related severance costs recognized in the prior year which also was a result of our June 2020 management reorganization and workforce reduction; and a $68,000 decrease in employee stock-based compensation expense associated with the modification of terms for certain participant stock options in Fiscal 2020 that resulted in the recognition of higher finished jewelry net sales during 2017. Traditional segment net salesstock compensation expense in the prior fiscal year. These decreases were partially offset by an $84,000 increase in bonus expense reflecting improved operating results in the current year that impacts this performance-based compensation-related benefit.

The increase in digital marketing expenses for the fiscal year ended December 31, 2017 of $15.95 million were 21% lower than Traditional segment net sales duringJune 30, 2021 compared to the fiscal year ended December 31, 2016,June 30, 2020 was primarily due to the Legacy Inventory Salea $766,000 increase in the prior year. This decreaseInternet marketing costs and a $20,000 increase in print media expenses. Both increases reflect changes in our overall social media and print marketing strategies during Fiscal 2021 compared with those in Fiscal 2020. These increases were partially offset by a $386,000 decrease in outside agency fees, also as a consequence of modifications in our marketing strategy and reliance on internal resources during the prior year was offset somewhat by strong finished jewelry sales during 2017. Online Channels segment net salescurrent year; a $111,000 decrease in cooperative advertising; and a $7,000 decrease in promotion-related expenses.

General and Administrative

General and administrative expenses for the fiscal years ended June 30, 2021 and 2020 are as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
             
General and administrative $4,441,441  $4,861,297  $(419,856)  (9)%

General and administrative expenses were $4.44 million for the fiscal year ended December 31, 2017 of $11.09June 30, 2021 compared to $4.86 million were 25% greater than Online Channels segment net sales duringfor the fiscal year ended December 31, 2016, primarily due to higher finished jewelry sales and increased demand for our Forever OneTM gemstones during 2017 evidenced through our increased presence on e-commerce outlets, including charlesandcolvard.com.June 30, 2020, a decrease of approximately $420,000, or 9%.

The decrease in the previous year. Finished jewelry sales comprised 39% of our total consolidated net sales and increased 35% to $10.45 million, compared with $7.72 million in the previous year.
Operating expenses from continuing operations decreased by $533,000, or 4%, to $12.17 million in 2017 from $12.70 million in 2016. Of this decrease, general and administrative expenses decreased $855,000, or 15%,for the fiscal year ended June 30, 2021 compared to $4.69 millionthe fiscal year ended June 30, 2020 was primarily due to a $428,000 decrease in professional services; a $206,000 decrease in compensation-related expenses; a $7,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve policy; and a $1,000 net decrease in miscellaneous other general and administrative expenses. These decreases were partially offset by a $58,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; a $50,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements; a $38,000 increase in housing allowances and travel-related expenditures; a $30,000 increase in insurance expenses principally related to higher renewal premiums; a $20,000 increase in bank charges as a result of transaction fees associated with increased online transactions; a $14,000 increase in Board member retainer fees due to the temporary reduction in fees paid to our Board of Directors in connection with cost control measures implemented during the COVID-19 pandemic in the prior year; a $9,000 increase in depreciation and amortization expense; and a $3,000 increase in business taxes and licenses.

Professional services fees decreased for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily due to a $283,000 decrease in legal fees resulting from non-recurring non-capitalized fees incurred in connection with our underwritten public offering and corporate governance matters in the prior year; a $101,000 decrease in consulting and other professional services primarily in connection with accounting department support in the prior year; and a $66,000 decrease in investor relations fees. These decreases were partially offset by a $22,000 increase in fees associated with audit and tax services in the current year.

Compensation expenses decreased for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily due to a $282,000 decrease in severance expenses recognized in the prior year related to our June 2020 management reorganization and workforce reduction; a $184,000 decrease in salaries and related employee benefits in the aggregate which also was a result of our June 2020 management reorganization and workforce reduction; and a $54,000 decrease in employee stock-based compensation expense associated with the modification of terms for certain participant stock options in Fiscal 2020 that resulted in the recognition of higher stock compensation expense in the prior fiscal year. These decreases were offset in part by a $314,000 increase in bonus expense reflecting improved operating results in Fiscal 2021 that impacts this performance-based compensation-related benefit.

Gain on Extinguishment of Debt

Gain on extinguishment of debt for the fiscal years ended June 30, 2021 and 2020 is as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Gain on extinguishment of debt
 $974,328  $-  $974,328   100%

On June 18, 2020, we received the proceeds from our Paycheck Protection Program Loan, or the PPP Loan, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or SBA. The PPP Loan in the principal amount of $965,000 was disbursed by Newtek Small Business Finance, LLC, or the Lender, pursuant to a promissory note, or the Promissory Note, dated June 15, 2020. During the period of time that the principal under the Promissory Note was outstanding, we accounted for the Promissory Note as debt within the accompanying consolidated financial statements. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000. The full amount of interest expense to-date in the amount of approximately $9,000 that the Company recognized during the period the principal of the PPP Loan was outstanding was also forgiven by the SBA. Accordingly, the full amount of the gain in connection with the extinguishment of this debt, including the benefit from the forgiveness of the inception to-date interest expense, was recognized in the fiscal year ended June 30, 2021.

Interest Income

Interest income for the fiscal years ended June 30, 2021 and 2020 is as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Interest income $5,581  $158,091  $(152,510)  (96)%

In June 2019, we completed an underwritten public offering of 6,250,000 shares of our common stock, which together with the partial exercise of the underwriters’ overallotment option for an additional 630,500 shares in July 2019, resulted in net proceeds of approximately $9.99 million. The net proceeds from this offering, along with excess operating cash, are deposited into and maintained in an interest-bearing account with a federally insured commercial bank. Accordingly, during the fiscal years ended June 30, 2021 and 2020, we earned interest from cash on deposit in this interest-bearing account. The decrease in earned interest reflects adverse changes in interest rate fluctuations during Fiscal 2021 compared with Fiscal 2020.

Interest Expense

Interest expense for the fiscal years ended June 30, 2021 and 2020 is as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Interest expense $8,953  $884  $8,069   913%

In accordance with the terms of the Promissory Note, during the period of time the principal of the PPP Loan was outstanding through June 23, 2021, we accrued interest at a fixed rate of 1% per annum. Our accrual for interest expense associated with the PPP Loan began June 18, 2020, the date we received the proceeds for the PPP Loan from our Lender. Likewise, we accrued interest on the PPP Loan during the fiscal year ended June 30, 2021, through June 23, 2021, the date our PPP Loan was forgiven by the SBA.

Loss on Foreign Currency Exchange

Loss on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the fiscal years ended June 30, 2021 and 2020 are as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Loss on foreign currency exchange $603  $1,829  $(1,226)  (67)%

During the fiscal years ended June 30, 2021 and 2020, we had international sales transactions denominated in currencies other than the U.S dollar that resulted in foreign currency exchange net losses. The decrease in these losses reflects the lower level of international sales denominated in foreign currencies as well as foreign currency exchange rate fluctuations during fiscal year ended June 30, 2021 compared with those of the prior fiscal year.

Provision for Income Taxes

We recognized a net income tax benefit of approximately $6.33 million and a net income tax expense of approximately $2,000 for the fiscal years ended June 30, 2021 and 2020, respectively. Our income tax provisions in these periods contain estimated taxes, penalties, and interest associated with uncertain tax positions.

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. Beginning in 2014, we determined that negative evidence outweighed the positive and established a full valuation allowance against our deferred tax assets and we maintained such full valuation allowance through the period ended June 30, 2020. However, 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 includes 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 exists as of June 30, 2021, to conclude that it is more likely than not deferred tax assets of approximately $6.35 million are realizable, and we reduced our valuation allowance accordingly. The reduction of the valuation allowances against these deferred tax assets was the main driver of the income tax benefit during the fiscal year ended June 30, 2021 of approximately $6.33 million. A valuation allowance remains against certain deferred tax assets primarily relating to state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of when it will generate positive taxable income to utilize the associated deferred tax assets. In addition, a valuation allowance also remains against certain deferred tax assets relating to operating loss carryforwards relating to our dormant subsidiary located in Hong Kong.

Our statutory tax rate as of the fiscal year ended June 30, 2021 is 22.24% and consists of the federal income tax rate of 21% and a blended state income tax rate of 1.24%, net of the federal benefit.

Certain Operating Metrics

We believe that certain metrics are key to our business, including but not limited to monitoring our average order value, or AOV. We use the AOV computation in part to make strategic digital marketing related decisions and to monitor the performance and return on investment of our marketing activities. Our AOV is based on financial results and customer-related data for charlesandcolvard.com, LLC, our wholly owned subsidiary and through which we operate our primary transactional website. Our calculation for AOV is sensitive to several factors, including sales volume and product mix. Therefore, we believe that this metric may vary widely going forward as we respond to ever changing consumer demand and provide the products – that may have widely variable price points – which our audiences are seeking.

For the fiscal year ended June 30, 2021, our AOV, based on charlesandcolvard.com revenue, net of returns, divided by the total number of customer orders, is estimated to be approximately $1,000.

An additional metric that we use to manage charlesandcolvard.com operations and to make strategic digital marketing decisions for our transactional website is period-over-period revenue growth. Accordingly, we believe this level of growth reinforces our current year’s digital marketing program and affirms our decision to increase our investment in consumer-driven marketing efforts in charlesandcolvard.com during Fiscal 2021. While we believe this metric is sensitive to many factors and may vary in future periods, we expect to continue to monitor and base our marketing-related investments in part on charlesandcolvard.com revenue growth going forward.

For the fiscal year ended June 30, 2021, we experienced a 45% year-over-year growth in charlesandcolvard.com revenue compared to revenue for the fiscal year ended June 30, 2020.

Liquidity and Capital Resources

The full impact of the COVID-19 pandemic on the global and domestic economy remains uncertain and the world continues adapting to the ongoing pandemic and evolving viral variants and its adverse effects on global economics and worldwide business operations. The impact of the COVID-19 pandemic continues to place unprecedented pressures on global and U.S. businesses including our own. Depending on future developments, including the success of the global vaccine efforts to control the spread of the underlying virus and evolving variants, the pandemic could materially adversely impact our capital resources and liquidity in the future. We remain increasingly focused on the COVID-19 pandemic and are continually evaluating its potential effect on our business and liquidity and capital resources.

Capital Structure and Long-Term Debt

On June 18, 2020, we received the proceeds from the PPP Loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. The PPP Loan in the principal amount of $965,000 was disbursed by the Lender pursuant to a promissory note, or the Promissory Note, issued by us on June 15, 2020. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000. The full amount of the gain in connection with the extinguishment of this debt, including the forgiveness of accrued and unpaid interest of approximately $9,000, was recognized in the fiscal year ended June 30, 2021.

The CARES Act provided that existing AMT credit carryforwards were eligible for acceleration and refundable AMT credits were to be completely refunded to companies for taxable years beginning in 2019, or by election, taxable years beginning in 2018. Accordingly, we elected to have our then existing AMT tax completely refunded and filed a refund claim for the remaining portion of our AMT tax credit. Accordingly, the remaining balance of our AMT credit refund in the amount of approximately $270,000 was completely refunded during the fiscal year ended June 30, 2021.

We took advantage of available COVID-19 related payroll tax credits for certain wages and paid leave provided by us during the pandemic. A portion of these eligible tax credits are determined by qualified emergency paid sick and expanded family and medical leave wages pursuant to FFCRA. In addition, the Consolidated Appropriations Act, 2021, provides that employers who received a PPP loan may also qualify for the Employee Retention Credit (the “ERC”). Previously, pursuant to the CARES Act, taxpayers that received a PPP loan were not eligible for the ERC and this change is retroactive to March 27, 2020. We believe that we qualify for certain employer-related tax benefits pursuant to the ERC and expect to amend our applicable federal payroll tax returns for such benefit. Further, as permitted by the NC COVID-19 Relief Act, we expect to receive an incremental tax credit towards our contributions to the North Carolina Unemployment Insurance Fund. Accordingly, we will recognize any payroll tax credits related to these federal and state legislative actions in the period such benefits are received.

For further discussion of the effects of the CARES Act, the Consolidated Appropriations Act, 2021, and the NC COVID-19 Relief Act on our provision for income taxes and deferred tax assets, see Note 13 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

As a component of our liquidity and capital structure, we have an effective shelf registration statement on Form S-3 on file with the SEC that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period.  Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of the COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.

Financing Activities

In June 2019, we completed an underwritten public offering of 6,250,000 newly issued shares of common stock, at a price to the public of $1.60 per share, pursuant to our effective shelf registration statement on Form S-3. Net proceeds from the offering were approximately $9.06 million, net of the underwriting discount and fees and expenses. Pursuant to the terms of the underwriting agreement entered into in connection with this offering, the underwriters were granted a 30-day option to buy up to an additional 937,500 shares of our common stock to cover over-allotments. Pursuant to the partial exercise of the underwriters’ over-allotment option, in July 2019, we issued an additional 630,500 shares of our common stock at a price of $1.60 per share for net proceeds of approximately $932,000, net of the underwriting discount and fees and expenses of approximately $77,000. After giving effect to the partial exercise of the over-allotment option, we sold an aggregate of 6,880,500 shares of our common stock at a price of $1.60 per share with total gross proceeds of approximately $11.01 million, before deducting the underwriting discount and fees and expenses of approximately $1.02 million. Early during Fiscal 2020, we began using the aggregate net proceeds of approximately $9.99 million from the offering for marketing and for general corporate and working capital purposes. In response to the COVID-19 pandemic and its impact on consumer confidence and spending, management drastically reduced related advertising and digital marketing expenditures in mid-March 2020. However, we continue to monitor and adjust our advertising and digital marketing and professional services expenditure levels to correspond to market changes. As a result, we increased these expenditures during the fiscal year ended June 30, 2021, and may continue seeing an increase in these expenditure levels during Fiscal 2022 and beyond.

As discussed above, on June 18, 2020, we received the proceeds from the PPP Loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. The PPP Loan in the principal amount of $965,000 was disbursed by the Lender pursuant to a Promissory Note issued by us on June 15, 2020. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000. The full amount of the gain in connection with the extinguishment of this debt, including the forgiveness of accrued and unpaid interest of approximately $9,000, was recognized in the fiscal year ended June 30, 2021.

Operating Activities and Cash Flows

We require cash to fund our operating expenses offset partially by increased bank fees associatedand working capital requirements, including outlays for capital expenditures. As of June 30, 2021, our principal sources of liquidity were cash, cash equivalents, and restricted cash totaling $21.45 million, trade accounts receivable of $1.66 million, and net current inventory of $11.45 million, as compared to cash, cash equivalents, and restricted cash totaling $14.62 million, trade accounts receivable of $671,000, and net current inventory of $7.44 million as of June 30, 2020. We also had access during Fiscal 2021 to a $5.00 million asset-based revolving credit facility with ourWhite Oak, or the White Oak Credit Facility, which we terminated in accordance with its terms as of July 9, 2021. As described more fully herein, effective July 7, 2021, we obtained from JPMorgan Chase Bank, N.A., or JPMorgan Chase, a $5.00 million cash collateralized line of credit facility, or the JPMorgan Chase Credit Facility. Also as described more fully herein, we had long-term debt in the form of a PPP Loan in the amount of $965,000, of which $193,000 was classified as current as of June 30, 2020. Effective June 23, 2021, the Company’s PPP Loan forgiveness was approved and credit card transaction processing and bad debt expense. Loss on abandonment of property and equipment decreased $118,000, or 100%,processed by the SBA for the full principal of the PPP Loan in the amount of $965,000 as well as forgiveness of accrued and unpaid interest of approximately $9,000.

During the fiscal year ended December 31, 2017, comparedJune 30, 2021, our working capital increased by approximately $12.72 million to $30.14 million from $17.42 million at June 30, 2020. As described more fully below, the previous year. In 2016, we abandoned costsincrease in working capital at June 30, 2021 is primarily attributable to an increase in our cash, cash equivalents, and restricted cash, principally resulting from cash provided by our operations, increase in our allocation of construction in progress relatedinventory from long-term to website branding and design for our direct-to-consumer e-commerce business, charlesandcolvard.com,short-term due to a changehigher expected sell through of inventory on hand in the upcoming period, an increase in our corporate strategy to consolidateaccounts receivable, a decrease in our web properties. We had no such abandonmentaccounts payable, an increase in connection with the issuance of propertya short-term note receivable, a decrease in the current portion of our long-term debt, resulting from the forgiveness of our PPP Loan, and equipmenta decrease in 2017.our short-term operating lease liabilities. These decreasesfactors were offset partially by an increase in our accrued expenses and other liabilities and a decrease in our prepaid expenses and other assets.

During the fiscal year ended June 30, 2020, our working capital decreased by approximately $5.75 million to $17.42 million from $23.17 million at June 30, 2019. As described more fully below, the decrease in working capital at June 30, 2020 is primarily attributable to a decrease in our allocation of inventory from long-term to short-term, a decrease in accounts receivable, an increase in short-term operating lease liabilities resulting from the adoption of the new lease accounting standard as of July 1, 2019, an increase in accrued expenses and other liabilities, an increase in accounts payable, and an increase in the current maturity of our long-term debt. These factors were offset partially by an increase in our cash, cash equivalents, and restricted cash resulting from cash provided by operating and financing activities and an increase in prepaid expenses and other assets.

During the fiscal year ended June 30, 2021, approximately $6.47 million of cash was provided by our operations. The primary drivers of our cash flows from operations were the favorable effect of net income in the amount of $12.81 million; an increase in accrued expenses and other liabilities of $3.71 million; a decrease in inventory of $1.31 million; and an increase in accrued income taxes in the amount of $2,000. These factors were offset partially by an increase in prepaid expenses and other assets of $3.14 million; an increase in accounts receivable of $955,000; and a decrease in accounts payable of $974,000. In addition, the net effect of non-cash items included in net income totaling $6.29 million, driven by the benefit recognized for deferred income taxes in the amount of approximately $6.35 million in connection with the release of our valuation allowance and the gain on extinguishment of debt resulting from the forgiveness of our PPP Loan, including forgiveness of accrued and unpaid interest, in the amount of approximately $974,000, also unfavorably impacted net cash provided by operating activities during the fiscal year ended June 30, 2021.

During the fiscal year ended June 30, 2020, approximately $249,000 of cash was provided by our operations. The primary drivers underlying the cash provided by our operating activities were a decrease in accounts receivable of $1.32 million; a decrease in prepaid expenses and other assets of $490,000; an increase in accounts payable of $469,000; and an increase in accrued expenses and other liabilities of $109,000. In addition, non-cash items totaling $6.78 million also had a favorable impact on our cash flow from operations during the fiscal year ended June 30, 2020. These factors were offset partially by the unfavorable effect of our net loss in the amount of $6.16 million and an increase in inventory of approximately $2.76 million resulting from lower quantities of inventory items sold as a result of lower period sales stemming from the impact of the COVID-19 pandemic.

During the fiscal year ended June 30, 2021, accounts receivable increased principally due to the increased level of sales during the three months ended June 30, 2021, as compared with the sales during the period leading up to June 30, 2020. As a result of the COVID-19 pandemic, from time to time we offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy customers during Fiscal 2021 and the second half of Fiscal 2020. 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 marketingprofits would likely be adversely impacted.

During the fiscal year ended June 30, 2021, prepaid expenses and other assets decreased principally as a result of $439,000,the timing of payments, primarily for insurance-related premium expenses, in advance of goods or 6%, to $7.48 million,services received. During the fiscal year ended June 30, 2021, accrued expenses and other liabilities increased principally as a result of the increase in our operating lease liability associated with the new lease amendment for our corporate headquarters facilities that was executed in January 2021. During the fiscal year ended June 30, 2021, accounts payable decreased primarily as a result of increased compensation-related expenses, an increase inthe timing of payments for costs associated with inventory-related purchases and professional services incurred. As a result of the pandemic, we have from time-to-time paid certain vendor business partners in advance of their payment terms to secure and achieve supply chain needs.

During the fiscal year ended June 30, 2020, prepaid expenses and an increaseother assets increased principally as a result of the timing of payments, principally for insurance-related expenses, in software-related expenses offset partially by a decrease in advertising expenses.
We recorded a net lossadvance of $453,000,goods or $0.02 per diluted share, forservices received. During the fiscal year ended December 31, 2017, compared toJune 30, 2020, accounts payable increased primarily as a net lossresult of $4.53 million in the previous year. The decreased net loss was due primarily to an increase in Forever OneTM gemstone sales with a more favorable profit margin as we implement our new sales and marketing strategies and a gain on an insurance claim settlement related to excess recovery overtiming of payment for costs previously written off associated with insured lossesinventory-related purchases and professional services incurred and due under our vendors’ payment terms. Likewise, accrued expenses and other liabilities increased principally due to the severance accrual in connection with aour June 2020 management reorganization and workforce reduction as well as increases in deferred revenue related to payments received prior to shipment of work-in-process materials. These improvements were partially offset by the increased salesgood from customers.

We manufactured approximately $7.63 million and marketing expenses. We recorded a net loss from continuing operations of $453,000 for the year ended December 31, 2017, compared to a net loss from continuing operations of $3.95$10.64 million in loose jewels and $12.72 million and $7.82 million in finished jewelry, which includes the previous year.
The executioncost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production, during the fiscal years ended June 30, 2021 and 2020, respectively. We expect our purchases of precious metals and labor to fluctuate in conjunction with the levels of our strategy to growfinished jewelry business. In addition, the price of gold has increased significantly over the past decade, resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our company, withcontrol, the ultimate goal of increasing consumer awarenessupward price trends could continue and clearly communicating the value proposition of moissanite, is challenging and not without risk. As such, there can be no assurance that future results for each reporting period will exceed past results in sales,have a negative impact on our operating cash flow and/or net income dueas 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 challenging business environmentsuppliers 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 operatemight otherwise maintain. As of June 30, 2021 and 2020, $17.72 million and $23.19 million, respectively, of our investment in various initiatives to support our growth strategies. In addition,inventories were classified as long-term assets. Loose jewel sales in the retail jewelry industry are typically seasonal due to increased consumer purchasing patterns during the year-end holiday season. We can also see the effect of seasonality due to the timing of orders we receive to support new or expanded distribution and the level of current inventory positions held by our customers. Accordingly, we expect to continue seeing these types of seasonal trends impact future reporting period financial results. However, as we execute our growth strategy and messaging initiatives, we remain committed to our current priorities of generating positive cash flow and strengthening our financial position while both monetizing our existing inventory and manufacturing our created moissanite loose jewels and finished jewelry featuring moissanite to meet sales demand. We believe the results of these efforts will propel our revenue growth and profitability and further enhance shareholder value in coming years, but we fully recognize the business and economic challenges that we face.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 $1.78 million and new raw material that we purchase pursuant to the Supply Agreement.

A more detailed description of our inventories is included in Note 6 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

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We made income tax payments of approximately $15,000 and $2,000 during the fiscal years ended June 30, 2021 and 2020, respectively. As of June 30, 2021, 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 June 30, 2021 and 2020, we had federal tax net operating loss carryforwards of approximately $19.00 million and $23.72 million, respectively, expiring between 2034 and 2037, or that have no expiration, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $19.87 million and  $20.12 million, respectively, 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.

Contractual Commitment

On December 12, 2014, we entered into the Supply Agreement with Cree. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties. Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of our premium moissanite product, Forever One™ and provided us with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following the expiration of the initial term. In addition, the amendment to the Supply Agreement established a process by which Cree may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Cree has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 2025 is approximately $52.95 million, of which approximately $32.85 million remains to be purchased as of June 30, 2021.

For more information regarding the second amendment to our Supply Agreement, executed on August 26, 2020, see Note 10 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

During the fiscal years ended June 30, 2021 and 2020, we purchased approximately $3.78 million and $7.47 million, respectively, of SiC crystals from Cree. Going forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, together with future cash expected to be provided by operating activities to finance our purchase commitment under the Supply Agreement, as amended.

Line of Credit

Effective July 7, 2021, we obtained from JPMorgan Chase our $5.00 million cash collateralized JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The JPMorgan Chase Credit Facility is secured by a cash deposit in the amount of $5.05 million held by JPMorgan Chase as collateral for the line of credit facility.

Each advance accrues interest at a rate equal to JPMorgan Chase’s monthly 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. See Note 2, under the caption of Recently Issued Accounting Pronouncements, to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for more detailed information relating to concerns about structural risks of interbank offered rates, or IBORs, and, particularly, the risk of cessation of the LIBOR.

The JPMorgan Chase Credit Facility is evidenced by a credit agreement between us and JPMorgan Chase, or the JPMorgan Chase Credit Agreement, dated as of July 12, 2021, and customary ancillary documents, in the principal amount not to exceed $5.00 million at any one time outstanding and a line of credit note, or the JPMorgan Chase Line of Credit Note, in which we promise to pay on or before July 31, 2022, the amount of $5.00 million or so much thereof as may be advanced and outstanding. In the event of default, JPMorgan Chase, at its option, may accelerate the maturity of advances outstanding under the JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Agreement and ancillary documents contain customary covenants, representations, fees, debt, contingent obligations, liens, loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.

In connection with the JPMorgan Chase Credit Facility, we incurred a non-refundable origination fee in the amount of $10,000 that was paid in full to JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12, 2021. We also agreed to maintain our primary banking depository and disbursement relationship with JPMorgan Chase.

Events of default under the JPMorgan Chase Credit Facility include, without limitation, a default, event of default, or event that would constitute a default or event of default (pending giving notice or lapse of time or both), of any provision of the JPMorgan Chase Credit Agreement, the JPMorgan Chase Line of Credit Note, or any other instrument or document executed in connection with the JPMorgan Chase Credit Agreement or with any of our indebtedness, liabilities, and obligations to JPMorgan Chase or would result from the extension of credit to us by JPMorgan Chase.

On July 12, 2021, upon its execution, we did not request any advances pursuant to the terms of 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 the Company’s achievement of a specified fixed charge coverage ratio during the period of any outstanding advances. However, any advances were in all cases subject to a minimum interest rate of 5.50% and interest would have been calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default, which again 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.

More detailed descriptions of both our JPMorgan Chase Credit Facility and former White Oak Credit Facility are included in Note 11 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

Liquidity and Capital Trends

We believe that our existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, and future cash expected to be provided by operating activities combined will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.

Our future capital requirements and the adequacy of available funds will depend on many factors, including the ongoing uncertainty surrounding COVID-19 that could lead to further disruption and volatility in the global capital markets as well as its impact on our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewels and lab grown diamond 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 I, Item 1A of this Annual Report on Form 10-K. Currently, we have the JPMorgan Chase Credit Facility through its expiration on July 31, 2022, which we believe would mitigate these risks to our cash and liquidity position. Also, we may make investments in, or acquisitions of, complementary businesses, which could also require us to seek additional equity or debt financing.

Critical Accounting PoliciesCosts and EstimatesExpenses

Our discussionCost of Goods Sold

Cost of goods sold for the fiscal years ended June 30, 2021 and analysis2020 are as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Product line cost of goods sold:            
Finished jewelry $11,272,012  $7,469,790  $3,802,222   51%
Loose jewels  6,857,755   6,062,186   795,569   13%
Total product line cost of goods sold  18,129,767   13,531,976   
4,597,791
   34%
Non-product line cost of goods sold  2,679,923   7,668,231   (4,988,308)  (65)%
Total cost of goods sold $20,809,690  $21,200,207  $(390,517)  (2)%

Total cost of goods sold was $20.81 million for the fiscal year ended June 30, 2021 compared to $21.20 million for the fiscal year ended June 30, 2020, a net decrease of approximately $391,000, or 2%. Product line cost of goods sold is defined as product cost of goods sold in each of our financial conditionOnline Channels segment and resultsTraditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory write-offs; and other inventory adjustments, comprising costs of operations are based upon our consolidated financial statements, which we preparedquality issues, and damaged goods.

The decrease in accordance with accounting principles generally accepted intotal cost of goods sold for the United States, or U.S. GAAP. 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 definedfiscal year ended June 30, 2021 as those most importantcompared to the financial statement presentation and that requirefiscal year ended June 30, 2020 was driven primarily by 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 underprior year write-off during the circumstances, the resultsquarter ended March 31, 2020, of which form the basis for making judgments aboutapproximately $5.26 million representing the carrying value of assetsour legacy loose jewel inventory and liabilities that are not readily apparent from other sources. Under different assumptions and/or conditions, actual results of operations may materially differ. The most significant estimates impacting our consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets, uncertain tax positions, and revenue recognition. We also have other policies that we consider key accounting policies, butfinished goods inventory set with these policies typically do not require us to make estimates or judgments that are difficult or subjective.
Valuation and Classification of Inventories - Inventories are stated at the lower of cost or net realizable value on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Any inventory on hand at the measurement date in excess of our current requirements based on historical and anticipated levels of sales is classified as long-term on our consolidated balance sheets. Our classification of our inventory as either short- or long-term inventory requires us to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realizedlegacy gemstones. This decrease in cost of goods sold overfor the next 12 months.fiscal year ended June 30, 2021, was offset in part by higher cost of goods sold principally driven by increased sales of finished jewelry, which reflect higher material and labor costs, in both our Online Channels segment and Traditional segment as a result of strong product demand during the year.

Our work-in-process inventories include raw SiC crystals on which processing costs, suchThe net decrease in non-product line cost of goods sold for the fiscal year ended June 30, 2021 comprises a $5.71 million lower change in inventory valuation adjustments principally related to the prior fiscal year’s write-off of the carrying cost of the Company’s legacy material inventory of $5.26 million during the quarter ended March 31, 2020, as labor and sawing, have been incurred and components, suchwell as metal castings and finished good moissanite jewels, that have been issuedother inventory valuation adjustments related to jobschanges in obsolescence reserves in the manufacturefiscal year ended June 30, 2021, compared to those in the prior fiscal year. This decrease in non-product line cost of finished jewelry. Our moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be madegoods sold was offset in advance of current finished inventory needs but remainpart by a $503,000 increase in work-in-process inventories. As of December 31, 2017 and December 31, 2016, work-in-process inventories issued to active production jobs approximated $2.99 million and $7.18 million, respectively.
The need for adjustments to inventory reserves is evaluated on a period-by-period basis.
Accounts Receivable Reserves - Estimates are used to determine the amount of two reserves against trade accounts receivable. The first reserve is an allowance for sales returns. At the time revenue is recognized, we estimate future returns using a historical return rate that is reviewed quarterly with consideration of any contractual return privileges granted to customers, and we reduce sales and trade accounts receivable by this estimated amount. The allowance for sales returns was $537,000 and $415,000 at December 31, 2017 and 2016, respectively.
The second reserve is an allowance for doubtful accounts for estimated lossesfreight out principally from increased shipments resulting from substantial Online Channels segment sales growth during the failure of our customers to make required payments. This allowance reduces trade accounts receivable to an amount expected to be collected. Based on historical percentages of uncollectible accounts by aging category, changesfiscal year ended June 30, 2021; a $147,000 increase in payment history,non-capitalized manufacturing and facts and circumstances regarding specific accounts that become known to management when evaluating the adequacy of the allowance for doubtful accounts, we determine a percentage based on the age of the receivable that we deem uncollectible. The allowance is then calculated by applying the appropriate percentage to each of our accounts receivable aging categories, with consideration given to individual customer account activity subsequent to the current period, including cash receipts, in determining the appropriate allowance for doubtful accountsproduction control expenses in the current period. Any increases or decreasesyear principally due to this allowancethe timing when work-in-process goods are charged or credited, respectively, as a bad debt expensereceived into inventory and applicable overhead costs are allocated; and an approximate $76,000 change in other inventory adjustments primarily relating to general and administrative expenses. We generally use an internal collection effort, which may include our sales personnel as we deem appropriate. After all internal collection efforts have been exhausted, we generally write offadverse changes in production standard cost variances compared to those during the account receivable.fiscal year ended June 30, 2020.
Any accounts with significant balances are reviewed separately to determine an appropriate allowance based on the facts and circumstances of the specific account. During the quarter ended September 30, 2016, we wrote off $815,000 in accounts receivable related to one international customer that was past due on its payment arrangement, as we determined that the benefits of continued collections efforts did not outweigh the costs of legal proceedings.

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For further discussion of non-product line cost of goods sold, see Note 3 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
Our
Sales and Marketing

Sales and marketing expenses for the fiscal years ended June 30, 2021 and 2020 are as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
             
Sales and marketing $8,476,716  $9,443,244  $(966,528)  (10)%

Sales and marketing expenses were $8.48 million for the fiscal year ended June 30, 2021 compared to $9.44 million for the fiscal year ended June 30, 2020, a decrease of approximately $967,000, or 10%.

The decrease in sales and marketing expenses for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 was primarily due to a $1.31 million decrease in compensation-related expenses; a $164,000 decrease in professional services fees principally comprising non-recurring consulting services for cybersecurity and merchandising imaging incurred in the prior year; a $26,000 decrease in travel expenses as a result of COVID-19 cost-control measures; and a $1,000 net decrease in miscellaneous other general sales and marketing expenses. These decreases were partially offset by a $282,000 increase in advertising and digital marketing expenses; an $84,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements; an $83,000 increase in general office-related expenses, which are principally related to higher credit card transaction fees from increased online sales levels; a $69,000 increase in depreciation and amortization expense relating to capitalized costs associated with information technology-related upgrades; and a $17,000 increase in employment-related recruiting fees.

Compensation expenses for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 decreased primarily as a result of a $1.25 million decrease in salaries, commissions, and related employee benefits in the aggregate as a result of our June 2020 management reorganization and workforce reduction; a $76,000 decrease in employee-related severance costs recognized in the prior year which also was a result of our June 2020 management reorganization and workforce reduction; and a $68,000 decrease in employee stock-based compensation expense associated with the modification of terms for certain participant stock options in Fiscal 2020 that resulted in the recognition of higher stock compensation expense in the prior fiscal year. These decreases were partially offset by an $84,000 increase in bonus expense reflecting improved operating results in the current year that impacts this performance-based compensation-related benefit.

The increase in digital marketing expenses for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 was primarily due to a $766,000 increase in Internet marketing costs and a $20,000 increase in print media expenses. Both increases reflect changes in our overall social media and print marketing strategies during Fiscal 2021 compared with those in Fiscal 2020. These increases were partially offset by a $386,000 decrease in outside agency fees, also as a consequence of modifications in our marketing strategy and reliance on internal resources during the current year; a $111,000 decrease in cooperative advertising; and a $7,000 decrease in promotion-related expenses.

General and Administrative

General and administrative expenses for the fiscal years ended June 30, 2021 and 2020 are as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
             
General and administrative $4,441,441  $4,861,297  $(419,856)  (9)%

General and administrative expenses were $4.44 million for the fiscal year ended June 30, 2021 compared to $4.86 million for the fiscal year ended June 30, 2020, a decrease of approximately $420,000, or 9%.

The decrease in general and administrative expenses for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 was primarily due to a $428,000 decrease in professional services; a $206,000 decrease in compensation-related expenses; a $7,000 decrease in bad debt expense associated with our allowance for doubtful accounts previously included an allowance for this accounts receivable,reserve policy; and therefore, this write-off did not have an impact ona $1,000 net lossdecrease in miscellaneous other general and administrative expenses. These decreases were partially offset by a $58,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; a $50,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements; a $38,000 increase in housing allowances and travel-related expenditures; a $30,000 increase in insurance expenses principally related to higher renewal premiums; a $20,000 increase in bank charges as a result of transaction fees associated with increased online transactions; a $14,000 increase in Board member retainer fees due to the temporary reduction in fees paid to our Board of Directors in connection with cost control measures implemented during the COVID-19 pandemic in the prior year; a $9,000 increase in depreciation and amortization expense; and a $3,000 increase in business taxes and licenses.

Professional services fees decreased for the fiscal year ended December 31, 2016. June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily due to a $283,000 decrease in legal fees resulting from non-recurring non-capitalized fees incurred in connection with our underwritten public offering and corporate governance matters in the prior year; a $101,000 decrease in consulting and other professional services primarily in connection with accounting department support in the prior year; and a $66,000 decrease in investor relations fees. These decreases were partially offset by a $22,000 increase in fees associated with audit and tax services in the current year.

Compensation expenses decreased for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily due to a $282,000 decrease in severance expenses recognized in the prior year related to our June 2020 management reorganization and workforce reduction; a $184,000 decrease in salaries and related employee benefits in the aggregate which also was a result of our June 2020 management reorganization and workforce reduction; and a $54,000 decrease in employee stock-based compensation expense associated with the modification of terms for certain participant stock options in Fiscal 2020 that resulted in the recognition of higher stock compensation expense in the prior fiscal year. These decreases were offset in part by a $314,000 increase in bonus expense reflecting improved operating results in Fiscal 2021 that impacts this performance-based compensation-related benefit.

Gain on Extinguishment of Debt

Gain on extinguishment of debt for the fiscal years ended June 30, 2021 and 2020 is as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Gain on extinguishment of debt
 $974,328  $-  $974,328   100%

On June 18, 2020, we received the proceeds from our Paycheck Protection Program Loan, or the PPP Loan, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or SBA. The PPP Loan in the principal amount of $965,000 was disbursed by Newtek Small Business Finance, LLC, or the Lender, pursuant to a promissory note, or the Promissory Note, dated June 15, 2020. During the period of time that the principal under the Promissory Note was outstanding, we accounted for the Promissory Note as debt within the accompanying consolidated financial statements. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, our reviewPPP Loan forgiveness was approved and processed by the SBA for 2017,the full principal of the PPP Loan in the amount of $965,000. The full amount of interest expense to-date in the amount of approximately $9,000 that the Company recognized during the period the principal of the PPP Loan was outstanding was also forgiven by the SBA. Accordingly, the full amount of the gain in connection with the extinguishment of this debt, including the benefit from the forgiveness of the inception to-date interest expense, was recognized in the fiscal year ended June 30, 2021.

Interest Income

Interest income for the fiscal years ended June 30, 2021 and 2020 is as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Interest income $5,581  $158,091  $(152,510)  (96)%

In June 2019, we determined nocompleted an underwritten public offering of 6,250,000 shares of our common stock, which together with the partial exercise of the underwriters’ overallotment option for an additional reserves were necessary630,500 shares in July 2019, resulted in net proceeds of approximately $9.99 million. The net proceeds from this offering, along with excess operating cash, are deposited into and maintained in an interest-bearing account with a federally insured commercial bank. Accordingly, during the fiscal years ended June 30, 2021 and 2020, we earned interest from cash on deposit in this interest-bearing account. The decrease in earned interest reflects adverse changes in interest rate fluctuations during Fiscal 2021 compared with Fiscal 2020.

Interest Expense

Interest expense for specific accounts. Based on these criteria, management determined that allowances for doubtful accounts receivable of $254,000the fiscal years ended June 30, 2021 and $226,000 at December 31, 2017 and 2016, respectively, were required.2020 is as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Interest expense $8,953  $884  $8,069   913%

Deferred Tax Assets -In accordance with the terms of the Promissory Note, during the period of time the principal of the PPP Loan was outstanding through June 23, 2021, we accrued interest at a fixed rate of 1% per annum. Our accrual for interest expense associated with the PPP Loan began June 18, 2020, the date we received the proceeds for the PPP Loan from our Lender. Likewise, we accrued interest on the PPP Loan during the fiscal year ended June 30, 2021, through June 23, 2021, the date our PPP Loan was forgiven by the SBA.

Loss on Foreign Currency Exchange

Loss on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the fiscal years ended June 30, 2021 and 2020 are as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Loss on foreign currency exchange $603  $1,829  $(1,226)  (67)%

During the fiscal years ended June 30, 2021 and 2020, we had international sales transactions denominated in currencies other than the U.S dollar that resulted in foreign currency exchange net losses. The decrease in these losses reflects the lower level of international sales denominated in foreign currencies as well as foreign currency exchange rate fluctuations during fiscal year ended June 30, 2021 compared with those of the prior fiscal year.

Provision for Income Taxes

We recognized a net income tax benefit of approximately $6.33 million and a net income tax expense of approximately $2,000 for the fiscal years ended June 30, 2021 and 2020, respectively. Our income tax provisions in these periods contain estimated taxes, penalties, and interest associated with uncertain tax positions.

As of each reporting date, management considerswe consider new evidence, both positive and negative, that could impact itsour view with regard to future realization of deferred tax assets. Beginning in 2014, managementwe determined that negative evidence outweighed the positive and established a full valuation allowance against our deferred tax assets. Weassets and we maintained asuch full valuation allowance through the period ended June 30, 2020. However, as of December 31, 2017 and 2016.
Our deferredJune 30, 2021, cumulative positive taxable income over the last three tax assets in Hong Kong were fully reserved with a valuation allowance of $996,000 as of December 31, 2017 and 2016 andyears had been fully reservedgenerated in all prior periods duethe U.S., as compared to the uncertaintynegative evidence of cumulative losses in previous years. We also determined that our expectations of future taxable income in this jurisdictionupcoming tax years, including estimated growth rates applied to utilizefuture expected taxable income that includes 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. Charles & Colvard (HK) Ltd., our Hong Kong subsidiary, which was re-activated in December 2017, but had no operating activity during the year ended December 31, 2017, previously ceased operations during 2008 and becameassets prior to any statutory expiration. As a dormant entity during 2009. If result, we use any portiondetermined that sufficient positive evidence exists as of ourJune 30, 2021, to conclude that it is more likely than not deferred tax assets in future periods,of approximately $6.35 million are realizable, and we reduced our valuation allowance accordingly. The reduction of the valuation allowance would need to be reversed and may impact our future operating results.
On December 22, 2017, the President signed the Tax Cuts and Jobs Act, or the “Tax Act,” which among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our netallowances against these deferred tax assets as of December 31, 2017 by approximately $519,000 to reflectwas the estimated impact of the Tax Act. We also recorded a corresponding net adjustment to our valuation allowance related to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax.
We have substantially completed our provisional analysismain driver of the income tax effectsbenefit during the fiscal year ended June 30, 2021 of the Tax Act and recorded a reasonable estimate of such effects. However, the SEC staff issued guidance regarding application of Financial Accounting Standards Board income tax guidance in the reporting period that includes December 22, 2017 – the date on which the Tax Act was signed into law – to address situations when a company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting forapproximately $6.33 million. A valuation allowance remains against certain income tax effects of the Tax Act. We have estimated the tax impacts related to the impact to deferred tax assets primarily relating to state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of when it will generate positive taxable income to utilize the associated deferred tax assets. In addition, a valuation allowance also remains against certain deferred tax assets relating to operating loss carryforwards relating to our dormant subsidiary located in Hong Kong.

Our statutory tax rate as of the fiscal year ended June 30, 2021 is 22.24% and liabilitiesconsists of the federal income tax rate of 21% and included these amountsa blended state income tax rate of 1.24%, net of the federal benefit.

Certain Operating Metrics

We believe that certain metrics are key to our business, including but not limited to monitoring our average order value, or AOV. We use the AOV computation in part to make strategic digital marketing related decisions and to monitor the performance and return on investment of our consolidatedmarketing activities. Our AOV is based on financial statementsresults and customer-related data for charlesandcolvard.com, LLC, our wholly owned subsidiary and through which we operate our primary transactional website. Our calculation for AOV is sensitive to several factors, including sales volume and product mix. Therefore, we believe that this metric may vary widely going forward as we respond to ever changing consumer demand and provide the products – that may have widely variable price points – which our audiences are seeking.

For the fiscal year ended June 30, 2021, our AOV, based on charlesandcolvard.com revenue, net of returns, divided by the total number of customer orders, is estimated to be approximately $1,000.

An additional metric that we use to manage charlesandcolvard.com operations and to make strategic digital marketing decisions for our transactional website is period-over-period revenue growth. Accordingly, we believe this level of growth reinforces our current year’s digital marketing program and affirms our decision to increase our investment in consumer-driven marketing efforts in charlesandcolvard.com during Fiscal 2021. While we believe this metric is sensitive to many factors and may vary in future periods, we expect to continue to monitor and base our marketing-related investments in part on charlesandcolvard.com revenue growth going forward.

For the fiscal year ended June 30, 2021, we experienced a 45% year-over-year growth in charlesandcolvard.com revenue compared to revenue for the fiscal year ended December 31, 2017,June 30, 2020.

Liquidity and Capital Resources

The full impact of the COVID-19 pandemic on a provisional basis. In this regard, the Tax Act repealsglobal and domestic economy remains uncertain and the corporate alternative minimum tax, or AMT, regime, including claiming a refund and full realization of remaining AMT credits. We have not been able to make a reasonable estimate with respectworld continues adapting to the realizationongoing pandemic and evolving viral variants and its adverse effects on global economics and worldwide business operations. The impact of existing AMT credit carryforwards,the COVID-19 pandemic continues to place unprecedented pressures on global and accordingly, continueU.S. businesses including our own. Depending on future developments, including the success of the global vaccine efforts to applycontrol the income tax-related accounting guidance that wasspread of the underlying virus and evolving variants, the pandemic could materially adversely impact our capital resources and liquidity in the future. We remain increasingly focused on the COVID-19 pandemic and are continually evaluating its potential effect immediately prioron our business and liquidity and capital resources.

Capital Structure and Long-Term Debt

On June 18, 2020, we received the proceeds from the PPP Loan pursuant to the enactmentPaycheck Protection Program under the CARES Act, as administered by the SBA. The PPP Loan in the principal amount of $965,000 was disbursed by the Lender pursuant to a promissory note, or the Promissory Note, issued by us on June 15, 2020. In accordance with applicable provisions of the Tax Act. In orderCARES Act, effective June 23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for us to complete the income tax effectsfull principal of the Tax Act onPPP Loan in the existing AMT deferred tax asset, we need to further analyze the nature, validity, and recoverabilityamount of $965,000. The full amount of the AMT-related deferred tax credit carryforwards prior to recordinggain in connection with the underlying appropriate tax benefit. Accordingly, the ultimate impact related to the Tax Act may differ, possibly materially, due to, among other things, completing our analysis of the realization of available AMT credit refunds, further refinement of our calculations, changes in interpretations and assumptions that we made, additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions that we may take as a result of the Tax Act. We expect this analysis to be complete when our 2017 U.S. corporate income tax return is filed in 2018.
Uncertain Tax Positions - Effective January 1, 2007, we adopted U.S. GAAP guidance regarding the de-recognition, classification, accounting in interim periods, and disclosure requirements for uncertain tax positions. Determining which tax positions qualify as uncertain positions and the subsequent accounting for these positions requires significant estimates and assumptions. Our net accrued income tax liability under the provisionsextinguishment of this guidancedebt, including the forgiveness of accrued and unpaid interest of approximately $9,000, was $462,000 and $434,000 at December 31, 2017 and 2016, respectively. This liability is only resolved when we obtain an official ruling fromrecognized in the tax authority on the positions or when the statute of limitations expires. As of December 31, 2017, our liability has increased by $28,000 for accrued interest on these positions.fiscal year ended June 30, 2021.

Revenue Recognition - Revenue is recognized when title transfers at the time of shipment from our facility or a third-party fulfillment company’s facility, excluding consignment shipments as discussed below; evidence of an arrangement exists; pricing is fixed or determinable; and collectability is reasonably assured. At the time revenue is recognized, an allowance for estimated returns is established. Any change in the allowance for returns is charged against net sales. Our return policy for certain customers in our Online Channels segment provides for the return of purchases for any reason generally within 60 days of shipment in accordance with our warranty policy as disclosed on the charlesandcolvard.com website. Our return policy for customers in our Online Channels segment (excluding those of charlesandcolvard.com) and those in our Traditional segment allows for the return of jewels and finished jewelry for credit generally within 30 days of shipment if returned for a valid reason. We have established an allowance for returns based on our historical return rate, which takes into account any contractual return privileges granted to our customers. Periodically, we ship loose jewel goods, finished jewelry goods, and finished goods inventory to Traditional segment customers on consignment terms. Under these terms, the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year. Our Traditional segment customers are generally required to make payments on consignment shipments within 60 days upon the customer informing us that it will keep the inventory. Accordingly, we do not recognize revenue on these consignment transactions until the earlier of (i) the customer informing us that it will keep the inventory, (ii) the expiration of the right of return period, or (iii) the customer informing us that the inventory has been sold.
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The CARES Act provided that existing AMT credit carryforwards were eligible for acceleration and refundable AMT credits were to be completely refunded to companies for taxable years beginning in 2019, or by election, taxable years beginning in 2018. Accordingly, we elected to have our then existing AMT tax completely refunded and filed a refund claim for the remaining portion of our AMT tax credit. Accordingly, the remaining balance of our AMT credit refund in the amount of approximately $270,000 was completely refunded during the fiscal year ended June 30, 2021.

We took advantage of available COVID-19 related payroll tax credits for certain wages and paid leave provided by us during the pandemic. A portion of these eligible tax credits are determined by qualified emergency paid sick and expanded family and medical leave wages pursuant to FFCRA. In addition, the Consolidated Appropriations Act, 2021, provides that employers who received a PPP loan may also qualify for the Employee Retention Credit (the “ERC”). Previously, pursuant to the Recent Accounting Pronouncements -CARES Act See, 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 qualify for certain employer-related tax benefits pursuant to the ERC and expect to amend our applicable federal payroll tax returns for such benefit. Further, as permitted by the NC COVID-19 Relief Act, we expect to receive an incremental tax credit towards our contributions to the North Carolina Unemployment Insurance Fund. Accordingly, we will recognize any payroll tax credits related to these federal and state legislative actions in the period such benefits are received.

For further discussion of the effects of the CARES Act, the Consolidated Appropriations Act, 2021, and the NC COVID-19 Relief Act on our provision for income taxes and deferred tax assets, see Note 213 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K10-K.

As a component of our liquidity and capital structure, we have an effective shelf registration statement on Form S-3 on file with the SEC that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period.  Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of the COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.

Financing Activities

In June 2019, we completed an underwritten public offering of 6,250,000 newly issued shares of common stock, at a price to the public of $1.60 per share, pursuant to our effective shelf registration statement on Form S-3. Net proceeds from the offering were approximately $9.06 million, net of the underwriting discount and fees and expenses. Pursuant to the terms of the underwriting agreement entered into in connection with this offering, the underwriters were granted a 30-day option to buy up to an additional 937,500 shares of our common stock to cover over-allotments. Pursuant to the partial exercise of the underwriters’ over-allotment option, in July 2019, we issued an additional 630,500 shares of our common stock at a price of $1.60 per share for net proceeds of approximately $932,000, net of the underwriting discount and fees and expenses of approximately $77,000. After giving effect to the partial exercise of the over-allotment option, we sold an aggregate of 6,880,500 shares of our common stock at a descriptionprice of recent accounting pronouncements,$1.60 per share with total gross proceeds of approximately $11.01 million, before deducting the underwriting discount and fees and expenses of approximately $1.02 million. Early during Fiscal 2020, we began using the aggregate net proceeds of approximately $9.99 million from the offering for marketing and for general corporate and working capital purposes. In response to the COVID-19 pandemic and its impact on consumer confidence and spending, management drastically reduced related advertising and digital marketing expenditures in mid-March 2020. However, we continue to monitor and adjust our advertising and digital marketing and professional services expenditure levels to correspond to market changes. As a result, we increased these expenditures during the fiscal year ended June 30, 2021, and may continue seeing an increase in these expenditure levels during Fiscal 2022 and beyond.

As discussed above, on June 18, 2020, we received the proceeds from the PPP Loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. The PPP Loan in the principal amount of $965,000 was disbursed by the Lender pursuant to a Promissory Note issued by us on June 15, 2020. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000. The full amount of the gain in connection with the extinguishment of this debt, including the expected datesforgiveness of adoptionaccrued and estimated effects, if any, on our consolidated financial statements.
2017 Summary
The following is a summaryunpaid interest of key financial results and certain non-financial results achieved forapproximately $9,000, was recognized in thefiscal year ended December 31, 2017:June 30, 2021.
·
Our total consolidated net sales decreased by $2.14 million, or 7%, to $27.03 million in 2017 from $29.17 million in 2016. The decrease in consolidated net sales was due primarily to the Legacy Inventory Sale in the first quarter of the prior year as a result of our efforts to reduce these legacy inventories in 2016. This decrease was partially offset by an increased demand for our Forever OneTM gemstones during 2017 over the prior year and higher finished jewelry net sales during 2017.
·
Operating expenses from continuing operations decreased by $533,000, or 4%, to $12.17 million in 2017 from $12.70 million in 2016. Of this decrease, general and administrative expenses decreased $855,000, or 15%, to $4.69 million primarily as a result of decreased compensation expenses and professional services expenses, partially offset by an increase in bank fees principally associated with the Credit Facility. Sales and marketing expenses increased $439,000, or 6%, to $7.48 million, primarily due to increased compensation expenses and professional services costs associated with implementing our new sales and marketing strategies, offset partially by a decrease in advertising expenses. We had no loss on abandonment of property and equipment for the year ended December 31, 2017 compared to approximately $118,000 for the year ended December 31, 2016, a decrease of $118,000, or 100% from the prior year. During the year ended December 31, 2016, we abandoned costs of construction in progress related to website branding and design for our direct-to-consumer e-commerce business, charlesandcolvard.com, due to a change in our corporate strategy to consolidate our web properties.
·
Net loss from continuing operations decreased $3.50 million to a loss of $454,000 in 2017 from a net loss from continuing operations of $3.95 million in 2016. The reduction in net loss was due primarily to an increase in sales of our Forever OneTM gemstones, which have a more favorable gross profit margin, and lower general and administrative expenses. These improvements were offset in part by an increase in sales and marketing expenses.
·
Net loss decreased $4.07 million to a loss of $454,000 in 2017 from a net loss of $4.53 million in 2016. Net loss per share was $0.02 in 2017 compared to a net loss per share of $0.22 in 2016. The reduction in net loss was primarily due to an increase in sales of products with a more favorable profit margin and lower overall operating expenses. Our net loss in 2017 also reflected the $183,000 favorable impact of an insurance claim settlement and we incurred no losses from previously reported discontinued operations related to the discontinuance of our direct-to-consumer home party business in the prior year. In 2016, we also reported a $118,000 loss on the abandonment of property and equipment in connection with costs of construction in progress related to website branding and design for our direct-to-consumer e-commerce business.
·
We generated negative cash flows from continuing operations of $2.56 million in 2017 compared to positive cash flows of $3.33 million from continuing operations in 2016. The primary drivers of our negative cash flow in 2017 were a net loss of $454,000; an increase in accounts receivable of $733,000; an increase in inventory of $3.50 million; and an increase in prepaid expenses and other assets of $36,000. These factors were offset partially by an increase in accounts payable of $489,000 and an increase in accrued liabilities of $246,000. Non-cash items partially offsetting the impact of net loss totaled $1.43 million.

3143
Operating Activities and Cash Flows
·
Cash and cash equivalents at December 31, 2017 were $4.59 million compared to $7.43 million at December 31, 2016. The primary reason for this decrease is the $2.56 million of cash used in operations.

·
Total inventory, including long-term and consignment inventory, was $30.97 million as of December 31, 2017, up from $28.13 million at December 31, 2016. This inventory increase was, in part, due to higher purchases of raw materials and higher levels of finished goods that were produced to meet increased product demand. Lower total inventory levels in the prior year reflected the Legacy Inventory Sale.
·
We continue to carry no long-term debt and believe we can fund our growth strategies for the foreseeable future from operating cash flows.
ResultsWe require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of Operations
The following table sets forth certain consolidated statementsJune 30, 2021, our principal sources of operations dataliquidity were cash, cash equivalents, and restricted cash totaling $21.45 million, trade accounts receivable of $1.66 million, and net current inventory of $11.45 million, as compared to cash, cash equivalents, and restricted cash totaling $14.62 million, trade accounts receivable of $671,000, and net current inventory of $7.44 million as of June 30, 2020. We also had access during Fiscal 2021 to a $5.00 million asset-based revolving credit facility with White Oak, or the White Oak Credit Facility, which we terminated in accordance with its terms as of July 9, 2021. As described more fully herein, effective July 7, 2021, we obtained from JPMorgan Chase Bank, N.A., or JPMorgan Chase, a $5.00 million cash collateralized line of credit facility, or the JPMorgan Chase Credit Facility. Also as described more fully herein, we had long-term debt in the form of a PPP Loan in the amount of $965,000, of which $193,000 was classified as current as of June 30, 2020. Effective June 23, 2021, the Company’s PPP Loan forgiveness was approved and processed by the SBA for the yearsfull principal of the PPP Loan in the amount of $965,000 as well as forgiveness of accrued and unpaid interest of approximately $9,000.

During the fiscal year ended December 31, 2017June 30, 2021, our working capital increased by approximately $12.72 million to $30.14 million from $17.42 million at June 30, 2020. As described more fully below, the increase in working capital at June 30, 2021 is primarily attributable to an increase in our cash, cash equivalents, and 2016.restricted cash, principally resulting from cash provided by our operations, increase in our allocation of inventory from long-term to short-term due to a higher expected sell through of inventory on hand in the upcoming period, an increase in our accounts receivable, a decrease in our accounts payable, an increase in connection with the issuance of a short-term note receivable, a decrease in the current portion of our long-term debt, resulting from the forgiveness of our PPP Loan, and a decrease in our short-term operating lease liabilities. These factors were offset partially by an increase in our accrued expenses and other liabilities and a decrease in our prepaid expenses and other assets.
  Year Ended December 31, 
  2017  2016 
Net sales 
$
27,032,964
  
$
29,168,128
 
Costs and expenses:        
Cost of goods sold  
15,470,617
   
20,401,439
 
Sales and marketing  
7,477,354
   
7,038,277
 
General and administrative  
4,689,823
   
5,544,452
 
Research and development  
3,714
   
2,848
 
Loss on abandonment of property and        
equipment  
-
   
117,930
 
Total costs and expenses  
27,641,508
   
33,104,946
 
Loss from operations  
(608,544
)
  
(3,936,818
)
Other income (expense):        
Interest expense  
(541
)
  
(1,737
)
Gain on insurance claim settlement  
183,217
   
-
 
Total other income (expense), net  
182,676
   
(1,737
)
Loss before income taxes from continuing operations  
(425,868
)
  
(3,938,555
)
Income tax net expense from continuing operations  
(27,609
)
  
(13,480
)
Net loss from continuing operations  
(453,477
)
  
(3,952,035
)
         
Discontinued operations:        
Loss from discontinued operations  
-
   
(586,124
)
Gain on sale of assets from discontinued operations  
-
   
12,398
 
Net loss from discontinued operations  
-
   
(573,726
)
Net loss 
$
(453,477
)
 
$
(4,525,761
)

Consolidated Net SalesDuring the fiscal year ended June 30, 2020, our working capital decreased by approximately $5.75 million to $17.42 million from $23.17 million at June 30, 2019. As described more fully below, the decrease in working capital at June 30, 2020 is primarily attributable to a decrease in our allocation of inventory from long-term to short-term, a decrease in accounts receivable, an increase in short-term operating lease liabilities resulting from the adoption of the new lease accounting standard as of July 1, 2019, an increase in accrued expenses and other liabilities, an increase in accounts payable, and an increase in the current maturity of our long-term debt. These factors were offset partially by an increase in our cash, cash equivalents, and restricted cash resulting from cash provided by operating and financing activities and an increase in prepaid expenses and other assets.

ConsolidatedDuring the fiscal year ended June 30, 2021, approximately $6.47 million of cash was provided by our operations. The primary drivers of our cash flows from operations were the favorable effect of net income in the amount of $12.81 million; an increase in accrued expenses and other liabilities of $3.71 million; a decrease in inventory of $1.31 million; and an increase in accrued income taxes in the amount of $2,000. These factors were offset partially by an increase in prepaid expenses and other assets of $3.14 million; an increase in accounts receivable of $955,000; and a decrease in accounts payable of $974,000. In addition, the net effect of non-cash items included in net income totaling $6.29 million, driven by the benefit recognized for deferred income taxes in the amount of approximately $6.35 million in connection with the release of our valuation allowance and the gain on extinguishment of debt resulting from the forgiveness of our PPP Loan, including forgiveness of accrued and unpaid interest, in the amount of approximately $974,000, also unfavorably impacted net cash provided by operating activities during the fiscal year ended June 30, 2021.

During the fiscal year ended June 30, 2020, approximately $249,000 of cash was provided by our operations. The primary drivers underlying the cash provided by our operating activities were a decrease in accounts receivable of $1.32 million; a decrease in prepaid expenses and other assets of $490,000; an increase in accounts payable of $469,000; and an increase in accrued expenses and other liabilities of $109,000. In addition, non-cash items totaling $6.78 million also had a favorable impact on our cash flow from operations during the fiscal year ended June 30, 2020. These factors were offset partially by the unfavorable effect of our net loss in the amount of $6.16 million and an increase in inventory of approximately $2.76 million resulting from lower quantities of inventory items sold as a result of lower period sales forstemming from the years ended December 31, 2017 and 2016 compriseimpact of the following:COVID-19 pandemic.
 Year Ended December 31,  Change 
 2017 2016  Dollars  Percent 
Loose jewels 
$
16,580,748
  
$
21,451,728
  
$
(4,870,980
)
  
-23
%
Finished jewelry  
10,452,216
   
7,716,400
   
2,735,816
   
35
%
Total consolidated net sales 
$
27,032,964
  
$
29,168,128
  
$
(2,135,164
)
  
-7
%

Consolidated net sales were $27.03 million forDuring the fiscal year ended December 31, 2017 compared to $29.17 million for the year ended December 31, 2016, a decrease of $2.14 million, or 7%. The decrease in consolidated net sales for the year ended December 31, 2017 was due primarily to the Legacy Inventory Sale during the first quarter of the prior year. However, this decrease in 2017 was partially offset byJune 30, 2021, accounts receivable increased demand for our Forever OneTM gemstones during 2017 over the prior year. In addition, we experienced higher finished jewelry net sales during 2017 in both our Online Channels segment and Traditional segment.
Sales of loose jewels represented 61% and 74% of total consolidated net sales for the years ended December 31, 2017 and 2016, respectively. For the year ended December 31, 2017, loose jewel sales were $16.58 million compared to $21.45 million for the year ended December 31, 2016, a decrease of $4.87 million, or 23%. While this decrease was primarilyprincipally due to the Legacy Inventory Sale during 2016, our Forever OneTM gemstone sales during 2017 increased approximately 67% as compared to 2016 as demand for this product increased.
Saleslevel of finished jewelry represented 39% and 26% of total consolidated net sales for the years ended December 31, 2017 and 2016, respectively. For the year ended December 31, 2017, finished jewelry sales were $10.45 million compared to $7.72 million for the year ended December 31, 2016, an increase of $2.74 million, or 35%. This increase was due primarily to strong finished jewelry sales in both our Online Channels segment and Traditional segment. These increases in finished jewelry sales resulted from leveraging our strategy to drive sales in 2017 through multiple channels. This is reflected in our expanded presence in Helzberg Diamonds stores in our Traditional segment and promotion of our updated brand platform and increased presence within our e-commerce outlets, including charlesandcolvard.com in our Online Channels segment.
U.S. net sales accounted for approximately 93% and 90% of total consolidated net sales during the yearsthree months ended December 31, 2017 and 2016, respectively.June 30, 2021, as compared with the sales during the period leading up to June 30, 2020. As a percentageresult of net sales, U.S. net sales increasedthe COVID-19 pandemic, from time to time we offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy customers during 2017Fiscal 2021 and the second half of Fiscal 2020. 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 increased demandongoing 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 U.S. distributorwholesale 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 and increasedduring the current global economic environment. We believe that we are unable to estimate the impact of these actions on our net sales, from U.S.but we believe that if we ceased providing extended payment terms, we would be at a competitive disadvantage for some Traditional segment customers in boththe marketplace during this economic period and that our Traditional segment and Online Channels segment. While the share of our U.S. net sales increased in 2017, U.S. net sales decreased to $25.18 million, or 4%, duringand profits would likely be adversely impacted.

During the fiscal year ended December 31, 2017 compared to $26.16 millionJune 30, 2021, prepaid expenses and other assets decreased principally as a result of the timing of payments, primarily for insurance-related premium expenses, in advance of goods or services received. During the priorfiscal year ended June 30, 2021, accrued expenses and other liabilities increased principally as a result of the increase in our operating lease liability associated with the new lease amendment for our corporate headquarters facilities that was executed in January 2021. During the fiscal year ended June 30, 2021, accounts payable decreased primarily as a result of the Legacy Inventory Sale in the first quartertiming of 2016.
Our largest U.S. customer during the year ended December 31, 2017 accountedpayments for 21% of our total consolidated sales compared to 17% during the year ended December 31, 2016. A second U.S. customer accounted for 23% of our total consolidated net sales during the year ended December 31, 2016, but did not have net sales that represented 10% or more of total net sales for the year ended December 31, 2017. No additional U.S. customers accounted for more than 10% of total consolidated sales in 2017 or 2016. We expect that we will remain dependent on our ability,costs associated with inventory-related purchases and that of our largest customers, to maintain and enhance retail programs. A change in or loss of any of these customer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately 7% and 10% of total consolidated net sales during the years ended December 31, 2017 and 2016, respectively. International net sales decreased 38% during 2017 as we serve distributors in the Hong Kong and India markets and demand for loose jewels in these markets was down compared to 2016. We continue to evaluate these and other potential distributors in these international markets to determine the best long-term partner. Additionally, we anticipate the need to develop a direct-to-consumer presence, which would require marketing and e-commerce investment to drive expected growth in these regions.professional services incurred. As a result of the pandemic, we have from time-to-time paid certain vendor business partners in advance of their payment terms to secure and achieve supply chain needs.

During the fiscal year ended June 30, 2020, prepaid expenses and other assets increased principally as a result of the timing of payments, principally for insurance-related expenses, in advance of goods or services received. During the fiscal year ended June 30, 2020, accounts payable increased primarily as a result of the timing of payment for costs associated with inventory-related purchases and professional services incurred and due under our salesvendors’ payment terms. Likewise, accrued expenses and other liabilities increased principally due to the severance accrual in these markets may continueconnection with our June 2020 management reorganization and workforce reduction as well as increases in deferred revenue related to payments received prior to shipment of good from customers.

We manufactured approximately $7.63 million and $10.64 million in loose jewels and $12.72 million and $7.82 million in finished jewelry, which includes the cost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production, during the fiscal years ended June 30, 2021 and 2020, respectively. We expect our purchases of precious metals and labor to fluctuate significantly each reporting period.
No international customers accounted for more than 10% of total consolidated sales in 2017 or 2016. A portionconjunction with the levels of our international consolidatedfinished jewelry business. In addition, the price of gold has increased significantly over the past decade, resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry.

Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with reduced sales represents jewels sold internationally that may be re-imported to U.S. retailers. Our top three international distributors by sales volumelevels during prior periods in which the year ended December 31, 2017purchase commitments were in ordereffect, have resulted in levels of inventories that are higher than we might otherwise maintain. As of June 30, 2021 and 2020, $17.72 million and $23.19 million, respectively, of our inventories were classified as long-term assets. Loose jewel sales volume, locatedand 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 $1.78 million and new raw material that we purchase pursuant to the Supply Agreement.

A more detailed description of our inventories is included in Hong Kong, Canada,Note 6 to our consolidated financial statements in Item 8, “Financial Statements and Hong Kong.Supplementary Data”, of this Annual Report on Form 10-K.

3345
We made income tax payments of approximately $15,000 and $2,000 during the fiscal years ended June 30, 2021 and 2020, respectively. As of June 30, 2021, 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 June 30, 2021 and 2020, we had federal tax net operating loss carryforwards of approximately $19.00 million and $23.72 million, respectively, expiring between 2034 and 2037, or that have no expiration, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $19.87 million and  $20.12 million, respectively, 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.

Contractual Commitment

On December 12, 2014, we entered into the Supply Agreement with Cree. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties. Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of our premium moissanite product, Forever One™ and provided us with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following the expiration of the initial term. In addition, the amendment to the Supply Agreement established a process by which Cree may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Cree has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 2025 is approximately $52.95 million, of which approximately $32.85 million remains to be purchased as of June 30, 2021.

For more information regarding the second amendment to our Supply Agreement, executed on August 26, 2020, see Note 10 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

During the fiscal years ended June 30, 2021 and 2020, we purchased approximately $3.78 million and $7.47 million, respectively, of SiC crystals from Cree. Going forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, together with future cash expected to be provided by operating activities to finance our purchase commitment under the Supply Agreement, as amended.

Line of Credit

Effective July 7, 2021, we obtained from JPMorgan Chase our $5.00 million cash collateralized JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The JPMorgan Chase Credit Facility is secured by a cash deposit in the amount of $5.05 million held by JPMorgan Chase as collateral for the line of credit facility.

Each advance accrues interest at a rate equal to JPMorgan Chase’s monthly 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. See Note 2, under the caption of Recently Issued Accounting Pronouncements, to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for more detailed information relating to concerns about structural risks of interbank offered rates, or IBORs, and, particularly, the risk of cessation of the LIBOR.

The JPMorgan Chase Credit Facility is evidenced by a credit agreement between us and JPMorgan Chase, or the JPMorgan Chase Credit Agreement, dated as of July 12, 2021, and customary ancillary documents, in the principal amount not to exceed $5.00 million at any one time outstanding and a line of credit note, or the JPMorgan Chase Line of Credit Note, in which we promise to pay on or before July 31, 2022, the amount of $5.00 million or so much thereof as may be advanced and outstanding. In the event of default, JPMorgan Chase, at its option, may accelerate the maturity of advances outstanding under the JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Agreement and ancillary documents contain customary covenants, representations, fees, debt, contingent obligations, liens, loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.

In connection with the JPMorgan Chase Credit Facility, we incurred a non-refundable origination fee in the amount of $10,000 that was paid in full to JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12, 2021. We also agreed to maintain our primary banking depository and disbursement relationship with JPMorgan Chase.

Events of default under the JPMorgan Chase Credit Facility include, without limitation, a default, event of default, or event that would constitute a default or event of default (pending giving notice or lapse of time or both), of any provision of the JPMorgan Chase Credit Agreement, the JPMorgan Chase Line of Credit Note, or any other instrument or document executed in connection with the JPMorgan Chase Credit Agreement or with any of our indebtedness, liabilities, and obligations to JPMorgan Chase or would result from the extension of credit to us by JPMorgan Chase.

On July 12, 2021, upon its execution, we did not request any advances pursuant to the terms of 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 the Company’s achievement of a specified fixed charge coverage ratio during the period of any outstanding advances. However, any advances were in all cases subject to a minimum interest rate of 5.50% and interest would have been calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default, which again 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.

More detailed descriptions of both our JPMorgan Chase Credit Facility and former White Oak Credit Facility are included in Note 11 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

Liquidity and Capital Trends

We believe that our existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, and future cash expected to be provided by operating activities combined will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.

Our future capital requirements and the adequacy of available funds will depend on many factors, including the ongoing uncertainty surrounding COVID-19 that could lead to further disruption and volatility in the global capital markets as well as its impact on our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewels and lab grown diamond 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 I, Item 1A of this Annual Report on Form 10-K. Currently, we have the JPMorgan Chase Credit Facility through its expiration on July 31, 2022, which we believe would mitigate these risks to our cash and liquidity position. Also, we may make investments in, or acquisitions of, complementary businesses, which could also require us to seek additional equity or debt financing.

Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the fiscal years ended December 31, 2017June 30, 2021 and 20162020 are as follows:

 Year Ended December 31,  Change  Year Ended June 30,  Change 
 2017  2016  Dollars  Percent  2021  2020  Dollars  Percent 
Product line cost of goods sold            
Product line cost of goods sold:            
Finished jewelry $11,272,012  $7,469,790  $3,802,222   51%
Loose jewels 
$
8,524,843
  
$
13,916,749
  
$
(5,391,906
)
  
-39
%
  6,857,755   6,062,186   795,569   13%
Finished jewelry  
5,226,660
   
4,148,788
   
1,077,872
   
26
%
Total product line cost of goods sold  
13,751,503
   
18,065,537
   
(4,314,034
)
  
-24
%
  18,129,767   13,531,976   
4,597,791
   34%
Non-product line cost of goods sold  
1,719,114
   
2,335,902
   
(616,788
)
  
-26
%
  2,679,923   7,668,231   (4,988,308)  (65)%
Total cost of goods sold 
$
15,470,617
  
$
20,401,439
  
$
(4,930,822
)
  
-24
%
 $20,809,690  $21,200,207  $(390,517)  (2)%

Total cost of goods sold was $15.47$20.81 million for the fiscal year ended December 31, 2017June 30, 2021 compared to $20.40$21.20 million for the fiscal year ended December 31, 2016,June 30, 2020, a net decrease of $4.93 million,approximately $391,000, or 24%2%. Product line cost of goods sold is defined as product cost of goods sold in each of our TraditionalOnline Channels segment and Online ChannelsTraditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory valuation allowance adjustments;write-offs; and other inventory adjustments, comprising costs of quality issues, and damaged goods, and inventory write-downs.goods.

The decrease in total cost of goods sold for the fiscal year ended June 30, 2021 as compared to the fiscal year ended June 30, 2020 was driven primarily by the prior year write-off during the quarter ended March 31, 2020, of approximately $5.26 million representing the carrying value of our legacy loose jewel inventory and finished goods inventory set with these legacy gemstones. This decrease in cost of goods sold for 2017the fiscal year ended June 30, 2021, was offset in part by higher cost of goods sold principally driven by increased sales of finished jewelry, which reflect higher material and labor costs, in both our Online Channels segment and Traditional segment as compared to the prior year was due primarily to the Legacy Inventory Salea result of strong product demand during the first quarter of 2016. year.

The net decrease in non-product line cost of goods sold for the fiscal year ended June 30, 2021 comprises a $980,000$5.71 million lower change in inventory valuation adjustments principally related to the prior fiscal year’s write-off of the carrying cost of the Company’s legacy material inventory of $5.26 million during the quarter ended March 31, 2020, as well as other inventory valuation adjustments related to changes in obsolescence reserves in the fiscal year ended June 30, 2021, compared to those in the prior fiscal year. This decrease in other inventory adjustmentsnon-product line cost of goods sold was offset in part by a $503,000 increase in freight out principally relating to production standard cost variances andfrom increased shipments resulting from substantial Online Channels segment sales growth during the fiscal year ended June 30, 2021; a $76,000 decrease$147,000 increase in non-capitalized manufacturing and production control expenses primarilyin the current year principally due to the timing of receivingwhen work-in-process goods are received into inventory and allocating overhead. These decreases were offsetapplicable overhead costs are allocated; and an approximate $76,000 change in part by a $398,000 increaseother inventory adjustments primarily relating to adverse changes in inventory valuation allowances, including inventory obsolescence, shrinkage, recuts, and repairs reserves, and a $40,000 increase in freight out as a resultproduction standard cost variances compared to those during the fiscal year ended June 30, 2020.

For further discussion of non-product line cost of goods sold, see Note 3 “Segment Informationto our consolidated financial statements in Item 8, “Financial Statements and GeographicSupplementary Data”, in the Notes to Consolidated Financial Statements.of this Annual Report on Form 10-K.

Sales and Marketing

Sales and marketing expenses for the fiscal years ended December 31, 2017June 30, 2021 and 20162020 are as follows:

 Year Ended December 31,  Change 
  2017 2016 Dollars  Percent 
Sales and marketing 
$
7,477,354
  
$
7,038,277
  
$
439,077
   
6
%
  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
             
Sales and marketing $8,476,716  $9,443,244  $(966,528)  (10)%

Sales and marketing expenses were $7.48$8.48 million for the fiscal year ended December 31, 2017June 30, 2021 compared to $7.04$9.44 million for the fiscal year ended December 31, 2016, an increaseJune 30, 2020, a decrease of approximately $439,000,$967,000, or 6%10%.

The increasedecrease in sales and marketing expenses for the fiscal year ended December 31, 2017June 30, 2021 compared to the fiscal year ended December 31, 2016June 30, 2020 was primarily due to a $531,000 increase$1.31 million decrease in compensation-related expense;expenses; a $201,000 increase$164,000 decrease in professional services fees;fees principally comprising non-recurring consulting services for cybersecurity and merchandising imaging incurred in the prior year; a $145,000$26,000 decrease in travel expenses as a result of COVID-19 cost-control measures; and a $1,000 net decrease in miscellaneous other general sales and marketing expenses. These decreases were partially offset by a $282,000 increase in advertising and digital marketing expenses; an $84,000 increase in software-related costs principally in connection with maintenance agreements associated with our migration to a cloud-based data storage arrangement as well as other software-related agreements; a $90,000an $83,000 increase in general office-related expenses;expenses, which are principally related to higher credit card transaction fees from increased online sales levels; a $24,000 increase in recruiting fees; a $12,000$69,000 increase in depreciation and amortization expense;expense relating to capitalized costs associated with information technology-related upgrades; and a $13,000$17,000 increase in miscellaneous other sales and marketing expenses. These increases were partially offset by a $596,000 decrease in advertising expenses; a $31,000 decrease in travel expense; and a $13,000 decrease in market research expenses.employment-related recruiting fees.
Compensation expenses for the fiscal year ended December 31, 2017June 30, 2021 compared to the December 31, 2016 increasedfiscal year ended June 30, 2020 decreased primarily as a result of a $362,000 increase$1.25 million decrease in salaries, commissions, and related employee benefits in the aggregate;aggregate as a $191,000 increase in severance expense primarily related to the departureresult of our Chief Revenue Officer duringJune 2020 management reorganization and workforce reduction; a $76,000 decrease in employee-related severance costs recognized in the first quarterprior year which also was a result of 2017;our June 2020 management reorganization and workforce reduction; and a $136,000$68,000 decrease in employee stock-based compensation expense associated with the modification of terms for certain participant stock options in Fiscal 2020 that resulted in the recognition of higher stock compensation expense in the prior fiscal year. These decreases were partially offset by an $84,000 increase in bonus expense;expense reflecting improved operating results in the current year that impacts this performance-based compensation-related benefit.

The increase in digital marketing expenses for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 was primarily due to a $766,000 increase in Internet marketing costs and a $13,000$20,000 increase in relocation expense.print media expenses. Both increases reflect changes in our overall social media and print marketing strategies during Fiscal 2021 compared with those in Fiscal 2020. These increases were partially offset by a $171,000 decrease in employee stock-based compensation expense.
The decrease in advertising expenses for the year ended December 31, 2017 compared to the year ended December 31, 2016 comprises an $849,000$386,000 decrease in outside agency fees, also as a consequence of modifications in our marketing strategy and reliance on internal resources during the current year; a $33,000$111,000 decrease in print media expenses. These decreases were partially offset by a $159,000 increase in promotional expenses; an $84,000 increase in cooperative advertising; a $33,000 increase in Internet marketing; and a $10,000 increase$7,000 decrease in all other advertisingpromotion-related expenses.

Sales and marketing expenses are allocated across our Traditional segment and Online Channels segment, which in 2016 included allocations to Charles & Colvard Direct, LLC, a segment we are reporting as discontinued operations. See Note 13, “Discontinued Operations”, in the Notes to the Consolidated Financial Statements for further discussion of discontinued operations. Approximately $61,000 of sales and marketing expenses for the year ended December 31, 2016, all of which were incurred during the first six months of 2016, are attributable to sales and marketing expenses that are now being allocated to our remaining two continuing operating segments that were previously allocated to Charles & Colvard Direct, LLC. We had no such sales and marketing expenses during the second half of 2016.
While our intent is to continue to invest in sales and marketing efforts to increase sales, we believe such expenses may also increase as part of our ongoing strategy to promote overall consumer awareness of moissanite and of our brands. However, this will be dependent on overall companywide marketing strategies and in which sales channels we may choose to make such further investments.
General and Administrative

General and administrative expenses for the fiscal years ended December 31, 2017June 30, 2021 and 20162020 are as follows:

 Year Ended December 31, Change 
 2017 2016 Dollars  Percent 
General and administrative 
$
4,689,823
  
$
5,544,452
  
$
(854,629
)
  
-15
%
  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
             
General and administrative $4,441,441  $4,861,297  $(419,856)  (9)%

General and administrative expenses were $4.69$4.44 million for the fiscal year ended December 31, 2017June 30, 2021 compared to $5.54$4.86 million for the fiscal year ended December 31, 2016,June 30, 2020, a decrease of approximately $855,000,$420,000, or 15%9%.

The decrease in general and administrative expenses for the fiscal year ended December 31, 2017June 30, 2021 compared to the fiscal year ended December 31, 2016June 30, 2020 was primarily due to a $751,000 decrease in compensation expenses; $300,000$428,000 decrease in professional services; a $77,000$206,000 decrease in depreciation and amortization expense;compensation-related expenses; a $74,000$7,000 decrease in insurance expenses; a $16,000 decrease in travel expenses; a $14,000 decrease in computer and software related expenses;bad debt expense associated with our allowance for doubtful accounts reserve policy; and a $16,000$1,000 net decrease in miscellaneous other general and administrative expenses. These decreases were partially offset by a $99,000$58,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; a $50,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements; a $38,000 increase in housing allowances and travel-related expenditures; a $30,000 increase in insurance expenses principally related to higher renewal premiums; a $20,000 increase in bank fees, which includescharges as a result of transaction fees associated with the Credit Facility and credit card clearingincreased online transactions; an $88,000a $14,000 increase in bad debt expense associatedBoard member retainer fees due to the temporary reduction in fees paid to our Board of Directors in connection with our allowance for doubtful accounts reserve policy; an $18,000cost control measures implemented during the COVID-19 pandemic in the prior year; a $9,000 increase in equipment-related rentaldepreciation and amortization expense; an $8,000 increase in board retainer fees; and a $5,000$3,000 increase in business taxes and licenses.

Professional services fees decreased for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 primarily due to a $283,000 decrease in legal fees resulting from non-recurring non-capitalized fees incurred in connection with our underwritten public offering and corporate governance matters in the prior year; a $101,000 decrease in consulting and other professional services primarily in connection with accounting department support in the prior year; and a $66,000 decrease in investor relations fees. These decreases were partially offset by a $22,000 increase in fees associated with audit and tax services in the current year.

Compensation expenses decreased for the fiscal year ended December 31, 2017June 30, 2021 compared to the fiscal year ended December 31, 2016June 30, 2020 primarily due to a $469,000$282,000 decrease in severance expenses recognized in the prior year related to our June 2020 management reorganization and workforce reduction; a $184,000 decrease in salaries and related employee benefits in the aggregate which also was a result of our June 2020 management reorganization and workforce reduction; and a $380,000$54,000 decrease in employee stock-based compensation expense principally due to changes in stock-based compensation performance measurements andassociated with the modification of restrictedterms for certain participant stock awards from wholly restrictedoptions in Fiscal 2020 that resulted in the recognition of higher stock awards to awards consisting of 70% restricted stock and 30% cashcompensation expense in lieu of restricted stock.the prior fiscal year. These decreases were offset in part by a $56,000$314,000 increase in bonus expense reflecting improved operating results in Fiscal 2021 that impacts this performance-based compensation-related benefit.

Gain on Extinguishment of Debt

Gain on extinguishment of debt for the fiscal years ended June 30, 2021 and an increase2020 is as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Gain on extinguishment of debt
 $974,328  $-  $974,328   100%

On June 18, 2020, we received the proceeds from our Paycheck Protection Program Loan, or the PPP Loan, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or SBA. The PPP Loan in the principal amount of $42,000$965,000 was disbursed by Newtek Small Business Finance, LLC, or the Lender, pursuant to a promissory note, or the Promissory Note, dated June 15, 2020. During the period of time that the principal under the Promissory Note was outstanding, we accounted for the Promissory Note as debt within the accompanying consolidated financial statements. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in severance expenses related to personnel changes.the amount of $965,000. The full amount of interest expense to-date in the amount of approximately $9,000 that the Company recognized during the period the principal of the PPP Loan was outstanding was also forgiven by the SBA. Accordingly, the full amount of the gain in connection with the extinguishment of this debt, including the benefit from the forgiveness of the inception to-date interest expense, was recognized in the fiscal year ended June 30, 2021.

3540
Interest Income
Professional services decreased
Interest income for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to a decrease of $230,000 in accounting services; a decrease of $105,000 in consulting and other professional services primarily related to human resources and sales and use tax projects in 2016; and a $1,000 decrease in investor and public relations expenses. These decreases were partially offset by an increase in legal fees of $36,000.
General and administrative expenses are allocated across our Traditional segment and Online Channels segment, which in 2016 included allocations to Charles & Colvard Direct, LLC, a segment we are reporting as discontinued operations. See Note 13, “Discontinued Operations”, in the Notes to the Consolidated Financial Statements for further discussion of discontinued operations. Approximately $175,000 of general and administrative expenses for the year ended December 31, 2016, all of which were incurred during the first six months of 2016, are attributable to general and administrative expenses that are now being allocated to our remaining two continuing operating segments that were previously allocated to Charles & Colvard Direct, LLC. We had no such general and administrative expenses during the second half of 2016.
Loss on Abandonment of Property and Equipment
Loss on abandonment of property and equipment for thefiscal years ended December 31, 2017June 30, 2021 and 20162020 is as follows:

 Year Ended December 31, Change 
 2017 2016 Dollars  Percent 
Loss on abandonment of property and equipment 
$
-
  
$
117,930
  
$
(117,930
)
  
-100
%
  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Interest income $5,581  $158,091  $(152,510)  (96)%

We had no lossIn June 2019, we completed an underwritten public offering of 6,250,000 shares of our common stock, which together with the partial exercise of the underwriters’ overallotment option for an additional 630,500 shares in July 2019, resulted in net proceeds of approximately $9.99 million. The net proceeds from this offering, along with excess operating cash, are deposited into and maintained in an interest-bearing account with a federally insured commercial bank. Accordingly, during the fiscal years ended June 30, 2021 and 2020, we earned interest from cash on abandonment of property and equipmentdeposit in this interest-bearing account. The decrease in earned interest reflects adverse changes in interest rate fluctuations during Fiscal 2021 compared with Fiscal 2020.

Interest Expense

Interest expense for the year ended December 31, 2017 compared to approximately $118,000 for the year ended December 31, 2016, a decrease of $118,000, or 100%. During the year ended December 31, 2016, we abandoned costs of construction in progress related to website branding and design for our e-commerce business, charlesandcolvard.com, due to a change in our corporate strategy to consolidate our web properties.
Gain on Insurance Claim Settlement
Gain on insurance claim settlement for thefiscal years ended December 31, 2017June 30, 2021 and 20162020 is as follows:

 Year Ended December 31, Change 
 2017 2016 Dollars  Percent 
Gain on insurance claim settlement 
$
183,217
  
$
-
  
$
183,217
   
100
%
  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Interest expense $8,953  $884  $8,069   913%

The gain on insurance claim settlementIn accordance with the terms of the Promissory Note, during the period of time the principal of the PPP Loan was approximately $183,000outstanding through June 23, 2021, we accrued interest at a fixed rate of 1% per annum. Our accrual for interest expense associated with the PPP Loan began June 18, 2020, the date we received the proceeds for the PPP Loan from our Lender. Likewise, we accrued interest on the PPP Loan during the fiscal year ended December 31, 2017, comparedJune 30, 2021, through June 23, 2021, the date our PPP Loan was forgiven by the SBA.

Loss on Foreign Currency Exchange

Loss on foreign currency exchange related to $0foreign sales transacted in functional currencies other than the U.S. dollar for the fiscal years ended June 30, 2021 and 2020 are as follows:

  Year Ended June 30,  Change 
  2021  2020  Dollars  Percent 
Loss on foreign currency exchange $603  $1,829  $(1,226)  (67)%

During the fiscal years ended June 30, 2021 and 2020, we had international sales transactions denominated in currencies other than the U.S dollar that resulted in foreign currency exchange net losses. The decrease in these losses reflects the lower level of international sales denominated in foreign currencies as well as foreign currency exchange rate fluctuations during fiscal year ended December 31, 2016, an increaseJune 30, 2021 compared with those of $183,000, or 100%. In the fourth quarter of 2017, we settled an outstanding insurance claim related to recovery of costs previously expensed and written off during 2017 associated with insured losses incurred in connection with a shipment of work-in-process materials. The gain represents the excess recovery over amounts previously expensed and written off.prior fiscal year.

Provision for Income Taxes

We recognized ana net income tax benefit of approximately $6.33 million and a net income tax expense of approximately $28,000 and 13,000$2,000 for the fiscal years ended December 31, 2017June 30, 2021 and 2016,2020, respectively. IncomeOur income tax provisions in these years primarily relate toperiods contain estimated tax,taxes, penalties, and interest associated with uncertain tax positions.

As of each reporting date, management considerswe consider new evidence, both positive and negative, that could impact itsour view with regard to future realization of deferred tax assets. Beginning in 2014, managementwe determined that negative evidence outweighed the positive and established a full valuation allowance against our deferred tax assets. Weassets and we maintained asuch full valuation allowance through the period ended June 30, 2020. However, as of December 31, 2017June 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 includes significant management estimates and 2016.
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, 36we determined that sufficient positive evidence exists as of June 30, 2021, to conclude that it is more likely than not deferred tax assets of approximately $6.35 million are realizable, and we reduced our valuation allowance accordingly. The reduction of the valuation allowances against these deferred tax assets was the main driver of the income tax benefit during the fiscal year ended June 30, 2021 of approximately $6.33 million. A valuation allowance remains against certain deferred tax assets primarily relating to state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of when it will generate positive taxable income to utilize the associated deferred tax assets. In addition, a valuation allowance also remains against certain deferred tax assets relating to operating loss carryforwards relating to our dormant subsidiary located in Hong Kong.

Our statutory tax rate as of the fiscal year ended June 30, 2021 is 23.25%22.24% and consists of the federal income tax rate of 21% and a blended state income tax rate of 2.25%1.24%, net of the federal benefit.

On December 22, 2017,
Certain Operating Metrics

We believe that certain metrics are key to our business, including but not limited to monitoring our average order value, or AOV. We use the President signedAOV computation in part to make strategic digital marketing related decisions and to monitor the Tax Actperformance and return on investment of our marketing activities. Our AOV is based on financial results and customer-related data for charlesandcolvard.com, LLC, our wholly owned subsidiary and through which we operate our primary transactional website. Our calculation for AOV is sensitive to several factors, including sales volume and product mix. Therefore, we believe that among other things loweredthis metric may vary widely going forward as we respond to ever changing consumer demand and provide the U.S. corporate income tax rate from 35%products – that may have widely variable price points – which our audiences are seeking.

For the fiscal year ended June 30, 2021, our AOV, based on charlesandcolvard.com revenue, net of returns, divided by the total number of customer orders, is estimated to 21% effective January 1, 2018. be approximately $1,000.

An additional metric that we use to manage charlesandcolvard.com operations and to make strategic digital marketing decisions for our transactional website is period-over-period revenue growth. Accordingly, we believe this level of growth reinforces our current year’s digital marketing program and affirms our decision to increase our investment in consumer-driven marketing efforts in charlesandcolvard.com during Fiscal 2021. While we believe this metric is sensitive to many factors and may vary in future periods, we expect to continue to monitor and base our marketing-related investments in part on charlesandcolvard.com revenue growth going forward.

For further discussion of the effects offiscal year ended June 30, 2021, we experienced a 45% year-over-year growth in charlesandcolvard.com revenue compared to revenue for the Tax Act on our deferred tax assets, see Note 12, “Income Taxes”, in the Notes to the Consolidated Financial Statements.fiscal year ended June 30, 2020.

Liquidity and Capital Resources

The full impact of the COVID-19 pandemic on the global and domestic economy remains uncertain and the world continues adapting to the ongoing pandemic and evolving viral variants and its adverse effects on global economics and worldwide business operations. The impact of the COVID-19 pandemic continues to place unprecedented pressures on global and U.S. businesses including our own. Depending on future developments, including the success of the global vaccine efforts to control the spread of the underlying virus and evolving variants, the pandemic could materially adversely impact our capital resources and liquidity in the future. We remain increasingly focused on the COVID-19 pandemic and are continually evaluating its potential effect on our business and liquidity and capital resources.

Capital Structure and Long-Term Debt

On June 18, 2020, we received the proceeds from the PPP Loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. The PPP Loan in the principal amount of $965,000 was disbursed by the Lender pursuant to a promissory note, or the Promissory Note, issued by us on June 15, 2020. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000. The full amount of the gain in connection with the extinguishment of this debt, including the forgiveness of accrued and unpaid interest of approximately $9,000, was recognized in the fiscal year ended June 30, 2021.

The CARES Act provided that existing AMT credit carryforwards were eligible for acceleration and refundable AMT credits were to be completely refunded to companies for taxable years beginning in 2019, or by election, taxable years beginning in 2018. Accordingly, we elected to have our then existing AMT tax completely refunded and filed a refund claim for the remaining portion of our AMT tax credit. Accordingly, the remaining balance of our AMT credit refund in the amount of approximately $270,000 was completely refunded during the fiscal year ended June 30, 2021.

We took advantage of available COVID-19 related payroll tax credits for certain wages and paid leave provided by us during the pandemic. A portion of these eligible tax credits are determined by qualified emergency paid sick and expanded family and medical leave wages pursuant to FFCRA. In addition, the Consolidated Appropriations Act, 2021, provides that employers who received a PPP loan may also qualify for the Employee Retention Credit (the “ERC”). Previously, pursuant to the CARES Act, taxpayers that received a PPP loan were not eligible for the ERC and this change is retroactive to March 27, 2020. We believe that we qualify for certain employer-related tax benefits pursuant to the ERC and expect to amend our applicable federal payroll tax returns for such benefit. Further, as permitted by the NC COVID-19 Relief Act, we expect to receive an incremental tax credit towards our contributions to the North Carolina Unemployment Insurance Fund. Accordingly, we will recognize any payroll tax credits related to these federal and state legislative actions in the period such benefits are received.

For further discussion of the effects of the CARES Act, the Consolidated Appropriations Act, 2021, and the NC COVID-19 Relief Act on our provision for income taxes and deferred tax assets, see Note 13 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

As a component of our liquidity and capital structure, we have an effective shelf registration statement on Form S-3 on file with the SEC that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period.  Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of the COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.

Financing Activities

In June 2019, we completed an underwritten public offering of 6,250,000 newly issued shares of common stock, at a price to the public of $1.60 per share, pursuant to our effective shelf registration statement on Form S-3. Net proceeds from the offering were approximately $9.06 million, net of the underwriting discount and fees and expenses. Pursuant to the terms of the underwriting agreement entered into in connection with this offering, the underwriters were granted a 30-day option to buy up to an additional 937,500 shares of our common stock to cover over-allotments. Pursuant to the partial exercise of the underwriters’ over-allotment option, in July 2019, we issued an additional 630,500 shares of our common stock at a price of $1.60 per share for net proceeds of approximately $932,000, net of the underwriting discount and fees and expenses of approximately $77,000. After giving effect to the partial exercise of the over-allotment option, we sold an aggregate of 6,880,500 shares of our common stock at a price of $1.60 per share with total gross proceeds of approximately $11.01 million, before deducting the underwriting discount and fees and expenses of approximately $1.02 million. Early during Fiscal 2020, we began using the aggregate net proceeds of approximately $9.99 million from the offering for marketing and for general corporate and working capital purposes. In response to the COVID-19 pandemic and its impact on consumer confidence and spending, management drastically reduced related advertising and digital marketing expenditures in mid-March 2020. However, we continue to monitor and adjust our advertising and digital marketing and professional services expenditure levels to correspond to market changes. As a result, we increased these expenditures during the fiscal year ended June 30, 2021, and may continue seeing an increase in these expenditure levels during Fiscal 2022 and beyond.

As discussed above, on June 18, 2020, we received the proceeds from the PPP Loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. The PPP Loan in the principal amount of $965,000 was disbursed by the Lender pursuant to a Promissory Note issued by us on June 15, 2020. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000. The full amount of the gain in connection with the extinguishment of this debt, including the forgiveness of accrued and unpaid interest of approximately $9,000, was recognized in the fiscal year ended June 30, 2021.

Operating Activities and Cash Flows

We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of December 31, 2017,June 30, 2021, our principal sources of liquidity were cash, and cash equivalents, and restricted cash totaling $4.59$21.45 million, trade accounts receivable of $3.38$1.66 million, and net current inventory of $11.21$11.45 million, as compared to cash, and cash equivalents, and restricted cash totaling $7.43$14.62 million, trade accounts receivable of $2.80 million,$671,000, and net current inventory of $9.77$7.44 million as of December 31, 2016.June 30, 2020. We also had access during Fiscal 2021 to a $5.00 million asset-based revolving credit facility with White Oak, or the White Oak Credit Facility, which we terminated in accordance with its terms as of July 9, 2021. As described more fully herein, effective July 7, 2021, we obtained from JPMorgan Chase Bank, N.A., or JPMorgan Chase, a $5.00 million cash collateralized line of credit facility, or the JPMorgan Chase Credit Facility. Also as described more fully herein, we had long-term debt in the form of a PPP Loan in the amount of $965,000, of which $193,000 was classified as current as of June 30, 2020. Effective June 23, 2021, the Company’s PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000 as well as forgiveness of accrued and unpaid interest of approximately $9,000.

During the fiscal year ended June 30, 2021, our working capital increased by approximately $12.72 million to $30.14 million from $17.42 million at June 30, 2020. As described more fully below, we also have accessthe increase in working capital at June 30, 2021 is primarily attributable to an increase in our $10.00 million Credit Facility.cash, cash equivalents, and restricted cash, principally resulting from cash provided by our operations, increase in our allocation of inventory from long-term to short-term due to a higher expected sell through of inventory on hand in the upcoming period, an increase in our accounts receivable, a decrease in our accounts payable, an increase in connection with the issuance of a short-term note receivable, a decrease in the current portion of our long-term debt, resulting from the forgiveness of our PPP Loan, and a decrease in our short-term operating lease liabilities. These factors were offset partially by an increase in our accrued expenses and other liabilities and a decrease in our prepaid expenses and other assets.

During the fiscal year ended December 31, 2017,June 30, 2020, our working capital decreased by approximately $1.37$5.75 million to $14.70$17.42 million from $16.07$23.17 million at December 31, 2016.June 30, 2019. As described more fully below, the decrease in working capital at December 31, 2017June 30, 2020 is primarily attributable to a decrease in our cash and cash equivalentsallocation of inventory from long-term to short-term, a decrease in accounts receivable, an increase in short-term operating lease liabilities resulting from cash usedthe adoption of the new lease accounting standard as of July 1, 2019, an increase in our operations and increases in accounts payable, accrued cooperative advertising, and accrued expenses and other liabilities.liabilities, an increase in accounts payable, and an increase in the current maturity of our long-term debt. These factors were offset partially by an increase in our allocation of inventory to short-termcash, cash equivalents, and restricted cash resulting from long-term,cash provided by operating and increasesfinancing activities and an increase in accounts receivable, and prepaid expenses and other assets.

During the fiscal year ended December 31, 2017, $2.56June 30, 2021, approximately $6.47 million of cash was usedprovided by our continuing operations. The primary drivers of our usecash flows from operations were the favorable effect of cash were a net lossincome in the amount of $454,000;$12.81 million; an increase in accounts receivableaccrued expenses and other liabilities of $733,000;$3.71 million; a decrease in inventory of $1.31 million; and an increase in inventoryaccrued income taxes in the amount of $3.50 million and$2,000. These factors were offset partially by an increase in prepaid expenses and other assets of $36,000.$3.14 million; an increase in accounts receivable of $955,000; and a decrease in accounts payable of $974,000. In addition, the net effect of non-cash items included in net income totaling $6.29 million, driven by the benefit recognized for deferred income taxes in the amount of approximately $6.35 million in connection with the release of our valuation allowance and the gain on extinguishment of debt resulting from the forgiveness of our PPP Loan, including forgiveness of accrued and unpaid interest, in the amount of approximately $974,000, also unfavorably impacted net cash provided by operating activities during the fiscal year ended June 30, 2021.

During the fiscal year ended June 30, 2020, approximately $249,000 of cash was provided by our operations. The primary drivers underlying the cash provided by our operating activities were a decrease in accounts receivable of $1.32 million; a decrease in prepaid expenses and other assets of $490,000; an increase in accounts payable of $469,000; and an increase in accrued expenses and other liabilities of $109,000. In addition, non-cash items totaling $6.78 million also had a favorable impact on our cash flow from operations during the fiscal year ended June 30, 2020. These factors were offset partially by an increasethe unfavorable effect of our net loss in accounts payablethe amount of $489,000$6.16 million and an increase in accrued liabilitiesinventory of $246,000. Non-cashapproximately $2.76 million resulting from lower quantities of inventory items partially offsettingsold as a result of lower period sales stemming from the impact of net loss totaled $1.43 million. The inventory increase was, in part, due to the purchaseCOVID-19 pandemic.

During the period pursuant to the Supply Agreement; production of moissanite jewels; and purchases of jewelry castings and other jewelry components due to increased demand in certain channels and preparation for market demand.
Accountsfiscal year ended June 30, 2021, accounts receivable increased principally due to the increased level of sales during the fourth quarter of 2017three months ended June 30, 2021, as compared with the samesales during the period inleading up to June 30, 2020. As a result of the prior year, as well as an overall increase of sales in our Online Channels segment in 2017 compared with 2016. We did not offer anyCOVID-19 pandemic, from time to time we offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy customers during Fiscal 2021 and the year ended December 31, 2017; however, we may offersecond half of Fiscal 2020. Because of the ongoing impact of the pandemic on the global economy, the extension of these terms from time to time, which may not immediately increase liquidity as a result of ongoing current-period sales. Wesales, which we expect 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 andduring the current global economic environment. We believe that our net sales have been favorably impacted. Wewe are unable to estimate the impact of this programthese actions on our net sales, but we believe that if we ceased providing extended payment terms, in select instances, we believe we would not be at a competitive disadvantage for some Traditional segment customers in the marketplace during this economic period and that our net sales and profits would likely decrease. be adversely impacted.

During the fiscal year ended December 31, 2016, we wrote off $815,000June 30, 2021, prepaid expenses and other assets decreased principally as a result of the timing of payments, primarily for insurance-related premium expenses, in accounts receivable related to one international customeradvance of goods or services received. During the fiscal year ended June 30, 2021, accrued expenses and other liabilities increased principally as a result of the increase in our operating lease liability associated with the new lease amendment for our corporate headquarters facilities that was past due on its payment arrangement as we determined thatexecuted in January 2021. During the benefits of continued collections efforts did not outweigh the costs of legal proceedings. We do not believe our commercial terms were a factor with this customer’s non-payment. Our allowance for doubtful accounts previously included an allowance for this customer’s accounts receivable balance, and therefore, this write-off did not have an impact on our net loss for thefiscal year ended December 31, 2016. WeJune 30, 2021, accounts payable decreased primarily as a result of the timing of payments for costs associated with inventory-related purchases and professional services incurred. As a result of the pandemic, we have not experienced any other significant accounts receivable write-offs relatedfrom time-to-time paid certain vendor business partners in advance of their payment terms to revenue arrangements with extended payment terms.secure and achieve supply chain needs.

PrepaidDuring the fiscal year ended June 30, 2020, prepaid expenses and other assets increased principally as a result of the timing of the receipt of an insurance claim settlement offset partially by the timing of payments, principally for insurance-related expenses, in advance of goods or services received. AccountsDuring the fiscal year ended June 30, 2020, accounts payable increased primarily as a result of the timing of payment for costs incurred but not yet paid as of December 31, 2017 associated with inventory-related purchases and professional services incurred but not yetand due under our vendors’ payment terms. Likewise, accrued expenses and other liabilities increased principally due to the timingseverance accrual in connection with our June 2020 management reorganization and workforce reduction as well as increases in deferred revenue related to payments received prior to shipment of travel-related expenses and services incurred but not yet due under our vendors’ payment terms.good from customers.
We manufactured approximately $15.26$7.63 million and $10.64 million in loose jewels and $7.61$12.72 million and $7.82 million in finished jewelry, which includes the cost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production, during the yearfiscal years ended December 31, 2017.June 30, 2021 and 2020, respectively. We expect our purchases of precious metals and labor to increase as we increasefluctuate in conjunction with the levels of our finished jewelry business. In addition, from the beginning of 2006 through the year ended December 31, 2017, the price of gold has increased significantly over the past decade, resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry.

Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with our reduced sales levels during theprior periods whenin which the purchase commitments were in effect, have resulted in levels of inventories that are higher than we might otherwise maintain. As of December 31, 2017, $19.77June 30, 2021 and 2020, $17.72 million and $23.19 million, respectively, of our inventories were classified as long-term assets. Loose jewel sales and finished jewelry that we manufacture will utilize both the finished goods loose jewels currently on-hand and, as we deplete certain shapes and sizes, our on-hand raw material SiC crystals of $4.29$1.78 million and new raw material that we are purchasingpurchase pursuant to the Supply Agreement.

Our inventory principally comprises the following two types of materials: (i) new material that has been produced since September 2015 to the present, which is the raw materials for our Forever OneTM products with colorless and near colorless gemstones, or New Material; and (ii) legacy material that was produced through the period ended August 2015, which is the raw materials for our Forever ClassicTM, Forever Brilliant® and lower grade gemstones, or Legacy Material. Of our total inventory as of December 31, 2017, 64% of the total inventory was New Material, while 36% was Legacy Material, as compared to percentages of total inventory of 49% of New Material and 51% of Legacy Material at December 31, 2016. We are actively selling goods set with the Legacy Material gemstones through our omni-channel strategy in such outlets as marketplaces, drop-ship and pure-play retailers. A more detailed description of our inventories is included in Note 5, “Inventories,”6 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

We made income tax payments of approximately $15,000 and $2,000 during the Notesfiscal years ended June 30, 2021 and 2020, respectively. As of June 30, 2021, all of our remaining federal income tax credits had expired or been utilized, and therefore, are not available to Consolidated Financial Statements.be carried forward to offset future income taxes. As of June 30, 2021 and 2020, we had federal tax net operating loss carryforwards of approximately $19.00 million and $23.72 million, respectively, expiring between 2034 and 2037, or that have no expiration, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $19.87 million and  $20.12 million, respectively, 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.

Contractual Commitment

On December 12, 2014, we entered into the Supply Agreement with Cree. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement willwas scheduled to expire on June 24, 2018, unless extended by the parties. Accordingly, we are reviewing various alternativesEffective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of our premium moissanite product, Forever One™ and provided us with respect to our purchase of SiC material, including whether to exercise our unilateralone option, subject to certain conditions, to renewunilaterally extend the term of the Supply Agreement for an additional two-year period.period following the expiration of the initial term. In addition, the amendment to the Supply Agreement established a process by which Cree may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Cree has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 20182025 is dependent uponapproximately $52.95 million, of which approximately $32.85 million remains to be purchased as of June 30, 2021.

For more information regarding the size of the SiC material and ranges between approximately $29.60 million and approximately $31.50 million. As of December 31, 2017,second amendment to our remaining purchase commitment through June 2018 under the Supply Agreement, ranges from approximately $5.15 millionexecuted on August 26, 2020, see Note 10 to approximately $7.05 million.our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

During the yearfiscal years ended December 31, 2017,June 30, 2021 and 2020, we purchased approximately $9.39$3.78 million and $7.47 million, respectively, of SiC crystals from Cree. WeGoing forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, together with future cash expected to be provided by operating activities and, if necessary, our Credit Facility, to finance our purchase commitment under the Supply Agreement.Agreement, as amended.

We made no income tax payments during the year ended December 31, 2017. AsLine of December 31, 2017,Credit

Effective July 7, 2021, we had approximately $884,000 of remaining federal income tax credits, $533,000 of which expire between 2018 and 2021 and the balance without an expiration, which can be carried forward to offset future income taxes. As of December 31, 2017, we also had federal tax net operating loss carryforwards of approximately $24.59obtained from JPMorgan Chase our $5.00 million expiring between 2020 and 2036, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $20.22 million expiring between 2023 and 2032; and various other state tax net operating loss carryforwards expiring between 2021 and 2036, which can be used to offset against future state taxable income.
On June 25, 2014, we and our wholly owned subsidiaries, Charles & Colvard Direct, LLC, and Moissanite.com, LLC (now charlesandcolvard.com, LLC), collectively referred to as the Borrowers, obtained thecash collateralized JPMorgan Chase Credit Facility from Wells Fargo.Facility. The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including transaction feespermitted acquisitions and expenses incurredcertain 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 connection therewith and the issuanceamount of letters$5.05 million held by JPMorgan Chase as collateral for the line of credit up to a $1.00 million sublimit. The Credit Facility was scheduled to mature on June 25, 2017.
Effective June 22, 2017, the Credit Facility was amended to extend the maturity date to June 25, 2018. The Credit Facility was also amended to reduce the interest rate payable on advances under the Credit Facility to a rate equal to Wells Fargo’s daily three-month LIBOR rate plus 2.00%, calculated on an actual/360 basis and payable monthly in arrears. In addition, the Credit Facility was amended further to include the addition of an EBITDA covenant, whereby the Borrowers were required to maintain a specified minimum monthly EBITDA through December 2017 if the cash position for the Borrowers’ demand deposit account maintained at Wells Fargo falls below $3.00 million or the Borrowers draw upon the Credit Facility.
The Credit Facility includes a $5.00 million sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank. Advances under the Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts and inventory, less reserves. Advances against inventory are further subject to an initial $3.00 million maximum. The Borrowers must maintain a minimum of $1.00 million in excess availability at all times.
Each advance accrues interest at a rate equal to either (i) Wells Fargo’s three-monthJPMorgan 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 2.00%, or (ii) Wells Fargo’s Prime Rate plus 1%, each 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. There are no mandatory prepaymentsSee Note 2, under the caption of Recently Issued Accounting Pronouncements, to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for more detailed information relating to concerns about structural risks of interbank offered rates, or line reductions.
The Credit Facility is secured by a lien on substantially all assetsIBORs, and, particularly, the risk of cessation of the Borrowers, eachLIBOR.

The JPMorgan Chase Credit Facility is evidenced by a Creditcredit agreement between us and SecurityJPMorgan Chase, or the JPMorgan Chase Credit Agreement, dated as of June 25, 2014,July 12, 2021, and customary ancillary documents, in the principal amount not to exceed $5.00 million at any one time outstanding and a line of credit note, or the JPMorgan Chase Line of Credit Note, in which we promise to pay on or before July 31, 2022, the amount of $5.00 million or so much thereof as amended, ormay be advanced and outstanding. In the event of default, JPMorgan Chase, at its option, may accelerate the maturity of advances outstanding under the JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Agreement and customary ancillary documents. The Credit Agreement containsdocuments contain customary covenants, representations, and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions,fees, debt, contingent obligations, liens, loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.

In connection with the JPMorgan Chase Credit Facility, we incurred a non-refundable origination fee in the amount of $10,000 that was paid in full to JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12, 2021. We also agreed to maintain our primary banking depository and disbursement relationship with JPMorgan Chase.

Events of default under the JPMorgan Chase Credit Facility include, without limitation, (i)a default, event of default, or event that would constitute a default or event of default (pending giving notice or lapse of time or both), of any impairmentprovision of the Export-Import Bank guaranty, unlessJPMorgan Chase Credit Agreement, the JPMorgan Chase Line of Credit Note, or any other instrument or document executed in connection with the JPMorgan Chase Credit Agreement or with any of our indebtedness, liabilities, and obligations to JPMorgan Chase or would result from the extension of credit to us by JPMorgan Chase.

On July 12, 2021, upon its execution, we did not request any advances pursuant to the terms of 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 are repaid within two business days, (ii)would have accrued interest at a rate equal to one-month LIBOR (reset monthly, and subject to a 1.25% floor) plus 3.75%, and any non-revolving advances would have accrued interest at such LIBOR rate plus 4.75%. Thereafter, the interest margins would have been reduced upon the Company’s achievement of a specified fixed charge coverage ratio during the period of any outstanding advances. However, any advances were in all cases subject to a minimum interest rate of 5.50% and interest would have been calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default, under any other indebtednesswhich again did not occur during the term of the BorrowersWhite Oak Credit Facility, would have accrued interest at a rate 2% in excess of $200,000, and (iii) a material adverse change in the ability of the Borrowers to perform their obligations under the Credit Agreement or in the Borrowers’ assets, liabilities, businesses or prospects, or other circumstancesrate that Wells Fargo believes may impair the prospect of repayment. If an event of default occurs, Wells Fargo is entitled to take enforcement action, including acceleration of amounts due under the Credit Agreement and foreclosure upon collateral.would have been otherwise applicable.

The Credit Agreement contains other customary terms, including indemnity, expense reimbursement, yield protection, and confidentiality provisions. Wells Fargo is permitted to assign the Credit Facility.
Since the current amendment to the Credit Facility matures on June 25, 2018, we are currently reviewing various credit facility alternatives. Given the Company’s market growth and our improved financial strength over the past year, we believe that we may have access to additional sources of working capital that may provide more advantageous terms than the existing Credit Agreement.
As of December 31, 2017, weWe had not borrowed against the White Oak Credit Facility.Facility as of July 9, 2021, the date upon which we terminated the White Oak Credit Facility in accordance with its terms.

More detailed descriptions of both our JPMorgan Chase Credit Facility and former White Oak Credit Facility are included in Note 11 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

Liquidity and Capital Trends

We believe that our existing cash and cash equivalents and access to other working capital together withresources, 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 12twelve months.

Our future capital requirements and the adequacy of available funds will depend on many factors, includingthe ongoing uncertainty surrounding COVID-19 that could lead to further disruption and volatility in the global capital markets as well as its impact on our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewels and lab grown diamond 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 I, Item 1A of this Annual Report on Form 10-K. We obtainedCurrently, we have the JPMorgan Chase Credit Facility tothrough its expiration on July 31, 2022, which we believe would mitigate these risks to our cash and liquidity position. Also, we may make investments in, or acquisitions of, complementary businesses, which could also require us to seek additional equity or debt financing.

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, 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.

Valuation and Classification of Inventories

Inventories are stated at the lower of cost or net realizable value on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs.
Any inventory on hand at the measurement date in excess of our current requirements based on historical and anticipated levels of sales is classified as long-term on our Consolidated Balance Sheets. The classification of our inventory as either current or long-term inventory requires us to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of sales over the next 12 months.

Our work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. Our moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms”, that vary depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of June 30, 2021 and 2020, work-in-process inventories issued to active production jobs approximated $2.23 million and $1.34 million, respectively.

Each accounting period we evaluate the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves and valuation allowances, which also include significant estimates by management.

3948
See Note 2 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K under the Inventories caption for a further description of our inventories accounting policy and see Note 6 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for more detailed information relating to our accounting for inventory-related reserves and valuation allowances.

Revenue Recognition

Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve this principle, we perform the following five steps: (i) identification of a contract with a customer; (ii) identification of any separate performance obligations; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when we have satisfied the underlying performance obligations. We recognize substantially all of our revenue at a point in time when control of our goods has passed to the customer with the exception of consigned goods. We consider our performance obligation related to the shipment of goods satisfied at the time this control is transferred. We also have a variable consideration element related to most of our contracts in the form of product return rights. At the time revenue is recognized, an allowance for estimated returns is established and any change in the allowance for returns is charged against net sales in the current period. For our customers (excluding those of charlesandcolvard.com), the returns policy generally allows for the return of jewels and finished jewelry with a valid reason for credit within 30 days of shipment, except for returns during the COVID-19 pandemic during which we generally extended the return period for an additional 30 days. Customers in both our charlesandcolvard.com and moissaniteoutlet.com websites may generally return purchases within 60 days and 30 days, respectively, of the shipment date in accordance with our returns policies as disclosed on our charlesandcolvard.com and moissaniteoutlet.com websites. Periodically, we ship loose jewel goods and finished goods to Traditional segment customers on consignment terms. Under these consignment terms, the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year. Our Online Channels segment and Traditional segment customers are generally required to make payments on consignment shipments within 30 to 60 days upon the customer informing us that such inventory will be kept by the customer. Accordingly, we do not recognize revenue on these consignment transactions until the earlier of (i) the customer informing us that the inventory will be kept by the customer; (ii) the expiration of the right of returns period; or (iii) the customer informing us that the inventory has been sold.

See Note 2 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K under the Revenue Recognition caption for additional information regarding the underlying required disclosures arising from contracts with customers as well as a more detailed description of our revenue recognition accounting policy.

Accounts Receivable Reserves

Estimates are used to determine the amount of two reserves against trade accounts receivable. The first reserve is an allowance for sales returns. At the time revenue is recognized, we estimate future returns using a historical return rate that is reviewed quarterly with consideration of any contractual return privileges granted to customers, including any current extenuating economic conditions resulting from the COVID-19 pandemic, and we reduce sales and trade accounts receivable by this estimated amount. Our allowance for sales returns was $675,000 and $704,000 at June 30, 2021 and 2020, respectively.

The second reserve is an allowance for uncollectible accounts for the measurement of estimated credit losses resulting from the failure of our customers to make required payments. This allowance reduces trade accounts receivable to an amount expected to be collected. We use a current expected credit loss (“CECL”) model whereby we estimate credit losses expected over the life of our pool of exposures based on historical percentages of uncollectible accounts, changes in payment history, and facts and circumstances, including any current extenuating economic conditions, for example those resulting from the COVID-19 pandemic, regarding specific accounts that become known to, or forecasted by, us when evaluating the adequacy of the allowance for uncollectible accounts. We determine a credit loss percentage based on the age of the receivable that we deem uncollectible related to potential credit losses. We record an allowance for such credit losses, which includes a provision for expected losses based on historical write-offs, adjusted for current conditions as deemed necessary, reasonable and supportable forecasts about future conditions, and a specific reserve for accounts deemed at risk. The allowance is our estimate for accounts receivable as of the balance sheet date that ultimately will not be collected. Any changes in the allowance are reflected in the results of operations in the period in which the change occurs. We write-off accounts receivable and the related allowance recorded previously when it becomes probable, based upon customer facts and circumstances, that such amounts will not be collected. We generally use internal collection efforts, which may include our sales personnel as deemed appropriate. After all internal collection efforts have been exhausted, we generally write-off the underlying account receivable.

Any accounts with significant balances are reviewed separately to determine an appropriate allowance based on the facts and circumstances of the specific underlying customer account. During our review for the fiscal years ended June 30, 2021 and 2020, we determined no additional reserves were necessary for specific accounts. Based on these criteria, we determined that allowances for uncollectible accounts receivable of $71,000 and $79,000 at June 30, 2021 and 2020, respectively, were required.

Deferred Tax Assets

As of each reporting date, management considers new evidence, both positive and negative, that could impact its view with regard to future realization of available deferred tax assets. As of the fiscal year ended June 30, 2020, we did not recognize an income tax benefit for any of our deferred tax assets, primarily related to net operating loss carryforwards and inventory valuation reserves, because management determined that sufficient negative evidence continued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize our deferred tax assets.

However, 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 expectation of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant management estimates and assumptions, would 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 exists as of June 30, 2021, to conclude that it is more likely than not deferred tax assets of approximately $6.35 million are realizable, and we reduced our valuation allowance accordingly. The reduction of the valuation allowances against these deferred tax assets was the main driver of the income tax benefit during the fiscal year ended June 30, 2021 of approximately $6.33 million. A valuation allowance remains against certain deferred tax assets primarily relating to state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of when it will generate positive taxable income to utilize the associated deferred tax assets. In addition, as detailed below, a valuation allowance also remains against certain deferred tax assets relating to operating loss carryforwards relating to our dormant subsidiary located in Hong Kong.

As of June 30, 2021, 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 June 30, 2021 and 2020, we had federal tax net operating loss carryforwards of approximately $19.00 million and $23.72 million, respectively, expiring between 2034 and 2037, or that have no expiration, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $19.87 million and  $20.12 million, respectively, 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.

As of each of June 30, 2021 and 2020, there was approximately $6.03 million in net operating loss carryforwards in Hong Kong. In accordance with the Hong Kong tax code, these amounts can be carried forward indefinitely to offset future taxable income in Hong Kong. Our deferred tax assets in Hong Kong were fully reserved with a valuation allowance of $996,000 as of each of June 30, 2021 and 2020, and had been fully reserved in all prior fiscal periods due to the uncertainty of future taxable income in this jurisdiction to utilize the deferred tax assets. Charles & Colvard (HK) Ltd., our Hong Kong subsidiary, was entered into dormancy as of September 30, 2020, following its re-activation in December 2017. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 and has had no operating activity since 2008. If we use any portion of our deferred tax assets in future periods, the valuation allowance would need to be reversed and may impact our future operating results.

For discussion of the effects of the CARES Act, the Consolidated Appropriations Act, 2021, and the NC COVID-19 Relief Act on our provision for income taxes and deferred tax assets, see Note 13 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

Uncertain Tax Positions

We account for the de-recognition, classification, accounting in interim periods, and disclosure requirements for uncertain tax positions in accordance with U.S. GAAP. Determining which tax positions qualify as uncertain positions and the subsequent accounting for these positions requires significant estimates and assumptions. Our net accrued income tax liability under the provisions of this guidance was approximately $10,000 and $8,000 at June 30, 2021 and 2020, respectively. This liability is only resolved when we obtain an official ruling from the tax authority on the positions or when the statute of limitations expires. Our liability for accrued interest on these uncertain tax positions has increased by approximately $2,000 for each of the fiscal years ended June 30, 2021 and 2020.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K under the Recently Issued Accounting Pronouncements caption for the description of recent accounting pronouncements, including the expected date of adoption and estimated effects, on our consolidated financial statements.

Off-Balance Sheet Arrangements

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of December 31, 2017,June 30, 2021 and 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.arrangements.

We have entered into an operating lease for approximately 36,350 square feet of mixed-use space, which we currently occupy, from an unaffiliated third-party for our offices and manufacturing facility in the normal course of business. This type of arrangement is often referred to as a form of off-balance sheet financing.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 8.
Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
Number
42
53
  
55
43
56
  
Consolidated Statements of Operations for the years ended December 31, 2017 and 2016
44
Consolidated Statements of Shareholders’ Equity for the fiscal years ended December 31, 2017June 30, 2021 and 20162020
45
57
 
46
58
 
47
59

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors and Shareholders
Charles & Colvard, Ltd.
Morrisville, North Carolina

Opinion on the Consolidated Financial Statements
 
We have audited the accompanying consolidated balance sheets of Charles & Colvard, Ltd. (the “Company”) and subsidiaries as of December 31, 2017June 30, 2021, and 2016,2020, the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2021 and subsidiaries at December 31, 2017 and 2016,2020, and the results of theirits operations and theirits cash flows for the years then ended,, in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
 
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. 
Inventories Net Realizable Value 
As described in Notes 2 and 6 to the Company’s consolidated financial statements, inventories totaled approximately $29.2 million at June 30, 2021.  Inventories are stated at the lower of cost or net realizable value.  Each accounting period, the Company evaluates the valuation of inventories including the need for potential adjustments to inventory-related reserves, which includes significant estimates by management.
We identified management’s estimates of the net realizable value of inventories, including inventory-related reserves, as a critical audit matter.  Certain of the Company’s inventories are subject to various market factors, including changes in styling trends, that could indicate a decline in the net realizable value.  Given the inherent uncertainty in estimating the future marketability of the Company’s products, auditing management’s estimates of the net realizable value of inventories required a high degree of auditor judgment and increased audit effort.  
The primary procedures we performed to address this critical audit matter included: 
Evaluating the reasonableness of the inputs used in management’s inventory reserve calculation as compared to historical demand and prices for similar products recently sold by the Company, current and expected margins based on current period sales of inventories on hand, and industry trends. 
Analyzing the reserve calculations to determine whether management identified evidence of potential declines in marketability, including slow moving inventory, for which carrying value may exceed estimates of net realizable value and appropriately evaluated potential reserves. 

Realizability of Deferred Tax Assets Previously Offset by Valuation Allowances
As described in Notes 2 and 13 to the Company’s consolidated financial statements, at each reporting date, management considers new evidence, both positive and negative, that could impact its view with regard to future realization of available deferred tax assets. The Company determined that sufficient evidence exists as of June 30, 2021, that it is more likely than not that deferred tax assets of approximately $6.4 million would be realized and released a portion of the Company’s valuation allowance. The release of the valuation allowance against these deferred tax assets was the main driver of the income tax benefit during the fiscal year ended June 30, 2021 of approximately $6.3 million.
We identified management’s judgments related to the future realization of deferred tax assets as a critical audit matter.  Management uses significant judgment and estimation to assess the future realization of deferred tax assets. This assessment includes an estimate of future taxable income which involves significant uncertainty, the auditing of which requires a high degree of judgment and an increased effort, including the involvement of professionals with special skills.  
The primary procedures we performed to address this critical audit matter included: 
Evaluating the reasonableness of management’s estimates of future taxable income, including consideration against historical performance of the Company and whether the information was materially consistent with evidence obtained in other areas of the audit. 
Utilizing personnel with specialized skill and knowledge in income taxes to assist in the evaluation of the appropriateness of the Company’s tax positions and analysis of management’s conclusion that certain of the Company’s deferred tax assets are more likely than not to be utilized.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2010.

Raleigh, North Carolina
March 8, 2018September 2, 2021

CHARLES & COLVARD, LTD.
CONSOLIDATED BALANCE SHEETS

 December 31,  June 30, 
 2017  2016  2021  
2020
 
ASSETS            
Current assets:            
Cash and cash equivalents 
$
4,594,007
  
$
7,427,273
  $21,302,317  $13,993,032 
Restricted cash  144,634   624,202 
Accounts receivable, net  
3,377,451
   
2,794,626
   1,662,074   670,718 
Inventory, net  
11,208,658
   
9,770,206
   11,450,141   7,443,257 
Note receivable  250,000   - 
Prepaid expenses and other assets  
969,857
   
682,083
   952,065   1,177,860 
Total current assets  
20,149,973
   
20,674,188
   35,761,231   23,909,069 
Long-term assets:                
Inventory, net  
19,764,959
   
18,360,211
   17,722,579   23,190,702 
Property and equipment, net  
1,242,200
   
1,391,116
   875,897   999,061 
Intangible assets, net  
8,597
   
8,808
   209,658   170,151 
Operating lease right-of-use assets  3,952,146   584,143 
Deferred income taxes, net  6,350,830   - 
Other assets  
64,978
   
71,453
   49,658   51,461 
Total long-term assets  
21,080,734
   
19,831,588
   29,160,768   24,995,518 
TOTAL ASSETS 
$
41,230,707
  
$
40,505,776
  $64,921,999  $48,904,587 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable 
$
4,466,163
  
$
3,977,149
  $2,774,373  $3,748,235 
Operating lease liabilities, current portion  566,083   622,493 
Current maturity of long-term debt  -   193,000 
Accrued expenses and other liabilities  
980,800
   
631,107
   2,281,807   1,922,332 
Total current liabilities  
5,446,963
   
4,608,256
   5,622,263   6,486,060 
Long-term liabilities:                
Deferred rent  
463,526
   
594,916
 
Long-term debt, net  -   772,000 
Noncurrent operating lease liabilities  3,600,842   203,003 
Accrued income taxes  
461,592
   
433,983
   9,878   7,947 
Total long-term liabilities  
925,118
   
1,028,899
   3,610,720   982,950 
Total liabilities  
6,372,081
   
5,637,155
   9,232,983   7,469,010 
Commitments and contingencies (Note 9)        
Commitments and contingencies (Note 10)        
Shareholders’ equity:                
Common stock, no par value; 50,000,000 shares authorized; 21,580,102 and 21,369,885 shares issued and outstanding at December 31, 2017 and 2016, respectively  
54,243,816
   
54,243,816
 
Common stock, no par value; 50,000,000 shares authorized; 29,913,095 and 28,949,410 shares issued and outstanding at June 30, 2021 and 2020, respectively  56,057,109   54,342,864 
Additional paid-in capital  
14,726,438
   
14,282,956
   25,608,593   25,880,165 
Accumulated deficit  
(34,111,628
)
  
(33,658,151
)
  (25,976,686)  (38,787,452)
Total shareholders’ equity  
34,858,626
   
34,868,621
   55,689,016   41,435,577 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 
$
41,230,707
  
$
40,505,776
  $64,921,999  $48,904,587 

See Notes to Consolidated Financial Statements.

CHARLES & COLVARD, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS

  Year Ended December 31, 
  2017  2016 
Net sales 
$
27,032,964
  
$
29,168,128
 
Costs and expenses:        
Cost of goods sold  
15,470,617
   
20,401,439
 
Sales and marketing  
7,477,354
   
7,038,277
 
General and administrative  
4,689,823
   
5,544,452
 
Research and development  
3,714
   
2,848
 
Loss on abandonment of property and equipment  
-
   
117,930
 
Total costs and expenses  
27,641,508
   
33,104,946
 
Loss from operations  
(608,544
)
  
(3,936,818
)
Other income (expense):        
Interest expense  
(541
)
  
(1,737
)
Gain on insurance claim settlement  
183,217
   
-
 
Total other income (expense), net  
182,676
   
(1,737
)
Loss before income taxes from continuing operations  
(425,868
)
  
(3,938,555
)
Income tax net expense from continuing operations  
(27,609
)
  
(13,480
)
Net loss from continuing operations  
(453,477
)
  
(3,952,035
)
         
Discontinued operations:        
Loss from discontinued operations  
-
   
(586,124
)
Gain on sale of assets from discontinued operations  
-
   
12,398
 
Net loss from discontinued operations  
-
   
(573,726
)
Net loss 
$
(453,477
)
 
$
(4,525,761
)
         
Net loss per common share:        
Basic - continuing operations 
$
(0.02
)
 
$
(0.19
)
Basic - discontinued operations  
-
   
(0.03
)
Basic - total 
$
(0.02
)
 
$
(0.22
)
         
Diluted - continuing operations 
$
(0.02
)
 
$
(0.19
)
Diluted - discontinued operations  
-
   
(0.03
)
Diluted - total 
$
(0.02
)
 
$
(0.22
)
         
Weighted average number of shares used in computing net loss per common share:        
Basic  
21,193,793
   
20,926,120
 
Diluted  
21,193,793
   
20,926,120
 
  Year Ended June 30, 
  2021  2020 
Net sales $39,235,839  $29,189,020 
Costs and expenses:        
Cost of goods sold  20,809,690   21,200,207 
Sales and marketing  8,476,716   9,443,244 
General and administrative  4,441,441   4,861,297 
Total costs and expenses  33,727,847   35,504,748 
Income (Loss) from operations  5,507,992   (6,315,728)
Other income (expense):        
Gain on extinguishment of debt  974,328   - 
Interest income  5,581   158,091 
Interest expense  (8,953)  (884)
Loss on foreign currency exchange  (603)  (1,829)
Total other income (expense), net  970,353   155,378 
Income (Loss) before income taxes  6,478,345   (6,160,350)
Income tax benefit (expense)  6,332,421   (1,733)
Net income (loss) $12,810,766  $(6,162,083)
         
Net income (loss) per common share:        
Basic $0.44  $(0.22)
Diluted  0.42   (0.22)
         
Weighted average number of shares used in computing net income (loss) per common share:        
Basic  29,144,820   28,644,133 
Diluted  30,232,567   28,644,133 

See Notes to Consolidated Financial Statements.

CHARLES & COLVARD, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 Common Stock           Common Stock          
 
Number of
Shares
  Amount  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Total
Shareholders’
Equity
  
Number of
Shares
  Amount  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Total
Shareholders’
Equity
 
Balance at December 31, 2015  
21,111,585
  
$
54,240,247
  
$
13,280,920
  
$
(29,132,390
)
 
$
38,388,777
 
Balance at June 30, 2019  28,027,569  $54,342,864  $24,488,147  $(32,625,369) $46,205,642 
Issuance of common stock, net of offering costs  630,500   -   932,480   -   932,480 
Stock-based compensation  
-
   
-
   
1,003,305
   
-
   
1,003,305
   -   -   459,538   -   459,538 
Issuance of restricted stock  
255,800
   
-
   
-
   
-
   
-
   325,000   -   -   -   - 
Stock option exercises  
2,500
   
3,569
   
(1,269
)
  
-
   
2,300
 
Retirement of restricted stock  (33,659)                
Net loss  
-
   
-
   
-
   
(4,525,761
)
  
(4,525,761
)
  -   -   -   (6,162,083)  (6,162,083)
Balance at December 31, 2016  
21,369,885
  
$
54,243,816
  
$
14,282,956
  
$
(33,658,151
)
 
$
34,868,621
 
Balance at June 30, 2020  28,949,410  $54,342,864  $25,880,165  $(38,787,452) $41,435,577 
Stock-based compensation  
-
   
-
   
443,482
   
-
   
443,482
   -   -   352,583   -   352,583 
Issuance of restricted stock  
210,217
   
-
   
-
   
-
   
-
   178,750   -   -   -   - 
Net loss  
-
   
-
   
-
   
(453,477
)
  
(453,477
)
Balance at December 31, 2017  
21,580,102
  
$
54,243,816
  
$
14,726,438
  
$
(34,111,628
)
 
$
34,858,626
 
Retirement of restricted stock  (162,500)  -   -   -   - 
Stock option exercises  947,435   1,714,245   (624,155)  -   1,090,090 
Net income  -   -   -   12,810,766   12,810,766 
Balance at June 30, 2021  29,913,095  $56,057,109  $25,608,593  $(25,976,686) $55,689,016 

See Notes to Consolidated Financial Statements.

4557
CHARLES & COLVARD, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

  Year Ended June 30, 
  2021  2020 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income (loss) 
$
12,810,766
  
$
(6,162,083
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:        
Depreciation and amortization  
567,122
   
490,235
 
Stock-based compensation  
352,583
   
459,538
 
Provision for uncollectible accounts  
2,030
   
8,788
 
Recovery of sales returns  
(29,000
)  
(42,000
)
Inventory write-downs  
150,000
   
5,863,991
 
(Recovery of) Provision for accounts receivable discounts  
(9,153
)  
3,751
 
Gain on extinguishment of debt  
(974,328
)  
-
 
Benefit for deferred income taxes, net  
(6,350,830
)  
-
 
Changes in operating assets and liabilities:        
Accounts receivable  
(955,233
)  
1,321,214
 
Inventory  
1,311,239
   
(2,764,230
)
Prepaid expenses and other assets, net  
(3,140,405
)
  
490,438
 
Accounts payable  
(973,862
)
  
468,687
 
Accrued income taxes  
1,931
   
1,733
 
Accrued expenses and other liabilities  
3,710,232
   
109,123
 
Net cash provided by operating activities  
6,473,092
   
249,185
 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchases of property and equipment  
(437,069
)  
(458,854
)
Payment to fund note receivable  
(250,000
)  
-
 
Payments for intangible assets  
(46,396
)  
(77,122
)
Net cash used in investing activities  
(733,465
)  
(535,976
)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Stock option exercises  
1,090,090
   - 
Proceeds from long-term debt  
-
   965,000 
Issuance of common stock, net of offering costs  
-
   
932,480
 
Net cash provided by financing activities  
1,090,090
   
1,897,480
 
         
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH  
6,829,717
   
1,610,689
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR  
14,617,234
   
13,006,545
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR 
$
21,446,951
  
$
14,617,234
 
         
Supplemental disclosure of non-cash investing and financing activities:
        
Additions to right-of-use assets obtained from new operating lease liabilities 
$
3,908,249
  $- 
Forgiveness of PPP Loan principal  
965,000
  $- 
         
Supplemental disclosure of cash flow information:        
Cash paid during the year for interest 
$
-
  $884 
Cash paid during the year for income taxes 
$
14,704
  
$
2,050
 

See Notes to Consolidated Financial Statements.

CHARLES & COLVARD, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended December 31, 
  2017  2016 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss 
$
(453,477
)
 
$
(4,525,761
)
Net loss from discontinued operations  
-
   
(573,726
)
Net loss from continuing operations  
(453,477
)
  
(3,952,035
)
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities of continuing operations:        
Depreciation and amortization  
422,018
   
557,393
 
Stock-based compensation  
443,482
   
959,134
 
Provision for uncollectible accounts  
28,000
   
(73,300
)
Provision for sales returns  
122,000
   
(316,000
)
Provision for inventory reserves  
598,000
   
200,000
 
Gain on insurance claim settlement  
(183,217
)
  
-
 
Loss on abandonment of property and equipment  
-
   
117,930
 
Changes in operating assets and liabilities:        
Accounts receivable  
(732,825
)
  
1,447,325
 
Inventory  
(3,503,032
)
  
3,998,003
 
Prepaid expenses and other assets, net  
(36,250
)
  
162,157
 
Accounts payable  
489,014
   
654,001
 
Deferred rent  
(131,390
)
  
(99,656
)
Accrued income taxes  
27,609
   
13,480
 
Accrued expenses and other liabilities  
349,693
   
(333,731
)
Net cash (used in) provided by operating activities of continuing operations  
(2,560,375
)
  
3,334,701
 
Net cash used in operating activities of discontinued operations  
-
   
(1,125,578
)
Net cash (used in) provided by operating activities  
(2,560,375
)
  
2,209,123
 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchases of property and equipment  
(271,390
)
  
(421,761
)
Intangible assets  
(1,501
)
  
(5,615
)
Proceeds from sale of long-term assets  
-
   
250
 
Net cash used in investing activities of continuing operations  
(272,891
)
  
(427,126
)
Net cash provided by investing activities of discontinued operations  
-
   
368,671
 
Net cash used in investing activities  
(272,891
)
  
(58,455
)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Stock option exercises  
-
   
2,300
 
Net cash provided by financing activities of continuing operations  
-
   
2,300
 
         
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS  
(2,833,266
)
  
2,152,968
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD  
7,427,273
   
5,274,305
 
CASH AND CASH EQUIVALENTS, END OF PERIOD 
$
4,594,007
  
$
7,427,273
 
         
Supplemental disclosure of cash flow information:        
Cash paid during the year for interest 
$
541
  
$
1,737
 
See Notes to the Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.DESCRIPTION OF BUSINESS

Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation, was founded in 1995,1995. The Company manufactures, markets, and distributes Charles & Colvard Created Moissanite® (hereinafter referred to as moissanite or moissanite jewels) and finished jewelry featuring moissanite, including Forever One™, the Company’s premium moissanite gemstone brand, for sale in the worldwide fine jewelry market. The Company also markets and distributes Caydia® lab grown diamonds and finished jewelry featuring lab grown diamonds for sale in the worldwide fine jewelry market. Moissanite, also known by its chemical name silicon carbide (“SiC”), is a rare mineral first discovered in a meteorite crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. Lab grown diamonds are also grown using technology that replicates the natural diamond growing process. The only differentiation between that of a lab grown diamond and a mined diamond is its origin. The result is a man-made diamond that is chemically, physically, and optically the same as those grown beneath the earth’s surface.

The Company sells loose moissanite jewels, loose lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds at wholesale prices to distributors, manufacturers, retailers, television shopping networks, and designers, including some of the largest distributors and jewelry manufacturers in the world, which mount themworld. The Company’s finished jewelry and loose moissanite jewels and lab grown diamonds that are mounted into fine jewelry to beby other manufacturers are sold at retail outlets and via the Internet. The Company sells at retail prices to end consumersend-consumers through its wholly owned operating subsidiaries,subsidiary, charlesandcolvard.com, LLC, (formerly Moissanite.com, LLC) and Charles & Colvard Direct, LLC (through March 2016), third-party online marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets. As of September 30, 2016, theThe Company changed the name ofalso sells at discount retail prices to end-consumers on its wholly owned subsidiary Moissanite.com, LLC toown transactional website, moissaniteoutlet.com, through charlesandcolvard.com, LLC.

In February 2016, the Company made the strategic decision to explore a potential divestiture of its direct-to-consumer home party business previously operated through its Charles & Colvard Direct, LLC (dba Lulu Avenue®) subsidiary. After careful analysis of the Company’s core competencies, go-to-market strategies, and intent to advance toward profitability, the management team and Board of Directors determined a divestiture of this distribution channel to be in the best interest of the Company and its shareholders. On March 4, 2016, the Company and Charles & Colvard Direct, LLC entered into an asset purchase agreement with Yanbal USA, Inc. (“Yanbal”), under which Yanbal purchased certain assets related to the Company’s direct-to-consumer home party business for $500,000 and assumed certain liabilities related to such assets. A more detailed description of this transaction is included in Note 13, “Discontinued Operations.” The Company is now presenting the operating results of Charles and Colvard Direct, LLC as a discontinued operation.
2.BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation -– The accompanying consolidated financial statements as of and for the fiscal years ended December 31, 2017June 30, 2021 and 20162020, include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC (formerly Moissanite.com, LLC), formed in 2011;LLC; Charles & Colvard Direct, LLC, formed in 2011;LLC; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was re-activatedentered into dormancy as of September 30, 2020 following its re-activation in December 2017, but had no operating activity during the year ended December 31, 2017. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 after its operations ceased inand has had no operating activity since 2008. Charles & Colvard Direct, LLC, had no operating activity during the fiscal years ended June 30, 2021 or 2020. All intercompany accounts have been eliminated.eliminated.

Change in Fiscal Year-End – On January 30, 2018, the Board of Directors of the Company approved a change in the Company’s fiscal year from a fiscal year beginning on January 1 and ending on December 31 of each year to a fiscal year beginning on July 1 and ending on June 30 of each year. This change in the Company’s fiscal year-end enables management to shift its annual planning and budgeting process away from the holiday season, so that management’s focus during that time is on revenue-generating opportunities with customers. This change to the fiscal year reporting cycle will begin July 1, 2018. As a result of the change, the Company will have a six-month transition period from January 1, 2018 to June 30, 2018. During this period, the Company plans to file its results for the three-month period ending March 31, 2018 in the Company’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2018 and to file a transition report with its results for the six-month period ending June 30, 2018 on Form 10-KT with the Securities and Exchange Commission.

Discontinued Operations - The results of operations for businesses that have been disposed of or classified as held-for-sale are segregated from the results of the Company’s continuing operations and classified as discontinued operations for each period presented in the Company’s consolidated income statements. Similarly, the assets and liabilities of such businesses are reclassified from continuing operations and presented as discontinued operations for each period presented on the Company’s consolidated balance sheets.
Use of Estimates -– The future effects of the COVID-19 pandemic on the Company’s results of operations, cash flows, and financial position continue to remain unclear. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates impacting the Company’s consolidated financial statements relate to the valuation and classification of inventories, accounts receivable reserves, deferred tax assets, uncertain tax positions, cooperative advertising,stock-based compensation, and revenue recognition. Actual results could differ materially from those estimates.
Changes in Accounting Policy – Effective July 1, 2020, the Company adopted the new accounting standard related to the measurement and disclosure of credit losses on financial instruments. The new guidance includes a current expected credit loss (“CECL”) model that requires an entity to estimate credit losses expected over the life of an exposure or pool of exposures based on historical information, current conditions, and supportable forecasts at the time the asset is recognized and is measured at each reporting period. The new guidance principally aligns the Company’s accounting for its trade accounts receivable with the economics of extending credit and improves its financial reporting by requiring timelier recording of related credit losses.
The adoption of the new accounting standard did not have a material impact on the Company’s financial position or results of operations and the Company did not record a cumulative-effect adjustment to retained earnings. The Company amended its allowance for credit losses policy, as set forth below, for the implementation of the new accounting standard.

Reclassifications -59 Certain amounts in
The Company records an allowance for credit losses, which includes a provision for expected losses based on historical write-offs, adjusted for current conditions as deemed necessary, reasonable and supportable forecasts about future conditions that affect the prior year’s consolidatedexpected collectability of the reported amount of the financial statements have been reclassified to conform toasset, and a specific reserve for accounts deemed at risk. The allowance is the current year presentation, primarily amounts described in Note 3, “Segment Information and Geographic Data”, related toCompany’s estimate for accounts receivable as of the balance sheet date that ultimately will not be collected. Any changes in the allowance are reflected in the results of operations in the period in which the change occurs. The Company writes-off accounts receivable and the related allowance recorded previously when it becomes probable, based upon customer facts and circumstances, that such amounts will not be collected.

Effective July 1, 2020, the Company also adopted the new accounting standard in connection with accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The new standard provides guidance to determine the accounting for fees paid in connection with a cloud computing arrangement that may include a software license. The adoption of this new accounting standard did not have a material impact on the Company’s reportable segments and in Note 8, “Accrued Expenses and Other Liabilities”, relating to the reclassificationfinancial position or results of certain accrued expenses.operations.

Cash and Cash Equivalents -– All highly liquid investments with an original maturity of three months or less from the date of purchase are considered to be cash equivalents. The Company’s cash and cash equivalents include cash on deposit and a money market fund. See the Restricted Cash caption below for further details on the nature and classifications of the Company’s restricted cash balances.

Restricted Cash – In accordance with cash management process requirements related to the Company’s asset-based revolving credit facility from White Oak Commercial Finance, LLC (“White Oak”), which was terminated by the Company on July 9, 2021 in accordance with its terms, such credit facility contained access and usage restrictions on certain cash deposit balances for periods of up to two business days during which time the deposits were held by White Oak for the benefit of the Company. During the period these cash deposits were held by White Oak, such amounts were classified as restricted cash for financial reporting purposes on the Company’s Consolidated Balance Sheets.

For additional information regarding termination of the Company’s asset-based revolving credit facility with White Oak, see Note 11, “Debt.”

In accordance with the terms of the Company’s cash collateralized $5.00 million credit facility from JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), which the Company entered into on July 12, 2021, the Company is required to keep $5.05 million in a cash deposit account held by JPMorgan Chase. Such amount is held as security for the Company’s credit facility from JPMorgan Chase. Accordingly, this cash deposit held by JPMorgan Chase will be classified as restricted cash for financial reporting purposes on the Company’s Consolidated Balance Sheets.

For additional information regarding the Company’s cash collateralized credit facility with JPMorgan Chase, see Note 11, “Debt” and Note 16, “Subsequent Event.”

The reconciliation of cash, cash equivalents, and restricted cash, as presented on the Consolidated Statements of Cash Flows, consists of the following as of the dates presented:
  June 30, 
 
 2021  2020 
Cash and cash equivalents 
$
21,302,317
  
$
13,993,032
 
Restricted cash  
144,634
   
624,202
 
Total cash, cash equivalents, and restricted cash 
$
21,446,951
  
$
14,617,234
 

Concentration of Credit Risk -– Financial instruments that potentially subject the Company to concentrations of credit risk consist primarilyprincipally of cash on deposit and cash equivalents held with one bank and trade accounts receivable. At times, cash and cash equivalents balances may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurable limits. The Company’s money market fund investment account (recognized as cash and cash equivalents) is with what the Company believes to be a high-quality issuer. The Company has never experienced any losses related to these balances. Non-interest-bearing amounts on deposit in excess of FDIC insurable limits at December 31, 2017June 30, 2021 and 2020 approximated $4.32 million.
$10.32 million and $2.01 million, respectively. Interest-bearing amounts on deposit in excess of FDIC insurable limits at June 30, 2021 and 2020 approximated $10.64 million and $11.64 million, respectively.

Trade receivables potentially subject the Company to credit risk. Payment terms on trade receivables for the Company’s Traditional segment customers are generally between 30 and 12090 days, though it may offer extended terms with specific customers and on significant orders from time to time. The Company believes its competitors and other vendors in the wholesale jewelry industry have also expanded their use of extended payment terms and, in aggregate, the Company believes that by expanding its use of extended payment terms, it has provided a competitive response in its market and that its net sales have been favorably impacted. The Company is unable to estimate the impact of this program on its net sales, but if it ceased providing extended payment terms in select instances, the Company believes it would not be competitive for some Traditional segment customers in the marketplace and that its net sales and profits would likely decrease. The Company extends credit to its customers based upon a number of factors, including an evaluation of the customer’s financial condition and credit history that is verified through trade association reference services, the customer’s payment history with the Company, the customer’s reputation in the trade, and/or an evaluation of the Company’s opportunity to introduce its moissanite jewels or finished jewelry featuring moissanite to new or expanded markets. Collateral is not generally required from customers. The need for an allowance for doubtful accounts is determined based upon factors surrounding the credit risk of specific customers, historical trends, and other information. During the year ended December 31, 2016, the Company wrote off $815,000 in accounts receivable related to one international customer that was past due on its payment arrangement as it determined that the benefits of continued collections efforts did not outweigh the cost of legal proceedings. The Company does not believe its commercial terms were a factor with this customer’s non-payment. The Company’s allowance for doubtful accounts previously included an allowance for this accounts receivable, and therefore, this write-off did not have an impact on net loss for the year ended December 31, 2016. The Company has not experienced any other significant accounts receivable write-offs related to revenue arrangements with extended payment terms.

See Note 14, “Major Customers and Concentration of Credit Risk”, for further discussion of credit risk within trade accounts receivable.

Accounts Receivable Reserves -– Estimates are used to determine the amount of two reserves against trade accounts receivable. The first reserve is an allowance for sales returns. At the time revenue is recognized, the Company estimates future returns using a historical return rate that is reviewed quarterly with consideration of any contractual return privileges granted to customers, including any current extenuating economic conditions resulting from the COVID-19 pandemic, and it reduces sales and trade accounts receivable by this estimated amount. The Company’s allowance for sales returns was $537,000$675,000 and $415,000$704,000 at December 31, 2017June 30, 2021 and 2016,2020, respectively.
The following is a reconciliationare reconciliations of the allowance for sales returns:returns balances as of the periods presented:

 Year Ended December 31,  Year Ended June 30, 
 2017  2016  2021  2020 
Balance, beginning of year 
$
415,000
  
$
731,000
  $704,000  $746,000 
Additions charged to operations  
3,878,736
   
3,574,297
   5,631,415   4,710,943 
Sales returns  
(3,756,736
)
  
(3,890,297
)
  (5,660,415)  (4,752,943)
Balance, end of year 
$
537,000
  
$
415,000
  
$
675,000
  $704,000 

The second reserve is an allowance for doubtfuluncollectible accounts for the measurement of estimated credit losses resulting from the failure of the Company’s customers to make required payments. This allowance reduces trade accounts receivable to an amount expected to be collected. Based The Company uses a CECL model whereby management estimates credit losses expected over the life of its pool of exposures based on historical percentages of uncollectible accounts, by aging category, changes in payment history, and facts and circumstances, including any current extenuating economic conditions, for example those resulting from the COVID-19 pandemic, regarding specific accounts that become known to, or forecasted by, management when evaluating the adequacy of the allowance for doubtful accounts, theuncollectible accounts. The Company determines a credit loss percentage based on the age of the receivable that it deems uncollectible.uncollectible related to potential credit losses. The Company records an allowance for such credit losses, which includes a provision for expected losses based on historical write-offs, adjusted for current conditions as deemed necessary, reasonable and supportable forecasts about future conditions, and a specific reserve for accounts deemed at risk. The allowance is then calculated by applying the appropriate percentage to eachCompany’s estimate for accounts receivable as of the Company’sbalance sheet date that ultimately will not be collected. Any changes in the allowance are reflected in the results of operations in the period in which the change occurs. The Company writes-off accounts receivable aging categories, with consideration given to individualand the related allowance recorded previously when it becomes probable, based upon customer account activity subsequent to the current period, including cash receipts, in determining the appropriate allowance for doubtful accounts in the current period. Any increases or decreases to this allowance are charged or credited, respectively, as a bad debt expense to generalfacts and administrative expenses. circumstances, that such amounts will not be collected. The Company generally uses an internal collection effort,efforts, which may include its sales personnel as it deems appropriate. After all internal collection efforts have been exhausted, the Company generally writes offwrites-off the underlying account receivable.

Any accounts with significant balances are reviewed separately to determine an appropriate allowance based on the facts and circumstances of the specific account. During the quarter ended September 30, 2016, the Company wrote off $815,000 in accounts receivable related to one internationalunderlying customer that was past due on its payment arrangement, as the Company determined that the benefits of continued collections efforts did not outweigh the costs of legal proceedings. The Company’s allowance for doubtful accounts previously included an allowance for this accounts receivable, and therefore, this write-off did not have an impact on net loss for the year ended December 31, 2016.account. During its review for 2017the fiscal years ended June 30, 2021 and 2016,2020, the Company determined no additional reserves were necessary for specific accounts. Based on these criteria, management determined that allowances for doubtfuluncollectible accounts receivable of $254,000$71,000 and $226,000$79,000 at December 31, 2017June 30, 2021 and 2016, 2020, respectively, were required.

The following is a reconciliationare reconciliations of the allowance for doubtful accounts:uncollectible accounts balances as of the periods presented:

 Year Ended December 31,  Year Ended June 30, 
 2017  2016  2021  2020 
Balance, beginning of year 
$
226,000
  
$
1,137,000
  $79,000  $249,000 
Additions (reductions) charged to operations  
28,000
   
(73,300
)
Additions charged to operations  2,030   8,788 
Write-offs, net of recoveries  
-
   
(837,000
)
  (10,030)  (178,788)
Balance, end of year 
$
254,000
  
$
226,000
  $71,000  $79,000 

Although the Company believes that its reserves are adequate, if the financial condition of its customers deteriorates, resulting in an impairment of their ability to make payments, or if it underestimates the allowances required, additional allowances may be necessary, which would result in increased expense in the period in which such determination is made.

Inventories - Inventories are stated at the lower of cost or net realizable value on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Any inventory on hand at the measurement date in excess of the Company’s current requirements based on historical and anticipated levels of sales is classified as long-term on the Company’s consolidated balance sheets.Consolidated Balance Sheets. The Company’s classification of its inventory as either shortcurrent or long-term inventory requires it to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of sales over the next 12 months.

Each accounting period, the Company evaluates the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves, which also include significant estimates by management. The Company’s inventory-related valuation allowances are recorded in the aggregate rather than an individual item approach for each obsolescence, rework, and shrinkage valuation allowance.
Property and Equipment -– Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method as follows:

Machinery and equipment
5 to 12 years
Computer hardware
3 to 5 years
Computer software
3 years
Furniture and fixtures
5 to 10 years
Leasehold improvements
Shorter of the estimated useful life or the lease term

Intangible Assets -– The Company capitalizes costs associated with obtaining or defending patents issued or pending for inventions and license rights related to the manufacture of moissanite jewels. Such costs are amortized over the life of the patent, generally 1715 years. The Company also capitalizes licenses it obtains for the use of certain advertising images and external costs incurred for trademarks. Such costs are amortized over the period of the license or estimated useful life of the trademark, respectively.

Impairment of Long-Lived Assets -– The Company evaluates the recoverability of its long-lived assets by reviewing them for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount exceeds the fair value and is recognized as an operating expense in the period in which the determination is made. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell. As of December 31, 2017,June 30, 2021, the Company did not identify any indicators of long-lived asset impairment.

In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the useful-life assumption will result in increased depreciation and amortization expense in the period when such determination is made, as well as in subsequent periods.

Revenue Recognition -– Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this principle, the Company performs the following five steps: (i) identification of a contract with a customer; (ii) identification of any separate performance obligations; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when title transfersthe Company has satisfied the underlying performance obligations. The Company recognizes substantially all of its revenue at a point in time when control of the Company’s goods has passed to the customer with the exception of consigned goods. The Company considers its sole performance obligation related to the shipment of goods satisfied at the time of shipment fromthis control is transferred. Customer payment terms for these shipments typically range between 30- and 90-days. Customers purchasing items through the Company’s facility orwebsites pay amounts in advance of the Company transferring control of the goods. Amounts received in advance of the transfer of control are included in deferred revenue within accrued expenses and other liabilities on the consolidated balance sheets until the time of the transfer of control of the goods. All amounts included in deferred revenue at June 30, 2020 were recorded in net sales during the fiscal year ended June 30, 2021. The Company has elected to treat shipping and handling performed after control has transferred to customers as a third-party fulfillment company’s facility, excluding consignment shipmentsactivity, and additionally, has elected the practical expedient to report sales taxes on a net basis. The Company records shipping and handling expense related to product sales as discussed below; evidencecost of an arrangement exists; pricing is fixed or determinable; and collectability is reasonably assured.sales.

The Company has a variable consideration element related to most of its contracts in the form of product return rights. At the time revenue is recognized, an allowance for estimated returns is established. Anyestablished and any change in the allowance for returns is charged against net sales.sales in the current period. For the Company’s Traditional segment and Online Channels segment customers (excluding those of charlesandcolvard.com), the returnreturns policy generally allows for the return of jewels and finished jewelry with a valid reason for credit generally within 30 days of shipment if returned for a valid reason. Forshipment. Customers in both of the Company’s Online Channels segment, customers cancharlesandcolvard.com and moissaniteoutlet.com websites may generally return their purchases for any reason generally within 60 days and 30 days, respectively, of the shipment date in accordance with the Company’s warranty policyreturns policies as noteddisclosed on theits charlesandcolvard.com website. The Company has established an allowance for returns based on the Company’s historical return rate, which takes into account any contractual return privileges granted to the Company’s customers. and moissaniteoutlet.com websites.

Periodically, the Company ships loose jewel goods finished jewelry goods, and finished goods inventory to Traditional segment customers on consignment terms. Under these consignment terms, the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year. The Company’s Online Channels segment and Traditional segment customers are generally required to make payments on consignment shipments within 30 to 60 days upon the customer informing the Company that it will keep the inventory. Accordingly, the Company does not recognize revenue on these consignment transactions until the earlier of (i)(i) the customer informing the Company that it will keep the inventory, (ii)inventory; (ii) the expiration of the right of return period,period; or (iii)(iii) the customer informing the Company that the inventory has been sold.sold to the end consumer.

The Company presents disaggregated net sales by its Online Channels segment and its Traditional segment for both finished jewelry and loose jewels product lines. The Company also presents disaggregated net sales by geographic area between the United States and international locations. For financial reporting purposes, disaggregated net sales amounts are presented in Note 3, “Segment Information and Geographic Data.”

Returns Asset and Refund Liabilities

The Company maintains a returns asset account and a refund liabilities account to record the effects of its estimated product returns and sales returns allowance. The Company’s returns asset and refund liabilities are updated at the end of each financial reporting period and the effect of such changes are accounted for in the period in which such changes occur.

The Company estimates anticipated product returns in the form of a refund liability based on historical return percentages and current period sales levels. The Company also accrues a related returns asset for goods expected to be returned in salable condition, less any expected costs to recover such goods, including return shipping costs that the Company may incur. As of June 30, 2021 and 2020, the Company’s refund liabilities balances were $675,000 and $704,000, respectively, and are included as allowances for sales returns within accounts receivable, net, in the accompanying consolidated balance sheets. As of June 30, 2021 and 2020, the Company’s returns asset balances were $252,000 and $289,000, respectively, and are included within prepaid expenses and other assets in the accompanying consolidated balance sheets.

Cost of Goods Sold -– Cost of goods sold is primarily composed of inventory sold during the period; inventory written offwritten-off during the period due to ongoing quality reviews or through customer returns;and obsolescence reviews; salaries and payroll-related expenses for personnel involved in preparing and shipping product to customers; an allocation of shared expenses such as rent, utilities, communication expenses, and depreciation related to preparing and shipping product to customers; and outbound freight charges.
Advertising Costs -– Advertising production costs are expensed as incurred. Media placement costs are expensed the first time the underlying advertising appears.

The Company also offers a cooperative advertising program to certain of its distributor and retail partners that reimburses, via a credit towards future purchases, a portion of their marketing costs based on the customers’ net purchases from the Company and is subject to the customer providing documentation of all advertising performed that includes the Company’s products. For the fiscal years ended December 31, 2017June 30, 2021 and 2016,2020, these approximate amounts were an expense of $210,000$380,000 and $126,000,$491,000, respectively, and are included as a component of sales and marketing expenses. Because the Company receives a distinct good or service in exchange for consideration and the fair value of the benefit can be reasonably estimated, these transactions are reflected as sales and marketing expenses.

Advertising expenses, inclusive of the cooperative advertising program, for the fiscal years ended December 31, 2017June 30, 2021 and 20162020, were approximately $1.94$4.25 million and $2.59$3.96 million, respectively. Approximately $56,000 related to discontinued operations was included in total advertising expense for the year ended December 31, 2016.

Sales and Marketing -– Sales and marketing costs are expensed as incurred. These costs include all expenses of promoting and selling the Company’s products and include such items as the salaries, payroll-related expenses, and travel of sales and marketing personnel; digital marketing; advertising; trade shows; market research; sales commissions; and an allocation of overhead expenses attributable to these activities. Except for an allocation to general and administrative expenses, these costs also include the operating expenses of charlesandcolvard.com, LLC, the Company’s wholly owned operating subsidiary.

General and Administrative -– General and administrative costs are expensed as incurred. These costs include the salaries and payroll-related expenses of executive, finance, information technology, and administrative personnel; legal, investor relations, and professional fees; general office and administrative expenses; Board of Directors fees; rent; bad debts; and insurance.

Research and Development - Research and development costs are expensed as incurred. These costs primarily comprise salary allocations and consultant fees associated with the study of product enhancement and manufacturing process efficiencies.

Stock-Based Compensation -– The Company recognizes compensation expense for stock-based awards based on estimated fair values on the date of grant. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The fair value of other stock-based compensation awards is determined by the market price of the Company’s common stock on the date of grant. The expense associated with stock-based compensation is recognized on a straight-line basis over the requisite service period of each award.

Fair value of stock options using the Black-Scholes-Merton option pricing model is estimated on the date of grant utilizing certain assumptions for dividend yield, expected volatility, risk-free interest rate, and expected lives of the awards, as follows:

·
Dividend yield - Although the Company issued dividends in prior years, a dividend yield of zero is used due to the uncertainty of future dividend payments.
Dividend Yield. Although the Company issued dividends in prior years, a dividend yield of zero is used due to the lack of recent dividend payments and the uncertainty of future dividend payments;

·
Expected volatility -Expected Volatility. Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration to the historical volatility of its common stock; Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration to the historical volatility of its common stock.

·
Risk-free interest rate - The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option.
Risk-Free Interest Rate. The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option; and

·
Expected lives - The expected lives of the issued stock options represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term.
Expected Lives. The expected lives of the issued stock options represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term. The simplified method is used because the Company does not have sufficient historical option exercise experience.

The assumptions used in calculating the fair value of share-basedstock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rates of stock-based awards and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rates, the Company analyzedanalyzes its historical forfeiture rates, the remaining lives of unvested stock-based awards, and the amount of vested awards as a percentage of total awards outstanding.rates. If the Company’s actual forfeiture rates are materially different from its estimates, or if the Company re-evaluates the forfeiture rates in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

Income Taxes -– Deferred income taxes are recognized for the income tax consequences of “temporary” differences by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the income tax bases of existing assets and liabilities. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more likely than not to be realized.
In light of the newly enacted Tax Cuts and Jobs Act, or the Tax Act, the Company has provisionally recorded its U.S. deferred taxes based on the Federal corporate income tax rate of 21%. The Company is continuing to analyze aspects of the Tax Act and, therefore, has not finalized its accounting policy with respect to accounting for deferred income taxes. For further discussion of the effects of the Tax Act on our deferred tax assets, see Note 12, “Income Taxes”.

Net LossIncome (Loss) per Common Share -– Basic net loss from continuing and discontinued operationsincome (loss) per common share is computed by dividing net lossincome (loss) by the weighted average number of common shares outstanding during the periods. Diluted net loss from continuing and discontinued operationsincome (loss) per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and unvested restricted shares that are computed using the treasury stock method. Anti-dilutive stock awards consist of stock options that would have been anti-dilutive in the application of the treasury stock method.

TheAs of the dates presented, the following table reconciles the differences between the basic and diluted net lossincome (loss) per share presentations:

  Year Ended December 31, 
  2017  2016 
Numerator:      
Net loss from continuing operations 
$
(453,477
)
 
$
(3,952,035
)
Net loss from discontinued operations  
-
   
(573,726
)
Net loss 
$
(453,477
)
 
$
(4,525,761
)
         
Denominator:        
Weighted average common shares outstanding:        
Basic  
21,193,793
   
20,926,120
 
Stock options  
-
   
-
 
Diluted  
21,193,793
   
20,926,120
 
         
Net loss per common share:        
Basic-continuing operations 
$
(0.02
)
 
$
(0.19
)
Basic-discontinued operations  
-
   
(0.03
)
Basic-total 
$
(0.02
)
 
$
(0.22
)
        
Diluted-continuing operations 
$
(0.02
)
 
$
(0.19
)
Diluted-discontinued operations  
-
   
(0.03
)
Diluted-total 
$
(0.02
)
 
$
(0.22
)
        
  Year Ended June 30, 
  2021  2020 
Numerator:      
Net income (loss) 
$
12,810,766
  
$
(6,162,083
)
         
Denominator:        
Weighted average common shares outstanding:        
Basic  
29,144,820
   
28,644,133
 
Effect of dilutive securities  
1,087,747
   
-
 
Diluted  
30,232,567
   
28,644,133
 
         
Net income (loss) per common share:        
Basic 
$
0.44
  
$
(0.22
)
Diluted 
$
0.42
  
$
(0.22
)

For the yearsfiscal year ended December 31, 2017 and 2016,June 30, 2021, stock options to purchase approximately 2.231.24 million and 2.13 million shares, respectively, were excluded from the computation of diluted net lossincome per common share because the exercise price of the stock options was greater than the average market price of the common shares or the effect of inclusion of such amounts would be anti-dilutive to net lossincome per common share. For the yearsfiscal year ended December 31, 2017 and 2016, 370,000 and 359,000, respectively, of restrictedJune 30, 2020, stock options to purchase approximately 2.81 million shares that have been issued but not yet vested have beenwere excluded from the computation of diluted net loss per common share because the effect of inclusion of such amounts would be anti-dilutive to net loss per common share. The quantity of 162,500 shares of unvested restricted stock were excluded from the computation of diluted net loss per common share as of June 30, 2020 because the shares were performance-based and the underlying conditions had not been met as of the year presented and the effects of the inclusion of such shares would have been anti-dilutive to net loss per common share. There are no such performance-based shares of unvested restricted stock excluded from the computation of basic and diluted net income per common share as of June 30, 2021 because the underlying performance conditions for these restricted stock shares were met as of June 30, 2021.

Recently Adopted/Issued Accounting Pronouncements -– In May 2014,December 2019, the Financial Accounting Standards Board (the “FASB”) issued anguidance on simplifying the accounting standardfor income taxes that supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principleis intended to reduce the complexity while maintaining or improving the usefulness of the standard is to recognize revenues when promised goods or services are transferred to customerstax disclosure information in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. financial statements. The Company adopted the standard on January 1, 2018, using the modified retrospective method. Based on the Company’s analysis, the timing and measurement of revenues under the new guidance is consistent with the Company’s existing policies. Accordingly, no adjustment was required in connection with the adoption of the standard and the standard will not have a material effect on the Company’s financial statements.
In February 2016, the FASB issued guidance that establishes a right-of-use, or ROU, model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after,2020. The Company does not expect the beginningimpact of the earliest comparative period presentednew guidance to have a material impact to the Company’s financial statements.
In March 2020, in response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), the FASB issued new guidance to ease the burden in accounting for or recognizing the effects of referenced interest rate reform on financial statements, with certain practical expedients available.reporting. The new guidance is effective as of March 12, 2020 through December 31, 2022. As described in more detail in Note 11, “Debt”, borrowings under the Company’s line of credit would have been based on a rate equal to the one-month LIBOR. As of June 30, 2021, the Company had not borrowed against its line of credit, and therefore, is in the early stagenot subject to recognizing or disclosing any effect of referenced rate reform as of its analysis, but currently expects that upon adoption of this standard, ROU assets and liabilities will be recognized in the balance sheet in amounts that will be material.fiscal year ended June 30, 2021.

3.SEGMENT INFORMATION AND GEOGRAPHIC DATA

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of the Company’s operating and reportable segments.

Previously, theThe Company managedmanages its business through two operating and reportable segments: wholesale distribution transacted through the parent entity, and the direct-to-consumer distribution channel transacted through the Company’s wholly owned operating subsidiary, charlesandcolvard.com, LLC (formerly Moissanite.com, LLC). During the first quarter of 2017, the Company began managing its business through two newly defined operating and reportable segments based on its distribution channels to sell its product lines, loose jewels and finished jewelry: its “Traditional” segment, which consists of wholesale, retail, and television customers; and its “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, moissaniteoutlet.com, third-party online marketplaces, drop-ship retail, and other pure-play, exclusively e-commerce outlets.outlets; and its “Traditional” segment, which consists of wholesale and retail customers. The accounting policies of the TraditionalOnline Channels segment and Online ChannelsTraditional segment are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies.”

The Company evaluates the financial performance of its segments based on net sales; product line gross profit, or the excess of product line sales over product line cost of goods sold; and operating income (loss).income. The Company’s product line cost of goods sold is defined as product cost of goods sold, excluding non-capitalized expenses from the Company’s manufacturing and production control departments, comprising personnel costs, depreciation, rent,leases, utilities, and corporate overhead allocations; freight out; inventory valuation allowance adjustments;write-downs; and other inventory adjustments, comprising costs of quality issues, and damaged goods, and inventory write-downs.goods.

The Company allocates certain general and administrative expenses from its Traditional segment tobetween its Online Channels segment primarilyand its Traditional segment based on net sales and number of employees to arrive at segment operating loss.income (loss). Unallocated expenses which also include interest and taxes, remain in its Traditional segment.

Summary financial information by reportable segment for the periods presented is as follows:

 Year Ended December 31, 2017  Year Ended June 30, 2021 
 Traditional  
Online
Channels
  Total  
Online
Channels
  Traditional  Total 
Net sales                  
Finished jewelry $19,905,199  $4,496,347  $24,401,546 
Loose jewels 
$
13,430,776
  
$
3,149,972
  
$
16,580,748
   3,304,439   11,529,854   14,834,293 
Finished jewelry  
2,515,443
   
7,936,773
   
10,452,216
 
Total 
$
15,946,219
  
$
11,086,745
  
$
27,032,964
  $23,209,638  $16,026,201  $39,235,839 
                        
Product line cost of goods sold                        
Finished jewelry $8,235,797  $3,036,215  $11,272,012 
Loose jewels 
$
6,998,485
  
$
1,526,358
  
$
8,524,843
   1,216,942   5,640,813   6,857,755 
Finished jewelry  
1,610,845
   
3,615,815
   
5,226,660
 
Total 
$
8,609,330
  
$
5,142,173
  
$
13,751,503
  $9,452,739  $8,677,028  $18,129,767 
                        
Product line gross profit                        
Finished jewelry $11,669,402  $1,460,132  $13,129,534 
Loose jewels 
$
6,432,291
  
$
1,623,614
  
$
8,055,905
   2,087,497   5,889,041   7,976,538 
Finished jewelry  
904,598
   
4,320,958
   
5,225,556
 
Total 
$
7,336,889
  
$
5,944,572
  
$
13,281,461
  $13,756,899  $7,349,173  $21,106,072 
                        
Operating (loss) income 
$
(836,797
)
 
$
228,253
  
$
(608,544
)
Operating income $3,739,553  $1,768,439  $5,507,992 
                        
Depreciation and amortization 
$
300,308
  
$
121,711
  
$
422,018
  $248,995  $318,127  $567,122 
                        
Capital expenditures 
$
123,944
  
$
147,446
  
$
271,390
  $253,935  $183,134  $437,069 

 Year Ended December 31, 2016  Year Ended June 30, 2020 
 Traditional  
Online
Channels
  Total  
Online
Channels
  Traditional  Total 
Net sales                  
Finished jewelry $13,680,440  $3,097,188  $16,777,628 
Loose jewels 
$
19,231,534
  
$
2,220,194
  
$
21,451,728
   2,944,100   9,467,292   12,411,392 
Finished jewelry  
1,075,157
   
6,641,243
   
7,716,400
 
Total 
$
20,306,691
  
$
8,861,437
  
$
29,168,128
  $16,624,540  $12,564,480  $29,189,020 
                        
Product line cost of goods sold         ��              
Finished jewelry $5,760,413  $1,709,377  $7,469,790 
Loose jewels 
$
13,107,366
  
$
809,383
  
$
13,916,749
   1,198,275   4,863,911   6,062,186 
Finished jewelry  
1,195,640
   
2,953,148
   
4,148,788
 
Total 
$
14,303,006
  
$
3,762,531
  
$
18,065,537
  $6,958,688  $6,573,288  $13,531,976 
                        
Product line gross profit (loss)            
Product line gross profit            
Finished jewelry $7,920,027  $1,387,811  $9,307,838 
Loose jewels 
$
6,124,168
  
$
1,410,811
  
$
7,534,979
   1,745,825   4,603,381   6,349,206 
Finished jewelry  
(120,483
)  
3,688,095
   
3,567,612
 
Total 
$
6,003,685
  
$
5,098,906
  
$
11,102,591
  $9,665,852  $5,991,192  $15,657,044 
                        
Operating loss 
$
(3,089,559
) 
$
(847,259
)
 
$
(3,936,818
)
 $(249,016) $(6,066,712) $(6,315,728)
                        
Depreciation and amortization 
$
479,517
  
$
77,876
  
$
557,393
  $177,703  $312,532  $490,235 
                        
Capital expenditures 
$
158,702
  
$
263,059
  
$
421,761
  $305,570  $153,284  $458,854 

The Company does not allocate any assets to the reportable segments, and therefore, no asset information is reported to the chief operating decision-maker or disclosed in the financial information for each segment.

A reconciliationThe reconciliations of the Company’s product line cost of goods sold to cost of goods sold, as reported in the consolidated financial statements isfor the periods presented, are as follows:

 Year Ended December 31,  Year Ended June 30, 
 2017  2016  2021  2020 
Product line cost of goods sold 
$
13,751,503
  
$
18,065,537
  $18,129,767  $13,531,976 
Non-capitalized manufacturing and production control expenses  
1,352,311
   
1,427,924
   1,591,114   1,443,698 
Freight out  
417,074
   
376,726
   1,013,275   510,612 
Inventory valuation allowances  
598,000
   
200,000
 
Inventory write-downs  150,000   5,863,991 
Other inventory adjustments  
(648,271
)
  
331,252
   (74,466)  (150,070)
Cost of goods sold 
$
15,470,617
  
$
20,401,439
  $20,809,690  $21,200,207 

The Company recognizes sales by geographic area based on the country in which the customer is based. Sales to international end consumers made through the Company’s transactional websites, charlesandcolvard.com and moissaniteoutlet.com, are included in international sales for financial reporting purposes. A portion of the Company’s Traditional segment sales made to international wholesale distributors represents products sold internationally that may be re-imported to U.S. retailers. Sales to international end consumers made by the Company’s Online Channels segment are included in U.S. sales because products are shipped and invoiced to a U.S.-based intermediary party that assumes all international shipping and credit risks.

All intangible assets, andas well as property and equipment, as of December 31, 2017June 30, 2021 and December 31, 20162020, are held and located in the United States.

The following presents net sales data by geographic area:area for the periods presented:

 Year Ended December 31,  Year Ended June 30, 
 2017  2016  2021  2020 
Net sales            
United States 
$
25,176,220
  
$
26,164,660
  $37,225,519  $26,814,024 
International  
1,856,744
   
3,003,468
   2,010,320   2,374,996 
Total 
$
27,032,964
  
$
29,168,128
  $39,235,839  $29,189,020 

4.FAIR VALUE MEASUREMENTS

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability.

The fair value hierarchy consists of three levels based on the reliability of inputs, as follows:

·
Level 1 - quoted prices in active markets for identical assets and liabilities
Level 1. Quoted prices in active markets for identical assets and liabilities;
Level 2. Inputs other than Level 1 quoted prices that are directly or indirectly observable; and
·
Level 2 - inputs other than Level 1 quoted prices that are directly or indirectly observable
Level 3. Unobservable inputs that are not corroborated by market data.
·
Level 3 - unobservable inputs that are not corroborated by market data

The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The financial instruments identified as subject to fair value measurements on a recurring basis are cash, and cash equivalents, and restricted cash, notes receivable, trade accounts receivable, and trade accounts payable. All financial instruments are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these financial instruments.

Assets that are measured at fair value on a non-recurring basis include property and equipment, leasehold improvements, and intangible assets, comprising patents, license rights, and trademarks. These items are recognized at fair value when they are considered to be impaired. As of December 31, 2017June 30, 2021 and December 31, 2016,2020, no assets were identified for impairment. Level 3 inputs are primarily based on the estimated future cash flows of the asset determined by market inquiries to establish fair market value of used machinery or future revenue expected to be generated with the assistance of patents and trademarks.

5.NOTE RECEIVABLE

On March 5, 2021, the Company entered into a $250,000 convertible promissory note agreement (the “Convertible Promissory Note”) with an unrelated third-party strategic marketing partner. The Convertible Promissory Note is unsecured and matures on March 5, 2022 (the “Maturity Date”). The Company has accounted for the Convertible Promissory Note as a current note receivable within the accompanying consolidated financial statements. Interest is accrued at a simple rate of 0.14% per annum and will accrue until the Convertible Promissory Note is converted in accordance with the conversion privileges contained within the Convertible Promissory Note or is repaid. Principal outstanding during an event of default accrues interest at the rate of 5% per annum. Accrued and unpaid interest on the Convertible Promissory Note is classified as a current asset and included in prepaid expenses and other assets in the accompanying consolidated financial statements.

Subject to the borrower’s completion of a specified equity financing transaction (an “Equity Financing”) on or prior to the Maturity Date, the unpaid principal amount, including accrued and unpaid interest, automatically converts into equity units of the most senior class of equity securities issued to investors in the Equity Financing at the lesser of 80% of the per unit price of the units purchased by investors or the price equal to $33,500,000 divided by the aggregate number of outstanding units of the borrower immediately prior to the closing of the financing. Unless converted as provided in the Convertible Promissory Note, the principal amount, including accrued and unpaid interest, will, on the Maturity Date, at the Company’s option either (i) become due and payable to the Company, or (ii) convert into equity units at the specified conversion price in accordance with the terms of the Convertible Promissory Note.

6.INVENTORIES

The Company’s total inventories, net of reserves, are as followsconsisted of the following as of the dates presented:

  June 30, 
  2021  2020 
Finished jewelry:      
Raw materials $1,476,514  $821,536 
Work-in-process  779,593   602,390 
Finished goods  8,025,816   6,019,985 
Finished goods on consignment  2,050,372   2,297,907 
Total finished jewelry  12,332,295   9,741,818 
Loose jewels:        
Raw materials  1,775,505   3,526,399 
Work-in-process  9,893,443   10,453,586 
Finished goods  4,942,192   6,619,487 
Finished goods on consignment  154,968   204,635 
Total loose jewels  16,766,108   20,804,107 
Total supplies inventory  74,317   88,034 
Total inventory $29,172,720  $30,633,959 

  December 31, 
  2017  2016 
Raw materials 
$
4,853,049
  
$
3,106,617
 
Work-in-process  
9,219,383
   
11,048,126
 
Finished goods  
17,896,992
   
15,057,668
 
Finished goods on consignment  
1,093,752
   
467,778
 
Supplies inventory  
75,441
   
17,228
 
Less inventory reserves  
(2,165,000
)
  
(1,567,000
)
Total 
$
30,973,617
  
$
28,130,417
 
         
Short-term portion 
$
11,208,658
  
$
9,770,206
 
Long-term portion  
19,764,959
   
18,360,211
 
Total 
$
30,973,617
  
$
28,130,417
 
Inventories are stated at the lower of cost or net realizable value on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Any inventory on hand at the measurement date in excessAs of the dates presented, the Company’s current requirements based on historical and anticipated levelstotal inventories, net of sales isreserves, are classified as long-term on the Company’s consolidated balance sheets. The Company’s classificationfollows:

  June 30, 
  2021  2020 
Short-term portion $11,450,141  $7,443,257 
Long-term portion  17,722,579   23,190,702 
Total inventory $29,172,720  $30,633,959 

69
The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurredincurred; and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of December 31, 2017June 30, 2021 and 2016,2020, work-in-process inventories issued to active production jobs approximated $2.99$2.23 million and $7.18$1.34 million, respectively.

The Company’s moissanite and lab grown diamond jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, the majority of jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends, norand product obsolescence is obsolescence a significant factor. The Company had the exclusive right in the U.S. through August 2015closely monitored and had the exclusive right in many other countries into the third quarterreviewed by management as of 2016 to produce and sell created SiC for use in jewelry applications.each financial reporting period.

The Company manufactures finished jewelry featuring moissanite.moissanite and lab grown diamonds. Relative to loose moissanite jewels and lab grown diamonds, finished jewelry is more fashion-oriented and subject to styling trends that could render certain designs obsolete over time. The majority of the Company’s finished jewelry featuring moissanite and lab grown diamonds is held in inventory for resale and largely consists of such core designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company generally holds smaller quantities of designer-inspired and trend moissanite fashion jewelry that is available for resale through retail companies and through its Online Channels segment. The Company also carries a limited amount of inventory as part of its sample line that is usedthe Company uses in the selling process to its customers.

The Company’s continuing operating subsidiary carriessubsidiaries carry no net inventories, and inventory is transferred without intercompany markup from the parent entity’s wholesale distribution segmententity as product line cost of goods sold when sold to the end consumer.

The Company’s inventories are stated at the lower of cost or net realizable value on an average cost basis. Each accounting period the Company evaluates the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves, which also include significant estimates by management, including the effect of market factors and sales trends. Changes to the Company’s inventory reserves and allowances are accounted for in the accounting period in which a change in such reserves and allowances is observed and deemed appropriate, including changes in management’s estimates used in the process to determine such reserves and valuation allowances.

As a result of the deterioration of marketability of the Company’s legacy inventory during the fiscal year ended June 30, 2020, management determined that this segment of the Company’s inventory had lost its revenue-generating ability and its net realizable value fell below that of its historical carrying cost. Accordingly, the Company recognized a loss in net realizable value in the quarterly period ended March 31, 2020, for its legacy material inventory, i.e., raw materials, or boules, preforms, work-in-process gemstones, finished gemstones, and gemstones set in finished jewelry, the carrying cost of which was approximately $5.26 million.

Included in cost of goods sold during the fiscal year ended June 30, 2020, was the above-referenced write-off of approximately $5.26 million representing the carrying value of the Company’s legacy loose jewel inventory and finished jewelry inventory set with these legacy gemstones. Total inventory write-downs were $150,000 and $5.86 million for the fiscal years ended June 30, 2021 and 2020, respectively.

5670
7.PROPERTY AND EQUIPMENT

Prior to March 2016, the Company purchased fashion finished jewelry comprising base metalsProperty and non-precious gemstones for sale through Lulu Avenue®, the Company’s former direct-to-consumer home party division of the Company’s wholly owned operating subsidiary, Charles & Colvard Direct, LLC. This finished jewelry was fashion-oriented and subject to styling trends that could change with each catalog season, of which there are generally two each year.
The Company’s total inventories,equipment, net, of reserves, consistedconsists of the following as of the dates presented:

  
December 31,
2017
  
December 31,
2016
 
Loose jewels      
Raw materials 
$
4,288,360
  
$
2,586,045
 
Work-in-process  
8,328,719
   
10,589,424
 
Finished goods  
9,487,245
   
9,455,393
 
Finished goods on consignment  
26,281
   
5,473
 
Total loose jewels 
$
22,130,605
  
$
22,636,335
 
Finished jewelry        
Raw materials 
$
564,689
  
$
520,572
 
Work-in-process  
890,664
   
458,702
 
Finished goods  
6,304,747
   
4,081,275
 
Finished goods on consignment  
1,007,471
   
416,305
 
Total finished jewelry  
8,767,571
   
5,476,854
 
Total supplies inventory  
75,441
   
17,228
 
Total inventory 
$
30,973,617
  
$
28,130,417
 
  June 30, 
  2021  2020 
Computer software $2,015,548  
$
1,827,581
 
Machinery and equipment  
1,250,345
   
1,145,525
 
Computer hardware  
1,274,561
   
1,158,559
 
Leasehold improvements  1,162,995   
1,158,807
 
Furniture and fixtures  
371,883
   
347,872
 
Total  6,075,332   
5,638,344
 
Less accumulated depreciation  
(5,199,435
)
  
(4,639,283
)
Property and equipment, net $875,897  
$
999,061
 
Total net loose jewel inventories at December 31, 2017 and December 31, 2016, including inventory on consignment net of reserves, were $22.13 million and $22.64 million, respectively. Total net finished jewelry inventories at December 31, 2017 and December 31, 2016, including inventory on consignment net of reserves and finished jewelry featuring moissanite manufactured by the Company, were $8.77 million and $5.48 million, respectively.
As of December 31, 2017 and December 31, 2016, management established an obsolescence reserve of $1,417,000 and $944,000, respectively. Typically, in the jewelry industry, slow-moving or discontinued lines are sold as closeouts or liquidated in alternative sales channels. During the year ended December 31, 2016, management identified an opportunity to sell approximately $6.77 million of legacy loose jewel inventory of less desirable quality. The Company had no bulk sales of such inventory during the year ended December 31, 2017. Regularly, management reviews the legacy loose jewel inventory for any lower of cost or net realizable value and obsolescence issues. Accordingly, based on demand during the year ended December 31, 2017, and ongoing feedback from customers on the value of some of these goods, management identified some of the remaining inventory of these lower quality goods that could not be sold at its current carrying value and increased the lower of cost or net realizable value reserve on this remaining inventory to approximately $1,326,000 as of December 31, 2017 from $517,000 as of December 31, 2016. As of December 31, 2017 and December 31, 2016, management identified certain finished jewelry that was obsolete due to damage and other factors that indicate the finished jewelry is unsaleable, and established an obsolescence reserve of $91,000 and $427,000, respectively, for the carrying costs in excess of any estimated scrap values. Management reviews the finished jewelry inventory on an ongoing basis for any lower of cost or net realizable value and obsolescence issues.
As of December 31, 2017 and December 31, 2016 management established a rework reserve for recut and repairs of $557,000 and $454,000, respectively. Loose jewel inventories at December 31, 2017 and December 31, 2016 included recut reserves of $468,000 and $425,000, respectively. The finished jewelry inventories at December 31, 2017 and December 31, 2016 include a repairs reserve of $89,000 and $29,000, respectively.
As of December 31, 2017 and December 31, 2016 management established a shrinkage reserve of $191,000 and $169,000, respectively. The loose jewel inventories at December 31, 2017 and December 31, 2016 include shrinkage reserves of $18,000 and $67,000, respectively. The finished jewelry inventories at December 31, 2017 and December 31, 2016 include shrinkage reserves of $173,000 and $102,000, respectively.
Periodically, the Company ships finished goods inventory to certain Traditional segment customers on consignment terms. Under these terms, the customer assumes the risk of loss and has an absolute right of return for a specified period. Included in the total shrinkage reserve is the shrinkage reserve for finished goods on consignment of $60,000 and $46,000 as of December 31, 2017 and December 31, 2016, respectively, to allow for certain loose jewels and finished jewelry on consignment with certain Traditional segment customers that may not be returned or may be returned in a condition that does not meet the Company’s current grading or quality standards. The loose jewel inventories on consignment at December 31, 2017 and December 31, 2016 include shrinkage reserves of $5,000 and $7,000, respectively. The finished jewelry inventories on consignment at December 31, 2017 and December 31, 2016 include shrinkage reserves of $55,000 and $39,000, respectively.
The need for adjustments to inventory reserves is evaluated on a period-by-period basis.
6.PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
  December 31, 
  2017  2016 
Computer software 
$
1,206,465
  
$
1,192,922
 
Machinery and equipment  
1,026,736
   
956,050
 
Computer hardware  
1,009,008
   
874,347
 
Leasehold improvements  
1,126,553
   
1,083,634
 
Furniture and fixtures  
318,627
   
309,046
 
Total  
4,687,389
   
4,415,999
 
Less accumulated depreciation  
(3,445,189
)
  
(3,024,883
)
Property and equipment, net 
$
1,242,200
  
$
1,391,116
 

Depreciation expense for the fiscal years ended December 31, 2017June 30, 2021 and 20162020 was approximately $420,000$560,000 and $528,000,$486,000, respectively.

Approximately $26,000 related to discontinued operations was included in total depreciation expense for the year ended December 31, 2016.
7.8.INTANGIBLE ASSETS

Intangible assets, net, consist of the following:following as of the dates presented:

  
    
Weighted
Average
Remaining
Amortization
Period
(in Years)
  


 December 31,
Weighted
Average
Remaining
Amortization
Period
 June 30,
20172016(in Years)
2021
  2020
Patents 
$
958,604
  
$
958,604
   
0.1
  
$
1,017,007
  
$
1,024,267
   
13.6
 
Trademarks  
57,325
   
55,824
   
7.7
   
214,339
   
160,683
   
12.9
 
License rights  
6,718
   
6,718
   
0.0
   
6,718
   
6,718
   
-
 
Total  
1,022,647
   
1,021,146
       
1,238,064
   
1,191,668
     
Less accumulated amortization  
(1,014,050
)
  
(1,012,338
)
      
(1,028,406
)
  
(1,021,517
)
    
Intangible assets, net 
$
8,597
  
$
8,808
      
$
209,658
  
$
170,151
     

Amortization expense for the fiscal years ended December 31, 2017June 30, 2021 and 20162020 was approximately $2,000$7,000 and $68,000,$4,000, respectively. Amortization expense on existing intangible assets is estimated to be approximately $2,000 for the year ending December 31, 2018 and approximately $1,000$17,000 for each of the fiscal years ending December 31, 2019, 2020, 2021,June 30, 2022 and 2022. The remainder2023 and approximately $16,000 for each of the amortization expense for total intangible assets, net, will be recognized in periods after December 31, 2022.fiscal years ending June 30, 2024, 2025, and 2026.

Approximately $13,000 related to discontinued operations was included in total amortization expense for the year ended December 31, 2016.
8.9.ACCRUED EXPENSES AND OTHER LIABILITIES

AccruedTotal accrued expenses and other liabilities current, consist of the following:following as of the dates presented:

 December 31,  June 30, 
 2017  2016  2021  2020 
Accrued compensation and related benefits 
$
652,177
  
$
443,547
  $866,705  $395,006 
Deferred revenue  774,891   794,740 
Accrued sales tax  555,547   295,651 
Accrued cooperative advertising  
134,018
   
50,000
   68,185   89,517 
Deferred rent  
131,389
   
115,307
 
Accrued sales tax  
20,844
   
6,885
 
Accrued income taxes  16,478   - 
Accrued severance  -   338,355 
Other  
42,372
   
15,368
   1   9,063 
Accrued expenses and other liabilities 
$
980,800
  
$
631,107
  $2,281,807  $1,922,332 

9.10.COMMITMENTS AND CONTINGENCIES

Lease CommitmentsArrangements

On December 9, 2013, the Company entered into a Lease Agreement, as amended on December 23, 2013, and April 15, 2014, and January 29, 2021 (the “Lease Agreement”), for a newits corporate headquarters, which occupies approximately 36,350 square feet of office, storage and light manufacturing space. space and is classified as an operating lease for financial reporting purposes. The expiration date of the base term of the Lease Agreement in effect as of June 30, 2021 is October 31, 2026 and the terms of the Lease Agreement contain no early termination provisions. Provided there is no outstanding uncured event of default under the Lease Agreement, the Company has an option to extend the lease term for a period of five years. The Company’s option to extend the term of the Lease Agreement must be exercised in writing on or before 270 days prior to expiration of the then-current term. If the option is exercised, the monthly minimum rent for the extended term will be adjusted to the then-prevailing fair market rate. The renewal option was not assumed to be exercised for purposes of calculating the lease term and the related operating lease liability.

The Company took possession of the leased property on May 23, 2014, once certain improvements to the leased space were completed and did not have access to the property before this date. TheseUpon execution of the third amendment to the Lease Agreement (the “Lease Amendment”) on January 29, 2021, the Lease Amendment included a rent abatement in the amount of approximately $214,000, which is reflected in the rent payments used in the calculation of the right-of-use (“ROU”) asset and lease liability once remeasured upon the execution of the Lease Amendment to extend the lease term. The Lease Amendment also included an allowance for leasehold improvements and other lease signing and moving incentives offered by the landlord totaledin an amount not to exceed approximately $550,000 and $73,000, respectively, which$545,000. Once such costs have been incurred, the Company will be amortizedreimbursed for qualified costs by the landlord and the Company will reduce the remaining ROU asset and lease liability by the amount of the reimbursement. Such reductions of the ROU asset and lease liability will be recognized prospectively by the Company over the liferemaining term of the lease until October 31, 2021. Included in the Lease Agreement is a seven-month rent abatement period effective June 2014 through December 2014.
The Company recognizes rent expense on a straight-line basis, giving consideration to the rent holidays and escalations, the lease signing and moving allowance to be paid to the Company, and the rent abatement.lease.
 
As of December 31, 2017,June 30, 2021, the Company’s future minimum payments under the operatingbalance sheet classifications of its leases wereare as follows:
 
2018 
$
600,871
 
2019  
617,395
 
2020  
634,373
 
2021  
541,957
 
Total 
$
2,394,596
 
Operating Leases:   
Noncurrent operating lease ROU assets
 
$
3,952,146
 
     
Current operating lease liabilities 
$
566,083
 
Noncurrent operating lease liabilities  
3,600,842
 
Total operating lease liabilities 
$
4,166,925
 

Rent expenseThe Company’s total operating lease cost was approximately $610,000 and $469,000 for the fiscal years ended December 31, 2017June 30, 2021 and 2016 was approximately $510,000 and $539,000, respectively.2020.
 
Approximately $40,000 relatedAs of June 30, 2021, the Company’s estimated incremental borrowing rate used and assumed discount rate with respect to discontinued operationsoperating leases was 2.81% and the remaining operating lease term was 5.33 years.

As of June 30, 2021, the Company’s remaining future payments under operating leases for each fiscal year ending June 30 are as follows:

2022 
$
575,591
 
2023  
869,742
 
2024  
893,660
 
2025  
918,236
 
2026  
943,487
 
2027  
317,327
 
Total lease payments  
4,518,043
 
Less: imputed interest  
351,118
 
Present value of lease payments  
4,166,925
 
Less: current lease liability  
566,083
 
Total long-term lease liability 
$
3,600,842
 

The Company makes cash payments for amounts included in total rent expensethe measurement of its lease liabilities. During the fiscal year ended June 30, 2021 and 2020, cash paid for operating leases was approximately $688,000 and $668,000, respectively. Upon the execution of the Lease Amendment, the Company recorded additional ROU assets in the amount of approximately $3.9 million obtained in exchange for the additional operating lease liability during the fiscal year ended December 31, 2016.June 30, 2021.

Purchase Commitments

On December 12, 2014, the Company entered into a newan exclusive supply agreement (the “Supply Agreement”) with Cree, Inc. (“Cree”). Under the Supply Agreement, subject to certain terms and conditions, the Company agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of the Company’s required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement willwas scheduled to expire on June 24, 2018, unless extended by the parties. Accordingly,

Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement was also amended to (i) provide the Company is reviewing various alternatives with respect to our purchase of SiC material, including whether to exercise our unilateralone option, subject to certain conditions, to renewunilaterally extend the term of the Supply Agreement for an additional two-year period.period following expiration of the initial term; (ii) establish a process by which Cree may begin producing alternate SiC material based on the Company’s specifications that will give the Company the flexibility to use the materials in a broader variety of its products; and (iii) permit the Company to purchase certain amounts of SiC materials from third parties under limited conditions.

Effective June 30, 2020, the Supply Agreement was further amended to extend the expiration date to June 29, 2025, which may be extended again by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread the Company’s total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Cree has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit the Company to purchase revised amounts of SiC materials from third parties under limited conditions.

The Company’s total purchase commitment under the Supply Agreement, as amended, until June 20182025 is dependent uponapproximately $52.95 million, of which approximately $32.85 remains to be purchased as of June 30, 2021. Over the sizelife of the SiC material and ranges between approximately $29.60 million and approximately $31.50 million. As of December 31, 2017, the Company’s remaining purchase commitment through June 2018 under the Supply Agreement, rangesas amended, the Company’s future minimum annual purchase commitments of SiC crystals range from approximately $5.15$4 million to approximately $7.05 million. $10 million each year.

During the yearfiscal years ended December 31, 2017June 30, 2021 and 2016,2020, the Company purchased approximately $9.39$3.78 million and $8.20$7.47 million, respectively, of SiC crystals from Cree.

COVID-19

In March 2020, the novel strain of coronavirus, known as COVID-19, was declared a pandemic by the World Health Organization and declared a national emergency by the U.S. Government, and has continued to negatively affect the U.S. and global economies. In response to the pandemic, federal, state, county and local governments, and public health organizations and authorities around the world have implemented a variety of measures intended to control the spread of the virus including quarantines, “stay-at-home” orders, travel restrictions, school closures, business limitations and closures, social distancing, and hygiene requirements. While some of these measures have been lifted or eased in certain jurisdictions, other jurisdictions have seen increases in new COVID-19 cases, resulting in restrictions being reinstated or new restrictions being imposed.

The Company has continued taking measures to protect the health and safety of its employees, including updating the Company’s return-to-work policies, as necessary, working with its customers and suppliers to minimize disruptions, and supporting its community in addressing the challenges posed by this ongoing global pandemic. During Fiscal 2021, the Company experienced impacts in its business related to COVID-19, primarily in continued increased coronavirus-related costs, interruptions in supplier deliveries, impacts of travel and delivery restrictions, site access and quarantine restrictions, and the impacts of remote work and adjusted work schedules.

5973
The COVID-19 pandemic continues to present business challenges and the Company expects these to continue into Fiscal 2022. The Company’s management has executed plans to reintroduce employees to the workplace as vaccine rates increase and COVID-19 cases decrease. Although, in light of the recent increase in infections due to evolving viral variants, the Company has not yet returned to pre-pandemic workforce levels in its workplace and is experiencing stabilization of employee attendance in its operations and distribution facilities and throughout its supply chain. A segment of the Company’s corporate staff continues working a blend of remote and in-person work schedules and management is taking measures to facilitate the provision of vaccines to the Company’s employees in line with state and local guidelines. The Company also continues working with its customers and suppliers to minimize disruptions, including at times accelerating payments to key suppliers that are due by their terms in future periods. The Company expects to continue accelerating payments to its suppliers in some cases into Fiscal 2022.

The ultimate impact of COVID-19 on the Company’s operations and financial performance in future periods, including management’s ability to execute its 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 related government actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. The Company cannot at this time predict the full impact of the COVID-19 pandemic, but the Company anticipates that the COVID-19 pandemic is likely to continue to impact its business, financial condition, results of operations and/or cash flows in the fiscal year ending June 30, 2022.

At the onset of the pandemic, the Company applied for and received the proceeds from a Paycheck Protection Program loan (a “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as administered by the U.S. Small Business Administration (the “SBA”). The Company’s PPP Loan in the principal amount of $965,000 was disbursed by Newtek Small Business Finance, LLC, (its “Lender”), a nationally licensed lender under the SBA, pursuant to a promissory note issued by the Company on June 15, 2020. In accordance with applicable provisions of the CARES Act, effective June 23, 2021, the Company’s PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000 and the related accrued and unpaid interest. The full amount of the gain in connection with the extinguishment of the underlying debt, including the forgiveness of accrued and unpaid interest, was recognized by the Company in the fiscal year ended June 30, 2021.

The Company took advantage of available COVID-19 related payroll tax credits for certain wages and paid leave provided by us during the pandemic. A portion of these eligible tax credits are determined by qualified emergency paid sick and expanded family and medical leave wages pursuant to the Families First Coronavirus Response Act (“FFCRA”). In addition, the Consolidated Appropriations Act, 2021, provides that employers who received a PPP loan may also qualify for the Employee Retention Credit (the “ERC”). Previously, pursuant to the CARES Act, taxpayers that received a PPP loan were not eligible for the ERC and this change is retroactive to March 27, 2020. The Company believes that it qualifies for certain employer-related tax benefits pursuant to the ERC and expects to amend its applicable federal payroll tax returns for such benefit. Further, as permitted by the NC COVID-19 Relief Act, the Company expects to receive an incremental tax credit towards its contributions to the North Carolina Unemployment Insurance Fund. Accordingly, the Company will recognize any payroll tax credits related to these federal and state legislative actions in the period such benefits are received.

10.11.LINE OF CREDITDEBT

Paycheck Protection Program Loan

On June 18, 2020, the Company received the proceeds from its PPP Loan. The loan in the principal amount of $965,000 was disbursed by the Lender pursuant to a promissory note issued by the Company (the “Promissory Note”) on June 15, 2020. During the period of time that the principal under the Promissory Note was outstanding, the Company accounted for the Promissory Note as debt within the accompanying consolidated financial statements.

Pursuant to its terms, the Promissory Note was scheduled to mature on June 18, 2022. However, on June 14, 2021, in accordance with applicable provisions of the CARES Act the Company filed its PPP Loan forgiveness application with the Lender for forgiveness of the full amount of the PPP Loan proceeds and the related accrued and unpaid interest. Effective June 23, 2021, the Company’s PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000 and the related accrued and unpaid interest. Accordingly, the full amount of the gain in connection with the extinguishment of this debt was recognized in the fiscal year ended June 30, 2021.

In accordance with the terms of the Promissory Note, during the period of time the principal of the PPP Loan was outstanding, interest was accrued by the Company at a fixed rate of 1% per annum. In connection with the Company’s PPP Loan forgiveness, the SBA also approved forgiveness of accrued interest amounts that would have been otherwise payable by the Company to the Lender. Accordingly, the benefit from the forgiveness of the inception to-date interest expense in the amount of approximately $9,000 was recognized and included within the gain on extinguishment of debt in the consolidated statement of operations for the fiscal year ended June 30, 2021.

For financial reporting purposes, during the period the principal of the PPP Loan was outstanding, the classification of the current maturity of long-term debt assumed there would have been no principal forgiveness. In accordance with the terms of the Promissory Note, as amended by the Paycheck Protection Program Flexibility Act, principal repayment for the full outstanding principal amount of the PPP Loan was assumed to have been spread in equal monthly installments over the period from October 1, 2021 through the maturity date of the Promissory Note.

The Company did not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any facility charge to the Lender when it obtained the PPP Loan. The Promissory Note provided for customary events of default, which did not occur during the period of time the PPP Loan was outstanding, including, among others, those relating to failure to make payment and breaches of representations.
 
On June 25, 2014,Line of Credit

Effective July 7, 2021, the Company and its wholly owned subsidiaries, Charles & Colvard Direct, LLC, and Moissanite.com, LLC (now charlesandcolvard.com, LLC) (collectively, the “Borrowers”), obtained from JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) a $10.00$5.00 million asset-based revolvingcash collateralized line of credit facility (the “Credit“JPMorgan Chase Credit Facility”) from Wells Fargo Bank, National Association (“Wells Fargo”). The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including transaction feespermitted acquisitions and expenses incurredcertain 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 connection therewith and the issuanceamount of letters$5.05 million held by JPMorgan Chase as collateral for the line of credit up to a $1.00 million sublimit. The Credit Facility was scheduled to mature on June 25, 2017.facility.

Effective June 22, 2017, the Credit Facility was amended to extend the maturity date to June 25, 2018. The Credit Facility was also amended to reduce theEach advance accrues interest rate payable on advances under the Credit Facility toat a rate equal to Wells Fargo’s daily three-monthJPMorgan 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 2.00%, a margin of 1.25% per annum. Interest is calculated monthly on an actual/360 day basis and payable monthly in arrears. Principal outstanding during an event of default, at JPMorgan Chase’s option, accrues interest at a rate of 3% per annum in excess of the above rate. Any advance may be prepaid in whole or in part without penalty at any time.

The JPMorgan Chase Credit Facility is evidenced by a credit agreement between JPMorgan Chase and the Company (the “JPMorgan Chase Credit Agreement”), dated as of July 12, 2021, and customary ancillary documents, in the principal amount not to exceed $5.00 million at any one time outstanding and a line of credit note (the “JPMorgan Chase Line of Credit Note”) in which the Company promises to pay on or before July 31, 2022, the amount of $5.00 million or so much thereof as may be advanced and outstanding. In addition, the event of default, JPMorgan Chase, at its option, may accelerate the maturity of advances outstanding under the JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Agreement and ancillary documents contain customary covenants, representations, fees, debt, contingent obligations, liens, loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.

In connection with the JPMorgan Chase Credit Facility, the Company incurred a non-refundable origination fee in the amount of $10,000 that was paid in full to JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12, 2021. The Company also agreed to maintain its primary banking depository and disbursement relationship with JPMorgan Chase.

Events of default under the JPMorgan Chase Credit Facility include, without limitation, a default, event of default, or event that would constitute a default or event of default (pending giving notice or lapse of time or both), of any provision of the JPMorgan Chase Credit Agreement, the JPMorgan Chase Line of Credit Note, or any other instrument or document executed in connection with the JPMorgan Chase Credit Agreement or with any of the indebtedness, liabilities, and obligations of the Company to JPMorgan Chase or would result from the extension of credit by JPMorgan Chase to the Company.

On July 12, 2021, upon its execution, the Company did not request any advances pursuant to the terms of the JPMorgan Chase Credit Facility.

Prior to obtaining the JPMorgan Chase Credit Facility, the Company and its wholly owned subsidiary, charlesandcolvard.com, LLC (collectively, the “Borrowers”), had a $5.00 million asset-based revolving credit facility (the “White Oak Credit Facility”) from White Oak Commercial Finance, LLC (“White Oak”), which was terminated by the Company in accordance with its terms as of July 9, 2021. The effective date of the White Oak Credit Facility was amended furtherJuly 13, 2018, and it was scheduled to includemature 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 Charles & Colvard Direct, LLC, a wholly owned subsidiary of the additionCompany (the “Guarantor”). Under the terms of an EBITDA covenant, wherebythe White Oak Credit Facility, the Borrowers were required to maintain a specified minimum monthly EBITDA through December 2017 if the cash position for the Borrowers’ demand deposit account maintained at Wells Fargo falls below $3.00 million or the Borrowers draw upon the Credit Facility. In connection with this amendment, the Company paid a 3% facility feeleast $500,000 in the amount of $150,000 that is being amortized over the life of the underlying term of theexcess availability at all times. The White Oak Credit Facility amendment.
The Credit Facility includes a $5.00 million sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank.contained no other financial covenants. Advances under the White Oak Credit Facility arewere limited to a borrowing base, which iswas computed by applying specified advance rates to the value of the Borrowers’ eligible accounts receivable and inventory, plus the value of precious metal jewelry components, less reserves. Advances againstEligible inventory arewould have been further subjectlimited to an initial $3.00 million maximum. The Borrowers must maintain a minimum60% of the net borrowing base, while precious metal jewelry components were limited to $500,000.
Available advances could have been in the form of either revolving or non-revolving. Non-revolving advances were limited to $1.00 million in excess availabilityaggregate principal amount outstanding and would have been required to be repaid on each January 15 (which could have been effected by conversion to revolving advances, absent an event of default, which did not occur during the term of the White Oak Credit Facility). There were no other mandatory prepayments or line reductions. The Company was able to prepay any advances in whole or in part at all times.any time without penalty. In addition, the White Oak Credit Facility could have been terminated by the Company at any time, subject to a $100,000 fee in the first year of the term of the White Oak Credit Facility, a $50,000 fee in the second year, and no fee thereafter. In connection with the execution of the White Oak Credit Facility, the Company incurred a non-refundable origination fee in the total amount of $125,000 that was due and payable to White Oak in three installments. The first installment in the amount of $41,667 was paid upon execution of the White Oak Credit Facility on July 13, 2018, the second installment in the amount of $41,667 was paid on July 15, 2019, and the third and final installment in the amount of $41,666 was paid on August 14, 2020.
 
Each advance accruesDuring the first year of the term of the White Oak Credit Facility, any revolving advances would have accrued interest at a rate equal to either (i) Wells Fargo’s three-monthone-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 2.00%, or (ii) Wells Fargo’s Prime Rate plus 1%, each4.75%. Thereafter, the interest margins would have been reduced upon the Company’s achievement of a specified fixed charge coverage ratio during the period of any outstanding advances. However, any advances were in all cases subject to a minimum interest rate of 5.50% and interest would have been calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default, accrueswhich again did not occur during the term of the White Oak Credit Facility, would have accrued interest at a rate of 3%2% in excess of the above rate. Any advance may be prepaid in whole or in part at any time. There are no mandatory prepayments or line reductions.rate that would have been otherwise applicable.

The White Oak Credit Facility iswas secured by a lien on substantially all assets of the Borrowers, each of which iswas jointly and severally liable for all obligations thereunder. Wells Fargo’sWhite Oak’s security interest in certain SiC materials iswas subordinate to Cree’s security interest in such materials pursuant to the Company’s Supply Agreement and an Intercreditor Agreement by and among the Borrowers and the Guarantor with Wells Fargo.White Oak. In addition, White Oak’s security interest in certain tangible personal property of the Company was subordinate to its landlord’s security interest in such tangible personal property.
 
The White Oak Credit Facility iswas evidenced by a Credit and Security Agreement,credit agreement, dated as of June 25, 2014,July 13, 2018 (the “Credit Agreement”), a security agreement, dated as amendedof July 13, 2018 (the “Credit“Security Agreement”), and customary ancillary documents. The Credit Agreement, containsSecurity Agreement, and ancillary documents contained customary covenants, representations, fees, and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries,and affiliate transactions, and changes in control.transactions.
 
Events of default under the White Oak Credit Facility include,included, without limitation, (i) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (ii)a change in control, an event of default under any other indebtedness of the Borrowers or Guarantor in excess of $200,000, and (iii)$250,000, a material adverse change in the abilitybusiness of the Borrowers or Guarantor or in their ability to perform their obligations under the White Oak Credit Agreement or in the Borrowers’ assets, liabilities, businesses or prospects, orFacility, and other defined circumstances that Wells Fargo believesWhite Oak would have believed may impairhave impaired the prospect of repayment. If an event of default occurs, Wells Fargo ishad occurred, White Oak would have been entitled to take enforcement action, including acceleration of any amounts that would have been due under the White Oak Credit AgreementFacility, and foreclosureto foreclose upon collateral.

The White Oak Credit Agreement containsFacility also contained other customary terms, includingthat included indemnity, collateral monitoring fee, minimum interest charge, expense reimbursement, yield protection, and certain confidentiality provisions. Wells Fargo is permitted to assign the Credit Facility.
Since the current amendment to the Credit Facility matures on June 25, 2018, the Company is currently reviewing various credit facility alternatives.

As of December 31, 2017, theThe Company had not borrowed against the White Oak Credit Facility.Facility as of July 9, 2021, the date upon which the White Oak Credit Facility was terminated by the Company in accordance with its terms.

11.12.SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Common Stock

The Company is authorized to issue 50,000,000 shares of common stock, no par value. As of December 31, 2017June 30, 2021 and 2016,2020, it had 21,580,10229,913,095 and 21,369,88528,949,410 shares of common stock outstanding, respectively. Holders of the Company’s common stock are entitled to one vote for each share held.

Preferred Stock

The Board of Directors is authorized, without further shareholder approval, to issue up to 10,000,000 shares of preferred stock, no par value. The preferred stock may be issued from time to time in one or more series. No shares of preferred stock had been issued as of December 31, 2017.June 30, 2021.

Dividends

The Company paid no cash dividends during the fiscal years ended June 30, 2021 and 2020.

Shelf Registration Statement

The Company has an effective shelf registration statement on Form S-3 on file with the U.S. Securities and Exchange Commission (the “SEC”) which allows it 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, the Company may offer and sell no more than one-third of its public float (which is the aggregate market value of the Company’s outstanding common stock held by non-affiliates) in any 12-month period. The Company’s ability to issue equity securities under its effective shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility caused by ongoing effects of the COVID-19 pandemic.

On June 11, 2019, the Company completed an underwritten public offering of 6,250,000 newly issued shares of common stock, at a price to the public of $1.60 per share, pursuant to its then effective shelf registration statement on Form S-3. Net proceeds from the offering were approximately $9.06 million, net of the underwriting discount and fees and expenses in the amount of approximately $941,000. Pursuant to the terms of the underwriting agreement entered in connection with this offering, the underwriters were granted a 30-day option to buy up to an additional 937,500 shares of the Company’s common stock to cover over-allotments. Accordingly, on July 3, 2019, the Company issued an additional 630,500 shares of its common stock at a price of $1.60 per share for net proceeds of approximately $932,000, net of the underwriting discount and fees and expenses of approximately $77,000. After giving effect to the partial exercise of the over-allotment option, the Company sold an aggregate of 6,880,500 shares of its common stock at a price of $1.60 per share with total gross proceeds of approximately $11.01 million, before deducting the total underwriting discount and fees and expenses of approximately $1.02 million.

Equity Compensation Plans

2018 Equity Incentive Plan

On November 21, 2018, the shareholders of the Company approved the adoption of the Charles & Colvard, Ltd. 2018 Equity Incentive Plan, (the “2018 Plan”). The 2018 Plan will expire by its terms on September 20, 2028.

The 2018 Plan provides for the grant of equity-based awards to selected employees, directors, and consultants of the Company and its affiliates. The aggregate number of shares of the Company’s common stock that could be issued pursuant to awards granted under the 2018 Plan are not to exceed the sum of 3,300,000 plus the number of shares of common stock underlying any award granted under any stock incentive plan maintained by the Company prior to the 2018 Plan (each, a “2018 Prior Plan”) that expires, terminates or is canceled or forfeited under the terms of the 2018 Prior Plans. Stock options granted to employees under the 2018 Plan generally vest over four years and have terms of up to 10 years. The vesting schedules and terms of stock options granted to independent contractors vary depending on the specific grant, but the terms are no longer than 10 years. Stock option awards granted to members of the Board of Directors generally vest at the end of one year from the date of the grant. The vesting schedules of restricted stock awards granted to employees or independent contractors vary depending on the specific grant but are generally four years or less. Only stock options and restricted stock have been granted under the 2018 Plan. As of June 30, 2021 and 2020, there were 1,151,935 and 790,407 stock options outstanding under the 2018 Plan, respectively.

2008 Stock Incentive Plan

In May 2008, the shareholders of the Company approved the adoption of the Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended on March 31, 2015 and approved by the shareholders of the Company on May 20, 2015 and further amended on March 15, 2016 and approved by the shareholders of the Company on May 18, 2016 (the “2008 Plan”). The 2008 Plan expired (with respect to future grants) on May 26, 2018.

The 2008 Plan authorizesauthorized the Company to grant stock options, stock appreciation rights, restricted stock, and other equity awards to selected employees, directors, and independent contractors. The aggregate number of shares of the Company’s common stock that maycould be issued pursuant to awards granted under the 2008 Plan shallwere not to exceed the sum of 6,000,000 plus any shares of common stock subject to an award granted under any stock incentive plan maintained by the Company prior to the 2008 Plan (each, a “Prior“2008 Prior Plan”) that is forfeited, cancelled, terminated, expires, or lapses for any reason without the issuance of shares pursuant to the award, or shares subject to an award granted under a 2008 Prior Plan which shares are forfeited to, or repurchased or reacquired by, the Company. Stock options granted to employees under the 2008 Plan generally vest over four years and have terms of up to 10 years. The vesting schedules and terms of stock options granted to independent contractors vary depending on the specific grant, but the terms are no longer than 10 years. Stock option awards granted to members of the Board of Directors generally vest at the end of one year from the date of the grant. The vesting schedules of restricted stock awards granted to employees or independent contractors vary depending on the specific grant but are generally four years or less. Only stock options and restricted stock havehad been granted under the 2008 Plan. As of December 31, 2017June 30, 2021 and 2016,2020, there were 2,227,2651,083,351 and 2,134,8982,018,688 stock options outstanding under the 2008 Plan, respectively.

Stock-Based Compensation

The following table summarizes the components of the Company’s stock-based compensation included in net loss:income (loss) for the periods presented:

 Year Ended December 31,  Year Ended June 30, 
 2017  2016  2021  2020 
Employee stock options $336,534  $383,778  $234,947  $309,999 
Consultant stock options  -   170,622 
Restricted stock awards  106,948   448,906   117,636   149,539 
Total $443,482  $1,003,306  $352,583  $459,538 

Due to the Company’s valuation allowance against deferred tax assets as discussed further in Note 12, “Income Taxes”, the income tax benefits for 2017 and 2016 were fully reserved.
No stock-based compensation was capitalized as a cost of inventory during the fiscal years ended December 31, 2017June 30, 2021 and 2016.2020.

Approximately $44,000 related to discontinued operations was included in total stock-based compensation expense for the year ended December 31, 2016.
78

Stock Options

The following is a summary of the stock option activity for the fiscal years ended December 31, 2017June 30, 2021 and 2016:2020:

 Shares  
Weighted
Average
Exercise Price
  Shares  
Weighted
Average
Exercise
Price
 
Outstanding, December 31, 2015  2,441,077  $2.11 
Outstanding at June 30, 2019  
2,523,638
  
$
1.39
 
Granted  
605,387
  
$
0.95
 
Forfeited  
(125,005
)
 
$
1.02
 
Expired  
(194,925
)
 
$
1.18
 
Outstanding at June 30, 2020  
2,809,095
  
$
1.19
 
Granted  591,005  $1.14   
438,533
  
$
1.05
 
Exercised  (2,500) $0.92   
(947,435
)
  
0.95
 
Forfeited  (449,122) $1.43   
(7,000
)
 
$
1.23
 
Expired  (445,562) $2.09   
(57,907
)
 
$
1.95
 
Outstanding, December 31, 2016  2,134,898  $1.99 
Granted  836,369  $0.94 
Forfeited  (103,000) $1.22 
Expired  (641,002) $2.99 
Outstanding, December 31, 2017  2,227,265  $1.35 
Outstanding at June 30, 2021  
2,235,286
  
$
1.24
 

The weighted average grant date fair value of stock options granted during the yearsfiscal year ended December 31, 2017June 30, 2021 and 20162020 was $0.53$0.54 and $0.63,$0.50, respectively. The total fair value of stock options that vested during the yearsfiscal year ended December 31, 2017June 30, 2021 and 20162020 was approximately $400,000$650,000 and $780,000,$282,000, respectively.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following
weighted average assumptions for stock options granted during the years ended December 31, 2017 and 2016:periods presented:

 Year Ended December 31,  Year Ended June 30, 
 2017  2016  2021  2020 
Dividend yield  0.0%  0.0%  
0.0
%
  
0.0
%
Expected volatility  63.4%  62.2%  
61.7
%
  
63.2
%
Risk-free interest rate  1.90%  1.42%  
0.36
%
  
0.82
%
Expected lives (years)  5.5   5.6   
4.9
   
5.2
 

The following table summarizestables summarize information aboutin connection with stock options outstanding at December 31, 2017:June 30, 2021:

Options OutstandingOptions Outstanding  Options Exercisable  Options Vested or Expected to Vest Options Outstanding  Options Exercisable  Options Vested or Expected to Vest 
Balance
as of
12/31/2017
  
Weighted
Average
Remaining
Contractual
Life
(Years)
  
Weighted
Average
Exercise
Price
  
Balance
as of
12/31/2017
  
Weighted
Average
Remaining
Contractual
Life
(Years)
  
Weighted
Average
Exercise
Price
  
Balance
as of
12/31/2017
  
Weighted
Average
Remaining
Contractual
Life
(Years)
  
Weighted
Average
Exercise
Price
 
Balance
as of
6/30/2021
Balance
as of
6/30/2021
  
Weighted
Average
Remaining
Contractual Life
(Years)
  
Weighted
Average
Exercise
Price
  
Balance
as of
6/30/2021
  
Weighted
Average
Remaining
Contractual
Life
(Years)
  
Weighted
Average
Exercise
Price
  
Balance
as of
6/30/2021
  
Weighted
Average
Remaining
Contractual
Life
(Years)
  
Weighted
Average
Exercise
Price
 
2,227,265   8.06  $1.35   1,359,646   7.30  $1.57   2,111,450   7.99  $1.36 
2,235,286
   
6.47
  
$
1.24
   
1,696,003
   
5.62
  
$
1.31
   
2,166,723
   
6.39
  
$
1.25
 

As of December 31, 2017,June 30, 2021, the unrecognized stock-based compensation expense related to unvested stock options was approximately $337,000,$192,000, which is expected to be recognized over a weighted average period of approximately 2819 months.

The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at December 31, 2017June 30, 2021 was approximately $458,000. This amount is$3.77 million. These amounts are before applicable income taxes and representsrepresent the closing market price of the Company’s common stock at December 31, 2017June 30, 2021, less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. This amount representsThese amounts represent the amountamounts that would have been received by the optionees had these stock options been exercised on that date.those dates. The aggregate intrinsic value of stock options exercised during the fiscal year ended June 30, 2021 was approximately $1.24 million. The total tax benefit associated with stock options exercised during the fiscal year ended June 30, 2021, was approximately $147,000. No stock options were exercised during the fiscal year ended December 31, 2017. During the year ended December 31, 2016, the aggregate intrinsic value of stock options exercised was approximately $0.June 30, 2020.

Restricted Stock

The following is a summary of the restricted stock activity for the fiscal years ended December 31, 2017June 30, 2021 and 2016:2020:

 Shares  
Weighted
Average
Grant Date
Fair Value
  Shares  
Weighted
Average
Grant Date
Fair Value
 
Unvested, December 31, 2015  425,000  $1.87 
Unvested at June 30, 2019  
129,500
  
$
1.08
 
Granted  509,250  $0.93   
325,000
  
$
1.57
 
Vested  (321,400) $2.00   
(258,341
)
 
$
1.07
 
Canceled  (253,450) $1.18   
(33,659
)
 
$
1.07
 
Unvested, December 31, 2016  359,400  $0.91 
Unvested at June 30, 2020  
162,500
  
$
1.57
 
Granted  420,000  $1.11   
178,750
  
$
0.72
 
Vested  (214,200) $0.92 
Canceled  (209,783) $0.96   
(162,500
)
 
$
1.57
 
Unvested, December 31, 2017  355,417  $1.11 
Unvested at June 30, 2021  
178,750
  
$
0.72
 

The unvested restricted shares as of December 31, 2017June 30, 2021 are all performance-based restricted shares that willare scheduled to vest, subject to achievement of the underlying performance goals, on February 23, 2018.in July 2021. As of December 31, 2017,June 30, 2021, the estimated unrecognized stock-based compensation expense related to these unvested restricted shares subject to the achievement of performance goals was approximately $69,000,$11,000, all of which is expected to be recognized over a weighted average period of approximately one month.month.

Dividends

The Company has paid no cash dividends during the years ended December 31, 2017 and 2016.

12.13.INCOME TAXES

On December 22, 2017, the President signed the Tax Act, which among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, the Company wrote down its net deferred tax assets as of December 31, 2017 by approximately $519,000 to reflect the estimated impact of the Tax Act. The Company recorded a corresponding net adjustment to its valuation allowance related to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax.

The Company has substantially completed its provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects. However, the SEC staff issued guidance regarding application of FASB income tax-related guidance in the reporting period that includes December 22, 2017 – the date on which the Tax Act was signed into law – to address situations when a company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has estimated the tax impacts related to the impact to deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017, on a provisional basis. In this regard, the Tax Act repeals the corporate alternative minimum tax, or AMT, regime, including claiming a refund and full realization of remaining AMT credits. The Company has not been able to make a reasonable estimate with respect to its realization of existing AMT credit carryforwards, and accordingly, continues to apply the income tax-related accounting guidance that was in effect immediately prior to the enactment of the Tax Act. In order for the Company to complete the income tax effects of the Tax Act on its existing AMT deferred tax asset, the Company needs to further analyze the nature, validity, and recoverability of its AMT-related deferred tax credit carryforwards prior to recording the underlying appropriate tax benefit. Accordingly, the ultimate impact related to the Tax Act may differ, possibly materially, due to, among other things, completing its analysis of the realization of available AMT credit refunds, further refinement of the Company’s calculations, changes in interpretations and assumptions that the Company made, additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions that the Company may take as a result of the Tax Act. The Company expects this analysis to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018.

The Company accounts for income taxes under the liability method. Under the liability method, deferred income taxes are recognized for the income tax consequences of “temporary differences” by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the income tax bases of existing assets and liabilities.
IncomeThe Company’s income tax net expensebenefit (expense) for the periods presented comprises the following:

 Year Ended December 31,  Year Ended June 30, 
 2017  2016  2021  2020 
Current:            
Federal $-  $-  
$
-
  
$
-
 
State  (27,609)  (13,480)  
(18,409
)
  
(1,733
)
Total  (27,609)  (13,480)
Total current expense  
(18,409
)
  
(1,733
)
                
Deferred:                
Federal  -   -   
6,062,222
   
-
 
State  -   -   
288,608
   
-
 
Total  -   - 
Income tax net expense $(27,609) $(13,480)
Total deferred benefit (expense)  
6,350,830
   
-
 
Income tax net benefit (expense) 
$
6,332,421
  
$
(1,733
)

Significant components of the Company’s noncurrent deferred income tax assets, net, as of the dates presented are as follows:

 December 31,  June 30, 
 2017  2016  2021  2020 
      
Reserves and accruals $686,573  $1,053,863 
Prepaid expenses  (28,744)  (43,774)
Federal NOL carryforwards  8,395,472   8,530,493 
Deferred tax assets:      
Reversals and accruals 
$
454,846
  
$
476,666
 
Federal net operating loss (“NOL”) carryforwards  
3,989,278
   
4,980,513
 
State NOL carryforwards  681,364   615,919   
585,563
   
663,918
 
Hong Kong NOL carryforwards  995,566   995,566   
995,566
   
995,566
 
Federal benefit on state taxes under uncertain tax positions  94,142   136,969   
2,073
   
1,668
 
Stock-based compensation  422,623   342,294   
149,047
   
177,508
 
Section 263A adjustment  
122,562
   
215,416
 
Research tax credit  434,637   434,637   
-
   
252
 
Alternative minimum tax credit  350,743   348,264 
Contributions carryforward  -   35,100   
-
   
7,184
 
Depreciation  (178,670)  (286,608)
Accrued rent  138,178   216,432 
Inventory valuation reserve  
1,605,871
   
1,594,795
 
Operating lease liabilities  
942,471
   
185,422
 
Loss on impairment of long-lived assets  33,864   53,042   
-
   
32,749
 
Valuation allowance  (12,025,748)  (12,432,197)  
(1,452,296
)
  
(8,988,696
)
Total  -   - 
Total deferred income tax assets, net $-  $- 
Noncurrent deferred tax assets, net  
7,394,981
   
342,961
 
Deferred tax liabilities:
        
Prepaid expenses  
(44,890
)
  
(39,943
)
Depreciation  
(105,369
)
  
(172,010
)
Operating lease right-of-use assets  
(893,892
)
  
(131,008
)
Noncurrent deferred tax liabilities  
(1,044,151
)
  
(342,961
)
Total noncurrent deferred tax assets, net 
$
6,350,830
  
$
-
 

A reconciliationThe following are reconciliations between expected income taxes, computed at the applicable statutory federal income tax rate of 21% applied to pretax accounting loss, and the income tax net expense included in the consolidated statements of operationsbenefit (expense) for the years ended December 31, 2017 and 2016 is as follows:periods presented:

  Year Ended December 31, 
  2017  2016 
Anticipated income tax benefit at statutory rate $144,795  $1,534,176 
State income tax expense, net of federal tax effect  (54,083)  (9,350)
Federal income tax effect of change in tax rate  (518,974)  - 
Income tax effect of uncertain tax positions  (17,946)  (8,896)
Return to provision adjustments  2,982   (23,070)
Stock-based compensation  (36,233)  (110,066)
Other changes in deferred income tax assets, net  (437)  (13,118)
Decrease (increase) in valuation allowance  452,287   (1,383,156)
Income tax net expense $(27,609) $(13,480)
  Year Ended June 30, 
  2021  2020 
Anticipated income tax (expense) benefit at statutory rate 
$
(1,360,452
)
 
$
1,293,673
 
State income tax (expense) benefit, net of federal tax effect  
(84,288
)
  
64,034
 
Income tax effect of uncertain tax positions  
(1,468
)
  
17,508
 
Return to provision adjustments  
(45
)
  
1
 
Stock-based compensation  
38,197
   
(31,195
)
PPP Loan forgiveness  
202,729
   
-
 
Other changes in deferred income tax assets, net  
1,348
   
(114,288
)
Decrease (Increase) in valuation allowance  
7,536,400
   
(1,231,466
)
Income tax net benefit (expense) 
$
6,332,421
  
$
(1,733
)

64The Company’s statutory tax rate as of June 30, 2021 is 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. The Company’s statutory tax rate as of the fiscal year ended June 30, 2020 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.

As of each reporting date, management considers new evidence, both positive and negative, that could impact its view with regard to future realization of available deferred tax assets. As of December 31, 2017the fiscal year ended June 30, 2020, the Company did not recognize an income tax benefit for any of its deferred tax assets, primarily related to net operating loss carryforwards and December 31, 2016, the Company’s inventory valuation reserves, because management determined that sufficient negative evidence continued to exist to conclude it was uncertain that the Company would have sufficient future taxable income to utilize its deferred tax assets.

However, as of June 30, 2021, cumulative positive taxable income over the last three tax years had been generated in the U.S., as compared to the negative evidence of cumulative losses in previous years. The Company’s management also determined that its expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant management estimates and therefore,assumptions, would be sufficient to result in full utilization of the Company maintainedCompany’s federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, the Company’s management determined that sufficient positive evidence exists as of June 30, 2021, to conclude that it is more likely than not deferred tax assets of approximately $6.35 million are realizable, and it reduced the Company’s valuation allowance accordingly. The reduction of the valuation allowances against these deferred tax assets was the main driver of the income tax benefit during the fiscal year ended June 30, 2021 of approximately $6.33 million. A valuation allowance remains against certain deferred tax assets primarily relating to state net operating loss carryforwards from the Company’s e-commerce subsidiary due to the timing uncertainty of when it will generate positive taxable income to utilize the associated deferred tax assets. In addition, as detailed below, a valuation allowance also remains against itscertain deferred tax assets.assets relating to operating loss carryforwards relating to the Company’s dormant subsidiary located in Hong Kong.

As of December 31, 2017,June 30, 2021, all of the Company had approximately $884,000 ofCompany’s remaining federal income tax credits $533,000 of which expire between 2018had expired or been utilized, and 2021 and the balance without an expiration, which cantherefore, are not available to be carried forward to offset future income taxes. As of December 31, 2017,June 30, 2021 and 2020, the Company had federal tax net operating loss carryforwards under U.S. GAAP of approximately $24.59$19.00 million and $23.72 million, respectively, expiring between 20202034 and 2036,2037, or that have no expiration, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $20.22$19.87 million and  $20.12 million, respectively, expiring between 2023 and 2032;2035; and various other state tax net operating loss carryforwards expiring between 20212023 and 2036,2040, which can be used to offset against future state taxable income.

As of December 31, 2017,each of June 30, 2021 and 2020, there was approximately $6.03 million in net operating loss carryforwards in Hong Kong. In accordance with the Hong Kong tax code, these amounts can be carried forward indefinitely to offset future taxable income in Hong Kong. The Company’s deferred tax assets in Hong Kong were fully reserved with a valuation allowance of $996,000 as of December 31, 2017each of June 30, 2021 and 20162020, and had been fully reserved in all prior fiscal periods due to the uncertainty of future taxable income in this jurisdiction to utilize the deferred tax assets. Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was re-activatedentered into dormancy as of September 30, 2020, following its re-activation in December 2017, but2017. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 and has had no operating activity during the year ended December 31, 2017, previously ceased operations during 2008 and became a dormant entity during 2009.since 2008. If the Company uses any portion of its deferred tax assets in future periods, the valuation allowance would need to be reversed and may impact the Company’s future operating results.

Pursuant to provisions of the CARES Act, existing AMT credit carryforwards were eligible for acceleration and refundable AMT credits were to be completely refunded to companies for taxable years beginning in 2019, or by election, taxable years beginning in 2018. Accordingly, during the fiscal year ended June 30, 2020, the Company elected to have its AMT credit in the amount of approximately $270,000 refunded and filed a refund claim with the IRS for the remaining AMT tax credit. Consequently, the full amount of the Company’s AMT credit refund was refunded by the IRS during the fiscal year ended June 30, 2021.

The Company continues to monitor future developments and interpretations of the CARES Act and other federal and state legislative actions for any material impacts on its future results of operations, financial position, and liquidity.

Uncertain Tax Positions

The gross liability for income taxes associated with uncertain tax positions at December 31, 2017June 30, 2021 and June 30, 2020, was approximately $560,000. This amount is shown net of approximately $98,000 recorded as a direct reduction to the associated deferred tax asset.$10,000 and $8,000, respectively. The gross liability, if recognized, would favorably affect the Company’s effective tax rate.

The Company’s policy for recording interest and penalties associated with tax audits is to record such items as a component of the provision for income taxes. The Company accrued approximately $28,000 and $13,000$2,000 of interest and penalties associated with uncertain tax positions for each of the fiscal years ended December 31, 2017June 30, 2021 and 2016, respectively.2020. Including the interest and penalties recorded for uncertain tax positions, there is a total of approximately $193,000$7,000 and $165,000$5,000 of interest and penalties included in the accrued income tax liability for uncertain tax positions as of December 31, 2017June 30, 2021 and 2016,2020, respectively. To the extent interest and penalties are not ultimately incurred with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

In all of the significant federal and state jurisdictions where it is required to file income tax returns, the Company has analyzed filing positions for all tax years in which the statute of limitations is open. The only periods subject to examination by the major tax jurisdictions where the Company does business are the 2013tax years ended December 31, 2016 through 2016 tax years.June 30, 2020. The Company does not believe that the outcome of any examination will have a material impact on its consolidated financial statements and does not expect settlement on any uncertain tax positions within the next 12 months.
The following summarizes Beginning with the activity related to the Company’s gross liability for uncertain tax positions from January 1, 2016 through December 31, 2017:
Balance as of January 1, 2016 $519,284 
Increases related to prior year tax positions  13,480 
Balance as of December 31, 2016  532,764 
Increases related to prior year tax positions  27,609 
Balance as of December 31, 2017 $560,373 
13.DISCONTINUED OPERATIONS
In March 2016, the Company and Charles & Colvard Direct, LLC (“Direct”) a wholly owned subsidiary of the Company, entered into an asset purchase agreement (the “Purchase Agreement”) with Yanbal, pursuant to which Yanbal agreed to purchase certain assets of Direct (the “Transferred Assets”). The transactions contemplated by the Purchase Agreement closed on March 4, 2016 (the “Closing Date”). The Company made the decision to divest of these assets after careful analysis and the sale of these assets represented a strategic shift that resulted in a significant favorable impact ontransition period ended June 30, 2018, the Company’s operations and financial results.tax year conforms with its fiscal accounting period year ending on June 30 of each year.

Pursuant to the terms of the Purchase Agreement, the Transferred Assets included, among other things, (i) an inventory credit usable towards certain inventory as of the Closing Date, (ii) all existing marketing collateral for Direct’s jewelry offered under the “Lulu Avenue” trademarks as of the Closing Date, (iii) certain assigned contracts, (iv) style advisor and customer lists, and (v) all intellectual property rights owned by the Company and Direct and used solely in connection with the operation of Direct’s direct-to-consumer home party business for the sale of fashion jewelry and related products and services in the U.S., excluding Lulu Avenue-related intellectual property. The inventory credit and an exclusive, nontransferable license to use the Lulu Avenue-related intellectual property that was also granted to Yanbal on the Closing Date expired on July 31, 2016. After the Closing Date, the Company and Direct may no longer engage in the direct-to-consumer home party business and may not solicit style advisors or customers of the direct-to-consumer home party business. The Company had also agreed to provide to Yanbal certain transition services, which services ended August 31, 2016.

The purchase price for the Transferred Assets was $500,000 with selling expenses of approximately $131,000, resulting in a net purchase price of approximately $369,000. The Company recorded a liability associated with $35,000 of expense related to certain style advisor incentives and reduced prepaid expenses by $60,000 related to contracts acquired by Yanbal.
There were no assets or liabilities related to the Company’s discontinued operations as of December 31, 2016 or 2017. Further, there were no transactions related to discontinued operations during the year ended December 31, 2017.

The following table presents the major classes of line items constituting pretax loss from discontinued operations during the year ended December 31, 2016:

Net sales $804,585 
Costs and expenses:    
Cost of goods sold  276,100 
Sales and marketing  940,685 
General and administrative  173,913 
Interest expense  11 
Total costs and expenses  1,390,709 
Loss from discontinued operations  (586,124)
Other income:    
Gain on sale of long-term assets  12,398 
Total other income, net  12,398 
Pretax loss from discontinued operations $(573,726)
14.MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

At times, a portion of the Company’s accounts receivable will be due from customers that have individual balances of 10% or more of the Company’s total gross accounts receivable.

The following is a summary of customers that represent greater than or equal to 10% of total gross accounts receivable:receivable as of the dates presented:

 June 30, 
 
December 31,
2017
  
December 31,
2016
  2021  2020 
Customer A  12%  16%  30%  26%
Customer B  18%  *%  22%  14%
        
* Customer B did not have individual balances that represented 10% or more of total gross accounts receivable as of December 31, 2016.
Customer C
  14%  13%

A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent greater than or equal to 10% of total net sales:sales for the periods presented:

  Year Ended December 31, 
  2017  2016 
Customer C  21%  17%
Customer D  *%  23%
         
* Customer D did not have net sales that represented 10% or more of total net sales for the year ended December 31, 2017.      
  Year Ended June 30, 
  2021  2020 
Customer A  13%  12%
Customer B  12%  13%

The Company records its sales returnreturns allowance at the corporate level based on several factors including historical sales return activity and specific allowances for known customer returns.

15.EMPLOYEE BENEFIT PLAN

All full-time employees who meet certain age and length of service requirements are eligible to participate in and receive benefits from the Company’s 401(k) Plan. This plan provides for matching contributions by the Company in such amounts as the Board of Directors may annually determine, as well as a 401(k) option under which eligible participants may defer a portion of their salaries. The Company contributed a total of $64,000$72,000 and $102,000$82,000 to thisits employee benefit defined contribution plan during the fiscal years ended December 31, 2017June 30, 2021 and 2016,2020, respectively.

16.SUBSEQUENT EVENT

On January 30, 2018,July 12, 2021, the Compensation CommitteeCompany obtained a cash collateralized $5.00 million line of credit facility with JPMorgan Chase Bank, N.A. See Note 11, “Debt”, for a more detailed description of the Board of Directors of the Company modified the awards granted under the Charles & Colvard, Ltd. 2017 Senior Management Equity Incentive Program, or the 2017 Program, to reflect a 75% achievement level of the Company Measures, as defined in the 2017 Program. In addition, the Compensation Committee modified the awards from wholly restricted stock awards to awards consisting of 70% restricted stock and 30% cash in lieu of restricted stock. As a result, the Compensation Committee approved the following combined modified awards for the Company’s named executive officers: cash payments totaling approximately $109,000 and total combined restrictions lapsed on approximately 183,000 of the 300,000 total shares of the named executive officers’ original restricted stock awards. The remainder of the original awards of restricted stock was forfeited.credit facility.

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.
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 December 31, 2017.June 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or 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 December 31, 2017,June 30, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting even though a segment of our corporate headquarters employees continue working a hybrid of remote and in-person schedules due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of COVID-19 on our internal control over financial reporting to minimize the impact on its design and operating effectiveness. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended December 31, 2017,June 30, 2021, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:


(i)(i)
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 

(ii)(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 

(iii)(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and the preparation of financial statements.

In making the assessment of internal control over financial reporting, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission, (“COSO”)or COSO, in Internal Control-Integrated Framework (2013). Based on that assessment and those criteria, management determined that our internal control over financial reporting was effective as of December 31, 2017.June 30, 2021.

Item 9B.
Other Information

Annual Meeting DateNone.

Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

In connection with the change in our fiscal year-end, our Board of Directors has scheduled our 2018 Annual Meeting of Shareholders, or the 2018 Annual Meeting, to be held on Thursday, November 8, 2018. The record date, time, and location of the 2018 Annual Meeting will be as set forth in our proxy statement for the 2018 Annual Meeting.Not applicable.

The 2018 Annual Meeting is being held more than 30 days after the anniversary of our most recent annual meeting of shareholders, which was held on May 17, 2017. As a result, we have set a new deadline for the receipt of any shareholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act for inclusion in our proxy materials for the 2018 Annual Meeting. The new deadline for the submission of such shareholder proposals is the close of business on June 11, 2018.

In addition, if a shareholder desires to make a proposal from the floor during the 2018 Annual Meeting, even if such proposal is not to be included in our proxy statement, our Bylaws provide that the shareholder must deliver or mail timely written notice of the proposal, or the Shareholder Notice, to our Corporate Secretary. In accordance with the Bylaws, if the corresponding date on which notice of the annual meeting is sent to shareholders of record is delayed by more than 60 days from the one-year anniversary of the previous year’s annual meeting of shareholders, the Shareholder Notice to be timely must be received by the Corporate Secretary no earlier than the 90th day prior to such annual meeting and not later than the 60th day prior to such annual meeting. Accordingly, a Shareholder Notice will be considered timely if it is delivered or mailed to and received at our principal executive office between August 10, 2018 and September 9, 2018.
PART III

Item 10.
Directors, Executive Officers and Corporate Governance

Directors

Our Bylaws currently provide that the Board of Directors shall consist of not less than five nor more than 10 members and that at any time that it consists of nine or more members, the terms shall be staggered. The six members of the Board named below will continue to serve on the Board until the 2018 Annual Meeting of Shareholders or until his or her successor is elected and qualified, or until his or her death, resignation, removal, or disqualification or until there is a decrease in the number of directors. The age and a brief biographical description of each director nominee are set forth below.

NameAgePosition(s) with Charles & Colvard, Ltd.Director Since
Neal I. Goldman73Chairman of the BoardJune 2014
Anne M. Butler69DirectorJune 2012
Benedetta Casamento51DirectorMay 2017
Jaqui Lividini56DirectorAugust 2015
Suzanne Miglucci57Director, President and Chief Executive OfficerAugust 2015
Ollin B. Sykes66DirectorMay 2008

Neal I. Goldman has served as a director of our company since June 2014, as Executive Chairman of the Board from January 2015 until August 2017, and as Chairman of the Board since August 2017. Mr. Goldman has served as President of Goldman Capital Management, Inc., an investment advisory firm, since he founded the firm in 1985. Prior to that, Mr. Goldman was an analyst and portfolio manager at Shearson/American Express Inc. Mr. Goldman served on the Board of Directors of Blyth, Inc. (NYSE: BTH), a multi-channel company focused on the direct-to-consumer market, and includes in its portfolio two direct sales companies, PartyLite Gifts, Inc., or PartyLite, and ViSalus Sciences. Since August 2012, Mr. Goldman has served on the Board of Imageware Systems, Inc. (OTCQB: IWSY), a leading company in the emerging market for biometrically enabled software-based identity management solutions. Our Board has determined that Mr. Goldman’s extensive experience with the investment advisory industry, including his service as President of Goldman Capital Management, Inc., qualifies him to serve on the Board of Directors.

Anne M. Butler has served as a director of our company since June 2012. As a leading executive in the direct selling industry, Ms. Butler has successfully run global businesses for Avon Products, Inc., or Avon, Aloette Cosmetics, Mary Kay Cosmetics, Inc., or Mary Kay, and PartyLite. She currently serves as a Director of AdvoCare International. Ms. Butler started her career with Avon, where she held a variety of progressive assignments across marketing, sales, new market expansion, and new business development while serving as Director of Marketing in Spain, Vice President of Avon Fashions in Brazil, and as General Manager, Avon Fashions for Continental Europe. At Mary Kay, Ms. Butler served as President of the Western and Central Europe business and subsequently successfully expanded the European business at PartyLite where she advanced to President, PartyLite International. Ms. Butler was appointed Worldwide President of PartyLite in May 2007, a position she held until January 2012. Since then, Ms. Butler has served as CEO of Butler Advisors, a consulting firm specializing in strategic and operational advising to private equity, venture capital, and institutional investors on direct selling acquisitions and management. She also served on the Board of ViSalus Sciences, the weight loss and fitness direct sales subsidiary of Blyth, Inc. Our Board has determined that Ms. Butler’s leadership in several public companies, as well as her background in marketing and global operations, qualifies her to serve on the Board of Directors.

Benedetta Casamento has served as a director of our company since May 2017. Since August 2017, Ms. Casamento has served as a Retail Consultant to various businesses. Ms. Casamento previously served as Chairman and President of Allyke, Inc., an artificial intelligence company creating digital imagery insights for retail and other industries, from June 2016 to August 2017. From December 2014 to April 2016, she served as Chief Executive Officer of Calypso St. Barth, a luxury boutique retailer of women’s apparel and accessories. Prior to her role at Calypso St. Barth, Ms. Casamento served as Executive Vice President, Finance & Operations of The Talbots, Inc., or Talbots, a specialty retailer and direct marketer of women’s apparel, accessories, and shoes, from March 2009 to July 2012. Prior to joining Talbots, Ms. Casamento served in various leadership roles within Liz Claiborne Inc. from February 1999 to November 2008, culminating in her position as President of Liz Claiborne Brands. Ms. Casamento started her career at Saks Fifth Avenue. Our Board has determined that Ms. Casamento’s extensive fashion and retail experience, as well as her background in accounting and finance, qualifies her to serve on the Board of Directors.
Jaqui Lividini has served as a director of our company since August 2015. Ms. Lividini has served as Chief Executive Officer and Founding Partner of Lividini & Co., a brand strategy company that specializes in brand development and marketplace positioning, engagement marketing, and retail strategy, since May 2005. Previously, Ms. Lividini served as Senior Vice President Fashion Merchandising & Communications at Saks Fifth Avenue from May 1999 to August 2004. Ms. Lividini also serves as Chairman of the Board of Women In Need, Inc., a non-profit organization that provides housing, programs, and critical services to New York City’s homeless mothers and their children, and serves on the Board of Trustees of the Fashion Institute of Technology, an internationally recognized college for fashion, design, art, communications, and business. Our Board has determined that Ms. Lividini’s years of brand marketing experience in the fashion, retail, and luxury industries qualify her to serve on the Board of Directors.

Suzanne Miglucci has served as our President and Chief Executive Officer since December 2015 and as a director of our company since August 2015.  Prior to joining us, Ms. Miglucci served as Chief Marketing Officer of ChannelAdvisor Corporation, or ChannelAdvisor, an e-commerce software-as-a-service solution provider, from June 2012 to November 2015, where she oversaw marketing, product management, client services, and business operations. Prior to joining ChannelAdvisor, Ms. Miglucci served as Senior Director, Global Procurement Solution Marketing, at SAP, a worldwide leader of Enterprise Resource Planning solutions, from November 2010 to March 2012. Prior to her time at SAP, Ms. Miglucci served as a Strategic Marketing Consultant for Miglucci on Marketing, LLC, a marketing consultant company, from January 2010 to November 2010. Ms. Miglucci has also held executive positions at SciQuest, Inc., MicroMass Communications, and Arsenal Digital Solutions. Our Board has determined that Ms. Miglucci’s extensive marketing background working with public and private technology companies, particularly with global footprints, qualify her to serve on the Board of Directors.

Ollin B. Sykes has served as a director of our company since May 2008. Since 1984, he has served as the President of Sykes & Company, P.A., a regional accounting firm specializing in accounting, tax, and financial advisory services. Mr. Sykes earned his Bachelor of Science degree in accounting at Mars Hill College and is a Certified Public Accountant, a Certified Information Technology Professional, and a Certified Management Accountant. Mr. Sykes served as a director of Hampton Roads Bankshares, Inc. (Nasdaq: HMPR), a financial holding company operating in North Carolina, Maryland eastern shore, and Virginia, from December 2008 until December 31, 2010. He also served as a director of Bank of Hampton Roads, a wholly owned subsidiary of Hampton Roads Bankshares, Inc. from January 2011 to June 2017. Our Board has determined that Mr. Sykes’s background in accounting and finance and his accounting certifications qualify him to serve on the Board of Directors.

Executive Officers

Certain information regarding our executive officers is set forth below. Executive officers are appointed by the Board of Directors to hold office until their successors are duly appointed and qualified, or until their resignation, retirement, death, removal, or disqualification. Information regarding Ms. Miglucci is included in the director nominee profiles set forth above.

NameAgeTitleExecutive Officer Since
Suzanne Miglucci57President and Chief Executive OfficerDecember 2015
Clint J. Pete56Chief Financial Officer and TreasurerDecember 2016
Don O’Connell52Chief Operating Officer and Senior Vice President, Supply ChainMay 2017

Clint J. Pete was appointed as our Chief Financial Officer on May 23, 2017. Mr. Pete previously served as our Interim Chief Financial Officer from December 2016 to May 2017 and as our Corporate Controller from June 2016 to December 2016. Prior to joining our company, Mr. Pete most recently served as Director of Business Planning for Oracle Corporation, a cloud application company, from June 2013 to May 2016.  Prior to his employment with Oracle Corporation, Mr. Pete served as Business Unit Controller, Global Signaling Solutions of Tekelec, a telecommunications company, from May 2011 to May 2013. At Tekelec, Mr. Pete also previously served as Global Revenue Controller. Prior to his employment with Tekelec, Mr. Pete served as Vice President of Finance and Controllers at Qualex Inc., a Kodak company. Before joining Qualex Inc., Mr. Pete held various management positions at Ernst & Young, LLP, an international public accounting firm. Mr. Pete holds a Bachelor of Business Administration degree in Accounting and Finance from Texas Tech University and is a Certified Public Accountant.
Don O’Connell was appointed as our Chief Operating Officer and Senior Vice President, Supply Chain on May 23, 2017. Mr. O’Connell previously served as our Senior Vice President, Supply Chain & Distribution from March 2016 to May 2017. Prior to joining our company, Mr. O’Connell served as Executive Vice President Operations & Global Jewelry Business Solutions at OFT Investment & Management Group, a fine jewelry solutions and services group, from February 2012 to March 2016. Prior to his employment with OFT Investment Management Group, Mr. O’Connell spent seven years with the Richline Group, LLC, a wholly owned subsidiary of Berkshire Hathaway, as Vice President, Operations & Procurement, both Foreign & Domestic. Prior to that, he was Vice President, Operations at Aurafin’s gem group division in Taramac, FL and La Paz, Bolivia as well as Vice President, Manufacturing & Contracting with OCON Enterprise.

Audit Committee and Audit Committee Financial Experts

The Board of Directors has a standing Audit Committee, which is currently composed of Mr. Sykes (Chairperson), Ms. Butler, Ms. Casamento, and Mr. Goldman. The Board of Directors has determined that Mr. Sykes, Ms. Casamento and Mr. Goldman are “audit committee financial experts” as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC.

Codes of Conduct

The Board of Directors has adopted two separate codes of conduct: a Code of Ethics for Senior Financial Officers that applies to persons holding the offices of the Chief Executive Officer, Chief Financial Officer, Treasurer, and Principal Accounting Officer of our company, and a Code of Business Conduct and Ethics that applies to all of our officers, directors, agents, and representatives (including consultants, advisors, and independent contractors). Each code is available on our website at http://ir.charlesandcolvard.com/governance. We intend to satisfy the disclosure requirement regarding any material amendment to a provision of either code that applies to the Chief Executive Officer, Chief Financial Officer, Treasurer, and Principal Accounting Officer by posting such information on our website. Any amendments or waivers of either code for any executive officer or director must be approved by the Board and will be publicly disclosed either by posting such amendment or waiver on our website at http://ir.charlesandcolvard.comor by filing a Form 8-K with the SEC, along with the reasons for the waiver, if applicable.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and certain officers and persons who own more than 10% of our outstanding shares of common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. As a practical matter, we assist our directors and officers by completing and filing Section 16(a) reports on their behalf based on information they provide to us. Based solely on a review of the reports that were filed and written representations that such reports accurately reflect all reportable transactions and holdings, we believe that all forms required to be filed by Section 16(a) during 2017 were filed on a timely basis, except that Anne M. Butler, Jaqui Lividini, Neal I. Goldman, and Ollin B. Sykes, each a director of our company, failed to timely file a Form 4 with respect to one transaction, and Don O’Connell, our Chief Operating Officer and Senior Vice President, Supply Chain, failed to timely file a Form 4 with respect to two transactions.
Item 11.
Executive Compensation

The following tables and narrative discussion summarize the compensation we paid for services in all capacities rendered to us during the years ended December 31, 2017 and 2016 by our principal executive officer and all other “named executive officers” during fiscal 2017.

Summary Compensation Table
Name and Principal
Position
Year Salary ($)  
Stock
Awards ($)(1)
  
Option
Awards
($)(1)
  
Non-Equity
Incentive Plan
Compensation
($)
  
All Other
Compensation
($)
  Total ($) 
Suzanne Miglucci2017 $335,000  $166,875
(2) 
 $-  $-  $18,261
(3) 
 $520,136 
President and Chief Executive Officer2016  347,885   136,500
(4) 
  -   -   17,691
(5) 
  502,076 
Clint J. Pete2017  221,696   83,438
(7) 
  52,315   14,028
(8) 
  4,187
(9) 
  375,664 
Chief Financial Officer and Treasurer(6)
2016  99,718   -   14,047   -   -   113,765 
Don O’Connell, Chief Operating Officer and Senior Vice President, Supply Chain(10)
2017  251,923   83,438
(11) 
  52,315   -   6,210
(12) 
  393,886 
(1)The amounts shown in these columns reflect the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 718, Compensation – Stock Compensation, or ASC Topic 718, of the restricted stock awards or option awards, as applicable, granted to each of our named executive officers. The assumptions made in determining these values are set forth in Note 11 to our consolidated financial statements.

(2)
Pursuant to ASC Topic 718, the aggregate grant date fair value of this performance-based award to Ms. Miglucci was $166,875 assuming that the highest level of performance conditions had been achieved.

(3)Includes $18,261 of long-term disability insurance and life insurance premiums.

(4)
Pursuant to ASC Topic 718, the aggregate grant date fair value of this performance-based award to Ms. Miglucci was $136,500 assuming that the highest level of performance conditions had been achieved.

(5)Includes $17,691 of long-term disability insurance and life insurance premiums.

(6)Mr. Pete joined our company as Corporate Controller on June 6, 2016, was appointed as our Interim Chief Financial Officer effective December 2, 2016, and was appointed as our Chief Financial Officer effective May 23, 2017.

(7)Pursuant to ASC Topic 718, the aggregate grant date fair value of this performance-based award to Mr. Pete was $83,438 assuming that the highest level of performance conditions had been achieved.

(8)Mr. Pete was paid a cash bonus in recognition of his performance as our Corporate Controller in 2016 against pre-established performance measures before he became our principal financial officer.

(9)Includes $4,187 of long-term disability insurance and life insurance premiums.

(10)Mr. O’Connell joined our company as Senior Vice President, Supply Chain & Distribution on March 1, 2016 and was appointed as our Chief Operating Officer and Senior Vice President, Supply Chain effective May 23, 2017.

(11)
Pursuant to ASC Topic 718, the aggregate grant date fair value of this performance-based award to Mr. O’Connell was $83,438 assuming that the highest level of performance conditions had been achieved.

(12)Includes $4,926 of 401(k) employer matching contributions and $1,284 of long-term disability insurance and life insurance premiums.
Agreements Involving Named Executive Officers

Suzanne Miglucci

In connection with Suzanne Miglucci’s appointment as President and Chief Executive Officer, we entered into an employment agreement with Ms. Miglucci, effective as of December 1, 2015, with a term of one year that renews automatically on an annual basis. Under the terms of the employment agreement, Ms. Miglucci received a signing bonus of $75,000 in December 2015 and received an initial annual base salary of $335,000. Ms. Miglucci also is entitled to receive such benefits as are made available to our other similarly-situated executive employees, including, but not limited to, life, medical, and disability insurance, as well as retirement benefits.

In addition, Ms. Miglucci received, on the effective date of the employment agreement, an initial stock option to purchase 300,000 shares of our common stock. The award vested over a two-year period, with 50% of the option award vesting on the grant date and an additional 25% of the option award vesting on each of the following two anniversaries of the grant date provided Ms. Miglucci remained continuously employed with us through each anniversary.

Pursuant to the employment agreement, if Ms. Miglucci’s employment is terminated by us without cause (as defined in the employment agreement) Ms. Miglucci will continue to receive her base salary at the time of termination for a period of one year from such termination, or the Termination Compensation, so long as she complies with certain covenants in the employment agreement. If we experience a change of control (as defined in the employment agreement), Ms. Miglucci may voluntarily terminate her employment for good reason (as defined in the employment agreement) within six months after such change of control and be entitled to the Termination Compensation. During her employment with us and for a period of one year following termination of her employment, Ms. Miglucci is prohibited from competing with us or attempting to solicit our customers or employees.

Clint J. Pete

In connection with Clint Pete’s appointment as Chief Financial Officer and Treasurer, we entered into an employment agreement with Mr. Pete, effective as of May 23, 2017, with a term of one year that renews automatically on an annual basis. Under the terms of the employment agreement, Mr. Pete received an initial annual base salary of $240,000. Mr. Pete also is entitled to receive such benefits as are made available to our other similarly-situated executive employees, including, but not limited to, life, medical, and disability insurance, as well as retirement benefits.

In addition, Mr. Pete received, on the effective date of the employment agreement, a stock option to purchase 100,000 shares of our common stock. The award vests over a three-year period, with 25% of the option award vesting six months after the grant date and an additional 25% of the option award vesting on each of the following three anniversaries of the grant date provided Mr. Pete remains continuously employed with us through each anniversary.

Pursuant to the employment agreement, if we experience a change of control (as defined in the employment agreement), and Mr. Pete’s employment is terminated within six months after such change of control by us without cause (as defined in the employment agreement) or by Mr. Pete for good reason (as defined in the employment agreement), Mr. Pete will continue to receive his base salary at the time of termination for a period of one year from such termination, so long as he complies with certain covenants in the employment agreement. In addition, Mr. Pete is entitled to receive six months of his base salary in the event we terminate him without cause not occurring within six months following a change of control or if the term of the employment agreement expires following our notice of non-renewal, so long as he complies with certain covenants in the employment agreement. We also agreed to accelerate the vesting of all outstanding unvested equity awards held by Mr. Pete upon the occurrence of a change of control or termination without cause not occurring within six months following a change of control, so long as he complies with certain covenants in the employment agreement. During Mr. Pete’s employment with us and for a period of one year following termination of his employment, Mr. Pete is prohibited from competing with us or attempting to solicit our customers or employees.
Don O’Connell

In connection with Don O’Connell’s appointment as Chief Operating Officer and Senior Vice President, Supply Chain, we entered into an employment agreement with Mr. O’Connell, effective as of May 23, 2017, with a term of one year that renews automatically on an annual basis. Under the terms of the employment agreement, Mr. O’Connell received an initial annual base salary of $275,000. Mr. O’Connell also is entitled to receive such benefits as are made available to our other similarly-situated executive employees, including, but not limited to, life, medical, and disability insurance, as well as retirement benefits.

In addition, Mr. O’Connell received, on the effective date of the employment agreement, a stock option to purchase 100,000 shares of our common stock. The award vests over a three-year period, with 25% of the option award vesting six months after the grant date and an additional 25% of the option award vesting on each of the following three anniversaries of the grant date provided Mr. O’Connell remains continuously employed with us through each anniversary.

Pursuant to the employment agreement, if we experience a change of control (as defined in the employment agreement), and Mr. O’Connell’s employment is terminated within six months after such change of control by us without cause (as defined in the employment agreement) or by Mr. O’Connell for good reason (as defined in the employment agreement), Mr. O’Connell will continue to receive his base salary at the time of termination for a period of one year from such termination, so long as he complies with certain covenants in the employment agreement. In addition, Mr. O’Connell is entitled to receive six months of his base salary in the event we terminate him without cause not occurring within six months following a change of control or if the term of the employment agreement expires following our notice of non-renewal, so long as he complies with certain covenants in the employment agreement. We also agreed to accelerate the vesting of all outstanding unvested equity awards held by Mr. O’Connell upon the occurrence of a change of control or termination without cause not occurring within six months following a change of control, so long as he complies with certain covenants in the employment agreement. During Mr. O’Connell’s employment with us and for a period of one year following termination of his employment, Mr. O’Connell is prohibited from competing with us or attempting to solicit our customers or employees.

Termination and Change of Control Arrangements

As discussed above in “Agreements Involving Named Executive Officers,” we have entered into agreements with certain of our named executive officers that provide for payments and benefits under specified circumstances to such named executive officers upon termination of employment and/or if we experience a change of control. In addition, the Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended, or the 2008 Plan, provides for adjustments to or accelerated vesting of equity awards under specified circumstances, as described below.

The 2008 Plan provides that, in the event of a change of control of our company (as defined in the 2008 Plan), the Compensation Committee (taking into account any Internal Revenue Code Section 409A considerations) has sole discretion to determine the effect, if any, on an award, including, but not limited to, the vesting, earning, and/or exercisability of an award. The Compensation Committee’s discretion includes, but is not limited to, the determination that an award will vest, be earned, or become exercisable in whole or in part (and discretion to determine that exercise of an award must occur, if at all, within time period(s) specified by the Compensation Committee, after which time period(s) the award will, unless the Compensation Committee determines otherwise, terminate), will be assumed or substituted for another award, will be cancelled without the payment of consideration, will be cancelled in exchange for a cash payment or other consideration, and/or that other actions (or no action) will be taken with respect to the award. The Compensation Committee also has discretion to determine that acceleration or any other effect of a change of control on an award will be subject to both the occurrence of a change of control event and termination of employment or service of the participant. Any such determination of the Compensation Committee may be, but is not required to be, stated in an individual award agreement.

2017 Senior Management Equity Incentive Program

On February 23, 2017, the Compensation Committee approved the Charles & Colvard, Ltd. 2017 Senior Management Equity Incentive Program, or the 2017 Program, with effect as of January 1, 2017. The 2017 Program supersedes and replaces all prior management incentive plans or programs.
The 2017 Program provides a long-term incentive opportunity for our executive officers and vice presidents, or the Eligible Employees, through grants of restricted stock awards with both performance and service measures. Achievement of an Eligible Employee’s performance measures will be measured by the Compensation Committee as follows: (i) 50% of each restricted stock award will be based on the achievement of shared company goals regarding revenue, EBITDA, and departmental budgets, or the Company Measures, and (ii) 50% of each restricted stock award will be based on the achievement of individual performance goals, or the Personal Measures, both for the period from January 1, 2017 to December 31, 2017. We must achieve 100% of the Company Measures in order for 50% vesting of the restricted stock award. For the remaining 50% vesting of the restricted stock award, an Eligible Employee may achieve from 0% to 100% of his or her Personal Measures, and 50% of the amount of his or her restricted stock award will be reduced by any performance that is measured below 100% accordingly. If certain EBITDA or revenue thresholds are not achieved, 100% of the restricted stock awards will be forfeited. The Personal Measures and Company Measures are determined by the Compensation Committee and may be modified by the Compensation Committee to reflect certain types of events as permitted by the 2008 Plan. In addition, an Eligible Employee must remain in continuous service until February 23, 2018 for restrictions to fully lapse.

Under the 2017 Program, the Compensation Committee granted the Chief Executive Officer 150,000 shares of restricted stock, each of the Chief Financial Officer and the Senior Vice President, Supply Chain & Distribution 75,000 shares of restricted stock, and each Vice President 35,000 shares of restricted stock. The 2017 Program also provides the Compensation Committee discretion to make additional equity compensation awards above the target award level in recognition of extraordinary performance. All awards granted pursuant to the 2017 Program are issued under and pursuant to the 2008 Plan and subject to the terms of our standard performance-based restricted stock award agreement.

On January 30, 2018, the Compensation Committee reviewed preliminary 2017 corporate performance and determined the achievement levels of the performance goals under the 2017 Program. The Compensation Committee exercised its discretion, as permitted by the 2017 Program, to deem the threshold level to have been achieved, even though the Company’s shared revenue goal was not achieved at the stretch threshold level due to a mid-year shift in focus towards financial profitability. The Compensation Committee modified the awards granted under the 2017 Program to reflect a 75% achievement level of the Company Measures. In addition, the Compensation Committee modified the awards from wholly restricted stock awards to awards consisting of 70% restricted stock and 30% cash in lieu of restricted stock. As a result, the Compensation Committee approved the following modified awards for our named executive officers: (i) Suzanne Miglucci received a cash payment of $55,125 and restrictions lapsed on 91,875 of the 150,000 shares of her original restricted stock award; (ii) Clint Pete received a cash payment of $26,750 and restrictions lapsed on 44,642 of the 75,000 shares of his original restricted stock award; and (iii) Don O’Connell received a cash payment of $27,500 and restrictions lapsed on 45,982 of the 75,000 shares of his original restricted stock award. The remainder of the original awards of restricted stock was forfeited.
Outstanding Equity Awards at 2017 Fiscal Year-End

    Option AwardsStock Awards 
NameGrant Date 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  
Option
Exercise
Price ($)
 
Option
Expiration
Date
Number of
shares or
units of
stock that
have not
vested (#)
Market
value of
shares or
units of
stock that
have not
vested ($)(1)
 
Equity
incentive
plan awards:
Number of
unearned
shares, units
or other
rights that
have not
vested
(#)
  
Equity
incentive
plan
awards:
Market or
payout
value of
unearned
shares, units
or other
rights that
have not
vested
($)(1)
 
Suzanne Miglucci8/18/2015  30,991   -  $1.21 8/18/2025        
 12/1/2015  300,000   -   1.21 12/1/2025        
 2/23/2017                 150,000
(2) 
  202,500 
                         
Clint J. Pete8/23/2016  5,000   15,000
(3) 
  1.29 8/23/2026          
 2/23/2017                 75,000
(2) 
  101,250 
 5/23/2017  25,000   75,000
(4) 
     5/23/2027          
                         
Don O’Connell3/15/2016  25,000   25,000
(5) 
     3/15/2026          
 2/23/2017                 75,000
(2) 
  101,250 
 5/23/2017  25,000   75,000
(4) 
     5/23/2027          


(1)The market value of shares that have not vested is based on a price of $1.35 per share (the closing price of our common stock as reported by Nasdaq on December 29, 2017).

(2)The restrictions on the stock award lapse on February 23, 2018, subject to achievement of performance goals and to the officer’s continued service to our company as of such date. The level of achievement of the performance goals under the 2017 Program as determined by the Compensation Committee is discussed above under the heading “2017 Senior Management Equity Incentive Program.”

(3)This option award vests in four equal installments on August 23, 2017, June 6, 2018, June 6, 2019, and June 6, 2020, subject to the officer’s continued service to our company as of such dates.

(4)This option award vests in four equal installments on November 23, 2017, May 23, 2018, May 23, 2019, and May 23, 2020, subject to the officer’s continued service to our company as of such dates.

(5)This option award vests in four equal installments on each of the grant date, March 1, 2017, March 1, 2018, and March 1, 2019, subject to the officer’s continued service to our company as of such dates.
Cash Compensation and Value of Vesting Equity Table

The following table shows the actual cash compensation and value of vesting equity received for the years ended December 31, 2017 and 2016 by our named executive officers. We believe that this table is important in order to distinguish between the actual cash and vested value received by each named executive officer as opposed to the grant date fair value of equity awards as shown in the Summary Compensation Table.

Name and Principal
Position
Year 
Realized
Salary ($)
  
Realized Stock
Awards ($)(1)
  
Realized
Option
Awards
($)(1)
  
Realized Non-
Equity
Incentive Plan
Compensation
($)(1)
  
All Other
Compensation
($)
  Total ($) 
Suzanne Miglucci2017 $335,000  $71,550  $-  $-  $18,261
(2) 
 $424,811 
President and Chief Executive Officer2016  347,885   -   -   -   17,691
(3) 
  365,576 
Clint J. Pete2017  221,696   -   -   14,028
(5) 
  4,187
(6) 
  239,911 
Chief Financial Officer and Treasurer(4)
2016  99,718   -   -   -   -   99,718 
Don O’Connell2017  251,923   15,582   -   -   6,210
(8) 
  273,715 
Chief Operating Officer and Senior Vice President, Supply Chain(7)
                         

(1)Reflects the value of restricted stock awards and option awards, respectively, that vested in fiscal 2017 (regardless of when granted). The value of realized stock awards reflects the price of our common stock on each vesting date, and the value of realized option awards reflects the difference between the exercise price of the option awards and the price of our common stock on each vesting date. The realized stock and option award amounts exclude any potential value that may be realized from vesting or any change in our company’s stock price after each vesting date (including any future value of “underwater” option awards that may become “in-the-money” after each vesting date).

(2)Includes $18,261 of long-term disability insurance and life insurance premiums.

(3)Includes $17,691 of long-term disability insurance and life insurance premiums.

(4)Mr. Pete joined our company as Corporate Controller on June 6, 2016, was appointed as our Interim Chief Financial Officer effective December 2, 2016, and was appointed as our Chief Financial Officer effective May 23, 2017.

(5)Mr. Pete was paid a cash bonus in recognition of his performance as our Corporate Controller in 2016 against pre-established performance measures before he became our principal financial officer.

(6)Includes $4,187 of long-term disability insurance and life insurance premiums.

(7)Mr. O’Connell joined our company as Senior Vice President, Supply Chain & Distribution on March 1, 2016 and was appointed as our Chief Operating Officer and Senior Vice President, Supply Chain effective May 23, 2017.

(8)Includes $4,926 of 401(k) employer matching contributions and $1,284 of long-term disability insurance and life insurance premiums.

Developments for 2018 Compensation

On January 30, 2018, the Compensation Committee approved the Charles & Colvard, Ltd. 2018 Senior Management Equity Incentive Program, or the 2018 Program, with effect as of January 1, 2018. The 2018 Program supersedes and replaces all prior management incentive plans or programs.
The 2018 Program provides an incentive opportunity for our executive officers and vice presidents, other than the Senior Vice President of Sales and Vice Presidents of Sales, or the 2018 Eligible Employees, through the grant of an award, with both performance and service measures, or the Award, consisting of (i) a restricted stock award representing 70% of the Award’s value, or the Restricted Stock Component, and (ii) a cash bonus award representing 30% of the Award’s value, or the Cash Component. The value of Awards is expressed in “Share Equivalents,” which is the number of shares of the Company’s restricted stock that would be granted pursuant to each Award if the Restricted Stock Component equaled 100% of the Award.

Achievement of a 2018 Eligible Employee’s performance measures will be measured by the Compensation Committee as follows: (i) 70% of each Award will be based on the achievement of a shared Company goal regarding revenue, or the Revenue Measure, (ii) 10% of each Award will be based on the achievement of a shared Company goal regarding EBITDA, or, together with the Revenue Measure, the Company Measures, and (iii) 20% of each Award will be based on the achievement of individual performance goals, or the Personal Measures, all for the period from January 1, 2018 to June 30, 2018, reflecting the previously disclosed change in the our fiscal year. If we do not achieve 80% of the Revenue Measure, the Restricted Stock Component of each Award will be forfeited and the Cash Component of each Award will not be paid. We must achieve at least 90% of the Revenue Measure in order for the portion of the Award attributed to the Company Measures to be vested/paid, as applicable.  Achievement on a sliding scale from 90% to 120% of the Revenue Measure will result in payment ranging from 75% to 140% of the portion of the Award attributed to the Revenue Measure. 2018 Eligible Employees may achieve from 0% to 100% of his or her Personal Measures. The Restricted Stock Component and Cash Component of each Award will be reduced proportionately by any performance that is measured below 100% accordingly. The Personal Measures and Company Measures are determined by the Compensation Committee and may be modified by the Compensation Committee to reflect certain types of events as permitted by the 2008 Plan. In addition, a 2018 Eligible Employee must remain in continuous service until July 31, 2018 for restrictions to fully lapse on the Restricted Stock Component and for the Cash Component to be paid.

Under the 2018 Program, the Compensation Committee has granted the Chief Executive Officer 75,000 Share Equivalents, the Chief Financial Officer and Chief Operating Officer 37,500 Share Equivalents, and each eligible Vice President 17,500 Share Equivalents. The 2018 Program also provides the Compensation Committee discretion to make additional Awards above the targeted award level in recognition of extraordinary performance. The Restricted Stock Component of all Awards granted pursuant to the 2018 Program is issued under and pursuant to the 2008 Plan and subject to the terms of our standard performance-based restricted stock award agreement.
2017 DIRECTOR COMPENSATION

The following table and narrative discussion summarize the compensation paid to our non-employee directors during the year ended December 31, 2017. None of our directors are party to any agreement or arrangement with a third party relating to compensation or other payment in connection with their candidacy or service as a director.

Name 
Fees Earned or
Paid in Cash ($)
  
Option Awards
($)(1)
  
All Other
Compensation
($)
  
Total
($)
 
Neal I. Goldman $50,000  $57,111  $-  $107,111 
Anne M. Butler  42,500   27,108   -   69,608 
Benedetta Casamento(2)
  11,827   27,066   -   38,893 
Jaqui Lividini  35,000   27,108   -   62,108 
Ollin B. Sykes  50,000   27,108   -   77,108 

(1)The amounts shown in this column reflect the aggregate grant date fair values computed in accordance with FASB ASC Topic 718 of the option awards granted to each of our directors. The assumptions made in determining these values are set forth in Note 11 to our consolidated financial statements. As of December 31, 2017, the aggregate number of shares that were subject to option awards outstanding for each director was as follows: Mr. Goldman, 332,002; Ms. Butler, 137,505; Ms. Casamento: 58,139; Ms. Lividini, 132,000; and Mr. Sykes, 137,505.

(2)Ms. Casamento was appointed to the Board of Directors on May 30, 2017.

Director Compensation Policy

From January 1, 2016 until September 30, 2017, our director compensation policy provided that each designated non-management member of the Board would receive (i) an annual retainer of $30,000 to be paid in four quarterly installments in arrears, to be pro-rated as applicable; (ii) upon appointment to the Board to fill a vacancy, a stock option grant with a grant date value determined by the Board as appropriate considering the time remaining before re-election; and (iii) a stock option grant upon annual re-election as a director with a grant date value of $50,000, except for the Executive Chairperson, who would receive a stock option grant with a grant date value of $55,000.  Additionally, certain specific members of the Board would receive additional annual retainers, paid in four quarterly installments in arrears, pro-rated as applicable, in the following amounts: (i) the Executive Chairperson would receive $50,000, (ii) the Chairperson of the Audit Committee would receive $15,000, (iii) the Chairperson of the Compensation Committee and Nominating and Governance Committee would receive $7,500, and (iv) Board committee members (excluding the committee chairperson and Executive Chairperson of the Board) would receive $5,000.  On January 1 of each year, the Executive Chairperson would receive an additional stock option award with a grant date value of $50,000. Directors would not receive a fee for each Board or committee meeting, whether or not such meeting is in person or telephonic. Members of the Board would only receive retainers for serving as a member (including chairperson) of two Board committees.

On September 12, 2017, our Board adopted a revised director compensation policy, effective as of October 1, 2017, which provides that each designated non-management member of the Board will receive (i) an annual retainer of $30,000 to be paid in four quarterly installments in arrears, to be pro-rated as applicable; (ii) upon appointment to the Board to fill a vacancy, a stock option grant with a grant date value determined by the Board as appropriate considering the time remaining before re-election; and (iii) a stock option grant upon annual re-election as a director with a grant date value of $50,000, except for the Chairperson, who will receive a stock option grant with a grant date value of $55,000.  Additionally, certain specific members of the Board will receive additional annual retainers, paid in four quarterly installments in arrears, pro-rated as applicable, in the following amounts: (i) the Chairperson will receive $40,000, in lieu of the $30,000 annual retainer paid to other members of the Board, (ii) the Chairperson of the Audit Committee will receive $15,000, (iii) the Chairperson of the Compensation Committee and Nominating and Governance Committee will receive $7,500, and (iv) Board committee members (excluding the committee chairperson) will receive $5,000.  Directors will not receive a fee for each Board or committee meeting, whether or not such meeting is in person or telephonic. Members of the Board may only receive retainers for serving as a member (including chairperson) of two Board committees.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information as of December 31, 2017 with respect to compensation plans (including any individual compensation arrangements) under which our equity securities are authorized for issuance.

Plan Category 
(a)
Number of
securities
to be issued
upon exercise
of outstanding
options,
warrants and
rights(1)
  
(b)
Weighted-
average
exercise price
of outstanding
options,
warrants, and
rights
  
(c)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))(1)
 
Equity compensation plans approved by security holders  2,227,265
(2) 
 $1.35   2,712,728
(3) 
             
Equity compensation plans not approved by security holders  -  $-   - 
             
Total  2,227,265  $1.35   2,712,728 

(1)Refers to shares of our company’s common stock.

(2)Includes shares issuable upon exercise of outstanding stock options under the 2008 Plan.

(3)Includes shares remaining for future issuance under the 2008 Plan, all of which are available for issuance in the form of restricted stock or other stock-based awards.


SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

The following table sets forth information with respect to the beneficial ownership of common stock as of February 28, 2018 by (i) each person known by us to own beneficially more than five percent of our company’s outstanding shares of common stock; (ii) each director and director nominee of our company; (iii) each named executive officer of our company; and (iv) all current directors and executive officers as a group. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, to our knowledge, each shareholder named in the table has sole voting and investment power with respect to the shares set forth opposite such shareholder’s name.

Name and Address of Beneficial Owner(1)
 
Number of Shares
Beneficially
Owned(2)
  Percent of Class 
Goldman Capital Management Inc.(3)
  1,092,783   5.1%
767 Third Ave.        
New York, NY 10017        
Neal I. Goldman(4)
  2,001,081   9.3 
Ollin B. Sykes(5)
  1,535,107   7.1 
Suzanne Miglucci(6)
  581,875   2.7 
Anne M. Butler(7)
  442,946   2.1 
Benedetta Casamento  20,600   * 
Jaqui Lividini(8)
  76,445   * 
Clint J. Pete(9)
  142,642   * 
Don O’Connell(10)
  193,596   * 
Directors and Executive Officers as a Group  (8 persons)(11)
  4,994,292   23.1 

*Indicates less than one percent
(1)Unless otherwise indicated, the address of each person is 170 Southport Drive, Morrisville, North Carolina 27560.

(2)Based upon 21,575,673 shares of common stock outstanding on February 28, 2018. The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Exchange Act and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the person has sole or shared voting power or investment power and also any shares that the person has the right to acquire within 60 days of February 28, 2018 through the exercise of any stock options or other rights. Any shares that a person has the right to acquire within 60 days are deemed to be outstanding for the purpose of computing the percentage ownership of such person but are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

(3)Neal I. Goldman, our Chairman, is the President of Goldman Capital Management Inc., and consequently he may be deemed to be the beneficial owner of shares held by Goldman Capital Management Inc.

(4)
Includes (i) 270,891 shares subject to options exercisable within 60 days of February 28, 2018 and (ii) 1,092,783 shares held by Goldman Capital Management Inc. as described in footnote 3 above, over which Mr. Goldman has shared voting and investment power, 120,000 of which shares are held through Mr. Goldman’s IRA, and 517,407 of which shares are owned by Mr. Goldman.

(5)
Includes (i) 35,787 shares owned by Mr. Sykes’s spouse, over which Mr. Sykes has shared voting and investment power; (ii) 918 shares held by Sykesco Investment Partners, over which Mr. Sykes has shared voting and investment power; (iii) 137,505 shares subject to options exercisable within 60 days of February 28, 2018; (iv) 745,818 shares held by the Sykes & Company Profit Sharing Plan and Trust, of which Mr. Sykes is the trustee; and (v) 615,079 shares held in Mr. Sykes’s margin account.

(6)
Includes (i) 421,875 shares subject to options exercisable within 60 days of February 28, 2018 and (ii) 75,000 shares held by Ms. Miglucci pursuant to a restricted stock award as to which restrictions had not lapsed as of February 28, 2018.

(7)
Includes (i) 81,950 shares subject to options exercisable within 60 days of February 28, 2018 and (ii) 360,996 shares jointly owned with Ms. Butler’s spouse, over which Ms. Butler has shared voting and investment power.

(8)
Includes 76,445 shares subject to options exercisable within 60 days of February 28, 2018.

(9)
Includes (i) 99,642 shares subject to options exercisable within 60 days of February 28, 2018 and (ii) 37,500 shares held by Mr. Pete pursuant to a restricted stock award as to which restrictions had not lapsed as of February 28, 2018.

(10)
Includes (i) 60,114 shares jointly owned with Mr. O’Connell’s spouse, over which Mr. O’Connell has shared voting and investment power, (ii) 95,982 shares subject to options exercisable within 60 days of February 28, 2018, and (iii) 37,500 shares held by Mr. O’Connell pursuant to a restricted stock award as to which restrictions had not lapsed as of February 28, 2018.

(11)
For all current directors and executive officers as a group, includes a total of 1,184,290 shares subject to options exercisable within 60 days of February 28, 2018 and 150,000 shares held pursuant to restricted stock awards as to which restrictions had not lapsed as of February 28, 2018.
Item 13.
Certain Relationships and Related Transactions, and Director Independence

Certain Transactions

Since January 1, 2016, we have not been a participant in or a party to any related person transactions requiring disclosure under the SEC’s rules.

Independent Directors

In accordance with the listing rules of The Nasdaq Stock Market LLC (“Nasdaq”), our Board of Directors must consist of a majority of “independent directors,” as determined in accordance with Nasdaq Rule 5605(a)(2). The Board has determined that current directors Ms. Butler, Ms. Casamento, Mr. Goldman, Ms. Lividini, and Mr. Sykes are independent directors in accordance with applicable Nasdaq listing rules. The Board performed a review to determine the independence of its members and made a subjective determination as to each member that no transactions, relationships, or arrangements exist that, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director of our company. In making these determinations, the Board reviewed the information provided by the directors with regard to each individual’s business and personal activities as they may relate to us and our management. In addition, the Board has determined that each of the members of the Audit Committee is an independent director in accordance with applicable Nasdaq listing rules and the additional independence rules for audit committee members promulgated by the SEC.
Item 14.
Principal Accounting Fees and Services

For the fiscal years ended December 31, 2016 and 2017, fees billed for services provided by BDO USA, LLP are as follows:
  Amount of Fees 
Type of Service 2016  2017 
Audit fees $159,000  $152,000 
Audit-Related Fees  -   - 
Tax Fees  19,000   23,000 
All Other Fees  -   - 
Total $178,000  $175,000 

Audit Fees. This category includes fees billed for the fiscal years shown for professional services for the audit of our annual financial statements, review of financial statements included in our quarterly reports on Form 10-Q, and services that are normally provided by the independent auditor in connection with statutory and regulatory filings or engagements for the relevant fiscal years.

Audit-Related Fees. This category includes fees billed in the fiscal years shown for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under the category “Audit Fees.” There were no “Audit-Related Fees” billed to us in 2016 or 2017.

Tax Fees. This category includes fees billed in the fiscal years shown for professional services for tax compliance, tax advice, and tax planning.

All Other Fees. This category includes fees billed in the fiscal years shown for products and services provided by the principal accountant that are not reported in any other category. There were no “All Other Fees” billed to us in 2016 or 2017.

The Board has adopted an Audit Committee Pre-Approval Policy. Pursuant to the Pre-Approval Policy, all new projects (and fees)information called for in Items 10 through 14 is incorporated by reference from our definitive Proxy Statement relating to our independent registered public accounting firm either must be authorized in advance under the general pre-approval guidelines set forth in the Pre-Approval Policy or specifically approved in advance by the full Audit Committee. General pre-approval under the policy is provided for 12 months (unless the Audit Committee specifically provides for a different period as2021 Annual Meeting of Shareholders, which will be filed with the case with respect toSEC within 120 days after the six-month period resulting from our change in fiscal year-end), is limited to certain projects listed in the policy, and is subject to meeting a specific budget for each project, which budget is contained in the policy. Any project that falls within the scopeend of the general pre-approval guidelines but exceeds the budgetary limit up to $10,000 may be approved by the Chairperson of the Audit Committee or his or her designee, while all other projects must be specifically approved by the full Audit Committee. There were no new projects authorized in 2017.fiscal year ended June 30, 2021.

PART IV

Item 15.
Exhibits, Financial Statement Schedules

(a)(1) and (2). The consolidated financial statements and report of our independent registered public accounting firm are filed as part of this report (see “Index to Financial Statements,” at Part II, Item 8). The financial statement schedules are not included in this Item as they are either not applicable or the information is otherwise included in the consolidated financial statements or the notes to the consolidated financial statements.

(a)(3). The following exhibits have been or are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:

Exhibit No.
Description
  
2.1
Asset Purchase Agreement, effective March 4, 2016, by and among Yanbal USA, Inc., Charles & Colvard, Ltd., and Charles & Colvard Direct, LLC (incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2016)
2.2
List of Schedules Omitted from Asset Purchase Agreement included as Exhibit 2.1 above (incorporated herein by reference to Exhibit 2.2 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2016)
3.1
Restated Articles of Incorporation of Charles & Colvard, Ltd. (incorporated herein by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 2004)
  
3.2
Bylaws of Charles & Colvard, Ltd., as amended and restated, effective May 19, 2011 (incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K, as filed with the SEC on May 24, 2011)
  
4.1
Specimen Certificate of Common Stock (incorporated herein by reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year ended December 31, 1998)
 
4.2Description of Common Stock++
  
10.1
Exclusive Supply Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Cree, Inc. and, solely for purposes of Section 6(c) of the Exclusive Supply Agreement, Charles & Colvard Direct, LLC and moissanite.com, LLC (incorporated herein by reference to Exhibit 10.110.4 to our CurrentQuarterly Report on Form 8-K,10-Q for the quarter ended December 31, 2020, as filed with the SEC on December 16, 2014)February 4, 2021)**
  
10.2
Credit and Security
First Amendment to Exclusive Supply Agreement, dated as of June 25, 2014,22, 2018, by and amongbetween Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, moissanite.com, LLC, and Wells Fargo Bank, National AssociationCree, Inc. (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 30, 2014)27, 2018)*
  
10.3
First
Second Amendment to Credit and SecurityExclusive Supply Agreement, datedeffective as of September 16, 2014,June 30, 2020, by and amongbetween Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014)
10.4
Second Amendment to Credit and Security Agreement, dated as of December 12, 2014, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, and Wells Fargo Bank, National AssociationCree, Inc. (incorporated herein by reference to Exhibit 10.3 to our CurrentAnnual Report on Form 8-K,10-K for the fiscal year ended June 30, 2020, as filed with the SEC on December 16, 2014)September 4, 2020)**
  
10.510.4
Third Amendment to
Credit and Security Agreement, and Other Loan Documents, dated as of September 23, 2016,July 12, 2021, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, to be known as charlesandcolvard.com, LLC, and Wells FargoJPMorgan Chase Bank, National Association (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016)
10.6
Fourth Amendment to Credit and Security Agreement, dated as of June 22, 2017, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC (formerly known as Moissanite.com, LLC) and Wells Fargo Bank, National AssociationN.A. (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on June 26, 2017)July 13, 2021)
  
10.710.5
Intercreditor Agreement,
Line of Credit Note, dated as of DecemberJuly 12, 2014,2021, by and among Charles & Colvard, Ltd., Charles & Colvard Direct, LLC, Moissanite.com, LLC, Cree, Inc., and Wells FargoJPMorgan Chase Bank, National AssociationN.A. (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on December 16, 2014)July 13, 2021)
  
10.810.6
Lease
Credit Agreement, dated December 9, 2013, betweenas of July 13, 2018, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, and Southport Business Park Limited PartnershipWhite Oak Commercial Finance, LLC (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on December 12, 2013)*July 17, 2018)
 
10.7
Security Agreement, dated as of July 13, 2018, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, and White Oak Commercial Finance, LLC (incorporated herein by reference to Exhibit 10.4 to our Transition Report on Form 10-KT for the transition period ended June 30, 2018)

10.8
Intercreditor Agreement, dated as of July 13, 2018, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, Cree, Inc., and White Oak Commercial Finance, LLC (incorporated herein by reference to Exhibit 10.5 to our Transition Report on Form 10-KT for the transition period ended June 30, 2018)
  
10.9
First Amendment to Credit Agreement, dated June 15, 2020, by and among Charles & Colvard, Ltd., charlesandcolvard.com, LLC, Charles & Colvard Direct, LLC, and White Oak Commercial Finance, LLC (incorporated herein by reference to Exhibit 10.7 to our Annual Report on Form 10-K for fiscal year ended June 30, 2020, as filed with the SEC on September 4, 2020)
 
10.10
Promissory Note, dated June 15, 2020, by and between Charles & Colvard, Ltd., and Newtek Small Business Finance, LLC (incorporated herein by reference to Exhibit 10.8 to our Annual Report on Form 10-K for fiscal year ended June 30, 2020, as filed with the SEC on September 4, 2020)
10.11
Lease Agreement, dated December 9, 2013, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership** ++
10.12
First Amendment to Lease, dated December 23, 2013, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the year ended December 31, 2013)
  
10.1010.13
Second Amendment to Lease, dated April 15, 2014, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014)
  
10.1110.14
Board Compensation Program, effective
Third Amendment to Lease Agreement, dated January 1, 201629, 2021, between Charles & Colvard, Ltd. and SBP Office Owner, L.P., successor to Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.110.5 to our CurrentQuarterly Report on Form 8-K,10-Q for the quarter ended December 31, 2020, as filed with the SEC on September 10, 2015)+February 4, 2021)
  
10.1210.15
Board Compensation Program, effective October 1, 2017 (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017)+
  
10.1310.16
Charles & Colvard, Ltd. 2008 Stock Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 20, 2016)+
  
10.1410.17
Form of Restricted Stock Award Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.115 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+
Form of Employee Incentive Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.11710.116 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+
  
10.1610.18
Form of Employee Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.118 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)+
  
10.1710.19
Form of Director Nonqualified Stock Option Agreement under the
Charles & Colvard, Ltd. 2008 Stock2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.11910.1 to our Current Report on Form 8-K, as filed with the SEC on June 2, 2008)November 9, 2018)+
  
10.1810.20
Form of Director NonqualifiedRestricted Stock OptionAward Agreement under the Charles & Colvard, Ltd. 2008 Stock2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the year ended December 31, 2013)+
10.19
Form of Employee Nonqualified Stock Option Agreement pursuant to the Charles & Colvard, Ltd. Long-Term Incentive Program (incorporated herein by reference to Exhibit 10.410.2 to our Current Report on Form 8-K, as filed with the SEC on April 21, 2014)+November 9, 2018)
10.2010.21
Form of RestrictedEmployee Incentive Stock AwardOption Agreement (Performance-Based) under the Charles & Colvard, Ltd. 20082018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on November 9, 2018)
10.22
Form of Employee Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K, as filed with the SEC on March 23, 2015)+November 9, 2018)

10.2110.23
Form of Non-Employee Director Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2016 Senior Management2018 Equity Incentive Program, effective January 1, 2016Plan (incorporated herein by reference to Exhibit 10.42 to our Annual Report on Form 10-K for the year ended December 31, 2015)+
10.22
Charles & Colvard, Ltd. 2017 Senior Management Equity Incentive Program, effective January 1, 2017 (incorporated herein by reference to Exhibit 10.110.5 to our Current Report on Form 8-K, as filed with the SEC on February 24, 2017)+November 9, 2018)
  
10.2310.24
Form of Independent Contractor Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.6 to our Current Report on Form 8-K, as filed with the SEC on November 9, 2018)
10.25
Charles & Colvard, Ltd. Fiscal 2019 Q1-Q2 Senior Management Equity Incentive Program, effective JanuaryJuly 1, 2018 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on February 1,May 29, 2018)+
  
10.2410.26
Form of Indemnification Agreement
Charles & Colvard, Ltd. Fiscal 2019 Q3-Q4 Senior Management Equity Incentive Program, effective January 1, 2019 (incorporated herein by reference to Exhibit 10.10910.1 to our Current Report on Form 8-K, as filed with the SEC on December 10, 2007)February 13, 2019)+
  
10.2510.27
Separation of Employment Agreement, dated March 9, 2017, between
Charles & Colvard, Ltd., and Steve Larkin Fiscal 2020 Senior Management Equity Incentive Program, effective July 1, 2019 (incorporated herein by reference to Exhibit 10.210.1 to our QuarterlyCurrent Report on Form 10-Q for8-K, as filed with the quarter ended March 31, 2017)SEC on July 11, 2019)+
  
10.2610.28
Charles & Colvard, Ltd. Fiscal 2021 Senior Management Equity Incentive Program, effective July 1, 2020 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on August 4, 2020)+
 
10.29
Employment Agreement, dated December 1, 2015, by and between Charles & Colvard, Ltd. and Suzanne Miglucci (incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015)+
  
10.2710.30
Employment Agreement, dated May 23, 2017, by and between Charles & Colvard, Ltd. and Clint J. Pete (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 24, 2017)+
  
10.2810.31
Employment Agreement, dated May 23, 2017, by and between Charles & Colvard, Ltd. and Don O’Connell (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on May 24, 2017)+
 
10.32
Amendment to 2015 Employment Agreement, dated April 9, 2020, by and between Charles & Colvard, Ltd. and Suzanne Miglucci (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on April 9, 2020)+
10.33
Amendment to 2017 Employment Agreement, dated April 9, 2020, by and between Charles & Colvard, Ltd. and Clint J. Pete (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on April 9, 2020)+
10.34
Amendment to 2017 Employment Agreement, dated April 9, 2020, by and between Charles & Colvard, Ltd. and Don O’Connell (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on April 9, 2020)+
10.35
Separation of Employment Agreement, dated May 28, 2020, by and between Charles & Colvard, Ltd. and Suzanne Miglucci (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 29, 2020)+
10.36
Amended and Restated Employment Agreement, effective as of June 1, 2020, by and between Charles & Colvard, Ltd. and Don O’Connell (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on May 29, 2020)+
  
21.1
Subsidiaries of Charles & Colvard, Ltd.++

23.1
Consent of BDO USA, LLPLLP++
  
31.1
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002++
  
31.2
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002++
  
32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002++
  
32.2
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002++
  
101
The following materials from Charles & Colvard, Ltd.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017June 30, 2021 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i)(i) Consolidated Balance Sheets; (ii)(ii) Consolidated Statements of Operations; (iii)(iii) Consolidated Statements of Shareholders’ Equity; (iv)(iv) Consolidated Statements of Cash Flows; and (v)(v) Notes to Consolidated Financial Statements.
*
Asterisks located within the exhibit denote information which has been redacted pursuant to a request for confidential treatment filed with the SEC.
 
**
Asterisks located within the exhibit denote information which has been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K because it is both not material and would likely cause competitive harm to us if publicly disclosed.
  
+Management
Denotes management contract or compensatory plan or arrangement.
++
Denotes filed herewith.

Item 16.
Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ Suzanne MiglucciDon O’Connell
March 8, 2018
September 2, 2021
 Suzanne Miglucci
Don O’Connell
  
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 
By:
/s/ Suzanne MiglucciDon O’Connell
March 8, 2018
September 2, 2021
 Suzanne Miglucci
Don O’Connell
  
Director, President and Chief Executive Officer
   
 
By:
/s/ Clint J. Pete
March 8, 2018
September 2, 2021
 
Clint J. Pete
  
Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)
   
 
By:
/s/ Neal I. Goldman
March 8, 2018
September 2, 2021
 
Neal I. Goldman
  
Chairman of the Board of Directors
   
 
By:
/s/ Anne M. Butler
March 8, 2018
September 2, 2021
 
Anne M. Butler
  
Director

By:
/s/ Benedetta Casamento
September 2, 2021
Benedetta Casamento
Director
   
 
By:
/s/ Benedetta CasamentoOllin B. Sykes
March 8, 2018
September 2, 2021
 Benedetta Casamento
Ollin B. Sykes
  
Director
By:/s/ Jaqui Lividini
March 8, 2018Jaqui Lividini
Director
By:/s/ Ollin B. Sykes
March 8, 2018Ollin B. Sykes
Director


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