| · | 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;
| • | an outbreak of a contagious disease, such as COVID-19 and other potential future public health crises, which may cause us or our distributors, vendors, 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;unexpected changes in, or impositions of, legislative or regulatory requirements; |
| · | tariffs and other trade barriers and restrictions;
|
| · | the burdens of complying with a variety of foreign laws and other factors beyond our control;delays resulting from difficulty in obtaining export licenses; |
| · | the potential difficulty of enforcing agreements with foreign customers and suppliers; and
|
| · | the complications related to collecting receivables through a foreign country’s legal system.
|
25
international regulatory requirements, tariffs and other trade barriers and restrictions, including the consequences of U.S. or international 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. The U.S. and China signed a contingent trade deal to reduce planned tariff increases. However, because of the current geopolitical unrest in eastern Europe and the apparent Chinese-Russian alliance, concerns over the stability of these bilateral trade relations continue to exist, and in some cases, have heightened in 2022.
Separately, with the U.K.’s exit from the E.U. in January 2020, known as Brexit, the ongoing uncertainties of the trading relationship between the U.K. and the E.U. have yet to be completely realized and the ultimate outcome and long-term impacts for the U.K. and Europe remain uncertain. Ongoing changes and uncertainties related to Brexit, including trade frictions and Britain’s high inflation rate, continue to subject us to heightened trade risks in that region. In addition, 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 changes also subject us to further uncertainty in the region. 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% of our net sales during each of the fiscal years ended June 30, 2022 and 2021, 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 and lab grown diamonds 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 central 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 2022, the price of gold has fluctuated significantly, resulting in generally 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 Wolfspeed, 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 Wolfspeed, and Wolfspeed 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 and may be further extended upon mutual agreement of the parties. 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. Wolfspeed 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 Wolfspeed 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 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, as amended July 28, 2022, 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, as amended, which matures on July 31, 2023. 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 and geopolitical unrest, 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 Wolfspeed 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 Wolfspeed’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.
Environmental, social, and governance matters may impact our business, reputation, financial condition, and results of operations. Increasingly, companies are being measured by their performance on a variety of environmental, social, and governance, or ESG, matters, which are considered to contribute to the long-term sustainability of companies’ performance. Recently, many investors, including large institutional investors, have publicly emphasized the importance of ESG measures to their investment decisions.
Our assessments on ESG matters include, among others, the Company’s efforts and impacts, including impacts associated with our suppliers or other business partners, on environmentally and socially responsible fine jewelry, climate change, diversity, ethics, and compliance with applicable regulations.
There can be no certainty that we will manage such ESG matters successfully, or that we will successfully meet investors’ expectations as to our proper role, or our own ESG goals and values. This could lead to risk of litigation or reputational damage relating to our ESG policies or performance. Further, our decisions regarding ESG matters may not be consistent with our short-term financial expectations and may not ultimately produce the long-term benefits that we expect, in which case our business, reputation, financial condition, and operating results may be adversely impacted.
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 regulation and oversight might adversely impact our operations. We are subjectRisks Related to governmental regulations in the manufacture and sale of moissanite jewels and finished jewelry. In particular, 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 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 marketingOwnership 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.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.
We cannot guarantee that our share repurchase program will be utilized to the full value approved, or that it will enhance long-term stockholder value and repurchases we consummate could increase the volatility of the price of our common stock and could have a negative impact on our available cash balance. Our Board authorized a share repurchase program pursuant to which we may repurchase up to $5.00 million of our common stock through April 29, 2025. The manner, timing and amount of any share repurchases may fluctuate and will be determined based on a variety of factors, including the market price of our common stock, our priorities for the use of cash to support our business operations and plans, general business and market conditions, tax laws, and alternative investment opportunities. The share repurchase program authorization does not obligate us to acquire any specific number or dollar value of shares. Further, our share repurchases could have an impact on our share trading prices, increase the volatility of the price of our common stock, or reduce our available cash balance such that we will be required to seek financing to support our operations. Our share repurchase program may be modified, suspended, or terminated at any time, which may result in a decrease in the trading prices of our common stock. Even if our share repurchase program is fully implemented, it may not enhance long-term stockholder value. 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, the most recent of which occurred 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, 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.
We currently lease approximately 36,350 square feet of office, retail, 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.
There are no material pending legal proceedings to which we are a party or to which any of our property is subject.
Not applicable.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| Period | | Total Number of Shares Purchased | | | Average Price Paid per share | | | Total Number of shares Purchased as Part of Publicly Announced Plans or Programs(1) | | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | | April 1, 2022 – April 30, 2022 |
|
| - | | | $ | - | |
|
| - |
|
| $ | 5,000,000 | | May 1, 2022 – May 30, 2022 |
|
| - | | | $ | - | |
|
| - |
|
| $ | 5,000,000 | | June 1, 2022 – June 30, 2022 |
|
| 30,287 | | | $ | 1.26 | |
|
| 30,287 |
|
| $ | 4,961,836 | | Total | |
| 30,287 | | | $ | 1.26 | |
|
| 30,287 |
|
| $ | 4,961,836 | |
| (1) | On May 5, 2022, we announced that our Board of Directors had approved a share repurchase program to permit us to repurchase up to $5.00 million worth of our issued and outstanding common stock over the three-year period ending April 29, 2025. |
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 26, 2022, there were 243223 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, 2022 and 2021. 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.
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 leadprovide a revolution in themore conscious and conflict-free fine jewelry industry – deliveringexperience for our customers. We are dedicated to blaze a more brilliant product at extraordinary value balancedpath forward with environmentalour Made, Not Mined™ gemstones and social responsibility.committed to create fine jewelry with a conscience.
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 distributes distribute Charles & Colvard Created Moissanite® (which we refer to as moissanite or moissanite jewels) and in September 2020, we announced our expansion into the lab grown diamond market with the launch of Caydia®, an exclusive brand of premium lab grown diamonds. We offer gemstones and finished jewelry featuring 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
The global outbreak of the novel strain of coronavirus, known as COVID-19, was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020. The pandemic has and continues to negatively affect the U.S. and global economy. In February 2016, we maderesponse to this pandemic, federal, state, county and local governments and public health organizations and authorities around the strategic decisionworld from time to exploretime implemented a variety of measures intended to control the spread of the virus including quarantines, “stay-at-home” orders, travel restrictions, business limitations and closures, social distancing, vaccine, and hygiene requirements. While some of these measures have been lifted or eased in certain jurisdictions, other jurisdictions – for example, most recently in China – have seen increases in new COVID-19 cases in recent periods, resulting in restrictions having been reinstated or new restrictions imposed for a period of time. There continues to be considerable uncertainty regarding such measures and potential divestiturefuture 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.
The COVID-19 pandemic continued to cause business impacts in the fiscal year ended June 30, 2022, or Fiscal 2022, primarily driven by the emergence of the Omicron variant in November 2021 with a resulting increase in COVID cases in early 2022. During Fiscal 2022, our performance was adversely affected by supply chain disruptions and delays, as well as labor challenges associated with employee absences, travel restrictions, site access, quarantine restrictions, remote work, and adjusted work schedules. Attendance for employees required to be onsite has fluctuated based on pandemic developments and rates of infection. We are actively engaging with our customers and are continuing to take measures to protect the health and safety of our direct-to-consumer home partyemployees by encouraging them to get vaccinated, including booster shots. During the fiscal year ending June 30, 2023, or Fiscal 2023, if governmental or executive orders are reinstated, or new mandates implemented, that result in business suspensions, it is uncertain to what extent compliance with any such mandates could result in adverse impacts for us or our suppliers. If the adverse impacts are significant for us or our suppliers, our operations and ability to execute on our business strategy could be adversely affected. The ultimate impact of COVID-19 on our operational and financial performance in future periods, including our ability to execute our business in the expected timeframe, remains uncertain and will depend on future pandemic-related developments, including the duration of the pandemic, potential subsequent waves of COVID-19 infection or potential new variants, such as the emergence of the Omicron subvariant BA.5, which according to recent medical research studies, has proven to be more vaccine-resistant than its previously operated throughmore-evasive predecessor, and is currently accounting for principally all increased viral infection rates worldwide and across the U.S. The ultimate impact of COVID-19 on our Charles & Colvard Direct, LLC (dba Lulu Avenue®) subsidiary. After careful analysisbusiness will also depend upon the effectiveness and adoption of COVID-19 vaccines, boosters, therapeutics, supplier impacts, and related government actions to prevent and manage disease spread, including the implementation of any federal, state, local, or foreign vaccine mandates, all of which are uncertain and cannot be predicted.
We have continued taking measures to protect the health and safety of our core competencies, go-to-market strategies,employees, including updating our return-to-work policies, as necessary, working with our customers and intentsuppliers to advance toward profitability,minimize disruptions, and supporting our community in addressing the challenges posed by this ongoing global pandemic. The COVID-19 pandemic continues to present personnel related business challenges and we expect these to continue into Fiscal 2023. Our management teamhas reintroduced employees to the workplace, including in some cases permitting a hybrid blend of remote and Boardonsite work for certain sectors of Directors determined a divestiture of this distribution channelthe workforce, as vaccine and related booster shot rates have increased and COVID-19 infection levels have decreased. We continue working with our customers and suppliers to beminimize disruptions, including at times accelerating payments to key suppliers that are due by their terms 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 relatedfuture periods. We expect to continue accelerating payments to our direct-to-consumer home party business for $500,000suppliers in some cases into Fiscal 2023.
Although the COVID-19 pandemic did not have a significant adverse impact on our financial results in Fiscal 2022, the ultimate impact of COVID-19 on our operations and assumed certain liabilities relatedfinancial performance in future periods, including our ability to such assets. A more detailed description of this transaction is included in Note 13, “Discontinued Operations,”execute our strategic initiatives in the Notesexpected 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 and subvariant viral infections, the effectiveness, distribution, and acceptance of COVID-19 vaccines and boosters, and related government actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. We cannot at this time predict the Consolidated Financial Statements. We are now presentingfull impact of the operatingCOVID-19 pandemic, but we anticipate that the pandemic is likely to continue to impact our business, financial condition, results of Charlesoperations and Colvard Direct, LLC as a discontinued operation.cash flows in Fiscal 2023. 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:
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, particularly those relating to transportation and freight expenses. 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 possible uncertainties in the supply chain and the potential impact on general economic conditions, 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 2023 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 well as our employees; the economic impact of government responses to the pandemic; the performance of the U.S. economy, including the impact on the economy of the COVID-19 pandemic and governmental orders restricting activities that may be imposed to prevent further outbreak of viral infections; and the resulting adverse economic events beyond our control.
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, including the impact on current inflation rates, 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 2023.
Highlights of the Fiscal Year Ended June 30, 2022
During the fiscal year ended June 30, 2022, we delivered on several key initiatives, which we believe positions us for future growth as we move forward into Fiscal 2023. These accomplishments in the fiscal year ended June 30, 2022, include the following:
| ·• | Innovated the Forever OneTM product line – In 2017, we invested resources into the continued expansionExpansion 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 believeBrand Awareness. During Fiscal 2022, we have achieved critical mass in the establishment of this gemstone as the industry’s leading moissanite option.
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| · | 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.
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| · | 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.
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| · | 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.
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| · | 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.
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| · | 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.
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| · | Amplify our global marketing efforts – We continueinvestments to carefully measure the return on our marketing investments, and focus our efforts on profitable endeavors that drive interest instrengthen the Charles & Colvard brand pullthrough our marketing strategy, which includes brand marketing campaigns across multiple digital platforms, social media outlets, earned media, and media placements as well as placements with key consumer-based influencers. As a result of our brand awareness expansion programs, we received positive press coverage during Fiscal 2022 for our fashion jewelry product lines on several major online shopping and fashion-related websites, such as Vogue.com, Brides.com, JCKonline.com, MSN.com, TheKnot.com, WWD.com, MensHealth.com, RetailMeNot.com, and Byrdie.com. We also received finished jewelry related press coverage on national online news outlet websites, such as CNN.com and NewsBreak.com. Our exclusive brand of premium lab grown diamonds, Caydia®, was photographed to be the featured cover story of the summer 2022 issue of JCK Magazine. In December, we kicked off our out-of-home marketing strategy and began a digital billboard advertising program in New York City that allowed us to present a collection of our fine jewelry and lab grown gemstones to live consumers in the New York City mass media market. In April, we announced our strategic distribution agreement with Cooksongold, a division of the Heimerle + Meule Group in Europe. We believe this expansion of our wholesale gemstone distribution network in the U.K. and surrounding areas will allow us to expand our many sales and educational outlets, and drive conversions. Digital marketing isglobal brand presence in 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.
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| · | Advance toward profitability – In 2017, we made calculated investments in our growth while continually striving to reach profitability, which culminated in profitable financial results formeaningful way. During the fourth quarter, we introduced our moissaniteoutlet.com product assortment to drop-ship retail partners and launched the secondary website on Amazon.com, which makes our line of 2017. These efforts solidified the management team’s understanding of whatconsumer products sold at discounted prices available to a much broader market. Lastly, we believe that it takesis possible to make Charles & Colvardexquisite fine jewelry in an ethical and environmentally responsible way. During Fiscal 2022, we unveiled our Made, not Mined™ marketing campaign, which we believe demonstrates our commitment to continuously evolve our craft so that it aligns with our commitment as a profitable business, as well as setsteward of nature and our adherence to what we believe is a baseline for the investments required to achieve sustainable top-line growth.strict standard of environmental and humanitarian governance;
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As we continue to execute our strategy to build and reinvest in our businesses, significant expenses and investment of cash will be required ahead of the revenue streams we expect in the future. While this has resulted in some unprofitable reporting periods during 2016 and 2017, we will continue to analyze each investment decision with the intent to grow our business while maintaining our goal of achieving positive financial results and cash flows. We believe that we will continue to generate or have access to sufficient working capital to fund operations as we execute our plans to expand and grow the business.
| • | Enhanced Customer Engagement. This fiscal year we substantially completed construction of an innovative broadcast studio at our corporate headquarters, which will expand our content production capabilities and provide us a platform to live-stream consumer-based broadcasts on our websites and through other online media channels, including those of our business partners. We believe these capabilities will provide incremental sales channels for our direct-to-consumer business and allow us to compete more effectively and to increase our market share within the fine jewelry space. As we begin streaming live content from our own broadcast studio, this will be a digital extension of our sales team and a tool that our marketing team will utilize for video content production, live-stream shopping, designer and influencer interviews, and fashion photography. We believe this digital marketing capability will continue to further position and define our brand in what we believe is a rapidly evolving consumer landscape and to better meet the consumer’s current appetite for digital content. Also, during Fiscal 2022, we hosted a social media platform-based engagement ring sweepstakes program that was designed to promote our Made, not Mined™ marketing campaign. The engagement ring that was given away featured our Forever One™ moissanite gemstones; |
Our total consolidated net sales
| • | Product Development. In Fiscal 2022, we launched our patented Signature Star Series line of finished jewelry featuring Caydia® lab grown diamonds set in unisex fine fashion jewelry styles and expanded our Moissanite by Charles & Colvard® product styles with our dropship business partners. In connection with other featured gemstone collections of fine jewelry, we launched expanded moissanite gemstone engagement and bridal assortments as well as our Zodiac Collection, which features our Caydia® lab grown diamond necklaces that present our unique designs of Western zodiac astrological signs. In addition, we added our specialty Pavé Collection, which also features the sophistication of our premium Caydia® lab grown pavé diamonds. While we believe other brands of fine jewelry may focus on creating jewelry that features such gemstones or recycled precious metals, we are pioneering a process to accomplish both components by capitalizing on our expertise in lab created gemstones along with our commitment to use recycled precious metals. We believe that we have set a new standard for such premium lines of fine jewelry set with lab grown gemstones. We also curated an assortment of fine fashion jewelry featuring our Forever One™ moissanite gemstones and Caydia®lab grown diamonds that is being used for the filming of upcoming seasons of the American Broadcast Company, or ABC, commercial broadcast television network’s series of The Bachelorette; and |
| • | Disciplined Growth. We have neared completion of our first Charles & Colvard Signature Showroom, or Signature Showroom, which we believe will complement and expand our omnichannel brand strategy in the fine jewelry space. This Signature Showroom, for which we expect to celebrate a grand opening during the second quarter of Fiscal 2023, will be the first location of our retail showroom expansion program and is located in our corporate headquarters in North Carolina’s Research Triangle Park. We believe that our retail showroom expansion program will allow us to develop a nationwide footprint to showcase our patented Signature Collection designs as well as a wide assortment of Forever One™ moissanite and Caydia® lab grown diamond fine jewelry. While we are in the early stages of expanding our geographic footprint, we believe these strategies will combine to help drive future and sustained growth and to present our brand and gemstone product lines to a broader range of consumers in the fine jewelry space. |
As we move forward into Fiscal 2023, our strategic focus remains centered on the year ended December 31, 2017 of $27.03 million were 7% lower than total consolidated net sales during the year ended December 31, 2016. The decrease in consolidated net sales for the year ended December 31, 2017, was due principally to the sale, in a single transaction, during the first quarter of 2016 of approximately $6.77 million of legacy gemstone inventory, or the Legacy Inventory Sale, as a resulthealth and growth of our effortsbrand on a global scale. We will continue to reduce inventories. This decrease in consolidated net sales forexecute 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 dynamic times, we plan to remain highly focused on prudently developing the year ended December 31, 2017, was offset partially by increased demand forreach of our Forever OneTM gemstones over the prior yearbrand – both domestically and higher finished jewelry net sales during 2017. Traditional segment net sales for the year ended December 31, 2017 of $15.95 million were 21% lower than Traditional segment net sales during the year ended December 31, 2016, primarily dueinternationally – through select digital marketing initiatives that align with consumer engagement and demand. We continue to the Legacy Inventory Sale in the prior year. This decrease compared with the prior year was offset somewhat by strong finished jewelry sales during 2017. Online Channels segment net sales for the year ended December 31, 2017 of $11.09 million were 25% greater than Online Channels segment net sales during the year ended December 31, 2016, primarily due to higher finished jewelry sales and increased demand forbelieve that our Forever OneTM gemstones during 2017 evidencedlong-term mission will ultimately be accomplished through our increased presence on e-commerce outlets, including charlesandcolvard.com.ability to remain fluid and shift to brand awareness strategies that are sensitive and responsive to these ever-changing times. Loose jewel sales comprised 61% of our total consolidated net sales for the year ended December 31, 2017 and decreased 23% to $16.58 million, compared with $21.45 million 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%, to $4.69 million primarily as a result of decreased compensation-related expenses and professional services expenses, offset partially by increased bank fees associated with our Credit Facility and credit card transaction processing and bad debt expense. Loss on abandonment of property and equipment decreased $118,000, or 100%, for the year ended December 31, 2017, compared to the previous year. In 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. We had no such abandonment of property and equipment in 2017. These decreases were offset partially by an increase in sales and marketing expenses of $439,000, or 6%, to $7.48 million, primarily as a result of increased compensation-related expenses, an increase in professional services expenses, and an increase in software-related expenses offset partially by a decrease in advertising expenses.
We recorded a net loss of $453,000, or $0.02 per diluted share, for the year ended December 31, 2017, compared to a net loss 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 over costs previously written off associated with insured losses incurred in connection with a shipment of work-in-process materials. These improvements were partially offset by the increased sales 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 million in the previous year.
The execution of our strategy to grow our company, with the ultimate goal of increasing consumer awareness 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, operating cash flow, and/or net income due to the challenging business environment in which we operate and our investment in various initiatives to support our growth strategies. In addition, 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.
Critical Accounting PoliciesOur MD&A generally discusses Fiscal 2022 and Estimates
Our discussionFiscal 2021 items and analysisyear-to-year comparisons between Fiscal 2022 and Fiscal 2021. Discussions of our financial conditionyear-to-year comparisons between Fiscal 2021 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,fiscal year ended June 30, 2020, 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 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 liabilitiesFiscal 2020, 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, 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 dateincluded 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 thatthis Form 10-K can be realized over the next 12 monthsfound in “Management’s Discussion and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of goods sold 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 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, 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 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. Based on historical percentages of uncollectible accounts by aging category, changes in payment history, 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 accounts in the current period. Any increases or decreases to this allowance are charged or credited, respectively, as a bad debt expense 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 off the 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, 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.
Our 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. During our review for 2017, we determined no additional reserves were necessary for specific accounts. Based on these criteria, management determined that allowances for doubtful accounts receivable of $254,000 and $226,000 at December 31, 2017 and 2016, 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 deferred tax assets. Beginning in 2014, management determined that negative evidence outweighed the positive and established a full valuation allowance against our deferred tax assets. We maintained a full valuation allowance as of December 31, 2017 and 2016.
Our deferred tax assets in Hong Kong were fully reserved with a valuation allowance of $996,000 as of December 31, 2017 and 2016 and had been fully reserved in all prior 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, 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 became a dormant entity during 2009. 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.
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 net deferred tax assets as of December 31, 2017 by approximately $519,000 to reflect 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 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 applicationAnalysis of Financial Accounting Standards Board income tax guidanceCondition and Results or Operations” 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. We have estimated the tax impacts related to the impact to deferred tax assets and liabilities and included these amounts in our 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. We have not been able to make a reasonable estimate with respect to the realization of existing AMT credit carryforwards, and accordingly, continue to apply the income tax-related accounting guidance that was in effect immediately prior to the enactment of the Tax Act. In order for us to complete the income tax effects of the Tax Act on the existing AMT deferred tax asset, we need to further analyze the nature, validity, and recoverability of the 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 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 provisions of this guidance was $462,000 and $434,000 at December 31, 2017 and 2016, 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. As of December 31, 2017, our liability has increased by $28,000 for accrued interest on these positions.
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.
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 for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.
2017 Summary
The following is a summary of key financial results and certain non-financial results achieved for thefiscal year ended December 31, 2017:June 30, 2021 filed with the SEC on September 3, 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.
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| · | 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.
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| · | 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.
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| · | 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.
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| · | 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.
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| · | 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.
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| · | 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.
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| · | We continue to carry no long-term debt and believe we can fund our growth strategies for the foreseeable future from operating cash flows.
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The following table sets forth certain consolidated statements of operations data for the fiscal years ended December 31, 2017June 30, 2022 and 2016. 2021: | | | 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 | ) |
| | Year Ended June 30, | |
| | 2022 | | | 2021 | | | Net sales | | $ | 43,089,024 | | | $ | 39,235,839 | | | Costs and expenses: | | | | | | | | | | Cost of goods sold | | | 22,845,702 | | | | 20,809,690 | | | Sales and marketing | | | 12,421,138 | | | | 8,476,716 | | | General and administrative | | | 4,948,980 | | | | 4,441,441 | | | Total costs and expenses | | | 40,215,820 | | | | 33,727,847 | | | Income from operations | | | 2,873,204 | | | | 5,507,992 | | | Other income (expense): | | | | | | | | | | Gain on extinguishment of debt | | | - | | | | 974,328 | | | Interest income | | | 19,277 | | | | 5,581 | | | Interest expense | | | - | | | | (8,953 | ) | | Loss on foreign currency exchange | | | (34 | ) | | | (603 | ) | | Total other income (expense), net | | | 19,243 | | | | 970,353 | | | Income before income taxes | | | 2,892,447 | | | | 6,478,345 | | | Income tax (expense) benefit |
| | (518,532 | ) | | | 6,332,421 | | | Net income |
| $ | 2,373,915 | | | $ | 12,810,766 | |
Consolidated Net Sales
Consolidated net sales for the fiscal years ended December 31, 2017June 30, 2022 and 20162021 comprise the following:
| | | Year Ended December 31, | | | Change | | | Year Ended June 30, | | | Change | | | | | 2017 | | | 2016 | | | Dollars | | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | Finished jewelry | | | $ | 29,712,230 | | | $ | 24,401,546 | | | $ | 5,310,684 | | | 22 | % | | Loose jewels | | $ | 16,580,748 | | | $ | 21,451,728 | | | $ | (4,870,980 | ) | | | -23 | % | | | 13,376,794 | | | | 14,834,293 | | | | (1,457,499 | ) | | (10) | % | | 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 | % | | $ | 43,089,024 | | | $ | 39,235,839 | | | $ | 3,853,185 | | | 10 | % |
Consolidated net sales were $27.03$43.09 million for the fiscal year ended December 31, 2017June 30, 2022 compared to $29.17$39.24 million for the fiscal year ended December 31, 2016, a decreaseJune 30, 2021, an increase of $2.14$3.85 million, or 7%10%. The decreaseincrease in consolidated net sales for the fiscal year ended June 30, 2022 was principally the result of our strong second quarter sales driven by robust calendar year-end holiday sales during the fiscal quarter ended December 31, 2017 was due primarily2021, and strong Valentine’s Day sales in February 2022 during our fiscal third quarter ended March 31, 2022. These higher sales for the fiscal year ended June 30, 2022, were also related to the Legacy Inventory Sale during the first quarter of the prior year. However, this decrease in 2017 was partially offset by increased consumer awareness and ongoing strong demand for our Forever OneTM gemstones during 2017 over the prior year. In addition, we experiencedmoissanite 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 2017the fiscal year ended June 30, 2022 in both our Online Channels segment and Traditional segment. The increases in our Online Channels segment net sales in the fiscal year ended June 30, 2022 were partially offset by lower loose jewel net sales in our Traditional segment and decreased international sales during the fiscal year ended June 30, 2022.
Sales of loose jewelsfinished jewelry represented 61%69% and 74%62% of total consolidated net sales for the fiscal years ended December 31, 2017June 30, 2022 and 2016,2021, respectively. For the fiscal year ended December 31, 2017, loose jewelJune 30, 2022, finished jewelry sales were $16.58$29.71 million compared to $21.45$24.40 million for the fiscal year ended December 31, 2016, a decreaseJune 30, 2021, an increase of $4.87$5.31 million, or 23%22%. While this decreaseThis increase in finished jewelry sales was due primarily due to the Legacy Inventory Sale during 2016,higher finished jewelry sales of Forever One™ and Moissanite by Charles & Colvard®in our Forever OneOnline Channels segment as well as in our Traditional segmentand higher finished jewelry sales of CaydiaTM® gemstone sales during 2017 increased approximately 67% as compared to 2016 as demand for this product increased.lab grown diamond jewelry in our Online Channels segment.
Sales of finished jewelryloose jewels represented 39%31% and 26%38% of total consolidated net sales for the fiscal years ended December 31, 2017June 30, 2022 and 2016,2021, respectively. For the fiscal year ended December 31, 2017, finished jewelryJune 30, 2022, loose jewel sales were $10.45$13.38 million compared to $7.72$14.83 million for the fiscal year ended December 31, 2016, an increaseJune 30, 2021, a decrease of $2.74$1.46 million, or 35%10%. This increaseThe decrease for the fiscal year ended June 30, 2022 was due primarily to strong finished jewelrya lower level of 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 storesthe distribution network 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%95% of total consolidated net sales during each of the fiscal years ended June 30, 2022 and 90%2021, respectively. U.S. net sales increased during the fiscal year ended June 30, 2022 primarily as a result of increased sales to U.S. customers in our Online Channels segment.
Our largest U.S. customer during the fiscal years ended June 30, 2022 and 2021 accounted for 14% and 13% of total consolidated net sales during each of the respective periods then ended. Our second largest U.S. customer during the fiscal year ended June 30, 2021 accounted for 12% of total consolidated net sales during the years ended December 31, 2017 and 2016, respectively. As a percentage of net sales, U.S. net sales increased during 2017 as a result of increased demand in the U.S. distributor market and increased sales from U.S. customers in both 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%, during the year ended December 31, 2017 compared to $26.16 million in the prior year primarily as a result of the Legacy Inventory Sale in the first quarter of 2016. Our largest U.S. customer during the year ended December 31, 2017 accounted 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, butperiod then ended. We did not have net sales that representedanother U.S. customer account for 10% or more of total netconsolidated sales forduring the fiscal year ended December 31, 2017. No additional U.S. customers accounted for more than 10% of total consolidated sales in 2017 or 2016.June 30, 2022. 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 customercustomers or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately 7% and 10%5% of total consolidated net sales during each of the fiscal years ended December 31, 2017June 30, 2022 and 2016,2021, respectively. International net sales decreased 38%to $1.95 million, or 3%, during 2017 as we serve distributorsthe fiscal year ended June 30, 2022 compared to $2.01 million in the Hong Kong and India markets and demand for loose jewels in these markets was downfiscal year ended June 30, 2021. International sales decreased during the fiscal year ended June 30, 2022, compared to 2016. Wethe prior fiscal year primarily due to somewhat lower demand in our international distributor market coupled with a slight increase in demand in our direct-to-consumer international 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 adapt to the COVID-19 pandemic, 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.partners. As a result, and in light of the ongoing worldwide pandemic and international trade challenges, we expect our sales in these markets may continue to fluctuate significantly each reporting period.
NoWe did not have an international customers accountedcustomer account for 10% or more than 10% of total consolidated sales in 2017 or 2016.during the fiscal years ended June 30, 2022 and 2021. A portion of our international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers. Our top three international distributors by sales volume during the year ended December 31, 2017 were, in order of sales volume, located in Hong Kong, Canada, and Hong Kong.retailers.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the fiscal years ended December 31, 2017June 30, 2022 and 20162021 are as follows:
| | | Year Ended December 31, | | | Change | |
| Year Ended June 30, | | | Change | | | | | 2017 | | | 2016 | | | Dollars | | | Percent | |
| 2022 | | | 2021 | | | Dollars | | | Percent | | | Product line cost of goods sold | | | | | | | | | | | | | | | Product line cost of goods sold: | |
| | | | | | | | | | | | | Finished jewelry | |
| $ | 13,932,700 | | | $ | 11,272,012 | | | $ | 2,660,688 | | | 24 | % | | Loose jewels | | $ | 8,524,843 | | | $ | 13,916,749 | | | $ | (5,391,906 | ) | | | -39 | % |
| | 6,169,790 | | | | 6,857,755 | | | | (687,965 | ) | | (10 | )% | | 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 | % |
| | 20,102,490 | | | 18,129,767 | | | 1,972,723 | | | 11 | % | | Non-product line cost of goods sold | | | 1,719,114 | | | | 2,335,902 | | | | (616,788 | ) | | | -26 | % |
| | 2,743,212 | | | | 2,679,923 | | | | 63,289 | | | 2 | % | | Total cost of goods sold | | $ | 15,470,617 | | | $ | 20,401,439 | | | $ | (4,930,822 | ) | | | -24 | % |
| $ | 22,845,702 | | | $ | 20,809,690 | | | $ | 2,036,012 | | | 10 | % |
Total cost of goods sold was $15.47$22.85 million for the fiscal year ended December 31, 2017June 30, 2022 compared to $20.40$20.81 million for the fiscal year ended December 31, 2016,June 30, 2021, a decreasenet increase of $4.93approximately $2.04 million, or 24%10%. 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 decreaseincrease in total cost of goods sold for 2017the fiscal year ended June 30, 2022 as compared to the priorfiscal year ended June 30, 2021 was due primarily to the Legacy Inventory Saledriven by increased sales of finished jewelry, which reflect higher material and labor costs, in our Online Channels segment as a result of strong demand during the first quarter of 2016. calendar year-end 2021 holiday season and Valentine’s Day period.
The net decreaseincrease in non-product line cost of goods sold for the fiscal year ended June 30, 2022 comprises an approximate $182,000 increase in freight out principally from increased shipments resulting from Online Channels segment sales growth during the fiscal year ended June 30, 2022, as well as a $980,000reflection of the rising costs of fuel and shipping overall during the period; an approximate $70,000 increase in non-capitalized manufacturing production control expenses principally related to the timing of when work-in-process goods are received into inventory and overhead costs are allocated; and an approximate $45,000 increase in inventory write-offs primarily related to increases in obsolescence reserves in the first three months of the fiscal year ended June 30, 2022, compared to those in the comparable prior year period. These increases were partially offset by a $234,000 decrease in other inventory adjustments principally relatingrelated to changes in production standard cost variances and a $76,000 decreasecompared to those in non-capitalized manufacturing and production control expenses primarily due to timing of receiving work-in-process into inventory and allocating overhead. These decreases were offset in part by a $398,000 increase in inventory valuation allowances, including inventory obsolescence, shrinkage, recuts, and repairs reserves, and a $40,000 increase in freight out as a result of an increase in sales transaction volume. the fiscal year ended June 30, 2022.
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, 2022 and 20162021 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 | | | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | | | | | | | | | | | | | | | Sales and marketing | | $ | 12,421,138 | | | $ | 8,476,716 | | | $ | 3,944,422 | | | | 47 | % |
Sales and marketing expenses were $7.48$12.42 million for the fiscal year ended December 31, 2017June 30, 2022 compared to $7.04$8.48 million for the fiscal year ended December 31, 2016,June 30, 2021, an increase of approximately $439,000,$3.94 million, or 6%47%. The increase in sales and marketing expenses for the fiscal year ended December 31, 2017June 30, 2022 compared to the fiscal year ended December 31, 2016June 30, 2021 was primarily due to a $531,000$3.13 million increase in compensation-related expense;advertising and digital marketing expenses; a $201,000$194,000 increase in compensation expenses; a $221,000 increase in professional services fees;principally comprising consulting services for marketing support in the current year period; a $145,000$185,000 increase in bank fees expenses, which are principally related to higher credit card transaction and payment platform fees from increased online sales levels; a $72,000 increase in software-related costs principallyincurred primarily in connection with maintenancenew software-related agreements associated with our migration toupgraded sales-related operating and cybersecurity systems; a cloud-based data storage arrangement as well as other software-related agreements; a $90,000$67,000 increase in general business taxes; a $41,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; and a $38,000 increase in travel expenses as we returned to more traditional business travel patterns following cut-backs relating to the COVID-19 pandemic and related cost-control measures in the prior year period. These increases were offset partially by a $4,000 net decrease in general office-related expenses;expenses.
The increase in digital marketing expenses for the fiscal year ended June 30, 2022 compared to the fiscal year ended June 30, 2021 was primarily due to a $2.33 million increase in digital advertising spend; a $412,000 increase in cooperative advertising; a $209,000 increase in brand awareness marketing campaign expenditures in the current year period; a $137,000 increase in expenses relating to our participation in the 2022 JCK Trade Show (the JCK Trade Show organization did not hold an event in the prior fiscal year due to restrictions related to the COVID-19 pandemic); a $24,000 increase in recruitingoutside agency fees; and a $12,000$23,000 increase in depreciation and amortization expense; and a $13,000 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 researchprint media expenses. Compensation expenses for the fiscal year ended December 31, 2017June 30, 2022 compared to the December 31, 2016fiscal year ended June 30, 2021 increased primarily as a result of a $362,000$157,000 increase in salaries, commissions, and related employee benefits in the aggregate;aggregate and a $191,000$63,000 increase in severance expense primarily related to the departure of our Chief Revenue Officer during the first quarter of 2017; a $136,000 increase in bonus expense; and a $13,000 increase in relocationemployee stock-based compensation expense. These increases were partially offset by a $171,000$24,000 decrease in employee stock-based compensation expense. Thebonus expense and a $2,000 decrease in advertising expenses foremployee-related severance costs from the year ended December 31, 2017 compared to the year ended December 31, 2016 comprises an $849,000 decrease in outside agency fees and a $33,000 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 in all other advertising expenses.prior year.
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, 2022 and 20162021 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 | | | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | | | | | | | | | | | | | | | General and administrative | | $ | 4,948,980 | | | $ | 4,441,441 | | | $ | 507,539 | | | | 11 | % |
General and administrative expenses were $4.69$4.95 million for the fiscal year ended December 31, 2017June 30, 2022 compared to $5.54$4.44 million for the fiscal year ended December 31, 2016, a decreaseJune 30, 2021, an increase of approximately $855,000,$508,000, or 15%11%. The decreaseincrease in general and administrative expenses for the fiscal year ended December 31, 2017June 30, 2022 compared to the fiscal year ended December 31, 2016June 30, 2021 was primarily due to a $751,000 decrease$336,000 increase in compensation expenses; $300,000 decreasea $110,000 increase in professional services;housing allowances and travel-related expenditures as we returned to more normal business travel patterns following cut-backs relating to the COVID-19 pandemic in the prior year period; a $77,000 decrease$75,000 increase in depreciationbusiness taxes and amortization expense;licenses; a $74,000 decreaseincrease in insurance expenses principally related to higher renewal premiums; a $57,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; a $51,000 increase in employee-related recruiting and search fees for new hires; a $13,000 increase in telephone expenses; a $16,000 decrease in travel expenses; a $14,000 decrease in computer and software related expenses; and a $16,000 decrease in miscellaneous other general and administrative expenses. These decreases were partially offset by a $99,000 increase in bank fees, which includes fees associated with the Credit Facility and credit card clearing transactions; an $88,000$12,000 increase in bad debt expense associated with our allowance for doubtful accounts reserve policy;policy in connection with an $18,000 increase in equipment-related rental expense; an $8,000accounts receivable, compared with the prior period; and a $7,000 net increase in board retainer fees;miscellaneous general and administrative expenses. These increases were partially offset by a $115,000 decrease in bank-related fees principally in connection with the Company’s prior credit facility that was terminated in accordance with its terms in July 2021; an $86,000 decrease in depreciation and amortization expense, principally related to fully depreciated assets when compared to those in prior periods; and a $5,000 increase$26,000 decrease in business taxes and licenses.professional services.
Compensation expenses decreasedincreased for the fiscal year ended December 31, 2017June 30, 2022 compared to the fiscal year ended December 31, 2016June 30, 2021 primarily due to a $469,000 decrease$315,000 increase in employee stock-based compensation expense and a $75,000 net increase in salaries and related employee benefits in the aggregate and a $380,000 decrease in employee stock-based compensation expense, principally due to changes in stock-based compensation performance measurements and the modification of restricted stock awards from wholly restricted stock awards to awards consisting of 70% restricted stock and 30% cash in lieu of restricted stock.aggregate. These decreasesincreases were offset by a $56,000 increase$54,000 decrease in bonus expense and an increase of $42,000 in severance expenses related to personnel changes.expense. Professional services fees decreased for the fiscal year ended December 31, 2017June 30, 2022 compared to the fiscal year ended December 31, 2016June 30, 2021 primarily due to a $67,000 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;legal fees associated with corporate governance matters and a $1,000$57,000 decrease in investor and public relations expenses.fees. These decreases were partially offset by ana $63,000 increase in legal fees associated with audit and tax services, principally related to a discrete income tax-related projects, and a $35,000 increase in marketing consulting services.
Gain on Extinguishment of Debt 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
Gain on extinguishment of discontinued operations. Approximately $175,000 of general and administrative expensesdebt 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, 2022 and 20162021 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 | | | | | 2022 | | | 2021 | | | 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 prior fiscal year ended June 30, 2021.
Interest Income
Interest income for the fiscal years ended June 30, 2022 and 2021 is as follows:
| | | Year Ended June 30, | | | Change | | | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | Interest income | | $ | 19,277 | | | $ | 5,581 | | | $ | 13,696 | | | | 245 | % |
Certain cash balances in excess of operating needs are deposited into and maintained in an interest-bearing account with a federally insured commercial bank. Accordingly, during the fiscal years ended June 30, 2022 and 2021, we earned interest from cash on deposit in this interest-bearing account. The increase in earned interest for the fiscal year ended June 30, 2022 reflects movement of invested funds into a higher-yield money market fund during the quarter ended June 30, 2022, coupled with the overall increase in interest rates during Fiscal 2022 compared with Fiscal 2021.
Interest Expense
Interest expense for the fiscal years ended June 30, 2022 and 2021 is as follows:
| | | Year Ended June 30, | | | Change | | | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | Interest expense | | $ | - | | | $ | 8,953 | | | $ | (8,953 | ) | | | (100 | )% |
As described above, during the period of time the principal of the PPP Loan was outstanding, we accrued interest at a fixed rate of 1% per annum. Our accrual for interest expense associated with the PPP Loan began June 18, 2020, the date we received the proceeds for the PPP Loan from our Lender, through June 23, 2021, the date our PPP Loan, including the related accrued and unpaid interest, was forgiven by the SBA.
We had no lossoutstanding debt during the fiscal year ended June 30, 2022.
Loss on abandonment of property and equipmentForeign Currency Exchange
Loss on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar 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, 2022 and 2016 is2021 are 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 | | | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | Loss on foreign currency exchange | | $ | 34 | | | $ | 603 | | | $ | (569 | ) | | | (94 | )% |
During the fiscal years ended June 30, 2022 and 2021, we had international sales transactions denominated in currencies other than the U.S. dollar that resulted in foreign currency exchange net losses. The gain on insurance claim settlement was approximately $183,000 fordecrease in these losses reflects the lower level of international sales denominated in foreign currencies during the fiscal year ended December 31, 2017,June 30, 2022, compared to $0 forwith the prior fiscal year, coupled with fluctuations in foreign currency exchange rates during the fiscal year ended December 31, 2016, an increase 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.June 30, 2022.
Provision for Income Taxes
Our statutory tax rate as of June 30, 2022 is 22.45% and consisted of the federal income tax rate of 21.00% and a blended state income tax rate of 1.45%, net of the federal benefit. Our statutory tax rate as of the fiscal year ended June 30, 2021 was 22.24% and consisted of the federal income tax rate of 21.00% and a blended state income tax rate of 1.24%, net of the federal benefit. For the fiscal year ended June 30, 2022, our effective income tax rate was 17.93%. Our effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax accounting arising primarily from the permanent tax benefits associated with stock-based compensation transactions during the accounting period then ended.
We recognized ana net income tax net expense of approximately $28,000 and 13,000$519,000 for the yearsfiscal year ended December 31, 2017 and 2016, respectively. IncomeJune 30, 2022, compared with a net income tax provisions in these years primarily relate to estimated tax, penalties, and interest associated with uncertain tax positions.benefit of approximately $6.33 million for the fiscal year ended June 30, 2021.
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, we determined that sufficient positive evidence existed as of June 30, 2021, to conclude that it was more likely than not deferred tax assets of approximately $6.35 million would be realizable, and we reduced our valuation allowance accordingly. 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.
With the reduction of our valuation allowance during the fiscal year ended June 30, 2021, we recognized deferred income tax expense during the fiscal year ended June 30, 2022 in the amount of approximately $499,000 compared to a deferred income tax benefit during the year ended June 30, 2021 in the amount of approximately $6.35 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.
As of June 30, 2022, we determined that our expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant estimates and assumptions, would continue to be sufficient to result in full utilization of our remaining federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of June 30, 2022, to conclude that it is more likely than not deferred tax assets of approximately $5.85 million remain realizable. Conversely, we further determined that sufficient negative evidence continued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize certain of our deferred tax assets. Therefore, we continued to maintain a valuation allowance against the deferred tax assets relating to certain state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of when it will generate positive taxable income to utilize the associated deferred tax assets. In addition, a valuation allowance remains against certain deferred tax assets relating to operating loss carryforwards relating to our dormant subsidiary located in Hong Kong. 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 statutory tax rateAOV is 23.25%based on financial results and consists ofcustomer-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 federal income tax rate of 21% and a blended state income tax rate of 2.25%,products – that may have widely variable price points – which our audiences are seeking.
For the fiscal year ended June 30, 2022, our AOV, based on charlesandcolvard.com revenue, net of returns, divided by the federal benefit.total number of customer orders, is estimated to be approximately $1,100.
On December 22, 2017,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 2022. 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 President signedfiscal year ended June 30, 2022, we experienced a 24% year-over-year growth in charlesandcolvard.com revenue compared to revenue for the Tax Act that among other things lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. For further discussion of the effects of 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, 2021.
Liquidity and Capital Resources
The full impact of the COVID-19 pandemic on the global and domestic economy remains uncertain and the world continues adapting to the ongoing pandemic and evolving viral variants and its adverse effects on global economics and worldwide business operations. The impact of the COVID-19 pandemic continues to place unprecedented pressures on global and U.S. businesses including our own. Depending on future developments, including the success of the global vaccine efforts to control the spread of the underlying virus and evolving variants and sub-variants, the pandemic could materially adversely impact our capital resources and liquidity in the future. We remain increasingly focused on the COVID-19 pandemic and are continually evaluating its potential effect on our business and liquidity and capital resources.
Capital Structure and 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.
Short-Term Liquidity and Capital Structure
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.
The Consolidated Appropriations Act, 2021, provides that employers who received a PPP loan may also qualify for the Employee Retention Credit, or 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 may qualify for certain employer-related tax benefits pursuant to the ERC and are currently working with an independent third-party tax credit firm to amend our applicable federal payroll tax returns for such benefit. Any benefit received in connection with available ERC credits will be recognized in the period such credits are received.
Long-Term Liquidity and Capital Structure
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
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.
Long-Term Financing Activities
In accordance with authority granted by our Board of Directors on April 29, 2022, we can repurchase up to $5.00 million in shares outstanding of our common stock over the three-year period ending April 29, 2025. Pursuant to the terms of the repurchase authorization, the common stock share repurchases are generally at the discretion of management. As we repurchase our common shares, which have no par value, we report such shares held as treasury stock on our consolidated balance sheets as of June 30, 2022 and 2021, with the purchase price recorded within treasury stock.
During the fiscal year ended June 30, 2022, we repurchased 30,287 shares of our common stock for an aggregate price of approximately $38,000 pursuant to the repurchase authorization. We repurchased no shares of our common stock during 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, 2022, our principal sources of liquidity were cash and cash equivalents totaling $4.59$15.67 million, trade accounts receivable of $3.38$2.22 million, and net current inventory of $11.21$11.02 million, as compared to cash, and cash equivalents, and restricted cash totaling $7.43$21.45 million, trade accounts receivable of $2.80$1.66 million, and net current inventory of $9.77$11.45 million as of December 31, 2016. As described more fully below,June 30, 2021. We also had access during Fiscal 2022 to a $5.00 million cash collateralized line of credit facility, or the JPMorgan Chase Credit Facility, that we also have access to our $10.00 million Credit Facility.obtained effective July 9, 2021, as amended July 28, 2022, from JPMorgan Chase Bank, N.A., or JPMorgan Chase.
During the fiscal year ended December 31, 2017,June 30, 2022, our working capital decreased by approximately $1.37$1.08 million to $14.70$29.06 million from $16.07$30.14 million at December 31, 2016.June 30, 2021. As described more fully below, the decrease in working capital at December 31, 2017June 30, 2022 is primarily attributable to an increase in our accounts payable, a decrease in our allocation of inventory from long-term to short-term due to a lower expected sell through of inventory on hand in the upcoming period, an increase in our short-term operating lease liabilities; and a net decrease in our cash, and cash equivalents, resulting from cash used in our operations and increases in accounts payable, accrued cooperative advertising, and accrued expenses and other liabilities.restricted cash. These factors were offset partially by a decrease in our accrued expenses and other liabilities, an increase in our allocation of inventory to short-term from long-term, and increases in accounts receivable, and an increase in our prepaid expenses and other assets. Our cash used for investing activities principally for construction-in-process expenditures related to our retail expansion program and the construction of our first Signature Showroom and other leasehold improvements in our corporate offices was offset partially by cash provided by net financing activities.
During the fiscal year ended December 31, 2017, $2.56 millionJune 30, 2022, approximately $573,000 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;$2.37 million, which also included $1.87 million of non-cash expenses; an increase in accounts receivablepayable of $733,000; an increase in inventory of $3.50 million$1.63 million; and an increase in prepaid expenses and other assets of $36,000.$927,000. These factors were offset partially by an increase in accounts payableinventory of $489,000$4.54 million; a decrease in accrued expenses and other liabilities of $1.20 million; an increase in accounts receivable of $484,000; and a decrease in accrued liabilitiesincome taxes of $246,000. Non-cash items partially offsetting$10,000.
During the impact of net loss totaled $1.43 million. The inventory increase was, in part, due to the purchase of new raw material SiC crystals 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, 2022, accounts receivable increased principally due to increased sales during the fourth quarter of 2017 as compared with the same period inour accounts receivable as of the prior year as well as an overall increaseended June 30, 2021. Throughout the course of sales in our Online Channels segment in 2017 compared with 2016. We did not offer anythe COVID-19 pandemic and through the fiscal year ended June 30, 2022, from time to time we have offered extended Traditional segment customer payment terms duringbeyond 90 days to certain credit-worthy customers. Because of the year ended December 31, 2017; however, we may offerongoing 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 $815,000 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. 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 the year ended December 31, 2016. We have not experienced any other significant accounts receivable write-offs related to revenue arrangements with extended payment terms. PrepaidJune 30, 2022, prepaid expenses and other assets increased principally as a result of an increase in the right-of-use asset associated with leasehold improvements in connection with the lease for our corporate headquarters facilities (which for financial reporting purposes is classified with prepaid expenses and other assets in the consolidated statement of cash flows) and the timing of the receipt of an insurance claim settlement offset partially by the timing ofcertain vendor payments, primarily for insurance-related premium expenses, in advance of goods or services received. AccountsDuring the fiscal year ended June 30, 2022, accrued expenses and other liabilities decreased principally due the timing of payments for certain incurred expenses, principally for compensation and related benefits, partially offset by an increase in the operating lease liability associated with the lease for our corporate headquarters facilities. During the fiscal year ended June 30, 2022, accounts payable increased primarily as a result of the timing of payments for costs incurred but not yet paid as of December 31, 2017 associated with inventory-related purchases and professional services incurred but not yetincurred. 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, 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 restricted cash, principally resulting from cash provided by our operations, increase in our allocation of inventory from long-term to short-term due underto a higher expected sell through of inventory on hand in the upcoming period, an increase in our vendors’ payment terms. Likewise,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 increased principally due to the timing of travel-relatedand a decrease in our prepaid expenses and services incurred but not yet due underother assets.
During the fiscal year ended June 30, 2021, approximately $6.47 million of cash was provided by our vendors’ payment terms.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.
We manufactured approximately $15.26$9.23 million and $7.63 million in loose jewels and $7.61$16.98 million and $12.72 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, 2022 and 2021, 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 increasedfluctuated significantly over the past decade, resulting in higher retail price points for gold jewelry. Because the market priceprices of gold and other precious metals isare beyond our control, 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, 2022 and 2021, $22.49 million and $17.72 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$1.99 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 $0 and $15,000 during the fiscal years ended June 30, 2022 and 2021, respectively. As of June 30, 2022, all of our remaining federal income tax credits had expired or been utilized, and therefore, are not available to be carried forward to offset future income taxes. As of June 30, 2022 and 2021, we had federal tax net operating loss carryforwards of approximately $16.53 million and $19.00 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 $19.77 million and $19.87 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.
Short-Term Capital Resources
Line of Credit
Effective July 7, 2021, we obtained from JPMorgan Chase our $5.00 million cash collateralized JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The JPMorgan Chase Credit Facility is secured by a cash deposit in the Notesamount of $5.05 million held by JPMorgan Chase as collateral for the line of credit facility. Effective July 28, 2022, the JPMorgan Chase Credit Facility was amended to, Consolidated Financial Statements.among other things, extend the maturity date to July 31, 2023, and append our obligations under the JPMorgan Chase Credit Facility to be guaranteed by our wholly owned subsidiaries, Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC, and moissaniteoutlet.com, LLC.
Each advance under the JPMorgan Chase Credit Facility, as amended, accrues interest at a rate equal to the sum of JPMorgan Chase’s monthly secured overnight financing rate, or the SOFR rate, to which JPMorgan Chase is subject with respect to the adjusted SOFR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum and an unsecured to secured interest rate adjustment of 0.10% per annum. Prior to its amendment, each advance under the JPMorgan Chase Credit Facility would have accrued interest at a rate equal to JPMorgan Chase’s monthly LIBOR rate multiplied by a statutory reserve rate for eurocurrency funding to which JPMorgan Chase is subject with respect to the adjusted LIBOR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum. Interest is calculated monthly on an actual/360-day basis and payable monthly in arrears. Principal outstanding during an event of default, at JPMorgan Chase’s option, accrues interest at a rate of 3% per annum in excess of the above rate. Any advance may be prepaid in whole or in part at any time. 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-Kfor more detailed information relating to concerns about structural risks of interbank offered rates, or IBORs, and, particularly, the risk of cessation of the LIBOR during the fiscal year ended June 30, 2022.
The JPMorgan Chase Credit Facility is evidenced by a credit agreement, as amended, between us and JPMorgan Chase, or the JPMorgan Chase Credit Agreement, dated as of July 28, 2022, 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, 2023, 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, changes in control, as well as indemnity, expense reimbursement, and confidentiality provisions.
In connection with the JPMorgan Chase Credit Facility, effective July 7, 2021, 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. There was no origination fee paid to JPMorgan Chase in connection with the amended JPMorgan Chase Credit Facility, dated, July 28, 2022.
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.
As of June 30, 2022, we had not borrowed against the JPMorgan Chase Credit Facility.
Prior to obtaining the JPMorgan Chase Credit Facility, we and our wholly owned subsidiary, charlesandcolvard.com, LLC, collectively referred to as the White Oak 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 White Oak 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.
Long-Term Capital Commitments
Contractual Agreement
On December 12, 2014, we entered into the Supply Agreement with Cree.Wolfspeed. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree,Wolfspeed, and CreeWolfspeed 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 Wolfspeed may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Wolfspeed has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 20182025 is dependent uponapproximately $52.95 million, of which approximately $26.55 million remains to be purchased as of June 30, 2022.
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, 2022 and 2021, we purchased approximately $9.39$6.29 million and $3.78 million, respectively, of SiC crystals from Cree. WeWolfspeed. 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 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. As of December 31, 2017, we had approximately $884,000 of remaining federal income tax credits, $533,000 of which expire between 2018Liquidity 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 $24.59 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.Capital Trends
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 the Credit Facility from Wells Fargo. The Credit Facility may be used for general corporate and working capital purposes, including transaction fees and expenses incurred in connection therewith and the issuance of letters 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-month LIBOR rate plus 2.00%, or (ii) Wells Fargo’s Prime Rate plus 1%, each calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate of 3% 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.
The Credit Facility is secured by a lien on substantially all assets of the Borrowers, each of which is jointly and severally liable for all obligations thereunder. Wells Fargo’s security interest in certain SiC materials is subordinate to Cree’s security interest in such materials pursuant to the Supply Agreement and an Intercreditor Agreement with Wells Fargo.
The Credit Facility is evidenced by a Credit and Security Agreement, dated as of June 25, 2014, as amended, or the Credit Agreement, and customary ancillary documents. The Credit Agreement contains customary covenants, representations and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.
Events of default under the Credit Facility include, without limitation, (i) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (ii) an event of default under any other indebtedness of the Borrowers 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 circumstances 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.
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, we had not borrowed against the Credit Facility.
We believe that our existing cash and cash equivalents and access to other working capital together with futureresources, including but not limited to the issuance of equity securities, and 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.
From a long-term perspective, we believe that our ongoing access to capital markets, including but not limited to the issuance of equity securities or even potential debt securities, coupled with cash provided by operating activities in future periods beyond the next twelve months, will continue to provide us with the necessary liquidity to meet our long-term working capital and capital expenditure requirements.
In connection with our short- and long-term capital resources, we have an effective shelf registration statement on Form S-3 on file with the SEC that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of the COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Our future capital requirements and the adequacy of available funds will depend on many factors, 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, toas amended, through its expiration on July 31, 2023, 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 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, those actual results of operations may materially differ. The most significant estimates impacting our consolidated financial statements relate to the valuation and classification of inventories, accounts receivable reserves, deferred tax assets, stock-based compensation, and revenue recognition. We also have other policies that we consider key accounting policies, but these policies typically do not require us to make estimates or judgments that are difficult or subjective.
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 goods set with 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, 2022 and 2021, work-in-process inventories issued to active production jobs approximated $2.76 million and $2.23 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.
See Note 2 to our consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-Kunder 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-Kfor more detailed information relating to our accounting for inventory-related reserves and valuation allowances.
Off-Balance Sheet ArrangementsRevenue 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 Traditional segment customers, the returns policy generally allows for the return of jewels and finished jewelry with a valid reason for credit within 30 days of shipment. Customers in both our charlesandcolvard.com and moissaniteoutlet.com websites may also generally return purchases within 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 and we reduce sales and trade accounts receivable by this estimated amount. Our allowance for sales returns was $591,000 and $675,000 at June 30, 2022 and 2021, 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 douse a current expected credit losses 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 or current worldwide adverse economic conditions, 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 off-balance sheet arrangementsinternal 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 unconsolidated entitiessignificant 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, 2022 and 2021, we determined no additional reserves were necessary for specific accounts. Based on these criteria, we determined that allowances for uncollectible accounts receivable of $85,000 and $71,000 at June 30, 2022 and 2021, 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 June 30, 2021, cumulative positive taxable income over the preceding three tax years had been generated in the U.S., as compared to the negative evidence of cumulative losses in the prior years. We also determined that our expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that included significant management estimates and assumptions, would be sufficient to result in full utilization of our federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of June 30, 2021, to conclude that it was more likely than not deferred tax assets of approximately $6.35 million would be realizable, and we reduced our valuation allowance accordingly. The reduction of the valuation allowances against these deferred tax assets was the main driver of the income tax benefit recognized during the fiscal year ended June 30, 2021 of approximately $6.33 million.
With the reduction of our valuation allowance during the fiscal year ended June 30, 2021, we recognized deferred income tax expense during the fiscal year ended June 30, 2022 in the amount of approximately $499,000 compared to a deferred income tax benefit during the year ended June 30, 2021 in the amount of approximately $6.35 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.
As of June 30, 2022, we determined that our expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant management estimates and assumptions, would continue to be sufficient to result in full utilization of our remaining federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of June 30, 2022, to conclude that it is more likely than not deferred tax assets of approximately $5.85 million remain realizable. Conversely, we further determined that sufficient negative evidence continued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize certain of its deferred tax assets. Therefore, we continued to maintain a valuation allowance against the deferred tax assets relating to certain state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of when it will generate positive taxable income to utilize the associated deferred tax assets. In addition, a valuation allowance remains against certain deferred tax assets relating to operating loss carryforwards relating to our dormant subsidiary located in Hong Kong
As of June 30, 2022, all of our remaining federal income tax credits had expired or related parties, nor dobeen utilized, and therefore, are not available to be carried forward to offset future income taxes. As of June 30, 2022 and 2021, we had federal tax net operating loss carryforwards of approximately $16.53 million and $19.00 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 $19.77 million and $19.87 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, 2022 and 2021, 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, 2022 and 2021, 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 other formsany portion of off-balance sheet arrangements. Accordingly, our liquiditydeferred tax assets in future periods, the valuation allowance would need to be reversed and capital resources are not subject to off-balance sheet risks from unconsolidated entities. Asmay impact our future operating results.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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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, 2022, and 2016,2021, 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, 2022 and subsidiaries at December 31, 2017 and 2016,2021, 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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 a critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Inventories Net Realizable Value As described in Notes 2 and 6 to the Company’s consolidated financial statements, inventories totaled approximately $33.5 million at June 30, 2022. 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 estimation 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 estimation 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 calculations including historical demand, 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. Assessing the reserve analysis 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.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2010.
Raleigh, North Carolina
March 8, 2018September 1, 2022
CHARLES & COLVARD, LTD. CONSOLIDATED BALANCE SHEETS
| | | December 31, | | | June 30, | | | | | 2017 | | | 2016 | | | 2022
| | | 2021
| | | ASSETS | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 4,594,007 | | | $ | 7,427,273 | | | $ | 15,668,361 | | | $ | 21,302,317 | | | Restricted cash | | | | 5,510,979 | | | | 144,634 | | | Accounts receivable, net | | | 3,377,451 | | | | 2,794,626 | | | | 2,220,816 | | | | 1,662,074 | | | Inventory, net | | | 11,208,658 | | | | 9,770,206 | | | | 11,024,276 | | | | 11,450,141 | | | Note receivable | | | | 250,000 | | | | 250,000 | | | Prepaid expenses and other assets | | | 969,857 | | | | 682,083 | | | | 1,190,012 | | | | 952,065 | | | Total current assets | | | 20,149,973 | | | | 20,674,188 | | | | 35,864,444 | | | | 35,761,231 | | | Long-term assets: | | | | | | | | | | | | | | | | | | Inventory, net | | | 19,764,959 | | | | 18,360,211 | | | | 22,488,524 | | | | 17,722,579 | | | Property and equipment, net | | | 1,242,200 | | | | 1,391,116 | | | | 1,901,176 | | | | 875,897 | | | Intangible assets, net | | | 8,597 | | | | 8,808 | | | | 265,730 | | | | 209,658 | | | Operating lease right-of-use assets | | | | 2,787,419 | | | | 3,952,146 | | | Deferred income taxes, net | | | | 5,851,904 | | | | 6,350,830 | | | Other assets | | | 64,978 | | | | 71,453 | | | | 49,658 | | | | 49,658 | | | Total long-term assets | | | 21,080,734 | | | | 19,831,588 | | | | 33,344,411 | | | | 29,160,768 | | | TOTAL ASSETS | | $ | 41,230,707 | | | $ | 40,505,776 | | | $ | 69,208,855 | | | $ | 64,921,999 | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | | Accounts payable | | $ | 4,466,163 | | | $ | 3,977,149 | | | $ | 4,401,229 | | | $ | 2,774,373 | | | Operating lease liabilities, current portion | | | | 856,571 | | | | 566,083 | | | Accrued expenses and other liabilities | | | 980,800 | | | | 631,107 | | | | 1,546,483 | | | | 2,281,807 | | | Total current liabilities | | | 5,446,963 | | | | 4,608,256 | | | | 6,804,283 | | | | 5,622,263 | | | Long-term liabilities: | | | | | | | | | | | | | | | | | | Deferred rent | | | 463,526 | | | | 594,916 | | | | Noncurrent operating lease liabilities | | | | 2,846,805 | | | | 3,600,842 | | | Accrued income taxes | | | 461,592 | | | | 433,983 | | | | - | | | | 9,878 | | | Total long-term liabilities | | | 925,118 | | | | 1,028,899 | | | | 2,846,805 | | | | 3,610,720 | | | Total liabilities | | | 6,372,081 | | | | 5,637,155 | | | | 9,651,088 | | | | 9,232,983 | | | 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; 30,778,046 shares issued and 30,747,759 shares outstanding at June 30, 2022 and 29,913,095 shares issued and outstanding at June 30, 2021 | | | | 57,242,211 | | | | 56,057,109 | | | Additional paid-in capital | | | 14,726,438 | | | | 14,282,956 | | | | 25,956,491 | | | | 25,608,593 | | Treasury stock, at cost, 30,287 shares and 0 shares at June 30, 2022 and 2021, respectively | | | | (38,164 | ) | | | - | | | Accumulated deficit | | | (34,111,628 | ) | | | (33,658,151 | ) | | | (23,602,771 | ) | | | (25,976,686 | ) | | Total shareholders’ equity | | | 34,858,626 | | | | 34,868,621 | | | | 59,557,767 | | | | 55,689,016 | | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 41,230,707 | | | $ | 40,505,776 | | | $ | 69,208,855 | | | $ | 64,921,999 | |
See Notes to Consolidated Financial Statements.
CHARLES & COLVARD, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Year Ended June 30, | | | | | 2022
| | | 2021
| | | Net sales | | $ | 43,089,024 | | | $ | 39,235,839 | | | Costs and expenses: | | | | | | | | | | Cost of goods sold | | | 22,845,702 | | | | 20,809,690 | | | Sales and marketing | | | 12,421,138 | | | | 8,476,716 | | | General and administrative | | | 4,948,980 | | | | 4,441,441 | | | Total costs and expenses | | | 40,215,820 | | | | 33,727,847 | | | Income from operations | | | 2,873,204 | | | | 5,507,992 | | | Other income (expense): | | | | | | | | | | Gain on extinguishment of debt | | | - | | | | 974,328 | | | Interest income | | | 19,277 | | | | 5,581 | | | Interest expense | | | - | | | | (8,953 | ) | | Loss on foreign currency exchange | | | (34 | ) | | | (603 | ) | | Total other income (expense), net | | | 19,243 | | | | 970,353 | | | Income before income taxes | | | 2,892,447 | | | | 6,478,345 | | | Income tax (expense) benefit | | | (518,532 | ) | | | 6,332,421 | | Net income
| | $ | 2,373,915 | | | $ | 12,810,766 | | | | | | | | | | | | | Net income per common share: | | | | | | | | | | Basic | | $ | 0.08 | | | $ | 0.44 | | | Diluted | | | 0.08 | | | | 0.42 | | | | | | | | | | | | | Weighted average number of shares used in computing net income per common share: | | | | | | | | | | Basic | | | 30,363,076 | | | | 29,144,820 | | | Diluted | | | 31,316,028 | | | | 30,232,567 | |
See Notes to Consolidated Financial Statements.
CHARLES & COLVARD, LTD. CONSOLIDATED STATEMENTS OF OPERATIONSSHAREHOLDERS’ EQUITY
| | | 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 | |
| | | Common Stock | | | | | | | | | | | | | | | | | Number of Shares | | | Amount | | | Additional Paid-in Capital | | |
Treasury Stock | | | Accumulated Deficit | | | Total Shareholders’ Equity | | Balance at June 30, 2020 | | | 28,949,410 | | | $ | 54,342,864 | | | $ | 25,880,165 | | | $ | - | | | $ | (38,787,452 | ) | | $ | 41,435,577 | | | Stock-based compensation | | | - | | | | - | | | | 352,583 | | | | - | | | | - | | | | 352,583 | | | Issuance of restricted stock | | | 178,750 | | | | - | | | | - | | | | - | | | | - | | | | - | | | 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 | | | Stock-based compensation | | | - | | | | - | | | | 774,341 | | | | - | | | | - | | | | 774,341 | | | Issuance of restricted stock | | | 242,725 | | | | - | | | | - | | | | - | | | | - | | | | - | | | Stock option exercises | | | 622,226 | | | | 1,185,102 | | | | (426,443 | ) | | | - | | | | - | | | | 758,659 | | Repurchases of common stock | | | (30,287 | ) | | | - | | | | - | | | | (38,164 | ) | | | - | | | | (38,164 | ) | | Net income | | | - | | | | - | | | | - | | | | - | | | | 2,373,915 | | | | 2,373,915 | | Balance at June 30, 2022 | | | 30,747,759 | | | $ | 57,242,211 | | | $ | 25,956,491 | | | $ | (38,164 | ) | | $ | (23,602,771 | ) | | $ | 59,557,767 | |
See Notes to Consolidated Financial Statements.
CHARLES & COLVARD, LTD. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS
| | | Common Stock | | | | | | | | | | | | | | 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 | | | Stock-based compensation | | | - | | | | - | | | | 1,003,305 | | | | - | | | | 1,003,305 | | | Issuance of restricted stock | | | 255,800 | | | | - | | | | - | | | | - | | | | - | | | Stock option exercises | | | 2,500 | | | | 3,569 | | | | (1,269 | ) | | | - | | | | 2,300 | | | Net loss | | | - | | | | - | | | | - | | | | (4,525,761 | ) | | | (4,525,761 | ) | | Balance at December 31, 2016 | | | 21,369,885 | | | $ | 54,243,816 | | | $ | 14,282,956 | | | $ | (33,658,151 | ) | | $ | 34,868,621 | | | Stock-based compensation | | | - | | | | - | | | | 443,482 | | | | - | | | | 443,482 | | | Issuance of restricted stock | | | 210,217 | | | | - | | | | - | | | | - | | | | - | | | 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 | |
| | | Year Ended June 30, | | | | | 2022
| | | 2021
| | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | Net income
| | $ | 2,373,915 | | | $ | 12,810,766 | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | Depreciation and amortization | | | 479,308 | | | | 567,122 | | | Stock-based compensation | | | 774,341 | | | | 352,583 | | | Provision for uncollectible accounts | | | 14,000 | | | | 2,030 | | | Recovery of sales returns | | | (84,000 | ) | | | (29,000 | ) | | Inventory write-downs | | | 195,000 | | | | 150,000 | | | Recovery of accounts receivable discounts | | | (4,285 | ) | | | (9,153 | ) | | Gain on extinguishment of debt | | | - | | | | (974,328 | ) | Deferred income taxes
| | | 498,926 | | | | (6,350,830 | ) | | Changes in operating assets and liabilities: | | | | | | | | | | Accounts receivable | | | (484,457 | ) | | | (955,233 | ) | | Inventory | | | (4,535,080 | ) | | | 1,311,239 | | | Prepaid expenses and other assets, net | | | 926,780 | | | | (3,140,405 | ) | | Accounts payable | | | 1,626,856 | | | | (973,862 | ) | | Accrued income taxes | | | (9,878 | ) | | | 1,931 | | | Accrued expenses and other liabilities | | | (1,198,873 | ) | | | 3,710,232 | | | Net cash provided by operating activities | | | 572,553 | | | | 6,473,092 | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | Purchases of property and equipment | | | (1,496,471 | ) | | | (437,069 | ) | | Payment to fund note receivable | | | - | | | | (250,000 | ) | | Payments for intangible assets | | | (64,188 | ) | | | (46,396 | ) | | Net cash used in investing activities | | | (1,560,659 | ) | | | (733,465 | ) | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | Stock option exercises | | | 758,659 | | | | 1,090,090 | | Repurchases of common stock | | | (38,164 | ) | | | -
| | | Net cash provided by financing activities | | | 720,495 | | | | 1,090,090 | | | | | | | | | | | | | NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | (267,611 | ) | | | 6,829,717 | | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR | | | 21,446,951 | | | | 14,617,234 | | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR | | $ | 21,179,340 | | | $ | 21,446,951 | | | | | | | | | | | | 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 income taxes | | $ | - | | | $ | 14,704 | |
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. Moissanite,The Company also known by its chemical name silicon carbide (“SiC”), is a rare mineral first discoveredmarkets and distributes Caydia® lab grown diamonds and finished jewelry featuring lab grown diamonds for sale in a meteorite crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. the worldwide fine jewelry market.
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 of itsalso sells at discount retail prices to end-consumers, drop-ship retail partners, and a third-party online marketplace through moissaniteoutlet.com, LLC, a wholly owned operating subsidiary Moissanite.com, LLC toof 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 30,2022 and 20162021, include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC; including its wholly-owned subsidiary, moissaniteoulet.com, LLC, (formerly Moissanite.com, LLC),which was formed in 2011;and incorporated as of February 24,2022; 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 in and has had no operating activity since 2008. Charles & Colvard Direct, LLC, had no operating activity during the fiscal years ended June 30,2022 or 2021. 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– The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“(“U.S. GAAP”GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As future events and their effects, including the impact of the COVID-19 pandemic and the related responses, cannot be fully determined with precision, actual results of operations, cash flow, and financial position could differ significantly from estimates. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets, uncertain tax positions, cooperative advertising,stock-based compensation, and revenue recognition. Actual results could differ materially from those estimates.
Reclassifications - Certain amountsChanges in estimates are reflected in the prior year’scondensed consolidated financial statements in the period in which the change in estimate occurs.
Recently Issued Accounting Pronouncements – Effective July 1,2021, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2019-12,Income Taxes: Simplifying the Accounting for Income Taxes (“ASU 2019-12”) that provides guidance for the simplification of the accounting for income taxes that is intended to reduce the complexity while maintaining or improving the usefulness of tax disclosure information in an entity’s financial statements. The resulting impact of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements. In March 2020, and as updated in January 2021, in response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), the FASB issued ASU 2020-04,Reference Rate Reform (Topic 848) (“ASU 2020-04”), which provides guidance to ease the burden in accounting for or recognizing the effects of referenced interest rate reform on financial reporting. ASU 2020-04 is elective and may be applied as of March 12,2020 through December 31,2022. As described in more detail in Note 10, “Debt”, borrowings under the Company’s line of credit during the fiscal year ended June 30,2022 would have been reclassified to conformbased on a rate equal to the currentone-month LIBOR. As of June 30,2022, the Company had not borrowed against its line of credit, and therefore, has not elected to apply ASU 2020-04 as of or for the fiscal year presentation, primarily amounts described in Note 3, “Segment Information and Geographic Data”, related to changes in the Company’s reportable segments and in Note 8, “Accrued Expenses and Other Liabilities”, relating to the reclassificationended June 30,2022.
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 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, and as amended on July 28,2022, the Company is required to keep $5.05 million in a cash deposit account held by JPMorgan Chase. Such amount was held as security for the Company’s credit facility from JPMorgan Chase. Accordingly, during the term of the JPMorgan Chase credit facility, the cash deposit held by JPMorgan Chase is 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.” Pursuant to the terms and conditions of the Company’s broker-dealer agreement with Oppenheimer & Co., Inc. (“Oppenheimer”), with whom the Company has engaged to transact common stock share repurchases in connection with its stock repurchase program, the Company is required to maintain a funded liquid margin account held by Oppenheimer for the benefit of the Company. The purpose of this account is to fund the Company’s common stock purchases and any underlying transaction costs and fees. Depending upon the level and timing of stock repurchase activity, the funded margin account cash balance will fluctuate from time to time. At June 30,2022, cash in the amount of approximately $461,000 was held by Oppenheimer. Such cash amount held by Oppenheimer was classified as restricted cash for financial reporting purposes on the Company’s Consolidated Balance Sheets.
For additional information regarding the Company’s stock repurchase program, see Note 12, “Shareholders’ Equity and Stock-Based Compensation.”
In accordance with cash management process requirements related to the Company’s former 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.” 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, | | | | | 2022
| | | 2021
| | | Cash and cash equivalents | | $ | 15,668,361 | | | $ | 21,302,317 | | | Restricted cash | | | 5,510,979 | | | | 144,634 | | | Total cash, cash equivalents, and restricted cash | | $ | 21,179,340 | | | $ | 21,446,951 | |
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 banks and trade accounts receivable. AtThe Company places cash deposits with federally insured financial institutions and maintains its cash at banks and financial institutions it considers to be of high credit quality. However, the Company’s cash deposits mayat times cash balances may exceed the Federal Deposit Insurance Corporation (“FDIC”)Corporation’s insurable limits. Accordingly, balances in excess of federally insured limitations may not be insured. The Company has nevernot experienced any losses relatedon these accounts, and management believes that the Company is not exposed to these balances. Non-interest-bearing amountssignificant risks on deposit in excess of FDIC insurable limits at December 31, 2017 approximated $4.32 million. such accounts.Trade receivables potentially subject the Company to credit risk. Payment terms on trade receivables for the Company’s Traditional segment customers are generally between 30 and 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 and it reduces sales and trade accounts receivable by this estimated amount. The Company’s allowance for sales returns was $537,000$591,000 and $415,000$675,000 at December 31, 2017June 30, 2022 and 2016,2021, respectively. The following is a reconciliationare reconciliations of the allowance for sales returns:returns balances for the periods presented:
| | | Year Ended December 31, | | | Year Ended June 30, | | | | | 2017 | | | 2016 | | | 2022
| | | 2021
| | | Balance, beginning of year | | $ | 415,000 | | | $ | 731,000 | | | $ | 675,000 | | | $ | 704,000 | | | Additions charged to operations | | | 3,878,736 | | | | 3,574,297 | | | | 6,012,069 | | | | 5,631,415 | | | Sales returns | | | (3,756,736 | ) | | | (3,890,297 | ) | | | (6,096,069 | ) | | | (5,660,415 | ) | | Balance, end of year | | $ | 537,000 | | | $ | 415,000 | | | $ | 591,000 | | | $ | 675,000 | |
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 current expected credit losses 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, 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, 2022 and 2016,2021, 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$85,000 and $226,000$71,000 at December 31, 2017June 30, 2022 and 2016, 2021, 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 | | | 2022
| | | 2021
| | | Balance, beginning of year | | $ | 226,000 | | | $ | 1,137,000 | | | $ | 71,000 | | | $ | 79,000 | | | Additions (reductions) charged to operations | | | 28,000 | | | | (73,300 | ) | | | Additions charged to operations | | | | 14,000 | | | | 2,030 | | | Write-offs, net of recoveries | | | - | | | | (837,000 | ) | | | - | | | | (10,030 | ) | | Balance, end of year | | $ | 254,000 | | | $ | 226,000 | | | $ | 85,000 | | | $ | 71,000 | |
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
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Intangible Assets -– The Company capitalizes costs associated with obtaining or defending patents issued or pending for inventions and license rights related to the manufacturemanufacturing of moissanite gemstones and fine jewelry set with moissanite and lab grown diamond 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 amountvalue of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amountvalue 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 amountvalue exceeds the fair value and such amount 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, 2022, 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 willwould result in increased depreciation and amortization expense in the current period whenin which 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, 2021 were recorded in net sales during the fiscal year ended June 30, 2022. 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. For the Company’sshipment. Online Channels segment customers canin both of the Company’s transactional websites, charlesandcolvard.com and moissaniteoutlet.com, may also generally return their purchases for any reason generally within 60 30 days 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, 2022 and 2021, the Company’s refund liabilities balances were $591,000 and $675,000, respectively, and are included as allowances for sales returns within accounts receivable, net, in the accompanying consolidated balance sheets. As of June 30, 2022 and 2021, the Company’s returns asset balances were $260,000 and $252,000, 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, 2022 and 2016,2021, these approximate amounts were an expense of $210,000$792,000 and $126,000,$380,000, 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, 2022 and 20162021, were approximately $1.94$7.38 million and $2.59$4.25 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.subsidiary, which include the operating expenses of its wholly owned subsidiary, moissaniteoutlet.com, LLC.
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 compensationrestricted stock 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.
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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 - 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.
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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;
| · | 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.
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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.
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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 historically the Company has not had sufficient 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 per Common Share -– Basic net loss from continuing and discontinued operationsincome per common share is computed by dividing net lossincome by the weighted average number of common shares outstanding during the periods. Diluted net loss from continuing and discontinued operationsincome 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 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, | | | | | 2022
| | | 2021
| | | Numerator: | | | | | | | Net income
| | $ | 2,373,915 | | | $ | 12,810,766 | | | | | | | | | | | | | Denominator: | | | | | | | | | | Weighted average common shares outstanding: | | | | | | | | | | Basic | | | 30,363,076 | | | | 29,144,820 | | | Effect of dilutive securities | | | 952,952 | | | | 1,087,747 | | | Diluted | | | 31,316,028 | | | | 30,232,567 | | | | | | | | | | | | | Net income per common share: | | | | | | | | | | Basic | | $ | 0.08 | | | $ | 0.44 | | | Diluted | | $ | 0.08 | | | $ | 0.42 | |
ForFor the fiscal years ended December 31, 2017June 30,2022 and 2016,2021, stock options to purchase approximately 2.23758,000 shares and 1.24 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 years ended December 31, 2017 and 2016, 370,000 and 359,000, respectively,Approximately 45,000 shares of unvested restricted shares that have been issued but not yet vested have beenstock were excluded from the computation of diluted net loss per common share.share as of June 30,2022 because the shares were performance-based and the underlying conditions had not been met as of the year presented. 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, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard that supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers 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. 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, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the early stage 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.
| 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. 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, 2022 | | | | | Traditional | | | Online Channels | | | Total | | | Online Channels | | | Traditional | | | Total | | | Net sales | | | | | | | | | | | | | | | | | | | | Finished jewelry | | | $ | 23,539,347 | | | $ | 6,172,883 | | | $ | 29,712,230 | | | Loose jewels | | $ | 13,430,776 | | | $ | 3,149,972 | | | $ | 16,580,748 | | | | 3,240,702 | | | | 10,136,092 | | | | 13,376,794 | | | Finished jewelry | | | 2,515,443 | | | | 7,936,773 | | | | 10,452,216 | | | | Total | | $ | 15,946,219 | | | $ | 11,086,745 | | | $ | 27,032,964 | | | $ | 26,780,049 | | | $ | 16,308,975 | | | $ | 43,089,024 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Product line cost of goods sold | | | | | | | | | | | | | | | | | | | | | | | | | | Finished jewelry | | | $ | 9,837,830 | | | $ | 4,094,870 | | | $ | 13,932,700 | | | Loose jewels | | $ | 6,998,485 | | | $ | 1,526,358 | | | $ | 8,524,843 | | | | 1,209,832 | | | | 4,959,958 | | | | 6,169,790 | | | Finished jewelry | | | 1,610,845 | | | | 3,615,815 | | | | 5,226,660 | | | | Total | | $ | 8,609,330 | | | $ | 5,142,173 | | | $ | 13,751,503 | | | $ | 11,047,662 | | | $ | 9,054,828 | | | $ | 20,102,490 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Product line gross profit | | | | | | | | | | | | | | | | | | | | | | | | | | Finished jewelry | | | $ | 13,701,517 | | | $ | 2,078,013 | | | $ | 15,779,530 | | | Loose jewels | | $ | 6,432,291 | | | $ | 1,623,614 | | | $ | 8,055,905 | | | | 2,030,870 | | | | 5,176,134 | | | | 7,207,004 | | | Finished jewelry | | | 904,598 | | | | 4,320,958 | | | | 5,225,556 | | | | Total | | $ | 7,336,889 | | | $ | 5,944,572 | | | $ | 13,281,461 | | | $ | 15,732,387 | | | $ | 7,254,147 | | | $ | 22,986,534 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating (loss) income | | $ | (836,797 | ) | | $ | 228,253 | | | $ | (608,544 | ) | | | Operating income | | | $ | 2,550,991 | | | $ | 322,213 | | | $ | 2,873,204 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | $ | 300,308 | | | $ | 121,711 | | | $ | 422,018 | | | $ | 235,643 | | | $ | 243,665 | | | $ | 479,308 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditures | | $ | 123,944 | | | $ | 147,446 | | | $ | 271,390 | | | $ | 305,586 | | | $ | 1,190,885 | | | $ | 1,496,471 | |
| | | Year Ended December 31, 2016 | | | | | Traditional | | | Online Channels | | | Total | | | Net sales | | | | | | | | | | | Loose jewels | | $ | 19,231,534 | | | $ | 2,220,194 | | | $ | 21,451,728 | | | Finished jewelry | | | 1,075,157 | | | | 6,641,243 | | | | 7,716,400 | | | Total | | $ | 20,306,691 | | | $ | 8,861,437 | | | $ | 29,168,128 | | | | | | | | | | | | | | | | | Product line cost of goods sold | | | | | | | | | | �� | | | | Loose jewels | | $ | 13,107,366 | | | $ | 809,383 | | | $ | 13,916,749 | | | Finished jewelry | | | 1,195,640 | | | | 2,953,148 | | | | 4,148,788 | | | Total | | $ | 14,303,006 | | | $ | 3,762,531 | | | $ | 18,065,537 | | | | | | | | | | | | | | | | | Product line gross profit (loss) | | | | | | | | | | | | | | Loose jewels | | $ | 6,124,168 | | | $ | 1,410,811 | | | $ | 7,534,979 | | | Finished jewelry | | | (120,483 | ) | | | 3,688,095 | | | | 3,567,612 | | | Total | | $ | 6,003,685 | | | $ | 5,098,906 | | | $ | 11,102,591 | | | | | | | | | | | | | | | | | Operating loss | | $ | (3,089,559 | ) | | $ | (847,259 | ) | | $ | (3,936,818 | ) | | | | | | | | | | | | | | | | Depreciation and amortization | | $ | 479,517 | | | $ | 77,876 | | | $ | 557,393 | | | | | | | | | | | | | | | | | Capital expenditures | | $ | 158,702 | | | $ | 263,059 | | | $ | 421,761 | |
| | | Year Ended June 30, 2021 | | | | | Online Channels | | | Traditional | | | Total | | | Net sales | | | | | | | | | | | Finished jewelry | | $ | 19,905,199 | | | $ | 4,496,347 | | | $ | 24,401,546 | | | Loose jewels | | | 3,304,439 | | | | 11,529,854 | | | | 14,834,293 | | | Total | | $ | 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 | | | 1,216,942 | | | | 5,640,813 | | | | 6,857,755 | | | Total | | $ | 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 | | | 2,087,497 | | | | 5,889,041 | | | | 7,976,538 | | | Total | | $ | 13,756,899 | | | $ | 7,349,173 | | | $ | 21,106,072 | | | | | | | | | | | | | | | | Operating income
| | $ | 3,739,553 | | | $ | 1,768,439 | | | $ | 5,507,992 | | | | | | | | | | | | | | | | | Depreciation and amortization | | $ | 248,995 | | | $ | 318,127 | | | $ | 567,122 | | | | | | | | | | | | | | | | | Capital expenditures | | $ | 253,935 | | | $ | 183,134 | | | $ | 437,069 | |
The Company does not allocate any assets to the reportable segments, and, therefore, no asset information is reported to the chief operating decision-makerdecision maker or disclosed in the financial information for each segment. A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the consolidated financial statements is as follows:
| | | Year Ended December 31, | | | Year Ended June 30, | | | | | 2017 | | | 2016 | | | 2022
| | | 2021
| | | Product line cost of goods sold | | $ | 13,751,503 | | | $ | 18,065,537 | | | $ | 20,102,490 | | | $ | 18,129,767 | | | Non-capitalized manufacturing and production control expenses | | | 1,352,311 | | | | 1,427,924 | | | | 1,661,207 | | | | 1,591,114 | | | Freight out | | | 417,074 | | | | 376,726 | | | | 1,195,062 | | | | 1,013,275 | | | Inventory valuation allowances | | | 598,000 | | | | 200,000 | | | | Inventory write-downs | | | | 195,000 | | | | 150,000 | | | Other inventory adjustments | | | (648,271 | ) | | | 331,252 | | | | (308,057 | ) | | | (74,466 | ) | | Cost of goods sold | | $ | 15,470,617 | | | $ | 20,401,439 | | | $ | 22,845,702 | | | $ | 20,809,690 | |
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, 2022 and December 31, 20162021, 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 | | | 2022
| | | 2021
| | | Net sales | | | | | | | | | | | | | | United States | | $ | 25,176,220 | | | $ | 26,164,660 | | | $ | 41,138,538 | | | $ | 37,225,519 | | | International | | | 1,856,744 | | | | 3,003,468 | | | | 1,950,486 | | | | 2,010,320 | | | Total | | $ | 27,032,964 | | | $ | 29,168,128 | | | $ | 43,089,024 | | | $ | 39,235,839 | |
| 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, 2022 and December 31, 2016,2021, no assets were identified for impairment. Level 3 inputs are primarily based
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 was scheduled originally to mature on March 5, 2022. In February 2022, the Company entered into an amendment to the Convertible Promissory Note that was effective as of December 9, 2021 and changed the maturity date to September 30, 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 estimated future cash flowsConvertible 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 asset determinedmost 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 market inquiriesinvestors or the price equal to establish fair market value$33,500,000 divided by the aggregate number of used machineryoutstanding 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 future revenue expected to be generated(ii) convert into equity units at the specified conversion price in accordance with the assistanceterms of patents and trademarks. the Convertible Promissory Note.The Company’s total inventories, net of reserves, are as followsconsisted of the following as of the dates presented:
| | | June 30, | | | | | 2022
| | | 2021
| | | Finished jewelry: | | | | | | | | Raw materials | | $ | 1,697,361 | | | $ | 1,476,514 | | | Work-in-process | | | 1,260,728 | | | | 779,593 | | | Finished goods | | | 12,100,910 | | | | 8,025,816 | | | Finished goods on consignment | | | 2,135,856 | | | | 2,050,372 | | | Total finished jewelry | | | 17,194,855 | | | | 12,332,295 | | | Loose jewels: | | | | | | | | | | Raw materials | | | 1,985,355 | | | | 1,775,505 | | | Work-in-process | | | 8,485,713 | | | | 9,893,443 | | | Finished goods | | | 5,454,266 | | | | 4,942,192 | | | Finished goods on consignment | | | 303,491 | | | | 154,968 | | | Total loose jewels | | | 16,228,825 | | | | 16,766,108 | | | Total supplies inventory | | | 89,120 | | | | 74,317 | | | Total inventory | | $ | 33,512,800 | | | $ | 29,172,720 | |
| | | 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 classification of its inventory as either short- 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 goods sold over the next 12 months.follows:
| | | June 30, | | | | | 2022
| | | 2021
| | | Short-term portion | | $ | 11,024,276 | | | $ | 11,450,141 | | | Long-term portion | | | 22,488,524 | | | | 17,722,579 | | | Total inventory | | $ | 33,512,800 | | | $ | 29,172,720 | |
The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been 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, 2022 and 2016,2021, work-in-process inventories issued to active production jobs approximated $2.99$2.76 million and $7.18$2.23 million, respectively.
The Company’s moissanite and lab grown diamond jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, approximately one-half of the majority ofCompany’s jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends nortrends. 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.
56The 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 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.
Prior to March 2016, the Company purchased fashion finished jewelry comprising base metals
Property 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, | | | | | 2022
| | | 2021
| | | Computer software | | $ | 2,392,465 | | | $ | 2,015,548 | | | Machinery and equipment | | | 1,182,171 | | | | 1,250,345 | | | Computer hardware | | | 1,621,198 | | | | 1,274,561 | | | Leasehold improvements | | | 1,847,227 | | | | 1,162,995 | | | Furniture and fixtures | | | 528,742 | | | | 371,883 | | | Total | | | 7,571,803 | | | | 6,075,332 | | | Less accumulated depreciation | | | (5,670,627 | ) | | | (5,199,435 | ) | | Property and equipment, net | | $ | 1,901,176 | | | $ | 875,897 | |
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.
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, 2022 and 20162021 was approximately $420,000$471,000 and $528,000,$560,000, respectively.
Approximately $26,000 related to discontinued operations was included in total depreciation expense for the year ended December 31, 2016.
Intangible assets, net, consist of the following:following as of the dates presented:
| | | | | | Weighted Average | | | | | | | | Remaining | | | | December 31, | | | Weighted Average Remaining Amortization Period | | | June 30,
| | | Amortization Period | | | | 2017 | | | 2016 | (in Years) | | | 2022 | | | 2021 | | | (in Years) | | | Patents | | $ | 958,604 | | | $ | 958,604 | | | | 0.1 | | | $ | 1,017,007 | | | $ | 1,017,007 | | | | 12.6 | | | Trademarks | | | 57,325 | | | | 55,824 | | | | 7.7 | | | | 242,342 | | | | 214,339 | | | | 13.5 | | | License rights | | | 6,718 | | | | 6,718 | | | | 0.0 | | | | 6,718 | | | | 6,718 | | | | - | | | Total | | | 1,022,647 | | | | 1,021,146 | | | | | | | | 1,266,067 | | | | 1,238,064 | | | | | | | Less accumulated amortization | | | (1,014,050 | ) | | | (1,012,338 | ) | | | | | | | (1,000,337 | ) | | | (1,028,406 | ) | | | | | | Intangible assets, net | | $ | 8,597 | | | $ | 8,808 | | | | | | | $ | 265,730 | | | $ | 209,658 | | | | | |
Amortization expense for the fiscal years ended December 31, 2017June 30, 2022 and 20162021 was approximately $2,000$8,000 and $68,000,$7,000, respectively. Amortization expense on existing intangible assets is estimated to be approximately $2,000$21,000 for the yearfiscal years ending December 31, 2018June 30, 2023 and 2024 and approximately $1,000$20,000 for each of the fiscal years ending December 31, 2019, 2020, 2021,June 30, 2025, 2026, and 2022.2027. The remainder of the amortization expense for the remaining unamortized balance of the total intangible assets, net, will be recognized in periodsfiscal years ending after December 31, 2022.June 30, 2027.
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 | | | 2022
| | | 2021
| | | Accrued compensation and related benefits | | $ | 652,177 | | | $ | 443,547 | | | $ | 614,443 | | | $ | 866,705 | | | Deferred revenue | | | | 452,866 | | | | 774,891 | | | Accrued sales tax | | | | 295,743 | | | | 555,547 | | | Accrued cooperative advertising | | | 134,018 | | | | 50,000 | | | | 137,467 | | | | 68,185 | | | Deferred rent | | | 131,389 | | | | 115,307 | | | | Accrued sales tax | | | 20,844 | | | | 6,885 | | | | Other | | | 42,372 | | | | 15,368 | | | | Accrued franchise taxes | | | | 45,963 | | | | 16,478 | | | Other accrued expenses | | | | 1 | | | | 1 | | | Accrued expenses and other liabilities | | $ | 980,800 | | | $ | 631,107 | | | $ | 1,546,483 | | | $ | 2,281,807 | |
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, 2022 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 each of the extended terms will be adjusted to the then prevailing fair market rate.
The Company took possession of the leased property on May 23, 2014, once certain improvements to the leased space were completed and did not have access to the property before this date. TheseUpon execution of the third amendment to the Lease Agreement (the “Lease Amendment”) on January 29, 2021, the Lease Amendment included a rent abatement in the amount of approximately $214,000, which is reflected in the rent payments used in the calculation of the right-of-use (“ROU”) asset and lease liability once remeasured upon the execution of the Lease Amendment to extend the lease term. The Lease Amendment also included an allowance for leasehold improvements and other lease signing and moving incentives offered by the landlord totaledin an amount not to exceed approximately $550,000$545,000. During the fiscal year ended June 30, 2022, the Company was reimbursed approximately $506,000 by the landlord for qualified leasehold improvements in accordance with the terms of the Lease Amendment. This reimbursement by the landlord reduced the remaining ROU asset by the same amount and $73,000, respectively, which will be amortizedrecognized prospectively 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.lease. The Company recognizes rent expense onhas no other material operating leases and is not party to leases that would qualify for classification as a straight-line basis, giving consideration tofinance lease, variable lease, or short-term lease.
As of June 30, 2022, the rent holidaysCompany’s balance sheet classifications of its leases are as follows: | Operating Leases: | | | | | Noncurrent operating lease ROU assets | | $ | 2,787,419 | | | | | | | | | Current operating lease liabilities | | $ | 856,571 | | | Noncurrent operating lease liabilities | | | 2,846,805 | | | Total operating lease liabilities | | $ | 3,703,376 | |
The Company’s total operating lease cost was approximately $596,000 and escalations,$610,000 for the lease signingfiscal years ended June 30, 2022 and moving allowance to be paid to the Company, and the rent abatement.2021, respectively. As of December 31, 2017,June 30, 2022, the Company’s estimated incremental borrowing rate used and assumed discount rate with respect to operating leases was 2.81% and the remaining operating lease term was 4.33 years.
As of June 30, 2022, the Company’s remaining future minimum payments under the operating leases werefor each fiscal year ending June 30 are as follows:
| 2018 | | $ | 600,871 | | | 2019 | | | 617,395 | | | 2020 | | | 634,373 | | | 2021 | | | 541,957 | | | Total | | $ | 2,394,596 | |
2023
| | $ | 869,742 | | 2024
| | | 893,660 | | 2025
| | | 918,236 | | 2026
| | | 943,487 | | 2027
| | | 317,327 | | | Total lease payments | | | 3,942,452 | | | Less: imputed interest | | | 239,076 | | | Present value of lease payments | | | 3,703,376 | | | Less: current lease liability | | | 856,571 | | | Total long-term lease liability | | $ | 2,846,805 | |
Rent expenseThe Company makes cash payments for amounts included in the measurement of its lease liabilities. During the fiscal year ended June 30, 2022 and 2021, cash paid for operating leases was approximately $550,000 and $688,000, respectively. Upon the execution of the Lease Amendment, the Company recorded additional ROU assets in the amount of approximately $3.91 million obtained in exchange for the years ended December 31, 2017 and 2016 was approximately $510,000 and $539,000, respectively.
Approximately $40,000 related to discontinued operations was included in total rent expense foradditional 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 Wolfspeed, Inc. (“Wolfspeed”), formerly known as Cree, Inc. (“Cree”). Under the Supply Agreement, subject to certain terms and conditions, the Company agreed to exclusively purchase from Cree,Wolfspeed, and CreeWolfspeed agreed to exclusively supply, 100% of the Company’s required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement 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 Wolfspeed may begin producing alternate SiC material based on the Company’s specifications that will give the Company the flexibility to use the materials in a broader variety of its products; and (iii) permit the Company to purchase certain amounts of SiC materials from third parties under limited conditions.
Effective June 30, 2020, the Supply Agreement was further amended to extend the expiration date to June 29, 2025, which may be extended again by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) 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 Wolfspeed 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 $26.55 million remains to be purchased as of June 30, 2022. 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$4.00 million to approximately $7.05 million. $10.00 million each year.
During the yearfiscal years ended December 31, 2017June 30, 2022 and 2016,2021, the Company purchased approximately $9.39$6.29 million and $8.20$3.78 million, respectively, of SiC crystals from Cree.Wolfspeed.
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 substantially all these measures have been lifted or eased in most jurisdictions, other jurisdictions have seen recent increases in new COVID-19 cases, resulting in restrictions being reinstated or new restrictions being imposed. The Company expects the imposition of such measures in various jurisdictions around the world to fluctuate into Fiscal 2023 as the pandemic continues to evolve. On June 25, 2014,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 2022, 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.
The COVID-19 pandemic continues to present business challenges and the Company expects these to continue into Fiscal 2023. The Company’s management has reintroduced employees to the workplace, including in some cases permitting a hybrid blend of remote and onsite work for certain sectors of the workforce, as vaccine and related booster shot rates have increased and COVID-19 infection levels have decreased. The Company 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 2023. 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 wholly owned subsidiaries, Charles & Colvard Direct, LLC,variant viral infections, the effectiveness, distribution and Moissanite.com, LLC (now charlesandcolvard.com, LLC) (collectively,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 “Borrowers”),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 cash flows in the fiscal year ending June 30, 2023.
Line of Credit
Effective July 7, 2021, the Company obtained from 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 Facilityfacility and was scheduled to mature on June 25, 2017. July 31,2022.Effective June 22, 2017,July 28,2022, the JPMorgan Chase Credit Facility was amended to, among other things, extend the maturity date to June 25, 2018. TheJuly 31, 2023, and append the Company’s obligations under the JPMorgan Chase Credit Facility was also amended to reducebe guaranteed by the interest rate payable on advancesCompany’s wholly owned subsidiaries, Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC, and moissaniteoutlet.com, LLC.
Each advance under the JPMorgan Chase Credit Facility, toas amended, accrues interest at a rate equal to Wells Fargo’s daily three-monththe sum of JPMorgan Chase’s monthly secured overnight financing rate (“SOFR rate”) to which JPMorgan Chase is subject with respect to the adjusted SOFR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum and an unsecured to secured interest rate adjustment of 0.10% per annum. Prior to its amendment, each advance under the JPMorgan Chase Credit Facility would have accrued interest at a rate equal to JPMorgan Chase’s monthly LIBOR rate multiplied by a statutory reserve rate for eurocurrency funding to which JPMorgan Chase is subject with respect to the adjusted LIBOR rate as established by the U.S. Federal Reserve Board, plus 2.00%,a margin of 1.25% per annum. Interest is calculated monthly on an actual/360360-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, as amended, between JPMorgan Chase and the Company (the “JPMorgan Chase Credit Agreement”), dated as of July 26, 2022, 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, 2023, 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, changes in control, as well as indemnity, expense reimbursement, and confidentiality provisions.
In connection with the JPMorgan Chase Credit Facility, effective July 7, 2021, 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. No origination fee was paid to JPMorgan Chase in connection with the amended JPMorgan Chase Credit Facility, dated July 28, 2022. 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 that would result from the extension of credit by JPMorgan Chase to the Company.
As of June 30, 2022, the Company had not borrowed against the JPMorgan Chase Credit Facility.
Prior to obtaining the JPMorgan Chase Credit Facility, the Company and its wholly owned subsidiary, charlesandcolvard.com, LLC (collectively, the “White Oak 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, whereby the White Oak Credit Facility, the White Oak 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 White Oak 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 accrues
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 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 White Oak 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, now known as Wolfspeed’s, security interest in such materials pursuant to the Company’s Supply Agreement and an Intercreditor Agreement by and among the White Oak 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 White Oak Borrowers or Guarantor in excess of $200,000, and (iii)$250,000, a material adverse change in the abilitybusiness of the White Oak 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.
Paycheck Protection Program Loan
On June 18, 2020, the Company received the proceeds from its Paycheck Protection Program Loan (“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 Coronavirus Aid, Relief, and Economic Security Act (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 U.S. Small Business Administration (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.
The Company had no outstanding debt during the fiscal year ended June 30, 2022.
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, 2022 and 2016,2021, it had 21,580,10230,747,759 and 21,369,88529,913,095 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, 2022.
Repurchases of Common Stock
Pursuant to authority granted by the Company’s Board of Directors on April 29, 2022, the Company can repurchase up to approximately $5.00 million in shares outstanding of the Company’s common stock over the three-year period ending April 29, 2025. Pursuant to the terms of the repurchase authorization, the common stock share repurchases are generally at the discretion of the Company’s management. As the Company repurchases its common shares, which have no par value, the Company reports such shares held as treasury stock on the accompanying consolidated balance sheets as of June 30, 2022 and 2021, with the purchase price recorded within treasury stock.
During the fiscal year ended June 30, 2022, the Company repurchased 30,287 shares of the Company’s common stock for an aggregate price of $38,164 pursuant to the repurchase authorization. The Company repurchased no shares of its common stock during the fiscal year ended June 30, 2021.
Dividends
The Company paid no cash dividends during the fiscal years ended June 30, 2022 and 2021.
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.
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, 2022 and 2021, there were 1,101,211 and 1,151,935 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, 2022 and 2016,2021, there were 2,227,265557,592 and 2,134,8981,083,351 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 for the periods presented:
| | | Year Ended December 31, | | | Year Ended June 30, | | | | | 2017 | | | 2016 | | | 2022 | | | 2021 | | | Employee stock options | | $ | 336,534 | | | $ | 383,778 | | | $ | 243,576 | | | $ | 234,947 | | | Consultant stock options | | | - | | | | 170,622 | | | | Restricted stock awards | | | 106,948 | | | | 448,906 | | | | 530,765 | | | | 117,636 | | | Total | | $ | 443,482 | | | $ | 1,003,306 | | | $ | 774,341 | | | $ | 352,583 | |
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, 2022 and 2016.2021.
Approximately $44,000 related to discontinued operations was included in total stock-based compensation expense for the year ended December 31, 2016.79
Stock Options
The following is a summary of the stock option activity for the fiscal years ended December 31, 2017June 30, 2022 and 2016:2021:
| | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | | | Outstanding, December 31, 2015 | | | 2,441,077 | | | $ | 2.11 | | | 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 | | | | Outstanding at June 30, 2021 | | | | 2,235,286 | | | $ | 1.24 | | | Granted | | | 836,369 | | | $ | 0.94 | | | | 289,793 | | | $ | 2.47 | | | Exercised | | | | (622,226 | ) | | $
| 1.15 | | | Forfeited | | | (103,000 | ) | | $ | 1.22 | | | | (24,753 | ) | | $ | 1.04 | | | Expired | | | (641,002 | ) | | $ | 2.99 | | | | (219,297 | ) | | $ | 2.57 | | | Outstanding, December 31, 2017 | | | 2,227,265 | | | $ | 1.35 | | | | Outstanding at June 30, 2022 | | | | 1,658,803 | | | $ | 1.32 | |
The weighted average grant date fair value of stock options granted during the yearsfiscal year ended December 31, 2017June 30,2022 and 20162021 was $0.53$1.27 and $0.63,$0.54, respectively. The total fair value of stock options that vested during the yearsfiscal year ended December 31, 2017June 30, 2022 and 20162021 was approximately $400,000$222,000 and $780,000,$650,000, 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 June 30, | | | | | 2022 | | | 2021 | | | Dividend yield | | | 0.0 | % | | | 0.0 | % | | Expected volatility | | | 61.6 | % | | | 61.7 | % | | Risk-free interest rate | | | 1.46 | % | | | 0.36 | % | | Expected lives (years) | | | 4.5 | | | | 4.9 | |
| | | Year Ended December 31, | | | | | 2017 | | | 2016 | | | Dividend yield | | | 0.0 | % | | | 0.0 | % | | Expected volatility | | | 63.4 | % | | | 62.2 | % | | Risk-free interest rate | | | 1.90 | % | | | 1.42 | % | | Expected lives (years) | | | 5.5 | | | | 5.6 | |
The following table summarizestables summarize information aboutin connection with stock options outstanding at December 31, 2017:June 30, 2022:
| Options Outstanding | Options Outstanding | | | Options Exercisable | | | Options Vested or Expected to Vest | | Options Outstanding | | | Options Exercisable | | | Options Vested or Expected to Vest | | Balance as of 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 6/30/2022 | | Balance as of 6/30/2022 | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Balance as of 6/30/2022 | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Balance as of 6/30/2022 | | | 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 | | 1,658,803
| | | 6.90
| | | $ | 1.32
| | | 1,239,820
| | | 6.18
| | | $ | 1.10
| | | 1,602,784
| | | 6.83
| | | $ | 1.30
| |
As of December 31, 2017,June 30, 2022, the unrecognized stock-based compensation expense related to unvested stock options was approximately $337,000,$303,000, which is expected to be recognized over a weighted average period of approximately 2825 months.
The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at December 31, 2017June 30, 2022 was approximately $458,000. This amount is$410,000. These amounts are before applicable income taxes and representsrepresent the closing market price of the Company’s common stock at December 31, 2017June 30, 2022, 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. No stock options were exercised during the year ended December 31, 2017. During the year ended December 31, 2016, thethose dates. The aggregate intrinsic value of stock options exercised during the fiscal year ended June 30, 2022 was approximately $0.$886,000. During the fiscal years ended June 30, 2022 and 2021, the total estimated tax benefit associated with certain stock options that were exercised during each period was approximately $89,000 and $147,000, respectively.
Restricted Stock
The following is a summary of the restricted stock activity for the fiscal years ended December 31, 2017June 30, 2022 and 2016:2021:
| | | 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, 2020 | | | | 162,500 | | | $ | 1.57 | | | Granted | | | | 178,750 | | | $ | 0.72 | | | Canceled | | | | (162,500 | ) | | $ | 1.57 | | Unvested at June 30, 2021 | | | | 178,750 | | | $ | 0.72 | | | Granted | | | 509,250 | | | $ | 0.93 | | | | 242,725 | | | $ | 2.75 | | | Vested | | | (321,400 | ) | | $ | 2.00 | | | | (242,725 | ) | | $ | 1.25 | | | Canceled | | | (253,450 | ) | | $ | 1.18 | | | | Unvested, December 31, 2016 | | | 359,400 | | | $ | 0.91 | | | | Granted | | | 420,000 | | | $ | 1.11 | | | | Vested | | | (214,200 | ) | | $ | 0.92 | | | | Canceled | | | (209,783 | ) | | $ | 0.96 | | | | Unvested, December 31, 2017 | | | 355,417 | | | $ | 1.11 | | | Unvested at June 30, 2022 | | | | 178,750 | | | $ | 2.75 | |
The unvested restricted shares as of December 31, 2017June 30, 2022 are all performance-based restricted shares that willare scheduled to vest, subject to achievement of the underlying performance goals, on February 23, 2018.in August 2022. As of December 31, 2017,June 30, 2022, the estimated unrecognized stock-based compensation expense related to these unvested restricted shares subject to the achievement of performance goals was approximately $69,000, all$48,000, none of which is expected to be recognized over a weighted average period of approximately one month..
Dividends
The Company has paid no cash dividends during the years ended December 31, 2017 and 2016.
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 asset and liability method. Under the asset and 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.
63The Company’s income tax net (expense) benefit for the periods presented comprises the following:
| | | Year Ended June 30, | | | | | 2022
| | | 2021
| | | Current: | | | | | | | | Federal | | $ | - | | | $ | - | | | State | | | (19,606 | ) | | | (18,409 | ) | | Total current expense | | | (19,606 | ) | | | (18,409 | ) | | | | | | | | | | | | Deferred: | | | | | | | | | | Federal | | | (493,910 | ) | | | 6,062,222 | | | State | | | (5,016 | ) | | | 288,608 | | Total deferred (expense) benefit | | | (498,926 | ) | | | 6,350,830 | | Income tax net (expense) benefit | | $ | (518,532 | ) | | $ | 6,332,421 | |
Income tax net expense comprises the following:
| | | Year Ended December 31, | | | | | 2017 | | | 2016 | | | Current: | | | | | | | | Federal | | $ | - | | | $ | - | | | State | | | (27,609 | ) | | | (13,480 | ) | | Total | | | (27,609 | ) | | | (13,480 | ) | | | | | | | | | | | | Deferred: | | | | | | | | | | Federal | | | - | | | | - | | | State | | | - | | | | - | | | Total | | | - | | | | - | | | Income tax net expense | | $ | (27,609 | ) | | $ | (13,480 | ) |
Significant components of the Company’s noncurrent deferred income tax assets, net, as of the dates presented are as follows:
| | | December 31, | | | | | 2017 | | | 2016 | | | | | | | | | | | Reserves and accruals | | $ | 686,573 | | | $ | 1,053,863 | | | Prepaid expenses | | | (28,744 | ) | | | (43,774 | ) | | Federal NOL carryforwards | | | 8,395,472 | | | | 8,530,493 | | | State NOL carryforwards | | | 681,364 | | | | 615,919 | | | Hong Kong NOL carryforwards | | | 995,566 | | | | 995,566 | | | Federal benefit on state taxes under uncertain tax positions | | | 94,142 | | | | 136,969 | | | Stock-based compensation | | | 422,623 | | | | 342,294 | | | Research tax credit | | | 434,637 | | | | 434,637 | | | Alternative minimum tax credit | | | 350,743 | | | | 348,264 | | | Contributions carryforward | | | - | | | | 35,100 | | | Depreciation | | | (178,670 | ) | | | (286,608 | ) | | Accrued rent | | | 138,178 | | | | 216,432 | | | Loss on impairment of long-lived assets | | | 33,864 | | | | 53,042 | | | Valuation allowance | | | (12,025,748 | ) | | | (12,432,197 | ) | | Total | | | - | | | | - | | | Total deferred income tax assets, net | | $ | - | | | $ | - | |
A reconciliation
| | | June 30, | | | | | 2022
| | | 2021
| | | Deferred tax assets: | | | | | | | | Reversals and accruals | | $ | 487,333 | | | $ | 454,846 | | | Federal net operating loss (“NOL”) carryforwards | | | 3,471,594 | | | | 3,989,278 | | | State NOL carryforwards | | | 532,300 | | | | 585,563 | | | Hong Kong NOL carryforwards | | | 995,566 | | | | 995,566 | | | Federal benefit on state taxes under uncertain tax positions | | | - | | | | 2,073 | | | Stock-based compensation | | | 155,139 | | | | 149,047 | | | Section 263A adjustment | | | 118,916 | | | | 122,562 | | | Inventory valuation reserve | | | 1,631,339 | | | | 1,605,871 | | | Operating lease liabilities | | | 850,910 | | | | 942,471 | | | Valuation allowance | | | (1,442,213 | ) | | | (1,452,296 | ) | | Noncurrent deferred tax assets, net | | | 6,800,884 | | | | 7,394,981 | | Deferred tax liabilities: | | | | | | | | | | Prepaid expenses | | | (52,792 | ) | | | (44,890 | ) | | Depreciation | | | (255,734 | ) | | | (105,369 | ) | | Operating lease right-of-use assets | | | (640,454 | ) | | | (893,892 | ) | | Noncurrent deferred tax liabilities | | | (948,980 | ) | | | (1,044,151 | ) | | Total noncurrent deferred tax assets, net | | $ | 5,851,904 | | | $ | 6,350,830 | |
The following are reconciliations between expected income taxes, computed at the applicable statutory federal income tax rate of 21% applied to pretax accounting loss,income, and the income tax net expense included in the consolidated statements of operations(expense) benefit for the yearsperiods presented:
| | | Year Ended June 30, | | | | | 2022 | | | 2021 | | Anticipated income tax expense at the statutory rate | | $ | (607,414 | ) | | $ | (1,360,452 | ) | State income tax expense, net of federal tax effect | | | (36,928 | ) | | | (84,288 | ) | Income tax effect of uncertain tax positions | | | 7,804 | | | | (1,468 | ) | Return to provision adjustments | | | 405 | | | | (45 | ) | | Stock-based compensation | | | 131,898 | | | | 38,197 | | | PPP Loan forgiveness | | | - | | | | 202,729 | | | Other changes in deferred income tax assets, net | | | (24,380 | ) | | | 1,348 | | Decrease in valuation allowance | | | 10,083 | | | | 7,536,400 | | Income tax net (expense) benefit | | $ | (518,532 | ) | | $ | 6,332,421 | |
The Company’s statutory tax rate as of June 30, 2022 is 22.45% and consisted of the federal income tax rate of 21.00% and a blended state income tax rate of 1.45%, net of the federal benefit. The Company’s statutory tax rate as of the fiscal year ended December 31, 2017June 30, 2021 was 22.24% and 2016 is as follows:consisted of the federal income tax rate of 21.00% and a blended state income tax rate of 1.24%, net of the federal benefit. For the fiscal year ended June 30, 2022, the Company’s effective income tax rate was 17.93%. The Company’s effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax accounting arising primarily from the permanent tax benefits associated with stock-based compensation transactions during the accounting period then ended.
| | | 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 | ) |
The Company recognized a net income tax expense of approximately $519,000 for the fiscal year ended June 30, 2022, compared with a net income tax benefit of approximately $6.33 million for the fiscal year ended June 30, 2021.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. As of December 31, 2017June 30, 2021, cumulative positive taxable income over the preceding three tax years had been generated in the U.S., as compared to the negative evidence of cumulative losses in previous years. The Company’s management also determined that its expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that included significant management estimates and December 31, 2016,assumptions, would be sufficient to result in full utilization of the Company’s federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, the Company’s management determined that sufficient positive evidence existed as of June 30, 2021, to conclude that it was more likely than not deferred tax assets of approximately $6.35 million would be realizable, and it reduced the Company’s valuation allowance accordingly. 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.
With the reduction of its valuation allowance during the fiscal year ended June 30, 2021, the Company recognized deferred income tax expense during the fiscal year ended June 30, 2022 in the amount of approximately $499,000 compared to a deferred income tax benefit during the year ended June 30, 2021 in the amount of approximately $6.35 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, a valuation allowance also remains against certain deferred tax assets relating to operating loss carryforwards relating to the Company’s dormant subsidiary located in Hong Kong.
As of June 30, 2022, the Company’s management determined that its expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant management estimates and assumptions, would continue to be sufficient to result in full utilization of the Company’s remaining federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, the Company’s management determined that sufficient positive evidence existed as of June 30, 2022, to conclude that it is more likely than not deferred tax assets of approximately $5.85 million remain realizable. Conversely, the Company’s management further determined that sufficient negative evidence continued to exist to conclude it was uncertain that the Company would have sufficient future taxable income to utilize certain of its deferred tax assets, and therefore,assets. Therefore, the Company maintainedcontinued to maintain a valuation allowance against itsthe deferred tax assets relating to certain 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, a valuation allowance remains against certain deferred tax assets relating to operating loss carryforwards relating to the Company’s dormant subsidiary located in Hong Kong.
As of December 31, 2017,June 30, 2022, 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, 2022 and 2021, the Company had federal tax net operating loss carryforwards under U.S. GAAP of approximately $24.59$16.53 million and $19.00 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$19.77 million and $19.87 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, 2022 and 2021, 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, 2022 and 20162021, 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.
Uncertain Tax Positions
The gross liability for income taxes associated with uncertain tax positions at December 31, 2017 was approximately $560,000. This amount is shown net of approximately $98,000 recorded as a direct reduction to the associated deferred tax asset. 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 of interest and penalties associated with uncertain tax positions for the years ended December 31, 2017 and 2016, respectively. Including the interest and penalties recorded for uncertain tax positions, there is a total of approximately $193,000 and $165,000 of interest and penalties included in the accrued income tax liability for uncertain tax positions as of December 31, 2017 and 2016, 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 2013 through 2016 tax years. 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 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 on the Company’s operations and financial results.
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 than10% or equal to 10%more of total gross accounts receivable:receivable as of the dates presented:
| | | | June 30, | | | | | December 31, 2017 | | | December 31, 2016 | | | 2022
| | | 2021
| | | Customer A | | | 12 | % | | | 16 | % | | | 29 | % | | | 22 | % | | Customer B | | | 18 | % | | | * | % | | | 20 | % | | | 30 | % | | | | | | | | | | | | * Customer B did not have individual balances that represented 10% or more of total gross accounts receivable as of December 31, 2016. | | Customer C | | | | 13 | % | | | * | % | Customer D
| | | | **
| %
| | | 14 | % |
* | Customer C did not have individual balances that represented 10% or more of total gross accounts receivable as of June 30, 2021. |
** | Customer D did not have individual balances that represented 10% or more of total gross accounts receivable as of June 30, 2022. |
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, | | | | | 2022
| | | 2021
| | | Customer A | | | * | % | | | 12 | % | | Customer B | | | 14 | % | | | 13 | % |
| * | Customer A did not have net sales that represented 10% or more of total net sales for the year ended June 30, 2022. |
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.
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$76,000 and $102,000$72,000 to thisits employee benefit defined contribution plan during the fiscal years ended December 31, 2017June 30, 2022 and 2016,2021, respectively.
| 16. | SUBSEQUENT EVENTEVENTS |
On January 30, 2018,July 28, 2022, the Compensation CommitteeCompany renewed its 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 ofCompany’s credit facility.
Subsequent to June 30, 2022, and through August 26, 2022, 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 totalrepurchased 273,257 shares of the named executive officers’ original restrictedCompany’s common stock awards. The remainderfor an aggregate price of the original awards of restricted stock was forfeited.$356,120 pursuant to its share repurchase authorization as discussed in Note 12, “Shareholders’ Equity and Stock-Based Compensation”.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
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, 2022. 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, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended December 31, 2017,June 30, 2022, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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, 2022.
None.
Annual Meeting Date
| Item 9C. | Disclosure Regarding Foreign Jurisdictions the Prevent Inspections |
Not applicable.
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.
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.
Name | | Age | | Position(s) with Charles & Colvard, Ltd. | | Director Since | Neal I. Goldman | | 73 | | Chairman of the Board | | June 2014 | Anne M. Butler | | 69 | | Director | | June 2012 | Benedetta Casamento | | 51 | | Director | | May 2017 | Jaqui Lividini | | 56 | | Director | | August 2015 | Suzanne Miglucci | | 57 | | Director, President and Chief Executive Officer | | August 2015 | Ollin B. Sykes | | 66 | | Director | | May 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.
Name | | Age | | Title | | Executive Officer Since | Suzanne Miglucci | | 57 | | President and Chief Executive Officer | | December 2015 | Clint J. Pete | | 56 | | Chief Financial Officer and Treasurer | | December 2016 | Don O’Connell | | 52 | | Chief Operating Officer and Senior Vice President, Supply Chain | | May 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.
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 Miglucci | 2017 | | $ | 335,000 | | | $ | 166,875 | (2) | | $ | - | | | $ | - | | | $ | 18,261 | (3) | | $ | 520,136 | | | President and Chief Executive Officer | 2016 | | | 347,885 | | | | 136,500 | (4) | | | - | | | | - | | | | 17,691 | (5) | | | 502,076 | | | Clint J. Pete | 2017 | | | 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 $27,500 and restrictions lapsed on 45,982 of the 75,000 shares of his original restricted stock award. The remainder of the original awards of restricted stock was forfeited.
Outstanding Equity Awards at 2017 Fiscal Year-End
| | | | Option Awards | Stock Awards | | | Name | Grant Date | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | | Option Exercise Price ($) | | 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 Miglucci | 8/18/2015 | | | 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. Pete | 8/23/2016 | | | 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’Connell | 3/15/2016 | | | 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 Miglucci | 2017 | | $ | 335,000 | | | $ | 71,550 | | | $ | - | | | $ | - | | | $ | 18,261 | (2) | | $ | 424,811 | | | President and Chief Executive Officer | 2016 | | | 347,885 | | | | - | | | | - | | | | - | | | | 17,691 | (3) | | | 365,576 | | | Clint J. Pete | 2017 | | | 221,696 | | | | - | | | | - | | | | 14,028 | (5) | | | 4,187 | (6) | | | 239,911 | | Chief Financial Officer and Treasurer(4) | 2016 | | | 99,718 | | | | - | | | | - | | | | - | | | | - | | | | 99,718 | | | Don O’Connell | 2017 | | | 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.
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(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.
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(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.
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(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.
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(8) | Includes 76,445 shares subject to options exercisable within 60 days of February 28, 2018.
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(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.
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(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.
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(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.
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| 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 as2022 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, 2022.
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 | | | | | | 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) | | | | | | 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) | | | | | | 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) | | | | | | 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) | | | | | | 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) | | | | | Description of Common Stock (incorporated herein by reference to Exhibit 4.2 to our Annual Report on Form 10-K for the year ended June 30, 2021) |
| 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)** | | | | | | Credit and SecurityFirst 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)* | | | | | | FirstSecond 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) | | | | | | 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)** | | | | | | 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) |
| | 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) | | | | | | | 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) | | | | | Line of Credit Note, dated as of July 28, 2022, by and among Charles & Colvard, Ltd., and JPMorgan Chase Bank, N.A. (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, as filed with the SEC on August 2, 2022) | | | | | Credit 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 10.1 to our Current Report on Form 8-K, as filed with the SEC on July 17, 2018) |
| 10.8 | 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) | | | | 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) | | | | 10.10 | 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) | | | | 10.11 | 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) | | | | Lease Agreement, dated December 9, 2013, between Charles & Colvard, Ltd. and Southport Business Park Limited Partnership (incorporated herein by reference to Exhibit 10.110.11 to our CurrentAnnual Report on Form 8-K,10-K for fiscal year ended June 30, 2021, as filed with the SEC on December 12, 2013)September 3, 2021)** | | | | | | | 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) | | | | | | | 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) | | | | | | | Board Compensation Program, effectiveThird 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) | | | | | | | 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)+ | | | | | | | 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)+ | | | | | | | 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)+ | | | | | | 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)+ | | | | | | | 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)+ | | | | | | | 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)+ | | | | | | 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)+ |
| | 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)+ | | | | 10.23 | 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)+ | | | | | 10.24 | Form of Non-Employee Director Nonqualified Stock Option Agreement under the Charles & Colvard, Ltd. 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.5 to our Current Report on Form 8-K, as filed with the SEC on November 9, 2018)+ | | | | 10.25 | 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)+ | | | | | | Charles & Colvard, Ltd. 2016Fiscal 2020 Senior Management Equity Incentive Program, effective JanuaryJuly 1, 2016 (incorporated herein by reference to Exhibit 10.42 to our Annual Report on Form 10-K for the year ended December 31, 2015)+ | | | | | | Charles & Colvard, Ltd. 2017 Senior Management Equity Incentive Program, effective January 1, 20172019 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on February 24, 2017)July 11, 2019)+ | | | | | | | Charles & Colvard, Ltd. 2018Fiscal 2021 Senior Management Equity Incentive Program, effective JanuaryJuly 1, 20182020 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on February 1, 2018)August 4, 2020)+ | | | | | | Form of Indemnification AgreementCharles & Colvard, Ltd. Fiscal 2022 Senior Management Equity Incentive Program, effective July 1, 2021 (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)September 15, 2021)+ | | | | | | | Separation of Employment Agreement, dated March 9, 2017, between Charles & Colvard, Ltd., and Steve Larkin (incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017)+ | | 10.29 | | | | | Employment Agreement, dated December 1, 2015, by 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)+ | | | | | | 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)+ | | | | | | | 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)+ | | | | | 10.31 | 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)+ | | | | 10.32 | 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)+ | | | | | 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.++ | | | | | | Consent of BDO USA, LLPLLP++ | | | | | | 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++ | | | |
| | 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++ | | | | | | 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++ | | | | | | 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.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.++ | | | 101101.SCH
| Inline XBRL Taxonomy Extension Schema Document++ | | | The following materials from Charles & Colvard, Ltd.’s Annual Report on Form 10-K for101.CAL
| Inline XBRL Taxonomy Extension Calculation Linkbase Document++ | | | 101.DEF
| Inline XBRL Taxonomy Extension Definition Linkbase Document++ | | | 101.LAB
| Inline XBRL Taxonomy Extension Label Linkbase Document++ | | | 101.PRE
| Inline XBRL Taxonomy Extension Presentation Linkbase document++ | | | 104
| Cover Page Interactive Data File – the year ended December 31, 2017 formattedcover page XBRL tags are embedded within the Inline XBRL document contained in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.Exhibit 101++
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| | | * | | 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. | | | | +
| | ManagementDenotes management contract or compensatory plan or arrangement. | | | ++
| Denotes filed herewith. |
None.
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, 2018September 1, 2022 | | Suzanne MiglucciDon 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, 2018September 1, 2022 | | Suzanne MiglucciDon O’Connell | | | | Director, President and Chief Executive Officer | | | | | | | By: | /s/ Clint J. Pete | March 8, 2018September 1, 2022 | | Clint J. Pete | | | | Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) | | | | | | | By: | /s/ Neal I. Goldman | March 8, 2018September 1, 2022 | | Neal I. Goldman | | | | Chairman of the Board of Directors | | | | | | | By: | /s/ Anne M. Butler | March 8, 2018September 1, 2022 | | Anne M. Butler | | | | Director | | By: | /s/ Benedetta I. Casamento | September 1, 2022 | | Benedetta I. Casamento | | | Director | | | | | | | By: | /s/ Benedetta CasamentoOllin B. Sykes | March 8, 2018September 1, 2022 | | Benedetta CasamentoOllin B. Sykes | | | | Director | | | | | By: | /s/ Jaqui Lividini | March 8, 2018 | | Jaqui Lividini | | | Director | | | | | By: | /s/ Ollin B. Sykes | March 8, 2018 | | Ollin B. Sykes | | | Director |
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