| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar words, although some forward-looking statements are expressed differently.
All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. You should be aware that although the forward-looking statements included herein represent management’s current judgment and expectations, our actual results may differ materially from those projected, stated, or implied in these forward-looking statements as a result of many factors including, but not limited to, the following:
| ·1. | Our business, financial condition and results of operations could continue to be adversely affected by an ongoing COVID-19 pandemic and related global economic conditions; |
| 2. | Our future financial performance depends upon increased consumer awareness and acceptance, growth of sales of our products, and operational execution of our strategic initiatives.initiatives; |
| 3. | Our business and our results of operations could be materially adversely affected as a result of general economic and market conditions; |
| 4. | We face intense competition in the worldwide gemstone and jewelry industry; |
| 5. | Our information technology, or IT, infrastructure, and our network may be impacted by a cyber-attack or other security incident as a result of the rise of cybersecurity events; |
| ·6. | Constantly evolving privacy regulatory regimes are creating new legal compliance challenges; |
| 7. | We are currently substantially dependent on a limited number of sales outlets that account for a large percentage ofsubject to certain risks due to our net sales.international operations, distribution channels and vendors; |
| · | The execution of our business plans could significantly impact our liquidity.
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| ·7. | Our business and our results of operations could be materially adversely affected as a result of our inability to fulfill orders on a timely basis.basis; |
| ·9. | We are currently dependent on a limited number of distributor and retail partners in our Traditional segment for the sale of our products; |
| 10. | We may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation; |
| 11. | Seasonality of our business may adversely affect our net sales and operating income; |
| 12. | Our operations could be disrupted by natural disasters; |
| 13. | Sales of moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control; |
| 14. | Our current customers may potentially perceive us as a competitor in the finished jewelry business; |
| 15. | We depend on a single supplier for substantially all of our silicon carbide, or SiC, crystals, the raw materials we use to produce moissanite jewels; if our supply of high-quality SiC crystals is interrupted, our business may be materially harmed; |
| 16. | If the e-commerce opportunity changes dramatically or if e-commerce technology or providers change their models, our results of operations may be adversely affected; |
| 17. | Governmental regulation and oversight might adversely impact our operations; |
| 18. | The execution of our business plans could significantly impact our liquidity; |
| 19. | The financial difficulties or insolvency of one or more of our major customers or their lack of willingness and ability to market our products could adversely affect results.results; |
| ·20. | We expect to remain dependent upon our exclusive supply agreement,Negative or the Supply Agreement, with Cree, Inc., or Cree, which we entered intoinaccurate information on December 12, 2014, for the sole supply of our silicon carbide, or SiC, crystals for the foreseeable future. |
| · | We face intense competition in the worldwide jewelry industry. |
| · | Our failure to maintain compliance with Nasdaq’s continued listing requirementssocial media could result in the delisting of our common stock. |
| · | Our current customers may potentially perceive us as a competitor in the finished jewelry business. |
| · | We may experience quality control challenges from time to time that can result in lost revenue and harm toadversely impact our brand and reputation.reputation; |
| · | Our business and our results of operations could be materially adversely affected as a result of general economic and market conditions. |
| ·21. | We are subjectrely on assumptions, estimates, and data to calculate certain risks due to our international distribution channels and vendors. |
| · | Our operations could be disrupted by natural disasters. |
| · | Sales of moissanite jewelry could be dependent upon the pricing of precious metals, which is beyond our control. |
| · | Seasonality of our businesskey metrics and real or perceived inaccuracies in such metrics may adverselyharm our reputation and negatively affect our net sales and operating income.business; |
| ·22. | We may not be able to adequately protect our intellectual property, which could harm the value of our products and brands and adversely affect our business.business; |
| ·23. | A failure of our information technology infrastructure or a failure to protect confidential information of our customersEnvironmental, social, and our network against security breaches could adverselygovernance matters may impact our business, reputation, financial condition, and operations. |
| · | 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.operations; |
| ·24. | Negative or inaccurate information on social media could adversely affect our brand and reputation. |
| · | If we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer.suffer; |
| ·25. | Governmental regulationOur loan, pursuant to the Paycheck Protection Program, or the PPP Loan, under the Coronavirus Aid, Relief, and oversight might adversely impact our operations.Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or the SBA, was forgiven in full and may be subject to review for compliance with applicable SBA requirements for six years from the date the loan was forgiven; |
| ·26. | Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our company.Company; and |
| 27. | Our failure to maintain compliance with The Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock. |
Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur except as required by the federal securities laws, and you are urged to review and consider disclosures that we make in the reports that we file with the Securities and Exchange Commission, or SEC, that discuss other factors relevant to our business.
The following discussion is designed to provide a better understanding of our unaudited condensed consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. This information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. June 30, 2021, or the 2021 Annual Report. Historical results and percentage relationships amongrelated to any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for future periods.
Overview
Our Mission
At Charles & Colvard, Ltd., our mission is to redefine the definition of real within the jewelry industry and for consumers everywhere. We believe fine jewelry can be accessible, beautiful, and conscientious.
About Charles & Colvard
Charles & Colvard, Ltd., a North Carolina corporation founded in 1995 (which may be referred to as Charles & Colvard, we, us, or our), is a globally recognized fine jewelry company specializing in lab grown gemstones. We manufacture, market, and distribute Charles & Colvard Created Moissanite® (which we refer to as moissanite or moissanite jewels) and in September 2020, we announced our expansion into the lab grown diamond market with the launch of Caydia®, an exclusive brand of premium lab grown diamonds. We offer gemstones and finished jewelry featuring our proprietary moissanite jewels and premium lab grown diamonds for sale in the worldwide fine jewelry market. Moissanite, also known by its chemical name silicon carbide, or SiC,Charles & Colvard is the original source of created moissanite, and in 2015, we debuted Forever One™, our premium moissanite gemstone brand. As an e-commerce and multi-channel destination for fine jewelry featuring lab grown gemstones, we believe that the addition of lab grown diamonds is a rare mineral first discoverednatural progression for the Charles & Colvard brand.
One of our unique differentiators, moissanite – The World’s Most Brilliant Gem® – is core to our ambition to create a movement around environmentally and socially responsible fine jewelry. We believe that we are leading the way in delivering the premium moissanite brand through technological advances in gemstone manufacturing, cutting, polishing, and setting. By coupling what we believe to be unprecedented moissanite jewels with responsibly sourced precious metals, we are delivering a meteorite crater. Because naturally occurring SiC crystalsuniquely positioned product line for the conscientious consumer. Our Caydia® lab grown diamonds are too small for commercial use, larger crystals must behand selected by our Gemological Institute of America, or GIA, certified gemologists to meet Charles & Colvard’s uncompromising standards and validated by independent third-party experts. Our Caydia® lab grown diamonds are available currently in E, F, and G color grades (based on the GIA’s color grading scale) with a laboratory. Leveragingminimum clarity in accordance with the GIA’s VS1 clarity classification along with excellent polish and symmetry. All of our advantageCaydia® lab grown diamonds are set with mostly recycled precious metals.
Our strategy is to build a globally revered brand of lab grown gemstones and finished jewelry that appeals to a wide consumer audience. We believe this strategy leverages our advantages of being the original and leading worldwide source of created moissanite jewels, our strategy is to establish Charles & Colvard with reputable, high-quality,Created Moissanite® and sophisticated brands across multiple channels, and to position moissanite as an ethically-sourced, affordable, and luxurious alternative to other gemstones such as diamond. We believe this is possible due to moissanite’s exceptional brilliance, fire, durability, and rarity like no other jewel available on the market. We sell loose moissanite jewels and finished jewelry at wholesale prices to distributors, manufacturers, retailers, TV shopping networks, and designers, including someoffering a curated assortment of the largest distributors and jewelry manufacturers in the world, which mount them into fine jewelry to be sold at retail outlets and via the Internet. We sell at retail prices to end consumers through our wholly owned operating subsidiaries, charlesandcolvard.com, LLC (formerly Moissanite.com, LLC) and Charles & Colvard Direct, LLC (until March 2016), third-party online marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets. As of September 30, 2016, we changed the name of our wholly owned subsidiary Moissanite.com, LLC to charlesandcolvard.com, LLC. We believe our continued and expanding use of multiple sales channels to the jewelry trade and the end consumer with branded finished jewelry featuring moissanite positions Charles & Colvard goods at the many touchpoints whereCaydia® lab grown diamonds, which together we believe offers an ideal combination of quality and value. We also believe a direct relationship with consumers are when they are making their buying decisions – thereby creating greater exposure foris important to this strategy, which entails delivering tailored educational content, engaging in dialogue with our audience, and positioning our brand and increasing consumer demand.to meet the demands of today’s discerning consumer.
In February 2016, we made the strategic decision to explore a potential divestiture of our direct-to-consumer home party business previously operated through our Charles & Colvard Direct, LLC (dba Lulu Avenue®) subsidiary. After careful analysis of our 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 our and our shareholders’ best interests. On March 4, 2016, we and Charles & Colvard Direct, LLC entered into an asset purchase agreement with Yanbal USA, Inc., or Yanbal, under which Yanbal purchased certain assets related to our direct-to-consumer home party business for $500,000 and assumed certain liabilities related to such assets. The operating results of Charles & Colvard Direct, LLC are being presented as a discontinued operation. A more detailed description of this transaction is included in Note 12, “Discontinued Operations,” in the Notes to Condensed Consolidated Financial Statements.
Previously, we managed our business through two operating and reportable segments: wholesale distribution transacted through the parent entity, and the direct-to-consumer distribution channel transacted through our wholly owned operating subsidiary, charlesandcolvard.com, LLC (formerly Moissanite.com, LLC). During the three months ended March 31, 2017, we began managing our business through two newly defined operating and reportable segments based on our distribution channels to sell our product lines, loose jewels and finished jewelry: our “Traditional” segment, which consists of wholesale, retail, and television customers; and our “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets.
Our go-forward strategy is one of optimization and growth. Our future success will be measured on our ability to expand existing channels while discovering new channel partners and new markets through calculated sales and marketing efforts. Our key strategies for 2017 are as follows:
| · | Innovate the Forever OneTM product line. We plan to invest research and development funds and efforts into the continued expansion of the Forever OneTM offering including new jewel shapes and sizes.
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| · | Expand our finished jewelry line. We plan to collaborate with key designers and jewelry suppliers to expand our product line and introduce new collections of fashion, fine, and bridal jewelry.
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| · | Invest in key retail and wholesale partnerships. We plan to leverage significant groundwork laid with existing partners whose brands and customers align with ours to amplify our reach into these established markets.
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COVID-19
| · | Explore new traditional and online sales channels. We plan to discover unexplored channels as green field opportunities that may open new and innovative ways to reach the consumer where they are shopping.
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The evolving COVID-19 pandemic continues to present unprecedented worldwide economic and business challenges. During the first nine months of the fiscal year ending June 30, 2022, or Fiscal 2022, we have experienced impacts on our business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, including at times using accelerated payments to our suppliers that are due by their terms in future periods. We expect to continue accelerating payments to certain suppliers through at least the fourth quarter of Fiscal 2022. Moreover, we are also continuing to see a sharp increase in international and domestic freight costs, with limited availability and long delays causing disruption in the global supply chain. Accordingly, we are taking steps where possible to mitigate such potential delays in supplier deliveries by accelerating orders and increasing order quantities. We have also taken measures to protect the health and safety of our employees, work with our customers and suppliers to minimize disruptions, and support our community in addressing the challenges posed by the ongoing COVID-19 pandemic and its evolving viral variants.
| · | Convey e-commerce learning to new channels. We plan to leverage our experience and significant underpinnings in e-commerce to expand our footprint into new channels and regions.
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| · | Evolve our customer service function. We plan to continually improve our customer service function with the intention of delivering world-class service to our partners and direct consumers.
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| · | Amplify our global marketing efforts. We plan to carefully measure the return on our marketing investments, and focus our efforts on profitable endeavors that drive interest in the Charles & Colvard brand, pull consumers to our many sales and educational outlets, and drive conversions.
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| · | Advance toward profitability. We plan to make calculated investments in our growth while continually striving to reach profitability.
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As we execute our strategy to build and reinvestFollowing the government mandated shut down during the early days of the pandemic, work in our businesses, significant expensesproduction and investmentdistribution facilities has continued throughout the pandemic, consistent with guidance from federal, state and local officials to minimize the spread of cash willCOVID-19. We continue to take actions to equip employees with personal protective equipment, establish minimum staffing and social distancing policies, sanitize workspaces, adopt alternate work schedules, and institute other measures aimed to sustain production and related services while minimizing the transmission of COVID-19, including measures to encourage all employees to be required aheadfully vaccinated and to provide evidence of the revenue streams we expectvaccination status in the future,line with state and this may result in some unprofitable reporting periods in the near future. Despite this,local guidelines. In addition, we have maintained as onea flexible teleworking policy for our employees who can meet customer commitments remotely, and a portion of our primary goals to generate positive cash flow from continuing operations to protectworkforce continues teleworking.
Although the COVID-19 pandemic did not have a significant adverse impact on our cash position. We will continue to monitor our cash burn rate and collection efforts as we grow the business.
Duringfinancial results during the nine monthsmonth period ended September 30, 2017,March 31, 2022, the ultimate impact of COVID-19 on our operations and financial performance in future periods, including our ability to execute our strategic initiatives in the expected timeframes, remains uncertain and will depend on future pandemic related developments, including the duration of the pandemic, any potential subsequent waves of COVID-19 and its variant viral infections, the effectiveness, distribution and acceptance of COVID-19 vaccines and boosters, and related government actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. We cannot at this time predict the full impact of the COVID-19 pandemic, but we continued to see positive momentumbelieve the risk exists that the COVID-19 pandemic, including changes in consumer-level spending as a result of the outcomespandemic, could adversely impact our business, financial condition, results of our re-branding effort began to materialize. Our Online Channels segment, including charlesandcolvard.com, marketplaces, drop-ship and other pure-play, exclusively e-commerce outlets, generated an 11% increaseoperations and/or cash flows in net sales over the same period in 2016. We believe this growth, fueled by our ongoing digital marketing efforts, drove increased trafficFiscal 2022.
For additional risks to the many e-commerce outlets where we advertiseCompany related to the COVID-19 pandemic, see “Part I, Item 1A. Risk Factors”, contained in our 2021 Annual Report.
Fiscal 2022 Financial Outlook
Our key strategic initiatives during Fiscal 2022 have been designed to increase brand awareness and sell goods. We remain on track with our strategic programs, including theto drive expansion of our Online Channels segment,favorable brand equity. As we enter the fourth quarter of Fiscal 2022, we believe that we remain on a strong trajectory toward accomplishing our goal for continued and sustained top line growth withinand remain poised to broaden our Traditional segment,consumer reach and maximize product value through our move up-market with our Forever One™ gemstone leading the charge. Continued demand from both channel partnersbrand- and consumers for Forever One™ products drove substantial improvement in our gross margin percentage to 43% for the nine months ended September 30, 2017, compared with 30% for the same period in 2016, with Forever One™ representing 87% of our overall loose gemstone and finished jewelry sales. Inperformance-based marketing strategy. During the first half of 2017,Fiscal 2022, we announcedmade significant investments to strengthen the availabilityCharles & Colvard brand through our marketing strategy, which included brand marketing campaigns across multiple digital platforms, social media outlets, earned media, and media placements as well as placements with key consumer-based influencers. We believe that to continue the growth of our business, we must continue to acquire new customers and retain existing customers in a cost-effective manner.
During the quarter ended March 31, 2022, we made significant progress on our first Charles & Colvard Signature Showroom, which we believe will complement and expand our omnichannel brand strategy in the fine jewelry space. This showroom, which we expect to open during the fourth quarter of Fiscal 2022, will be the first location of our retail showroom expansion program and is located in our corporate headquarters in North Carolina’s Research Triangle Park. We believe that our retail showroom expansion program will allow us to develop a nationwide footprint to showcase our patented Signature Collection designs as well as a wide assortment of Forever One™ moissanite and Caydia® lab grown diamond fine jewelry. We also expect to begin streaming live content during the fourth quarter of Fiscal 2022 from the newly constructed innovative broadcast studio in sixour corporate headquarters. The studio will be a digital extension of the sales team and a tool that our marketing team will utilize for video content production, live-stream shopping, designer and influencer interviews, and fashion photography. We believe this digital marketing capability will continue to further position and define our brand in what we believe is a rapidly evolving consumer landscape and better meet the consumer’s current appetite for digital content. We believe these capabilities will provide incremental sales channels for our direct-to-consumer business and allow us to compete more effectively and to increase our market share within the fine jewelry space by engaging with consumers wherever they are shopping. We continually develop and scale our investment in dynamic marketing strategies to optimize our messaging and advertising spend across multiple channels in an effort to drive strategic customer acquisition and to increase fine jewelry sales from new sought-after shapes – emerald, hearts & arrows, pear, radiant, princess,customers and baguette. In September 2017,repeat orders from existing customers.
Also during the quarter ended March 31, 2022, we announced the availability of Forever One™ in Exotic Gems (a selection of grand loose gemstoneshosted a social media platform-based engagement ring sweepstakes program that range from six caratswas designed to 15.5 carats) and three new shapes – heart, marquise, and trillion. With these additional shapes, we have increased thepromote our “Made not Mined” marketing campaign. The engagement ring that was given away featured our Forever One™ moissanite collection to a total of 14 gemstone shapes. We are continuing to focus on our expanded jewelry line, leveraging our new gemstone shapes into additional fashion, bridal, and fine jewelry selections.
Our total consolidated net sales for the nine months ended September 30, 2017 of $18.50 million were 20% less than total consolidated net salesgemstones. Also, during the nine months ended September 30, 2016. The decreasequarter we launched our Signature Star Series line of finished jewelry featuring Caydia® lab grown diamonds set in consolidated net sales was primarily due to the sale, in a single transaction, during the first quarter of 2016, of approximately $6.77 million of legacy loose gemstone inventory, or the Legacy Inventory Sale, resulting fromunisex fine fashion jewelry styles and expanded our efforts to reduce inventory levels. Traditional segment net sales for the nine months ended September 30, 2017 of $12.02 million were 31% lower than Traditional segment net sales during the nine months ended September 30, 2016, primarily due to the Legacy Inventory Sale in the prior year. Online Channels segment net sales for the nine months ended September 30, 2017 of $6.48 million were 11% greater than Online Channels segment net sales during the nine months ended September 30, 2016, primarily due to an ongoing increase in marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets.
Loose jewel sales comprised 69% ofMoissanite by Charles & Colvard product styles with our total consolidated net sales for the nine months ended September 30, 2017 and decreased 30% to $12.77 million, compared with $18.20 million in the same period of 2016, primarily due to the Legacy Inventory Sale in the prior year. Finished jewelry sales for the nine months ended September 30, 2017 comprised 31% of our total consolidated net sales and increased 16% to $5.73 million, compared with $4.94 million in the same period of 2016 due to increased demand in the Traditional segment.
Operating expenses from continuing operations were $9.07 million for the nine months ended September 30, 2017, compared with $9.72 million in the same period of 2016. Sales and marketing expenses increased $226,438 or 4%, to $5.45 million, primarily asdropship business partners. As a result of our brand awareness expansion programs, we received positive press coverage during the quarter for our fashion jewelry product lines on several major online shopping and fashion-related websites, such as Vogue.com, Brides.com, TheKnot.com, WWD.com, MensHealth.com, and Byrdie.com. We also received finished jewelry related press coverage on national online news outlet websites, such as CNN.com and NewsBreak.com. Lastly, during the quarter ended March 31, 2002, we curated an increaseassortment of fine fashion jewelry featuring our Forever One™ moissanite gemstones and Caydia®lab grown diamonds that are being used for the filming of the upcoming seasons of the ABC television network’s series of The Bachelor and The Bachelorette.
While we are in compensation expensesthe 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 connection with severance benefits relatedthe fine jewelry space. We further believe that we remain well-positioned to meet current marketing-level trends within the departurejewelry industry, where consumers are increasingly more aware of our former Chief Revenue Officer. Generalthe products they purchase and administrative expenses decreased $767,600, or 18%, to $4.38 million, primarily as a result of a decrease in compensation-related expensesseek brands that stand for sustainability and professional services fees, partially offset by an increase in bad debt expense associated with our allowance for doubtful accounts reserve policy.social and environmental responsibility.
We recorded a net lossdiscuss our strategic outlook and key strategies for Fiscal 2022 in Part I, Item 1, “Business” and in Part II, Item 7, “Management’s Discussion and Analysis of $1.14 million, or $0.05 per diluted share, for the nine months ended September 30, 2017, compared to a net lossFinancial Condition and Results of $3.45 million, or $0.17 per diluted share,Operations”, contained in the same period in 2016. The decreased net loss was primarily due to the discontinuance of our direct-to-consumer home party business and a more favorable gross profit margin. We recorded a net loss from continuing operations of $1.14 million for the nine months ended September 30, 2017, compared to a net loss from continuing operations of $2.88 million in the same period of 2016. The decreased net loss from continuing operations was primarily due to an increase in Forever One™ sales with a more favorable gross profit margin.2021 Annual Report.
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 directly to consumers, 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. 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 Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which we prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The future effects of the COVID-19 pandemic on our results of operations, cash flows, and financial position remain unclear. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. “Critical accounting policies and estimates” are defined as those most important to the financial statement presentation and that require the most difficult, subjective, or complex judgments. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions and/or conditions, including the impact of the COVID-19 pandemic and the related responses, those actual results of operations may materially differ. The most significant estimates impacting our consolidated financial statements relate to the valuation and classification of inventories, accounts receivable reserves, deferred tax assets, stock-based compensation, and revenue recognition. We also have other policies that we consider key accounting policies, but these policies typically do not require us to make estimates or judgments that are difficult or subjective.
We have disclosed our critical accounting policies and estimates in our 2021 Annual Report, on Form 10-K for the year ended December 31, 2016, and that disclosure should be read in conjunction with this Quarterly Report on Form 10-Q. There have been no significant changes in our critical accounting policies and estimates during the first nine months of Fiscal 2022.
Results of Operations
The following table sets forth certain consolidated statements of operations data for the three and nine months ended September 30, 2017March 31, 2022 and 2016:2021:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Net sales | | $ | 6,208,808 | | | $ | 5,212,973 | | | $ | 18,495,982 | | | $ | 23,133,248 | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Cost of goods sold | | | 3,483,603 | | | | 3,221,007 | | | | 10,544,303 | | | | 16,278,989 | |
Sales and marketing | | | 1,757,007 | | | | 1,891,162 | | | | 5,449,195 | | | | 5,222,757 | |
General and administrative | | | 1,137,736 | | | | 1,244,400 | | | | 3,612,618 | | | | 4,380,218 | |
Research and development | | | 489 | | | | - | | | | 3,633 | | | | 2,848 | |
Loss on abandonment of property and equipment | | | - | | | | 473 | | | | - | | | | 116,021 | |
Total costs and expenses | | | 6,378,835 | | | | 6,357,042 | | | | 19,609,749 | | | | 26,000,833 | |
Loss from operations | | | (170,027 | ) | | | (1,144,069 | ) | | | (1,113,767 | ) | | | (2,867,585 | ) |
Other expense: | | | | | | | | | | | | | | | | |
Interest expense | | | (5 | ) | | | (36 | ) | | | (97 | ) | | | (1,548 | ) |
Total other expense, net | | | (5 | ) | | | (36 | ) | | | (97 | ) | | | (1,548 | ) |
Loss before income taxes from continuing operations | | | (170,032 | ) | | | (1,144,105 | ) | | | (1,113,864 | ) | | | (2,869,133 | ) |
Income tax net expense from continuing operations | | | (4,507 | ) | | | (3,325 | ) | | | (23,102 | ) | | | (10,068 | ) |
Net loss from continuing operations | | | (174,539 | ) | | | (1,147,430 | ) | | | (1,136,966 | ) | | | (2,879,201 | ) |
| | | | | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | | | |
Loss from discontinued operations | | | - | | | | (6,949 | ) | | | - | | | | (586,027 | ) |
(Loss) gain on sale of assets from discontinued operations | | | - | | | | (3,065 | ) | | | - | | | | 12,398 | |
| | | | | | | | | | | | | | | | |
Net loss from discontinued operations | | | - | | | | (10,014 | ) | | | - | | | | (573,629 | ) |
Net loss | | $ | (174,539 | ) | | $ | (1,157,444 | ) | | $ | (1,136,966 | ) | | $ | (3,452,830 | ) |
| | Three Months Ended March 31, | | | Nine Months Ended March 31, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Net sales | | $ | 9,751,835 | | | $ | 9,436,056 | | | $ | 33,785,281 | | | $ | 29,509,140 | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Cost of goods sold | | | 5,296,530 | | | | 5,093,452 | | | | 17,347,026 | | | | 15,457,215 | |
Sales and marketing | | | 2,932,587 | | | | 2,211,350 | | | | 9,741,774 | | | | 6,339,854 | |
General and administrative | | | 1,106,850 | | | | 1,092,683 | | | | 3,880,684 | | | | 3,278,246 | |
Total costs and expenses | | | 9,335,967 | | | | 8,397,485 | | | | 30,969,484 | | | | 25,075,315 | |
Income from operations | | | 415,868 | | | | 1,038,571 | | | | 2,815,797 | | | | 4,433,825 | |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | 1,120 | | | | 540 | | | | 1,964 | | | | 5,126 | |
Interest expense | | | - | | | | (2,412 | ) | | | - | | | | (7,318 | ) |
Loss on foreign currency exchange | | | - | | | | - | | | | (34 | ) | | | (603 | ) |
Total other income (expense), net | | | 1,120 | | | | (1,872 | ) | | | 1,930 | | | | (2,795 | ) |
Income before income taxes | | | 416,988 | | | | 1,036,699 | | | | 2,817,727 | | | | 4,431,030 | |
Income tax expense | | | (78,480 | ) | | | (472 | ) | | | (484,582 | ) | | | (1,460 | ) |
Net income | | $ | 338,508 | | | $ | 1,036,227 | | | $ | 2,333,145 | | | $ | 4,429,570 | |
Consolidated Net Sales
Consolidated net sales for the three and nine months ended September 30, 2017March 31, 2022 and 20162021 comprise the following:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
Finished jewelry | | | $ | 7,420,591 | | | $ | 6,219,892 | | | $ | 1,200,699 | | | 19 | % | | $ | 23,646,044 | | | $ | 18,820,428 | | | $ | 4,825,616 | | | 26 | % |
Loose jewels | | $ | 4,098,472 | | | $ | 3,597,479 | | | $ | 500,993 | | | 14 | % | | $ | | 12,770,835 | | | $ | 18,195,370 | | | $ | (5,424,535 | ) | | -30 | % | | | 2,331,244 | | | | 3,216,164 | | | | (884,920 | ) | | (28 | )% | | | 10,139,237 | | | | 10,688,712 | | | | (549,475 | ) | | (5 | )% |
Finished jewelry | | | 2,110,336 | | | | 1,615,494 | | | | 494,842 | | | 31 | % | | | | 5,725,147 | | | | 4,937,878 | | | | 787,269 | | | 16 | % | |
Total consolidated net sales | | $ | 6,208,808 | | | $ | 5,212,973 | | | $ | 995,835 | | | 19 | % | | $ | | 18,495,982 | | | $ | 23,133,248 | | | $ | (4,637,266 | ) | | -20 | % | | $ | 9,751,835 | | | $ | 9,436,056 | | | $ | 315,779 | | | 3 | % | | $ | 33,785,281 | | | $ | 29,509,140 | | | $ | 4,276,141 | | | 14 | % |
Consolidated net sales were $6.21$9.75 million for the three months ended September 30, 2017March 31, 2022 compared to $5.21$9.44 million for the three months ended September 30, 2016,March 31, 2021, an increase of $996,000,$316,000, or 19%3%. Consolidated net sales were $18.50$33.79 million for the nine months ended September 30, 2017March 31, 2022 compared to $23.13$29.51 million for the nine months ended September 30, 2016, a decreaseMarch 31, 2021, an increase of $4.64$4.28 million, or 20%14%. The increase in consolidated net sales for the three months ended September 30, 2017March 31, 2022 was primarily due to anstrong Valentine’s Day sales during February 2022. The increase in consolidated net sales for the nine-month period ended March 31, 2022 was the result of our strong third quarter sales coupled with robust calendar year-end holiday sales during our fiscal quarter ended December 31, 2021. These higher sales for the three- and nine-month periods ended March 31, 2022, were also related to increased consumer awareness and ongoing strong demand for our moissanite jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds. These increases resulted in higher finished jewelry product net sales during the three and nine months ended March 31, 2022 in the Traditional segment, and to a lesser extent, in the Online Channels segment, and increased net sales in loose jewels in both theour Online Channels segment and Traditional segment. The decreaseincreases in consolidatedour Online Channels segment net sales forin the ninethree months ended September 30, 2017 was primarily due to the Legacy Inventory SaleMarch 31, 2022 were partially offset by lower net sales in our Traditional segment driven by lower loose jewels sales and decreased international sales during the first quarter of the prior year.three months ended March 31, 2022.
Sales of loose jewelsfinished jewelry represented 66%76% and 69%70% of total consolidated net sales for the three and nine months ended September 30, 2017,March 31, 2022, respectively, compared to 69%66% and 79%64%, respectively, of total consolidated net sales for the corresponding periods of the prior year. For the three months ended September 30, 2017, loose jewelMarch 31, 2022, finished jewelry sales were $4.10$7.42 million compared to $3.60$6.22 million for the corresponding period of the prior year, an increase of $501,000,approximately $1.20 million, or 14%19%. The increase for the three months ended September 30, 2017 was primarily due to the increased demand in our Forever One™ gemstones. For the nine months ended September 30, 2017, loose jewelMarch 31, 2022, finished jewelry sales were $12.77$23.65 million compared to $18.20$18.82 million for the corresponding period of the prior year, a decreasean increase of $5.42approximately $4.83 million, or 30%26%. The decreaseincrease in finished jewelry sales for the nine monthsthree- and nine-month periods ended September 30, 2017March 31, 2022 was due primarily due to the Legacy Inventory Sale during the first quarterhigher finished jewelry sales of the prior year.Forever One™ and Moissanite by Charles & Colvard® in our Online Channels segment as well as in our Traditional segmentand higher finished jewelry sales of Caydia® lab grown diamond jewelry in our Online Channels segment.
Sales of finished jewelryloose jewels represented 34%24% and 31%30% of total consolidated net sales for the three and nine months ended September 30, 2017,March 31, 2022, respectively, compared to 31%34% and 21%36%, respectively, of total consolidated net sales for the corresponding periods of the prior year. For the three months ended September 30, 2017, finished jewelryMarch 31, 2022, loose jewel sales were $2.11$2.33 million compared to $1.62$3.22 million for the corresponding period of the prior year, an increasea decrease of $495,000,$885,000, or 31%28%. For the nine months ended September 30, 2017, finished jewelryMarch 31, 2022, sales of loose jewels were $5.73$10.14 million compared to $4.94$10.69 million for the corresponding period of the prior year, an increasea decrease of $787,000,$549,000, or 16%5%. The increasedecrease in finished jewelry sales of loose jewels for the three-three-month and nine-month periods ended September 30, 2017March 31, 2022 was due primarily to strong finished jewelry retaila lower level of sales through the distribution network in both of our Online Channels segment and Traditional segment.
U.S. net sales accounted for approximately 93%96% and 95% of total consolidated net sales for each of the three-three and nine-month periodsnine months ended September 30, 2017,March 31, 2022, respectively, compared to 88%95% and 89%, respectively,94% of total consolidated net sales for the corresponding periods in the prior year. U.S. net sales increased $422,000, or 5%, during the three months ended March 31, 2022 from the corresponding period of the prior fiscal year. U.S. net sales increased $4.38 million, or 16%, during the nine months ended March 31, 2022 from the corresponding period of the prior year. U.S. net sales increased to $5.75 million, or 25%, during the three and nine months ended September 30, 2017 from the corresponding period of the prior yearMarch 31, 2022 primarily as a result of increased demand in the U.S. distributor market and increased sales fromto U.S. customers in both our Traditional segment and Online Channels segment. U.S. net sales decreased to $17.21 million, or 17%, during the nine months ended September 30, 2017 from the corresponding period of the prior year primarily as a result of the Legacy Inventory Sale during the first quarter of the prior year.
Our largest U.S. customer during the three and nine months ended September 30, 2017 and 2016March 31, 2022 accounted for 23%13% and 27%14% of total consolidated net sales during each respective period. This same customer was our largest customer during the three and nine months ended March 31, 2021 when this customer accounted for 25%15% and 17%, respectively,13% of total consolidated net sales during each of the nine months ended September 30, 2017respective three- and 2016 and was our largest U.S. customer during each period.nine-month periods. Our second largest U.S. customer during the three and nine months ended September 30, 2017March 31, 2021 accounted for 13% and 11% of total consolidated sales, but did not account for a significant portion of our consolidatednet sales during each of the same period in 2016 orrespective three- and nine-month periods. Other than our U.S. customers noted above during the three- and nine-month periods ended September 30, 2017March 31, 2022 and 2021, we had no other customers with sales that represented 10% or 2016. Our third largest U.S. customer during the three months ended September 30, 2017 accounted for 10% of our total consolidated sales during that period and the nine months ended September 30, 2017, but did not account for a significant portion of our consolidated sales during the three or nine months ended September 30, 2016. Finally, our largest U.S. customer during the nine months ended September 30, 2016 accounted for 29%more of total consolidated net sales as a result offor the one-time Legacy Inventory Sale transaction. This U.S. customer did not account for a significant portion ofperiods then ended. We expect that we, along with our consolidated sales during any of the other periods presented herein.customers, will remain dependent on our ability to maintain and enhance our customer-related programs. A change in or loss of any of these large customerscustomer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately 7%4% and 5% of total consolidated net sales for each of the three-three and nine-month periodsnine months ended September 30, 2017,March 31, 2022, respectively, compared to 12%5% and 11%, respectively,6% of total consolidated net sales for the corresponding periods of the prior year. International net sales decreased 26%23% and 47%6% during the three and nine months ended September 30, 2017,March 31, 2022, respectively, from the corresponding periods of the prior fiscal year 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 we serve distributors in the Hong Kong and India markets and demand for loose jewels in these markets was down comparedworld continues to adapt to the corresponding periods of the prior year. We have been evaluatingCOVID-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.
We did not have an international customer account for 10% or more of total consolidated sales during the three and nine months ended September 30, 2017March 31, 2022 or 2016.2021. 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 three months ended September 30, 2017 were located in Hong Kong, United Kingdom, and Hong Kong, respectively. For the nine months ended September 30, 2017 the top two international distributors by sales volume were located in Hong Kong and the third was located in Canada.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the three and nine months ended September 30, 2017March 31, 2022 and 20162021 are as follows:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
Product line cost of goods sold | | | | | | | | | | | | | | | | | | | | | | | | | |
Product line cost of goods sold: | | | | | | | | | | | | | | | | | | | | | | | | | |
Finished jewelry | | | $ | 3,709,864 | | | $ | 3,051,936 | | | $ | 657,928 | | | 22 | % | | $ | 10,748,323 | | | $ | 8,808,372 | | | $ | 1,939,951 | | | 22 | % |
Loose jewels | | $ | 2,244,588 | | | $ | 1,808,979 | | | $ | 435,609 | | | | 24 | % | | $ | 6,647,861 | | | $ | 11,992,862 | | | $ | (5,345,001 | ) | | | -45 | % | | | 1,013,986 | | | | 1,468,338 | | | | (454,352 | ) | | (31 | )% | | | 4,507,997 | | | | 5,017,863 | | | | (509,866 | ) | | (10 | )% |
Finished jewelry | | | 989,561 | | | | 706,179 | | | | 283,382 | | | | 40 | % | | | 2,606,328 | | | | 2,666,960 | | | | (60,632 | ) | | | -2 | % | |
Total product line cost of goods sold | | | 3,234,149 | | | | 2,515,158 | | | | 718,991 | | | | 29 | % | | | 9,254,189 | | | | 14,659,822 | | | | (5,405,633 | ) | | | -37 | % | | 4,723,850 | | | 4,520,274 | | | 203,576 | | | 5 | % | | 15,256,320 | | | 13,826,235 | | | 1,430,085 | | | 10 | % |
Non-product line cost of goods sold | | | 249,454 | | | | 705,849 | | | | (456,395 | ) | | | -65 | % | | | 1,290,114 | | | | 1,619,167 | | | | (329,053 | ) | | | -20 | % | | | 572,680 | | | | 573,178 | | | | (498 | ) | | 0 | % | | | 2,090,706 | | | | 1,630,980 | | | | 459,726 | | | 28 | % |
Total cost of goods sold | | $ | 3,483,603 | | | $ | 3,221,007 | | | $ | 262,596 | | | | 8 | % | | $ | 10,544,303 | | | $ | 16,278,989 | | | $ | (5,734,686 | ) | | | -35 | % | | $ | 5,296,530 | | | $ | 5,093,452 | | | $ | 203,078 | | | 4 | % | | $ | 17,347,026 | | | $ | 15,457,215 | | | $ | 1,889,811 | | | 12 | % |
Total cost of goods sold was $3.48$5.30 million for the three months ended September 30, 2017March 31, 2022 compared to $3.22$5.09 million for the three months ended September 30, 2016,March 31, 2021, a net increase of $263,000,approximately $203,000, or 8%4%. Total cost of goods sold was $10.54$17.35 million for the nine months ended September 30, 2017March 31, 2022 compared to $16.28$15.46 million for the nine months ended September 30, 2016, a decreaseMarch 31, 2021, an increase of $5.73approximately $1.89 million, or 35%12%. 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 increase in total product line cost of goods sold for the three and nine months ended March 31, 2022 compared to the same period in 2021 was primarily driven 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 calendar year-end 2021 holiday season and Valentine’s Day season. Our finished jewelry products cost more to produce due to higher material and labor costs when compared to the production of loose jewels.
The non-product line cost of goods sold for the three months ended September 30, 2017 was primarily dueMarch 31, 2022 compared to an increase in sales volume partially offset by a favorable change in product mix with greater sales of higher margin finished jewelry product in the third quarter of 2017 compared with the same period in 2016. 2021 was flat.
The net decreaseincrease in non-product line cost of goods sold comprises a $299,000 decrease in other inventory adjustments; a $149,000 decrease in non-capitalized manufacturing and production control expenses; a $6,000 decrease in freight out; and a $2,000 decrease in inventory valuation allowances.
The decrease in cost of goods sold for the nine months ended September 30, 2017March 31, 2022, comprises an approximate $293,000 increase in freight out principally from increased shipments resulting from Online Channels segment sales growth during the nine months ended March 31, 2022, as well as a reflection of the rising costs of freight overall during the period; an approximate $104,000 increase in inventory write-offs primarily related to increases in obsolescence reserves in the first three months of the nine month-period ended March 31, 2022, compared to those in the same periodcomparable prior year period; and an approximate $121,000 increase in 2016 was primarily duenon-capitalized manufacturing production control expenses principally related to the Legacy Inventory Sale during the first quartertiming of 2016. The net decrease in non-product line cost ofwhen work-in-process goods sold comprisesare received into inventory and overhead costs are allocated. These increases were partially offset by a $155,000$58,000 decrease in other inventory adjustments; a $168,000 decreaseadjustments principally related to changes in non-capitalized manufacturing and production control expenses; and a $10,000 decreasestandard cost variances compared to those in inventory valuation allowances. These decreases were offset in part by a $4,000 increase in freight out. the nine-month period ended March 31, 2021.
For further discussion ofadditional disclosure relating to non-product line cost of goods sold, see Note 3 “Segment Information and Geographic Data,”to our condensed consolidated financial statements in the Notes to Condensed Consolidated Financial Statements included elsewhere inItem 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.
Sales and Marketing
Sales and marketing expenses for the three and nine months ended September 30, 2017March 31, 2022 and 20162021 are as follows:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | |
| | 2017 | | 2016 | | | Dollars | | | Percent | | | 2017 | | 2016 | | | Dollars | | | Percent | |
Sales and marketing | | $ | 1,757,007 | | $ | 1,891,162 | | | $ | (134,155 | ) | | | -7 | % | | $ | 5,449,195 | | $ | 5,222,757 | | | $ | 226,438 | | | 4 | % |
| | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
Sales and marketing | | $ | 2,932,587 | | | $ | 2,211,350 | | | $ | 721,237 | | | | 33 | % | | $ | 9,741,774 | | | $ | 6,339,854 | | | $ | 3,401,920 | | | | 54 | % |
Sales and marketing expenses were $1.76$2.93 million for the three months ended September 30, 2017March 31, 2022 compared to $1.89$2.21 million for the three months ended September 30, 2016, a decreaseMarch 31, 2021, an increase of $134,000,approximately $721,000, or 7%33%. Sales and marketing expenses were $5.45$9.74 million for the nine months ended September 30, 2017March 31, 2022 compared to $5.22$6.34 million for the nine months ended September 30, 2016,March 31, 2021, an increase of $226,000,approximately $3.40 million, or 4%54%.
The decreaseincrease in sales and marketing expenses for the three months ended September 30, 2017March 31, 2022 compared to the same period in 20162021 was primarily due to a $244,000 decrease$543,000 increase in advertising and digital marketing expenses; a $67,000 decrease in compensation-related expenses; and a $39,000 decrease in travel expense. These decreases were partially offset by a $92,000$63,000 increase in professional services fees; an $84,000principally comprising consulting services for marketing support in the current year period; a $59,000 increase in bank fees, which are principally related to higher credit card transaction fees from increased online sales levels; a $46,000 increase in compensation expenses; a $35,000 increase in software-related costs principallyincurred primarily in connection with maintenancenew software-related agreements associated with our migration to a cloud-based data storage arrangement as well as other software-related agreements; a $24,000upgraded operating and cybersecurity systems; an $8,000 increase in recruiting fees; a $10,000 increaserent expense, primarily related to our corporate headquarters operating lease amendment that was executed in depreciation;January 2021; and a $6,000 increase in all other salestravel expenses as we returned to more traditional business travel patterns following cut-backs relating to the COVID-19 pandemic and marketingrelated cost-control measures in the prior year period. These increases were offset partially by an $18,000 decrease in recruiting and employment agency fees, a $10,000 decrease in depreciation and amortization expense relating to capitalized costs associated with information technology-related upgrades, and an $11,000 net decrease in general office-related expenses.
The decreaseincrease in advertising and digital marketing expenses for the three months ended September 30, 2017March 31, 2022 compared to the same period in 2016 was primarily due to2021 comprises a $372,000 decrease$360,000 increase in digital advertising spend; a $34,000 increase in cooperative advertising; a $149,000 increase in brand awareness marketing campaigns; and a $6,000 increase in outside agency fees related to re-branding and the re-platformed web presence andfees. These increases were offset partially by a $5,000 net$6,000 decrease in print media expenses. These decreasesDuring the comparable prior year period, advertising and digital marketing expenses were partially offset by a $78,000 increaselower due to cost reductions we imposed in Internet marketing; a $44,000 increase in cooperative advertising; and an $11,000 increase in promotions.response to the COVID-19 pandemic.
Compensation expenses for the three months ended September 30, 2017March 31, 2022 compared to the same period in 2016 decreased2021 increased primarily as a result of a $35,000 decrease in severance expenses relateddue to personnel changes; a $35,000 decrease in employee stock-based compensation expense; and an $8,000 decrease in bonus expense. These decreases were partially offset by an $8,000 increase in relocation expense and a $3,000 increase in salaries, commissions, and related employee benefits in the aggregate; a $27,000 increase in bonus expense; and an $11,000 increase in employee stock-based compensation expense. The increases in bonus and employee stock-based compensation expenses reflect the impact of our performance-based bonus plans and stock compensation-related benefits.
The increase in sales and marketing expenses for the nine months ended September 30, 2017March 31, 2022 compared to the same period in 20162021 was primarily due to a $383,000$2.75 million increase in compensation-related expense;advertising and digital marketing expenses; a $181,000$191,000 increase in compensation expenses; a $170,000 increase in professional services fees;principally comprising consulting services for marketing support in the current year period; a $178,000$140,000 increase in bank fees expenses, which are principally related to higher credit card transaction fees from increased online sales levels; an $80,000 increase in software-related costs principallyincurred primarily in connection with maintenancenew software-related agreements associated with upgraded sales-related operating and cybersecurity systems; a $51,000 increase in rent expense, primarily related to our migrationcorporate headquarters operating lease amendment that was executed in January 2021; a $31,000 increase in travel expenses as we returned to more traditional business travel patterns following cut-backs relating to the COVID-19 pandemic and related cost-control measures in the prior year period; and a cloud-based data storage arrangement as well as other software-related agreements;$9,000 increase in depreciation and amortization expense relating to capitalized costs associated with information technology-related upgrades. These increases were offset partially by an $18,000 decrease in recruiting and employment agency fees and a $25,000 increase$1,000 net decrease in general office-related expenses; a $16,000expenses.
The increase in depreciation;advertising and an $11,000 increase in recruiting fees. These increases were partially offset by a $572,000 decrease in advertising expenses; a $45,000 decrease in travel expense; and a $12,000 decrease in research and development expenses.
The decrease in advertisingdigital marketing expenses for the nine months ended September 30, 2017March 31, 2022 compared to the same period in 20162021 comprises a $733,000 decrease$2.20 million increase in outside agency fees anddigital advertising spend; a $37,000 decrease in print media expenses. These decreases were partially offset by a $78,000$245,000 increase in cooperative advertising; a $73,000$137,000 increase in promotional expenses;expenses relating to our participation in the 2021 JCK Trade Show (the JCK Trade Show organization did not hold an event in the prior year due to restrictions related to the COVID-19 pandemic); a $38,000$129,000 increase in Internet marketing;brand awareness marketing campaign expenditures in the current year period; a $23,000 increase in print media expenses; and a $9,000$16,000 increase in all other advertising expenses.outside agency fees.
Compensation expenses for the nine months ended September 30, 2017March 31, 2022 compared to the same period in 20162021 increased primarily as a result of a $238,000$94,000 increase in salaries, commissions, and related employee benefits in the aggregate; a $191,000$57,000 increase in severance expense primarily related to the departure of our Chief Revenue Officer during the first quarter of 2017;employee stock-based compensation expense; and a $68,000$42,000 increase in bonus expense;expense. The increases in employee stock-based compensation and a $13,000 increase in relocation expense.bonus expenses reflect improved operating results that impact these performance-based compensation-related benefits. These increases were partially offset by a $127,000$2,000 decrease in employee stock-based compensation expense.employee-related severance costs from the 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 12, “Discontinued Operations,” in the Notes to the Condensed Consolidated Financial Statements for further discussion of discontinued operations. Approximately $61,000 of sales and marketing expenses for the nine months ended September 30, 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. The Company had no such sales and marketing expenses during the third quarter of 2016.
General and Administrative
General and administrative expenses for the three and nine months ended September 30, 2017March 31, 2022 and 20162021 are as follows:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | |
| | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2017 | | | 2016 | | | Dollars | | | Percent | |
General and administrative | | $ | 1,137,736 | | | $ | 1,244,400 | | | $ | (106,664 | ) | | -9 | % | | $ | 3,612,618 | | | $ | 4,380,218 | | | $ | (767,600 | ) | | -18 | % |
| | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
General and administrative | | $ | 1,106,850 | | | $ | 1,092,683 | | | $ | 14,167 | | | | 1 | % | | $ | 3,880,684 | | | $ | 3,278,246 | | | $ | 602,438 | | | | 18 | % |
General and administrative expenses were $1.14$1.11 million for the three months ended September 30, 2017March 31, 2022 compared to $1.24$1.09 million for the three months ended September 30, 2016, a decreaseMarch 31, 2021, an increase of $107,000,approximately $14,000, or 9%1%. General and administrative expenses were $3.61$3.88 million for the nine months ended September 30, 2017March 31, 2021 compared to $4.38$3.28 million for the nine months ended September 30, 2016, a decreaseMarch 31, 2022, an increase of $768,000,approximately $602,000, or 18%.
The decreaseincrease in general and administrative expenses for the three months ended September 30, 2017March 31, 2022 compared to the same period in 20162021 was primarily due to a $189,000 decrease$97,000 increase in compensation expenses; a $20,000 decrease$28,000 increase in housing allowances and travel-related expenditures as we returned to more normal business taxestravel patterns following cut-backs relating to the COVID-19 pandemic in the prior year period; a $12,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; and licenses; an $11,000 decreasea $26,000 increase in insurance expenses; a $5,000 decrease in depreciation and amortization expense; and a $4,000 decrease in travel expenses.expenses principally related to higher renewal premiums. These decreasesincreases were partially offset by a $68,000 increase$74,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve policy;policy in connection with the decrease in accounts receivable, compared with the prior period; a $33,000 decrease in bank-related fees principally in connection with the Company’s prior credit facility that was terminated in accordance with its terms in July 2021; a $24,000 decrease in depreciation and amortization expense, principally related to fully depreciated assets when compared to those in prior periods; and an $18,000 decrease in professional services.
The increase in compensation expenses for the three months ended March 31, 2022 compared to the same period in 2021 comprises a $93,000 increase in employee stock-based compensation expense, which reflects improved operating results that impact our performance-based compensation-related benefits, and a $28,000 net increase in professionalsalaries and related employee benefits. These increases were partially offset by a $24,000 decrease in bonus expense.
Professional services fees; a $9,000 increase in board retainer fees; and a $17,000 increase in miscellaneous other general and administrative expenses.
Compensation expensesfees decreased for the three months ended September 30, 2017March 31, 2022 compared to the same period in 20162021 primarily due to an $81,000a $44,000 decrease in employee stock-based compensation expense; an $80,000 decrease in salaries and related employee benefitslegal fees associated with corporate governance matters in the aggregate; a $24,000 decrease in bonus expense;prior year period, and a $4,000$14,000 net decrease in severance expense.
Professional services fees increased for the three months ended September 30, 2017 compared to the same period in 2016 primarily due to an increase of $61,000 in legal fees. This increase was partially offset by a decrease of $27,000 in consulting and other professional services primarilyin the current year period. These decreases were partially offset by a $40,000 increase in fees associated with audit and tax services, principally related to human resources and sales and use tax projects in the same period in 2016; a $4,000 decrease in investor and public relations expenses; and a $2,000 decrease in accounting services.discrete income tax-related project.
The decreaseincrease in general and administrative expenses for the nine months ended September 30, 2017March 31, 2022 compared to the samenine-month period in 2016ended March 31, 2021 was primarily due to a $908,000 decrease$481,000 increase in compensation expenses; a $95,000 decreaseincrease in 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 $67,000 increase in rent expense, primarily related to our corporate headquarters operating lease amendment that was executed in January 2021; a $39,000 increase in employee-related recruiting and search fees for new hires; a $47,000 increase in insurance expenses principally related to higher renewal premiums; a $29,000 increase in professional services fees;services; and a $76,000$9,000 increase in business taxes and licenses. These increases were partially offset by a $70,000 decrease in depreciation and amortization expense;expense, principally related to fully depreciated assets when compared to those in prior periods; a $44,000$67,000 decrease in insurance expenses;bank-related fees principally in connection with the Company’s prior credit facility that was terminated in accordance with its terms in July 2021; and a $28,000 decrease in travel expenses; a $2,000 decrease in board retainer fees; and a $22,000 decrease in miscellaneous other general and administrative expenses. These decreases were partially offset by a $156,000 increase in bad debt expense associated with our allowance for doubtful accounts reserve policy; a $46,000 increasepolicy in bank fees, which includes fees associatedconnection with the Wells Fargo Credit Facility and credit card clearing transactions; a $16,000 increasedecrease in equipment-related rental expense; and a $14,000 increase in business taxes and licenses.accounts receivable, compared with the prior period.
Compensation expenses decreasedincreased for the nine months ended September 30, 2017March 31, 2022 compared to the same period in 20162021 primarily due to a $429,000 decrease$307,000 increase in employee stock-based compensation expense; a $158,000 increase in bonus expense; and a $16,000 net increase in salaries and related employee benefits in the aggregate; a $407,000 decreaseaggregate. The increases in employee stock-based compensation expense; and a $75,000 decrease in bonus expense. These decreases were partially offset by an increase of $3,000 in severance expenses related to personnel changes.reflect improved operating results that impact these performance-based compensation-related benefits.
Professional services fees decreasedincreased for the nine months ended September 30, 2017March 31, 2022 compared to the samenine-month period in 2016ended March 31, 2021 primarily due to a $78,000 increase in fees associated with audit and tax services, principally related to a discrete income tax-related project. This increase was partially offset by a $6,000 net decrease of $83,000 in consulting and other professional services primarily related to human resources and sales and use tax projects in the same period in 2016; a decrease of $51,000 in accounting services; and a $1,000$43,000 decrease in investor and public relations expenses. These decreases were partially offset by an increase in legal fees of $40,000.associated with corporate governance matters.
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 12, “Discontinued Operations,” in the Notes to the Condensed Consolidated Financial Statements for further discussion of discontinued operations. Approximately $175,000 of general and administrative expenses for the nine months ended September 30, 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. The Company had no such general and administrative expenses during the third quarter of 2016.Interest Income
Loss on Abandonment of Property and Equipment
Loss on abandonment of property and equipmentInterest income for the three and nine months ended September 30, 2017March 31, 2022 and 20162021 is as follows:
| | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | |
| | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2017 | | | 2016 | | | Dollars | | | Percent | |
Loss on abandonment of property and equipment | | $ | - | | | $ | 473 | | | $ | (473 | ) | | | -100 | % | | $ | - | | | $ | 116,021 | | | $ | (116,021 | ) | | | -100 | % |
| | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
Interest income | | $ | 1,120 | | | $ | 540 | | | $ | 580 | | | | 107 | % | | $ | 1,964 | | | $ | 5,126 | | | $ | (3,162 | ) | | | (62 | )% |
Certain cash balances in excess of operating needs are deposited into and maintained in an interest-bearing account with a federally insured commercial bank. Accordingly, during the three and nine months ended March 31, 2022 and 2021, we earned interest from cash on deposit in this interest-bearing account. The Company had no losses on abandonment of property and equipmentdecrease in earned interest for the nine months ended March 31, 2022 reflects adverse changes in interest rates during Fiscal 2022 compared with Fiscal 2021.
Interest Expense
Interest expense for the three and nine months ended September March 31, 2022 and 2021 is as follows:
| | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
Interest expense | | $ | - | | | $ | 2,412 | | | $ | (2,412 | ) | | | (100 | )% | | $ | - | | | $ | 7,318 | | | $ | (7,318 | ) | | | (100 | )% |
During the period of time the principal of the PPP Loan was outstanding, we accrued interest at a fixed rate of 1% per annum. Our accrual for interest expense associated with the PPP Loan began June 18, 2020, the date we received the proceeds for the PPP Loan from our Lender, through June 23, 2021, the date our PPP Loan, including the related accrued and unpaid interest, was forgiven by the U.S. Small Business Administration.
We had no outstanding debt during the nine months ended March 31, 2022.
Loss on Foreign Currency Exchange
Loss on foreign currency exchange related to approximately $500 and $116,000foreign sales transacted in functional currencies other than the U.S. dollar for the three and nine months ended September 30, 2016, respectively, a decrease of approximately $500March 31, 2022 and $116,000, respectively, or 100% for each period.2021 are as follows:
| | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | |
| | 2022 | | | 2021 | | | Dollars | | | Percent | | | 2022 | | | 2021 | | | Dollars | | | Percent | |
Loss on foreign currency exchange | | $ | - | | | $ | - | | | $ | - | | | | - | % | | $ | 34 | | | $ | 603 | | | $ | (569 | ) | | | (94 | )% |
During the nine-monththree and nine months ended March 31, 2022 and 2021, we had international sales transactions denominated in currencies other than the U.S. dollar that resulted in foreign currency exchange net losses. The decrease in these losses reflects the lower level of international sales denominated in foreign currencies during the three and nine months ended March 31, 2022, compared with the same period in the prior year, coupled with fluctuations in foreign currency exchange rates during the nine months ended September 30, 2016, we abandoned costs of construction in progress related to website branding and design for our direct-to-consumer e-commerce business due to a change in our corporate strategy to consolidate our web properties.March 31, 2022.
Provision for Income Taxes
We recognized anFor each of the three and nine months ended March 31, 2022, our statutory tax rate was 22.24% and consisted of the federal income tax net expenserate of approximately $4,50021% and $3,300 for the three-month periods ended September 30, 2017 and 2016, respectively. We recognized ana blended state income tax rate of 1.24%, net expense of approximately $23,100the federal benefit. For each of the three and $10,100 fornine months ended March 31, 2021, our statutory tax rate was 22.11% and consisted of the nine-month periods ended September 30, 2017federal income tax rate of 21% and 2016, respectively. Incomea blended state income tax provisionsrate of 1.11%, net of the federal benefit. Our effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in these periodsbook and tax accounting arising primarily relate to estimatedfrom the permanent tax penalties, and interestbenefits associated with uncertainstock-based compensation transactions during the quarter. For the nine months ended March 31, 2022, our effective tax positions.rate was 17.20%.
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. BeginningAs of June 30, 2021, cumulative positive taxable income over the last three tax years had been generated in 2014, managementthe U.S., as compared to the negative evidence of cumulative losses in previous years. We also determined that our expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that included significant management estimates and assumptions, would be sufficient to result in full utilization of our federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of June 30, 2021, to conclude that it was more likely than not deferred tax assets of approximately $6.35 million would be realizable, and we reduced our valuation allowance accordingly.
Accordingly, we recognized a net income tax expense of approximately $78,000 and $485,000 for the three and nine months ended March 31, 2022, respectively, compared with a net income tax expense of approximately $500 and $1,000 for the three and nine months ended March 31, 2021, respectively. With the reduction of our valuation allowance during the fiscal year ended June 30, 2021, we recognized deferred income tax expense during the three and nine months ended March 31, 2022 in the amount of approximately $78,000 and $483,000, respectively. Included in our tax provision, we record estimated taxes, penalties, and interest associated with uncertain tax positions as income tax expense and recognized such expense related to these items of approximately $500 for each of the three months ended March 31, 2022 and 2021, respectively, and approximately $1,500 for each of the nine months ended March 31, 2022 and 2021, respectively.
As of March 31, 2022, we determined that our expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant management estimates and assumptions, would continue to be sufficient to result in full utilization of our remaining federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of March 31, 2022, to conclude that it is more likely than not deferred tax assets of approximately $5.87 million remain realizable. Conversely, we further determined that sufficient negative evidence outweighed the positive and established a full valuation allowance againstcontinued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize certain of our deferred tax assets. We maintainedTherefore, we continued to maintain a full valuation allowance asagainst the deferred tax assets relating to certain state net operating loss carryforwards from our e-commerce subsidiary due to the timing uncertainty of September 30, 2017 and December 31, 2016.when we will generate positive taxable income to utilize the associated deferred tax assets. In addition, a valuation allowance remains against certain deferred tax assets relating to operating loss carryforwards relating to our dormant subsidiary located in Hong Kong.
Liquidity and Capital Resources
The full impact of the COVID-19 pandemic on the global and domestic economy remains uncertain and the world continues adapting to the ongoing pandemic and evolving viral variants and its adverse effects on global economics and worldwide business operations. The impact of the COVID-19 pandemic continues to place unprecedented pressures on global and U.S. businesses including our own. Depending on future developments, including the success of the global vaccine efforts to control the spread of the underlying virus and evolving variants, the pandemic could materially adversely impact our capital resources and liquidity in the future. We remain increasingly focused on the COVID-19 pandemic and are continually evaluating its potential effect on our business and liquidity and capital resources.
Capital Structure and Long-Term Debt
As a component of our liquidity and capital structure, we have an effective shelf registration statement on Form S-3 on file with the SEC that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of the COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Our weighted average shares outstanding on a diluted basis were 31.27 million shares for each of the three and nine months ended March 31, 2022, compared to 30.53 million shares and 29.67 million shares for the three and nine months ended March 31, 2021, respectively. The increases in our weighted average shares outstanding in the current year periods were driven by an increase in option exercises since the prior year periods presented herein.
We had no outstanding debt as of March 31, 2022.
Operating Activities and Cash Flows
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of September 30, 2017,March 31, 2022, our principal sources of liquidity were cash, and cash equivalents and restricted cash totaling $5.13$21.91 million, trade accounts receivable of $2.61$1.57 million, and net current inventory of $11.12$13.44 million, as compared to cash, and cash equivalents, and restricted cash totaling $7.43$21.45 million, trade accounts receivable of $2.79$1.66 million, and net current inventory of $9.77$11.45 million as of December 31, 2016.June 30, 2021. As described more fully below,herein, we also have access to our $10.00a $5.00 million asset-based revolvingcash collateralized line of credit facility with JPMorgan Chase Bank, N.A., or the Credit Facility, from Wells Fargo Bank, National Association, or Wells Fargo.JPMorgan Chase.
During the nine months ended September 30, 2017,March 31, 2022, our working capital decreasedincreased by approximately $2.23$2.32 million to $13.83$32.46 million from $16.07$30.14 million at December 31, 2016.June 30, 2021. As described more fully below, the decreaseincrease in working capital at September 30, 2017March 31, 2022 is primarily attributable to an increase in our allocation of inventory from long-term to short-term due to a higher expected sell through of inventory on hand in the upcoming period, an increase in our prepaid expenses and other assets, a decrease in our cash and cash equivalents resulting from cash used in our operations, a decrease in accounts receivable, and an increase in accounts payable, accrued cooperative advertising, and accrued expenses and other liabilities.liabilities, and a net increase in our cash, cash equivalents, and restricted cash. These factors were offset partially by an increase in both our allocationaccounts payable, a decrease in our accounts receivable, and an increase in our short-term operating lease liabilities. Our cash used for investing activities for construction in-process expenditures related to our retail expansion program and the construction of inventory to short-term from long-term and prepaid expensesour first Charles & Colvard Signature Showroom, or Signature Showroom, and other assets.leasehold improvements in our corporate offices was offset by cash provided by financing and operating activities.
In accordance with the terms of the lease agreement for our corporate headquarters, or Lease Agreement, and the location for our first Signature Showroom, the Lease Agreement includes an allowance for leasehold improvements offered by the landlord in an amount not to exceed approximately $545,000. During the three months ended March 31, 2022, we were reimbursed approximately $506,000 by the landlord for qualified leasehold improvements in accordance with the terms of the Lease Amendment. This reimbursement by the landlord reduced the remaining ROU asset by the same amount and will be recognized prospectively over the remaining term of the lease.
For more detailed information about the allowance for leasehold improvements contained within the Lease Agreement, see Note 9 to our condensed consolidated financial statements in Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.
During the nine months ended September 30, 2017, $2.05March 31, 2022, approximately $1.10 million of cash was used in continuing operations.provided by our operating activities. The primary drivers of our cash flow from operations were the usefavorable effect of cash were a net lossincome in the amount of $1.14$2.33 million, which includes $765,000also included $1.74 million of non-cash expenditures;expenses; an increase in inventoryaccounts payable of $2.81 million; and an increase$356,000; a decrease in accounts receivable of $92,000; a decrease in prepaid expenses and other assets of $49,000. These factors were partially offset by a decrease in accounts receivable of $105,000; an increase in accounts payable of $907,000$641,000; and an increase in accrued income taxes of $1,400. These factors were offset partially by an increase in inventory of $3.56 million; and an increase in accrued expenses and other liabilities of $169,000. The inventory increase was, in part,$504,000.
Accounts receivable decreased principally due to collection efforts to ensure customers made timely payments. Throughout the purchasecourse of new raw material SiC crystals during the COVID-19 pandemic and through the current period pursuantended March 31, 2022, from time 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 the upcoming holiday season. We did not offer anytime we have offered extended Traditional segment customer payment terms duringbeyond 90 days to certain credit-worthy customers. Because of the nine months ended September 30, 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 ceaseceased 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 nine months ended September 30, 2017, weWe manufactured approximately $11.41 million in loose jewels and $4.73$13.86 million in finished jewelry, which includes the cost of the loose jewels, the purchase price of precious metals, and cost of labor and overhead in connection with jewelry production, and $6.93 million in loose jewels, which includes the purchase of precious metalsraw materials and labor in connection with jewelry production.gemstone production, during the nine months ended March 31, 2022. We expect our purchases of precious metals and labor to increase as we increase our finished jewelry business. In addition, the price of gold has increasedfluctuated significantly over the past decade, resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry.
Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with our reduced sales levels during theprior periods whenin which the purchase commitments were in effect, have resulted in levels of inventories that are higher than we might otherwise maintain. As of September 30, 2017, $19.78March 31, 2022, $19.06 million of our inventories were classified as long-term assets. Loose jewel sales and finished jewelry that we manufacture will utilize both the finished goodgoods loose jewels currently on-hand and, as we deplete certain shapes and sizes, our on-hand raw material SiC crystals of $4.08$1.69 million and new raw material that we are purchasingpurchase pursuant to the Supply Agreement. A
Our future capital requirements and the adequacy of available funds will depend on many factors, includingthe ongoing spread of COVID-19 and duration of the underlying pandemic that could lead to further disruption and volatility in the global capital markets as well as its impact on our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jeweljewels and lab grown diamonds business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and the risk factors described in more detail in “Risk Factors” in Part II, Item 1A of this reportQuarterly Report on Form 10-Q, in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2021 and December 31, 2021, and in Part I, Item 1A of our 2021 Annual Report on Form 10-K for the year ended December 31, 2016.10-K. We obtained the Credit Facility to 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.
Not applicable.
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 September 30, 2017,March 31, 2022, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting.
There are no material pending legal proceedings to which we are a party or to which any of our property is subject.
The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.