UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2022

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

For the transition period from ______ to ______

Commission File Number: 000-23329

Charles & Colvard, Ltd.

(Exact name of registrant as specified in its charter)

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

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

(919) 468-0399

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value per share	CTHR	The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

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

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

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

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

As of ~~October 30, 2017,~~April 29, 2022, there were ~~21,594,685~~30,688,796 shares of the registrant’s common stock, no par value per share, outstanding.

CHARLES & COLVARD, LTD.

FORM 10-Q

For the Quarterly Period Ended ~~September 30, 2017~~March 31, 2022

TABLE OF CONTENTS

		Page Number
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2022 (unaudited) and ~~December 31, 2016~~June 30, 2021	31
		Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	42
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the three and nine months ended March 31, 2022 and 2021	3
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021	54
	Notes to Condensed Consolidated Financial Statements (unaudited)	65
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2021
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3235
Item 4.	Controls and Procedures	3235

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	3336
Item 1A.	Risk Factors	3336
Item 6.	Exhibits	3438

~~SIGNATURES~~Signatures		3539

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2017 (unaudited)			December 31, 2016			March 31, 2022 (unaudited)			June 30, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	5,127,906		$	7,427,273		$	16,861,685		$	21,302,317
Restricted cash								5,050,000			144,634
Accounts receivable, net		2,612,188			2,794,626			1,565,541			1,662,074
Inventory, net		11,115,715			9,770,206			13,440,016			11,450,141
Note receivable								250,000			250,000
Prepaid expenses and other assets		736,493			682,083			1,328,244			952,065
Total current assets		19,592,302			20,674,188			38,495,486			35,761,231
Long-term assets:
Inventory, net		19,782,460			18,360,211			19,063,408			17,722,579
Property and equipment, net		1,319,962			1,391,116			1,781,966			875,897
Intangible assets, net		9,026			8,808			242,554			209,658
Operating lease right-of-use assets								2,935,124			3,952,146
Deferred income taxes, net								5,867,662			6,350,830
Other assets		66,330			71,453			49,658			49,658
Total long-term assets		21,177,778			19,831,588			29,940,372			29,160,768
TOTAL ASSETS	$	40,770,080		$	40,505,776		$	68,435,858		$	64,921,999

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,884,461		$	3,977,149		$	3,130,684		$	2,774,373
Accrued cooperative advertising		86,173			50,000
Operating lease liabilities								850,781			566,083
Accrued expenses and other liabilities		787,449			581,107			2,053,873			2,281,807
Total current liabilities		5,758,083			4,608,256			6,035,338			5,622,263
Long-term liabilities:
Accrued expenses and other liabilities		498,068			594,916
Noncurrent operating lease liabilities								3,039,216			3,600,842
Accrued income taxes		457,085			433,983			11,292			9,878
Total long-term liabilities		955,153			1,028,899			3,050,508			3,610,720
Total liabilities		6,713,236			5,637,155			9,085,846			9,232,983
Commitments and contingencies (Note 7)
Commitments and contingencies (Note 9)
Shareholders’ equity:								0			0
Common stock, no par value; 50,000,000 shares authorized; 21,594,685 and 21,369,885 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		54,243,816			54,243,816
Common stock, 0 par value; 50,000,000 shares authorized; 30,688,796 and 29,913,095 shares issued and outstanding at March 31, 2022 and June 30, 2021, respectively								57,066,143			56,057,109
Additional paid-in capital		14,608,145			14,282,956			25,927,410			25,608,593
Accumulated deficit		(34,795,117	)		(33,658,151	)		(23,643,541	)		(25,976,686	)
Total shareholders’ equity		34,056,844			34,868,621			59,350,012			55,689,016
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	40,770,080		$	40,505,776		$	68,435,858		$	64,921,999

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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 (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 )

Net loss per common share:
Basic – continuing operations $ (0.01 ) $ (0.06 ) $ (0.05 ) $ (0.14 )
Basic – discontinued operations - (0.00 ) - (0.03 )
Basic – total $ (0.01 ) $ (0.06 ) $ (0.05 ) $ (0.17 )

Diluted – continuing operations $ (0.01 ) $ (0.06 ) $ (0.05 ) $ (0.14 )
Diluted – discontinued operations - (0.00 ) - (0.03 )
Diluted – total $ (0.01 ) $ (0.06 ) $ (0.05 ) $ (0.17 )

Weighted average number of shares used in computing net loss per common share:
Basic 21,218,468 20,997,686 21,184,211 20,898,484
Diluted 21,218,468 20,997,686 21,184,211 20,898,484

	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		0			(2,412	)		0			(7,318	)
Loss on foreign currency exchange		0			0			(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

Net income per common share:
Basic	$	0.01		$	0.04		$	0.08		$	0.15
Diluted		0.01			0.03			0.07			0.15

Weighted average number of shares used in computing net income per common share:
Basic		30,484,897			29,320,434			30,286,195			28,967,946
Diluted		31,268,410			30,525,438			31,271,677			29,667,729

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

Nine Months Ended September 30,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,136,966 ) $ (3,452,830 )
Net loss from discontinued operations - (573,629 )
Net loss from continuing operations (1,136,966 ) (2,879,201 )
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities of continuing operations:
Depreciation and amortization 318,722 445,576
Stock-based compensation 325,189 829,381
Provision for uncollectible accounts 96,000 (60,300 )
Provision for sales returns (19,000 ) (430,000 )
Provision for inventory reserves 44,000 54,000
Loss on abandonment of property and equipment - 116,021
Changes in operating assets and liabilities:
Accounts receivable 105,438 2,396,925
Inventory (2,811,758 ) 5,092,381
Prepaid expenses and other assets, net (49,287 ) (87,071 )
Accounts payable 907,312 281,477
Accrued cooperative advertising 36,173 (49,000 )
Accrued income taxes 23,102 10,068
Accrued expenses and other liabilities 109,494 (151,071 )
Net cash (used in) provided by operating activities of continuing operations (2,051,581 ) 5,569,186
Net cash used in operating activities of discontinued operations - (1,123,381 )
Net cash (used in) provided by operating activities (2,051,581 ) 4,445,805

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (246,284 ) (410,306 )
Intangible assets (1,502 ) (2,446 )
Net cash used in investing activities of continuing operations (247,786 ) (412,752 )
Net cash provided by investing activities of discontinued operations - 368,671
Net cash used in investing activities (247,786 ) (44,081 )

CASH FLOWS FROM FINANCING ACTIVITIES:
Stock option exercises - 2,300
Net cash provided by financing activities of continuing operations - 2,300

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,299,367 ) 4,404,024
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,427,273 5,274,305
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,127,906 $ 9,678,329

Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 97 $ 1,548

	Nine Months Ended March 31, 2022
	Common Stock				Additional						Total
	Number of Shares		Amount		Paid-in Capital			Accumulated Deficit			Shareholders’ Equity
Balance at June 30, 2021		29,913,095	$	56,057,109	$	25,608,593		$	(25,976,686	)	$	55,689,016
Stock-based compensation		-		0		279,407			0			279,407
Issuance of restricted stock		242,725		0		0			0			0
Stock option exercises		183,637		397,112		(139,742	)		0			257,370
Net income		-		0		0			827,025			827,025
Balance at September 30, 2021		30,339,457	$	56,454,221	$	25,748,258		$	(25,149,661	)	$	57,052,818
Stock-based compensation		-		0		199,004			0			199,004
Stock option exercises		255,590		447,877		(159,329	)		0			288,548
Net income		-		0		0			1,167,612			1,167,612
Balance at December 31, 2021		30,595,047	$	56,902,098	$	25,787,933		$	(23,982,049	)	$	58,707,982
Stock-based compensation		-		0		198,523			0			198,523
Stock option exercises		93,749		164,045		(59,046	)		0			104,999
Net income		-		0		0			338,508			338,508
Balance at March 31, 2022		30,688,796	$	57,066,143	$	25,927,410		$	(23,643,541	)	$	59,350,012

	Nine Months Ended March 31, 2021
	Common Stock					Additional						Total
	Number of Shares			Amount		Paid-in Capital			Accumulated Deficit			Shareholders’ Equity
Balance at June 30, 2020		28,949,410		$	54,342,864	$	25,880,165		$	(38,787,452	)	$	41,435,577
Stock-based compensation		-			0		107,355			0			107,355
Issuance of restricted stock		178,750			0		0			0			0
Retirement of restricted stock		(162,500	)		0		0			0			0
Net income		-			0		0			874,266			874,266
Balance at September 30, 2020		28,965,660		$	54,342,864	$	25,987,520		$	(37,913,186	)	$	42,417,198
Stock-based compensation		-			0		87,938			0			87,938
Stock option exercises		126,666			177,325		(62,326	)		0			114,999
Net income		-			0		0			2,519,077			2,519,077
Balance at December 31, 2020		29,092,326		$	54,520,189	$	26,013,132		$	(35,394,109	)	$	45,139,212
Stock-based compensation		-			0		76,916			0			76,916
Stock option exercises		760,624			1,412,619		(514,527	)		0			898,092
Net income		-			0		0			1,036,227			1,036,227
Balance at March 31, 2021		29,852,950		$	55,932,808	$	25,575,521		$	(34,357,882	)	$	47,150,447

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended March 31,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,333,145		$	4,429,570
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		350,198			419,511
Stock-based compensation		676,934			272,209
Provision for uncollectible accounts		26,000			53,514
(Recovery of) Provision for sales returns		(25,000	)		67,000
Inventory write-off		232,000			128,000
Provision for accounts receivable discounts		3,269			29,123
Deferred income taxes		483,168			0
Changes in operating assets and liabilities:
Accounts receivable		92,264			(1,617,077	)
Inventory		(3,562,704	)		1,559,759
Prepaid expenses and other assets, net		640,843			(3,451,872	)
Accounts payable		356,311			(827,665	)
Accrued income taxes		1,414			1,460
Accrued expenses and other liabilities		(504,862	)		3,604,002
Net cash provided by operating activities		1,102,980			4,667,534

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,250,296	)		(346,112	)
Payment to fund note receivable		0			(250,000	)
Payments for intangible assets		(38,867	)		(26,374	)
Net cash used in investing activities		(1,289,163	)		(622,486	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Stock option exercises		650,917			1,013,091
Net cash provided by financing activities		650,917			1,013,091

NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH		464,734			5,058,139
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD		21,446,951			14,617,234
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD	$	21,911,685		$	19,675,373

Supplemental disclosure of non-cash investing and financing activities:
Additions to right-of-use assets in connection with operating lease liabilities	$	0		$	3,908,249

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	0		$	9,050

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CHARLES & COLVARD, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	DESCRIPTION OF BUSINESS

Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation, was founded in ~~1995,~~1995. The Company manufactures, markets, and distributes Charles & Colvard Created Moissanite^® (hereinafter referred to as moissanite or moissanite jewels) and finished jewelry featuring moissanite, including Forever One™, the Company’s premium moissanite gemstone brand, for sale in the worldwide fine jewelry market. The Company also markets and distributes Caydia^® lab grown diamonds and finished jewelry featuring lab grown diamonds for sale in the worldwide fine jewelry market. Moissanite, also known by its chemical name silicon carbide ~~(SiC)~~(“SiC”), is a rare mineral first discovered in a meteorite crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. ~~Leveraging~~Lab grown diamonds are also grown using technology that replicates the natural diamond growing process. The only differentiation between that of a lab grown diamond and a mined diamond is its ~~advantage of being~~origin. The result is a man-made diamond that is chemically, physically, and optically the ~~original and leading worldwide source of created moissanite,~~same as those grown beneath the Company’s strategy is to establish itself with reputable, high-quality, and sophisticated brands across multiple channels, and to position moissanite as an ethically-sourced, affordable, and luxurious alternative to other gemstones such as diamond. The Company believes this is possible due to moissanite’s exceptional brilliance, fire, durability, and rarity like no other jewel available on the market. earth’s surface.

The Company sells loose moissanite jewels, loose lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds at wholesale prices to distributors, manufacturers, retailers, ~~TV shopping networks,~~ and designers, including some of the largest distributors and jewelry manufacturers in the ~~world, which mount them~~world. The Company’s finished jewelry and loose moissanite jewels and lab grown diamonds that are mounted into fine jewelry ~~to be~~by other manufacturers are sold at retail outlets and via the Internet. The Company sells at retail prices to ~~end consumers~~end-consumers through its wholly owned operating ~~subsidiaries,~~subsidiary, 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, the~~The Company ~~changed the name of its~~also sells at discount retail prices to end-consumers through moissaniteoutlet.com, LLC, a wholly owned operating subsidiary ~~Moissanite.com,~~of charlesandcolvard.com, LLC, ~~to charlesandcolvard.com, LLC. The Company~~ ~~believes its continued~~ and expanding use of multiple sales channels to the jewelry trade and the end consumer with branded finished jewelry featuring moissanite positions the Company’s goods at the many touchpoints where consumers are when they are making their buying decisions – thereby creating greater exposure for its brand and increasing consumer demand.third-party online marketplaces.

~~In February 2016, the Company~~ ~~made the strategic decision to explore a potential divestiture of its direct-to-consumer home party business previously operated through its Charles & Colvard Direct, LLC (dba~~ ~~Lulu Avenue~~^®) subsidiary. After careful analysis of the Company’s core competencies, go-to-market strategies, and intent to advance toward profitability, the management team and Board of Directors determined a divestiture of this distribution channel to be in the best interest of the Company and its shareholders. On March 4, 2016, the Company and Charles & Colvard Direct, LLC entered into an asset purchase agreement with Yanbal USA, Inc. (“Yanbal”), under which Yanbal purchased certain assets related to the Company’s direct-to-consumer home party business for $500,000 and assumed certain liabilities related to such assets. A more detailed description of this transaction is included in ~~Note 12, “Discontinued Operations.”~~

2.	BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation -– The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the ~~three and~~ nine months ended ~~September 30, 2017~~March 31, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending ~~December 31, 2017.~~June 30, 2022.

The condensed consolidated financial statements as of March 31, 2022 and for the three and nine months ended ~~September 30, 2017~~March 31, 2022 and ~~the three and nine months ended September 30, 2016~~2021 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of ~~December 31, 2016~~June 30, 2021 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes ~~together with Management’s Discussion and Analysis of Financial Condition and Results of Operations,~~ contained in Item 8 of the Company’s Annual Report on Form 10-K (the “2021 Annual Report”) for the fiscal year ended ~~December 31, 2016~~June 30, 2021 filed with the SEC on ~~March 10, 2017 (the “2016 Annual Report”).~~September 3, 2021.

~~Table of Contents~~

The accompanying condensed consolidated financial statements as of ~~and~~March 31, 2022, for the three and nine months ended ~~September 30, 2017, as of~~March 31, 2022 and ~~for the three and nine months ended September 30, 2016,~~2021, and as of ~~December 31, 2016~~June 30, 2021, include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC, ~~(formerly Moissanite.com, LLC),~~including its wholly-owned subsidiary, moissaniteoulet.com, LLC, which was formed ~~in 2011;~~and incorporated as of February 24, 2022; Charles & Colvard Direct, ~~LLC, formed in 2011;~~LLC; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, ~~that~~which was entered into dormancy as of September 30, 2020 following its re-activation in December 2017. Charles & Colvard (HK) Ltd. previously became a dormant ~~entity~~ in the second quarter of 2009 and has had no operating activity since 2008. Charles & Colvard Direct, LLC, had no operating activity during the ~~operations of which ceased in 2008.~~nine-month periods ended March 31, 2022 or 2021. All intercompany accounts have been eliminated.

Significant Accounting Policies -– In the opinion of the Company’s management, except as discussed below, the Company’s significant accounting policies used for the three and nine months ended ~~September 30, 2017~~March 31, 2022, are consistent with those used for the fiscal year ended ~~December 31, 2016.~~June 30, 2021. Accordingly, please refer to Note 2 to the Consolidated Financial Statements in the ~~2016~~2021 Annual Report for the Company’s significant accounting policies.

~~Discontinued Operations -~~ ~~The results~~

Table of operations for businesses that have been disposed of or classified as held-for-sale are segregated from the results of the Company’s continuing operations and classified as discontinued operations for each period presented in the Company’s condensed consolidated income statement. Similarly, the assets and liabilities of such businesses are presented as discontinued operations for each period presented on the Company’s condensed consolidated balance sheet.Contents

Use of Estimates -The– The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As future events and their effects, including the impact of the COVID-19 pandemic and the related responses, cannot be fully determined with precision, actual results of operations, cash flow, and financial position could differ significantly from estimates. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets, ~~uncertain tax positions, cooperative advertising,~~ stock-based compensation, and revenue recognition. ~~Actual results could differ materially from those estimates.~~

~~Reclassifications -~~ ~~Certain amounts~~Changes in estimates are reflected in the ~~prior year’s~~ condensed consolidated financial statements ~~have been reclassified~~in the period in which the change in estimate occurs.

Cash and Cash Equivalents – All highly liquid investments with an original maturity of three months or less from the date of purchase are considered to ~~conform~~be cash equivalents.

Restricted Cash – In accordance with the terms of the Company’s cash collateralized $5.00 million credit facility from JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), which expires by its terms on July 31, 2022, the Company is required to keep $5.05 million in a cash deposit account held by JPMorgan Chase. Such amount is held as security for the Company’s credit facility from JPMorgan Chase. Accordingly, this cash deposit held by JPMorgan Chase is classified as restricted cash for financial reporting purposes on the Company’s condensed consolidated balance sheets. For additional information regarding the Company’s cash collateralized credit facility, see Note 10, “Debt.”

In accordance with cash management process requirements related to the ~~current year presentation, primarily~~Company’s asset-based revolving credit facility from White Oak Commercial Finance, LLC (“White Oak”), which the Company had in place prior to obtaining the JPMorgan Chase Credit Facility, there were access and usage restrictions on certain cash deposit balances for periods of up to two business days during which time such deposits were held by White Oak for the benefit of the Company. During the period these cash deposits were held by White Oak, such amounts ~~described in Note 3, “Segment Information and Geographic Data” related to changes in~~were classified as restricted cash for reporting purposes on the Company’s ~~reportable segments.~~condensed consolidated balance sheets. For additional information regarding the Company’s prior asset-based revolving credit facility, see Note 10, “Debt.”

The reconciliation of cash, cash equivalents, and restricted cash, as presented on the Condensed Consolidated Statements of Cash Flows, consist of the following as of the dates presented:

	March 31, 2022		June 30, 2021
Cash and cash equivalents	$	16,861,685	$	21,302,317
Restricted cash		5,050,000		144,634
Total cash, cash equivalents, and restricted cash	$	21,911,685	$	21,446,951

Recently Adopted/Issued Accounting Pronouncements – ~~In May 2014,~~Effective July 1, 2021, the ~~Financial Accounting Standards Board (the “FASB”) issued an~~Company adopted the new accounting standard that ~~supersedes nearly all existing revenue recognition~~provides guidance ~~under U.S. GAAP. The core principle~~for the simplification of the ~~standard~~accounting for income taxes that is intended to ~~recognize revenues when promised goods~~reduce the complexity while maintaining or ~~services are transferred to customers~~improving the usefulness of tax disclosure information in an ~~amount that reflects the consideration to which an entity expects to be entitled for those goods or services.~~entity’s financial statements. The standard defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using eitherresulting impact of the ~~following transition methods: (i)~~new guidance did not have a ~~full retrospective approach reflecting~~material impact on the ~~application~~Company’s condensed consolidated financial statements.

In March 2020, and as updated in January 2021, in response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The Company will complete its review of contracts, the related documentation and the new disclosure requirements in the fourth quarter of 2017. The Company anticipates using the modified retrospective method of adoption and does not anticipate a material effect on the timing and measurement of revenue recognition.

~~In February 2016,~~London Interbank Offered Rate (“LIBOR”), the FASB issued new guidance ~~that establishes a right-of-use (“ROU”) model that requires a lessee~~ to ~~record a ROU asset and a lease liability~~ease the burden in accounting for or recognizing the effects of reference interest rate reform on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations.financial reporting. The ~~standard~~new guidance is effective ~~for fiscal years beginning after~~as of March 12, 2020 through December ~~15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach~~31, 2022. As described in more detail in Note 10, “Debt”, borrowings under the Company’s new line of credit are based on a rate equal to the one-month LIBOR. As of March 31, 2022, the Company had 0t borrowed against its line of credit, and therefore, is ~~required for lessees for capital and operating leases existing at,~~not subject to recognizing or ~~entered into after, the beginning~~disclosing any effect of ~~the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company currently expects that upon adoption~~reference rate reform as of ~~this standard, ROU assets and liabilities will be recognized in the balance sheet in amounts that will be material.~~March 31, 2022.

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3.	SEGMENT INFORMATION AND GEOGRAPHIC DATA

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

~~Previously, the~~The Company ~~managed~~manages its business through two operating and reportable segments: wholesale distribution transacted through the parent entity, and the direct-to-consumer distribution channel transacted through the Company’s wholly owned operating subsidiary, charlesandcolvard.com, LLC (formerly Moissanite.com, LLC). ~~During the first quarter of 2017, the Company~~ ~~began managing its business through two newly defined~~2 operating and reportable segments based on its distribution channels to sell its product lines, loose jewels and finished jewelry: its ~~“Traditional” segment, which consists of wholesale, retail, and television customers; and its~~ “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, moissaniteoutlet.com, third-party online marketplaces, drop-ship retail, and other pure-play, exclusively e-commerce ~~outlets.~~outlets; and its “Traditional” segment, which consists of wholesale and retail customers. The accounting policies of the ~~Traditional~~Online Channels segment and ~~Online Channels~~Traditional segment are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies” of this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements in the ~~2016~~2021 Annual Report.

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

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

Summary financial information by reportable segment is as follows:

	Three Months Ended September 30, 2017								Three Months Ended March 31, 2022
	Traditional		Online Channels			Total			Online Channels		Traditional		Total
Net sales
Finished jewelry									$	5,720,197	$	1,700,394	$	7,420,591
Loose jewels	$	3,407,092	$	691,380		$	4,098,472			634,617		1,696,627		2,331,244
Finished jewelry		726,985		1,383,351			2,110,336
Total	$	4,134,077	$	2,074,731		$	6,208,808		$	6,354,814	$	3,397,021	$	9,751,835

Product line cost of goods sold
Finished jewelry									$	2,560,952	$	1,148,912	$	3,709,864
Loose jewels	$	1,877,210	$	367,378		$	2,244,588			229,714		784,272		1,013,986
Finished jewelry		378,799		610,762			989,561
Total	$	2,256,009	$	978,140		$	3,234,149		$	2,790,666	$	1,933,184	$	4,723,850

Product line gross profit
Finished jewelry									$	3,159,245	$	551,482	$	3,710,727
Loose jewels	$	1,529,882	$	324,002		$	1,853,884			404,903		912,355		1,317,258
Finished jewelry		348,186		772,589			1,120,775
Total	$	1,878,068	$	1,096,591		$	2,974,659		$	3,564,148	$	1,463,837	$	5,027,985

Operating income (loss)	$	110,601	$	(280,628	)	$	(170,027	)
Operating income									$	350,276	$	65,592	$	415,868

Depreciation and amortization	$	74,281	$	30,277		$	104,558		$	52,613	$	59,374	$	111,987

Capital expenditures	$	19,651	$	-		$	19,651		$	28,145	$	446,445	$	474,590

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	Three Months Ended September 30, 2016									Three Months Ended March 31, 2021
	Traditional			Online Channels			Total			Online Channels		Traditional		Total
Net sales
Finished jewelry										$	4,902,964	$	1,316,928	$	6,219,892
Loose jewels	$	3,165,142		$	432,337		$	3,597,479			680,804		2,535,360		3,216,164
Finished jewelry		302,652			1,312,842			1,615,494
Total	$	3,467,794		$	1,745,179		$	5,212,973		$	5,583,768	$	3,852,288	$	9,436,056

Product line cost of goods sold
Finished jewelry										$	2,045,519	$	1,006,417	$	3,051,936
Loose jewels	$	1,654,137		$	154,842		$	1,808,979			246,302		1,222,036		1,468,338
Finished jewelry		148,760			557,419			706,179
Total	$	1,802,897		$	712,261		$	2,515,158		$	2,291,821	$	2,228,453	$	4,520,274

Product line gross profit
Finished jewelry										$	2,857,445	$	310,511	$	3,167,956
Loose jewels	$	1,511,005		$	277,495		$	1,788,500			434,502		1,313,324		1,747,826
Finished jewelry		153,892			755,423			909,315
Total	$	1,664,897		$	1,032,918		$	2,697,815		$	3,291,947	$	1,623,835	$	4,915,782

Operating loss	$	(612,526	)	$	(531,070	)	$	(1,143,596	)
Operating income										$	751,953	$	286,618	$	1,038,571

Depreciation and amortization	$	100,720		$	14,709		$	115,429		$	67,373	$	81,077	$	148,450

Capital expenditures	$	58,695		$	233,178		$	291,873		$	22,770	$	55,858	$	78,628

	Nine Months Ended September 30, 2017									Nine Months Ended March 31, 2022
	Traditional			Online Channels			Total			Online Channels		Traditional		Total
Net sales
Finished jewelry										$	18,659,690	$	4,986,354	$	23,646,044
Loose jewels	$	10,506,456		$	2,264,379		$	12,770,835			2,388,584		7,750,653		10,139,237
Finished jewelry		1,512,310			4,212,837			5,725,147
Total	$	12,018,766		$	6,477,216		$	18,495,982		$	21,048,274	$	12,737,007	$	33,785,281

Product line cost of goods sold
Finished jewelry										$	7,705,127	$	3,043,196	$	10,748,323
Loose jewels	$	5,546,616		$	1,101,245		$	6,647,861			877,604		3,630,393		4,507,997
Finished jewelry		893,600			1,712,728			2,606,328
Total	$	6,440,216		$	2,813,973		$	9,254,189		$	8,582,731	$	6,673,589	$	15,256,320

Product line gross profit
Finished jewelry										$	10,954,563	$	1,943,158	$	12,897,721
Loose jewels	$	4,959,840		$	1,163,134		$	6,122,974			1,510,980		4,120,260		5,631,240
Finished jewelry		618,710			2,500,109			3,118,819
Total	$	5,578,550		$	3,663,243		$	9,241,793		$	12,465,543	$	6,063,418	$	18,528,961

Operating loss	$	(475,236	)	$	(638,531	)	$	(1,113,767	)
Operating income										$	2,104,674	$	711,123	$	2,815,797

Depreciation and amortization	$	225,906		$	92,816		$	318,722		$	173,786	$	176,412	$	350,198

Capital expenditures	$	242,663		$	3,621		$	246,284		$	114,445	$	1,135,851	$	1,250,296

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	Nine Months September 30, 2016									Nine Months Ended March 31, 2021
	Traditional			Online Channels			Total			Online Channels		Traditional		Total
Net sales
Finished jewelry										$	15,114,765	$	3,705,663	$	18,820,428
Loose jewels	$	16,572,061		$	1,623,309		$	18,195,370			2,520,576		8,168,136		10,688,712
Finished jewelry		723,545			4,214,333			4,937,878
Total	$	17,295,606		$	5,837,642		$	23,133,248		$	17,635,341	$	11,873,799	$	29,509,140

Product line cost of goods sold
Finished jewelry										$	6,242,635	$	2,565,737	$	8,808,372
Loose jewels	$	11,444,109		$	548,753		$	11,992,862			947,417		4,070,446		5,017,863
Finished jewelry		842,147			1,824,813			2,666,960
Total	$	12,286,256		$	2,373,566		$	14,659,822		$	7,190,052	$	6,636,183	$	13,826,235

Product line gross profit (loss)
Product line gross profit
Finished jewelry										$	8,872,130	$	1,139,926	$	10,012,056
Loose jewels	$	5,127,952		$	1,074,556		$	6,202,508			1,573,159		4,097,690		5,670,849
Finished jewelry		(118,602	)		2,389,520			2,270,918
Total	$	5,009,350		$	3,464,076		$	8,473,426		$	10,445,289	$	5,237,616	$	15,682,905

Operating loss	$	(2,111,576	)	$	(756,009	)	$	(2,867,585	)
Operating income										$	3,021,067	$	1,412,758	$	4,433,825

Depreciation and amortization	$	400,321		$	45,255		$	445,576		$	180,946	$	238,565	$	419,511

Capital expenditures	$	147,246		$	263,060		$	410,306		$	195,695	$	150,417	$	346,112

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

A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,					Three Months Ended March 31,						Nine Months Ended March 31,
	2017			2016			2017			2016		2022			2021			2022			2021
Product line cost of goods sold	$	3,234,149		$	2,515,158		$	9,254,189		$	14,659,822	$	4,723,850		$	4,520,274		$	15,256,320		$	13,826,235
Non-capitalized manufacturing and production control expenses		298,858			448,038			1,021,676			1,190,321		484,299			398,073			1,243,528			1,122,715
Freight out		100,016			105,616			273,088			268,705		294,143			191,700			976,855			683,580
Inventory valuation allowances		(3,000	)		(1,000	)		44,000			54,000
Inventory write-off													0			23,000			232,000			128,000
Other inventory adjustments		(146,420	)		153,195			(48,650	)		106,141		(205,762	)		(39,595	)		(361,677	)		(303,315	)
Cost of goods sold	$	3,483,603		$	3,221,007		$	10,544,303		$	16,278,989	$	5,296,530		$	5,093,452		$	17,347,026		$	15,457,215

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The Company recognizes sales by geographic area based on the country in which the customer is based. Sales to international end consumers made through the Company’s transactional websites, charlesandcolvard.com and moissaniteoutlet.com, are included in international sales for financial reporting purposes. A portion of the Company’s Traditional segment sales made to international wholesale distributors represents products sold internationally that may be re-imported to U.S. retailers. Sales to international end consumers made by the Company’s Online Channels segment are included in U.S. sales because products are shipped and invoiced to a U.S.-based intermediary party that assumes all international shipping and credit risks. All intangible assets and property and equipment as of September 30, 2017 and December 31, 2016 are held and located in the United States.

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The following presents net sales by geographic area:

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,				Nine Months Ended March 31,
	2017		2016		2017		2016		2022		2021		2022		2021
Net sales
United States	$	5,750,825	$	4,590,299	$	17,206,485	$	20,682,341	$	9,390,774	$	8,969,267	$	32,237,221	$	27,857,667
International		457,983		622,674		1,289,497		2,450,907		361,061		466,789		1,548,060		1,651,473
Total	$	6,208,808	$	5,212,973	$	18,495,982	$	23,133,248	$	9,751,835	$	9,436,056	$	33,785,281	$	29,509,140

4.	FAIR VALUE MEASUREMENTS

U~~nder~~

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

~~Level 1 -~~ ~~quoted prices in active markets for identical assets and liabilities~~

Level 1. Quoted prices in active markets for identical assets and liabilities;

Level 2. Inputs other than Level 1 quoted prices that are directly or indirectly observable; and

~~Level 2 -~~ ~~inputs other than Level 1 quoted prices that are directly or indirectly observable~~

Level 3. Unobservable inputs that are not corroborated by market data.

~~Level 3 -~~ ~~unobservable inputs that are not corroborated by market data~~

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

Assets that are measured at fair value on a non-recurring basis include property and equipment, leasehold improvements, and intangible assets comprising patents, license rights, and trademarks. These items are recognized at fair value when they are considered to be impaired. For ~~each of~~ the ~~three-~~three and ~~nine- month periods~~nine months ended ~~September 30, 2017~~March 31, 2022 and ~~2016, no~~2021, 0 impairment was recorded.

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5.	INVENTORIES

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

	March 31, 2022		June 30, 2021
Finished jewelry:
Raw materials	$	1,469,003	$	1,476,514
Work-in-process		1,279,987		779,593
Finished goods		11,386,771		8,025,816
Finished goods on consignment		2,258,071		2,050,372
Total finished jewelry	$	16,393,832	$	12,332,295
Loose jewels:
Raw materials	$	1,692,819	$	1,775,505
Work-in-process		8,285,457		9,893,443
Finished goods		5,714,303		4,942,192
Finished goods on consignment		328,167		154,968
Total loose jewels		16,020,746		16,766,108
Total supplies inventory		88,846		74,317
Total inventory	$	32,503,424	$	29,172,720

September 30,
2017

December 31,
2016

Raw materials $ 4,076,977 $ 3,106,617
Work-in-process 10,715,382 11,048,126
Finished goods 16,749,663 15,057,668
Finished goods on consignment 944,957 467,778
Supplies Inventory 22,196 17,228
Less inventory reserves (1,611,000 ) (1,567,000 )
Total $ 30,898,175 $ 28,130,417

Current portion $ 11,115,715 $ 9,770,206
Long-term portion 19,782,460 18,360,211
Total $ 30,898,175 $ 28,130,417

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

	March 31, 2022		June 30, 2021
Short-term portion	$	13,440,016	$	11,450,141
Long-term portion		19,063,408		17,722,579
Total	$	32,503,424	$	29,172,720

The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished ~~good~~goods set with moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of ~~September~~March 31, 2022 and June 30, ~~2017 and December 31, 2016,~~2021, work-in-process inventories issued to active production jobs approximated ~~$5.20~~$2.44 million and ~~$7.18~~$2.23 million, respectively.

The Company’s moissanite and lab grown diamond jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, approximately one-half of the ~~majority of~~Company’s jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion ~~trends nor~~trends. Product obsolescence is ~~obsolescence a significant factor. The Company had the exclusive right in the U.S. through August 2015~~closely monitored and ~~the exclusive right in many other countries into the third quarter~~reviewed by management as of ~~2016 to produce~~ and ~~sell created SiC~~ for ~~use in jewelry applications.~~each financial reporting period.

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

~~Prior to March 2016, the Company purchased fashion finished jewelry comprising base metals and non-precious gemstones for sale through~~ ~~Lulu Avenue~~^®, the Company’s former direct-to-consumer home party business of the Company’s wholly owned operating subsidiary, Charles & Colvard Direct, LLC. This finished jewelry was fashion oriented and subject to styling trends that could change with each catalog season, of which there are generally two each year.

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

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

14.	SUBSEQUENT EVENT

Pursuant to authority granted by the Company’s Board of Directors on April 29, 2022, the Company ~~and Charles & Colvard Direct, LLC (“Direct”) a wholly-owned subsidiary of the Company, entered into an asset purchase agreement (the “Purchase Agreement”) with Yanbal, pursuant~~can repurchase up to which Yanbal agreed to purchase certain assets of Direct (the “Transferred Assets”). The transactions contemplated by the Purchase Agreement also closed on March 4, 2016 (the “Closing Date”). The Company determined that the sale of these assets represented a strategic shift that will have a major effect on the Company’s operations and financial results. The Company made the decision to divest of these assets after careful analysisapproximately $5.00 million in shares outstanding of the Company’s ~~core competencies, go-to-market strategies, and intent to advance toward profitability.~~

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common stock over the three-year period ending April 29, 2025. Pursuant to the terms of the ~~Purchase Agreement,~~repurchase authorization, the ~~Transferred Assets included, among other things, (i) an inventory credit to be used towards $250,000 in existing non-moissanite and moissanite inventory as~~common stock share repurchases are generally at the discretion of the ~~Closing Date, consisting~~Company’s management. At May 5, 2022, 0 shares of ~~Direct’s current jewelry offered under~~Company’s common stock had been purchased pursuant to the “Lulu Avenue” trademarks, (ii) all existing marketing collateral such as packaging and catalogs for Direct’s current jewelry offered under the “Lulu Avenue” trademarks as of the Closing Date, (iii) certain assigned contracts, (iv) style advisor and customer lists, and (v) all intellectual property rights owned by the Company and Direct and used solely in connection with the operation of Direct’s direct-to-consumer home party business for the sale of fashion jewelry and related products and services in the United States, excluding the “Lulu Avenue” and “Love Knot” trademarks and other “Lulu Avenue” specific intellectual property such as the domain name www.luluavenue.com and all content located on such website (the “Lulu Intellectual Property”). The inventory credit and an exclusive, nontransferable license to use the Lulu Intellectual Property that was also granted to Yanbal on the Closing Date expired on July 31, 2016. Following the Closing Date, the Company and Direct may not engage in the direct-to-consumer home party business and may not solicit style advisors or customers of the direct-to-consumer home party business. The Company had also agreed to provide to Yanbal certain transition services, which services ended August 31, 2016.repurchase authorization.

The purchase price for the Transferred Assets was $500,000 with selling expenses of approximately $131,000, resulting in a net purchase price of approximately $369,000. The Company recorded a liability associated with $35,000 of expense related to certain style advisor incentives and reduced prepaid expenses by $60,000 related to contracts acquired by Yanbal.

~~There were no assets or liabilities related to discontinued operations at September 30, 2017 or December 31, 2016.~~

~~The following table presents the major classes of line items constituting pretax loss from discontinued operations:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net sales $ - $ 29,850 $ - $ 804,585
Costs and expenses:
Cost of goods sold - 7,188 - 276,100
Sales and marketing - 29,611 - 940,592
General and administrative - - - 173,909
Interest expense - - - 11
Total costs and expenses - 36,799 - 1,390,612
Loss from discontinued operations - (6,949 ) - (586,027 )
Other income:
(Loss) gain on sale of long-term assets - (3,065 ) - 12,398
Total other (loss) income, net - (3,065 ) - 12,398
Pretax loss from discontinued operations $ - $ (10,014 ) $ - $ (573,629 )

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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;

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;

Our business and our results of operations could be materially adversely affected as a result of general economic and market conditions;

We face intense competition in the worldwide gemstone and jewelry industry;

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;

We are ~~currently substantially dependent on a limited number of sales outlets that account for a large percentage of~~subject 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~~.

·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 into~~inaccurate 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 requirements~~social 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 to~~adversely 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 subject~~rely 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 ~~business~~key metrics and real or perceived inaccuracies in such metrics may ~~adversely~~harm 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 customers~~Environmental, social, and ~~our network against security breaches could adversely~~governance 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 regulation~~Our 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;

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·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.

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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 ~~among~~related to any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for future periods.

Overview

Our Mission

At Charles & Colvard, Ltd., our mission is to redefine the definition of real within the jewelry 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 discovered~~natural 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 crystals~~uniquely positioned product line for the conscientious consumer. Our Caydia^® lab grown diamonds are ~~too small for commercial use, larger crystals must be~~hand selected by our Gemological Institute of America, or GIA, certified gemologists to meet Charles & Colvard’s uncompromising standards and validated by independent third-party experts. Our Caydia^® lab grown diamonds are available currently in E, F, and G color grades (based on the GIA’s color grading scale) with a ~~laboratory. Leveraging~~minimum clarity in accordance with the GIA’s VS1 clarity classification along with excellent polish and symmetry. All of our ~~advantage~~Caydia^® 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 some~~offering 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 where~~Caydia^® 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 for~~is 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 One~~^TM ~~product line.~~ ~~We plan to invest research and development funds and efforts into the continued expansion of the~~ ~~Forever One~~^TM ~~offering including new jewel shapes and sizes.~~

~~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.~~

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.~~

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.~~

~~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.~~

~~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.

~~Advance toward profitability.~~ ~~We plan to make calculated investments in our growth while continually striving to reach profitability.~~

~~As we execute our strategy to build and reinvest~~Following the government mandated shut down during the early days of the pandemic, work in our ~~businesses, significant expenses~~production and ~~investment~~distribution facilities has continued throughout the pandemic, consistent with guidance from federal, state and local officials to minimize the spread of ~~cash will~~COVID-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 ahead~~fully vaccinated and to provide evidence of ~~the revenue streams we expect~~vaccination 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 one~~a 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 protect~~workforce 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.~~

~~During~~financial results during the nine ~~months~~month 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 momentum~~believe the risk exists that the COVID-19 pandemic, including changes in consumer-level spending as a result of the ~~outcomes~~pandemic, 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 traffic~~Fiscal 2022.

For additional risks to the ~~many e-commerce outlets where we advertise~~Company related to the COVID-19 pandemic, see “Part I, Item 1A. Risk Factors”, contained in our 2021 Annual Report.

Fiscal 2022 Financial Outlook

Our key strategic initiatives during Fiscal 2022 have been designed to increase brand awareness and ~~sell goods. We remain on track with our strategic programs, including the~~to 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 ~~within~~and 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 partners~~brand- 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 ~~announced~~made significant investments to strengthen the ~~availability~~Charles & Colvard brand through our marketing strategy, which included brand marketing campaigns across multiple digital platforms, social media outlets, earned media, and media placements as well as placements with key consumer-based influencers. We believe that to continue the growth of our business, we must continue to acquire new customers and retain existing customers in a cost-effective manner.

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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 ~~six~~our corporate headquarters. The studio will be a digital extension of the sales team and a tool that our marketing team will utilize for video content production, live-stream shopping, designer and influencer interviews, and fashion photography. We believe this digital marketing capability will continue to further position and define our brand in what we believe is a rapidly evolving consumer landscape and better meet the consumer’s current appetite for digital content. We believe these capabilities will provide incremental sales channels for our direct-to-consumer business and allow us to compete more effectively and to increase our market share within the fine jewelry space by engaging with consumers wherever they are shopping. We continually develop and scale our investment in dynamic marketing strategies to optimize our messaging and advertising spend across multiple channels in an effort to drive strategic customer acquisition and to increase fine jewelry sales from new ~~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 gemstones~~hosted a social media platform-based engagement ring sweepstakes program that ~~range from six carats~~was designed to ~~15.5 carats) and three new shapes – heart, marquise, and trillion. With these additional shapes, we have increased the~~promote 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 sales~~gemstones. Also, during the ~~nine months ended September 30, 2016. The decrease~~quarter 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% of~~Moissanite 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.

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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 as~~dropship business partners. As a result of our brand awareness expansion programs, we received positive press coverage during the quarter for our fashion jewelry product lines on several major online shopping and fashion-related websites, such as Vogue.com, Brides.com, TheKnot.com, WWD.com, MensHealth.com, and Byrdie.com. We also received finished jewelry related press coverage on national online news outlet websites, such as CNN.com and NewsBreak.com. Lastly, during the quarter ended March 31, 2002, we curated an ~~increase~~assortment of fine fashion jewelry featuring our Forever One™ moissanite gemstones and Caydia^®lab grown diamonds that are being used for the filming of the upcoming seasons of the ABC television network’s series of The Bachelor and The Bachelorette.

While we are in ~~compensation expenses~~the early stages of expanding our geographic footprint, we believe these strategies will combine to help drive future and sustained growth and to present our brand and gemstone product lines to a broader range of consumers in ~~connection with severance benefits related~~the fine jewelry space. We further believe that we remain well-positioned to meet current marketing-level trends within the ~~departure~~jewelry industry, where consumers are increasingly more aware of ~~our former Chief Revenue Officer. General~~the 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 expenses~~seek 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 loss~~discuss our strategic outlook and key strategies for Fiscal 2022 in Part I, Item 1, “Business” and in Part II, Item 7, “Management’s Discussion and Analysis of ~~$1.14 million, or $0.05 per diluted share, for the nine months ended September 30, 2017, compared to a net loss~~Financial 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.

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Results of Operations

The following table sets forth certain consolidated statements of operations data for the three and nine months ended ~~September 30, 2017~~March 31, 2022 and ~~2016:~~2021:

	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, 2017~~March 31, 2022 and ~~2016~~2021 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, 2017~~March 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, 2017~~March 31, 2022 compared to ~~$23.13~~$29.51 million for the nine months ended ~~September 30, 2016, a decrease~~March 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, 2017~~March 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 the~~our Online Channels segment and Traditional segment. The ~~decrease~~increases in ~~consolidated~~our Online Channels segment net sales ~~for~~in the ~~nine~~three months ended ~~September 30, 2017 was primarily due to the Legacy Inventory Sale~~March 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.

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Sales of ~~loose jewels~~finished 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 jewel~~March 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 jewel~~March 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 decrease~~an increase of ~~$5.42~~approximately $4.83 million, or ~~30%~~26%. The ~~decrease~~increase in finished jewelry sales for the ~~nine months~~three- and nine-month periods ended ~~September 30, 2017~~March 31, 2022 was due primarily ~~due~~ to ~~the Legacy Inventory Sale during the first quarter~~higher 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 jewelry~~loose 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 jewelry~~March 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 increase~~a decrease of ~~$495,000,~~$885,000, or ~~31%~~28%. For the nine months ended ~~September 30, 2017, finished jewelry~~March 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 increase~~a decrease of ~~$787,000,~~$549,000, or ~~16%~~5%. The ~~increase~~decrease in ~~finished jewelry~~ sales of loose jewels for the ~~three-~~three-month and nine-month periods ended ~~September 30, 2017~~March 31, 2022 was due primarily to ~~strong finished jewelry retail~~a 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 periods~~nine 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 year~~March 31, 2022 primarily as a result of increased ~~demand in the U.S. distributor market and increased~~ sales ~~from~~to 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 2016~~March 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, 2017~~respective 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, 2017~~March 31, 2021 accounted for 13% and 11% of total consolidated ~~sales, but did not account for a significant portion of our consolidated~~net sales during each of the ~~same period in 2016 or~~respective three- and nine-month periods. Other than our U.S. customers noted above during the three- and nine-month periods ended ~~September 30, 2017~~March 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 of~~for the ~~one-time Legacy Inventory Sale transaction. This U.S. customer did not account for a significant portion of~~periods 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 customers~~customer 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 periods~~nine 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 compared~~world continues to adapt to the ~~corresponding periods of the prior year. We have been evaluating~~COVID-19 pandemic, we continue to evaluate these and other potential distributors in ~~these~~ international markets to determine the best long-term ~~partner. Additionally, we anticipate the need to develop a direct-to-consumer presence, which would require marketing and e-commerce investment to drive expected growth in these regions.~~partners. As a result, and in light of the ongoing worldwide pandemic and international trade challenges, we expect our sales in these markets may ~~continue to~~ fluctuate significantly each reporting period.

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, 2017~~March 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.

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Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the three and nine months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 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, 2017~~March 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, 2017~~March 31, 2022 compared to ~~$16.28~~$15.46 million for the nine months ended ~~September 30, 2016, a decrease~~March 31, 2021, an increase of ~~$5.73~~approximately $1.89 million, or ~~35%~~12%. Product line cost of goods sold is defined as product cost of goods sold in each of our ~~Traditional~~Online Channels segment and ~~Online Channels~~Traditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory ~~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 due~~March 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 ~~decrease~~increase 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, 2017~~March 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 period~~comparable prior year period; and an approximate $121,000 increase in ~~2016 was primarily due~~non-capitalized manufacturing production control expenses principally related to the ~~Legacy Inventory Sale during the first quarter~~timing of ~~2016. The net decrease in non-product line cost of~~when work-in-process goods ~~sold comprises~~are 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 decrease~~adjustments principally related to changes in ~~non-capitalized manufacturing and~~ production ~~control expenses; and a $10,000 decrease~~standard 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 of~~additional 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 in~~Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.

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Sales and Marketing

Sales and marketing expenses for the three and nine months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 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, 2017~~March 31, 2022 compared to ~~$1.89~~$2.21 million for the three months ended ~~September 30, 2016, a decrease~~March 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, 2017~~March 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%.

~~Table of Contents~~

The ~~decrease~~increase in sales and marketing expenses for the three months ended ~~September 30, 2017~~March 31, 2022 compared to the same period in ~~2016~~2021 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 $84,000~~principally 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 ~~principally~~incurred primarily in connection with ~~maintenance~~new software-related agreements associated with ~~our migration to a cloud-based data storage arrangement as well as other software-related agreements; a $24,000~~upgraded operating and cybersecurity systems; an $8,000 increase in ~~recruiting fees; a $10,000 increase~~rent 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 sales~~travel expenses as we returned to more traditional business travel patterns following cut-backs relating to the COVID-19 pandemic and ~~marketing~~related 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 ~~decrease~~increase in advertising and digital marketing expenses for the three months ended ~~September 30, 2017~~March 31, 2022 compared to the same period in ~~2016 was primarily due to~~2021 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 and~~fees. These increases were offset partially by a ~~$5,000 net~~$6,000 decrease in print media expenses. ~~These decreases~~During the comparable prior year period, advertising and digital marketing expenses were ~~partially offset by a $78,000 increase~~lower 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, 2017~~March 31, 2022 compared to the same period in ~~2016 decreased~~2021 increased primarily ~~as a result of a $35,000 decrease in severance expenses related~~due 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, 2017~~March 31, 2022 compared to the same period in ~~2016~~2021 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 ~~principally~~incurred primarily in connection with ~~maintenance~~new software-related agreements associated with upgraded sales-related operating and cybersecurity systems; a $51,000 increase in rent expense, primarily related to our ~~migration~~corporate headquarters operating lease amendment that was executed in January 2021; a $31,000 increase in travel expenses as we returned to more traditional business travel patterns following cut-backs relating to the COVID-19 pandemic and related cost-control measures in the prior year period; and a ~~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 $16,000~~expenses.

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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 advertising~~digital marketing expenses for the nine months ended ~~September 30, 2017~~March 31, 2022 compared to the same period in ~~2016~~2021 comprises a ~~$733,000 decrease~~$2.20 million increase in ~~outside agency fees and~~digital 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, 2017~~March 31, 2022 compared to the same period in ~~2016~~2021 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, 2017~~March 31, 2022 and ~~2016~~2021 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	%

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General and administrative expenses were ~~$1.14~~$1.11 million for the three months ended ~~September 30, 2017~~March 31, 2022 compared to ~~$1.24~~$1.09 million for the three months ended ~~September 30, 2016, a decrease~~March 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, 2017~~March 31, 2021 compared to ~~$4.38~~$3.28 million for the nine months ended ~~September 30, 2016, a decrease~~March 31, 2022, an increase of ~~$768,000,~~approximately $602,000, or 18%.

The ~~decrease~~increase in general and administrative expenses for the three months ended ~~September 30, 2017~~March 31, 2022 compared to the same period in ~~2016~~2021 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 ~~taxes~~travel 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 decrease~~a $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 ~~decreases~~increases 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 ~~professional~~salaries 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 expenses~~fees decreased for the three months ended ~~September 30, 2017~~March 31, 2022 compared to the same period in ~~2016~~2021 primarily due to ~~an $81,000~~a $44,000 decrease in ~~employee stock-based compensation expense; an $80,000 decrease in salaries and related employee benefits~~legal 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 ~~primarily~~in the current year period. These decreases were partially offset by a $40,000 increase in fees associated with audit and tax services, principally related to ~~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 ~~decrease~~increase in general and administrative expenses for the nine months ended ~~September 30, 2017~~March 31, 2022 compared to the ~~same~~nine-month period ~~in 2016~~ended March 31, 2021 was primarily due to a ~~$908,000 decrease~~$481,000 increase in compensation expenses; a $95,000 ~~decrease~~increase in housing allowances and travel-related expenditures as we returned to more normal business travel patterns following cut-backs relating to the COVID-19 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 increase~~policy in ~~bank fees, which includes fees associated~~connection with the ~~Wells Fargo Credit Facility and credit card clearing transactions; a $16,000 increase~~decrease in ~~equipment-related rental expense; and a $14,000 increase in business taxes and licenses.~~accounts receivable, compared with the prior period.

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Compensation expenses ~~decreased~~increased for the nine months ended ~~September 30, 2017~~March 31, 2022 compared to the same period in ~~2016~~2021 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 decrease~~aggregate. 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 ~~decreased~~increased for the nine months ended ~~September 30, 2017~~March 31, 2022 compared to the ~~same~~nine-month period ~~in 2016~~ended March 31, 2021 primarily due to a $78,000 increase in fees associated with audit and tax services, principally related to a discrete income tax-related project. This increase was partially offset by a $6,000 net decrease ~~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

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~~Loss on Abandonment of Property and Equipment~~

~~Loss on abandonment of property and equipment~~Interest income for the three and nine months ended ~~September 30, 2017~~March 31, 2022 and ~~2016~~2021 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 equipment~~decrease 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.

30 ~~2017 compared~~

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Loss on Foreign Currency Exchange

Loss on foreign currency exchange related to ~~approximately $500 and $116,000~~foreign 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 $500~~March 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-month~~three and nine months ended March 31, 2022 and 2021, we had international sales transactions denominated in currencies other than the U.S. dollar that resulted in foreign currency exchange net losses. The decrease in these losses reflects the lower level 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 an~~For each of the three and nine months ended March 31, 2022, our statutory tax rate was 22.24% and consisted of the federal income tax ~~net expense~~rate of ~~approximately $4,500~~21% and ~~$3,300 for the three-month periods ended September 30, 2017 and 2016, respectively. We recognized an~~a blended state income tax rate of 1.24%, net ~~expense~~ of ~~approximately $23,100~~the federal benefit. For each of the three and ~~$10,100 for~~nine months ended March 31, 2021, our statutory tax rate was 22.11% and consisted of the ~~nine-month periods ended September 30, 2017~~federal income tax rate of 21% and ~~2016, respectively. Income~~a blended state income tax ~~provisions~~rate of 1.11%, net of the federal benefit. Our effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in ~~these periods~~book and tax accounting arising primarily ~~relate to estimated~~from the permanent tax ~~penalties, and interest~~benefits associated with ~~uncertain~~stock-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 considers~~we consider new evidence, both positive and negative, that could impact ~~its~~our view with regard to future realization of deferred tax assets. ~~Beginning~~As of June 30, 2021, cumulative positive taxable income over the last three tax years had been generated in ~~2014, management~~the U.S., as compared to the negative evidence of cumulative losses in previous years. We also determined that our expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that included significant management estimates and assumptions, would be sufficient to result in full utilization of our federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of June 30, 2021, to conclude that it was more likely than not deferred tax assets of approximately $6.35 million would be realizable, and we reduced our valuation allowance accordingly.

Accordingly, we recognized a net income tax expense of approximately $78,000 and $485,000 for the three and nine months ended March 31, 2022, respectively, compared with a net income tax expense of approximately $500 and $1,000 for the three and nine months ended March 31, 2021, respectively. With the reduction of our valuation allowance during the fiscal year ended June 30, 2021, we recognized deferred income tax expense during the three and nine months ended March 31, 2022 in the amount of approximately $78,000 and $483,000, respectively. Included in our tax provision, we record estimated taxes, penalties, and interest associated with uncertain tax positions as income tax expense and recognized such expense related to these items of approximately $500 for each of the three months ended March 31, 2022 and 2021, respectively, and approximately $1,500 for each of the nine months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, we determined that our expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant management estimates and assumptions, would continue to be sufficient to result in full utilization of our remaining federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, we determined that sufficient positive evidence existed as of March 31, 2022, to conclude that it is more likely than not deferred tax assets of approximately $5.87 million remain realizable. Conversely, we further determined that sufficient negative evidence ~~outweighed the positive and established a full valuation allowance against~~continued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize certain of our deferred tax assets. ~~We maintained~~Therefore, 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.

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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 $10.00~~a $5.00 million ~~asset-based revolving~~cash 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 ~~decreased~~increased 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 ~~decrease~~increase in working capital at ~~September 30, 2017~~March 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 ~~allocation~~accounts 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 expenses~~our 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.

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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, $2.05~~March 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 ~~use~~favorable effect of ~~cash were a~~ net ~~loss~~income in the amount of ~~$1.14~~$2.33 million, which ~~includes $765,000~~also included $1.74 million of non-cash ~~expenditures;~~expenses; an increase in ~~inventory~~accounts 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 ~~purchase~~course of ~~new raw material SiC crystals during~~ the COVID-19 pandemic and through the current period ~~pursuant~~ended 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 ~~during~~beyond 90 days to certain credit-worthy customers. Because of the ~~nine months ended September 30, 2017; however, we may offer~~ongoing impact of the pandemic on the global economy, the extension of these terms ~~from time to time, which~~ may not immediately increase liquidity as a result of ongoing current-period ~~sales. We~~sales, which we expect may continue to be pressured due to the effects of the ongoing pandemic. In addition, we believe our competitors and other vendors in the wholesale jewelry industry have expanded their use of extended payment terms and, in aggregate, we believe that, through our use of extended payment terms, we provide a competitive response in our market ~~and~~during the current global economic environment. We believe that ~~our net sales have been favorably impacted. We~~we are unable to estimate the impact of ~~this program~~these actions on our net sales, but we believe that if we ~~cease~~ceased providing extended payment terms, ~~in select instances, we believe~~ we would ~~not~~ be at a competitive disadvantage for some Traditional segment customers in the marketplace during this economic period and that our net sales and profits would likely ~~decrease.~~be adversely impacted.

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~~During the nine months ended September 30, 2017, we~~We 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 metals~~raw 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 ~~increased~~fluctuated 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 ~~the~~prior periods ~~when~~in 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, $19.78~~March 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 ~~good~~goods 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 purchasing~~purchase pursuant to the Supply Agreement. A

With our investment in the lab grown diamond product line in recent periods, the level of our lab grown diamond inventory, which has a higher carrying value, has increased to support the business and expected product sales. This has contributed to the growth in our overall inventory levels compared with prior periods.

Our more detailed description of our inventories is included in Note 5 ~~“Inventories,”~~to our condensed consolidated financial statements in ~~the Notes to Condensed Consolidated Financial Statements included elsewhere in~~Part I, Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.

As of March 31, 2022, all of our remaining federal income tax credits had expired or been utilized, and therefore, are not available to be carried forward to offset future income taxes. As of March 31, 2022, we also had a federal tax net operating loss carryforward of approximately $19.00 million expiring between 2034 and 2037, or that have no expiration, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $19.87 million expiring between 2023 and 2035; and various other state tax net operating loss carryforwards expiring between 2023 and 2040, which can be used to offset against future state taxable income.

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Contractual Commitment

On December 12, 2014, we entered into the Supply Agreement with Cree, ~~our raw material SiC crystal supplier.~~Inc., now known as Wolfspeed, Inc., or Wolfspeed. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from ~~Cree,~~Wolfspeed, and ~~Cree~~Wolfspeed agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement ~~will~~was scheduled to expire on June 24, 2018, unless extended by the parties. ~~We have~~Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of the raw materials used in our premium moissanite product, Forever One™ and provided us with one option, subject to certain conditions, to unilaterally extend the term of the ~~agreement~~Supply Agreement for an additional two-year period following the expiration of the initial term. In addition, the amendment to the Supply Agreement established a process by which Wolfspeed may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Wolfspeed has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June ~~2018~~2025 is ~~dependent upon the size~~approximately $52.95 million, of ~~the SiC material and ranges between~~which approximately ~~$29.60~~$28.35 million ~~and approximately $31.50 million. As~~remains to be purchased as of ~~September 30, 2017, our remaining purchase commitment through June 2018 under the Supply Agreement ranges from approximately $7.64 million to approximately $9.54 million.~~March 31, 2022.

During the nine months ended ~~September 30, 2017,~~March 31, 2022 and 2021, we purchased approximately ~~$6.90~~$4.49 million and $2.28 million, respectively, of SiC crystals from ~~Cree. We~~Wolfspeed pursuant to the terms of the Supply Agreement, as amended. Going forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, together with future cash expected to be provided by operating activities ~~and, if necessary, our Credit Facility,~~ to finance our purchase commitment under the Supply ~~Agreement.~~Agreement, as amended.

~~We made no income tax payments during~~Line of Credit

Effective July 7, 2021, we obtained from JPMorgan Chase our $5.00 million cash collateralized line of credit facility, or the nine months ended September 30, 2017. As of September 30, 2017, we had approximately $882,000 of remaining federal income tax credits, $533,000 of which expire between 2018 and 2021 and the balance without an expiration, which can be carried forward to offset future income taxes. As of September 30, 2017, we also had a federal tax net operating loss carryforward of approximately $25.01 million expiring between 2020 and 2036, which can be used to offset against future federal taxable income, a North Carolina tax net operating loss carryforward of approximately $20.23 million expiring between 2023 and 2031, and various other state tax net operating loss carryforwards expiring between 2021 and 2036, which can be used to offset against future state taxable income.

~~On June 25, 2014, we and our wholly owned subsidiaries, Charles & Colvard Direct, LLC and Moissanite.com, LLC (now charlesandcolvard.com, LLC), collectively referred to as the Borrowers, obtained the~~JPMorgan Chase Credit ~~Facility from Wells Fargo.~~Facility. The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including ~~transaction fees~~permitted acquisitions and ~~expenses incurred in connection therewith~~certain additional indebtedness for borrowed money, installment obligations, and ~~the issuance of letters of credit up to a $1.00 million sublimit.~~ obligations under capital and operating leases. TheJPMorgan Chase Credit Facility, ~~was~~which is scheduled to mature on ~~June 25, 2017.~~

~~Effective June 22, 2017,~~July 31, 2022, is secured by a cash deposit in the Credit Facility was amended to extend the maturity date to June 25, 2018. The Credit Facility was also amended to reduce the interest rate payable on advances under the Credit Facility to a rate equal to Wells Fargo’s daily three-month LIBOR rate plus 2.00%, calculated on an actual/360 basis and payable monthly in arrears. In addition, the Credit Facility was amended further to include the additionamount of ~~an EBITDA covenant, whereby the Borrowers must maintain a specified minimum monthly EBITDA through December 2017 if the cash position~~$5.05 million held by JPMorgan Chase as collateral for the ~~Borrowers’ demand deposit account maintained at Wells Fargo falls below $3.00 million or the Borrowers draw upon the Credit Facility.~~
line of credit facility.

~~Table of Contents~~

The Credit Facility includes a $5.00 million sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank. Advances under the Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts and inventory, less reserves. Advances against inventory are further subject to an initial $3.00 million maximum. We must maintain a minimum of $1.00 million in excess availability at all times.

Each advance accrues interest at a rate equal to ~~either (i) Wells Fargo’s three-month~~JPMorgan Chase’s monthly London Interbank Offered Rate, or LIBOR, multiplied by a statutory reserve rate for eurocurrency funding to which JPMorgan Chase is subject with respect to the adjusted LIBOR rate as established by the U.S. Federal Reserve Board, plus ~~2.00% or (ii) Wells Fargo’s Prime Rate plus 1.00%, each~~a margin of 1.25% per annum. Interest is calculated monthly on an actual/~~360~~360-day basis and payable monthly in arrears. Principal outstanding during an event of default, at JPMorgan Chase’s option, accrues interest at a rate of 3% per annum in excess of the above rate. Any advance may be prepaid in whole or in part at any time. ~~There are no mandatory prepayments or line reductions.~~

The Credit Facility is secured by a lien on substantially all assets of the Borrowers, each of which is jointly and severally liable for all obligations thereunder. Wells Fargo’s security interest in certain SiC materials is subordinate to Cree’s security interest in such materials pursuant to the Supply Agreement and an Intercreditor Agreement with Wells Fargo.

The Credit Facility is evidenced by a Credit and Security Agreement dated as of June 25, 2014, as amended, or the Credit Agreement, and customary ancillary documents. The Credit Agreement contains customary covenants, representations and cash dominion provisions, including a financial reporting covenant and limitations on dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, and changes in control.

Events of default under the Credit Facility include, without limitation, (i) any impairment of the Export-Import Bank guaranty, unless the guaranteed advances are repaid within two business days, (ii) an event of default under any other indebtedness of the Borrowers in excess of $200,000, and (iii) a material adverse change in the ability of the Borrowers to perform their obligations under the Credit Agreement or in the Borrowers’ assets, liabilities, businesses or prospects, or other circumstances that Wells Fargo believes may impair the prospect of repayment. If an event of default occurs, Wells Fargo is entitled to take enforcement action, including acceleration of amounts due under the Credit Agreement and foreclosure upon collateral.

The Credit Agreement contains other customary terms, including indemnity, expense reimbursement, yield protection, and confidentiality provisions. Wells Fargo is permitted to assign the Credit Facility.

As of ~~September 30, 2017,~~March 31, 2022, we had not borrowed against the JPMorgan Chase Credit Facility.

Prior to obtaining the JPMorgan Chase Credit Facility, we and our wholly owned subsidiary, charlesandcolvard.com, LLC, collectively referred to as the Borrowers, had a $5.00 million asset-based revolving credit facility, or the White Oak Credit Facility, from White Oak Commercial Finance, LLC, or White Oak, which we terminated in accordance with its terms as of July 9, 2021. The effective date of the White Oak Credit Facility was July 13, 2018, and it was scheduled to mature on July 13, 2021.

The White Oak Credit Facility was available for general corporate and working capital purposes, including permitted acquisitions and was guaranteed by the Borrowers. Under the terms of the White Oak Credit Facility, the Borrowers were required to maintain at least $500,000 in excess availability at all times. The White Oak Credit Facility contained no other financial covenants.

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Advances under the White Oak Credit Facility could have been either revolving or non-revolving. During the first year of the term of the White Oak Credit Facility, any revolving advances would have accrued interest at a rate equal to one-month LIBOR (reset monthly, and subject to a 1.25% floor) plus 3.75%, and any non-revolving advances would have accrued interest at such LIBOR rate plus 4.75%. Thereafter, the interest margins would have been reduced upon our achievement of a specified fixed charge coverage ratio. However, any advances were in all cases subject to a minimum interest rate of 5.50%. Interest would have been calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default, which did not occur during the term of the White Oak Credit Facility, would have accrued interest at a rate 2% in excess of the rate that would have been otherwise applicable.

We had not borrowed against the White Oak Credit Facility as of July 9, 2021, the date upon which we terminated the White Oak Credit Facility in accordance with its terms.

Liquidity and Capital Trends

Notwithstanding the adverse impact that the COVID-19 pandemic has had on the global economy and on our own business operations, we believe that it has not materially adversely impacted our liquidity position and we continue to generate operating cash flows to meet our short-term liquidity needs. We further believe that our existing cash, ~~and~~ cash equivalents, and restricted cash and access to other working capital ~~together with~~resources, including but not limited to, the issuance of equity securities, and future cash expected to be provided by operating activities combined will be sufficient to meet our working capital and capital expenditure needs over the next 12twelve months.

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 ~~jewel~~jewels 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 ~~report~~Quarterly Report on Form 10-Q, in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2021 and December 31, 2021, and in Part I, Item 1A of our 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.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.

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Changes in Internal Control Over Financial Reporting

We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended ~~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.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

We discuss in our Annual Report on Form 10-K for the fiscal year ended ~~December 31, 2016~~June 30, 2021 and our Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2017~~December 31, 2021 various risks that may materially affect our business. There have been no material changes to such risks, except as set forth below.

Our ~~failure~~information technology, or IT, infrastructure, and our network may be impacted by a cyber-attack or other security incident as a result of the rise of cybersecurity events. Our business operations rely on the secure processing, storage, and transmission of certain confidential, sensitive, proprietary, and other information, as well as personal information about our customers and employees. Cyber-attacks, including those associated with the current conflict in Eastern Europe, are rapidly evolving as cyber criminals have become increasingly sophisticated and carry out direct large-scale, complex, and automated attacks against companies or through their vendors.

Breaches of our technology systems, whether from circumvention of security systems, denial-of-service attacks or other cyber-attacks, hacking, “phishing” attacks, computer viruses, ransomware or malware, employee or insider error, malfeasance, social engineering, vendor software supply chain compromises, physical breaches or other actions, have and may result in manipulation or corruption of sensitive data, material interruptions or malfunctions in our websites, applications, data processing and certain products and services, or disruption of other business operations. Furthermore, any such breaches could compromise the confidentiality and integrity of material information held by us (including information about our business, employees, or customers), as well as sensitive information, the disclosure of which could lead to ~~maintain compliance~~identity theft. Breaches of our product services that rely on technology and internet connectivity can expose us to product and other liability risk and reputational harm. Measures that we take to avoid, detect, mitigate, or recover from material incidents, may be insufficient, circumvented, or may become ineffective.

We are not able to anticipate or prevent all such cyber-attacks and, to the extent a cyber-attack or other security incident results in a breach of the above-described information, it could disrupt our business operations, harm our reputation, compel us to comply with ~~Nasdaq’s continued listing requirements~~applicable data breach notification laws, subject us to litigation, regulatory investigation, or otherwise subject us to liability under laws, regulations and contractual obligations. This could result in ~~the delisting~~increased costs to us and result in significant legal and financial exposure and/or reputational harm.

We have invested and continue to invest in risk management and information security and data privacy measures in order to protect our systems and data, including employee training, organizational investments, incident response plans, table-top exercises, and technical defenses. The cost and operational consequences of implementing, maintaining, and enhancing data or system protection measures could increase significantly to overcome intense, complex, and sophisticated global cyber threats.

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In addition, we and certain of our ~~common stock~~third-party vendors receive and store certain information associated with our sales operations and other aspects of our business. In connection with our e-commerce business, we rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information.Our ~~common stock~~disclosure controls and procedures address cybersecurity and include elements intended to ensure that there is ~~currently listed~~an analysis of potential disclosure obligations arising from security breaches. We also maintain compliance programs to address the potential applicability of restrictions against trading while in possession of material, nonpublic information generally and in connection with a cybersecurity breach. The breakdown in existing controls and procedures around our cybersecurity environment may prevent us from detecting, reporting or responding to cyber incidents in a timely manner and could have a material adverse effect on our financial position and value of our Company’s stock. Despite our implementation of security measures, our IT systems and e-commerce business are vulnerable to damages from computer viruses, natural disasters, unauthorized access, cyber-attack, and other similar disruptions.

Constantly evolving privacy regulatory regimes are creating new legal compliance challenges. Domestic and international privacy and data security laws are complex and changing rapidly. There are a variety of laws and regulations, including regulation by federal government agencies, including the ~~Nasdaq Capital Market. On May 4, 2017, we received a notification letter from~~ ~~Nasdaq’s Listing Qualifications Department indicating that we were~~Federal Trade Commission, or FTC, and state and local agencies. In addition to federal laws such as §5 of the Federal Trade Commission Act, the Gramm-Leach-Bliley Act, and the Fair Credit Reporting Act, certain states have also enacted laws regulating companies’ collection, use, and disclosure of personal information and requiring the implementation of reasonable data security measures. Various laws across states and U.S. territories also require businesses to notify affected individuals, governmental entities, and/or credit reporting agencies of certain security breaches affecting personal information. International privacy laws, including in Canada and the European Union, pose further challenges. These domestic and international laws are not inconsistent, and compliance with ~~Nasdaq Listing Rule 5450(a)(1), because~~these laws in the ~~minimum bid price~~event of ~~our common stock closed below $1.00 per share for 30 consecutive business days on~~a widespread data breach would be complex and costly.

In addition, privacy advocates and industry groups have regularly proposed, and may propose in the ~~Nasdaq Global Select Market, and that~~future, self-regulatory standards by which we ~~had 180 calendar days,~~are legally or until October 31, 2017, to regain compliance with the minimum $1.00 bid price per share requirement. We received notice transferring our listing to the Nasdaq Capital Market from the Nasdaq Global Select Market, effective November 3, 2017, which resulted in an additional 180-day period within which to regain compliance with the $1.00 minimum bid price requirement.

While we intend to engage in efforts to regain compliance, and thus maintain our listing, including by carrying out a reverse stock split, if necessary, there can be no assurance that we will be able to regain compliance during the applicable time periods set forth above.contractually bound. If we fail to ~~continue~~comply with these obligations or standards, we may face substantial liability or fines.

Despite our efforts to ~~meet~~comply with all applicable ~~listing requirements in the future~~data protection laws and ~~Nasdaq determines to delist our common stock, the delisting~~regulations, any actual or perceived non-compliance could substantially decrease trading in our common stock and adversely affect the market liquidity of our common stock; adversely affect our ability to obtain financing on acceptable terms, if at all; and may result in ~~the potential loss of confidence~~litigation and proceedings against us by ~~investors, suppliers,~~governmental entities, customers, or others, fines and ~~employees~~civil or criminal penalties, limited ability or inability to operate our business, offer services, or market our business in certain jurisdictions, negative publicity and ~~fewer business development opportunities. Additionally, the market price of~~harm to our ~~common stock may decline further~~brand and ~~shareholders may lose some or all of their investment.~~

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

Environmental, social, and governance matters may impact our business, reputation, financial ~~condition.~~

Wecondition, and results of operations. Increasingly, companies are ~~subject~~being measured by their performance on a variety of environmental, social, and governance, or ESG, matters, which are considered to ~~certain risks due to our international distribution channels and vendors.~~ We currently have approximately 20 international distributors for moissanite jewels and finished jewelry covering portions of Western Europe, Australia, India, China and other Southeast Asian countries, and the Middle East. In addition, we use certain companies based outside the U.S. to facet our moissanite jewels and to manufacture finished jewelry. Due to our reliance on development of foreign markets and use of foreign vendors, we are subjectcontribute to the ~~risks~~long-term sustainability of ~~conducting~~companies’ performance. Recently, many investors, including large institutional investors, have publicly emphasized the importance of ESG measures to their investment decisions.

Our assessments on ESG matters include, among others, the Company’s efforts and impacts, including impacts associated with our suppliers or other business ~~outside of the U.S. These risks include the following:~~partners, on environmentally and socially responsible fine jewelry, climate change, diversity, ethics, and compliance with applicable regulations.

·	the adverse effects on U.S.-based companies operating in foreign markets that might result from war; terrorism; changes in diplomatic, trade, or business relationships; or other political, social, religious, or economic instability;

·	~~the continuing adverse economic effects of any global financial crisis;~~

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

·	~~delays resulting from difficulty in obtaining export licenses;~~

·	~~tariffs and other trade barriers and restrictions;~~

·	~~the burdens of complying with a variety of foreign laws and other factors beyond our control;~~

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

·	~~the complications related to collecting receivables through a foreign country’s legal system.~~

Additionally, while all of our foreign transactions are denominated in U.S. dollars, foreign currency fluctuations could impact demand for our products or the ability of our foreign suppliers to continue to perform. Further, some of our foreign distributors operate relatively small businesses and may not have the financial stability to assure their continuing presence in their markets. There can be no ~~assurance~~certainty that we will manage such ESG matters successfully, or that we will successfully meet investors’ expectations as to our proper role, or our own ESG goals and values. This could lead to risk of litigation or reputational damage relating to our ESG policies or performance. Further, our decisions regarding ESG matters may not be consistent with our short-term financial expectations and may not ultimately produce the ~~foregoing factors will not~~long-term benefits that we expect, in which case our business, reputation, financial condition, and operating results may be adversely ~~affect our operations in the future or require us to modify our anticipated business practices.~~impacted.

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Item 6.

Exhibits

The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:

Exhibit No.	Description

~~10.1~~	~~Board Compensation Program, effective October 1, 2017~~

31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

~~101~~101.INS	~~The following materials from Charles & Colvard, Ltd.’s Quarterly Report on Form 10-Q for~~ Inline XBRL Instance Document – the ~~quarter ended September 30, 2017 formatted~~instance document does not appear in the Interactive Data File because its XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements.tags are embedded within the Inline XBRL document.

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase document

104	Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document contained in Exhibit 101

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CHARLES & COLVARD, LTD.

	By:	/s/ ~~Suzanne Miglucci~~Don O’Connell
~~November 2, 2017~~ May 5, 2022		~~Suzanne Miglucci~~ Don O’Connell
		President and Chief Executive Officer

	By:	/s/ Clint J. Pete
~~November 2, 2017~~ May 5, 2022		Clint J. Pete
		Chief Financial Officer
		(Principal Financial Officer and Chief Accounting Officer)

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	March 31, 2022		June 30, 2021
Accrued sales tax	$	811,366	$	555,547
Accrued compensation and related benefits		631,117		866,705
Deferred revenue		505,148		774,891
Accrued cooperative advertising		89,763		68,185
Accrued income taxes		16,478		16,478
Other		1		1
Total accrued expenses and other liabilities	$	2,053,873	$	2,281,807

Operating Leases:
Noncurrent operating lease ROU assets	$	2,935,124

Current operating lease liabilities	$	850,781
Noncurrent operating lease liabilities		3,039,216
Total operating lease liabilities	$	3,889,997

2022	$	213,521
2023		869,742
2024		893,660
2025		918,236
2026		943,487
2027		317,327
Total lease payments		4,155,973
Less: imputed interest		265,976
Present value of lease payments		3,889,997
Less: current lease liability		850,781
Total long-term lease liability	$	3,039,216

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,						Nine Months Ended March 31,
	2017		2016		2017		2016		2022			2021			2022			2021
Employee stock options	$	93,631	$	94,715	$	249,969	$	339,441		$	60,045		$	45,312		$	187,059		$	186,528
Consultant stock options		-		39,143		-		136,253
Restricted stock awards		25,472		100,796		75,220		397,859			138,478			31,604			489,875			85,681
Totals	$	119,103	$	234,654	$	325,189	$	873,553		$	198,523		$	76,916		$	676,934		$	272,209

	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, December 31, 2016		2,134,898		$	1.99
Outstanding, June 30, 2021							2,235,286		$	1.24
Granted		681,369		$	0.92		249,793		$	2.66
Exercised							(532,976	)	$	1.22
Forfeited		(68,000	)	$	1.38		(24,753	)	$	1.04
Expired		(603,252	)	$	3.08		(169,297	)	$	3.12
Outstanding, September 30, 2017		2,145,015		$	1.36
Outstanding, March 31, 2022							1,758,053		$	1.27

	September 30, 2017			December 31, 2016
Raw materials	$	4,076,977		$	3,106,617
Work-in-process		10,715,382			11,048,126
Finished goods		16,749,663			15,057,668
Finished goods on consignment		944,957			467,778
Supplies Inventory		22,196			17,228
Less inventory reserves		(1,611,000	)		(1,567,000	)
Total	$	30,898,175		$	28,130,417

Current portion	$	11,115,715		$	9,770,206
Long-term portion		19,782,460			18,360,211
Total	$	30,898,175		$	28,130,417

~~Dividend yield~~	~~0.0~~	%
~~Expected volatility~~	~~63.0~~	%
~~Risk-free interest rate~~	~~1.86~~	%
~~Expected lives (years)~~	~~5.49~~

Options Outstanding	Options Outstanding					Options Exercisable						Options Vested or Expected to Vest						Options Outstanding					Options Exercisable						Options Vested or Expected to Vest
Balance as of 9/30/2017		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 9/30/2017		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 9/30/2017		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
Balance as of 3/31/2022																		Balance as of 3/31/2022	Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 3/31/2022		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 3/31/2022		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
	2,145,015		8.14	$	1.36		1,256,146		7.32	$	1.62		2,039,272		8.08	$	1.38	1,758,053		6.53	$	1.27		1,289,070		5.64	$	1.08		1,688,085		6.42	$	1.25

	Shares			Weighted Average Grant Date Fair Value
Unvested, December 31, 2016		359,400		$	0.91
Granted		420,000		$	1.11
Vested		(210,453	)	$	0.92
Canceled		(195,200	)	$	0.95
Unvested, September 30, 2017		373,747		$	1.11

	Shares			Weighted Average Grant Date Fair Value
Unvested, June 30, 2021		178,750		$	0.72
Granted		242,725		$	2.75
Vested		(242,725	)	$	1.25
Unvested, March 31, 2022		178,750		$	2.75

	~~September 30,~~ ~~2017~~			~~December 31,~~ ~~2016~~
~~Customer A~~		21	%		*	%
~~Customer B~~		17	%		*	%
~~Customer C~~		**	%		13	%

	March 31, 2022			June 30, 2021
Customer A		36	%		30	%
Customer B		11	%		14	%
Customer C		*	%		22	%