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:
| ·27. | Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our company.Company; and
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| 28. | We cannot guarantee that our share repurchase program will be utilized to the full value approved, or that it will enhance long-term stockholder value and repurchases we consummate could increase the volatility of the price of our common stock and could have a negative impact on our available cash balance. |
Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur except as required by the federal securities laws, and you are urged to review and consider disclosures that we make in the reports that we file with the Securities and Exchange Commission, or SEC, that discuss other factors relevant to our business.
The following discussion is designed to provide a better understanding of our unaudited condensed consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. This information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. June 30, 2023, or the 2023 Annual Report. Historical results and percentage relationships amongrelated to any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for future periods.periods.
Overview
Our Mission
At Charles & Colvard, Ltd., our mission is to provide a more conscious and conflict-free fine jewelry experience for our customers. We are dedicated to blazing a more brilliant path forward with our Made, not Mined™ gemstones and are committed to creating fine jewelry with a conscience.
About Charles & Colvard
Charles & Colvard, Ltd., a North Carolina corporation founded in 1995 (which may be referred to as Charles & Colvard, we, us, or our) is a globally recognized fine jewelry company specializing in lab created 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 mineralnatural progression for the Charles & Colvard brand.
We sell loose moissanite jewels, lab grown diamonds, and finished jewelry set with these gems through two operating segments: our Online Channels segment, which encompasses our digital properties components, comprised of our charlesandcolvard.com, moissaniteoutlet.com, and charlesandcolvarddirect.com websites, e-commerce outlets, including marketplaces, drop-ship customers, and other pure-play, exclusively e-commerce customers; and our Traditional segment, which consists of domestic and international distributors and retail customers, including end-consumers through our first discoveredCharles & Colvard Signature Showroom, which opened in October 2022. We report segment information based on the “management” approach. This segment reporting approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of our operating and reportable segments. We operate in an e-commerce environment characterized by both complexity in global markets and ongoing economic uncertainties in the U.S. and internationally. Our strategy is to build a meteorite crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must beglobally revered and accessible brand of gemstones and finished fine jewelry products set with moissanite and lab grown indiamonds. We believe that our goods appeal to a laboratory. Leveragingwide consumer audience and leverage our advantage of being the original and leading worldwide source of created moissanite jewels,and purveyor of premium lab grown diamonds. We believe a direct relationship with consumers is an important component of this strategy, which entails delivering tailored educational content, engaging in interactive dialogue with our audience, and positioning our brand to meet the demands of today’s discerning consumer. A significant component of our strategy in this environment is to establish Charles & Colvard with reputable, high-quality,focus on our core products, improving thequality 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 somepredictability 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 namedelivery of our wholly owned subsidiary Moissanite.com, LLCproducts and services, and placing those products quickly into the hands of our U.S. and international customers at affordable prices.Moreover, recognizing today that our customers and vendors are resource-constrained, we are endeavoring to charlesandcolvard.com, LLC.develop and extend our portfolio of products in a disciplined manner witha focus on domestic markets close to our core capabilities, as well as growing our global marketplace sales. We believe our continuedcontinue to focus on affordability initiatives. We also expect to continueinnovating and expanding use of multiple sales channelsinvesting in lab created gemstone technologies to the jewelry trade and the end consumer with branded finished jewelry featuring moissanite positions Charles & Colvard goods at the many touchpoints where consumers are when they are making their buying decisions – thereby creating greater exposurefulfill evolving product requirements for our brandcustomers and increasing consumer demand.
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 beinvesting in our people so that we have the technical 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 relatedproduction skills necessary 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 onsucceed without limiting 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:build sound financial returns to our investors.
| · | Innovate the Forever OneTM product line. We plan to invest research and development funds and efforts into the continued expansion of the Forever OneTM offering including new jewel shapes and sizes.
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| · | Expand our finished jewelry line. We plan to collaborate with key designers and jewelry suppliers to expand our product line and introduce new collections of fashion, fine, and bridal jewelry.
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| · | Invest in key retail and wholesale partnerships. We plan to leverage significant groundwork laid with existing partners whose brands and customers align with ours to amplify our reach into these established markets.
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Cybersecurity Event Update
| · | Explore new traditional and online sales channels. We plan to discover unexplored channels as green field opportunities that may open new and innovative ways to reach the consumer where they are shopping.
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| · | Convey e-commerce learning to new channels. We plan to leverage our experience and significant underpinnings in e-commerce to expand our footprint into new channels and regions.
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| · | Evolve our customer service function. We plan to continually improve our customer service function with the intention of delivering world-class service to our partners and direct consumers.
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| · | Amplify our global marketing efforts. We plan to carefully measure the return on our marketing investments, and focus our efforts on profitable endeavors that drive interest in the Charles & Colvard brand, pull consumers to our many sales and educational outlets, and drive conversions.
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| · | Advance toward profitability. We plan to make calculated investments in our growth while continually striving to reach profitability.
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AsOn or about June 28, 2023, we executeidentified a cybersecurity incident that temporarily disrupted the Company’s IT network and resulted in some limited downtime for certain systems. Upon discovery, we took immediate action to activate our strategyincident response and business continuity protocols. We took immediate action to buildcontain the incident and reinvestappropriate incident response professionals were engaged to assist in our businesses, significant expensesinvestigating the nature and investment of cash will be required aheadscope of the revenue streamsevent and to further harden the Company’s defenses. Through investigation, we expectconfirmed that this event was related to an apparent ransomware attack involving the unauthorized encryption of some Company files and the deployment of malware.
Our investigation revealed no evidence that any sensitive customer data was compromised as a result of this incident, and our relationship with our customers has not been negatively impacted. We have worked closely with engaged security specialists to assist in the future,review and this may result in some unprofitable reporting periods in the near future. Despite this, we have maintained as oneassessment of our primary goalsinformation technology controls, and, we implemented recommended strengthening of our access requirements, and improved our unauthorized access detection.
Additionally, we temporarily implemented manual processes to generate positive cash flowconduct our operations with as little disruption to production as possible. All major systems, including our enterprise resource planning, or ERP, financial systems and affected manufacturing and service operations, were restored as quickly as possible from continuingavailable backups, and the incident did not have a material impact on the operations of our business operating segments. No payments were made to protect our cash position. the ransomware threat actors.
We willhave incurred costs in this first quarter of the year ending June 30, 2024 or Fiscal 2024 of approximately $300,000 and expect to continue to monitor our cash burn rate and collection efforts as we grow the business.
During the nine months ended September 30, 2017, we continued to see positive momentum as the outcomes 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% increaseincur costs in net sales over the same period in 2016. We believeconnection with this growth, fueled by our ongoing digital marketing efforts, drove increased traffic to the many e-commerce outlets where we advertise and sell goods. We remain on track with our strategic programs, including the expansion of our Online Channels segment, continued growth within our Traditional segment, and our move up-market with our Forever One™ gemstone leading the charge. Continued demand from both channel partners 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.incident. In the first half of 2017, we announced the availability of Forever One™ in six new, sought-after shapes – emerald, hearts & arrows, pear, radiant, princess, and baguette. In September 2017, we announced the availability of Forever One™ in Exotic Gems (a selection of grand loose gemstones that range from six carats to 15.5 carats) and three new shapes – heart, marquise, and trillion. With these additional shapes, we have increased the 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 during the nine months ended September 30, 2016. The decrease in consolidated net sales was primarily due to the sale, in a single transaction, during the first quarter of 2016,Fiscal 2024, these costs have been primarily comprised of approximately $6.77 millionvarious third-party consulting services, including forensic experts, restoration experts, legal counsel, and other information technology professional expenses, enhancements to our cybersecurity measures, costs to restore our systems and access our data, and employee-related expenses, including with respect to increased overtime. We expect to incur these and other costs related to this incident in the future.
COVID-19 Update
The ultimate impact of legacy loose gemstone inventory, orCOVID-19 on our operations and financial performance in future periods, including management’s ability to execute its strategic initiatives in the Legacy Inventory Sale, resulting from our effortsexpected timeframes, remains uncertain and will depend on future pandemic-related developments, including the duration of the pandemic, any potential subsequent waves of COVID-19 and its variant viral infections, the effectiveness, distribution and acceptance of COVID-19 vaccines, and related government actions to reduce inventory levels. Traditional segment net sales for the nine months ended September 30, 2017prevent and manage disease spread, all of $12.02 million were 31% lower than Traditional segment net sales during the nine months ended September 30, 2016, primarily duewhich are uncertain and cannot be predicted.
For additional risks to the Legacy Inventory SaleCompany related to the COVID-19 pandemic, see “Part I, Item 1A-.” Risk Factors-”, contained in our 2023 Annual Report.
Fiscal 2024 Financial Outlook
Our strategic goals for Fiscal 2024 are centered on continuing to expand Charles & Colvard’s brand on a global scale and to increase the prior year. Online Channels segment net sales forsize of our business through top-line growth. As lab-created gemstones are being embraced by emerging generations, we believe our ability to establish moissanite and our lab grown diamonds along with the 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 dueCharles & Colvard brand directly with conscious consumers is key to our future success and ability to fuel our growth. We plan to continue executing our key Fiscal 2024 strategies with an ongoing increasecommitment to spending judiciously with the long-term plan to generate sustainable earnings.
Our key strategic goals for Fiscal 2024 are as follows:
Global Brand Awareness
We plan to continue strengthening the fine jewelry brand we have been building for nearly three decades. As the consumer landscape continues to shift and factors beyond price, craftmanship, and origin are driving decisions to purchase, brand equity is more important than ever. We will continue investing in marketplaces, drop-ship,paid media campaigns targeting the trade and other pure-play, exclusively e-commerce outlets.consumers as we reinforce our Made, not Mined™ provenance. We will also remain steadfast in our quest for sustained top-line organic growth as our brand messaging resonates with new audiences.
Loose jewel sales comprised 69% of our total consolidated net sales for the nine months ended September 30, 2017 and decreased 30% to $12.77 million, compared with $18.20 million in the same period of 2016, primarily due to the Legacy Inventory Sale in the prior year. Finished jewelry sales for the nine months ended September 30, 2017 comprised 31% of our total consolidated net sales and increased 16% to $5.73 million, compared with $4.94 million in the same period of 2016 due to increased demand in the Traditional segment.
Operating expenses from continuing operations were $9.07 millionDiversified Product Categories
We will continue to evaluate opportunities for growth with synergistic brands, products, and verticals beyond our current offerings. Emerging consumer trends and data will inform new product lines, collections, and partnerships with designers and influencers. We will explore strategic alliances to fuel growth and deliver incremental long-term shareholder value while prioritizing our sustainable practices and core values.
Innovative Technology
Evolving technology continues to shape how consumers discover, research, and ultimately purchase. We will continue to invest strategically in technology to service customers in existing and new outlets. Our investments in innovative technology, artificial intelligence, and predictive analytics will further maximize our ability to be agile and efficient in our business. We will enhance our consumer experience through immersive virtual selling and fully customizable products driven by actionable data.
We will work to capitalize on these strategic goals to deliver top-line growth and strong financial results in this fiscal year. We believe that by implementing innovative technological solutions and developing operational efficiencies, we will position ourselves for scalability and sustained, disciplined growth in the years ahead. We plan to make additional investments in our internal technology-driven systems that lead to further operational efficiencies and improvements that we expect will drive down costs and help us deliver on our profitability targets. We will also remain cognizant of opportunistic strategic alliances and business arrangements that would lead to incremental long-term shareholder value.
As evidenced by our results for the nine months ended September 30, 2017, comparedfirst quarter of Fiscal 2024, domestic and global inflation and rising interest rates, coupled with $9.72 millionongoing fears of recession, continue to erode consumer confidence and present major challenges for the global retail and e-commerce industry. We are facing the same challenges as all retailers and those in the e-commerce space. At the same periodtime, however, these same challenges are providing us the opportunity to reevaluate technologies, strategies, and talent to shape a new era of 2016. Salesshopping.In many ways, we believe the pandemic and marketing expenses increased $226,438 or 4%, to $5.45 million, primarily ascurrent global economic conditions have opened the door for what we believe may be a result of an increase in compensation expenses in connection with severance benefits related to the departure oflong-overdue reset within our former Chief Revenue Officer. Generalindustry that could help move retailers and administrative expenses decreased $767,600, or 18%, to $4.38 million, primarily as a result of a decrease in compensation-related expenses and professional services fees, partially offset by an increase in bad debt expense associated with our allowance for doubtful accounts reserve policy.
We recorded a net loss of $1.14 million, or $0.05 per diluted share, for the nine months ended September 30, 2017, compared to a net loss of $3.45 million, or $0.17 per diluted share,those in the same periode-commerce space into more stable – and potentially more profitable – positions. We plan to continue to invest 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 millionseize current challenges by turning them into opportunities 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.
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 revenuecontinued growth and improved profitability.
We discuss our strategic outlook and further enhance shareholder valuekey strategies for Fiscal 2024 in coming years, but we fully recognize the businessPart I, Item 1, “Business” and economic challenges that we face.in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our 2023 Annual Report.
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 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, 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, 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 2023 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 three months of Fiscal 2024.
Results of Operations
The following table sets forth certain consolidated statements of operations data for the three and nine months ended September 30, 20172023 and 2016:2022:
| | | Three Months Ended September 30, | |
| | | 2023 | | | 2022 | |
| Net sales | | $ | 4,953,023 | | | $ | 7,374,083 | |
| Costs and expenses: | | | | | | | | |
| Cost of goods sold | | | 3,008,507 | | | | 4,086,010 | |
| Sales and marketing | | | 2,721,965 | | | | 3,107,946 | |
| General and administrative | | | 1,854,268 | | | | 1,413,476 | |
| Total costs and expenses | | | 7,584,740 | | | | 8,607,432 | |
| Loss from operations | | | (2,631,717 | ) | | | (1,233,349 | ) |
| Other income: | | | | | | | | |
| Interest income | | | 92,260 | | | | 40,201 | |
| Loss before income taxes | | | (2,539,457 | ) | | | (1,193,148 | ) |
| Income tax benefit | | | - | | | | 302,956 | |
| Net loss | | $ | (2,539,457 | ) | | $ | (890,192 | ) |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| Net sales | | $ | 6,208,808 | | | $ | 5,212,973 | | | $ | 18,495,982 | | | $ | 23,133,248 | |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| Cost of goods sold | | | 3,483,603 | | | | 3,221,007 | | | | 10,544,303 | | | | 16,278,989 | |
| Sales and marketing | | | 1,757,007 | | | | 1,891,162 | | | | 5,449,195 | | | | 5,222,757 | |
| General and administrative | | | 1,137,736 | | | | 1,244,400 | | | | 3,612,618 | | | | 4,380,218 | |
| Research and development | | | 489 | | | | - | | | | 3,633 | | | | 2,848 | |
| Loss on abandonment of property and equipment | | | - | | | | 473 | | | | - | | | | 116,021 | |
| Total costs and expenses | | | 6,378,835 | | | | 6,357,042 | | | | 19,609,749 | | | | 26,000,833 | |
| Loss from operations | | | (170,027 | ) | | | (1,144,069 | ) | | | (1,113,767 | ) | | | (2,867,585 | ) |
| Other expense: | | | | | | | | | | | | | | | | |
| Interest expense | | | (5 | ) | | | (36 | ) | | | (97 | ) | | | (1,548 | ) |
| Total other expense, net | | | (5 | ) | | | (36 | ) | | | (97 | ) | | | (1,548 | ) |
| Loss before income taxes from continuing operations | | | (170,032 | ) | | | (1,144,105 | ) | | | (1,113,864 | ) | | | (2,869,133 | ) |
| Income tax net expense from continuing operations | | | (4,507 | ) | | | (3,325 | ) | | | (23,102 | ) | | | (10,068 | ) |
| Net loss from continuing operations | | | (174,539 | ) | | | (1,147,430 | ) | | | (1,136,966 | ) | | | (2,879,201 | ) |
| | | | | | | | | | | | | | | | | |
| Discontinued operations: | | | | | | | | | | | | | | | | |
| Loss from discontinued operations | | | - | | | | (6,949 | ) | | | - | | | | (586,027 | ) |
| (Loss) gain on sale of assets from discontinued operations | | | - | | | | (3,065 | ) | | | - | | | | 12,398 | |
| | | | | | | | | | | | | | | | | |
| Net loss from discontinued operations | | | - | | | | (10,014 | ) | | | - | | | | (573,629 | ) |
| Net loss | | $ | (174,539 | ) | | $ | (1,157,444 | ) | | $ | (1,136,966 | ) | | $ | (3,452,830 | ) |
Consolidated Net Sales
Consolidated net sales for the three and nine months ended September 30, 20172023 and 20162022 comprise the following:
| | | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | | | Three Months Ended September 30, | | Change | |
| | | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2023 | | 2022 | | Dollars | | Percent | |
| Finished jewelry | | | $ | 4,301,259 | | | $ | 5,540,406 | | | $ | (1,239,147 | ) | | (22 | )% |
| Loose jewels | | $ | 4,098,472 | | | $ | 3,597,479 | | | $ | 500,993 | | | 14 | % | | $ | | 12,770,835 | | | $ | 18,195,370 | | | $ | (5,424,535 | ) | | -30 | % | | | 651,764 | | | | 1,833,677 | | | | (1,181,913 | ) | | (64 | )% |
| 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 | % | | $ | 4,953,023 | | | $ | 7,374,083 | | | $ | (2,421,060 | ) | | (33 | )% |
Consolidated net sales were $6.21$4.95 million for the three months ended September 30, 20172023 compared to $5.21$7.37 million for the three months ended September 30, 2016, an increase2022, a decrease of $996,000,approximately $2.42 million, or 19%33%. ConsolidatedWe had lower net sales were $18.50 million forin both operating business segments during the ninethree months ended September 30, 2017 compared2023. Overall consumer confidence has continued to $23.13 millionshow signs of weakening due to general economic uncertainties, coupled with domestic and worldwide inflation, including recessionary fears, and rising interest rates. These same general economic conditions also caused weakness in demand for moissanite jewels from our domestic and international distributors, which in turn resulted in lower loose jewel and jewelry product net sales during the ninethree months ended September 30, 2016, a decrease2023 in our Traditional segment.
Sales of $4.64 million, or 20%. The increase infinished jewelry represented 87% of total consolidated net sales for the three months ended September 30, 2017 was primarily due to an increase in finished jewelry net sales in the Traditional segment, and to a lesser extent, in the Online Channels segment, and increased net sales in loose jewels in both the Online Channels segment and Traditional segment. The decrease in consolidated net sales for the nine months ended September 30, 2017 was primarily due to the Legacy Inventory Sale during the first quarter of the prior year.
Sales of loose jewels represented 66% and 69% of total consolidated net sales for the three and nine months ended September 30, 2017, respectively,2023, compared to 69% and 79%, respectively,with 75% of total consolidated net sales for the corresponding periodsperiod of the prior year. For the three months ended September 30, 2017, loose jewel2023, finished jewelry sales were $4.10$4.30 million compared to $3.60 million for the corresponding period of the prior year, an increase of $501,000, or 14%. 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 sales were $12.77 million compared to $18.20$5.54 million for the corresponding period of the prior year, a decrease of $5.42approximately $1.24 million or 30%22%. TheThis decrease for the nine months ended September 30, 2017in finished jewelry sales was due primarily due to the Legacy Inventory Sale during the first quarterlower demand across all of the prior year.our finished jewelry products as a result of adverse global and domestic general economic conditions and increased competition.
Sales of finished jewelryloose jewels represented 34% and 31%13% of total consolidated net sales for the three and nine months ended September 30, 2017, respectively,2023, compared to 31% and 21%, respectively,25% of total consolidated net sales for the corresponding periodsperiod of the prior year. For the three months ended September 30, 2017, finished jewelry2023, loose jewel sales were $2.11 million$652,000 compared to $1.62$1.83 million for the corresponding period of the prior year, an increasea decrease of $495,000,approximately $1.18 million, or 31%64%. ForThe decrease for the ninethree months ended September 30, 2017, finished jewelry sales were $5.73 million compared to $4.94 million for the corresponding period of the prior year, an increase of $787,000, or 16%. The increase in finished jewelry sales for the three- and nine-month periods ended September 30, 2017 2023 was due primarily to strong finished jewelry retaillower sales of loose jewels through our distribution network in both of our Online Channels segment and Traditional segment.segment, as a result of global and domestic general adverse macroeconomic conditions and increased competition coupled with continued downward pricing pressure on mined and lab grown diamonds.
U.S. net sales accounted for approximately 93% of total consolidated net sales for each of the three- and nine-month periods ended September 30, 2017, compared to 88% and 89%, respectively,96% of total consolidated net sales for the corresponding periods ofthree-months ended September 30, 2023, compared with 96% for the prior year.three-months ended September 30, 2022. U.S. net sales increaseddecreased to $5.75$4.77 million, or 25%33%, duringin the three months ended September 30, 2017 from2023 compared to $7.1 million in the corresponding periodcomparable quarter of the priorfiscal year ended June 30, 2023 or Fiscal 2023, primarily as a result of increased demand in the U.S. distributor market and increaseddecreased sales fromto U.S. customers in both our Online Channels segment and Traditional segment and Online Channels segment. U.S. net sales decreased to $17.21 million, or 17%, duringfor 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.same reasons outlined above.
Our largest U.S. customer during the three months ended September 30, 2017 and 2016 accounted for 23% and 27% of total consolidated sales during each respective period. This same customer accounted for 25% and 17%, respectively, of total consolidated sales during the nine months ended September 30, 2017 and 2016 and2023 was also our largest U.S. customer during each period. Our second largest U.S. customer during the three months ended September 30, 20172022 and accounted for 11%14% and 17% of total consolidated net sales butduring each of the respective periods then ended. We did not have another U.S. customer account for a significant portion10% or more of ourtotal consolidated sales during the same period in 2016 or the nine-month periods ended September 30, 2017 or 2016. Our third largest U.S. customer during the three months ended September 30, 2017 accounted for 10% of2023 or 2022. We expect that we, along with our total consolidated sales during that periodcustomers, will remain dependent on our ability to maintain and the nine months ended September 30, 2017, but did not account for a significant portion ofenhance 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% of total consolidated sales as a result of the one-time Legacy Inventory Sale transaction. This U.S. customer did not account for a significant portion of our consolidated sales during any of the other periods presented herein.customer-related programs. A change in or loss of any of these large customerscustomer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately 7%4% of total consolidated net sales forduring each of the three- and nine-month periodsquarters ended September 30, 2017, compared to 12%2023 and 11%, respectively, of total consolidated net sales for the corresponding periods of the prior year.2022. International net sales decreased 26% and 47%to $184,000, or 34%, during the three and nine monthsfirst quarter of Fiscal 2024 compared to $279,000 in the first quarter of the year ended September 30, 2017, respectively, from the corresponding periods2022, or Fiscal 2023. International sales decreased due to lower demand in our international distributor market as a result of global general adverse macroeconomic conditions and increased competition coupled with continued downward pricing pressure on mined and lab grown diamonds.In light of the prior year aseffects of ongoing global economic conditions, we serve distributors in the Hong Kong and India markets and demand for loose jewels in these markets was down comparedcontinue to the corresponding periods of the prior year. We have been evaluatingevaluate 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 international trade challenges, we expect that our sales in these markets may continue tosignificantly 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, 20172023 or 2016.2022. A portion of our international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers.
Costs and Expenses
Cost of Goods Sold
Our top three international distributors by sales volume duringtotal cost of goods sold for the three months ended September 30, 2017 were located in Hong Kong, United Kingdom,2023 and Hong Kong, respectively. For the nine months ended September 30, 2017 the top two international distributors by sales volume were located in Hong Kong and the third was located in Canada.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the three and nine months ended September 30, 2017 and 20162022 are as follows:
| | | Three Months Ended September 30, | | | Change | | | Nine Months Ended September 30, | | | Change | | | Three Months Ended September 30, | | Change | |
| | | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2023 | | 2022 | | Dollars | | Percent | |
| Product line cost of goods sold | | | | | | | | | | | | | | | | | | | | | | | | | |
| Product line cost of goods sold: | | | | | | | | | | |
| Finished jewelry | | | $ | 1,959,167 | | | $ | 2,606,699 | | | $ | (647,532 | ) | | (25 | )% |
| Loose jewels | | $ | 2,244,588 | | | $ | 1,808,979 | | | $ | 435,609 | | | | 24 | % | | $ | 6,647,861 | | | $ | 11,992,862 | | | $ | (5,345,001 | ) | | | -45 | % | | | 239,374 | | | | 825,623 | | | | (586,249 | ) | | (71 | )% |
| 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 | % | | 2,198,541 | | | 3,432,322 | | | (1,233,781 | ) | | (36 | )% |
| Non-product line cost of goods sold | | | 249,454 | | | | 705,849 | | | | (456,395 | ) | | | -65 | % | | | 1,290,114 | | | | 1,619,167 | | | | (329,053 | ) | | | -20 | % | | | 809,966 | | | | 653,688 | | | | 156,278 | | | 24 | % |
| Total cost of goods sold | | $ | 3,483,603 | | | $ | 3,221,007 | | | $ | 262,596 | | | | 8 | % | | $ | 10,544,303 | | | $ | 16,278,989 | | | $ | (5,734,686 | ) | | | -35 | % | | $ | 3,008,507 | | | $ | 4,086,010 | | | $ | (1,077,503 | ) | | (26 | )% |
Total cost of goods sold was $3.48$3.0 million for the three months ended September 30, 20172023 compared to $3.22$4.09 million for the three months ended September 30, 2016, a net increase of $263,000, or 8%. Total cost of goods sold was $10.54 million for the nine months ended September 30, 2017 compared to $16.28 million for the nine months ended September 30, 2016,2022, a decrease of $5.73approximately $1.08 million, or 35%26%. Product line cost of goods sold is defined as product cost of goods sold in each of our TraditionalOnline Channels segment and Online ChannelsTraditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory valuation allowance adjustments;write-offs; and other inventory adjustments, comprising costs of quality issues, and damaged goods, and inventory write-downs.goods.
The increasedecrease in total cost of goods sold for the three months ended September 30, 20172023 compared to the same period in 2022 was primarily due to decreased sales of loose jewels and finished jewelry during the three months ended September 30, 2023 in our Traditional and Online Channels as a result of lower product demand during the quarter, offset by an increase in sales volume partially offset by a favorable change in product mix with greater salesnon-product line cost of higher margin finished jewelry product in the third quarter of 2017 compared with the same period in 2016. goods sold.
The net decreaseincrease in non-product line cost of goods sold comprises a $299,000 decrease in other inventory adjustments; a $149,000 decrease in non-capitalized manufacturing and production control expenses; a $6,000 decrease in freight out; and a $2,000 decrease in inventory valuation allowances.
The decrease in cost of goods sold for the ninethree months ended September 30, 2017 compared2023, comprises an approximate $221,000 increase in non-capitalized manufacturing production control expenses principally related to the same period in 2016 was primarily due to the Legacy Inventory Sale during the first quartertiming of 2016. The net decrease in non-product line cost ofwhen work-in-process goods sold comprisesare received into inventory and overhead costs are allocated; and a $155,000 decrease$126,000 increase in other inventory adjustments; a $168,000 decreaseadjustments principally related to changes in non-capitalized manufacturing and production control expenses; and a $10,000standard cost variances compared to those in the first three months of Fiscal 2023. These increases were partially offset by an approximate $119,000 decrease in inventory valuation allowances. These decreases were offsetwrite-offs in part by a $4,000 increasethe first three months of the Fiscal 2024, compared to those in the comparable prior year period, in addition to an approximate $72,000 decrease in freight out. out principally from lower shipments during the period.
For further discussion ofadditional disclosure relating to non-product line cost of goods sold, see Note 3 “Segment Information and Geographic Data,”to our condensed consolidated financial statements in the Notes to Condensed Consolidated Financial Statements included elsewhere inItem 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.
Sales and Marketing
Sales and marketing expenses for the three and nine months ended September 30, 20172023 and 20162022 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 September 30, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| Sales and marketing | | $ | 2,721,965 | | | $ | 3,107,946 | | | $ | (385,981 | ) | | | (12 | )% |
Sales and marketing expenses were $1.76$2.72 million for the three months ended September 30, 20172023 compared to $1.89$3.11 million for the three months ended September 30, 2016,2022, a decrease of $134,000,approximately $386,000, or 7%. Sales and marketing expenses were $5.45 million for the nine months ended September 30, 2017 compared to $5.22 million for the nine months ended September 30, 2016, an increase of $226,000, or 4%12%.
The decrease in sales and marketing expenses for the three months ended September 30, 20172023 compared to the same period in 20162022 was primarily due to a $244,000$165,000 decrease in advertising and digital marketing expenses; a $67,000$196,000 decrease in compensation-relatedcompensation expenses; a $57,000 decrease in bank fees; a $50,000 decrease in general business taxes; a $14,000 decrease in amortization and depreciation; a $9,000 decrease in charitable contributions; an $8,000 decrease in insurance costs; and a $39,000$3,000 decrease in travel expense.and entertainment. These decreases were offset partially offset by a $92,000$43,000 increase in professional services fees; an $84,000temporary labor; a $45,000 net increase in software-related costs principally in connection with maintenance agreements associated with our migration togeneral office-related expenses; a cloud-based data storage arrangement as well as other software-related agreements; a $24,000$20,000 increase in recruiting fees; a $10,000software related costs; and an $8,000 increase in depreciation; and a $6,000 increase in all other sales and marketing expenses.telephone costs.
The decrease in advertising and digital marketing expenses for the three months ended September 30, 20172023 compared to the same period in 20162022 was primarily due to a $372,000an $80,000 decrease in outside agency fees related to re-branding and the re-platformed web presence andsponsorships; a $5,000 net$60,000 decrease in print media expenses. These decreases were partially offset by a $78,000 increase in Internet marketing; a $44,000 increase in cooperative advertising; and an $11,000 increasea net decrease in promotions.digital advertising expense of approximately $25,000.
CompensationThe decrease in compensation expenses for the three months ended September 30, 20172023 compared to the same period in 2016 decreased primarily as a result of a $35,000 decrease in severance expenses related 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.
The increase in sales and marketing expenses for the nine months ended September 30, 2017 compared to the same period in 20162022 was primarily due to a $383,000 increase$107,000 decrease in compensation-relatedbonus expense; a $181,000 increasean $81,000 decrease in professional services fees; a $178,000 increase in software-related costs principally in connection with maintenance agreements associated with our migration to a cloud-based data storage arrangement as well as other software-related agreements; a $25,000 increase in general office-related expenses; a $16,000 increase in depreciation;salaries and related employee benefits; 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 expenses for the nine months ended September 30, 2017 compared to the same period in 2016 comprises a $733,000 decrease in outside agency fees and a $37,000 decrease in print media expenses.employee stock-based compensation. These decreases were partially offset by a $78,000$3,000 increase in cooperative advertising; a $73,000 increase in promotional expenses; a $38,000 increase in Internet marketing; and a $9,000 increase in all other advertising expenses.
Compensation expenses for the nine months ended September 30, 2017 compared to the same period in 2016 increased primarily as a result of a $238,000 increase in salaries, commissions, andemployee severance related employee benefits in the aggregate; a $191,000 increase in severance expense primarily related to the departure of our Chief Revenue Officer during the first quarter of 2017; a $68,000 increase in bonus expense; and a $13,000 increase in relocation expense. These increases were partially offset by a $127,000 decrease in employee stock-based compensation expense.
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 and 2016 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 | % |
General and Administrative
General and administrative expenses for the three months ended September 30, 2023 and 2022 are as follows:
| | | Three Months Ended September 30, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| General and administrative | | $ | 1,854,268 | | | $ | 1,413,476 | | | $ | 440,792 | | | | 31 | % |
General and administrative expenses were $1.14$1.85 million for the three months ended September 30, 20172023 compared to $1.24$1.41 million for the three months ended September 30, 2016, a decrease2022, an increase of $107,000,approximately $441,000, or 9%. General and administrative expenses were $3.61 million for the nine months ended September 30, 2017 compared to $4.38 million for the nine months ended September 30, 2016, a decrease of $768,000, or 18%31%.
The decreaseincrease in general and administrative expenses for the three months ended September 30, 20172023 compared to the same period in 20162022 was primarily due to a $189,000 decrease$559,000 increase in compensation expenses;professional fees; a $20,000 decrease in business taxes and licenses; an $11,000 decrease in insurance expenses; a $5,000 decrease in depreciation and amortization expense; and a $4,000 decrease in travel expenses. These decreases were partially offset by a $68,000$79,000 increase in bad debt expense associated with our allowance for doubtfuluncollectible accounts reserve policy; a $28,000$51,000 increase in professional services fees;depreciation and amortization expense; a $13,000 increase in taxes and licenses; a $9,000 increase in board retainer fees;insurance expense; and a $17,000$1,000 increase in miscellaneousequipment rent. These increases were partially offset by a $121,000 decrease in compensation-related expenses; a net decrease of $118,000 in other generaladministrative- related expenses; and administrative expenses.a $32,000 decrease in travel-related expenditures.
CompensationThe decrease in compensation expenses decreased for the three months ended September 30, 20172023 compared to the same period in 20162022 was primarily due to an $81,000 decrease in employee stock-based compensation expense; an $80,000a $58,000 decrease in salaries and related employee benefits in the aggregate;benefits; a $24,000$37,000 decrease in bonus expense; and a $4,000$26,000 decrease in severanceemployee stock-based compensation expense.
Professional services feesexpenses increased for the three months ended September 30, 20172023 compared to the same period in 20162022 primarily due to ana $277,000 increase of $61,000 in legal fees. This increase was partially offset by a decrease of $27,000 in consultingfees associated with the cyber security event on June 28, 2023 and other corporate matters; a $220,000 increase in other professional services primarily relatedfees due to human resourcesthe cyber security event on June 28, 2023; a $39,000 increase in fees associated with audit and salestax services; and use tax projects in the same period in 2016; a $4,000 decrease$23,000 increase in investor and public relations expenses; and a $2,000 decrease in accounting services.fees.
The decrease in general and administrative expensesInterest Income
Interest income for the ninethree months ended September 30, 2017 compared to2023 and 2022 is as follows:
| | | Three Months Ended September 30, | | | Change | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | |
| Interest income | | $ | 92,260 | | | $ | 40,201 | | | $ | 52,059 | | | | 129 | % |
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 same period in 2016 was primarily due to a $908,000 decrease in compensation expenses; a $95,000 decrease in professional services fees; a $76,000 decrease in depreciation and amortization expense; a $44,000 decrease in insurance expenses; 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 in bank fees, which includes fees associated with the Wells Fargo Credit Facility and credit card clearing transactions; a $16,000 increase in equipment-related rental expense; and a $14,000 increase in business taxes and licenses.
Compensation expenses decreased for the ninethree months ended September 30, 2017 compared to the same period2023 and 2022, we earned interest from cash on deposit in 2016 primarily due to a $429,000 decreasethis interest-bearing account. The increase in salaries and related employee benefits in the aggregate; a $407,000 decrease 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.
Professional services fees decreasedearned interest for the nine monthsquarterly period ended September 30, 2017 compared to2023 reflects the same period in 2016 primarily due to a 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 decrease in investor and public relations expenses. These decreases were partially offset by an increase in legal fees of $40,000.
General and administrative expenses are allocated across our Traditional segment and Online Channels segment, which in 2016 included allocations to Charles & Colvard Direct, LLC, a segment we are reporting as discontinued operations. See Note 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 incurredhigher interest rates 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.Fiscal 2024 compared with Fiscal 2023.
Loss on Abandonment of Property and EquipmentProvision for Income Taxes
Loss on abandonment of property and equipment forFor the three and nine months ended September 30, 20172023, the Company’s statutory tax rate was 22.94% and 2016 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 | % |
The Company had no losses on abandonmentconsisted of propertythe federal income tax rate of 21.00% and equipment fora blended state income tax rate of 1.94%, net of the federal benefit. For the three and nine months ended September 30, 2017 compared to approximately $5002022, the Company’s statutory tax rate was 22.98% and $116,000 forconsisted of the threefederal income tax rate of 21.00% and ninea blended state income tax rate of 1.98%, net of the federal benefit. For the three months ended September 30, 2016, respectively, a decrease2023 and 2022 the Company’s effective tax rate was 0% and 25.39%. The Company’s effective income tax rate reflects the effect of approximately $500federal and $116,000, respectively,state income taxes on earnings and the impact of differences in book and tax accounting arising primarily from the permanent tax benefits associated with stock-based compensation transactions during the accounting period then ended.
The Company recognized zero net income tax benefit or 100%expense for each period.
During the nine-month periodquarter 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 to2023, compared with a change in our corporate strategy to consolidate our web properties.
Provision for Income Taxes
We recognized annet income tax net expensebenefit of approximately $4,500 and $3,300$303,000 for the three-month periodsquarter ended September 30, 2017 and 2016, respectively. We recognized an income tax net expense of approximately $23,100 and $10,100 for the nine-month periods ended September 30, 2017 and 2016, respectively. Income tax provisions in these periods primarily relate to estimated tax, penalties, and interest associated with uncertain tax positions.2022.
As of each reporting date, our management considers new evidence, both positive and negative, that could impact itsour view with regard to future realization of deferred tax assets. Beginning in 2014,As of September 30, 2023, our management determined that sufficient negative evidence outweighed the positivecontinued to exist to conclude it was uncertain that we would have sufficient future taxable income to utilize our deferred tax assets, and establishedtherefore, we maintained a full valuation allowance against our deferred tax assets. We maintained a full valuation allowance as of September 30, 2017 and December 31, 2016.
Liquidity and Capital Resources
Capital Structure and Debt
Long-Term Liquidity and Capital Structure
We have an effective shelf registration statement on Form S-3 on file with the SEC, with an expiration date of June 2, 2024, 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 rising inflation rates and fear of recession. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Debt
We have no short- or long-term outstanding debt as of September 30, 2023.
Financing Activities
Long-Term Financing Activities
In accordance with authority granted by our Board of Directors on April 29, 2022, we can repurchase up to $5.00 million in shares outstanding of our common stock over the three-year period ending April 29, 2025. Pursuant to the terms of the repurchase authorization, the common stock share repurchases are generally at the discretion of management. As we repurchase our common shares, which have no par value, we report such shares held as treasury stock on our condensed consolidated balance sheets, with the purchase price recorded within treasury stock.
We repurchased no shares of our common stock during the three-month period ended September 30, 2023. During the three-month period ended September 30, 2022, we repurchased approximately 358,000 shares of our common stock for an aggregate price of approximately $452,000 pursuant to the repurchase authorization.
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, 2017,2023, our principal sources of liquidity were cash and cash equivalents totaling $5.13$7.6 million, trade accounts receivable of $2.61 million,$443,000, and net current inventory of $11.12$8.3 million, as compared to cash and cash equivalents totaling $7.43$10.45 million, trade accounts receivable of $2.79 million,$380,000, and net current inventory of $9.77$7.48 million as of December 31, 2016. As described more fully below, weJune 30, 2023. We also havehad access during the three-month period ended September 30, 2023 to our $10.00a $5.00 million asset-based revolvingcash collateralized line of credit facility, or the JPMorgan Chase Credit Facility, that we obtained effective July 9, 2021, as amended July 28, 2022 and amended further effective June 21, 2023, from Wells FargoJPMorgan Chase Bank, National Association,N.A., or Wells Fargo.JPMorgan Chase.
During the ninethree months ended September 30, 2017,2023, our working capital decreased by approximately $2.23$2.38 million to $13.83$15.13 million from $16.07$17.51 million at December 31, 2016.June 30, 2023. As described more fully below, the decrease in working capital at September 30, 20172023 is primarily attributable to an increase in our accounts payable, an increase in the current portion of our operating lease liabilities, and a net 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.restricted cash. These factors were offset partially by an increase in bothour accounts receivables, a decrease in our accrued expenses and other liabilities, an increase in our allocation of inventory from long-term to short-term from long-termdue to a higher expected sell through of inventory on hand in the upcoming period, and an increase in our prepaid expenses and other assets. Our cash used for investing activities were principally used for the purchase of property and equipment.
During the ninethree months ended September 30, 2017, $2.052023, approximately $2.67 million of cash was used in continuingour operations. The primary drivers of theour use of cash were a net loss in the amount of $1.14approximately $2.54 million, which includes $765,000$238,000 of non-cash expenditures; an increase in inventory of $2.81 million;$576,000 to build inventory for the upcoming calendar year-end holiday season; a decrease in accrued expenses and other liabilities of approximately $669,000 due to decreases in deferred revenues and other accrued liabilities; and an increase in accounts receivable of $71,000. These factors were offset partially by an increase in accounts payable of $866,000; and a decrease in prepaid expenses and other assets, net 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 and an increase in accrued liabilities of $169,000. The inventory increase was, in part, due$86,000.
From time to the purchase of new raw material SiC crystals during the period pursuant to the Supply Agreement; production of moissanite jewels; and purchases of jewelry castings and other jewelry components due to increased demand in certain channels and preparation for the upcoming holiday season. We did not offer anytime, we have offered extended Traditional segment customer payment terms duringbeyond 90 days to certain credit-worthy customers the nine months ended September 30, 2017; however, we may offer these terms from time to time,extension of which may not immediately increase liquidity as a result of ongoing current-period sales. WeIn addition, we believe our competitors and other vendors in the wholesale jewelry industry have expanded their use of extended payment terms and, in aggregate, we believe that, through our use of extended payment terms, we provide a competitive response in our market andduring the current global economic environment. We believe that our net sales have been favorably impacted. Wewe are unable to estimate the impact of this programthese actions on our net sales, but we believe that if we ceaseceased providing extended payment terms, in select instances, we believe we would not be at a competitive disadvantage for some Traditional segment customers in the marketplace during this economic period and that our net sales and profits would likely decrease.be adversely impacted.
During the nine months ended September 30, 2017, weWe manufactured approximately $11.41$466,000 and $2.83 million in loose jewels and $4.73$2.61 million and $4.97 million in finished jewelry, which includes the cost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production.production, during the three months ended September 30, 2023 and 2022, respectively. We expect our purchases of precious metals and labor to increase as we increasefluctuate in conjunction with the levels of our finished jewelry business. In addition, the price of gold has increasedfluctuated significantly over the past decade, resulting in higher retail price points for gold jewelry. Because the market priceprices of gold and other precious metals isare beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry.
Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with our reduced sales levels during theprior periods whenin which the purchase commitments were in effect, have resulted in levels of inventories that are higher than we might otherwise maintain. As of September 30, 2017, $19.782023 and June 30, 2023, $19.07 million and $19.28 million of our inventories were classified as long-term assets. Loose jewel sales and finished jewelry that we manufacture will utilize both the finished goodgoods loose jewels currently on-hand and, as we deplete certain shapes and sizes, our on-hand raw material SiC crystals of $4.08 million$317,000 and new raw material that we are purchasingmay purchase pursuant to the Supply Agreement. A
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 inPart I, Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.
As of September 30, 2023, all of our remaining federal income tax credits had expired or been utilized, and therefore, are not available to be carried forward to offset future income taxes. As of September 30, 2023, we also had federal tax net operating loss carryforward of approximately $24.76 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 $20.01 million expiring between 2023 and 2035; and various other state tax net operating loss carryforwards expiring between 2023 and 2040, which can be used to offset against future state taxable income.
Short-Term Capital Resources
Line of Credit
Effective July 7, 2021, we obtained from JPMorgan Chase our $5.00 million cash collateralized JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The JPMorgan Chase Credit Facility is secured by a cash deposit in the amount of $5.1 million held by JPMorgan Chase as collateral for the line of credit
facility. Effective July 28, 2022, the JPMorgan Chase Credit Facility was amended to, among other things, extend the maturity date to July 31, 2023, and append our obligations under the JPMorgan Chase Credit Facility to be guaranteed by our wholly-owned subsidiaries, Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC, and moissaniteoutlet.com, LLC. Effective June 21, 2023, the JPMorgan Chase Credit Facility was amended further to extend the maturity date to July 31, 2024.
Each advance under the JPMorgan Chase Credit Facility, as amended, accrues interest at a rate equal to the sum of JPMorgan Chase’s monthly secured overnight financing rate, or the SOFR rate, to which JPMorgan Chase is subject with respect to the adjusted SOFR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum and an unsecured to secured interest rate adjustment of 0.10% per annum. Interest is calculated monthly on an actual/360-day basis and payable monthly in arrears. Principal outstanding during an event of default, at JPMorgan Chase’s option, accrues interest at a rate of 3% per annum in excess of the above rate. Any advance may be prepaid in whole or in part at any time.
The JPMorgan Chase Credit Facility is evidenced by a credit agreement, as amended, between us and JPMorgan Chase, or the JPMorgan Chase Credit Agreement, dated as of June 21, 2023, and customary ancillary documents, in the principal amount not to exceed $5.00 million at any one time outstanding and a line of credit note, or the JPMorgan Chase Line of Credit Note, in which we promise to pay on or before July 31, 2024, the amount of $5.00 million or so much thereof as may be advanced and outstanding. In the event of default, JPMorgan Chase, at its option, may accelerate the maturity of advances outstanding under the JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Agreement and ancillary documents contain customary covenants, representations, fees, debt, contingent obligations, liens, loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, changes in control, as well as indemnity, expense reimbursement, and confidentiality provisions.
In connection with the JPMorgan Chase Credit Facility, effective July 7, 2021, we incurred a non-refundable origination fee in the amount of $10,000 that was paid in full to JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12, 2021. There was no origination fee paid to JPMorgan Chase in connection with the amended JPMorgan Chase Credit Facility, dated July 28, 2022 and June 21, 2023.
Events of default under the JPMorgan Chase Credit Facility include, without limitation, a default, event of default, or event that would constitute a default or event of default (pending giving notice or lapse of time or both), of any provision of the JPMorgan Chase Credit Agreement, the JPMorgan Chase Line of Credit Note, or any other instrument or document executed in connection with the JPMorgan Chase Credit Agreement or with any of our indebtedness, liabilities, and obligations to JPMorgan Chase or would result from the extension of credit to us by JPMorgan Chase.
As of September 30, 2023, we had not borrowed against the JPMorgan Chase Credit Facility.
Long-Term Capital Commitments
Contractual Agreement
On December 12, 2014, we entered into the Supply Agreement with Cree, our raw material SiC crystal supplier.Wolfspeed. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree,Wolfspeed, and CreeWolfspeed agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement willwas scheduled to expire on June 24, 2018, unless extended by the parties. We haveEffective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of our premium moissanite product, Forever One™ and provided us with one option, subject to certain conditions, to unilaterally extend the term of the agreementSupply 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 20182025 is dependent upon the sizeapproximately $52.95 million, of the SiC material and ranges betweenwhich approximately $29.60$24.75 million and approximately $31.50 million. Asremains 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.2023.
During the ninethree months ended September 30, 2017,2023 we made no purchases of SiC crystals. For the period ended September 30, 2022 we purchased approximately $6.90$1.80 million of SiC crystals from Cree. We expectWolfspeed pursuant to use existing cashthe terms of the Supply Agreement, as amended.
On July 28, 2023, Wolfspeed initiated a confidential arbitration against us for breach of contract claiming damages, plus interest, costs, and cash equivalents,attorneys’ fees. Wolfspeed has alleged that we failed to satisfy the purchase obligations provided in the Supply Agreement for Fiscal 2023 in the amount of $4.25 million and other working capital together with future cash expectedfailed to be provided by operating activities and, if necessary,pay for $3.30 million of SiC crystals Wolfspeed delivered to us. Wolfspeed further alleges that we intend to breach our Credit Facility, to finance ourremaining purchase commitmentobligations under the Supply Agreement.
We made no income tax payments during 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 withoutAgreement, representing 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 Credit Facility from Wells Fargo. The Credit Facility may be used for general corporate and working capital purposes, including transaction fees and expenses incurred in connection therewith and the issuance of letters of credit up to a $1.00 million sublimit. The Credit Facility was scheduled to mature on June 25, 2017.
Effective June 22, 2017, the Credit Facility was amended to extend the maturity date to June 25, 2018. The Credit Facility was also amended to reduce the interest rate payable on advances under the Credit Facility to a rate equal to Wells Fargo’s daily three-month LIBOR rate plus 2.00%, calculated on an actual/360 basis and payable monthly in arrears. In addition, the Credit Facility was amended further to include the addition of an EBITDA covenant, whereby the Borrowers must maintain a specified minimum monthly EBITDA through December 2017 if the cash position for the Borrowers’ demand deposit account maintained at Wells Fargo falls below $3.00 million or the Borrowers draw upon the Credit Facility.
The Credit Facility includes a $5.00 million sublimit for advances that are supported by a 90% guaranty provided by the U.S. Export-Import Bank. Advances under the Credit Facility are limited to a borrowing base, which is computed by applying specified advance rates to the value of the Borrowers’ eligible accounts and inventory, less reserves. Advances against inventory are further subject to an initial $3.00 million maximum. We must maintain a minimum of $1.00additional $18.5 million in excess availability at all times.alleged damages.
Each advance accrues interest at a rate equalWhile the Company is evaluating Wolfspeed’s claims, we dispute the amount sought, and we intend to either (i) Wells Fargo’s three-month LIBOR rate plus 2.00% or (ii) Wells Fargo’s Prime Rate plus 1.00%, each calculated on an actual/360 basisvigorously defend our position, including by asserting rights and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate of 3% in excess of the above rate. Any advancedefenses that we 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 tohave under the Supply Agreement, at law 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 ofequity. A hearing has been scheduled for September 30, 2017, we had not borrowed against the Credit Facility.2024. The final determinations of liability arising from this matter will be made following comprehensive investigations, discovery and arbitration processes.
Liquidity and Capital Trends
We believe that our existing cash and cash equivalents and other working capital, together with 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.
From a long-term perspective, we believe that our ongoing access to capital markets, including but not limited to the issuance of equity securities or even potential debt securities, coupled with cash provided by operating activities in future periods beyond the next twelve months, will continue to provide us with the necessary liquidity to meet our long-term working capital and capital expenditure requirements.
In connection with our short- and long-term capital resources, we have an effective shelf registration statement on Form S-3 on file with the SEC, with an expiration date of June 2, 2024, 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 rising inflation and fears of recession. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Our future capital requirements and the adequacy of available funds will depend on many factors, includingthe ongoing uncertainty surrounding rising inflation and fears of recession that could lead to further disruption and volatility in the global capital markets as well as its impact on our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jeweljewels and lab grown diamond business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and the risk factors described in more detail in “Risk Factors” in Part II, Item 1A, of this reportQuarterly Report on Form 10-Q and in Part I, Item 1A, of our 2023 Annual Report on Form 10-K for the year ended December 31, 2016. 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.Report.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended September 30, 2017,2023, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting, with the exception of enhanced internal controls related to cybersecurity and certain manual processes implemented for business continuity during the period in which we were impacted by the cybersecurity incident.
PART II – OTHER INFORMATION
There are no material pendingFrom time to time, we may be involved in legal proceedings or subject to whichclaims incident to the ordinary course of business. The outcome of litigation is inherently uncertain, and there can be no assurances that favorable outcomes will be obtained. In addition, regardless of the outcome, such proceedings or claims can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors.
On July 28, 2023, Wolfspeed initiated a confidential arbitration against us for breach of contract claiming damages, plus interest, costs, and attorneys’ fees. Wolfspeed has alleged that we are a party orfailed to which anysatisfy the purchase obligations provided in the Supply Agreement for Fiscal 2023 in the amount of $4.25 million and failed to pay for $3.30 million of SiC crystals Wolfspeed delivered to us. Wolfspeed further alleges that we intend to breach our propertyremaining purchase obligations under the Supply Agreement, representing an additional $18.5 million in alleged damages.
While the Company is subject.evaluating Wolfspeed’s claims, we dispute the amount sought, and we intend to vigorously defend our position, including asserting rights and defenses that the Company may have under the Supply Agreement, at law and in equity. A hearing has been scheduled for September 30, 2024. The final determinations of liability arising from this matter will be made following comprehensive investigations, discovery and arbitration processes.
We discussdiscussed these in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 various risks that may materially affect our business.2023. There have been no material changes to such risks, except as set forth below.risks.
Our failure to maintain compliance with Nasdaq’s continued listing requirements could result in the delisting of our common stock. Our common stock is currently listed on the Nasdaq Capital Market. On May 4, 2017, we received a notification letter from Nasdaq’s Listing Qualifications Department indicating that we were not in compliance with Nasdaq Listing Rule 5450(a)(1), because the minimum bid price of our common stock closed below $1.00 per share for 30 consecutive business days on the Nasdaq Global Select Market, and that we had 180 calendar days, 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. If we fail to continue to meet all applicable listing requirements in the future and Nasdaq determines to delist our common stock, the delisting could substantially decrease trading in our common stock and adversely affect the market liquidity of our common stock; adversely affect our ability to obtain financing on acceptable terms, if at all; and may result in the potential loss of confidence by investors, suppliers, customers, and employees and fewer business development opportunities. Additionally, the market price of our common stock may decline further and shareholders may lose some or all of their investment.
Negative or inaccurate information on social media could adversely affect our brand and reputation. We are actively using various forms of digital and social media outreach to accomplish greater awareness of our brand and the value proposition we offer. These social media platforms and other forms of Internet-based communications allow access not only by us, but by any individual, to a broad audience of consumers and other interested persons. Consumers value readily available information concerning goods that they have or plan to purchase, however, they may act on such information without further investigation or authentication. Many social media platforms immediately publish the content of their participants’ posts, often without filters or checks on accuracy of the content posted. While we actively monitor social media sites, we may be unable to quickly and effectively respond to or correct inaccurate and/or unfavorable information posted on social media platforms. Any such information may harm our reputation or brand, which could in turn materially and adversely affect our business, results of operations, and financial condition.
We are subject 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 subject to the risks of conducting business outside of the U.S. These risks include the following:
·Item 2. | 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;Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
| Period | | Total Number of Shares Purchased | | | Average Price Paid per share | | | Total Number of shares Purchased as Part of Publicly Announced Plans or Programs(1) | | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |
| July 1, 2023 – July 31, 2023 | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
| August 1, 2023 – August 31, 2023 | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
| September 1, 2023 – September 30, 2023 | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
| Total | | | - | | | $ | - | | | | - | | | $ | 4,510,021 | |
·(1) | On May 5, 2022, we announced that our Board of Directors had approved a share repurchase program to permit us to repurchase up to $5.00 million worth of our issued and outstanding common stock over the continuing adverse economic effects of any global financial crisis;three-year period ending April 29, 2025. |
· | 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 that the foregoing factors will not adversely affect our operations in the future or require us to modify our anticipated business practices.
The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
Exhibit No. |
| Description |
| | |
| Board Compensation Program, effective October 1, 2017 |
| | |
| | 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 |
| | | |
| | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
101101.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 formattedinstance 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. |
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| 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 |
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 MiglucciDon O’Connell |
November 2, 20179, 2023 | | Suzanne MiglucciDon O’Connell |
| | | President and Chief Executive Officer |
| | | |
| | By: | /s/ Clint J. Pete |
November 2, 20179, 2023 | | Clint J. Pete |
| | | Chief Financial Officer |
| | | (Principal Financial Officer and Chief Accounting Officer) |