The following table reconciles the differences between the basic and diluted net (loss) income per share presentations:
Trade receivables potentially subject the Company to credit risk. Payment terms on trade receivables for the Company’s Traditional segment customers are generally between 30 and 90 days, though it may offer extended terms with specific customers and on significant orders from time to time. The Company extends credit to its customers based upon a number of factors, including an evaluation of the customer’s financial condition and credit history that is verified through trade association reference services, the customer’s payment history with the Company, the customer’s reputation in the trade, and/or an evaluation of the Company’s opportunity to introduce its moissanite jewels or finished jewelry featuring moissanite to new or expanded markets. Collateral is not generally required from customers. The need for an allowance for doubtful accounts is determined based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
At times, a portion of the Company’s accounts receivable will be due from customers that have individual balances of 10% or more of the Company’s total gross accounts receivable.
The following is a summary of customers that represent 10% or more of total gross accounts receivable as of the dates presented:
A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent greater than10% or equal to 10%more of total net sales for the periods presented:
In April 2020,Effective January 29, 2021, the Company applied forentered into a loan pursuantthird amendment (the “Lease Amendment”) to the Paycheck Protection ProgramCompany’s Lease Agreement. The Lease Amendment, among other things, (i) extends the base term of the Lease Agreement from November 1, 2021 through October 31, 2026 (the “Extension Period”); (ii) sets forth the minimum monthly rents, including a specified rent abatement, during the Extension Period; (iii) provides for an allowance by the landlord to reimburse the Company for certain direct costs incurred for improvements to the leased real property; and (iv) provided there is no outstanding uncured event of default under the CARES Act, as administered byLease Agreement, gives the U.S. Small Business Administration (the “SBA”). The application was approved on May 3, 2020Company the option to extend the term of the Lease Agreement beyond October 31, 2026 for one additional five-year period, in each case in accordance with the principal amount of $965,000 (the “PPP Loan”), but the PPP Loan has not yet been disbursedterms and subject to the Company. There is no guarantee thatconditions set forth therein. During the Company will receiveExtension Period, the principal amount of the PPP Loan.
Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, coveredCompany’s minimum monthly rent payments and covered utilities during the measurement period beginning on the date of first disbursement of the PPP Loan. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 25% of the forgiven amount can be attributablerange from approximately $71,000 to non-payroll costs. $79The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its future adherence to the forgiveness criteria.,000 each month.
As permitted by the CARES Act, the Company is also deferring payment of the employer’s share of Social Security tax payable currently to the federal government. The deferred employment tax over the measurement period is payable over the next two years - with half of the required amount to be paid by December 31, 2021 and the other half by December 31, 2022. In addition, the CARES Act provides that existing alternative minimum tax, or AMT, credit carryforwards are now eligible for acceleration and refundable AMT credits are to be completely refunded to companies for taxable years beginning in 2019, or by election, taxable years beginning in 2018. Accordingly, the Company has elected to have the AMT tax completely refunded and has filed a tentative refund claim for the remaining AMT tax credit. Therefore, the remaining balance of the Company’s AMT credit refund in the amount of approximately $270,000 will be completely refundable with the filing of the Company’s Fiscal 2020 federal income tax return. The full amount of the Company’s AMT credit refund has been classified as current as of the quarter ended March 31, 2020. The Company continues to monitor future developments and interpretations of the CARES Act for any material impacts on its future results of operations, financial position, and liquidity.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “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:
Our business, financial condition and results of operations could continue to be adversely affected by an ongoing COVID-19 pandemic and related global economic conditions.
Our future financial performance depends upon increased consumer acceptance, growth of sales of our products, and operational execution of our strategic initiatives.
The execution of our business plans could significantly impact our liquidity.
| •1. | Our business, financial condition and results of operations could continue to be adversely affected by an ongoing COVID-19 pandemic and related global economic conditions; |
| 2. | Our future financial performance depends upon increased consumer acceptance, growth of sales of our products, and operational execution of our strategic initiatives; |
| 3. | The execution of our business plans could significantly impact our liquidity; |
| 4. | Our business and our results of operations could be materially adversely affected as a result of general and economic conditions.conditions; |
We face intense competition in the worldwide gemstone and jewelry industry.
The financial difficulties or insolvency of one or more of our major customers or their lack of willingness and ability to market our products could adversely affect results.
We are subject to certain risks due to our international operations, distribution channels and vendors.
Our business and our results of operations could be materially adversely affected as a result of our inability to fulfill orders on a timely basis.
We are currently dependent on a limited number of distributor and retail partners in our Traditional segment for the sale of our products.
We depend on an exclusive supply agreement, or the Supply Agreement, with Cree, Inc., or Cree, for substantially all of our silicon carbide, or SiC, crystals, the raw materials we use to produce moissanite jewels; if our supply of high-quality SiC crystals is interrupted, our business may be materially harmed.
We rely on assumptions, estimates, and data to calculate certain of our key metrics and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
Our failure to maintain compliance with The Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock.
We may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation.
Seasonality of our business may adversely affect our net sales and operating income.
Our operations could be disrupted by natural disasters.
Our anticipated loan, or the PPP Loan, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or the SBA may not be forgiven or may subject us to challenges and investigations regarding qualification for the loan.
Sales of moissanite jewelry could be dependent upon the pricing of precious metals, which is beyond our control.
Our current customers may potentially perceive us as a competitor in the finished jewelry business.
If the e-commerce opportunity changes dramatically or if e-commerce technology or providers change their models, our results of operations may be adversely affected.
A failure of our information technology infrastructure or a failure to protect confidential information of our customers and our network against security breaches could adversely impact our business and operations.
We may not be able to adequately protect our intellectual property, which could harm the value of our products and brands and adversely affect our business.
Negative or inaccurate information on social media could adversely affect our brand and reputation.
| 5. | The financial difficulties or insolvency of one or more of our major customers or their lack of willingness and ability to market our products could adversely affect results; |
| 6. | We face intense competition in the worldwide gemstone and jewelry industry; |
| 7. | We are subject to certain risks due to our international operations, distribution channels and vendors; |
| 8. | Our business and our results of operations could be materially adversely affected as a result of our inability to fulfill orders on a timely basis; |
| 9. | We are currently dependent on a limited number of distributor and retail partners in our Traditional segment for the sale of our products; |
| 10. | We rely on assumptions, estimates, and data to calculate certain of our key metrics and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business; |
| 11. | We may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation; |
| 12. | Seasonality of our business may adversely affect our net sales and operating income; |
| 13. | Our operations could be disrupted by natural disasters; |
| 14. | Our loan, pursuant to the Paycheck Protection Program, or the PPP Loan, under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or the SBA, may not be forgiven or may subject us to challenges and investigations regarding qualification for the loan; |
| 15. | We may not be able to adequately protect our intellectual property, which could harm the value of our products and brands and adversely affect our business; |
| 16. | Negative or inaccurate information on social media could adversely impact our brand and reputation; |
| 17. | Sales of moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control; |
| 18. | Our current customers may potentially perceive us as a competitor in the finished jewelry business; |
| 19. | Our failure to maintain compliance with The Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock; |
| 20. | We depend on an exclusive supply agreement, or the Supply Agreement, with Cree, Inc., or Cree, for substantially all of our silicon carbide, or SiC, crystals, the raw materials we use to produce moissanite jewels; if our supply of high-quality SiC crystals is interrupted, our business may be materially harmed; |
| 21. | If the e-commerce opportunity changes dramatically or if e-commerce technology or providers change their models, our results of operations may be adversely affected; |
| 22. | A failure of our information technology infrastructure or a failure to protect confidential information of our customers and our network against security breaches could adversely impact our business and operations; |
| 23. | If we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer; |
| 24. | Governmental regulation and oversight might adversely impact our operations; and |
| 25. | Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our company. |
If we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer.
Governmental regulation and oversight might adversely impact our operations.
Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our company.
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 June 30, 2019,2020, or the 20192020 Annual Report. Historical results and percentage relationships related to any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for future periods.
Overview
Our Mission
At Charles & Colvard, we believe luxury can be both beautiful and conscientious. With innovative technology and sustainable practices,Ltd., our goalmission is to lead a revolution inredefine the definition of real within the jewelry industry – delivering a brilliant product at extraordinary value balanced with environmental and social responsibility.for consumers everywhere. We believe fine jewelry can be accessible, beautiful, and conscientious.
About Charles & Colvard
Charles & Colvard, Ltd., a North Carolina corporation founded in 1995 (which may be referred to as Charles & Colvard, we, us, or our)
, manufactures, markets is a globally recognized lab created gemstone company specializing in fine jewelry. We manufacture, market, and
distributesdistribute Charles & Colvard Created Moissanite® (which we refer to as moissanite or moissanite jewels) and
on September 14, 2020, we announced our expansion into the lab grown diamond market with the launch of Caydia™, an exclusive brand of premium lab grown diamonds. We offer gemstones and finished jewelry featuring our proprietary moissanite
gemstonejewels and premium lab grown diamonds for sale in the worldwide
fine jewelry market.
OurCharles & Colvard is the original source of created moissanite, and in 2015, we debuted Forever One™, our premium moissanite gemstone brand. As an e-commerce and multi-channel destination for fine jewelry featuring lab grown gemstones, we believe that the addition of lab grown diamonds is a natural progression for the Charles & Colvard brand.
One of our unique differentiator,differentiators, moissanite – The World’s Most Brilliant Gem® – is core to our ambition to create a movement around beautiful, environmentally and socially responsible fine jewelry and fashion jewelry. Charles & Colvard is the originator of lab-created moissanite, and weWe believe that we are leading the way in delivering the premium moissanite brand through technological advances in gemstone manufacturing, cutting, polishing, and setting. By coupling what we believe to be unprecedented gemstonesmoissanite jewels with responsibly sourced precious metals, we are delivering a uniquely positioned product line for the conscientious consumer. Our Caydia™ lab grown diamonds are hand selected by our Gemological Institute of America, or GIA, certified gemologists to meet Charles & Colvard’s uncompromising standards and validated by independent third-party experts. Our Caydia™ lab grown diamonds are available currently in E, F, and G color grades (based on the GIA’s color grading scale) with a minimum clarity in accordance with the GIA’s VS1 clarity classification along with excellent cut, polish, and symmetry. All of our Caydia™ lab grown diamonds are set with responsibly sourced precious metals.
Our strategy is to build a globally revered brand of lab created gemstones and finished jewelry that appealsappeal to a wide consumer audience andaudience. We believe this strategy leverages our advantageadvantages of being the original and leading worldwide source of moissanite.Charles & Colvard Created Moissanite® and offering a curated assortment of jewelry featuring Caydia™ lab grown diamonds, which we believe offers an ideal combination of quality and value. We believe a direct relationship with consumers is important to this strategy, which entails delivering tailored educational content, engaging in dialogue with our audience, and positioning our brand to meet the demands of today’s discerning consumer. In June
COVID-19 Update
The global outbreak of the coronavirus disease 2019, we successfully completed an underwritten public offeringor COVID-19, was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place” and quarantine restrictions, and created significant disruption of 6,250,000 sharesthe financial markets. Certain countries and jurisdictions, including some geographic areas of the U.S., have begun to return to significantly more stringent social, business, and travel-related restrictions due to the dramatic increase in new and variant strains of COVID-19 cases. Even in the absence of legal restrictions, businesses and individuals may voluntarily continue to limit in-person interactions and practice social distancing, and such behaviors may continue beyond the formal end of the pandemic. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location. We have taken measures to protect the health and safety of our common stock, which, togetheremployees, work with our customers and suppliers to minimize disruptions, reduce our expenses, and support our community in addressing the partial exercisechallenges posed by this ongoing COVID-19 pandemic. The pandemic continues to present unprecedented business challenges, and we have experienced impacts on our business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, delays in supplier deliveries, impacts of travel restrictions, access to some customer locations, the effects to net revenue related to reduced demand and store closures, and the impacts of remote work and adjusted work schedules.
The impact of the underwriters’ over-allotment option forCOVID-19 pandemic on the global and domestic economy is currently not fully known. Our operations have, to date, been operating under applicable governmental orders that have restricted activities in an additional 630,500 shares in July 2019, resulted in total gross proceedseffort to prevent further outbreak of approximately $11.01 million, before deducting the underwriting discount and fees and expenses of approximately $1.02 million. The timing of this financing event was critical given the growing worldwide acceptance of lab-created gemstones with emerging generations of consumers. These proceeds, whichCOVID-19. As such, we are using for marketingconducting business with certain modifications, including having non-operational personnel working remotely where applicable; limiting site access to necessary employees and for general corporatecritical third parties; enhancing the cleaning and working capital purposes, will enable usdisinfection of equipment and common areas, including engaging third-party specialists to focus efforts on expanding Charles & Colvard global brand awarenessdisinfect personal workspaces; and issuing a quarantine policy regarding employees with COVID-19 symptoms or potential exposure, among other things. We continue to actively monitor the situation and may take further actions that alter our target consumerbusiness operations including any that may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers, vendors, communities and further develop our global omni-channel sales strategy with a primary focus on top line growth.other stakeholders.
Despite these challenges, our efforts, especially with regard to product fulfillment and supply chain management, helped to partially mitigate the disruptions caused by the COVID-19 pandemic on our operations in the second quarter of our fiscal year ending June 30, 2021, or Fiscal 2021. In addition, strong net sales performance in our Online Channels segment during the calendar year-end 2020 holiday season and an overall reduction in costs and operating expenses resulting from cost-savings initiatives implemented by us have helped to offset the adverse impacts of the COVID-19 pandemic on our financial results in our second fiscal quarter. However, the ultimate impact of the COVID-19 pandemic on our operations and financial performance in Fiscal 2021 and future periods, including our ability to execute our business plan and strategic initiatives in the expected timeframe, remains uncertain and will depend on future developments, including the duration and recent increased spread of the coronavirus disease and related actions taken by the U.S. Government, state and local government officials, and international governments to prevent and manage disease spread, including the global roll-out of COVID-19 vaccines, all of which are uncertain and cannot be predicted. The long-term impacts of the COVID-19 pandemic on global consumer buying behaviors, which impacts demand for our products and services, are also difficult to predict.
For additional risks to the Company related to the COVID-19 pandemic, see “Part II, Item 1A. Risk Factors”, contained in our 2020 Annual Report.
Fiscal 2021 Financial Trends
Currently, our financial outlook for Fiscal 2021 is subject to various risks and uncertainties and is based on assumptions that we believe in good faith are reasonable, but which may be materially different from actual results. The full extent of the impact of the COVID-19 pandemic on our operational and financial performance remains uncertain and continues to depend on many factors outside of our control, including, without limitation: the timing, extent, trajectory and duration of the pandemic particularly in light of the recent dramatic increases in new and variant strains of COVID-19 cases in the U.S. to the extent such outbreak would impact the local geographic region in which our business principally operates; the development and availability of effective treatments and the long-term effects of the recently implemented global vaccine rollout; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for consumer products. We expect the COVID-19 pandemic will continue to have an adverse impact on our business, results of operations, financial condition, and liquidity during Fiscal 2021. Due to the potentially significant impact on our operations of the COVID-19 pandemic, including governmental responses to prevent further outbreak of COVID-19, current period results are not necessarily indicative of expected performance for other interim periods or our full Fiscal 2021. We expect the COVID-19 pandemic will continue to have an adverse impact on our business, results of operations, financial condition, and liquidity during Fiscal 2021.
COVID-19
During the third quarter ofAs we manage through these challenging times, our fiscal year ending June 30, 2020, or Fiscal 2020, the global outbreak of the coronavirus disease 2019, known as COVID-19, was declared a pandemic by the World Health Organization, or the WHO, and a national emergency by the U.S. Government, and has negatively affected the U.S. and global economies. In response to this pandemic, federal, state, county and local governments and public health organizations and authorities around the world have implemented a variety of measures intended to control the spread of the virus, including quarantines, “stay-at-home” orders, travel restrictions, school closures, business limitations and closures, social distancing and hygiene requirements. These measures have adversely affected workforces, customers, economies and global supply chains, and resulted in significant travel and transport restrictions – all of which have combined to lead to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. In early 2020 in the Asia Pacific region and during our quarter ended March 31, 2020 globally, the pandemic and related governmental and business responses began to have an adverse effect on our operations, supply chains, distribution channels, and consumer buying behaviors. Cumulatively, these things also impacted the net realizable value and marketability of our legacy inventory, which was subsequently written-off. The overall impacts of the COVID-19 pandemic include following:
Across our supply chain, we have experienced instances of suppliers temporarily closing their operations, delaying order fulfillment or limiting their production. Where applicable, we utilized alternative supply arrangements with partners whose businesses are not under stay-at-home orders or whose production came back online. However, we and our suppliers remain subject to ongoing changes to governmental closure requirements that may have a long-term impact on our supply chain and ability to produce gemstones and finished jewelry for sale.
In our Online Channels segment, our transactional website charlesandcolvard.com remained open under restricted fulfillment capabilities. However, a quickly rising unemployment rate combined with consumer uncertainty and lack of confidence began reducing website traffic and conversions in March 2020. Beginning in March 2020, we maintained limited shipping functions with support from third-party production and fulfillment partners. We were also able to support only a certain level of active products on marketplaces and drop-ship partner websites such as Macys.com, Helzberg.com, Overstock.com, ShopHQ.com and more. This ongoing e-commerce presence was restricted to available stock and the limited production capacity of functioning suppliers. Until stay-at-home orders are fully lifted and business resumes to pre-pandemic levels across our entire supply chain, our Online Channels segment will continue to be adversely impacted by the pandemic.
In our Traditional segment, brick and mortar customers began closing their stores to foot traffic in March 2020, with tentative plans to re-open on a rolling schedule that may lead into the fall timeframe or later. We also experienced instances of distributors, whose businesses rely on sales into retail organizations, reducing or closing their operations. These adverse effects impacted our ability to maintain significant levels of sales through our wholesale customers. In addition, trade shows and industry events have been preemptively cancelled for the critical production season leading up to the calendar year-end 2020 holiday season. As a result, our selling activities have been significantly modified, and our ability to convert those activities into sales have been – and may continue to be – adversely impacted by the pandemic.
As global and U.S economic activity slowed in response to the COVID-19 pandemic, we experienced and anticipate ongoing constraints on our cash and working capital, including experiencing potential liquidity challenges. The impact of the pandemic has had – and is expected to continue having – an adverse effect on our operations and financial condition as revenues declined and, despite our cost-saving efforts, many business and operating expenses remained flat or continued to rise. Cash flow scrutiny will be crucial for our business in the months ahead as we anticipate seeing lower revenues resulting in less cash flow, along with delayed accounts receivable collections, as needs grow to step up payables to important suppliers. We expect to become much more nimble in managing our inventory levels given the uncertainty in the supply chain, which may also place further demands on working capital.
We believe that our management has taken swift and appropriate action designed to hedge against the overall impact that the pandemic may have on our business, to prepare for a recessionary environment that may follow, and to efficiently manage the business while maintaining adequate liquidity and maximum operating flexibility. We remain focused on three critical areas of wellbeing, including safeguarding the health and safety of our employees, streamlining operations while ensuring support of our brand and customers, and maintaining our financial strength and stability. Given these uncertainties, these disruptions may have a material adverse impact on our future results of operations, financial condition, and liquidity.
Since the onset of the pandemic domestically, we have implemented the following measures:
We deployed a work-from-home option for our employees on March 13, 2020, and effective March 27, 2020, instituted a mandatory work-from-home policy for all, but essential, employees due to mandated stay-at-home orders by the State of North Carolina and local governmental authorities;
We suspended all hiring of employees, and furloughed approximately 50% of our employee workforce, starting April 13, 2020, with furloughed employees retaining their health and welfare benefits at no cost to them;
We extended new benefits to assist employees who participate in our 401(k) plan with additional distribution and new borrowing terms;
We implemented temporary salary and wage reductions for all employees, including a 25% reduction in salary for the President and Chief Executive Officer and a 15% reduction for each of the Chief Financial Officer and Chief Operating Officer;
We instituted a temporary 50% reduction in fees paid to our Board of Directors; and
We reduced non-payroll operating expenses, including decreased digital marketing spend and significantly reduced product development investments and travel expenditures.
Going forward, we also plan to take the following actions to further address the impact of the COVID-19 pandemic:
We are actively renegotiating contracts with vendors and suppliers to amend commitments to size our supply with current demand and delivery terms with others to reduce our cost of goods and services;
We are negotiating extended payment terms with select partners; and
We are continuing to align variable expenses to match current sales trends.
Fiscal 2020 Financial Trends
The continued spread of COVID-19 has led to disruption and volatility in the global and U.S. economies, and, depending on future developments, could continue to adversely impact our operations and financial position. Ourstrategic focus for the remainder of Fiscal 2020 is2021 remains centered on the healthexpansion of ourCharles & Colvard’s brand on a global scale. Asscale and to continue increasing the size of our business through top-line disciplined growth by leveraging existing resources. We believe that lab-created gemstones, including our premier moissanite products, Forever One™ and Moissanite by Charles & Colvard® and our lab grown diamond product line, Caydia™, are now being embraced by emerging generations, we will continueworldwide markets. We also believe that our questability to establishelevate our own lab-created gemstones - including both moissanite jewels and our jewelrylab grown diamonds - and the Charles & Colvard brand directly with consumers.consumers is key to our future success and ability to continue fueling our growth. We willintend to elevate the Charles & Colvard name by making it synonymous with quality, value, and price. Notwithstanding the global challenges we face in Fiscal 2021, we plan to execute on our key strategies with a continuedan ongoing commitment to spending judiciously and generating sustainable earnings improvement.
As we manage through these challenging times, we plan to remain highly focused on prudently managing the reach of our brand – both domestically and internationally – through select digital marketing initiatives that align with consumer engagement and demand. In prior years, we primarily directed our digital advertising spend to convert consumers whom we believed were already familiar with our brand or to customers for whom we had evidence were searching for the term moissanite. With the benefit of our June 2019 underwritten public offering, and in order to garner the attention of consumers not yet familiar with our brand but interested in the ethical appeal of lab-created gemstones or a value-priced bridal option, we shifted our resources and paid more attention to converting new prospects. However, in response to the global economic impact of the COVID-19 pandemic and its effect on consumer confidence and spending levels, we have narrowed our near-term digital advertising spend toward higher-converting, low marketing funnel activities. We believe that our long-term mission will ultimately be accomplished through our ability to remain fluid and shift brand awareness strategies that are sensitive to these ever-changing times.
We discuss our key strategies for Fiscal 20202021 in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our 20192020 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, including the impact of the COVID-19 pandemic and the related responses, those actual results of operations may materially differ. We have disclosed our critical accounting policies and estimates in our 20192020 Annual Report, and that disclosure should be read in conjunction with this Quarterly Report on Form 10-Q. Except as set forth below, there have been no significant changes in our critical accounting policies and estimates during the first ninesix months of Fiscal 2020.
2021.For a discussion regarding our adoption of the new lease accounting standard effective July 1, 2019,related to the measurement and disclosure of credit losses on financial instruments, see Note 2 to our condensedcondensed consolidated financial statements in Part I, Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.
10-Q.
Results of Operations
The following table sets forth certain consolidated statements of operations data for the three and ninesix months ended MarchDecember 31, 2020 and 2019:
| | | Three Months Ended March 31, | | | Nine Months Ended March 31, | | | Three Months Ended December 31, | | | Six Months Ended December 31, | |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Net sales | | $ | 6,491,048 | | | $ | 7,902,242 | | | $ | 24,758,559 | | | $ | 24,636,409 | | | $ | 12,146,790 | | | $ | 10,659,090 | | | $ | 20,073,083 | | | $ | 18,267,511 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of goods sold | | 9,171,932 | | | 4,150,229 | | | 18,579,069 | | | 13,110,185 | | | 6,167,708 | | | 5,530,514 | | | 10,363,763 | | | 9,407,138 | |
| Sales and marketing | | 2,518,732 | | | 1,912,484 | | | 7,909,289 | | | 5,900,501 | | | 2,480,571 | | | 3,160,965 | | | 4,128,503 | | | 5,390,556 | |
| General and administrative | | 994,254 | | | 1,042,048 | | | 3,547,441 | | | 3,517,004 | | | | 977,528 | | | | 1,203,686 | | | | 2,185,564 | | | | 2,553,187 | |
| Research and development | | | - | | | | - | | | | - | | | | 1,422 | | |
| Total costs and expenses | | | 12,684,918 | | | | 7,104,761 | | | | 30,035,799 | | | | 22,529,112 | | | | 9,625,807 | | | | 9,895,165 | | | | 16,677,830 | | | | 17,350,881 | |
| (Loss) Income from operations | | (6,193,870 | ) | | 797,481 | | | (5,277,240 | ) | | 2,107,297 | | |
| Income from operations | | | 2,520,983 | | | 763,925 | | | 3,395,253 | | | 916,630 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | 39,425 | | | - | | | 146,182 | | | - | | | 1,126 | | | 45,379 | | | 4,586 | | | 106,758 | |
| Interest expense | | (116 | ) | | (287 | ) | | (535 | ) | | (985 | ) | | (2,466 | ) | | (277 | ) | | (4,905 | ) | | (419 | ) |
| Loss on foreign currency exchange | | (206 | ) | | (209 | ) | | (1,058 | ) | | (311 | ) | | | (72 | ) | | | (314 | ) | | | (603 | ) | | | (853 | ) |
| Other expense | | | - | | | | - | | | | - | | | | (13 | ) | |
| Total other income (expense) | | | 39,103 | | | | (496 | ) | | | 144,589 | | | | (1,309 | ) | |
| (Loss) Income before income taxes | | (6,154,767 | ) | | 796,985 | | | (5,132,651 | ) | | 2,105,988 | | |
| Total other (expense) income, net | | | | (1,412 | ) | | | 44,788 | | | | (922 | ) | | | 105,486 | |
| Income before income taxes | | | 2,519,571 | | | 808,713 | | | 3,394,331 | | | 1,022,116 | |
| Income tax (expense) benefit | | | (493 | ) | | | 17,099 | | | | (1,240 | ) | | | 7,565 | | | | (494 | ) | | | 5,337 | | | | (988 | ) | | | (747 | ) |
| Net (loss) income | | $ | (6,155,260 | ) | | $ | 814,084 | | | $ | (5,133,891 | ) | | $ | 2,113,553 | | |
| Net income | | | $ | 2,519,077 | | | $ | 814,050 | | | $ | 3,393,343 | | | $ | 1,021,369 | |
Consolidated Net Sales
Consolidated net sales for the three and ninesix months ended MarchDecember 31, 2020 and 2019 comprise the following:
| | Three Months Ended March 31, | | Change | | Nine Months Ended March 31, | | Change | | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | 2020 | | 2019 | | Dollars | | | Percent | | 2020 | | 2019 | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Finished jewelry | | $ | 3,480,168 | | | $ | 3,958,061 | | | $ | (477,893 | ) | | -12 | % | | $ | 13,776,510 | | | $ | 11,709,955 | | | $ | 2,066,555 | | | 18 | % | | $ | 8,265,197 | | | $ | 6,438,347 | | | $ | 1,826,850 | | | 28 | % | | $ | 12,600,534 | | | $ | 10,296,342 | | | $ | 2,304,192 | | | 22 | % |
| Loose jewels | | | 3,010,880 | | | | 3,944,181 | | | | (933,301 | ) | | -24 | % | | | 10,982,049 | | | | 12,926,454 | | | | (1,944,405 | ) | | -15 | % | | | 3,881,593 | | | | 4,220,743 | | | | (339,150 | ) | | -8 | % | | | 7,472,549 | | | | 7,971,169 | | | | (498,620 | ) | | -6 | % |
| Total consolidated net sales | | $ | 6,491,048 | | | $ | 7,902,242 | | | $ | (1,411,194 | ) | | -18 | % | | $ | 24,758,559 | | | $ | 24,636,409 | | | $ | 122,150 | | | 0 | % | | $ | 12,146,790 | | | $ | 10,659,090 | | | $ | 1,487,700 | | | 14 | % | | $ | 20,073,083 | | | $ | 18,267,511 | | | $ | 1,805,572 | | | 10 | % |
Consolidated net sales were
$6.49$12.15 million for the three months ended
MarchDecember 31, 2020 compared to
$7.90$10.66 million for the three months ended
MarchDecember 31, 2019,
a decreasean increase of
$1.41approximately $1.49 million, or
18%14%. Consolidated net sales were
$24.76$20.07 million for the
ninesix months ended
MarchDecember 31, 2020 compared to
$24.64$18.27 million for the
ninesix months ended
MarchDecember 31, 2019, an increase of
$122,000,approximately $1.81 million, or
0.5%10%. The
decreaseincrease in consolidated net sales for the three
and six months ended
MarchDecember 31, 2020
and essentially flat consolidated net sales for the nine months ended March 31, 2020 werewas due primarily to
the adverse impacts of the geopolitical unrest in Hong Kong in early 2020 which affected our international distributor market and the global outbreak of the COVID-19 pandemic. This pandemic has negatively affected the U.S. and global economies and has had a significant adverse impact on our worldwide sales and results of operations. Notwithstanding the impact of the COVID-19 pandemic, during the year-to-date period through March 31, 2020, we saw increased seasonal sales for both thestrong calendar year-end holiday
sales and
Valentine’s Day. We also witnessed increased consumer awareness
and strong demand for our moissanite
products throughout the period. Our transactional website, charlesandcolvard.com, decreased 12%jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds. These increases resulted in net sales versus the year-ago quarter. Net sales through our cross-border trade, or CBT, platform decreased 15% versus the year-ago quarter. Despite sales pressures we experienced during the pandemic, these results were evidence of stronghigher finished jewelry product net sales during the
ninethree and six months ended
MarchDecember 31, 2020 in
both our Online Channels segment and Traditional segment.
The increases in our Online Channels segment net sales in the three and six months ended December 31, 2020 were partially offset by lower net sales in our Traditional segment driven by lower loose jewels sales and decreased international sales during the three and six months ended December 31, 2020.
Sales of finished jewelry represented
54%68% and
56%63% of total consolidated net sales for the three and
ninesix months ended
MarchDecember 31, 2020, respectively, compared to
50%60% and
48%56%, respectively, of total consolidated net sales for the corresponding periods of the prior year. For the three months ended
MarchDecember 31, 2020, finished jewelry sales were
$3.48$8.27 million compared to
$3.96 million for the corresponding period of the prior year, a decrease of approximately $478,000, or 12%. Finished jewelry sales for the three-month period ended March 31, 2020 compared with the same period in the prior year were lower primarily as a result of the adverse impact of the COVID-19 pandemic and the resulting impact on consumer confidence and spending. For the nine months ended March 31, 2020, finished jewelry sales were $13.78 million compared to $11.71$6.44 million for the corresponding period of the prior year, an increase of approximately
$2.07$1.83 million, or
18%28%. For the six months ended December 31, 2020, finished jewelry sales were $12.60 million compared to $10.30 million for the corresponding period of the prior fiscal year, an increase of approximately $2.30 million, or 22%. The increase in finished jewelry sales for the
nine-month periodthree- and six-month periods ended
MarchDecember 31, 2020 was due primarily to higher finished jewelry
retail sales in our Online Channels segment as well as increased sales of
Forever One™ and
Moissanite by Charles & Colvard® productsin our Online Channels segment as well as in our Traditional
segment during periods prior to the COVID-19 pandemic. Net sales of our Forever One™finished jewelry and loose jewels represented 82% of total net sales for the three month-period ended March 31, 2020.segment.
Sales of loose jewels represented 46%32% and 44%37% of total consolidated net sales for the three and ninesix months ended MarchDecember 31, 2020, respectively, compared to 50%40% and 52%44%, respectively, of total consolidated net sales for the corresponding periods of the prior fiscal year. For the three months ended MarchDecember 31, 2020, loose jewel sales were $3.01$3.88 million compared to $3.94$4.22 million for the corresponding period of the prior year, a decrease of $933,000,$339,000, or 24%8%. For the ninesix months ended MarchDecember 31, 2020, loose jewel sales were $10.98$7.47 million compared to $12.93$7.97 million for the corresponding period of the prior fiscal year, a decrease of $1.94 million,$500,000, or 15%6%. The decrease in loose jewels sales for both the threethree- and nine monthssix-month periods ended MarchDecember 31, 2020 was primarily a result of the adverse impact of the COVID-19 pandemic and the resulting impact on consumer confidence and spending. The decrease was also due to lower levels of loose jewel sales in our Online Channels segment and, in particular, lower levels of loose jewel salesprincipally through the international distributiondistributor network in our Traditional segment.
U.S. net sales accounted for approximately
95% and 91%94% of total consolidated net sales for
each of the
threethree- and
nine monthssix-month periods ended
MarchDecember 31, 2020,
respectively, compared to
88%90% of total consolidated net sales for each of the corresponding periods
inof the prior year. U.S. net sales
decreased $838,000,increased to $11.39 million, or
12%18%, during the three months ended
MarchDecember 31, 2020 from the corresponding period of the prior
year primarily as a result of the adverse impact of the COVID-19 pandemic and the resulting impact on domestic consumer confidence and spending.fiscal year. U.S. net sales increased
$876,000,to $18.89 million, or
4%15%, during the
ninesix months ended
MarchDecember 31, 2020 from the corresponding period of the prior
yearyear. U.S. net sales increased during the three and six months ended December 31, 2020 primarily as a result of increased sales to U.S. customers
during the periods prior to the impact of the COVID-19 pandemic in both our Online Channels segment and Traditional segment.
Our largest U.S. customer during the three and six months ended MarchDecember 31, 2020 and 2019, accounted for 15%14% and 12%, respectively, of total consolidated net sales during each respective period. This same customer was also one of our two largest customerU.S. customers during the ninethree and six months ended MarchDecember 31, 2020 and 2019 andwhen this customer accounted for 14%13% of total consolidated net sales during botheach of the respective three- and six-month periods. Our two second largest U.S. customerscustomer during the threesix months ended MarchDecember 31, 2020 each accounted for 11%10% of total consolidated net sales during the period. Our secondperiod then ended. This same customer was also one of our two largest U.S. customercustomers during the ninethree and six months ended MarchDecember 31, 2020 and 2019, when this customer accounted for 13% and 10% of total consolidated net sales during each of the respective period.three- and six-month periods. We expect that we will remain dependent on our ability, and that of our largest customers, to maintain and enhance retail and wholesale programs. A change in or loss of any of these customerscustomer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately
5% and 9%6% of total consolidated net sales for
each of the
threethree- and
nine monthssix-month periods ended
MarchDecember 31, 2020, respectively, compared to
12%10% of total consolidated net sales for
botheach of the corresponding periods of the prior year. International net sales decreased
63%25% and
26%36% during the three and
ninesix months ended
MarchDecember 31, 2020,
respectively. International sales also decreased due torespectively, from the corresponding periods of the prior fiscal year principally as a result of lower demand in our international distributor market,
resulting from the adverse impact of the geopolitical unrest in Hong Kong and the COVID-19 pandemic affecting the distributors we serve in the China and Hong Kong markets. Prior to the effects of the COVID-19 pandemic, the lower demand in our international distributor marketwhich was
partially offset
somewhat by growth in our direct-to-consumer presence internationally
while also seeing an increase in the number of CBT transactions in these periods reflecting
increasedsolid direct-to-consumer sales from our Online Channels segment in international markets. In light of the
effects of ongoing global economic conditions, we continue to evaluate these and other potential distributors in international markets to determine the best long-term partners. As a result, and in light of the ongoing worldwide pandemic and international trade challenges, we expect our sales in these markets to continue to fluctuate significantly each reporting period.
We did not have an international customer account for 10% or more of total consolidated sales during the three and ninesix months ended MarchDecember 31, 2020 or 2019. A portion of our international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold for the three and ninesix months ended MarchDecember 31, 2020 and 2019 are as follows:
| | | Three Months Ended March 31, | | | Change | | | Nine Months Ended March 31, | | | Change | | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Product line cost of goods sold: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Finished jewelry | | $ | 1,589,501 | | | $ | 1,633,379 | | | $ | (43,878 | ) | | -3 | % | | $ | 6,256,525 | | | $ | 5,161,046 | | | $ | 1,095,479 | | | 21 | % | | $ | 4,002,146 | | | $ | 2,964,114 | | | $ | 1,038,032 | | | 35 | % | | $ | 5,756,435 | | | $ | 4,667,024 | | | $ | 1,089,411 | | | 23 | % |
| Loose jewels | | | 1,512,049 | | | | 1,906,183 | | | | (394,134 | ) | | -21 | % | | | 5,393,155 | | | | 6,425,361 | | | | (1,032,206 | ) | | -16 | % | | | 1,805,603 | | | | 2,081,654 | | | | (276,051 | ) | | -13 | % | | | 3,549,525 | | | | 3,881,106 | | | | (331,581 | ) | | -9 | % |
| Total product line cost of goods sold | | 3,101,550 | | | 3,539,562 | | | (438,012 | ) | | -12 | % | | 11,649,680 | | | 11,586,407 | | | 63,273 | | | 1 | % | | 5,807,749 | | | 5,045,768 | | | 761,981 | | | 15 | % | | 9,305,960 | | | 8,548,130 | | | 757,830 | | | 9 | % |
| Non-product line cost of goods sold | | | 6,070,382 | | | | 610,667 | | | | 5,459,715 | | | 894 | % | | | 6,929,389 | | | | 1,523,778 | | | | 5,405,611 | | | 355 | % | | | 359,959 | | | | 484,746 | | | | (124,787 | ) | | -26 | % | | | 1,057,803 | | | | 859,008 | | | | 198,795 | | | 23 | % |
| Total cost of goods sold | | $ | 9,171,932 | | | $ | 4,150,229 | | | $ | 5,021,703 | | | 121 | % | | $ | 18,579,069 | | | $ | 13,110,185 | | | $ | 5,468,884 | | | 42 | % | | $ | 6,167,708 | | | $ | 5,530,514 | | | $ | 637,194 | | | 12 | % | | $ | 10,363,763 | | | $ | 9,407,138 | | | $ | 956,625 | | | 10 | % |
Total cost of goods sold was $9.17$6.17 million for the three months ended MarchDecember 31, 2020 compared to $4.15$5.53 million for the three months ended MarchDecember 31, 2019, a net increase of approximately $5.02 million,$637,000, or 121%12%. Total cost of goods sold was $18.58$10.36 million for the ninesix months ended MarchDecember 31, 2020 compared to $13.11$9.41 million for the ninesix months ended MarchDecember 31, 2019, an increase of approximately $5.47 million,$957,000, or 42%10%. Product line cost of goods sold is defined as product cost of goods sold in each of our Online Channels segment and Traditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory write-offs; and other inventory adjustments, comprising costs of quality issues, and damaged goods.
The increase in cost of goods sold for the three and nine months ended MarchDecember 31, 2020 compared to the same period in 2019 was primarily driven by a write-offincreased sales of approximately $5.26 million representing the carrying value of our legacy loose jewel inventory and finished goods inventory set with these legacy gemstones. The legacy material inventory comprised lower grade raw materials, or boules, work-in-process gemstones, loose finished gemstones and finished jewelry, set with these legacy gemstoneswhich reflect higher material and labor costs, in precious metals. The legacy inventory raw materials were purchasedboth our Online Channels segment and finished gemstone products were produced through the period ended August 2015. These gemstone products and finished jewelry items are known and marketedTraditional segment as our older Forever ClassicTM, Forever Brilliant® and lower-grade gemstones.
Our primary international gemstone distributors, which historically have been the principal customer base for our legacy gemstone products are located in the Asia Pacific region of the world, primarily in China and Hong Kong. As a result of the recent geopolitical unrest in Hong Kong, coupled with the global impact of the COVID-19 pandemic, consumer confidence and spending in this region plummetedstrong demand during the secondcalendar year-end 2020 holiday season. Our finished jewelry products cost more to produce due to higher material and third quarterslabor costs when compared to the production of Fiscal 2020. As a consequence of this, our marketability of these products suffered a sudden and complete deterioration over this same period.loose jewels.
The net
increasedecrease in non-product line cost of goods sold for the three months ended
MarchDecember 31, 2020, comprises
an unfavorable neta favorable $167,000 change in
inventory write-offs of approximately $5.15 million principally related to the write-off of the carrying cost of the Company’s legacy material inventory of $5.26 million offset by other inventory
valuation adjustments
relatedprincipally relating to
lower increasespositive changes in
obsolescence reserves inproduction standard cost variances compared to the three months ended
MarchDecember 31,
2020.2019. The net
increasedecrease in non-product line cost of goods
sold was also related to an approximate
$375,000$101,000 change in inventory valuation adjustments primarily related to favorable
set of production standard cost variances during the three months ended March 31, 2019 that were not repeatedchanges in obsolescence reserves in the current
period compared to those in the comparable prior year
period as well as an approximate
$27,000 increase in freight out in the same period due to higher shipment costs during the three months ended March 31, 2020. These increases in non-product line cost of goods were offset in part by an approximate $89,000$32,000 decrease in non-capitalized manufacturing and production control expenses principally due to the timing when work-in-process is received into inventory and overhead costs are allocated.
These decreases in non-product line cost of goods sold were offset in part by an approximate $175,000 increase in freight out from increased shipments resulting from Online Channels segment sales growth during the quarter ended December 31, 2020.
The increase in cost of goods sold for the six months ended December 31, 2020 compared to the same period in 2019 was also primarily driven by the increased finished jewelry sales in both our Online Channels segment and Traditional segment as a result of strong sales during the calendar year-end 2020 holiday season.
The net increase in non-product line cost of goods sold for the ninesix months ended MarchDecember 31, 2020, comprises an unfavorable net$116,000 change in other inventory write-offs of approximately $5.24 millionadjustments principally related to adverse changes in production standard cost variances compared to the write-off of the carrying cost of the Company’s legacy material inventory of $5.26 million offset by other immaterial inventory valuation adjustments related to lower increases in obsolescence reserves in the ninesix months ended MarchDecember 31, 2020.2019. The net increase in non-product line cost of goods sold was also related to an approximate $91,000 favorable set of production standard cost variances$220,000 increase in freight out from increased shipments resulting from Online Channels segment sales growth during the ninesix months ended MarchDecember 31, 2019 that2020. These increases in non-product line cost of goods sold were not repeatedoffset in the current year as well aspart by an approximate $75,000 increase$93,000 decrease in non-capitalized manufacturing and production control expenses principally due to the timing when work-in-process is received into inventory and overhead costs are allocated. These increases in non-product line cost of goods were offset in part byallocated as wells as an approximate $4,000 decrease$44,000 change in freight outinventory valuation allowances primarily related to favorable changes in obsolescence reserves in the same period due to lower shipment costs during the ninesix months ended MarchDecember 31, 2020.2020, compared to those in the comparable prior year period.
For additional disclosure relating to non-product line cost of goods sold, see Note 3 to our condensedcondensed consolidated financial statements in Part I, Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.10-Q.
Sales and marketing expenses for the three and ninesix months ended MarchDecember 31, 2020 and 2019 are as follows:
| | Three Months Ended March 31, | | Change | | Nine Months Ended March 31, | | Change | |
| | 2020 | | 2019 | | Dollars | | | Percent | | 2020 | | 2019 | | Dollars | | | Percent | |
| Sales and marketing | | $ | 2,518,732 | | | $ | 1,912,484 | | | $ | 606,248 | | | | 32 | % | | $ | 7,909,289 | | | $ | 5,900,501 | | | $ | 2,008,788 | | | | 34 | % |
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Sales and marketing | | $ | 2,480,571 | | | $ | 3,160,965 | | | $ | (680,394 | ) | | | -22 | % | | $ | 4,128,503 | | | $ | 5,390,556 | | | $ | (1,262,053 | ) | | | -23 | % |
Sales and marketing expenses were $2.52$2.48 million for the three months ended MarchDecember 31, 2020 compared to $1.91$3.16 million for the three months ended MarchDecember 31, 2019, an increasea decrease of approximately $606,000,$680,000, or 32%22%. Sales and marketing expenses were $7.91$4.13 million for the ninesix months ended MarchDecember 31, 2020 compared to $5.90$5.39 million for the ninesix months ended MarchDecember 31, 2019, an increasea decrease of approximately $2.01$1.26 million, or 34%23%.
The
increasedecrease in sales and marketing expenses for the three months ended
MarchDecember 31, 2020 compared to the same period in 2019 was primarily due to a
$452,000$418,000 decrease in compensation-related expenses; a $321,000 decrease in advertising and digital marketing expenses; a $14,000 decrease in travel expenses as a result of COVID-19 cost-control measures; and a $6,000 decrease in software-related costs compared with those incurred in the prior year associated with upgraded operating system maintenance agreements. These decreases were partially offset by a $51,000 increase
in general office-related expenses primarily due to increased credit card transaction fees associated with a higher level of online sales; a $26,000 increase in depreciation and amortization principally associated with the capitalization of costs relating to information technology-related upgrades; and a $2,000 increase in professional services principally comprising non-recurring consulting information technology services.
Compensation expenses for the three months ended December 31, 2020 compared to the same period in 2019 decreased primarily due to a $337,000 decrease in salaries, commissions, and related employee benefits in the aggregate; a $67,000 decrease in bonus expense; and a $14,000 decrease in employee stock-based compensation expense. All three of these compensation-related expense decreases reflect our June 2020 management reorganization and workforce reduction.
The decrease in advertising and digital marketing expenses reflectingfor the activation of funds from our Junethree months ended December 31, 2020 compared to the same period in 2019 underwritten public offering that we have deployedcomprises a $148,000 decrease in Internet marketing; a $98,000 decrease in outside agency fees; a $55,000 decrease in cooperative advertising; and a $20,000 decrease in promotion-related expenses.
The decrease in sales and marketing expenses for the six months ended December 31, 2020 compared to expand brand awareness;the same period in 2019 was primarily due to an $819,000 decrease in compensation-related expenses; a $128,000 increase$457,000 decrease in advertising and digital marketing expenses; a $56,000 decrease in professional services fees principally comprising non-recurring consulting services for cybersecurity and merchandise imaging;merchandising imaging in the prior year period; and a $48,000$21,000 decrease in travel expenses as a result of COVID-19 cost-control measures. These decreases were partially offset by a $49,000 increase in general office-related expenses, which is primarilyare principally related to higher credit card transaction fees from increased online sales levels; a $30,000 increase in depreciation and use taxes and higher software maintenance agreement-related expenses;amortization expense relating to capitalized costs associated with information technology-related upgrades; and a $35,000$12,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements. These increases were partially offset by a $47,000 decrease in compensation-related expenses and $10,000 decrease in travel expenses as a result of COVID-19 cost control measures.
The increase in advertising and digital marketing expenses for the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to a $290,000 increase in outside agency fees; a $149,000 increase in Internet marketing; and a $28,000 increase in cooperative advertising. These increases were partially offset by a $15,000 reduction in print media advertising. In response to the COVID-19 pandemic and the resulting ongoing impact on consumer confidence and spending, management drastically reduced advertising and digital marketing expenditures in mid-March 2020.
Compensation expenses for the
threesix months ended
MarchDecember 31, 2020 compared to the same period in 2019 decreased primarily as a result of
cost control measures implemented by management in connection with the COVID-19 pandemic and its effect on our operations that led to a
$132,000$655,000 decrease
in bonus expense and a $37,000 decrease in employee stock-based compensation expense. These decreases were partially offset by a $122,000 increase in salaries, commissions, and related employee benefits in the
aggregate.aggregate; a $114,000 decrease in bonus expense; and a $52,000 decrease in employee stock-based compensation expense. All three of these compensation-related expense decreases reflect our June 2020 management reorganization and workforce reduction. These decreases were partially offset by a $2,000 increase in employee-related severance costs.
The increasedecrease in salesadvertising and digital marketing expenses for the ninesix months ended MarchDecember 31, 2020 compared to the same period in 2019 comprises a $190,000 decrease in Internet marketing; a $174,000 decrease in cooperative advertising; an $88,000 decrease in outside agency fees; and an $8,000 decrease in print media expenses. These decreases were partially offset by a $3,000 increase in promotion-related expenses.
General and Administrative
General and administrative expenses for the three and six months ended December 31, 2020 and 2019 are as follows:
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| General and administrative | | $ | 977,528 | | | $ | 1,203,686 | | | $ | (226,158 | ) | | | -19 | % | | $ | 2,185,564 | | | $ | 2,553,187 | | | $ | (367,623 | ) | | | -14 | % |
General and administrative expenses were $978,000 for the three months ended December 31, 2020 compared to $1.20 million for the three months ended December 31, 2019, a decrease of approximately $226,000, or 19%. General and administrative expenses were $2.19 million for the six months ended December 31, 2020 compared to $2.55 million for the six months ended December 31, 2019, a decrease of approximately $368,000, or 14%.
The decrease in general and administrative expenses for the three months ended December 31, 2020 compared to the same period in 2019 was primarily due to a $1.53 million$118,000 decrease in professional services; an $83,000 decrease in compensation expenses; and a $45,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve policy. These decreases were partially offset by a $7,000 increase in advertisinginsurance expenses, principally related to higher renewal premiums; a $3,000 increase in depreciation and digital marketing expenses reflectingamortization expense; a $2,000 increase in equipment-related rental expense; a $2,000 increase in business taxes and licenses; and a $6,000 net increase in miscellaneous other general and administrative expenses.
Professional services fees decreased for the activation of fundsthree months ended December 31, 2020 compared to the same period in 2019 primarily due to a $73,000 decrease in legal fees resulting from non-recurring non-capitalized fees incurred in connection with our June 2019 underwritten public offering that we have deployedand corporate governance matters in the prior year; a $30,000 decrease in investor relations fees; a $12,000 decrease in accounting services also principally related to expand brand awareness;non-recurring fees associated with our underwritten public offering in the prior year; and a $201,000$3,000 decrease in consulting and other professional services.
Compensation expenses decreased for the three months ended December 31, 2020 compared to the same period in 2019 principally due to a $39,000 decrease in salaries and related employee benefits in the aggregate; a $22,000 decrease in bonus expense; and a $22,000 decrease in employee stock-based compensation expense. All three of these compensation-related expense decreases reflect our June 2020 management reorganization and workforce reduction.
The decrease in general and administrative expenses for the six months ended December 31, 2020 compared to the same period in 2019 was primarily due to a $247,000 decrease in professional services; a $197,000 decrease in compensation expenses; and a $9,000 decrease in Board retainer fees as a result of the resignation of a former Director in September 2019. These decreases were partially offset by a $24,000 increase in insurance expenses principally related to higher renewal premiums; a $16,000 increase in bad debt expense associated with our allowance for doubtful accounts reserve policy; a $14,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements; a $151,000an $8,000 increase in professional services fees principally comprising consulting services for cybersecurity and merchandise imaging;travel-related expenses; a $79,000$7,000 increase in compensation-related expenses; a $53,000 increase in general office-related expenses, which is primarily related to increased sales and use taxes and higher software maintenance agreement-related expenses; and a $12,000 net increase in all other sales and marketing related expenses. These increases were partially offset by a $19,000 decrease in travel expensesbank charges as a result of COVID-19 cost control measures.
The increase in advertising and digital marketing expenses for the nine months ended March 31, 2020 compared to the same period in 2019 was primarily due an $837,000 increase in Internet marketing; a $443,000 increase in outside agency fees; a $183,000 increase in cooperative advertising; and an $84,000 increase in promotional expenses, primarily related to sponsorship of a local professional sports team. These increases were partially offset by a $15,000 reduction in print media advertising. In response to the COVID-19 pandemic and the resulting ongoing impact on consumer confidence and spending, management drastically reduced advertising and digital marketing expenditures in mid-March 2020.
Compensation expenses for the nine months ended March 31, 2020 compared to the same period in 2019 increased primarily as a result of a $240,000 increase in salaries, commissions, and related employee benefits in the aggregate. This increase was partially offset by cost control measures implemented by management as a result of the COVID-19 pandemic and its effect on our operations that led to a $138,000 decrease in bonus expense and a $16,000 decrease in employee stock-based compensation expense; coupled with a $7,000 decrease in severance expense related to a terminated employee in the prior year.
General and Administrative
General and administrative expenses for the three and nine months ended March 31, 2020 and 2019 are as follows:
| | Three Months Ended March 31, | | Change | | Nine Months Ended March 31, | | Change | |
| | 2020 | | 2019 | | Dollars | | | Percent | | 2020 | | 2019 | | Dollars | | | Percent | |
| General and administrative | | $ | 994,254 | | | $ | 1,042,048 | | | $ | (47,794 | ) | | | -5 | % | | $ | 3,547,441 | | | $ | 3,517,004 | | | $ | 30,437 | | | | 1 | % |
General and administrative expenses were $994,000 for the three months ended March 31, 2020 compared to $1.04 million for the three months ended March 31, 2019, a decrease of approximately $48,000, or 5%. General and administrative expenses were $3.55 million for the nine months ended March 31, 2020 compared to $3.52 million for the nine months ended March 31, 2019, an increase of approximately $30,000, or 1%.
The decrease in general and administrative expenses for the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to a $300,000 decrease in compensation expenses; a $29,000 decrease in banktransaction fees
as a result of lower credit card sales transactions during the COVID-19 pandemic; a $9,000 decrease in board retainer fees as a result of the resignation of a director; and a $9,000 decrease in travel expenses also as a result of COVID-19 cost control measures. These decreases were partially offset by a $170,000 increase in bad debt expense associated with
our allowance for doubtful accounts reserve policy in connection with delayed accounts receivable collections and increased
concerns over collectability reflecting customer cash constraints during the COVID-19 pandemic; an $85,000 increase in professional services fees; a $25,000 increase in business franchise taxes and licenses, principally sales and use taxes;online transactions; a $6,000 increase in
business taxes and licenses; a $4,000 increase in equipment-related rental expense; a
$5,000$4,000 increase in depreciation and amortization expense;
a $4,000 increase in insurance expenses; and a
$4,000$2,000 net increase in
allmiscellaneous other general and administrative expenses.
Compensation expensesProfessional services fees decreased for the
threesix months ended
March 31, 2020 compared to the same period in 2019 primarily due to cost control measures implemented as a result of the COVID-19 pandemic and its effect on our operations that led to a $167,000 decrease in employee stock-based compensation expense and a $163,000 decrease in bonus expense. These decreases were offset in part by a $30,000 increase in salaries and related employee benefits in the aggregate.
Professional services fees increased for the three months ended MarchDecember 31, 2020 compared to the same period in 2019 primarily due to a
$59,000 increase$159,000 decrease in
consulting and other professional services primarilylegal fees resulting from non-recurring non-capitalized fees incurred in connection with
temporaryour underwritten public offering and corporate governance matters in the prior year; a $45,000 decrease in accounting
department support; an increase of $53,000 in legalservices also principally related to non-recurring fees associated with
corporate governance matters;our underwritten public offering in the prior year; a $33,000 decrease in investor relations fees; and a
$3,000 increase in investor and public relations expenses. These increases were partially offset by a $30,000 decrease in accounting and audit fees from nonrecurring expenses associated with non-capitalized fees from our June 2019 underwritten public offering.
The increase in general and administrative expenses for the nine months ended March 31, 2020 compared to the nine-month period ended March 31, 2019 was primarily due to a $152,000 increase in bad debt expense associated with our allowance for doubtful accounts reserve policy in connection with delayed accounts receivable collections reflecting customer cash constraints during the COVID-19 pandemic; a $117,000 increase in professional services fees; a $5,000 increase in equipment-related rental expense; and a $1,000 increase in depreciation and amortization expense. These increases were partially offset by a $105,000 decrease in compensation expenses; a $52,000 decrease in business franchise taxes and licenses; a $40,000 decrease in bank fees as a result of lower credit card sales transactions during the COVID-19 pandemic; an $18,000 decrease in board retainer fees as a result of the resignation of a director; a $16,000 decrease in insurance expenses; an $11,000 decrease in travel expenses as a result of COVID-19 cost control measures; and a $3,000 net decrease in all other general and administrative expenses.
Professional services fees increased for the nine months ended March 31, 2020 compared to the nine-month period ended March 31, 2019 primarily due to an $85,000 increase in legal fees associated with corporate governance matters; a $28,000 increase in accounting services related to higher annual audit and tax fees, as well as fees associated with tax consulting services; and an $18,000 increase in investor and public relations expenses. These increases were partially offset by a $14,000$10,000 decrease in consulting and other professional
services primarily in connection with nonrecurring accounting and financial reporting related consulting fees.services.
Compensation expenses decreased for the ninesix months ended MarchDecember 31, 2020 compared to the nine-monthsame period ended March 31,in 2019 primarilyprincipally due to cost control measures implemented as a result of the COVID-19 pandemic and its effect on our operations that led to a $108,000$93,000 decrease in bonus expense and a $98,000 decrease in employee stock-based compensation expense. These decreases were offset in part by a $101,000 increase in salaries and related employee benefits in the aggregate.aggregate; a $55,000 decrease in employee stock-based compensation expense; and a $49,000 decrease in bonus expense. All three of these compensation-related expense decreases reflect our June 2020 management reorganization and workforce reduction.
Loss on Foreign Currency Exchange
Loss on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the three and nine months ended March 31, 2020 and 2019 are as follows:
| | Three Months Ended March 31, | | Change | | Nine Months Ended March 31, | | Change | |
| | 2020 | | 2019 | | Dollars | | | Percent | | 2020 | | 2019 | | Dollars | | | Percent | |
| Loss on foreign currency exchange | | $ | 206 | | | $ | 209 | | | $ | (3 | ) | | | -1 | % | | $ | 1,058 | | | $ | 311 | | | $ | 747 | | | | * | % |
* Not Meaningful
During the three and nine months ended March 31, 2020, we had international sales transactions denominated in currencies other than the U.S dollar that resulted in foreign currency exchange net losses. The increase in these losses for the nine months ended March 31, 2020, reflects the increased direct-to-consumer sales during periods prior to the COVID-19 pandemic from our Online Channels segment in international markets during the nine-month period ended March 31, 2020 compared with the same period in the prior fiscal year. Accordingly, also due to the COVID-19 pandemic, international direct-to-consumer sales transactions during the three months ended March 31, 2020 were essentially flat compared with the prior year period, and coupled with period-over-period foreign currency rate fluctuations, resulted in slightly lower foreign currency exchange net losses during the current year period.
Interest Income
Interest income for the three and ninesix months ended MarchDecember 31, 2020 and 2019 is as follows:
| | Three Months Ended March 31, | | Change | | Nine Months Ended March 31, | | Change | |
| | 2020 | | 2019 | | Dollars | | | Percent | | 2020 | | 2019 | | Dollars | | | Percent | |
| Interest income | | $ | 39,425 | | | $ | - | | | $ | 39,425 | | | | 100 | % | | $ | 146,182 | | | $ | - | | | $ | 146,182 | | | | 100 | % |
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Interest income | | $ | 1,126 | | | $ | 45,379 | | | $ | (44,253 | ) | | | -98 | % | | $ | 4,586 | | | $ | 106,758 | | | $ | (102,172 | ) | | | -96 | % |
In June 2019, we completed an underwritten public offering of 6,250,000 shares of our common stock, which together with the partial exercise of the underwriters’ overallotment option for an additional 630,500 shares in July 2019, resulted in net proceeds of approximately $9.99 million. The net proceeds from this offering, have beenalong with excess operating cash, are deposited into and maintained in an interest-bearing account with a federally insured commercial bank. Accordingly, during the three and ninesix months ended MarchDecember 31, 2020 and 2019, we earned interest from cash on deposit in this interest-bearing account. The decrease in earned interest reflects adverse changes in interest rate fluctuations during the first half of Fiscal 2021 compared with the first half of Fiscal 2020.
Interest Expense
Interest expense for the three and six months ended December 31, 2020 and 2019 is as follows:
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Interest expense | | $ | 2,466 | | | $ | 277 | | | $ | 2,189 | | | | 790 | % | | $ | 4,905 | | | $ | 419 | | | $ | 4,486 | | | | 1,071 | % |
On June 18, 2020, we received the proceeds from our Paycheck Protection Program Loan, or the PPP Loan, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as administered by the U.S. Small Business Administration, or SBA. The PPP Loan in the principal amount of $965,000 was disbursed by Newtek Small Business Finance, LLC, or the Lender, pursuant to a promissory note, or the Promissory Note, dated June 15, 2020. We had no such interest-bearing amounts on depositaccounted for the Promissory Note as debt within the accompanying consolidated financial statements. Accordingly, during the three and ninesix months ended MarchDecember 31, 2019.2020, we incurred interest on the Promissory Note. We had no debt during the comparable periods in the prior fiscal year.
Loss on Foreign Currency Exchange
Losses on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the three and six months ended December 31, 2020 and 2019 are as follows:
| | | Three Months Ended December 31, | | | Change | | | Six Months Ended December 31, | | | Change | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2020 | | | 2019 | | | Dollars | | | Percent | |
| Loss on foreign currency exchange | | $ | 72 | | | $ | 314 | | | $ | (242 | ) | | | -77 | % | | $ | 603 | | | $ | 853 | | | $ | (250 | ) | | | -29 | % |
During the three and six months ended December 31, 2020 and 2019, we had international sales transactions denominated in currencies other than the U.S dollar that resulted in foreign currency exchange net losses. The decrease in these losses reflects the lower level of international sales during the three and six months ended December 31, 2020 compared with the same periods in the prior year.
Provision for Income Taxes
We recognized
a net income tax
net expense of
approximately $500 and
a net income tax
net benefit of approximately
$17,000$5,000 for the three-month periods ended
MarchDecember 31, 2020 and 2019, respectively. We recognized
a net income tax
net expense of approximately $1,000 and
a net income tax benefit of approximately $8,000$1,000 for the
nine-monthsix-month periods ended
MarchDecember 31, 2020 and 2019, respectively. Income tax provisions in these periods primarily relate to estimated taxes, penalties, and interest associated with uncertain tax positions.
As of each reporting date, we considermanagement considers new evidence, both positive and negative, that could impact ourits view with regard to future realization of deferred tax assets. Beginning in 2014, wemanagement determined that negative evidence outweighed the positive evidence and established a full valuation allowance against our deferred tax assets, which we have continued to maintainassets. We maintained a full valuation allowance against our deferred taxes as of MarchDecember 31, 2020 and June 30, 2019.2020.
Liquidity and Capital Resources
AsThe impact of the COVID-19 pandemic on the global and domestic economy is currently not fully known. With the dramatic increase in new and variant strains of COVID-19 infection levels around the world, many geographical regions, including some parts of the U.S., are reimposing tighter social and business restrictions in an effort to prevent further outbreak of COVID-19. Accordingly, the world continues to adapt to the
ongoing COVID-19 pandemic and its
adverse effects on global economics and business
operations, the outbreakoperations. The impact of
the coronavirus and the impact that the COVID-19 pandemic
has had on the wider economy has placedcontinues to place unprecedented pressures on
global and U.S. businesses including our own.
The continuedongoing spread of COVID-19 has also ledthe coronavirus disease continues to lead to business disruption and volatility in the global capital markets, which, depending on future developments, including the success of the global vaccine efforts to control the spread of the underlying virus, could further adversely impact our capital resources and liquidity in the future.
We have becomeremain increasingly focused on
the COVID-19 pandemic and are continually evaluating its potential
effect on our business and liquidity
issues and
debt incurrence capacity. Accordingly, faced with the prospect of significantly declining cash flows, we evaluated the possibility of raising additional capital through loans, debt or access to other capital transactions. On March 27, 2020, the CARES Act was signed into law, which, along with earlier issued Internal Revenue Service guidelines, provides for deferral of certain taxes. The CARES Act, among other things, contains economic relief programs in the form of loans and grants for small businesses.resources.
In AprilCapital Structure and Long-Term Debt
As disclosed above, on June 18, 2020, we applied for areceived the proceeds from our PPP Loan, pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. The application was approved on May 3, 2020 forPPP Loan in the principal amount of $965,000 butwas disbursed by the PPP Loan has not yet been disbursedLender pursuant to us. There is no guarantee that we will receive the principal amount of the PPP Loan.Promissory Note, dated June 15, 2020.
Under the CARES Act and the Promissory Note, loan forgiveness is available, subject to certain conditions, for the sum of documented payroll costs, covered rent payments, and covered utilities during the measurement24-week period beginning on the date of first disbursement of the PPP Loan. For purposes of the CARES Act, payroll costs exclude cash compensation of an individual employee in excess of $100,000, prorated annually. Not more than 25%40% of the forgiven amount can be attributable to non-payroll costs. The receipt of these funds, and the forgivenessAlthough we currently believe that our use of the loan attendant to these funds, is dependent on our having initially qualifiedPPP Loan will meet the conditions for forgiveness for a portion of the loan and qualifying for the forgiveness of such loan based onPPP Loan, we cannot assure our future adherence to the forgiveness. criteria and that the PPP Loan will be forgiven, in whole or in part.
On April 10, 2020, we also applied for capital relief pursuant to the Economic Injury Disaster Loan Program, or the EIDL Program, also under the CARES Act and administered by the SBA. To date, we have been notified by the SBA that our EIDL Program application is currently being processed and that we will be notified when there is a change to our application.
As permitted by the CARES Act, to enhance cash flow and to help maintain operations and fund current payroll requirements, we are also deferring payment of the employer’s share of Social Security tax payable currently to the federal government. The
deferred employment tax for the measurement period is payable over the next two years - with half of the required amount to be paid by December 31, 2021 and the other half by December 31, 2022. In addition, the CARES Act provides that existing
alternative minimum tax, or AMT credit carryforwards are now eligible for acceleration and refundable AMT credits are to be completely refunded to companies for taxable years beginning in 2019, or by election, taxable years beginning in 2018.
For us, this meansAccordingly, we elected to have the AMT tax completely refunded and filed a refund claim for the remaining AMT tax credit. The full amount of the remaining balance of our AMT credit refund in the amount of approximately
$270,000 will be completely refundable with$272,000 was refunded by the
filing of our Fiscal 2020 federal income tax return. Accordingly, the full amount of our AMT credit refund has been classified as current as of the quarter ended March 31,Internal Revenue Service in October 2020.
We also intend to take advantage of COVID-19 related tax credits for required paid leave provided by us. These eligible tax credits are determined by qualified emergency paid sick and expanded family and medical leave wages pursuant to the Families First Coronavirus Response Act, or the FFCRA. Under the FFCRA, we must providehave provided employees with paid federal sick and expanded family and medical leave benefits for which we may be reimbursed by the government through payroll tax credits. Qualifying wages for tax credit purposes under the FFCRA are those paid to an employee who takes leave under the FFCRA for a qualifying reason, up to the applicable per diem and aggregate payment caps. Applicable tax credits also extend to the employer’s share of amounts paid or incurred to maintain a group health plan.
The Consolidated Appropriations Act, 2021, or the Act, which is the latest federal stimulus relief bill for the COVID-19 pandemic, was signed into law on December 27, 2020. Notably, this legislation provides that employers who received a PPP loan may also qualify for the Employee Retention Credit, or ERC, once certain shutdown-related gross receipts decline eligibility hurdles are met. Previously, pursuant to the CARES Act, taxpayers that received a PPP loan were not eligible for the ERC and this change is retroactive to March 27, 2020. While we have had minimal short-term shutdowns related to the COVID-19 pandemic such that we have not utilized this aid, if future shutdowns are mandated and more extensive, we may be eligible to claim the ERC.
Finally, as permitted by the NC COVID-19 Relief Act, we will receive a tax credit towards our contributions to the North Carolina Unemployment Insurance Fund, which will also serve to further enhance future cash flow.
As a component of our liquidity and capital structure, we have an effective shelf registration statement on Form S-3 on file with the SEC which 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 approximately $13.99 million remains available after giving effect to our June 2019 public offering, including the impact of the partial exercise of the underwriters’ over-allotment option, described below. 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 are in turn, subject to the disruption and volatility being caused by the currentongoing COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us.
OnFinancing Activities
In June 11, 2019, we completed an underwritten public offering of 6,250,000 newly issued shares of common stock, at a price to the public of $1.60 per share, pursuant to our effective shelf registration statement on Form S-3. Net proceeds from the offering were approximately $9.06 million, net of the underwriting discount and fees and expenses. Pursuant to the terms of the underwriting agreement entered into in connection with this offering, the underwriters were granted a 30-day option to buy up to an additional 937,500 shares of our common stock to cover over-allotments. Pursuant to the partial exercise of the underwriters’ over-allotment option, onin July 3, 2019, we issued an additional 630,500 shares of our common stock at a price of $1.60 per share for net proceeds of approximately $932,000, net of the underwriting discount and fees and expenses of approximately $76,000.$77,000. After giving effect to the partial exercise of the over-allotment option, we sold an aggregate of 6,880,500 shares of our common stock at a price of $1.60 per share with total gross proceeds of approximately $11.01 million, before deducting the underwriting discount and fees and expenses of approximately $1.02 million. During earlyEarly during Fiscal 2020, we began using the aggregate net proceeds of approximately $9.99 million from the offering for marketing and for general corporate and working capital purposes.purposes. However, in response to the COVID-19 pandemic and its impact on consumer confidence and spending, management drastically reduced related advertising and digital marketing expenditures in mid-March 2020. We will continue to monitor and adjust our advertising and digital marketing and professional services expenditure levels to correspond to the e-commerce market disruption and volatility being caused by the ongoing COVID-19 pandemic. However, we plan to maintain these reduced advertising and digital marketing expenditure levels for the foreseeable future.
As discussed above, on June 18, 2020 we received a PPP Loan in the principal amount of $965,000 from the Lender pursuant to a Promissory Note dated June 15, 2020. The Promissory Note matures June 18, 2022 and may be extended with the consent of the Lender under the provisions of the CARES Act. The Promissory Note bears interest at a fixed rate of 1% per annum. Pursuant to the terms of the Promissory Note, monthly principal and interest payments in the amount of approximately $41,000 will commence on April 1, 2021. For financial reporting purposes as of December 31, 2020, the classification of the current maturity of this long-term debt assumes there will be no principal forgiveness and principal repayment for the full outstanding principal amount of the PPP Loan will be spread in equal monthly installments over the period from April 1, 2021 through the maturity date of the Promissory Note.
We did not provide any collateral or guarantees for the PPP Loan, nor did we pay any facility charge to obtain the PPP Loan. The Promissory Note provides for customary events of default, including, among others, those relating to failure to make payment and breaches of representations. We may prepay the principal of the PPP Loan at any time without incurring any prepayment charges.
Operating Activities and Cash Flows
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of MarchDecember 31, 2020, our principal sources of liquidity were cash, cash equivalents and restricted cash totaling $11.90$16.87 million, trade accounts receivable net, of $1.65$3.06 million, and net current inventory of $5.32$12.07 million, as compared to cash and cash equivalents and restricted cash totaling $13.01$14.62 million, trade accounts receivable net, of $1.96 million,$671,000, and net current inventory of $11.91$7.44 million as of June 30, 2019.2020. As described more fully below,herein, we also have long-term debt in the amount of $965,000, of which $579,000 is classified as its current maturity as of December 31, 2020, and access to a $5.00 million asset-based revolving credit facility with White Oak, or the White Oak Credit Facility.
During the ninesix months ended MarchDecember 31, 2020, our working capital decreasedincreased by approximately $8.91$9.94 million to $14.26$27.36 million from $23.17$17.42 million at June 30, 2019.2020. As described more fully below, the decreaseincrease in working capital at MarchDecember 31, 2020 is primarily attributable to an increase in accounts payable, a decrease in our allocation of inventory from long-term to short-term, an increase in short-term operating lease liabilities resulting from the adoption of the new accounting standard as of July 1, 2019, and a decrease inour accounts receivable. These factors were offset partially by a decrease in accrued expenses and other liabilities, an increase in prepaid expenses and other assets, andreceivable, an increase in our cash, cash equivalents, and restricted cash resulting from cash provided by financing activities.our operations, a decrease in our accounts payable, an increase in our prepaid expenses and other assets, and a decrease in our short-term operating lease liabilities. These factors were offset partially by an increase in the current maturity of our long-term debt and an increase in our accrued expenses and other liabilities.
During the ninesix months ended MarchDecember 31, 2020, approximately $1.57$2.41 million of cash was usedprovided by our operations. The primary drivers underlyingof our use of cash flows from operations were the unfavorablefavorable effect of our net lossincome in the amount of $5.13$3.39 million; a decrease in inventory of $1.86 million; a decrease in prepaid expenses and other assets of $62,000; and an increase in inventoryaccrued income taxes in the amount of approximately $3.56$1,000. In addition, the net effect of non-cash items included in net income totaling $1.25 million resulting from lower quantitiesalso favorably impacted net cash provided by operating activities during the six months ended December 31, 2020. These factors were offset partially by an increase in accounts receivable of inventory items sold as$3.07 million; a resultdecrease in accounts payable of lower period sales stemming from the impact of the COVID-19 pandemic;$816,000; and a decrease in accrued expenses and other liabilities of $479,000. These factors were offset partially by a decrease in accounts payable of $754,000; an increase in prepaid expenses and other assets of $326,000; and a decrease in accounts receivable of $51,000. In addition, the net effect of the changes in combined non-cash items totaling $6.47 million also favorably impacted net cash used in operating activities during the nine months ended March 31, 2020.$274,000.
Accounts receivable decreasedincreased principally due to decreasedthe increased level of sales during the threesix months ended MarchDecember 31, 2020 as a result ofcompared with the effects thatsales during the COVID-19 pandemic and the impact that the global economy had on our Traditional segment customers.period leading up to June 30, 2020. As a result of the COVID-19 pandemic, we offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy customers during the three months ended March 31,first half of Fiscal 2021 and second half of Fiscal 2020. As a resultBecause of the ongoing impact of the pandemic on the global economy, the extension of these terms may not immediately increase liquidity as a result of ongoing current-period sales, which we expect to continue to be pressured due to the effects of the ongoing COVID-19 pandemic. In addition, we believe our competitors and other vendors in the wholesale jewelry industry have expanded their use of extended payment terms and, in aggregate, we believe that, through our use of extended payment terms, we provide a competitive response in our market during the current global economic environment. We believe that we are unable to estimate the impact of these actions on our net sales, but we believe that if we ceased providing extended payment terms, we believe we would not be at a competitive disadvantage for some Traditional segment customers in the marketplace during this timeeconomic period and that our net sales and profits would likely be adversely impacted.
We manufactured approximately
$6.38$6.36 million in finished jewelry and
$9.04$3.76 million in loose jewels, which includes the cost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production, during the
ninesix months ended
MarchDecember 31, 2020. We expect our purchases of precious metals and labor to
fluctuate in conjunction with the levels ofincrease as we increase our finished jewelry business. In addition, the price of gold has increased significantly over the past decade,
and more significantly over the last 12 months, resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry.
Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with reduced sales levels during prior periods in which the purchase commitments were in effect, have resulted in levels of inventories that are higher than we might otherwise maintain. As of MarchDecember 31, 2020 and June 30, 2019, $26.352020, $16.59 million and $21.82$23.19 million, respectively, of our inventories were classified as long-term assets. Loose jewel sales and finished jewelry that we manufacture will utilize both the finished goods loose jewels currently on-hand and, as we deplete certain shapes and sizes, our on-hand raw material SiC crystals of $3.95$2.06 million and new raw material that we purchase pursuant to the Supply Agreement.
Our more detailed description of our inventories is included in Note
5 to our
condensedcondensed consolidated financial statements in Part I, Item 1, “Financial Statements”, of this Quarterly Report on Form 10-Q.10-Q.
34As of December 31, 2020, we had approximately $309 of remaining federal income tax credits that expire in 2021 and can be carried forward to offset future income taxes. As of December 31, 2020, we also had a federal tax net operating loss carryforward of approximately $23.72 million expiring between 2022 and 2037, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $20.12 million expiring between 2023 and 2033; and various other state tax net operating loss carryforwards expiring between 2021 and 2040, which can be used to offset against future state taxable income.
On December 12, 2014, we entered into the Supply Agreement with Cree. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties. Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement, as amended, also provides for the exclusive production of our premium moissanite product, Forever One™ and to provideprovided us with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following the expiration of the initial term. In addition, the amendment to the Supply Agreement was amended further to establishestablished a process by which Cree may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Cree has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 20232025 is approximately $52.95 million, of which approximately $36.51$35.57 million remains to be purchased as of MarchDecember 31, 2020.
During the ninesix months ended MarchDecember 31, 2020, we purchased approximately $7.47$1.03 million of SiC crystals from Cree.Cree pursuant to the terms of the Supply Agreement, as amended. Going forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, together with future cash expected to be provided by operating activities and, if necessary, our White Oak Credit Facility, to finance our purchase commitment under the Supply Agreement, as amended.
AsLine of March 31, 2020, we had approximately $102,000 of remaining federal income tax credits that expire between 2020 and 2021, and all of which can be carried forward to offset future income taxes. As of March 31, 2020, we also had a federal tax net operating loss carryforward of approximately $23.39 million expiring between 2030 and 2037, which can be used to offset against future federal taxable income; North Carolina tax net operating loss carryforwards of approximately $20.20 million expiring between 2023 and 2033; and various other state tax net operating loss carryforwards expiring between 2021 and 2034, which can be used to offset against future state taxable income.Credit
On July 13, 2018, we and our wholly ownedwholly-owned subsidiary, charlesandcolvard.com, LLC, collectively referred to as the Borrowers, obtained the $5.00 million asset-based revolving White Oak Credit Facility. The White Oak Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions. The White Oak Credit Facility, which matures on July 13, 2021, is guaranteed by Charles & Colvard Direct, LLC, another of our wholly ownedwholly-owned subsidiaries. Under the terms of the White Oak Credit Facility, the Borrowers must maintain at least $500,000 in excess borrowing availability at all times. The White Oak Credit Facility contains no other financial covenants.covenants.
Advances under the White Oak Credit Facility may be either revolving or non-revolving. During the first year of the term of the White Oak Credit Facility, revolving advances accrued interest at a rate equal to one-month LIBOR (reset monthly, and subject to a 1.25% floor) plus 3.75%, and non-revolving advances accrued interest at such LIBOR rate plus 4.75%. Thereafter, the interest margins will reduce upon our achievement of a specified fixed charge coverage ratio. However, advances are in all cases subject to a minimum interest rate of 5.50%. Interest is calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate 2% in excess of the rate otherwise applicable.applicable.
As of
MarchDecember 31, 2020, we had not borrowed against the
White Oak Credit Facility. As a result of our diminished borrowing base as of December 31, 2020, which is tied to our accounts receivable, our ability to draw down funds from the White Oak Credit Facility is currentlymay from time to time be restricted.
Liquidity and Capital Trends
We believe that our existing cash and cash equivalents and access to other working capital resources, including but not limited to the availability ofaccess to federal government economic relief programs pursuant to the CARES Act, including possible loans,our existing PPP Loan and the available conditional forgiveness of certain loans, the deferral of certain taxes,PPP Loan in whole or in part, access to available federal and state tax-related considerations, the issuance of equity securities, together withand future cash expected to be provided by operating activities combined will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.
Our future capital requirements and the adequacy of available funds will depend on many factors, including the continuedongoing spread of COVID-19 that could lead to further disruption and volatility in the global capital markets as well as its impact on our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewels and lab grown diamonds business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and the risk factors described in more detail in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q,, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2019,September 30, 2020, and in Part I, Item 1A of our 20192020 Annual Report.Report on Form 10-K. Currently, we have the White Oak Credit Facility through its expiration on July 13, 2021, that we believe would help 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.
As of December 31, 2020, we had not borrowed against the 35White Oak Credit Facility.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting despite the fact that our corporate employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of COVID-19 on our internal control over financial reporting to minimize the impact on its design and operating effectiveness. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. During the three months ended MarchDecember 31, 2020, 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 reportingreporting.
PART II – OTHER INFORMATION
There are no material pending legal proceedings to which we are a party or to which any of our property is subject.
We discuss in our Annual Report on Form 10-K for the fiscal year ended June 30, 20192020 and our Quarterly Report on Form 10-Q for the quarter December 31, 2019September 30, 2020 various risks that may materially affect our business. There have been no material changes to such risks, except asrisks.
On January 29, 2021, we entered into a third amendment, or Lease Amendment, to our lease agreement, or Lease Agreement, with SBP Office Owner, L.P., successor-in-interest to Southport Business Park Limited Partnership, relating to space leased by us for our corporate headquarters at 170 Southport Drive, Morrisville, North Carolina 27560. The Lease Amendment, among other things, (i) extends the base term of the Lease Agreement from November 1, 2021 through October 31, 2026, or the Extension Period; (ii) sets forth the minimum monthly rents, including a specified rent abatement, during the Extension Period; (iii) provides for an allowance by the landlord to reimburse us for certain direct costs we incur for improvements to the leased real property; and (iv) provided there is no outstanding uncured event of default under the Lease Agreement, gives us the option to extend the term of the Lease Agreement beyond October 31, 2026 for one additional five-year period, in each case on the terms and subject to the conditions set forth below.
The COVID-19 pandemic and related global economic impacts have adversely affectedtherein. During the Extension Period, our business and are expectedminimum monthly rent payments range from approximately $71,000 to continue to adversely affect our business, financial condition and results of operations. The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020, and has negatively affected the U.S. and global economy. In response to this pandemic, federal, state, county and local governments and public health organizations and authorities around the world have implemented a variety of measures intended to control the spread of the virus including quarantines, “stay-at-home” orders, travel restrictions, school closures, business limitations and closures, social distancing and hygiene requirements. These measures have adversely affected workforces, customers, economies and global supply chains, and resulted in significant travel and transport restrictions – all of which have combined to lead to an economic downturn. It has also disrupted the normal operations of many businesses, including ours.$79,000 each month.
As a result of the COVID-19 pandemic, state and local governmental mandates have required a forced shutdown of our facility which may impact us for an extended period. In response, a significant number of our employees are currently working from home and we have furloughed 50% of our employees, materially impacting our productivity. This widespread outbreak could also adversely affect our workforce in terms of serious health issues and absenteeism, which could further materially impact our productivity. The pandemic has also interfered with general commercial activity related to our supply chain, including our raw material and components sources. We have experienced widespread instances of suppliers temporarily closing their operations, delaying order fulfillment or limiting their production, impacting our ability to produce finished goods and deliver to our customers. In our Traditional segment, our brick-and-mortar customers began closing their stores to foot traffic in March, with tentative plans to re-open on a rolling schedule that may lead into the fall timeframe or later. We have also experienced widespread instances of distributors reducing or closing their operations, impacting our ability to maintain significant levels of sales through our wholesale sales customers. In addition, trade shows, industry events and product demonstrations have been preemptively cancelled for the critical production season leading up to the calendar year-end 2020 holiday season. As a result, our selling activities and our ability to convert those activities into sales have been, and we expect will continue to be, adversely impacted by the pandemic. In our Online Channels segment, our transactional website charlesandcolvard.com remains open, but is restricted to available stock and the limited production capacity of functioning suppliers. In addition, our ability to draw down from our existing credit facility with White Oak is currently restricted as a result of our diminished borrowing base, which is tied to our accounts receivable.
The extent to which the COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments that are uncertain and that we are not able to predict at this time. These factors include: the severityforegoing is only a summary description of the virus; the duration and scopeterms of the pandemic; governmental, business, individualLease Amendment, does not purport to be complete and other actions takenis qualified in responseits entirety by reference to the pandemic; the effect on our suppliers and distributors, and disruptionsLease Amendment, which is filed as Exhibit 10.5 to the global supply chain; the impact on economic activity; the extent and duration of the impact on Traditional segment partner confidence and order placements; the effect on consumer demand and their buying patterns for our products; the effect of any closures or other changes in operations of our and our suppliers’ and distributors’ facilities; the health of and the effect on our employees and our ability to meet staffing needs in our manufacturing and distribution facility and other critical functions, particularly if employees become ill, are quarantined as a result of exposure or are reluctant to show up for work; our ability to sell our products worldwide and provide customer support, including as a result of travel restrictions, work from home requirements and arrangements and other restrictions or changes in behavior or preferences for interactions; restrictions or disruptions to transportation, including reduced availability of ground, sea or air transport; the ability of our distributors, retailers, third party customers and consumers to pay for our products; the effect of the fair value measurement of certain assets or liabilities; and the effect on our ability to access capital, including government stimulus funds, on favorable terms and continue to meet our liquidity needs.
Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession that has occurred or may continue for the foreseeable future. The COVID-19 pandemic could also exacerbate or trigger other risks discussed in our 2019 Annualthis Quarterly Report and subsequent Quarterly Reports on Form 10-Q any of which could have a material and adverse effect on our business, results of operations and financial condition. We continue to monitor the pandemic, have actively implemented policies and procedures to address the current business and economic environment, and may adjust our current policies and procedures as more information and guidance become available to address the evolving situation.incorporated herein by reference.
Our anticipated PPP Loan may not be forgiven or may subject us to challenges and investigations regarding qualification for the loan. On May 3, 2020, our application for a PPP Loan was approved for the principal amount of $965,000 pursuant to the Paycheck Protection Program under the CARES Act, as administered by the SBA. Because the PPP Loan has not yet been disbursed to us, there is no guarantee that we will receive the principal amount of the PPP Loan. Assuming we receive the PPP Loan, pursuant to Section 1106 of the CARES Act we may apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of the loan proceeds for qualifying expenses, which include payroll costs, rent, and utility costs over the eight-week measurement period following receipt of the loan proceeds.
The SBA continues to develop and issue new and updated guidance regarding the Paycheck Protection Program loan application process, including guidance regarding required borrower certifications and requirements for forgiveness of loans made under the program. We continue to track the guidance as it is released and assess and re-assess various aspects of its application as necessary based on the guidance. However, given the evolving nature of the guidance and based on our projected ability to use the loan proceeds for qualifying expenses, we cannot give any assurance that the anticipated PPP Loan will be forgiven in whole or in part.
Additionally, the PPP Loan application required us to certify that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. While we made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan and that our anticipated receipt of the PPP Loan is consistent with the broad objectives of the Paycheck Protection Program of the CARES Act, the certification described above does not contain any objective criteria and is subject to interpretation. In addition, the SBA has stated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good faith belief that we satisfied all eligibility requirements for the PPP Loan, we are found to have been ineligible to receive the PPP Loan or in violation of any of the laws or regulations that apply to us in connection with the PPP Loan, including the False Claims Act, we may be subject to penalties, including significant civil, criminal and administrative penalties and could be required to repay the PPP Loan. In the event that we seek forgiveness of all or a portion of the anticipated PPP Loan, we will also be required to make certain certifications which will be subject to audit and review by governmental entities and could subject us to significant penalties and liabilities if found to be inaccurate. In addition, our anticipated receipt of the PPP Loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial condition.
Our failure to maintain compliance with Nasdaq’s continued listing requirements could result in the delisting of our common stock. Our common stock is currently listed on The Nasdaq Capital Market. In order to maintain this listing, we must satisfy minimum financial and other requirements. On March 24, 2020, we received a notification letter from Nasdaq’s Listing Qualifications Department indicating that we are not in compliance with Nasdaq Listing Rule 5550(a)(2), because the minimum bid price of our common stock on the Nasdaq Capital Market has closed below $1.00 per share for 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have 180 calendar days to regain compliance with the minimum bid requirement; however, due to the market disruption caused by the ongoing COVID-19 pandemic, Nasdaq has tolled the requirement for meeting the minimum bid price until June 30, 2020. As such, we have until December 4, 2020, to achieve compliance with the minimum bid price requirement. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least ten consecutive business days before December 4, 2020. If we do not regain compliance during this cure period, we expect that Nasdaq will provide written notification to us that our common stock will be delisted. At that time, we may appeal Nasdaq’s delisting determination to a Nasdaq hearing panel.
While we intend to engage in efforts to regain compliance, and thus maintain our listing, 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 Nasdaq Capital Market requirements in the future and Nasdaq determines to delist our common stock, the delisting could substantially decrease trading in our common stock; adversely affect the market liquidity of our common stock as a result of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws; 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.
The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
Exhibit No. | Description
|
| | |
| Amendment to 2015 EmploymentLetter Agreement, dated April 9, 2020, by andeffective March 22, 2010, between Charles & Colvard, Ltd. and Suzanne Miglucci (incorporated herein by reference to Exhibit 10.1 to our Current report on Form 8-K, as filed with the SEC on April 9, 2020)Cree, Inc.** |
| | |
| Amendment to 2017 EmploymentLetter Agreement, dated April 9, 2020,effective February 8, 2013, between Charles & Colvard, Ltd. and Cree, Inc.** |
| |
| Second Amendment to Letter Agreement, effective September 5, 2013, between Charles & Colvard, Ltd. and Cree, Inc.** |
| |
| Exclusive Supply Agreement, effective as of December 12, 2014 by and between Charles & Colvard, Ltd. and Clint J. Pete (incorporated herein by reference to Exhibit 10.2 to our Current report on Form 8-K, as filed withCree, Inc., and, solely for purposes of Section 6(c) of the SEC on April 9, 2020)Exclusive Supply Agreement, Charles & Colvard Direct, LLC, and Moissanite.com, LLC** |
| | |
| Third Amendment to 2017 EmploymentLease Agreement, dated April 9, 2020, by andJanuary [00], 2021, between Charles & Colvard, Ltd. and Don O’Connell (incorporated herein by referenceSBP Office Owner, L.P., successor to Exhibit 10.3 to our Current report on Form 8-K, as filed with the SEC on April 9, 2020)Southport Business Park Limited Partnership |
| | |
| 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 |
| | |
| 101 | The following materials from Charles & Colvard, Ltd.’s Quarterly Report on Form 10-Q for the quarterquarterly period ended MarchDecember 31, 2020 formatted in 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 Changes in Shareholders’ Equity; (iv) Condensed Consolidated Statements of Cash Flows;Flow; and (v) Notes to Condensed Consolidated Financial Statements. |
| |
| ** | Asterisks located within the exhibit denote information which has been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K because it is both not material and would cause in all likelihood competitive harm to us if publicly disclosed. |
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 |
May 21, 2020February 4, 2021
| | Suzanne MiglucciDon O’Connell
|
| | | President and Chief Executive Officer |
| | | |
| | By: | /s/ Clint J. Pete |
May 21, 2020February 4, 2021
| | Clint J. Pete |
| | | Chief Financial Officer |
| | | (Principal Financial Officer and Chief Accounting Officer) |
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