| BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES | 2.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation – The accompanying consolidated financial statements as of and for the fiscal years ended June and include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC;
including its wholly-owned subsidiary, moissaniteoulet.com, LLC, which was formed and incorporated as of February ; Charles & Colvard Direct, LLC; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was entered into dormancy as of September following its re-activation in December Charles & Colvard (HK) Ltd. previously became dormant in the quarter of and has had no operating activity since Charles & Colvard Direct, LLC,
had no operating activity during the fiscal years ended June
or All intercompany accounts have been eliminated . Use of Estimates – The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As future events and their effects, including the impact of the
COVID- pandemic and the related responses, cannot be fully determined with precision, actual results of operations, cash flow, and financial position could
differ significantly from estimates. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets,
stock-based compensation, and revenue recognition. Changes in estimates are reflected in the condensed consolidated financial statements in the period in which the change in estimate occurs Recently Issued Accounting Pronouncements – Effective
July the Company adopted the Financial Accounting Standards
Board (“FASB”) Accounting Standards Update (“ASU”) - Income Taxes: Simplifying the Accounting for Income Taxes (“ASU - ”) that provides guidance for the simplification of the accounting for income
taxes that is intended to reduce the complexity while maintaining or improving the usefulness of tax disclosure information in an entity’s financial statements. The resulting impact of ASU - did not have a material impact on the Company’s consolidated financial statements In March and as updated in January in response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly,
the risk of cessation of the London Interbank Offered Rate (“LIBOR”), the FASB issued ASU - Reference Rate Reform (Topic 848) (“ASU - ”), which provides guidance to ease the burden in accounting for or recognizing the effects of referenced interest rate reform on financial reporting. ASU - is elective and may be applied as of March through December As described in more detail in Note
“Debt”, borrowings under the Company’s line of credit during the fiscal year ended June would have been based on a rate equal to the LIBOR. As of June the Company had not borrowed against its line of credit, and therefore, has not elected to apply ASU - as of or for the fiscal year ended June Cash and Cash Equivalents – Restricted Cash Restricted Cash – In accordance with the
terms of the Company’s cash collateralized credit facility from JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), which the Company entered into on July and as amended on July the Company is required to keep in a cash deposit account held by JPMorgan Chase. Such amount was held as security for the Company’s credit facility from JPMorgan Chase. Accordingly, during the term of the JPMorgan Chase
credit facility, the cash deposit held by JPMorgan Chase is classified as restricted cash for financial reporting purposes on the Company’s Consolidated Balance Sheets For additional information regarding the Company’s cash collateralized credit
facility with JPMorgan Chase, see Note “Debt” and Note
“Subsequent Event.” Pursuant to the terms and conditions of the Company’s broker-dealer agreement with
Oppenheimer & Co., Inc. (“Oppenheimer”), with whom the Company has engaged to transact common stock share repurchases in connection with its stock repurchase program, the Company is required to maintain a funded liquid margin account held
by Oppenheimer for the benefit of the Company. The purpose of this account is to fund the Company’s common stock purchases and any underlying transaction costs and fees. Depending upon the level and timing of stock repurchase activity, the
funded margin account cash balance will fluctuate from time to time. At June cash in the amount of approximately ,000 was held by Oppenheimer. Such cash amount held by Oppenheimer was classified as restricted cash for financial reporting purposes on the Company’s Consolidated Balance Sheets. For additional information regarding the Company’s stock repurchase program, see Note “Shareholders’ Equity and Stock-Based Compensation.” In accordance with cash management process requirements related to the Company’s former
asset-based revolving credit facility from White Oak Commercial Finance, LLC (“White Oak”), which was terminated by the Company on July in accordance with its terms, such credit facility contained access and usage restrictions on certain cash deposit balances for periods of up to two business days during which time the deposits were held by White Oak
for the benefit of the Company. During the period these cash deposits were held by White Oak, such amounts were classified as restricted cash for financial reporting purposes on the Company’s Consolidated Balance Sheets. For additional information regarding termination of the Company’s asset-based revolving
credit facility with White Oak, see Note “Debt.” The reconciliation of cash, cash equivalents, and restricted cash, as presented on the Consolidated Statements of Cash Flows, consists of the following as of the dates presented:
June 30,
2022
2021
Cash and cash equivalents
$
15,668,361
$
21,302,317
Restricted cash
5,510,979
144,634
Total cash, cash equivalents, and restricted cash
$
21,179,340
$
21,446,951 Concentration of Credit Risk – 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. See Note 14, “Major Customers and Concentration of Credit Risk”, for further discussion of credit risk within trade accounts receivable. Accounts Receivable Reserves – The following are reconciliations of the allowance for sales returns balances for the periods presented:
Year Ended June 30,
2022
2021
Balance, beginning of year
$
675,000
$
704,000
Additions charged to operations
6,012,069
5,631,415
Sales returns
(6,096,069
)
(5,660,415
)
Balance, end of year
$
591,000
$
675,000 The second reserve is an allowance for uncollectible accounts for the measurement of estimated credit losses resulting from the failure of the Company’s
customers to make required payments. This allowance reduces trade accounts receivable to an amount expected to be collected. The Company generally uses internal collection efforts, which may include its sales personnel as it deems appropriate. After all internal collection efforts have been exhausted, the
Company generally writes-off the underlying account receivable. Any accounts with significant balances are reviewed separately to determine an appropriate allowance based on the facts and circumstances of the specific
underlying customer account. on these criteria,
management determined that allowances for uncollectible accounts receivable of $85,000 and $71,000 at June 30, 2022 and 2021, The following are reconciliations of the allowance for uncollectible accounts balances as of the periods presented:
Year Ended June 30,
2022
2021
Balance, beginning of year
$
71,000
$
79,000
Additions charged to operations
14,000
2,030
Write-offs, net of recoveries
-
(10,030
)
Balance, end of year
$
85,000
$
71,000 Although the Company believes that its reserves are adequate, if the financial condition of its customers deteriorates, resulting in an impairment of their
ability to make payments, or if it underestimates the allowances required, additional allowances may be necessary, Inventories - Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Each accounting period, the Company evaluates the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves, which also
include significant estimates by management. The Company’s inventory-related valuation allowances are recorded in the aggregate rather than an individual item approach for each obsolescence, rework, and shrinkage valuation allowance. Property and Equipment – Property and equipment are stated at cost and are depreciated over
their estimated useful lives using the straight-line method as follows:
Machinery and equipment
5 to 12 years
Computer hardware
3 to 5 years
Computer software
3 years
Furniture and fixtures
5 to 10 years
Leasehold improvements
Shorter of the estimated useful life or lease term Intangible Assets – Impairment of Long-Lived Assets – whenever events or changes in
circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying value of the asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the impairment is measured as the amount by which the carrying value exceeds the fair value and such amount is recognized as an operating expense in the period in which the
determination is made. As of June 30, 2022, the Company did not identify any indicators of long-lived asset impairment. In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the
useful-life assumption would result in increased depreciation and amortization expense in the current period in which such determination is made, as well as in subsequent periods. Revenue Recognition – Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this
principle, the Company performs the following five steps: ( i ) identification of a contract with a customer; ( ii ) identification of any separate performance obligations; ( iii ) determination of the
transaction price; ( iv ) allocation of the transaction price to the performance obligations in the contract; and ( v ) recognition of revenue when the Company has satisfied the underlying performance obligations. The Company recognizes substantially all of its revenue at a point in time when
control of the Company’s goods has passed to the customer with the exception of consigned goods. The Company considers its sole performance obligation related to the shipment of goods satisfied at the time this control is transferred. Customer
payment terms for these shipments typically range between 30- and 90-days. The Company has elected to treat shipping and handling performed after control has transferred to customers as a fulfillment
activity, and additionally, has elected the practical expedient to report sales taxes on a net basis. The Company records shipping and handling expense related to product sales as cost of sales. The Company has a variable consideration element related to most of its contracts in the form of product return rights. At the time revenue is recognized,
an allowance for estimated returns is established and any change in the allowance for returns is charged against net sales in the current period. For the Company’s Traditional segment customers, the returns policy generally allows for the
return of jewels and finished jewelry with a valid reason for credit within 30 days of shipment. Online Channels segment customers
in both of the Company’s transactional websites, charlesandcolvard.com may also generally return purchases within in accordance with the Company’s returns policies as disclosed on its charlesandcolvard.com Periodically, the Company ships loose jewel goods and finished goods to Traditional segment customers on consignment terms. Under these consignment terms, the
customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to
one year. The Company’s Online Channels segment and Traditional segment customers are generally required to make payments on
consignment shipments within 30 to 60 days upon the customer informing the Company that it will keep the inventory. Accordingly, the Company does not recognize revenue on these consignment transactions until the earlier of ( i ii iii The Company presents disaggregated net sales by its Online Channels segment and its Traditional segment for both finished jewelry and loose jewels product lines. The
Company also presents disaggregated net sales by geographic area between the United States and international locations. For financial reporting purposes, disaggregated net sales amounts are presented in Note 3, “Segment Information and Geographic
Data.” Returns Asset and Refund Liabilities The Company maintains a returns asset account and a refund liabilities account to record the effects of its estimated product returns and sales returns allowance.
The Company’s returns asset and refund liabilities are updated at the end of each financial reporting period and the effect of such changes are accounted for in the period in which such changes occur. The Company estimates anticipated product returns in the form of a refund liability based on historical return percentages and current period sales levels.
The Company also accrues a related returns asset for goods expected to be returned in salable condition, less any expected costs to recover such goods, including return shipping costs that the Company may incur. As of June 30, 2022 and 2021,
the Company’s refund liabilities balances were $591,000 and $675,000, respectively, and are included as allowances for sales returns within accounts receivable, net, in the accompanying consolidated balance sheets. As of June 30, 2022 and 2021,
the Company’s returns asset balances were $260,000 and $252,000, respectively, and are included within prepaid expenses and other assets in the accompanying consolidated balance sheets Cost of Goods Sold – Advertising Costs – The Company also offers a cooperative advertising program to certain of its distributor and retail partners that reimburses, via a credit towards future purchases, a portion of their
marketing costs based on the customers’ net purchases from the Company and is subject to the customer providing documentation of all advertising performed that includes the Company’s products. For the fiscal years ended June 30, 2022 and 2021,
these approximate amounts were $792,000 and $380,000, respectively, and are included as a component of sales and marketing expenses. Because the Company receives a distinct good or service in exchange for consideration and the fair value of the benefit can
be reasonably estimated, these transactions are reflected as sales and marketing expenses. Advertising expenses, inclusive of the cooperative advertising program, for the fiscal years ended June 30, 2022 and 2021, were approximately $7.38 million and $4.25 million, respectively. Sales and Marketing – charlesandcolvard.com, LLC, wholly owned operating subsidiary . General and Administrative – Stock-Based Compensation – The Company recognizes compensation expense for stock-based awards
based on estimated fair values on the date of grant. Fair value of stock options using the Black-Scholes-Merton option pricing model is estimated on the date of grant utilizing certain assumptions for dividend yield, expected volatility,
risk-free interest rate, and expected lives of the awards, as follows: Dividend Yield. Expected Volatility. Volatility is a measure of the
amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. ; Risk-Free Interest Rate. Expected Lives. The expected lives of the issued stock
options represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the
application of management’s judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to
estimate the expected forfeiture rates of stock-based awards and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rates, the Company analyzes its historical forfeiture rates. If the Company’s actual
forfeiture rates are materially different from its estimates, or if the Company re-evaluates the forfeiture rates in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the
current period. Income Taxes – Net Income per Common Share – As of the dates presented, t he following table reconciles the differences between the basic and diluted net income per share presentations:
Year Ended June 30,
2022
2021
Numerator:
Net income
$
2,373,915
$
12,810,766
Denominator:
Weighted average common shares outstanding:
Basic
30,363,076
29,144,820
Effect of dilutive securities
952,952
1,087,747
Diluted
31,316,028
30,232,567
Net income per common share:
Basic
$
0.08 $ 0.44
Diluted
$
0.08 $ 0.42
F or the fiscal years ended June and
stock options to purchase approximately
shares and shares, respectively,
were excluded from the computation of diluted net income per common share because the exercise price of the stock options was greater than the average market price of the common shares or the effect of inclusion of such amounts would be
anti-dilutive to net income per common share. Approximately 45,000 shares of unvested restricted stock were excluded from the
computation of diluted net loss per common share as of June
because the shares were performance-based and the underlying conditions had not been met as of the year presented. There are no such
performance-based shares of unvested restricted stock excluded from the computation of basic and diluted net income per common share as of June because the underlying performance conditions for these restricted stock shares were met as of June |
