CHARLES & COLVARD LTD
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
For the quarterly period ended
December 31, 2023
OR
For the transition period from ______ to ______
Commission File Number:
000-23329
(Exact name of registrant as specified in its charter)
|
|
|
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
|
|
|
|
(Address of principal executive offices)
|
(Zip Code)
|
(
919
)
468-0399
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
|
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☒
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
☐ |
Accelerated filer
|
☐ | |
|
|
☒ |
|
Smaller reporting company
|
|
|
Emerging growth company
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No ☒
As of February 2, 2024, there were
30,344,955
shares of the registrant’s
common stock, no par value per share, outstanding.
CHARLES & COLVARD, LTD.
FORM 10-Q
For the Quarterly Period Ended December 31, 2023
|
|
|
Page
Number
|
|
PART I – FINANCIAL INFORMATION
|
||
|
Item 1.
|
Financial Statements
|
|
|
1
|
||
|
2
|
||
|
3
|
||
|
4
|
||
|
5
|
||
|
Item 2.
|
20 | |
|
Item 3.
|
33 | |
|
Item 4.
|
33
|
|
|
|
||
|
PART II – OTHER INFORMATION
|
||
|
Item 1.
|
34
|
|
|
Item 1A.
|
34
|
|
|
Item 2.
|
34
|
|
|
Item 5.
|
Other Information
|
34
|
|
Item 6.
|
35
|
|
|
36
|
||
PART I – FINANCIAL INFORMATION
| Item 1. |
Financial Statements
|
CHARLES & COLVARD, LTD.
|
|
December 31, 2023
(unaudited)
|
June 30, 2023 | ||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Restricted cash
|
|
|
||||||
|
Accounts receivable, net
|
|
|
||||||
|
Inventory, net
|
|
|
||||||
|
Note receivable
|
|
|
||||||
|
Prepaid expenses and other assets
|
|
|
||||||
|
Total current assets
|
|
|
||||||
|
Long-term assets:
|
||||||||
|
Inventory, net
|
|
|
||||||
|
Property and equipment, net
|
|
|
||||||
|
Intangible assets, net
|
|
|
||||||
|
Operating lease right-of-use assets
|
|
|
||||||
|
Other assets
|
|
|
||||||
|
Total long-term assets
|
|
|
||||||
|
TOTAL ASSETS
|
$
|
|
$
|
|
||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$
|
|
$
|
|
||||
|
Operating lease liabilities, current portion
|
|
|
||||||
|
Accrued expenses and other liabilities
|
|
|
||||||
|
Total current liabilities
|
|
|
||||||
|
Long-term liabilities:
|
||||||||
|
Noncurrent operating lease liabilities
|
|
|
||||||
|
Total long-term liabilities
|
|
|
||||||
|
Total liabilities
|
|
|
||||||
|
Commitments and contingencies (Note 9)
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
Common stock,
|
|
|
||||||
|
Additional paid-in capital
|
|
|
||||||
|
Treasury stock, at cost,
|
(
|
) |
(
|
) | ||||
|
Accumulated deficit
|
(
|
)
|
(
|
)
|
||||
|
Total shareholders’ equity
|
|
|
||||||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
|
$
|
|
||||
See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
(unaudited)
|
Three Months Ended December 31,
|
Six Months Ended December 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||
|
Net sales
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Costs and expenses:
|
||||||||||||||||
|
Cost of goods sold
|
|
|
|
|
||||||||||||
|
Sales and marketing
|
|
|
|
|
||||||||||||
|
General and administrative
|
|
|
|
|
||||||||||||
|
Total costs and expenses
|
|
|
|
|
||||||||||||
|
Loss from operations
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Other income (expense):
|
||||||||||||||||
|
Interest income
|
|
|
|
|
||||||||||||
|
Interest expense
|
(
|
) |
|
(
|
) |
|
||||||||||
|
Total other income (expense), net
|
|
|
|
|
||||||||||||
|
Loss before income taxes
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Income tax benefit
|
|
|
|
|
||||||||||||
|
Net loss
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Net loss per common share:
|
||||||||||||||||
|
Basic
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Diluted
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Weighted average number of shares used in computing net loss per common share:
|
||||||||||||||||
|
Basic
|
|
|
|
|
||||||||||||
|
Diluted
|
|
|
|
|
||||||||||||
See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
(unaudited)
| Six Months Ended December 31, 2023 | ||||||||||||||||||||||||
|
Common Stock
|
|
|||||||||||||||||||||||
|
Number of
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Treasury Stock
|
Accumulated
Deficit
|
Total
Shareholders’
Equity
|
|||||||||||||||||||
|
Balance at June 30, 2023
|
|
$
|
|
$
|
|
$ |
(
|
) |
$
|
(
|
)
|
$
|
|
|||||||||||
|
Stock-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Net loss
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Balance at September 30, 2023
|
|
$
|
|
$
|
|
$ |
(
|
) |
$
|
(
|
)
|
$
|
|
|||||||||||
|
Stock-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Cancellation of restricted stock
|
(
|
)
|
|
|
|
|
|
|||||||||||||||||
|
Net loss
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Balance at December 31, 2023
|
|
$
|
|
$
|
|
$ |
(
|
) |
$
|
(
|
)
|
$
|
|
|||||||||||
|
|
Six Months Ended December 31, 2022
|
|||||||||||||||||||||||
|
Common Stock
|
|
|||||||||||||||||||||||
|
Number of
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Treasury Stock |
Accumulated
Deficit
|
Total
Shareholders’
Equity
|
|||||||||||||||||||
|
Balance at June 30, 2022
|
|
$
|
|
$
|
|
$ |
(
|
) |
$
|
(
|
)
|
$
|
|
|||||||||||
|
Stock-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Cancellation of restricted stock
|
(
|
) |
|
|
|
|
|
|||||||||||||||||
|
Repurchases of common stock
|
(
|
) |
|
|
(
|
) |
|
(
|
) | |||||||||||||||
|
Net loss
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Balance at September 30, 2022
|
|
$
|
|
$
|
|
$ |
(
|
) |
$
|
(
|
)
|
$
|
|
|||||||||||
|
Stock-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Issuance of restricted stock
|
|
|
|
|
|
|
||||||||||||||||||
|
Net loss
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Balance at December 31, 2022
|
|
$
|
|
$
|
|
$ |
(
|
) |
$
|
(
|
)
|
$
|
|
|||||||||||
See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
(unaudited)
|
Six Months Ended December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Depreciation and amortization
|
|
|
||||||
|
Stock-based compensation
|
|
|
||||||
|
Provision for uncollectible accounts
|
|
|
||||||
|
Provision for sales returns
|
|
|
||||||
|
Inventory write-downs
|
|
|
||||||
|
Provision for accounts receivable discounts
|
|
|
||||||
|
Deferred income taxes
|
|
(
|
) | |||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
(
|
)
|
(
|
)
|
||||
|
Inventory
|
|
(
|
)
|
|||||
|
Prepaid expenses and other assets, net
|
|
|
||||||
|
Accounts payable
|
|
|
||||||
|
Accrued expenses and other liabilities
|
(
|
)
|
(
|
)
|
||||
|
Net cash used in operating activities
|
(
|
)
|
(
|
)
|
||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchases of property and equipment
|
(
|
)
|
(
|
)
|
||||
|
Payments for intangible assets
|
(
|
)
|
(
|
)
|
||||
|
Net cash used in investing activities
|
(
|
)
|
(
|
)
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from line of credit
|
|
|
||||||
|
Payments on line of credit
|
(
|
) |
|
|||||
|
Repurchases of common stock
|
|
(
|
) | |||||
|
Net cash used in financing activities
|
|
(
|
)
|
|||||
|
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
|
(
|
)
|
(
|
)
|
||||
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
||||||
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
|
$
|
|
$
|
|
||||
|
Supplemental disclosure of cash flow information:
|
||||||||
|
Cash paid during the period for income taxes
|
$
|
|
$
|
|
||||
|
Cash paid during the period for interest expense
|
|
|
||||||
See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
| 1. |
DESCRIPTION OF BUSINESS
|
Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation, was founded in 1995. The Company manufactures, markets, and distributes
Charles & Colvard Created Moissanite
®
(hereinafter referred to as moissanite or moissanite jewels) and
finished jewelry featuring moissanite, including
Forever One™
, the Company’s premium moissanite gemstone brand, for sale in the worldwide fine jewelry market. The Company also markets and distributes
Caydia
®
lab grown diamonds and finished jewelry featuring lab grown diamonds and created color for sale in the worldwide fine jewelry market.
The Company sells loose moissanite jewels, loose lab grown diamonds, and finished jewelry featuring, moissanite, lab grown diamonds, and created color at wholesale prices to
distributors, manufacturers, retailers, and designers, including some of the largest distributors and jewelry manufacturers in the world.
In addition, in May 2023, the Company launched charlesandcolvarddirect.com,
a direct-to-wholesaler sales portal, which is a gemstone product disposition wholesale outlet.
The Company’s finished jewelry and loose moissanite jewels and lab grown diamonds that are mounted into fine jewelry by other
manufacturers are sold at retail outlets and via the Internet. The Company sells at retail prices to end-consumers through its own
Charles & Colvard Signature
Showroom
, which opened in October 2022, and through its wholly-owned operating subsidiary, charlesandcolvard.com, LLC, which includes the Company’s own transactional website madeshopping.com, third-party online marketplaces, drop-ship,
and other pure-play, exclusively e-commerce outlets. The Company also sells at discount retail prices to end-consumers through moissaniteoutlet.com, LLC, a wholly-owned operating subsidiary of charlesandcolvard.com, LLC, and third-party online
marketplaces.
| 2. |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation and Principles of Consolidation
–
The accompanying unaudited condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain
information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the
“SEC”). In the opinion of the Company’s management, the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for
the interim periods presented. The results for the six months ended December 31, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2024.
The condensed consolidated financial statements as of December 31, 2023 and for the three and six months ended December 31, 2023 and 2022 included in this Quarterly Report on Form 10-Q
are unaudited. The balance sheet as of June 30, 2023 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes contained in
Item 8 of the Company’s Annual Report on Form 10-K (the “2023 Annual Report”) for the fiscal year ended June 30, 2023 or Fiscal 2023 filed with the SEC on October 12, 2023.
The accompanying condensed consolidated financial statements as of December 31,
2023 and June 30, 2023 and for the three and six months ended December 31, 2023 and 2022, 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 24, 2022; Charles & Colvard Direct, LLC; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was entered into dormancy as of September 30,
2020 following its re-activation in December 2017. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 and has had no operating activity since 2008. Charles & Colvard Direct, LLC, had no operating activity
during the six-month periods ended December 31, 2023 or 2022. All intercompany accounts have been eliminated.
Significant Accounting Policies
–
In the opinion of the
Company’s management, the Company’s significant accounting policies used for the three and six months ended December 31, 2023, are consistent with those used for the fiscal year ended June 30, 2023. Accordingly, please refer to Note 2 to the
Consolidated Financial Statements in the 2023 Annual Report for the Company’s significant accounting policies.
Use of Estimates
– The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As
future events and their effects 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
consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves,
stock-based compensation, and revenue recognition. Changes in estimates are reflected in the consolidated financial statements in the period in which the change in estimate occurs.
Restricted Cash –
I
n accordance with the terms of the Company’s cash collateralized $
5.00
million credit facility from JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), which expires by its terms on July 31, 2024, the Company is required to keep cash in a cash deposit account held by JPMorgan Chase. Such amount is held as security for
the Company’s credit facility from JPMorgan Chase. Accordingly, this cash deposit held by JPMorgan Chase is classified as restricted cash for financial reporting purposes on the Company’s condensed consolidated balance sheets. For additional
information regarding the Company’s cash collateralized credit facility, see Note 10, “Debt.
”
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 December 31, 2023 and June 30, 2023, cash in the amount
of approximately $
250
,000 and approximately $
30
, respectively, was held by Oppenheimer. Such cash amount held by Oppenheimer was classified as restricted cash for financial reporting purposes on the Company’s condensed
consolidated balance sheets. For additional information regarding the Company’s stock repurchase program, see Note 11, “Shareholders’ Equity and Stock-Based Compensation.”
The reconciliation of cash, cash equivalents, and restricted cash, as presented
on the Condensed Consolidated Statements of Cash Flows, consist of the following as of the dates presented:
|
December 31,
2023
|
June 30,
2023
|
|||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Restricted cash
|
|
|
||||||
|
Total cash, cash equivalents, and restricted cash
|
$
|
|
$
|
|
||||
Recently Adopted/Issued Accounting Pronouncements –
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, “
Segment
Reporting
(
Topic
280):
Improvements to Reportable Segment Disclosures
” which expands annual and interim disclosure requirements for reportable
segments, primarily through enhanced disclosures about significant expenses. The updated standard is effective for annual periods beginning after December 15, 2023 and interim periods beginning after December 15, 2023. Early adoption is
permitted. The Company is currently evaluation the effect of adopting this ASU.
In December, 2023 the FASB issued ASU No. 2023-09 “
Income Taxes
(
Topic
740):
Improvements to Income Tax Disclosures
” which requires two primary disclosure enhancements of 1) disaggregated information on a reporting entity’s
effective tax rate reconciliation, and 2) information on income taxes paid. For public business entities, the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective
basis with the option to apply the standard retrospectively. Early adoption is permitted. The Company is currently evaluating the effect of adopting this ASU.
| 3. |
SEGMENT INFORMATION AND GEOGRAPHIC DATA
|
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making operating decisions
and assessing performance as the source of the Company’s operating and reportable segments.
The Company manages its business through
two
operating and reportable
segments based on its distribution channels to sell its product lines, loose jewels and finished jewelry: its “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, moissaniteoutlet.com,
charlesandcolvarddirect.com
,
madeshopping.com,
third-party online marketplaces, drop-ship retail, and other pure-play, exclusively e-commerce outlets; and its “Traditional” segment, which consists of wholesale and retail customers
,
including its own
Charles & Colvard Signature Showroom
. The accounting policies of the
Online Channels segment and Traditional segment are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies” of this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements
in the 2023 Annual Report.
The Company evaluates the financial performance of its segments based on net sales and product line gross profit, or the excess of product line sales over product line cost of goods
sold. The Company’s product line cost of goods sold is defined as product cost of goods sold, excluding non-capitalized expenses from the Company’s manufacturing and production control departments, comprising personnel costs, depreciation,
leases, utilities, and corporate overhead allocations; freight out; inventory write-downs; and other inventory adjustments, comprising costs of quality issues, and damaged goods.
Summary financial information by reportable segment is as follows:
|
Three Months Ended December 31, 2023
|
||||||||||||
|
Online
Channels
|
Traditional
|
Total
|
||||||||||
|
Net sales
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line cost of goods sold
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line gross profit
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Depreciation and amortization
|
$
|
|
$
|
|
$
|
|
||||||
|
Capital expenditures
|
$
|
|
$
|
|
$
|
|
||||||
|
Three Months Ended December 31, 2022
|
||||||||||||
|
Online
Channels
|
Traditional
|
Total
|
||||||||||
|
Net sales
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line cost of goods sold
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line gross profit
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Depreciation and amortization
|
$
|
|
$
|
|
$
|
|
||||||
|
Capital expenditures
|
$
|
|
$
|
|
$
|
|
||||||
|
Six Months Ended December 31, 2023
|
||||||||||||
|
Online
Channels
|
Traditional
|
Total
|
||||||||||
|
Net sales
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line cost of goods sold
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line gross profit
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Depreciation and amortization
|
$
|
|
$
|
|
$
|
|
||||||
|
Capital expenditures
|
$
|
|
$
|
|
$
|
|
||||||
|
Six Months Ended December 31, 2022
|
||||||||||||
|
Online
Channels
|
Traditional
|
Total
|
||||||||||
|
Net sales
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line cost of goods sold
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line gross profit
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Depreciation and amortization
|
$
|
|
$
|
|
$
|
|
||||||
|
Capital expenditures
|
$
|
|
$
|
|
$
|
|
||||||
The Company does not allocate any assets to the reportable segments, and, therefore, no asset information is reported to the chief operating decision maker or disclosed in the financial
information for each segment.
A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:
|
Three Months Ended December 31,
|
Six Months Ended December 31, | |||||||||||||||
|
2023
|
2022
|
2023 | 2022 | |||||||||||||
|
Product line cost of goods sold
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Non-capitalized manufacturing and production control expenses
|
|
|
|
|
||||||||||||
|
Freight out
|
|
|
|
|
||||||||||||
|
Inventory write-downs
|
|
|
|
|
||||||||||||
|
Other inventory adjustments
|
(
|
)
|
(
|
)
|
(
|
) |
(
|
) | ||||||||
|
Cost of goods sold
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
A reconciliation of the Company’s consolidated product line gross profit to the Company’s consolidated net loss before income taxes is as follows:
|
Three Months Ended December 31,
|
Six Months Ended December 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022 | |||||||||||||
|
Product line gross profit
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Non-allocated cost of goods sold
|
(
|
)
|
(
|
)
|
(
|
) |
(
|
) | ||||||||
|
Sales and marketing
|
(
|
)
|
(
|
)
|
(
|
) |
(
|
) | ||||||||
|
General and administrative
|
(
|
)
|
(
|
)
|
(
|
) |
(
|
) | ||||||||
|
Other income (expense) net
|
|
|
|
|
||||||||||||
|
Loss before income taxes
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
) |
$
|
(
|
) | ||||
The Company recognizes sales by geographic area based on the country in which the customer is based. Sales to international end consumers made through the Company’s transactional
websites, charlesandcolvard.com and moissaniteoutlet.com, are included in international sales for financial reporting purposes. A portion of the Company’s Traditional segment sales made to international wholesale distributors represents products
sold internationally that may be re-imported to U.S. retailers.
The following presents net sales data by geographic area:
|
Three Months Ended December 31,
|
Six Months Ended December 31, | |||||||||||||||
|
|
2023
|
2022
|
2023 | 2022 | ||||||||||||
|
Net sales
|
||||||||||||||||
|
United States
|
$
|
|
$
|
|
$ |
|
$ |
|
||||||||
|
International
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$ |
|
$ |
|
||||||||
| 4. |
FAIR VALUE MEASUREMENTS
|
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value
hierarchy consists of three levels based on the reliability of inputs, as follows:
Level 1.
Quoted prices in active markets for identical assets and liabilities;
Level 2.
Inputs other than Level 1 quoted prices that are directly or indirectly observable; and
Level 3.
Unobservable inputs that are not corroborated by market data.
The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each
reporting period. This determination requires significant judgments to be made by management of the Company. The financial instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents,
restricted cash, notes receivable, trade accounts receivable, and trade accounts payable. All financial instruments are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the
short-term nature of these financial instruments.
There
were
no
assets measured at fair value on a non-recurring basis as of December 31, 2023 or June 30, 2023.
| 5. |
INVENTORIES
|
The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:
|
December 31,
2023
|
June 30,
2023
|
|||||||
|
Finished jewelry:
|
||||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work-in-process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
Finished goods on consignment
|
|
|
||||||
|
Total finished jewelry
|
$
|
|
$
|
|
||||
|
Loose jewels:
|
||||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work-in-process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
Finished goods on consignment
|
|
|
||||||
|
Total loose jewels
|
|
|
||||||
|
Total supplies inventory
|
|
|
||||||
|
Total inventory
|
$
|
|
$
|
|
||||
As of the dates presented, the Company’s total inventories, net of reserves, are classified as follows:
|
December 31,
2023
|
June 30,
2023
|
|||||||
|
Short-term portion
|
$
|
|
$
|
|
||||
|
Long-term portion
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and
finished goods set with moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary
depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of December 31, 2023 and
June 30, 2023, work-in-process inventories issued to active production jobs approximated $
1.20
million and $
1.99
million, respectively.
The Company’s moissanite and lab grown diamond jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry
industry. Product obsolescence is closely monitored and reviewed by management as of and for each financial reporting period.
The Company manufactures finished jewelry featuring moissanite, lab grown diamonds, and created color gemstones. Relative to loose moissanite jewels and lab grown diamonds, finished
jewelry is more fashion-oriented and subject to styling trends that could render certain designs obsolete over time. The majority of the Company’s finished jewelry featuring moissanite and lab grown diamonds is held in inventory for resale and
largely consists of such core designs as stud earrings, solitaire and side-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company generally holds
smaller quantities of designer-inspired and trend fashion jewelry that is available for resale through retail companies and through its Online Channels segment. The Company also carries a limited amount of inventory as part of its sample line
that the Company uses in the selling process to its customers.
The Company’s continuing operating subsidiaries carry no net inventories, and inventory is transferred without intercompany markup from the parent entity as product line cost of goods
sold when sold to the end consumer.
The Company’s inventories are stated at the lower of cost or net realizable value on an average cost basis. Each accounting period the Company
evaluates the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves, which include significant estimates by management, including the effect of market factors and sales trends.
Changes
to the Company’s inventory reserves and allowances are accounted for in the accounting period in which a change in such reserves and allowances is observed and deemed appropriate, including changes in management’s estimates used in the process to
determine such reserves and valuation allowances
.
| 6. |
NOTE RECEIVABLE
|
On March 5, 2021, the Company entered into a $
250,000
convertible promissory note agreement (the “Convertible Promissory Note”), with an unrelated third-party strategic marketing partner. The Convertible Promissory Note is unsecured and was scheduled originally to mature on March 5, 2022. In
February 2022, the Company entered into an amendment to the Convertible Promissory Note that was effective as of December 9, 2021 and changed the maturity date to September 30, 2022. Effective September 26, 2022, the Company further amended the
Convertible Promissory Note (the “September 2022 Amendment”) and changed the maturity date to June 20, 2024 (the “Maturity Date”).
Interest
is accrued at a simple rate of
0.14
%
per annum and will continue to accrue until the Convertible Promissory Note is converted in accordance with the conversion privileges contained within the Convertible Promissory Note or is repaid.
Principal outstanding during an event of
default accrues interest at the rate of
5
% per annum.
Subject to the borrower’s completion of a specified equity financing transaction (an “Equity Financing”) on or prior to the Maturity Date, the unpaid principal amount, including accrued
and unpaid interest, automatically converts into equity units of the most senior class of equity securities issued to investors in the Equity Financing at the lesser of
80
% of the per unit price of the units purchased by investors or the price equal to $
33,500,000
divided by the aggregate number of outstanding units of the borrower immediately prior to the closing of the financing. Unless converted as provided in the Convertible Promissory Note, the principal
amount, including accrued and unpaid interest, will, on the Maturity Date, at the Company’s option either (
i
) become due and payable to the Company, or (
ii
) convert
into equity units at the specified conversion price in accordance with the terms of the Convertible Promissory Note.
| 7. |
ACCRUED EXPENSES AND OTHER LIABILITIES
|
Accrued expenses and other liabilities, current, consist of the following as of the dates presented:
|
December 31,
2023
|
June 30,
2023
|
|||||||
|
Deferred revenue
|
$
|
|
$
|
|
||||
|
Accrued compensation and related benefits
|
|
|
||||||
|
Accrued sales taxes and franchise tax
|
|
|
||||||
|
Accrued cooperative advertising
|
|
|
||||||
|
Other accrued expenses
|
|
|
||||||
|
Total accrued expenses and other liabilities
|
$
|
|
$
|
|
||||
| 8. |
INCOME TAXES
|
For the three and six months
ended December 31, 2023, the Company’s statutory tax rate was
22.94
% and consisted of the federal income tax rate of
21.00
% and a blended state income tax rate of
1.94
%, net of the federal benefit. For both the three and six months ended December 31, 2023, the Company’s average effective tax rate was
zero
. For the three and six months ended December 31, 2022, the Company’s effective tax rate was
11.24
% and
18.37
%,
respectively. The Company’s effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax accounting arising primarily from the permanent tax benefits
associated with stock-based compensation transactions during the accounting period then ended.
The Company recognized
zero
net income tax benefit for the three and six months ended December 31, 2023, compared with a net income tax benefit of
approximately $
132
,000 and $
435
,000
for the three and six months ended December 31, 2022, respectively.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax
assets. As of December 31, 2023, the Company’s management determined that sufficient negative evidence continued to exist to conclude it was uncertain that the Company would have sufficient future taxable income to utilize its
deferred tax assets, and therefore, the Company maintained a full valuation allowance against its deferred tax assets.
| 9. |
COMMITMENTS AND CONTINGENCIES
|
Lease Arrangements
On December 9, 2013, the Company entered into a Lease Agreement, as amended on December 23, 2013,
April 15, 2014, and January 29, 2021 (the “Lease Agreement”), for its corporate headquarters, which occupies approximately
36,350
square feet of office, storage and light manufacturing space and is classified as an operating lease for financial reporting purposes. The expiration date of the base term of the Lease Agreement in effect as of December 31, 2023 is October 31,
2026 and the terms of the Lease Agreement contain no early termination provisions. Provided there is no outstanding uncured event of default under the Lease Agreement, the Company has an option to extend the lease term for a period of
five years
. The Company’s option to extend the term of the Lease Agreement must be exercised in writing on or before
270
days prior to expiration of the then-current term. If the option is exercised, the monthly minimum rent for each of the extended terms will be
adjusted to the then prevailing fair market rate.
The Company took possession of the leased property on May 23, 2014, once certain improvements to the
leased space were completed and did not have access to the property before this date. Upon execution of the third amendment to the Lease Agreement (the “Lease Amendment”) on January 29, 2021, the Lease Amendment included a rent abatement in the
amount of approximately $
214
,000, which is reflected in the rent payments used in the calculation of the right-of-use (“ROU”) asset and
lease liability once remeasured upon the execution of the Lease Amendment to extend the lease term. The Lease Amendment also included an allowance for leasehold improvements offered by the landlord in an amount not to exceed approximately $
545
,000. As of the quarter ended December 31, 2023, the Company has been reimbursed approximately $
506
,000 by the landlord for qualified leasehold improvements in accordance with the terms of the Lease Amendment. This reimbursement by the landlord reduced the remaining ROU
asset by the same amount and is being recognized prospectively over the remaining term of the lease.
The Company has no other material operating leases and is not party to leases that would qualify for
classification as a finance lease, variable lease, or short-term lease.
As of December 31, 2023, the Company’s balance sheet classifications of its leases are as follows:
|
Operating Leases:
|
||||
|
Noncurrent operating lease ROU assets
|
$
|
|
||
|
|
||||
|
Current operating lease liabilities
|
$
|
|
||
|
Noncurrent operating lease liabilities
|
|
|||
|
Total operating lease liabilities
|
$
|
|
||
The Company’s total operating lease cost for the three months ended December 31, 2023 and 2022 was approximately $
175
,000 for each period. The Company’s total operating lease cost for the six months ended December 31, 2023 and 2022 was approximately $
349
,000 for each period.
As of December 31, 2023, the Company’s estimated incremental borrowing rate used and assumed discount
rate with respect to operating leases was
2.81
% and the remaining operating lease term was
2.83
years.
As of December 31, 2023, the Company’s remaining future payments under operating leases for each
fiscal year ending June 30 are as follows:
|
2024
|
$
|
|
||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
Total lease payments
|
$
|
|
||
|
Less: imputed interest
|
|
|||
|
Present value of lease payments
|
|
|||
|
Less: current lease obligations
|
|
|||
|
Total long-term lease obligations
|
$
|
|
The Company makes cash payments for amounts included in the measurement of its lease liabilities.
During the three months ended December 31, 2023 and 2022, cash paid for operating leases was approximately $
241
,000 and $
235
,000, respectivel
y.
During the six months ended December 31, 2023 and 2022, cash paid for operating leases was approximately $
479
,000 and $
466
,000, respectively
.
Purchase Commitments
On December 12, 2014, the Company entered into an exclusive supply agreement (the “Supply Agreement”)
with Wolfspeed, Inc. (“Wolfspeed”), formerly known as Cree, Inc. Under the Supply Agreement, subject to certain terms and conditions, the Company agreed to exclusively purchase from Wolfspeed, and Wolfspeed agreed to exclusively supply,
100
% of the Company’s 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 was also amended to (i) provide the Company with
one
option, subject to certain conditions, to unilaterally
extend the term of the Supply Agreement for an additional
two-year
period following expiration of the initial term; (ii) establish a
process by which Wolfspeed may begin producing alternate SiC material based on the Company’s specifications that will give the Company the flexibility to use the materials in a broader variety of its products; and (iii) permit the Company to
purchase certain amounts of SiC materials from third parties under limited conditions.
Effective June 30, 2020, the Supply Agreement was further amended to extend the expiration date to
June 29, 2025, which may be extended again by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread the Company’s total purchase commitment under the Supply Agreement in the amount of
approximately $
52.95
million over the term of the Supply Agreement, as amended; (ii) establish a process by which Wolfspeed has agreed
to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit the Company to purchase revised amounts of SiC materials from third parties under limited conditions.
The Company’s total purchase commitment under the Supply Agreement, as amended, until June 2025 is
approximately $
52.95
million, of which approximately $
24.75
million remains to be purchased as of December 31, 2023. Over the life of the Supply Agreement, as amended, the Company’s future minimum annual purchase commitments of SiC crystals
range from approximately $
4.00
million to $
10.00
million each year.
During the six months ended December 31, 2023 the Company made
no
purchases of SiC crystals. During the six months ended December 31, 2022 the Company purchased $
1.80
million of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended.
The Company has made
no
purchases of SiC crystals during the twelve-month period ended December 31, 2023. while engaged in discussions regarding the terms of the Supply Agreement.
On July 28, 2023,
Wolfspeed initiated a confidential arbitration against the Company for breach of contract claiming damages, plus interest, costs, and attorneys’ fees. Wolfspeed has alleged that the Company failed to satisfy the purchase obligations provided in
the Supply Agreement for Fiscal 2023 in the amount of $
4.25
million and failed to pay for $
3.30
million of SiC crystals Wolfspeed delivered to the Company. Wolfspeed further alleges that the Company intends to breach its remaining purchase obligations under the
Supply Agreement, representing an additional $
18.5
million in alleged damages.
While the Company is evaluating Wolfspeed’s claims, the Company disputes the amount sought, and intends to vigorously defend its position, including by asserting rights and
defenses that the Company may have under the Supply Agreement at law and in equity. A hearing has been scheduled for September 30, 2024. The final determinations of liability arising from this matter will be made following comprehensive
investigations, discovery and arbitration processes.
| 10. |
DEBT
|
Line of Credit
Effective July 7, 2021, the Company obtained from JPMorgan Chase a $
5.00
million
cash collateralized line of credit facility (the “JPMorgan Chase Credit Facility”). The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions and certain additional
indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The JPMorgan Chase Credit Facility is secured by a cash deposit in the amount of $
5.1
million held by JPMorgan Chase as collateral for the line of credit facility and was scheduled to mature on July 31, 2022. Effective July 28, 2022, the JPMorgan
Chase Credit Facility was amended to, among other things, extend the maturity date to July 31, 2023, and append the Company’s obligations under the JPMorgan Chase Credit Facility to be guaranteed by the Company’s wholly-owned subsidiaries,
Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC, and moissaniteoutlet.com, LLC. Effective, June 21, 2023, the JPMorgan Chase Credit Facility was amended further to extend the maturity date to July 31, 2024.
Each advance under the JPMorgan Chase Credit Facility, as amended, accrues interest at a rate equal
to the sum of JPMorgan Chase’s monthly secured overnight financing rate (“SOFR rate”) to which JPMorgan Chase is subject with respect to the adjusted SOFR rate as established by the U.S. Federal Reserve Board, plus a margin of
1.25
% per annum and an unsecured to secured interest rate adjustment of
0.10
% per annum. Interest is calculated monthly on an actual/360-day basis and payable monthly in arrears. Principal outstanding during an event of default, at JPMorgan Chase’s
option, accrues interest at a rate of
3
% per annum in excess of the above rate. Any advance may be prepaid in whole or in part
without penalty at any time
.
The JPMorgan Chase Credit Facility is evidenced by a credit agreement, as amended, between JPMorgan Chase and the Company (the “JPMorgan Chase Credit Agreement”), effective as of June 21, 2023,
and customary ancillary documents, in the principal amount not to exceed $
5.00
million at any one time outstanding and a line
of credit note (the “JPMorgan Chase Line of Credit Note”) in which the Company promises to pay on or before July 31, 2024, the amount of $
5.00
million or so much thereof as may be advanced and outstanding. In the event of default, JPMorgan Chase, at its option, may accelerate the maturity of advances outstanding under the JPMorgan Chase Credit Facility. The JPMorgan Chase Credit
Agreement and ancillary documents contain customary covenants, representations, fees, debt, contingent obligations, liens, loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, changes in
control, as well as indemnity, expense reimbursement, and confidentiality provisions.
In connection with
the JPMorgan Chase Credit Facility, effective July 7, 2021, the Company incurred a non-refundable origination fee in the amount of $
10,000
that was paid in full to JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12, 2021.
No
origination fee was paid to JPMorgan Chase in connection with amending the JPMorgan Chase Credit Facility on July 28, 2022, and June 21, 2023. The Company also agreed to maintain its primary banking depository and disbursement relationship
with JPMorgan Chase.
Events of default
under the JPMorgan Chase Credit Facility include, without limitation, a default, event of default, or event that would constitute a default or event of default (pending giving notice or lapse of time or both), of any provision of the
JPMorgan Chase Credit Agreement, the JPMorgan Chase Line of Credit Note, or any other instrument or document executed in connection with the JPMorgan Chase Credit Agreement or with any of the indebtedness, liabilities, and obligations of
the Company to JPMorgan Chase or that would result from the extension of credit by JPMorgan Chase to the Company.
As of December 31, 2023 the Company had
no
outstanding debt
.
| 11. |
SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
|
Repurchases of Common Stock
Pursuant to authority granted by the Company’s Board of Directors on April 29,
2022, the Company can repurchase up to approximately $
5.00
million in shares outstanding of the Company’s common stock over the
three-year
period ending April 29, 2025. Pursuant to the terms of the repurchase authorization, the common stock share repurchases are generally at
the discretion of the Company’s management. As the Company repurchases its common shares, which have
no
par value, the Company
reports such shares held as treasury stock in the accompanying condensed consolidated balance sheets with the purchase price recorded within treasury stock.
During the six-month period ended December 31, 2023 the Company repurchased
no
shares of its common stock. During the six-month period ended December 31, 2022, the Company repurchased
358,116
shares of the Company’s common stock for an aggregate price of $
451,815
pursuant to the repurchase authorization.
Dividends
The Company has paid
no
cash dividends during the current fiscal year through December 31, 2023.
Stock-Based Compensation
The following table summarizes the components of the Company’s stock-based compensation included in net income for the periods presented:
|
Three Months Ended
December 31,
|
Six Months Ended
December 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||
|
Employee stock options
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Restricted stock awards
|
|
|
|
|
||||||||||||
|
Totals
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Stock Options –
The following is a summary of the stock option activity for the six months
ended December 31, 2023:
|
|
Shares
|
Weighted
Average
Exercise Price
|
||||||
|
Outstanding, June 30, 2023
|
|
$
|
|
|||||
|
Granted
|
|
$
|
|
|||||
|
Forfeited
|
(
|
)
|
$
|
|
||||
|
Expired
|
(
|
)
|
$
|
|
||||
|
Outstanding, December 31, 2023
|
|
$
|
|
|||||
T
he weighted average grant date fair value of stock options granted during the six-months ended December 31, 2023 and 2022 was approximately $
0.21
and $
0.59
, respectively. The total fair value of stock options that vested during the six months ended
December 31, 2023 and 2022
was approximately $
188
,000 and $
176
,000, respectively.
The following table summarizes information about stock options outstanding at December 31, 2023:
|
Options Outstanding
|
Options Exercisable
|
Options Vested or Expected to Vest
|
||||||||||||||||||||||||||||||||
|
Balance
as of
12/31/2023
|
Weighted
Average Remaining
Contractual Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
12/31/2023
|
Weighted
Average Remaining
Contractual Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
12/31/2023
|
Weighted
Average Remaining
Contractual Life
(Years)
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||||||
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|||||||||||||||||||||||
As of December 31, 2023, the unrecognized stock-based compensation expense related to unvested stock options was approximately $
248
,000, which is expected to be recognized over a weighted average period of approximately
15 months
.
The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at December 31, 2023 and 2022 was approximately $
59
,000 and $
57
,000, respectively. These amounts are before applicable income taxes and
represents the closing market price of the Company’s common stock at December 31, 2023 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. These values represent
the amount that would have been received by the optionees had these stock options been exercised on that date.
There were
no
stock options exercised during the six-month-periods ended December 31, 2023 and 2022
.
Restricted Stock
During the six-month period ended December 31, 2023 there were
no
restricted stock shares awarded to plan participants. The unvested restricted shares as of December 31, 2022, totaled
178,750
with a weighted average grant date fair value of $
0.97
,
were all performance-based restricted shares and were scheduled to vest in July 2023, subject to achievement of the underlying performance goals.
None
of these shares vested and during the three-month period ended December 31, 2023, these shares were cancelled as the underlying performance goals were not met
.
| 12. |
NET LOSS PER COMMON SHARE
|
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss per common share is
computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and unvested restricted shares that are computed using the treasury stock
method. Anti-dilutive stock awards consist of stock options that would have been anti-dilutive in the application of the treasury stock method.
For the three and six months ended December 31, 2023, stock options to purchase approximately
2.75
million shares were excluded from the computation of diluted net loss per common share because the effect of inclusion of such amounts would be anti-dilutive to net loss per common share.
For the three and six months ended December 31, 2022, stock options to purchase approximately
1.91
million shares were excluded from the computation of diluted net loss per common share because the effect of inclusion of such amounts would be anti-dilutive to net loss per
common share. Approximately
179,000
shares of unvested restricted stock are excluded from the computation of diluted net loss
for the three and six months ended December 31, 2022 because the shares were performance-based and the underlying conditions had not been met as of December 31, 2022.
| 13. |
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
|
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash on deposit and cash equivalents held with banks and trade accounts receivable. The Company places cash deposits with federally
insured financial institutions and maintains its cash at banks and financial institutions it considers to be of high credit quality. However, the Company’s cash deposits may at times exceed the Federal Deposit Insurance Corporation’s
insurable limits. Accordingly, balances in excess of federally insured limitations may not be insured. The Company has not experienced losses on these accounts, and management believes that the Company is not exposed to significant risks
on such accounts.
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 and lab grown diamonds to new or expanded markets. Collateral is not generally required from customers. The need for an allowance for uncollectible 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:
|
December 31,
2023
|
June 30,
2023
|
|||||||
|
Customer A
|
|
%
|
|
%
|
||||
|
Customer B
|
|
%
|
|
% | ||||
|
Customer C
|
% |
|
% | |||||
|
Customer D
|
|
% | % | |||||
|
Customer E
|
|
% | % | |||||
|
*
|
|
|
**
|
|
A significant portion of sales is derived from certain customer relationships.
The following is a summary of customers that represent
10% or more of total net sales for the periods presented:
|
Three Months Ended
December 31,
|
Six Months Ended
December 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||
|
Customer E
|
|
% |
|
%
|
|
%
|
|
%
|
||||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such
as “may,” “will,” “should,” “could,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar words, although some forward-looking statements are expressed differently.
All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. You should be aware that although the
forward-looking statements included herein represent management’s current judgment and expectations, our actual results may differ materially from those projected, stated, or implied in these forward-looking statements as a result of many factors
including, but not limited to, the following:
|
|
1. |
Our business and our results of operations could be materially adversely affected as a result of general economic and market 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. |
We face intense competition in the worldwide gemstone and jewelry industry;
|
|
|
4. |
We have historically been dependent on a single supplier for substantially all of our silicon carbide, or SiC crystals, the raw materials we use to produce moissanite jewels; if our supply
of high quality SiC crystals is interrupted, our business may be materially harmed;
|
|
|
5. |
Constantly evolving privacy regulatory regimes are creating new legal compliance challenges;
|
|
|
6. |
Our information technology, or IT, infrastructure, and our network has been and may be impacted by a cyber-attack or other security incident as a result of the rise of cybersecurity
events;
|
|
|
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 may experience quality control challenges from time to time that can result in lost revenue and harm to our brands and reputation;
|
|
|
11. |
The effects of COVID-19 and other potential future public health crises, epidemics, pandemics or similar events on our business, operating results, and cash flows are uncertain;
|
|
|
12. |
Seasonality of our business may adversely affect our net sales and operating income;
|
|
|
13. |
Our operations could be disrupted by natural disasters;
|
|
|
14. |
Sales of moissanite and lab grown diamond jewelry could be dependent upon the pricing of precious metals, which is beyond our control;
|
|
|
15. |
Our current customers may potentially perceive us as a competitor in the finished jewelry business;
|
|
|
16. |
If the e-commerce opportunity changes dramatically or if e-commerce technology or providers change their models, our results of operations may be adversely affected;
|
|
|
17. |
Governmental regulation and oversight might adversely impact our operations;
|
|
|
18. |
The execution of our business plans could significantly impact our liquidity;
|
|
|
19. |
We are subject to arbitration, litigation and demands, which could result in significant liability and costs, and impact our resources and reputation;
|
|
|
20. |
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;
|
|
|
21. |
Negative or inaccurate information on social media could adversely impact our brand and reputation;
|
|
|
22. |
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;
|
|
|
23. |
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
;
|
|
|
24. |
Environmental, social, and governance matters may impact our business, reputation, financial condition, and results of operations;
|
|
|
25. |
If we fail to evaluate, implement, and integrate strategic acquisition or disposition opportunities successfully, our business may suffer;
|
|
|
26. |
Our failure to maintain compliance with The Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock;
|
|
|
27. |
Some anti-takeover provisions of our charter documents may delay or prevent a takeover of our Company;
and
|
|
|
28. |
We cannot guarantee that our share repurchase program will be utilized to the full value approved, or that it will enhance long-term stockholder value and repurchases we consummate could
increase the volatility of the price of our common stock and could have a negative impact on our available cash balance.
|
Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new
circumstances or unanticipated events as they occur except as required by the federal securities laws, and you are urged to review and consider disclosures that we make in the reports that we file with the Securities and Exchange Commission, or
SEC, that discuss other factors relevant to our business.
The following discussion is designed to provide a better understanding of our unaudited condensed consolidated financial statements, including a brief discussion of our
business and products, key factors that impacted our performance, and a summary of our operating results. This information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in
Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2023, or the 2023 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, Ltd., our mission is to provide a more conscious and conflict-free fine jewelry experience for our customers. We are dedicated to blazing a more
brilliant path forward with our
Made, not Mined
™
gemstones and are committed to creating fine jewelry with a conscience.
About Charles & Colvard
Charles & Colvard, Ltd., a North Carolina corporation founded in 1995 (which may be referred to as Charles & Colvard, we, us, or our), is a globally recognized fine
jewelry company specializing in lab created gemstones. We have manufactured, marketed, and distributed
Charles & Colvard Created Moissanite
® (which we refer to as moissanite or moissanite jewels) since
introducing created moissanite to the world nearly three decades ago. After years of perfecting the process, Charles & Colvard debuted the world’s first colorless moissanite and its premium moissanite gemstone brand, Forever One™, in 2015. As
an e-commerce and multi-channel destination for fine jewelry featuring lab grown gemstones, we believe the addition of lab grown diamonds is a natural progression for the Charles & Colvard brand. In September 2020, we announced our expansion
into the lab grown diamond market with the launch of Caydia®, our brand of premium lab grown diamonds.
We offer gemstones and finished jewelry featuring our proprietary moissanite jewels, premium lab grown diamonds, and created color gemstones for sale in the
worldwide fine jewelry market through two operating segments: our Online Channels segment, which encompasses our digital properties components, comprised of our charlesandcolvard.com, moissaniteoutlet.com, charlesandcolvarddirect.com, and
madeshopping.com websites, e-commerce outlets, including marketplaces, drop-ship customers, and other pure-play, exclusively e-commerce customers; and our Traditional segment, which consists of domestic and international distributors and retail
customers, including end-consumers through our first
Charles & Colvard Signature Showroom
, which opened in October 2022. We report
segment information based on the “management” approach. This segment reporting approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of our operating and reportable
segments.
We operate in an e-commerce environment characterized by both complexity in global markets and ongoing economic uncertainties in the U.S. and internationally.
Our strategy is to build a globally revered and accessible brand of gemstones and finished fine jewelry products set with moissanite and lab grown diamonds. We believe our goods appeal to a broad consumer audience and leverage our
advantage of being the original and leading worldwide source of moissanite and purveyor of premium lab grown diamonds. We believe a direct relationship with consumers is an essential component of this strategy, which entails delivering tailored
educational content, engaging in an interactive dialogue with our audience, and positioning our brand to meet the demands of today’s discerning consumer.
A significant component of our strategy in
this environment is to focus on our core products, improving the
quality and predictability of the delivery of our products and services, and placing those
products quickly into the hands of our U.S. and international customers at affordable prices.
Moreover, recognizing today that our customers and vendors are resource-constrained, we are endeavoring to develop and extend our portfolio of products in a
disciplined manner with
a focus on domestic markets close to our core capabilities, and growing our global marketplace sales. We continue to focus on
affordability initiatives. We also expect to continue
innovating and investing in lab created gemstone technologies to fulfill evolving product requirements
for our customers and investing in our people so that we have the technical and production skills necessary to succeed without limiting our ability to build sound financial returns to our investors.
Cybersecurity Event Update
On or about June 28, 2023, we identified a cybersecurity incident that temporarily disrupted the Company’s IT network and resulted in some limited downtime for certain
systems. Upon discovery, we took immediate action to activate our incident response and business continuity protocols. We took immediate action to contain the incident and appropriate incident response professionals were engaged to assist in
investigating the nature and scope of the event and to further harden the Company’s defenses. Through investigation, we confirmed that this event was related to an apparent ransomware attack involving the unauthorized encryption of some Company
files and the deployment of malware.
Our investigation revealed no evidence that any sensitive customer data was compromised as a result of this incident, and our relationship with our customers has not been
negatively impacted. We have worked closely with engaged security specialists to assist in the review and assessment of our information technology controls, and we implemented recommended strengthening of our access requirements, and improved our
unauthorized access detection.
Additionally, we temporarily implemented manual processes to conduct our operations with as little disruption to production as possible. All major systems, including our
enterprise resource planning, or ERP, financial systems and affected manufacturing and service operations, were restored as quickly as possible from available backups, and the incident did not have a material impact on the operations of our
business operating segments. No payments were made to the ransomware threat actors.
We have incurred costs in the first six months of the year ending June 30, 2024 or Fiscal 2024 of approximately $300,000 and do not expect to incur additional costs in
connection with this incident. In the first six months of the year ending June 30, 2024, these costs have been primarily comprised of various third-party consulting services, including forensic experts, restoration experts, legal counsel, and other
information technology professional expenses, enhancements to our cybersecurity measures, costs to restore our systems and access our data, and employee-related expenses, including with respect to increased overtime. We do not expect to incur these
and other additional costs related to this incident in the future.
COVID-19 Update
The ultimate impact of COVID-19 on our operations and financial performance in future periods, including management’s ability to execute its strategic initiatives in the
expected timeframes, remains uncertain and will depend on future pandemic-related developments, including the duration of the pandemic, any potential subsequent waves of COVID-19 and its variant viral infections, the effectiveness, distribution and
acceptance of COVID-19 vaccines, and related government actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted.
For additional risks to the Company related to the COVID-19 pandemic, see Part I, Item 1A, “Risk Factors” contained in our 2023 Annual Report.
Fiscal 2024 Financial Outlook
Our strategic goals for Fiscal 2024 are centered on continuing to expand Charles & Colvard’s brand on a global scale and increasing the size of our business through
top-line growth. As lab-created gemstones are being embraced by emerging generations, we believe our ability to establish moissanite and our lab grown diamonds along with the Charles & Colvard brand directly with conscious consumers is key to
our future success and ability to fuel our growth. We plan to continue executing our key Fiscal 2024 strategies with an ongoing commitment to spending judiciously with the long-term plan to generate sustainable earnings.
Our key strategic goals for Fiscal 2024 are as follows:
Global Brand Awareness
We plan to continue strengthening the fine jewelry brand we have been building for nearly three decades. As the consumer landscape continues to shift and factors beyond price,
craftmanship, and origin are driving decisions to purchase, brand equity is more important than ever. We will continue investing in paid media campaigns targeting the trade and consumers as we reinforce our
Made,
not Mined™
provenance. We will also remain steadfast in our quest for sustained top-line organic growth as our brand messaging resonates with new audiences.
Diversified Product Categories
We will continue to evaluate opportunities for growth with synergistic brands, products, and verticals beyond our current offerings. Emerging consumer trends and data will
inform new product lines, collections, and partnerships with designers and influencers. We will explore strategic alliances to fuel growth and deliver incremental long-term shareholder value while prioritizing our conscious practices and core
values.
Innovative Technology
Evolving technology continues to shape how consumers discover, research, and ultimately purchase. We will continue to invest strategically in technology to service customers
in existing and new outlets. Our investments in innovative technology, artificial intelligence, and predictive analytics will further maximize our ability to be agile and efficient in our business. We will enhance our consumer experience through
immersive virtual selling and fully customizable products driven by actionable data.
We will work to capitalize on these strategic goals to deliver top-line growth and strong financial results in this fiscal year. We believe that by implementing innovative
technological solutions and developing operational efficiencies, we will position ourselves for scalability and sustained, disciplined growth in the years ahead. We plan to make additional investments in our internal technology-driven systems that
lead to further operational efficiencies and improvements that we expect will drive down costs and help us deliver on our profitability targets. We will also remain cognizant of opportunistic strategic alliances and business arrangements that would
lead to incremental long-term shareholder value.
As evidenced by our results for the first half of Fiscal 2024, domestic and global inflation and rising interest rates, coupled with ongoing fears of recession,
continue to erode consumer confidence and present significant challenges for the global retail and e-commerce industry. We face the same challenges as all retailers and those in the e-commerce space. At the same time, however, these same
challenges are providing us the opportunity to reevaluate technologies, strategies, and talent to shape a new era of shopping.
In many ways, we believe the
pandemic and current global economic conditions have opened the door for what we believe may be a long-overdue reset within our industry that could help move retailers and those in the e-commerce space into more stable – and potentially more
profitable – positions. We plan to continue to invest in our business and seize current challenges by turning them into opportunities for continued growth and improved profitability
.
We discuss our strategic outlook and key strategies for Fiscal 2024 in Part I, Item 1, “Business” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, contained in our 2023 Annual Report.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our 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 consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues,
and expenses and related disclosures of contingent assets and liabilities. “Critical accounting policies and estimates” are defined as those most important to the financial statement presentation and that require the most difficult, subjective, or
complex judgments. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Under different assumptions and/or conditions, those actual results of operations may materially differ. The most significant estimates impacting our consolidated financial statements
relate to the valuation and classification of inventories, accounts receivable reserves, and revenue recognition. We also have other policies that we consider key accounting policies, but these policies typically do not require us to make estimates
or judgments that are difficult or subjective.
We have disclosed our critical accounting policies and estimates in our 2023 Annual Report, and that disclosure should be read in conjunction with this Quarterly Report on
Form 10-Q. There have been no significant changes in our critical accounting policies and estimates during the first six months of Fiscal 2024.
Results of Operations
The following table sets forth certain consolidated statements of operations data for the three- and six- months ended December 31, 2023 and 2022:
|
Three Months Ended December 31,
|
Six Months Ended December 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||
|
Net sales
|
$
|
7,905,639
|
$
|
10,366,122
|
$
|
12,858,662
|
$
|
17,740,204
|
||||||||
|
Costs and expenses:
|
||||||||||||||||
|
Cost of goods sold
|
5,049,947
|
6,071,775
|
8,058,454
|
10,157,785
|
||||||||||||
|
Sales and marketing
|
4,296,324
|
4,339,684
|
7,018,289
|
7,447,630
|
||||||||||||
|
General and administrative
|
1,497,061
|
1,187,955
|
3,351,329
|
2,601,431
|
||||||||||||
|
Total costs and expenses
|
10,843,332
|
11,599,414
|
18,428,072
|
20,206,846
|
||||||||||||
|
Loss from operations
|
(2,937,693
|
)
|
(1,233,292
|
)
|
(5,569,410
|
)
|
(2,466,642
|
)
|
||||||||
|
Other income (expense):
|
||||||||||||||||
|
Interest income
|
77,359
|
59,574
|
169,619
|
99,776
|
||||||||||||
|
Interest expense
|
(5,571
|
)
|
-
|
(5,571
|
)
|
-
|
||||||||||
|
Total other income (expense), net
|
71,788
|
59,574,
|
164,048
|
99,776
|
||||||||||||
|
Loss before income taxes
|
(2,865,905
|
)
|
(1,173,718
|
)
|
(5,405,362
|
)
|
(2,366,866
|
)
|
||||||||
|
Income tax benefit
|
-
|
131,937
|
-
|
434,893
|
||||||||||||
|
Net loss
|
$
|
(2,865,905
|
)
|
$
|
(1,041,781
|
)
|
$
|
(5,405,362
|
)
|
$
|
(1,931,973
|
)
|
||||
Consolidated Net Sales
Consolidated net sales for the three- and six- months ended December 31, 2023 and 2022 comprise the following:
|
Three Months Ended
December 31,
|
Change
|
Six Months Ended
December 31,
|
Change
|
|||||||||||||||||||||||||||||
|
2023
|
2022
|
Dollars
|
Percent
|
2023
|
2022
|
Dollars
|
Percent
|
|||||||||||||||||||||||||
|
Finished jewelry
|
$
|
7,391,352
|
$
|
8,436,208
|
$
|
(1,044,856
|
)
|
(12
|
)%
|
$
|
11,692,611
|
$
|
13,976,614
|
$
|
(2,284,003
|
)
|
(16
|
)%
|
||||||||||||||
|
Loose jewels
|
514,287
|
1,929,914
|
(1,415,627
|
)
|
(73
|
)%
|
1,166,051
|
3,763,590
|
(2,597,539
|
)
|
(69
|
)%
|
||||||||||||||||||||
|
Total consolidated net sales
|
$
|
7,905,639
|
$
|
10,366,122
|
$
|
(2,460,483
|
)
|
(24
|
)%
|
$
|
12,858,662
|
$
|
17,740,204
|
$
|
(4,881,542
|
)
|
(28
|
)%
|
||||||||||||||
Consolidated net sales were $7.91 million for the three months ended December 31, 2023 compared to $10.37 million for the three months ended December 31, 2022, a
decrease of approximately $2.46 million, or 24%.
Consolidated net sales were $12.86 million for the six months ended December 31, 2023 compared to $17.74 million for the six months ended December 31, 2022, a decrease of approximately
$4.88 million, or 28%.
Overall consumer confidence has continued to show signs of weakening due to general economic uncertainties, coupled with domestic and worldwide inflation, including recessionary fears, and
rising interest rates. These same general economic conditions also caused weakness in demand for moissanite jewels from our domestic and international distributors, which in turn resulted in lower loose jewel and jewelry product net sales during
the three and six-months ended December 31, 2023 in both of our operating segments.
Sales of finished jewelry represented 93% and 91% of total consolidated net sales for the three and six months ended December 31, 2023, respectively, compared with 81% and 79%, respectively, of total
consolidated net sales for the corresponding periods of the prior year. For the three months ended December 31, 2023, finished jewelry sales were $7.4 million compared to $8.4 million for the corresponding period of the prior year, a decrease of
approximately $1.0 million or 12%.
For the six months ended December 31, 2023, finished jewelry sales were $11.69 million compared to $13.98 million for the corresponding period of the prior fiscal year, a decrease of approximately $2.28
million, or 16%. These decreases in finished jewelry sales for the three- and six-month periods ended December 31, 2023 were
due primarily to lower demand across all of our finished jewelry products as a result
of adverse global and domestic general economic conditions and increased competition.
Sales of loose jewels represented 7% and 9% of total consolidated net sales for the three and six months ended December 31, 2023, respectively, compared to 19%
and 21%, respectively, of total consolidated net sales for the corresponding periods of the prior year. For the three months ended December 31, 2023, loose jewel sales were $514,000 compared to $1.93 million for the corresponding period of the
prior year, a decrease of approximately $1.42 million, or 73%.
For the six months ended December 31, 2023, loose jewel sales were $1.17 million compared to $3.76 million for the corresponding period of the prior fiscal year, a decrease of
$2.6 million, or 69%.
The decrease for the three- and six-month periods ended December 31, 2023 was due primarily to lower sales of loose jewels through our distribution network in our Online Channels segment and
Traditional segment, as a result of global and domestic general adverse macroeconomic conditions and increased competition coupled with continued downward pricing pressure on mined and lab grown diamonds.
U.S. net sales accounted for approximately 98% and 97%, respectively, of total consolidated net sales for each of the three- and six-months ended December 31, 2023, compared with 96% for each of the
corresponding periods ended December 31, 2022. U.S. net sales decreased to $7.74 million, or 22%, during the three months ended December 31, 2023 compared to $9.99 million in the comparable period of the prior fiscal year.
U.S. net sales
decreased to $12.51 million, or 27%, during the six months ended December 31, 2023 from the corresponding period of the prior year. U.S. net sales decreased during the three and six months ended December 31, 2023 primarily as a result of decreased
sales to U.S. customers in both our Online Channels segment and Traditional segment for the same reasons outlined above.
Our largest U.S. customer during the three and six months ended December 31, 2023 was also our largest customer during the three and six months ended December 31, 2022 and
accounted for 13% of total consolidated net sales during each of the three and six month periods ended December 31, 2023 and 12% and 14% respectively, for the three and six month periods ended December 31, 2022. We did not have another U.S.
customer account for 10% or more of total consolidated sales during the three months ended December 31, 2023 or 2022. We expect that we, along with our customers, will remain dependent on our ability to maintain and enhance our customer-related
programs. A change in or loss of any of these customer or retailer relationships could have a material adverse effect on our results of operations.
International net sales accounted for approximately 2% and 3%, respectively, of total consolidated net sales for the three- and six months periods ended December
31, 2023, and 4% for both the three- and six-months periods ended December 31, 2022.
International net sales decreased 57% and 47% during the three and six months ended December 31, 2023, respectively, as compared to the respective
periods in the prior year.
International sales decreased due to lower demand in our international distributor market as a result of global general adverse macroeconomic conditions and increased competition
coupled with continued downward pricing pressure on mined and lab grown diamonds. In light of the effects of ongoing global economic conditions, we continue to evaluate current and other potential distributors in international markets to
determine the best long-term partners. As a result, and considering the ongoing international trade challenges, we expect that our sales in these markets may significantly fluctuate with each reporting period.
We did not have an international customer account for 10% or more of total consolidated sales during the three or six months ended December 31, 2023 or 2022. A portion of our
international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers.
Costs and Expenses
Cost of Goods Sold
Our total cost of goods sold for the three and six months ended December 31, 2023 and 2022 are as follows:
|
Three Months Ended
December 31,
|
Change
|
Six Months Ended
December 31,
|
Change
|
|||||||||||||||||||||||||||||
|
2023
|
2022
|
Dollars
|
Percent
|
2023
|
2022
|
Dollars
|
Percent
|
|||||||||||||||||||||||||
|
Product line cost of goods sold:
|
||||||||||||||||||||||||||||||||
|
Finished jewelry
|
$
|
3,918,516
|
$
|
4,185,332
|
$
|
(266,816
|
)
|
(6
|
)%
|
$
|
5,877,683
|
$
|
6,792,031
|
$
|
(914,348
|
)
|
(13
|
)%
|
||||||||||||||
|
Loose jewels
|
200,993
|
871,250
|
(670,257
|
)
|
(77
|
)%
|
440,367
|
1,696,873
|
(1,256,506
|
)
|
(74
|
)%
|
||||||||||||||||||||
|
Total product line cost of goods sold
|
4,119,509
|
5,056,582
|
(937,073
|
)
|
(19
|
)%
|
6,318,050
|
8,488,904
|
(2,170,854
|
)
|
(26
|
)%
|
||||||||||||||||||||
|
Non-product line cost of goods sold
|
930,438
|
1,015,193
|
(84,755
|
)
|
(8
|
)%
|
1,740,404
|
1,668,881
|
71,523
|
4
|
%
|
|||||||||||||||||||||
|
Total cost of goods sold
|
$
|
5,049,947
|
$
|
6,071,775
|
$
|
(1,021,828
|
)
|
(17
|
)%
|
$
|
8,058,454
|
$
|
10,157,785
|
$
|
(2,099,331
|
)
|
(21
|
)%
|
||||||||||||||
Total cost of goods sold was $5.05 million for the three months ended December 31, 2023 compared to $6.07 million for the three months ended December 31, 2022, a
decrease of approximately $1.02 million, or 17%.
Total cost of goods sold was $8.06 million for the six months ended December 31, 2023 compared to $10.16 million for the six months ended December 31, 2022, a net decrease of approximately
$2.10 million, or 21%.
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 decrease in total cost of goods sold for the three months ended December 31, 2023 compared to the same period in 2022 was primarily due to decreased sales of loose jewels
and finished jewelry during the three months ended December 31, 2023 in our Traditional and Online Channels as a result of lower product demand during the quarter, as well as a decrease in non-product line cost of goods sold.
The net decrease in non-product line cost of goods sold for the three months ended December 31, 2023, comprises a $20,000 decrease in freight out principally from lower
shipments during the period
;
an approximate $22,000 decrease in non-capitalized manufacturing production control expenses principally related to the timing of when
work-in-process goods are received into inventory and overhead costs are allocated; and a $42,000 decrease in other inventory adjustments principally related to changes in production standard cost variances.
The decrease in total cost of goods sold for the six months ended December 31, 2023 compared to the same period in 2022 was also primarily driven by the decreased sales of finished goods and loose jewels during the six-months ended December 31,
2023 in both of our Online Channels segment and Traditional segment. We experienced lower demand in our Online Channels segment as a result of lower finished jewelry product demand during the six-month-period despite the calendar year-end 2023
holiday season and likewise saw lower loose jewel product demand in our Traditional segment throughout the six-month period.
The net increase in non-product line cost of goods sold for the six months ended December 31, 2023, comprises an approximate $199,000 increase in non-capitalized manufacturing production control expenses principally related to the timing of when
work-in-process goods are received into inventory and overhead costs are allocated and an approximate $84,000 increase in other inventory adjustments principally related to changes in production standard cost variances compared to those in the
first six months of 2022. These increases were partially offset by an approximate $119,000 decrease in inventory valuation allowances in the first six months of 2022, compared to those in the comparable prior year period, and an approximate $92,000
decrease in freight out principally from decreased shipping volume during the six-month period.
For additional disclosure relating to non-product line cost of goods sold, see Note 3 to our condensed consolidated financial statements in Item 1, “Financial Statements”, of
this Quarterly Report on Form 10-Q.
Sales and Marketing
Sales and marketing expenses for the three- and six- months ended December 31, 2023 and 2022 are as follows:
|
Three Months Ended
December 31,
|
Change
|
Six Months Ended
December 31,
|
Change
|
|||||||||||||||||||||||||||||
|
2023
|
2022
|
Dollars
|
Percent
|
2023
|
2022
|
Dollars
|
Percent
|
|||||||||||||||||||||||||
|
Sales and marketing
|
$
|
4,296,324
|
$
|
4,339,684
|
$
|
(43,360
|
)
|
(1
|
)%
|
$
|
7,018,289
|
$
|
7,447,630
|
$
|
(429,341
|
)
|
(6
|
)%
|
||||||||||||||
Sales and marketing expenses were $4.30 million for the three months ended December 31, 2023 compared to $4.34 million for the three months ended December 31, 2022, a decrease
of approximately $43,000, or 1%.
The decrease in sales and marketing expenses for the three months ended December 31, 2023 compared to the same period in 2022 was primarily due to a $75,000 decrease in general business taxes; a $16,000
decrease in bank fees; a $15,000 decrease in compensation expenses; an $8,000 decrease in insurance costs; a $6,000 decrease in charitable contributions; a $4,000 decrease in travel and entertainment; a $4,000 decrease in
software-related
costs incurred primarily in connection with software-related agreements and a $2,000 decrease in depreciation and amortization expense
. These decreases were offset partially by a $30,000 increase in
employee-related recruiting and search fees for new hires; a $20,000 increase in temporary labor; a $20,000 increase in advertising and digital marketing expenses; an $8,000 increase in
telephone/fiber related communications
expenses; a $7,000 net increase in general office-related expenses; and a $3,000 increase in other professional services.
The increase in advertising and digital marketing expenses for the three months ended December 31, 2023 compared to the same period in 2022 was primarily due to an increase in advertising expense of approximately
$79,000; a $13,000 increase in cooperative advertising; and an $8,000 increase in print media expenses. These increases were offset partially by an $80,000 decrease in sponsorships.
The decrease in compensation expenses for the three months ended December 31, 2023 compared to the same period in 2022 was primarily due to a $23,000 decrease in salaries and related employee benefits; and a $12,000
decrease in employee stock-based compensation. These decreases were partially offset by a $20,000 increase in bonus expense.
The decrease in sales and marketing expenses for the six months ended December 31, 2023 compared to the same period in 2022 was primarily due to a $211,000 decrease in compensation expenses; a $146,000 decrease in advertising and digital
marketing expenses;
a $125,000 decrease in general business taxes; a $73,000 decrease in bank fees; a $16,000 decrease in insurance costs;
a $9,000 decrease in depreciation and amortization expense; and a
$7,000 decrease in travel expenses. These decreases were offset partially by a $67,000 increase in professional services principally comprising consulting services for marketing support in the current year period; a $37,000 net increase in customer
meetings and general office-related expenses; a $23,000 increase in employee-related recruiting and search fees for new hires; a $16,000 increase in software-related costs incurred primarily in connection with new software-related agreements
associated with upgraded sales-related operating systems; and a $15,000 increase in telephone/fiber related communications expenses.
Compensation expenses for the six months ended December 31, 2023 compared to the same period in 2022 decreased primarily as a result of a $104,000 decrease in salaries, commissions, and related employee benefits; an $88,000 decrease in bonus
expense; and a $22,000 decrease in employee stock-based compensation expense. These decreases were partially offset by a $3,000 increase in severance costs.
The decrease in advertising and digital marketing expenses for the six months ended December 31, 2023 compared to the same period in 2022 comprises a $175,000 decrease in sponsorships; a $46,000 decrease in cooperative advertising; and a
decrease of $8,000 in trade show expenses. These decreases were offset partially by a $54,000 increase in digital advertising expense; a $17,000 increase in print media expenses; and a $12,000 increase in agency fees.
General and Administrative
General and administrative expenses for the three- and six- months ended December 31, 2023 and 2022 are as follows:
|
Three Months Ended
December 31,
|
Change
|
Six Months Ended
December 31,
|
Change
|
|||||||||||||||||||||||||||||
|
2023
|
2022
|
Dollars
|
Percent
|
2023
|
2022
|
Dollars
|
Percent
|
|||||||||||||||||||||||||
|
General and administrative
|
$
|
1,497,061
|
$
|
1,187,955
|
$
|
309,106
|
26
|
%
|
$
|
3,351,329
|
$
|
2,601,431
|
$
|
749,898
|
29
|
%
|
||||||||||||||||
General and administrative expenses were $1.50 million for the three months ended December 31, 2023 compared to $1.19 million for the three months ended December 31, 2022, an
increase of approximately $309,000, or 26%.
The increase in general and administrative expenses for the three months ended December 31, 2023 compared to the same period in 2022 was primarily due to a $378,000 increase
in professional fees; a $66,000 increase in general business taxes and licenses; a $38,000 increase in bad debt expense; an $11,000 increase in depreciation and amortization expense; and an $8,000 increase in insurance expense. These increases were
partially offset by a $132,000 decrease in compensation-related expenses; a $40,000 decrease in travel-related expenditures; a $13,000 decrease in overall rent expense; and a net decrease of $7,000 in other administrative-related expenses.
The decrease in compensation expenses for the three months ended December 31, 2023 compared to the same period in 2022 was primarily due to an $86,000 decrease in salaries and
benefits; and a $51,000 decrease in bonus expense. The decrease was partially offset by a $5,000 increase in employee stock-based compensation expense.
Professional services expenses increased for the three months ended December 31, 2023 compared to the same period in 2022 primarily due to a $198,000 increase in legal fees
associated with various corporate matters; a $76,000 increase in temporary labor; a $58,000 increase in other professional fees due to corporate matters including pay versus performance analysis; a $31,000 increase in investor relations fees; and
a $15,000 increase in fees associated with audit and tax services.
The increase in general and administrative expenses for the six months ended December 31, 2023 compared to the same period in 2023 was primarily due to a $937,000 increase in professional services expenses; a $117,000 increase in bad debt
expense; a $62,000 increase in depreciation and amortization; a $17,000 increase in insurance expense; and a $13,000 net increase in miscellaneous other general and administrative expenses. These increases were partially offset by a $253,000
decrease in compensation related costs; a $72,000 decrease in travel and entertainment expense; a $45,000 decrease in general business taxes and licenses; a $14,000 decrease in bank fees; and a $13,000 decrease in overall rent expense.
Compensation expenses decreased for the six months ended December 31, 2023 compared to the same period in 2022 principally due to a $144,000 net decrease in salaries and related employee benefits; an $88,000 decrease in bonus expense; and a
$21,000 decrease in employee stock-based compensation expense.
Professional services fees increased for the six months ended December 31, 2023 compared to the same period in 2022 primarily due to a $475,000 increase in legal fees
associated with the cyber-security event on
June 28, 2023 and other corporate matters
; a $262,000 increase in professional fees mainly
due to the cyber security event on June 28, 2023 and a pay versus performance analysis
;
a $92,000 increase in temporary labor;
a $54,000 increase in investor relations fees; and a $53,000 increase in fees associated with audit and tax services.
Interest Income
Interest income for the three- and six- months ended December 31, 2023 and 2022 is as follows:
|
Three Months Ended
December 31,
|
Change
|
Six Months Ended
December 31,
|
Change
|
|||||||||||||||||||||||||||||
|
2023
|
2022
|
Dollars
|
Percent
|
2023
|
2022
|
Dollars
|
Percent
|
|||||||||||||||||||||||||
|
Interest income
|
$
|
77,359
|
$
|
59,574
|
$
|
17,785
|
30
|
%
|
$
|
169,619
|
$
|
99,776
|
$
|
69,843
|
70
|
%
|
||||||||||||||||
Certain cash balances in excess of operating needs are deposited into and maintained in an interest-bearing account with a federally insured commercial bank. Accordingly,
during the three- and six- months ended December 31, 2023 and 2022, we earned interest from cash on deposit in this interest-bearing account. The increase in earned interest for the three- and six-months periods ended December 31, 2023 reflects the
higher interest rates during the first three- and six- months periods of Fiscal 2024 compared with Fiscal 2023.
Interest Expense
Interest expense for the three- and six- months ended December 31, 2023 and 2022 is as follows:
|
Three Months Ended
December 31,
|
Change
|
Six Months Ended
December 31,
|
Change
|
|||||||||||||||||||||||||||||
|
2023
|
2022
|
Dollars
|
Percent
|
2023
|
2022
|
Dollars
|
Percent
|
|||||||||||||||||||||||||
|
Interest expense
|
$
|
5,571
|
$
|
-
|
$
|
5,571
|
100
|
%
|
$
|
5,571
|
$
|
-
|
$
|
5,571
|
100
|
%
|
||||||||||||||||
Interest expense was incurred for the three- and six- months ended December 31, 2023 as a result of the drawdown on the Company’s line of credit.
Provision for Income Taxes
For the three and six months ended December 31, 2023, the Company’s statutory tax rate was 22.94% and consisted of the federal income tax rate of 21.00% and a blended state income tax rate of 1.94%, net of
the federal benefit.
For both the three and six months ended December 31, 2023, the Company’s average effective tax rate was zero. For the three and six months ended December 31, 2022, the Company’s effective tax rate was 11.24% and
18.37%, respectively.
The Company’s effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax accounting arising primarily from
the permanent tax benefits associated with stock-based compensation transactions during the accounting period then ended.
The Company recognized zero net income tax benefit for the three and six months ended December 31, 2023, compared with a net income tax benefit of approximately $132,000
and $435,000 for the three and six months ended December 31, 2022, respectively.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact its view with regard to future realization of
deferred tax assets. As of December 31, 2023, the Company’s management determined that sufficient negative evidence continued to exist to conclude it was uncertain that the Company would have sufficient future taxable income to utilize its
deferred tax assets, and therefore, the Company maintained a full valuation allowance against its deferred tax assets.
Liquidity and Capital Resources
Capital Structure and Debt
Long-Term Liquidity and Capital Structure
We have an effective shelf registration statement on Form S-3 on file with the SEC, with an expiration date of June 2, 2024, that allows us to periodically offer and sell, individually or in any combination, shares
of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available.
However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf
registration statement is subject to market conditions, which may be in turn, subject to, among other things, the potential disruption and volatility that may be caused by ongoing effects of rising inflation rates and fear of recession. Any capital
raise is not assured and may not be at terms that would be acceptable to us.
In addition,
on June 12, 2023, 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. The notification letter has no immediate effect on the Nasdaq listing or trading in our common stock. In
accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had 180 calendar days, or until December 11
, 2023, to regain compliance with the minimum $1.00 bid price per share requirement. We received notice on December
12, 2023 from the
Nasdaq’s Listing Qualifications Department
which resulted in an additional 180-day period, or until June 10, 2024, within which to regain compliance with the $1.00 minimum bid price
requirement.
While we intend to engage in efforts to regain compliance, and thus maintain our listing, including by carrying out a reverse stock split, if necessary, there can be no
assurance that we will be able to regain compliance during the applicable time periods set forth above. If we fail to continue to meet all applicable listing requirements in the future and Nasdaq determines to delist our common stock, the delisting
could substantially decrease trading in our common stock and adversely affect the market liquidity of our common stock; adversely affect our ability to obtain financing on acceptable terms, if at all; and may result in the potential loss of
confidence by investors, suppliers, customers, 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.
Debt
We have no short- or long-term outstanding debt as of December 31, 2023.
Financing Activities
Long-Term Financing Activities
In accordance with authority granted by our Board of Directors on April 29, 2022, we can repurchase up to $5.00 million in shares outstanding of our common stock over the
three-year period ending April 29, 2025. Pursuant to the terms of the repurchase authorization, the common stock share repurchases are generally at the discretion of management. As we repurchase our common shares, which have no par value, we report
such shares held as treasury stock on our condensed consolidated balance sheets, with the purchase price recorded within treasury stock.
We repurchased no shares of our common stock during the three- and six- month periods ended December 31, 2023. During the three-month period ended December 31, 2022, we
repurchased no shares of our common stock. During the six-month period ended December 31, 2022 we purchased approximately 358,000 shares of our common stock for an aggregate price of approximately $452,000 pursuant to the repurchase authorization.
Operating Activities and Cash Flows
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of December 31, 2023, our principal sources of
liquidity were cash and cash equivalents totaling $5.8 million, trade accounts receivable of $1.5 million, and net current inventory of $9.9 million, as compared to cash and cash equivalents totaling $10.4 million, trade accounts receivable of
$380,000, and net current inventory of $7.48 million as of June 30, 2023. We also had access during the three-month period ended December 31, 2023 to a $5.00 million cash collateralized line of credit facility, or the JPMorgan Chase Credit
Facility, that we obtained effective July 9, 2021, as amended July 28, 2022 and amended further effective June 21, 2023, from JPMorgan Chase Bank, N.A., or JPMorgan Chase.
During the six months ended December 31, 2023, our working capital decreased by approximately $2.18 million to $15.34 million from $17.51 million at June 30, 2023. As
described more fully below, the decrease in working capital at December 31, 2023 is primarily attributable to a net decrease in our cash, cash equivalents, and restricted cash, an increase in our accounts payable, an increase in our accrued
expenses and other liabilities, and an increase in the current portion of our operating lease liabilities. These factors were offset partially by an increase in our allocation of inventory from long-term to short-term due to a higher expected sell
through of inventory on hand in the upcoming period, an increase in our accounts receivables, and an increase in our prepaid expenses and other assets. Our cash used for investing activities were principally used for the purchase of property and
equipment.
During the six months ended December 31, 2023, approximately $3.94 million of cash was used in our operations. The primary drivers of our use of cash were a net loss in the
amount of approximately $5.41 million; a $1.43 million increase in accounts receivable and a decrease in accrued expenses and other liabilities of approximately $395,000. These factors were offset partially by a decrease in inventory of $991,000;
an increase in accounts payable of $1.26 million; $752,000 of non-cash expenditures; and a $274,000 decrease in prepaid expense and other assets.
From time to time, we have offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy customers the extension of which may not
immediately increase liquidity as a result of ongoing current-period sales. 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 would be at a competitive disadvantage for some Traditional segment customers in the marketplace during this economic period and our net sales and profits would likely be adversely impacted.
We manufactured approximately $786,000 and $4.89 million in loose jewels and $5.30 million and $8.77 million in finished jewelry, which includes the cost of the loose jewels
and the purchase of precious metals and labor in connection with jewelry production, during the six months ended December 31, 2023 and 2022, respectively. We expect our purchases of precious metals and labor to fluctuate in conjunction with the
levels of our finished jewelry business. In addition, the price of gold has fluctuated significantly over the past decade, resulting in higher retail price points for gold jewelry. Because the market prices of gold and other precious metals are
beyond our control, upward price trends could 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 December 31, 2023 and June 30, 2023, $15.88 million and $19.28 million of our inventories were classified as long-term assets, respectively. 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 $174,000 and new raw material that we may
purchase pursuant to the Supply Agreement.
Our more detailed description of our inventories is included in Note 5 to our condensed consolidated financial statements in Part I, Item 1, “Financial Statements”, of this
Quarterly Report on Form 10-Q.
As of December 31, 2023, all of our remaining federal income tax credits had expired or been utilized, and therefore, are not available to be carried forward to offset future
income taxes. As of December 31, 2023, we also had federal tax net operating loss carryforward of approximately $24.76 million expiring between 2034 and 2037, or that have no expiration, which can be used to offset against future federal taxable
income; North Carolina tax net operating loss carryforwards of approximately $20.01 million expiring between 2023 and 2035; and various other state tax net operating loss carryforwards expiring between 2023 and 2040, which can be used to offset
against future state taxable income.
Short-Term Capital Resources
Line of Credit
Effective July 7, 2021, we obtained from JPMorgan Chase our $5.00 million cash collateralized JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Facility may be used
for general corporate and working capital purposes, including permitted acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The JPMorgan Chase Credit
Facility is secured by a cash deposit in the amount of $5.1 million held by JPMorgan Chase as collateral for the line of credit facility.
Effective July 28, 2022, the JPMorgan Chase Credit Facility was amended to, among other things, extend the maturity date to July 31, 2023, and append our obligations under the
JPMorgan Chase Credit Facility to be guaranteed by our wholly-owned subsidiaries, Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC, and moissaniteoutlet.com, LLC. Effective June 21, 2023, the JPMorgan Chase Credit Facility was amended
further to extend the maturity date to July 31, 2024.
Each advance under the JPMorgan Chase Credit Facility, as amended, accrues interest at a rate equal to the sum of JPMorgan Chase’s monthly secured overnight financing rate, or
the SOFR rate, to which JPMorgan Chase is subject with respect to the adjusted SOFR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum and an unsecured to secured interest rate adjustment of 0.10% per annum.
Interest is calculated monthly on an actual/360-day basis and payable monthly in arrears. Principal outstanding during an event of default, at JPMorgan Chase’s option, accrues interest at a rate of 3% per annum in excess of the above rate. Any
advance may be prepaid in whole or in part at any time.
The JPMorgan Chase Credit Facility is evidenced by a credit agreement, as amended, between us and JPMorgan Chase, or the JPMorgan Chase Credit Agreement, dated as of June 21,
2023, and customary ancillary documents, in the principal amount not to exceed $5.00 million at any one time outstanding and a line of credit note, or the JPMorgan Chase Line of Credit Note, in which we promise to pay on or before July 31, 2024,
the amount of $5.00 million or so much thereof as may be advanced and outstanding. In the event of default, JPMorgan Chase, at its option, may accelerate the maturity of advances outstanding under the JPMorgan Chase Credit Facility. The JPMorgan
Chase Credit Agreement and ancillary documents contain customary covenants, representations, fees, debt, contingent obligations, liens, loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, changes
in control, as well as indemnity, expense reimbursement, and confidentiality provisions.
In connection with the JPMorgan Chase Credit Facility, effective July 7, 2021, we incurred a non-refundable origination fee in the amount of $10,000 that was paid in full to
JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12, 2021. There was no origination fee paid to JPMorgan Chase in connection with the amended JPMorgan Chase Credit Facility, dated July 28, 2022 and June 21, 2023.
Events of default under the JPMorgan Chase Credit Facility include, without limitation, a default, event of default, or event that would constitute a default or event of
default (pending giving notice or lapse of time or both), of any provision of the JPMorgan Chase Credit Agreement, the JPMorgan Chase Line of Credit Note, or any other instrument or document executed in connection with the JPMorgan Chase Credit
Agreement or with any of our indebtedness, liabilities, and obligations to JPMorgan Chase or would result from the extension of credit to us by JPMorgan Chase.
As of December 31, 2023, we had no outstanding balance against the JPMorgan Chase Credit Facility.
Long-Term Capital Commitments
Contractual Agreement
On December 12, 2014, we entered into the Supply Agreement with Wolfspeed. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively
purchase from Wolfspeed, and Wolfspeed agreed to exclusively supply, 100% of our required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement 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, provides for the exclusive production of our
premium moissanite product,
Forever One
™,
and provides 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 established a process by which Wolfspeed may begin producing alternate SiC
material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. On
August 26, 2020, the Supply Agreement was further amended, effective June 30, 2020, to extend the expiration date to June 29, 2025, which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among
other things, (
i
) spread our total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (
ii
) establish a process by which Wolfspeed has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (
iii
) permit us
to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, until June 2025 is approximately $52.95 million, of which approximately $24.75 million
remains to be purchased as of December 31, 2023.
During the six months ended December 31, 2023 we made no purchases of SiC crystals. For the six-month period ended December 31, 2022 we purchased approximately $1.80 million
of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended.
On July 28, 2023, Wolfspeed initiated a confidential arbitration against us for breach of contract claiming damages, plus interest, costs, and attorneys’ fees. Wolfspeed has
alleged that we failed to satisfy the purchase obligations provided in the Supply Agreement for Fiscal 2023 in the amount of $4.25 million and failed to pay for $3.30 million of SiC crystals Wolfspeed delivered to us. Wolfspeed further alleges that
we intend to breach our remaining purchase obligations under the Supply Agreement, representing an additional $18.5 million in alleged damages.
While the Company is evaluating Wolfspeed’s claims, we dispute the amount sought, and we intend to vigorously defend our position, including by asserting rights and defenses
that we may have under the Supply Agreement, at law and in equity. A hearing has been scheduled for September 30, 2024. The final determinations of liability arising from this matter will be made following comprehensive investigations, discovery
and arbitration processes.
Liquidity and Capital Trends
We believe that our existing cash and cash equivalents and 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.
From a long-term perspective, we believe that our ongoing access to capital markets, including but not limited to the issuance of equity securities or even potential debt
securities, coupled with cash provided by operating activities in future periods beyond the next twelve months, will continue to provide us with the necessary liquidity to meet our long-term working capital and capital expenditure requirements.
In connection with our short- and long-term capital resources, we have an effective shelf registration statement on Form S-3 on file with the SEC, with an
expiration date of June 2, 2024, that allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units
consisting of any combination of the foregoing types of securities, up to a total of $25.00 million, of which all is available. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our
outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which may be in turn, subject to, among other things, the
potential disruption and volatility that may be caused by ongoing effects of rising inflation and fears of recession
and the risks associated with the potential delisting of our common stock on the Nasdaq Capital Market if we fail to
regain compliance with applicable Nasdaq Listing Rules within the periods of time described therein
. Any capital raise is not assured and may not be at terms that would be acceptable to us.
Our future capital requirements and the adequacy of available funds will depend on many factors, including
the
ongoing uncertainty surrounding rising inflation and fears of recession that could lead to further disruption and volatility in the global capital markets
as well as its impact on our rate of sales
growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewels and lab grown diamond business and precious metals
and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and the risk factors described in more detail in “Risk Factors” in Part II, Item 1A, of this Quarterly Report
on Form 10-Q and in Part I, Item 1A, of our 2023 Annual Report.
| 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 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
December 31, 2023, we made no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that we believe materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
| Item 1. |
Legal Proceedings
|
From time to time, we may be involved in legal proceedings or subject to claims incident to the ordinary course of business. The outcome of litigation is inherently uncertain,
and there can be no assurances that favorable outcomes will be obtained. In addition, regardless of the outcome, such proceedings or claims can have an adverse impact on us because of defense and settlement costs, diversion of resources and other
factors.
On July 28, 2023, Wolfspeed initiated a confidential arbitration against us for breach of contract claiming damages, plus interest, costs, and attorneys’ fees. Wolfspeed has
alleged that we failed to satisfy the purchase obligations provided in the Supply Agreement for Fiscal 2023 in the amount of $4.25 million and failed to pay for $3.30 million of SiC crystals Wolfspeed delivered to us. Wolfspeed further alleges that
we intend to breach our remaining purchase obligations under the Supply Agreement, representing an additional $18.5 million in alleged damages.
While the Company is evaluating Wolfspeed’s claims, we dispute the amount sought, and we intend to vigorously defend our position, including asserting rights and defenses that
the Company may have under the Supply Agreement, at law and in equity. A hearing has been scheduled for September 30, 2024. The final determinations of liability arising from this matter will be made following comprehensive investigations,
discovery and arbitration processes.
| Item 1A. |
Risk Factors
|
We discussed these in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023. There have been no material changes to such risks, except as set forth below.
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 June 12, 2023, 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. The notification letter has no immediate effect on the Nasdaq listing or
trading in our common stock. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had 180 calendar days, or until December 11
, 2023, to regain compliance with the minimum $1.00 bid price per share requirement.
We received notice on December 12, 2023 from the
Nasdaq’s Listing Qualifications Department
which resulted in an additional 180-day period, or until June 10, 2024, within which to regain compliance with
the $1.00 minimum bid price
requirement.
While we intend to engage in efforts to regain compliance, and thus maintain our listing, including by carrying out a reverse stock split, if necessary, there can be no
assurance that we will be able to regain compliance during the applicable time periods set forth above. If we fail to continue to meet all applicable listing requirements in the future and Nasdaq determines to delist our common stock, the delisting
could substantially decrease trading in our common stock and adversely affect the market liquidity of our common stock; adversely affect our ability to obtain financing on acceptable terms, if at all; and may result in the potential loss of
confidence by investors, suppliers, customers, 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.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
|
Issuer Purchases of Equity Securities
|
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid per
share
|
Total Number of
shares Purchased
as Part of
Publicly
Announced Plans
or Programs
(1)
|
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs
|
||||||||||||
|
October 1, 2023 – October 31, 2023
|
-
|
$
|
-
|
-
|
$
|
4,510,021
|
||||||||||
|
November 1, 2023 – November 30, 2023
|
-
|
$
|
-
|
-
|
$
|
4,510,021
|
||||||||||
|
December 1, 2023 – December 31, 2023
|
-
|
$
|
-
|
-
|
$
|
4,510,021
|
||||||||||
|
Total
|
-
|
$
|
-
|
-
|
$
|
4,510,021
|
||||||||||
| (1) |
On May 5, 2022, we announced that our Board of Directors had approved a share repurchase program to permit us to repurchase up to $5.00 million worth of our issued and outstanding common stock over the
three-year period ending April 29, 2025.
|
During the three months ended December 31, 2023, no director or officer of the Company
adopted
or
terminated
a “Rule 10b5-1 trading
arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
| Item 6. |
Exhibits
|
The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
|
Exhibit No.
|
Description
|
|
|
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.INS
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
|
|
|
101.SCH
|
Inline XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB
|
Inline XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase document
|
|
|
104
|
Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document contained in Exhibit 101
|
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/ Don O’Connell
|
|
|
February 13, 2024
|
Don O’Connell
|
|
|
President and Chief Executive Officer
|
||
|
By:
|
/s/ Clint J. Pete
|
|
|
February 13, 2024
|
Clint J. Pete
|
|
|
Chief Financial Officer
|
||
|
(Principal Financial Officer and Chief Accounting Officer)
|
36
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 5. Other InformationItem 6. Exhibits