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

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

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

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☒		Smaller reporting company	☒
			Emerging growth company	☐

		Page Number
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and June 30, 2021	1
	Condensed Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2021 and 2020	2
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the three months ended September 30, 2021 and 2020	3
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended September 30, 2021 and 2020	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 6.	Exhibits	34
	Signatures	35

Item 1.

Financial Statements

		September 30, 2021 (unaudited)				June 30, 2021
ASSETS
Current assets:
Cash and cash equivalents		$	14,116,632			$	21,302,317
Restricted cash			5,050,000				144,634
Accounts receivable, net			2,671,701				1,662,074
Inventory, net			12,043,187				11,450,141
Note receivable			250,000				250,000
Prepaid expenses and other assets			1,427,801				952,065
Total current assets			35,559,321				35,761,231
Long-term assets:
Inventory, net			19,571,239				17,722,579
Property and equipment, net			1,151,725				875,897
Intangible assets, net			207,739				209,658
Operating lease right-of-use assets			3,779,395				3,952,146
Deferred income taxes, net			6,228,672				6,350,830
Other assets			49,658				49,658
Total long-term assets			30,988,428				29,160,768
TOTAL ASSETS		$	66,547,749			$	64,921,999
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,752,907			$	2,774,373
Operating lease liabilities			612,988				566,083
Accrued expenses and other liabilities			1,700,577				2,281,807
Total current liabilities			6,066,472				5,622,263
Long-term liabilities:
Noncurrent operating lease liabilities			3,418,110				3,600,842
Accrued income taxes			10,349				9,878
Total long-term liabilities			3,428,459				3,610,720
Total liabilities			9,494,931				9,232,983
Commitments and contingencies (Note 9)
Shareholders’ equity:
Common stock, no par value; 50,000,000 shares authorized; 30,339,457 and 29,913,095 shares issued and outstanding at September 30, 2021 and June 30, 2021, respectively			56,454,221				56,057,109
Additional paid-in capital			25,748,258				25,608,593
Accumulated deficit			(25,149,661	)			(25,976,686	)
Total shareholders’ equity			57,052,818				55,689,016
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	66,547,749			$	64,921,999

		Three Months Ended September 30,
		2021				2020
Net sales		$	10,280,311			$	7,926,293
Costs and expenses:
Cost of goods sold			5,016,550				4,196,055
Sales and marketing			2,730,153				1,647,933
General and administrative			1,584,275				1,208,035
Total costs and expenses			9,330,978				7,052,023
Income from operations			949,333				874,270
Other income (expense):
Interest income			355				3,459
Interest expense			-				(2,439	)
Loss on foreign currency exchange			(34	)			(530	)
Total other income (expense), net			321				490
Income before income taxes			949,654				874,760
Income tax expense			(122,629	)			(494	)
Net Income		$	827,025			$	874,266
Net income per common share:
Basic		$	0.03			$	0.03
Diluted		$	0.03			$	0.03
Weighted average number of shares used in computing net income per common share:
Basic			29,971,178				28,786,910
Diluted			31,097,540				28,839,897

		Three Months Ended September 30, 2021
		Common Stock								Additional								Total
		Number of Shares				Amount				Paid-in Capital				Accumulated Deficit				Shareholders’ Equity
Balance at June 30, 2021			29,913,095			$	56,057,109			$	25,608,593			$	(25,976,686	)		$	55,689,016
Stock-based compensation			-				-				279,407				-				279,407
Issuance of restricted stock			242,725				-				-				-				-
Stock option exercises			183,637				397,112				(139,742	)			-				257,370
Net income			-				-				-				827,025				827,025
Balance at September 30, 2021			30,339,457			$	56,454,221			$	25,748,258			$	(25,149,661	)		$	57,052,818

		Three Months Ended September 30, 2020
		Common Stock								Additional								Total
		Number of Shares				Amount				Paid-in Capital				Accumulated Deficit				Shareholders’ Equity
Balance at June 30, 2020			28,949,410			$	54,342,864			$	25,880,165			$	(38,787,452	)		$	41,435,577
Stock-based compensation			-				-				107,355				-				107,355
Issuance of restricted stock			178,750				-				-				-				-
Retirement of restricted stock			(162,500	)			-				-				-				-
Net income			-				-				-				874,266				874,266
Balance at September 30, 2020			28,965,660			$	54,342,864			$	25,987,520			$	(37,913,186	)		$	42,417,198

		Three Months Ended September 30,
		2021				2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	827,025			$	874,266
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			124,212				132,456
Stock-based compensation			279,407				107,355
Provision for uncollectible accounts			32,000				32,514
Provision for sales returns			27,000				96,000
Inventory write-off			232,000				80,000
Provision for accounts receivable discounts			16,419				1,688
Deferred income taxes			122,158				-
Changes in operating assets and liabilities:
Accounts receivable			(1,085,046	)			(1,084,999	)
Inventory			(2,673,706	)			829,199
Prepaid expenses and other assets, net			(302,985	)			27,920
Accounts payable			978,534				(1,165,697	)
Accrued income taxes			471				494
Accrued expenses and other liabilities			(717,057	)			(573,120	)
Net cash used in operating activities			(2,139,568	)			(641,924	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(398,121	)			(101,459	)
Payments for intangible assets			-				(12,142	)
Net cash used in investing activities			(398,121	)			(113,601	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock option exercises			257,370				-
Net cash provided by financing activities			257,370				-
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH			(2,280,319	)			(755,525	)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD			21,446,951				14,617,234
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD		$	19,166,632			$	13,861,709
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	-			$	2,439
Cash paid during the period for income taxes		$	-			$	3,350

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 for sale in the worldwide fine jewelry market. Moissanite, also known by its chemical name silicon carbide (“SiC”), is a rare mineral first discovered in a meteorite crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. Lab grown diamonds are also grown using technology that replicates the natural diamond growing process. The only differentiation between that of a lab grown diamond and a mined diamond is its origin. The result is a man-made diamond that is chemically, physically, and optically the same as those grown beneath the earth’s surface.

The Company sells loose moissanite jewels, loose lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds at wholesale prices to distributors, manufacturers, retailers, and designers, including some of the largest distributors and jewelry manufacturers in the world. 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 wholly owned operating subsidiary, charlesandcolvard.com, LLC, 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 on its own transactional website, moissaniteoutlet.com, through charlesandcolvard.com, LLC.

2.	BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation – The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three months ended September 30, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2022.

The condensed consolidated financial statements as of September 30, 2021 and for the three months ended September 30, 2021 and 2020 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of June 30, 2021 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes contained in Item 8 of the Company’s Annual Report on Form 10-K (the “2021 Annual Report”) for the fiscal year ended June 30, 2021 filed with the SEC on September 3, 2021.

The accompanying condensed consolidated financial statements as of and for the three months ended September 30, 2021 and 2020, and as of the fiscal year ended June 30, 2021, include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC; 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 three-month periods ended September 30, 2021 or 2020. All intercompany accounts have been eliminated.

Significant Accounting Policies – In the opinion of the Company’s management, except as discussed below, the Company’s significant accounting policies used for the three months ended September 30, 2021, are consistent with those used for the fiscal year ended June 30, 2021. Accordingly, please refer to Note 2 to the Consolidated Financial Statements in the 2021 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, including the impact of the COVID-19 pandemic and the related responses, cannot be fully determined with precision, actual results of operations, cash flow, and financial position could differ significantly from estimates. The most significant estimates impacting the Company’s condensed consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, deferred tax assets, stock-based compensation, and revenue recognition. Changes in estimates are reflected in the condensed consolidated financial statements in the period in which the change in estimate occurs.

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:

		September 30, 2021				June 30, 2021
Cash and cash equivalents		$	14,116,632			$	21,302,317
Restricted cash			5,050,000				144,634
Total cash, cash equivalents, and restricted cash		$	19,166,632			$	21,446,951

Recently Adopted/Issued Accounting Pronouncements – Effective July 1, 2021, the Company adopted the new accounting standard that provides guidance for the simplification of the accounting for income taxes that is intended to reduce the complexity while maintaining or improving the usefulness of tax disclosure information in an entity’s financial statements. The resulting impact of the new guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2020, and as updated in January 2021, in response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), the FASB issued new guidance to ease the burden in accounting for or recognizing the effects of referenced interest rate reform on financial reporting. The new guidance is effective as of March 12, 2020 through December 31, 2022. As described in more detail in Note 10, “Debt”, borrowings under the Company’s new line of credit are based on a rate equal to the one-month LIBOR. As of September 30, 2021, the Company had not borrowed against its line of credit, and therefore, is not subject to recognizing or disclosing any effect of referenced rate reform as of September 30, 2021.

4.	FAIR VALUE MEASUREMENTS

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.

5.	INVENTORIES

		September 30, 2021				June 30, 2021
Finished jewelry:
Raw materials		$	1,681,561			$	1,476,514
Work-in-process			2,034,428				779,593
Finished goods			9,993,963				8,025,816
Finished goods on consignment			2,131,244				2,050,372
Total finished jewelry		$	15,841,196			$	12,332,295
Loose jewels:
Raw materials		$	1,683,330			$	1,775,505
Work-in-process			9,058,183				9,893,443
Finished goods			4,783,702				4,942,192
Finished goods on consignment			169,879				154,968
Total loose jewels			15,695,094				16,766,108
Total supplies inventory			78,136				74,317
Total inventory		$	31,614,426			$	29,172,720

As of the dates presented, the Company’s total inventories, net of reserves, are classified as follows:

		September 30, 2021				June 30, 2021
Short-term portion		$	12,043,187			$	11,450,141
Long-term portion			19,571,239				17,722,579
Total		$	31,614,426			$	29,172,720

The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of September 30, 2021 and June 30, 2021, work-in-process inventories issued to active production jobs approximated $2.95 million and $2.23 million, respectively.

The Company’s moissanite and lab grown diamond jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, the majority of jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends, and product obsolescence is closely monitored and reviewed by management as of and for each financial reporting period.

The Company manufactures finished jewelry featuring moissanite and lab grown diamonds. 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 three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company generally holds smaller quantities of designer-inspired and trend moissanite fashion jewelry that is available for resale through retail companies and through its Online Channels segment. The Company also carries a limited amount of inventory as part of its sample line that 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 also 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

In March 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 matures on March 5, 2022 (the “Maturity Date”). The Company has accounted for the Convertible Promissory Note as a current note receivable within the accompanying consolidated financial statements. Interest is accrued at a simple rate of 0.14% per annum and will 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. Accrued and unpaid interest on the Convertible Promissory Note is classified as a current asset and included in prepaid expenses and other assets in the accompanying consolidated financial statements.

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:

		September 30, 2021				June 30, 2021
Accrued sales tax		$	658,863			$	555,547
Deferred revenue			559,150				774,891
Accrued compensation and related benefits			303,675				866,705
Accrued cooperative advertising			80,681				68,185
Accrued income taxes			16,478				16,478
Other			81,730				1
Total accrued expenses and other liabilities		$	1,700,577			$	2,281,807

8.	INCOME TAXES

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 September 30, 2021 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 options are 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. Once such costs have been incurred, the Company will be reimbursed for qualified costs by the landlord and the Company will reduce the remaining ROU asset and lease liability by the amount of the reimbursement. Such reductions of the ROU asset and lease liability will be recognized prospectively by the Company 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 September 30, 2021, the Company’s balance sheet classifications of its leases are as follows:

Operating Leases:
Noncurrent operating lease ROU assets		$	3,779,395
Current operating lease liabilities		$	612,988
Noncurrent operating lease liabilities			3,418,110
Total operating lease liabilities		$	4,031,098

The Company’s total operating lease cost for the three months ended September 30, 2021 and 2020 was approximately $202,000 and $131,000, respectively.

As of September 30, 2021, 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 5.08 years.

As of September 30, 2021, the Company’s remaining future payments under operating leases for each fiscal year ending June 30 are as follows:

2022		$	410,799
2023			869,742
2024			893,660
2025			918,236
2026			943,487
2027			317,327
Total lease payments			4,353,251
Less: imputed interest			322,153
Present value of lease payments			4,031,098
Less: current lease obligations			612,988
Total long-term lease obligations		$	3,418,110

The Company makes cash payments for amounts included in the measurement of its lease liabilities. During the three months ended September 30, 2021 and 2020, cash paid for operating leases was approximately $162,000 and $170,000, respectively. Upon the execution of the Lease Amendment, the Company recorded additional ROU assets in the amount of approximately $3.9 million obtained in exchange for the additional operating lease liability during the fiscal year ended June 30, 2021.

On December 12, 2014, the Company entered into an exclusive supply agreement (the “Supply Agreement”) with Cree, Inc., now known as Wolfspeed, Inc. (“Wolfspeed”). 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 $31.35 million remains to be purchased as of September 30, 2021. 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 three months ended September 30, 2021, the Company purchased approximately $1.50 million of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended. During the three months ended September 30, 2020, the Company did not purchase SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended.

COVID-19 Update

The COVID-19 pandemic continues to present unprecedented business challenges in the Company’s fiscal year ending June 30, 2022 (“Fiscal 2022”). The Company’s management has taken measures to protect the health and safety of the Company’s employees, work with its customers and suppliers to minimize disruptions, reduce its expenses, and support its community in addressing the challenges posed by the ongoing COVID-19 pandemic.

The Company has experienced impacts on its business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, including using accelerated payments in some cases to the Company’s suppliers that are due by their terms in future periods and the Company expects to continue accelerating payments to certain suppliers through at least a portion of Fiscal 2022. The Company is also seeing a sharp increase in international freight costs, with limited availability and long delays causing disruption in the global supply chain. Accordingly, the Company’s management is taking steps where possible to mitigate such potential delays in supplier deliveries by accelerating orders and increasing order quantities.

Following the government mandated shut down during the early days of the pandemic, work in the Company’s production and distribution facilities has continued throughout the remainder of the pandemic, consistent with guidance from federal, state, and local officials to minimize the spread of COVID-19. The Company’s management continues to take actions to equip its employees with personal protective equipment, establish minimum staffing and social distancing policies, sanitize workspaces more frequently, adopt alternate work schedules, and institute other measures aimed to sustain production and related services while minimizing the transmission of COVID-19, including measures to facilitate the provision of vaccines to the Company’s employees in line with state and local guidelines. In addition, the Company has maintained a flexible teleworking policy for its employees who can meet customer commitments remotely, and a portion of the Company’s workforce continues teleworking.

Although the COVID-19 pandemic did not have a significant adverse impact on the Company’s financial results in the quarter ended September 30, 2021, the ultimate impact of COVID-19 on the Company’s 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. The Company cannot at this time predict the full impact of the COVID-19 pandemic, but the Company’s management believes there is a risk  that the COVID-19 pandemic could adversely impact the Company’s business, financial condition, results of operations and/or cash flows in Fiscal 2022.

10.

DEBT

Paycheck Protection Program Loan

Pursuant to its terms, the Promissory Note was scheduled to mature on June 18, 2022. However, on June 14, 2021, in accordance with applicable provisions of the CARES Act the Company filed its PPP Loan forgiveness application with the Lender for forgiveness of the full amount of the PPP Loan proceeds and the related accrued and unpaid interest. Effective June 23, 2021, the Company’s PPP Loan forgiveness was approved and processed by the SBA for the full principal of the PPP Loan in the amount of $965,000 and the related accrued and unpaid interest. Accordingly, the full amount of the gain in connection with the extinguishment of this debt was recognized in the fiscal year ended June 30, 2021.

In accordance with the terms of the Promissory Note, during the period of time the principal of the PPP Loan was outstanding, interest was accrued by the Company at a fixed rate of 1% per annum. In connection with the Company’s PPP Loan forgiveness, the SBA also approved forgiveness of accrued interest amounts that would have been otherwise payable by the Company to the Lender. Accordingly, the benefit from the forgiveness of the inception to-date interest expense in the amount of approximately $9,000 was recognized and included within the gain on extinguishment of debt in the consolidated statement of operations for the fiscal year ended June 30, 2021.

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:

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.

Overview

Our Mission

About Charles & Colvard

One of our unique differentiators, moissanite – The World’s Most Brilliant Gem^® – is core to our ambition to create a movement around environmentally and socially responsible fine jewelry. We believe that we are leading the way in delivering the premium moissanite brand through technological advances in gemstone manufacturing, cutting, polishing, and setting. By coupling what we believe to be unprecedented moissanite jewels with responsibly sourced precious metals, we are delivering a uniquely positioned product line for the conscientious consumer. Our Caydia^® lab grown diamonds are hand selected by our Gemological Institute of America, or GIA, certified gemologists to meet Charles & Colvard’s uncompromising standards and validated by independent third-party experts. Our Caydia^® lab grown diamonds are available currently in E, F, and G color grades (based on the GIA’s color grading scale) with a minimum clarity in accordance with the GIA’s VS1 clarity classification along with excellent polish and symmetry. All of our Caydia^® lab grown diamonds are set with mostly recycled precious metals.

COVID-19 Update

The COVID-19 pandemic continues to present unprecedented business challenges in Fiscal 2022. We have taken measures to protect the health and safety of our employees, work with our customers and suppliers to minimize disruptions, reduce our expenses, and support our community in addressing the challenges posed by the ongoing COVID-19 pandemic.

We have experienced impacts on our business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, including using accelerated payments in some cases to our suppliers that are due by their terms in future periods and we expect to continue accelerating payments to certain suppliers through at least a portion of Fiscal 2022. We are also seeing a sharp increase in international freight costs, with limited availability and long delays causing disruption in the global supply chain. According to reports regarding international import and export traffic, shipping container shortages and delays are expected to last into calendar year 2022. Accordingly, we are taking steps where possible to mitigate such potential delays in supplier deliveries by accelerating orders and increasing order quantities.

Following the government mandated shut down during the early days of the pandemic, work in our production and distribution facilities has continued throughout the remainder of the pandemic, consistent with guidance from federal, state and local officials to minimize the spread of COVID-19. We continue to take actions to equip employees with personal protective equipment, establish minimum staffing and social distancing policies, sanitize workspaces more frequently, adopt alternate work schedules, and institute other measures aimed to sustain production and related services while minimizing the transmission of COVID-19, including measures to facilitate the provision of vaccines to our employees in line with state and local guidelines. In addition, we have maintained a flexible teleworking policy for our employees who can meet customer commitments remotely, and a portion of our workforce continues teleworking.

For additional risks to the Company related to the COVID-19 pandemic, see “Part I, Item 1A. Risk Factors”, contained in our 2021 Annual Report.

Fiscal 2022 Financial Outlook

As we continue to manage through these challenging times, our strategic initiatives during Fiscal 2022 are designed to drive expansion and help us remain on a strong trajectory toward our goal for top line growth. We look to further position and articulate our brand in what we believe is a rapidly evolving consumer landscape and intend to meet the consumer’s current appetite for digital content. We believe that our plans to expand these digital capabilities will create additional platforms and innovative portals to showcase our brand and elevate its awareness. In addition to growing our online brand presence, in September 2021 we began construction on our first Charles & Colvard Signature Showroom, which we believe will complement and expand our omnichannel brand strategy in the fine jewelry space. This first retail showroom, which we plan to open during Fiscal 2022, will be featured in our corporate headquarters in North Carolina’s Research Triangle Park and allow us to showcase our exclusive Signature Collection designs as well as a wide assortment of Forever One™ moissanite and Caydia^® lab grown diamond fine jewelry for those consumers who want to see and feel our products in person. During Fiscal 2022 we will be expanding our content production capabilities by constructing an innovative broadcast studio at our corporate headquarters, which will provide us a platform to live-stream broadcasts on our websites and through other online media channels, including those of our business partners. We believe this capability will provide another sales channel for our direct-to-consumer business and allow more personal interaction with our online consumer base. In August, we attended and had an exhibition booth at the JCK Trade Show in Las Vegas, Nevada, that allowed us to feature a collection of our fine jewelry and lab created gemstones. The JCK Trade Fair is among the most significant domestic trade events representing the jewelry industry and is attended by jewelry retailers, manufacturers, designers, and other industry influencers who create the jewelry business and drive it forward. This August trade show was the first such in-person JCK event held for the jewelry industry since before the onset of the COVID-19 pandemic. This opportunity provided the jewelry industry with re-entry into the live market space following the impact of the pandemic. It also allowed us to present our brand and gemstone product lines to a broad range of leaders in the jewelry industry.

Critical Accounting Policies and Estimates

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Results of Operations

The following table sets forth certain consolidated statements of operations data for the three months ended September 30, 2021 and 2020:

Consolidated Net Sales

Consolidated net sales for the three months ended September 30, 2021 and 2020 comprise the following:

Consolidated net sales were $10.28 million for the three months ended September 30, 2021 compared to $7.93 million for the three months ended September 30, 2020, an increase of approximately $2.35 million, or 30%. The increase in consolidated net sales for the three months ended September 30, 2021 was due to increased consumer awareness and ongoing strong demand for our moissanite jewels, lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds. These increases resulted in higher finished jewelry product net sales during the three months ended September 30, 2021 in our Online Channels segment and Traditional segment. As consumer confidence has strengthened and with traditional brick-and-mortar stores now having re-opened following their being shut down during much of the comparable prior year period, net sales during the three months ended September 30, 2021, in our Traditional segment increased over this period driven by stronger loose jewel sales in our distributor network.

Sales of finished jewelry represented 55% of total consolidated net sales for the three months ended September 30, 2021, which was consistent with 55% of total consolidated net sales for the corresponding period of the prior year. For the three months ended September 30, 2021, finished jewelry sales were $5.69 million compared to $4.34 million for the corresponding period of the prior year, an increase of approximately $1.35 million, or 31%. This increase in finished jewelry sales was due primarily to higher finished jewelry sales of Forever One™, Moissanite by Charles & Colvard^®, and Signature Collection in our Online Channels segment as well as in our Traditional segment.

		Three Months Ended September 30,								Change
		2021				2020				Dollars				Percent
Product line cost of goods sold:
Finished jewelry		$	2,334,482			$	1,754,289			$	580,193				33	%
Loose jewels			2,059,446				1,743,922				315,524				18	%
Total product line cost of goods sold			4,393,928				3,498,211				895,717				26	%
Non-product line cost of goods sold			622,622				697,844				(75,222	)			(11	)%
Total cost of goods sold		$	5,016,550			$	4,196,055			$	820,495				20	%

		Three Months Ended September 30,								Change
		2021				2020				Dollars				Percent
Sales and marketing		$	2,730,153			$	1,647,933			$	1,082,220				66	%

		Three Months Ended September 30,								Change
		2021				2020				Dollars				Percent
General and administrative		$	1,584,275			$	1,208,035			$	376,240				31	%

		Three Months Ended September 30,								Change
		2021				2020				Dollars				Percent
Interest income		$	355			$	3,459			$	(3,104	)			(90	)%

		Three Months Ended September 30,								Change
		2021				2020				Dollars				Percent
Interest expense		$	-			$	2,439			$	(2,439	)			(100	)%

		Three Months Ended September 30,								Change
		2021				2020				Dollars				Percent
Loss on foreign currency exchange		$	34			$	530			$	(496	)			(94	)%

Exhibit No.		Description
10.1		Charles & Colvard, Ltd. Fiscal 2022 Senior Management Equity Incentive Program, effective July 1, 2021 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on September 15, 2021)+
31.1		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.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
+		Denotes management contract or compensatory plan or arrangement

		CHARLES & COLVARD, LTD.
	By:	/s/ Don O’Connell
November 4, 2021		Don O’Connell
		President and Chief Executive Officer
	By:	/s/ Clint J. Pete
November 4, 2021		Clint J. Pete
		Chief Financial Officer
		(Principal Financial Officer and Chief Accounting Officer)