UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q



(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2021

OR

Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

Commission File Number: 000-23329



Charles & Colvard, Ltd.
(Exact name of registrant as specified in its charter)



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)

(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
Common Stock, no par value per share
CTHR
The Nasdaq Stock Market LLC

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
Non-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 January 28, 2022, there were 30,639,689 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, 2021

TABLE OF CONTENTS



Page
Number
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
 

1
 
2
 
3
 
4
 
5
Item 2.
20
Item 3.
34
Item 4.
34
 
PART II – OTHER INFORMATION
Item 1.
35
Item 1A.
35
Item 6.
36
 
37

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS


 
December 31, 2021
(unaudited)
    June 30, 2021  
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
16,260,765
   
$
21,302,317
 
Restricted cash
   
5,050,000
     
144,634
 
Accounts receivable, net
   
3,647,127
     
1,662,074
 
Inventory, net
   
12,492,151
     
11,450,141
 
Note receivable
   
250,000
     
250,000
 
Prepaid expenses and other assets
   
1,781,448
     
952,065
 
Total current assets
   
39,481,491
     
35,761,231
 
Long-term assets:
               
Inventory, net
   
19,348,160
     
17,722,579
 
Property and equipment, net
   
1,417,380
     
875,897
 
Intangible assets, net
   
233,400
     
209,658
 
Operating lease right-of-use assets
   
3,605,817
     
3,952,146
 
Deferred income taxes, net
    5,945,671
      6,350,830
 
Other assets
   
49,658
     
49,658
 
Total long-term assets
   
30,600,086
     
29,160,768
 
TOTAL ASSETS
 
$
70,081,577
   
$
64,921,999
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
4,870,745
   
$
2,774,373
 
Operating lease liabilities
   
774,024
     
566,083
 
Accrued expenses and other liabilities
   
2,487,724
     
2,281,807
 
Total current liabilities
   
8,132,493
     
5,622,263
 
Long-term liabilities:
               
Noncurrent operating lease liabilities
   
3,230,281
     
3,600,842
 
Accrued income taxes
   
10,821
     
9,878
 
Total long-term liabilities
   
3,241,102
     
3,610,720
 
Total liabilities
   
11,373,595
     
9,232,983
 
Commitments and contingencies (Note 9)
           
Shareholders’ equity:
               
Common stock, no par value; 50,000,000 shares authorized; 30,595,047 and 29,913,095 shares issued and outstanding at December 31, 2021 and June 30, 2021, respectively
   
56,902,098
     
56,057,109
 
Additional paid-in capital
   
25,787,933
     
25,608,593
 
Accumulated deficit
   
(23,982,049
)
   
(25,976,686
)
Total shareholders’ equity
   
58,707,982
     
55,689,016
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
70,081,577
   
$
64,921,999
 

See Notes to Condensed Consolidated Financial Statements.

CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

   
Three Months Ended December 31,
   
Six Months Ended December 31,
 
   
2021
   
2020
   
2021
   
2020
 
Net sales
 
$
13,753,135
   
$
12,146,790
   
$
24,033,446
   
$
20,073,083
 
Costs and expenses:
                               
Cost of goods sold
   
7,033,946
     
6,167,708
     
12,050,496
     
10,363,763
 
Sales and marketing
   
4,079,035
     
2,480,571
     
6,809,187
     
4,128,503
 
General and administrative
   
1,189,559
     
977,528
     
2,773,835
     
2,185,564
 
Total costs and expenses
   
12,302,540
     
9,625,807
     
21,633,518
     
16,677,830
 
Income from operations
   
1,450,595
     
2,520,983
     
2,399,928
     
3,395,253
 
Other income (expense):
                               
Interest income
   
490
     
1,126
     
845
     
4,586
 
Interest expense
   
-
     
(2,466
)
   
-
     
(4,905
)
Loss on foreign currency exchange
   
-
     
(72
)
   
(34
)
   
(603
)
Total other income (expense), net
   
490
     
(1,412
)
   
811
     
(922
)
Income before income taxes
   
1,451,085
     
2,519,571
     
2,400,739
     
3,394,331
 
Income tax expense
   
(283,473
)
   
(494
)
   
(406,102
)
   
(988
)
Net income
 
$
1,167,612
   
$
2,519,077
   
$
1,994,637
   
$
3,393,343
 
                                 
Net income per common share:
                               
Basic
 
$
0.04
   
$
0.09
   
$
0.07
   
$
0.12
 
Diluted
  $
0.04
    $
0.09
    $
0.06
    $
0.12
 
                                 
Weighted average number of shares used in computing net income per common share:
                               
Basic
   
30,287,677
     
28,804,265
     
30,159,543
     
28,795,424
 
Diluted
   
31,315,488
     
29,262,702
     
31,237,948
     
28,980,009
 

See Notes to Condensed Consolidated Financial Statements.

CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)

    Six Months Ended December 31, 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
 
Stock-based compensation
   
-
     
-
     
199,004
     
-
     
199,004
 
Stock option exercises
   
255,590
     
447,877
     
(159,329
)
   
-
     
288,548
 
Net income
   
-
     
-
     
-
     
1,167,612
     
1,167,612
 
Balance at December 31, 2021
   
30,595,047
   
$
56,902,098
   
$
25,787,933
   
$
(23,982,049
)
 
$
58,707,982
 

   
Six Months Ended December 31, 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
 
Stock-based compensation
   
-
     
-
     
87,938
     
-
     
87,938
 
Stock option exercises
    126,666       177,325       (62,326 )     -       114,999  
Net income
   
-
     
-
     
-
     
2,519,077
     
2,519,077
 
Balance at December 31, 2020
   
29,092,326
   
$
54,520,189
   
$
26,013,132
   
$
(35,394,109
)
 
$
45,139,212
 

See Notes to Condensed Consolidated Financial Statements.

CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
Six Months Ended December 31,
 
   
2021
   
2020
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
1,994,637
   
$
3,393,343
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
238,210
     
271,061
 
Stock-based compensation
   
478,411
     
195,293
 
Provision for uncollectible accounts
   
52,000
     
5,514
 
Provision for sales returns
   
652,000
     
662,000
 
Inventory write-off
   
232,000
     
105,000
 
Provision for accounts receivable discounts
   
29,250
     
9,581
 
Deferred income taxes
    405,159
      -
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(2,718,303
)
   
(3,066,219
)
Inventory
   
(2,899,591
)
   
1,862,843
 
Prepaid expenses and other assets, net
   
(483,054
)
   
62,095
 
Accounts payable
   
2,096,372
     
(815,659
)
Accrued income taxes
   
943
     
988
 
Accrued expenses and other liabilities
   
43,297
     
(273,784
)
Net cash provided by operating activities
   
121,331
     
2,412,056
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
   
(775,705
)
   
(244,688
)
Payments for intangible assets
   
(27,730
)
   
(26,538
)
Net cash used in investing activities
   
(803,435
)
   
(271,226
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Stock option exercises
   
545,918
     
114,999
 
Net cash provided by financing activities
   
545,918
     
114,999
 
                 
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
   
(136,186
)
   
2,255,829
 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
   
21,446,951
     
14,617,234
 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
 
$
21,310,765
   
$
16,873,063
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for interest
 
$
-
   
$
-
 
Cash paid during the period for income taxes
 
$
-
   
$
8,961
 

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 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 six months ended December 31, 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 December 31, 2021 and for the three and six months ended December 31, 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 December 31, 2021, for the three and six months ended December 31, 2021 and 2020, and as of 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 six-month periods ended December 31, 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 and six months ended December 31, 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.

Cash and Cash Equivalents – All highly liquid investments with an original maturity of three months or less from the date of purchase are considered to be cash equivalents.

Restricted Cash – In 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, 2022, the Company is required to keep $5.05 million 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.”

In accordance with cash management process requirements related to the Company’s asset-based revolving credit facility from White Oak Commercial Finance, LLC (“White Oak”), which the Company had in place prior to obtaining the JPMorgan Chase Credit Facility, there were access and usage restrictions on certain cash deposit balances for periods of up to two business days during which time such deposits were held by White Oak for the benefit of the Company. During the period these cash deposits were held by White Oak, such amounts were classified as restricted cash for reporting purposes on the Company’s condensed consolidated balance sheets. For additional information regarding the Company’s prior asset-based revolving credit facility, see Note 10, “Debt.”

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,
2021
   
June 30,
2021
 
Cash and cash equivalents
 
$
16,260,765
   
$
21,302,317
 
Restricted cash
   
5,050,000
     
144,634
 
Total cash, cash equivalents, and restricted cash
 
$
21,310,765
   
$
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 December 31, 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 December 31, 2021.

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, 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. 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 2021 Annual Report.

The Company evaluates the financial performance of its segments based on net sales; product line gross profit, or the excess of product line sales over product line cost of goods sold; and operating income. 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.

The Company allocates certain general and administrative expenses between its Online Channels segment and its Traditional segment based on net sales and number of employees to arrive at segment operating income. Unallocated expenses remain in its Traditional segment.

Summary financial information by reportable segment is as follows:

   
Three Months Ended December 31, 2021
 
   
Online
Channels
   
Traditional
   
Total
 
Net sales
                 
Finished jewelry
 
$
8,452,535
   
$
2,086,631
   
$
10,539,166
 
Loose jewels
   
871,119
     
2,342,850
     
3,213,969
 
Total
 
$
9,323,654
   
$
4,429,481
   
$
13,753,135
 
                         
Product line cost of goods sold
                       
Finished jewelry
 
$
3,432,950
   
$
1,271,026
   
$
4,703,976
 
Loose jewels
   
333,785
     
1,100,780
     
1,434,565
 
Total
 
$
3,766,735
   
$
2,371,806
   
$
6,138,541
 
                         
Product line gross profit
                       
Finished jewelry
 
$
5,019,585
   
$
815,605
   
$
5,835,190
 
Loose jewels
   
537,334
     
1,242,070
     
1,779,404
 
Total
 
$
5,556,919
   
$
2,057,675
   
$
7,614,594
 
                         
Operating income
 
$
1,432,727
   
$
17,868
   
$
1,450,595
 
                         
Depreciation and amortization
 
$
53,470
   
$
60,528
   
$
113,998
 
                         
Capital expenditures
 
$
27,040
   
$
350,545
   
$
377,585
 

   
Three Months Ended December 31, 2020
 
   
Online
Channels
   
Traditional
   
Total
 
Net sales
                 
Finished jewelry
 
$
6,588,338
   
$
1,676,859
   
$
8,265,197
 
Loose jewels
   
997,939
     
2,883,654
     
3,881,593
 
Total
 
$
7,586,277
   
$
4,560,513
   
$
12,146,790
 
                         
Product line cost of goods sold
                       
Finished jewelry
 
$
2,863,733
   
$
1,138,413
   
$
4,002,146
 
Loose jewels
   
388,426
     
1,417,177
     
1,805,603
 
Total
 
$
3,252,159
   
$
2,555,590
   
$
5,807,749
 
                         
Product line gross profit
                       
Finished jewelry
 
$
3,724,605
   
$
538,446
   
$
4,263,051
 
Loose jewels
   
609,513
     
1,466,477
     
2,075,990
 
Total
 
$
4,334,118
   
$
2,004,923
   
$
6,339,041
 
                         
Operating income
 
$
1,494,448
 
$
1,026,535
 
$
2,520,983
                         
Depreciation and amortization
 
$
59,221
   
$
79,384
   
$
138,605
 
                         
Capital expenditures
 
$
90,852
   
$
52,350
   
$
143,202
 

   
Six Months Ended December 31, 2021
 
   
Online
Channels
   
Traditional
   
Total
 
Net sales
                 
Finished jewelry
 
$
12,939,493
   
$
3,285,960
   
$
16,225,453
 
Loose jewels
   
1,753,966
     
6,054,027
     
7,807,993
 
Total
 
$
14,693,459
   
$
9,339,987
   
$
24,033,446
 
                         
Product line cost of goods sold
                       
Finished jewelry
 
$
5,144,174
   
$
1,894,285
   
$
7,038,459
 
Loose jewels
   
647,890
     
2,846,121
     
3,494,011
 
Total
 
$
5,792,064
   
$
4,740,406
   
$
10,532,470
 
                         
Product line gross profit
                       
Finished jewelry
 
$
7,795,319
   
$
1,391,675
   
$
9,186,994
 
Loose jewels
   
1,106,076
     
3,207,906
     
4,313,982
 
Total
 
$
8,901,395
   
$
4,599,581
   
$
13,500,976
 
                         
Operating income
 
$
1,754,398
   
$
645,530
   
$
2,399,928
 
                         
Depreciation and amortization
 
$
121,172
   
$
117,038
   
$
238,210
 
                         
Capital expenditures
 
$
86,300
   
$
689,405
   
$
775,705
 

   
Six Months Ended December 31, 2020
 
   
Online
Channels
   
Traditional
   
Total
 
Net sales
                 
Finished jewelry
 
$
10,211,799
   
$
2,388,735
   
$
12,600,534
 
Loose jewels
   
1,839,772
     
5,632,777
     
7,472,549
 
Total
 
$
12,051,571
   
$
8,021,512
   
$
20,073,083
 
                         
Product line cost of goods sold
                       
Finished jewelry
 
$
4,197,115
   
$
1,559,320
   
$
5,756,435
 
Loose jewels
   
701,115
     
2,848,410
     
3,549,525
 
Total
 
$
4,898,230
   
$
4,407,730
   
$
9,305,960
 
                         
Product line gross profit
                       
Finished jewelry
 
$
6,014,684
   
$
829,415
   
$
6,844,099
 
Loose jewels
   
1,138,657
     
2,784,367
     
3,923,024
 
Total
 
$
7,153,341
   
$
3,613,782
   
$
10,767,123
 
                         
Operating income
 
$
2,269,113
   
$
1,126,140
 
$
3,395,253
                         
Depreciation and amortization
 
$
113,573
   
$
157,488
   
$
271,061
 
                         
Capital expenditures
 
$
150,129
   
$
94,559
   
$
244,688
 

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,
 
   
2021
   
2020
   
2021
   
2020
 
Product line cost of goods sold
 
$
6,138,541
   
$
5,807,749
   
$
10,532,470
   
$
9,305,960
 
Non-capitalized manufacturing and production control expenses
   
416,828
     
395,237
     
759,229
     
724,641
 
Freight out
   
465,207
     
316,542
     
682,712
     
491,881
 
Inventory write-off
   
-
     
25,000
     
232,000
     
105,000
 
Other inventory adjustments
   
13,370
     
(376,820
)
   
(155,915
)
   
(263,719
)
Cost of goods sold
 
$
7,033,946
   
$
6,167,708
   
$
12,050,496
   
$
10,363,763
 

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 by geographic area:

   
Three Months Ended December 31,
   
Six Months Ended December 31,
 

 
2021
   
2020
   
2021
   
2020
 
Net sales
                       
United States
 
$
13,021,717
   
$
11,388,680
   
$
22,846,447
   
$
18,888,399
 
International
   
731,418
     
758,110
     
1,186,999
     
1,184,684
 
Total
 
$
13,753,135
   
$
12,146,790
   
$
24,033,446
   
$
20,073,083
 

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, notes receivable, trade accounts receivable, and trade accounts payable. All financial instruments, including but not limited to the note receivable, 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.

Assets that are measured at fair value on a non-recurring basis include property and equipment, leasehold improvements, and intangible assets comprising patents, license rights, and trademarks. These items are recognized at fair value when they are considered to be impaired. For the three and six months ended December 31, 2021 and 2020, no impairment was recorded.

5.
INVENTORIES

The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:

   
December 31,
2021
   
June 30,
2021
 
Finished jewelry:
           
Raw materials
 
$
1,728,266
   
$
1,476,514
 
Work-in-process
   
1,826,826
     
779,593
 
Finished goods
   
10,089,451
     
8,025,816
 
Finished goods on consignment
   
2,316,408
     
2,050,372
 
Total finished jewelry
 
$
15,960,951
   
$
12,332,295
 
Loose jewels:
               
Raw materials
 
$
1,673,194
   
$
1,775,505
 
Work-in-process
   
8,604,863
     
9,893,443
 
Finished goods
   
5,153,778
     
4,942,192
 
Finished goods on consignment
   
344,337
     
154,968
 
Total loose jewels
   
15,776,172
     
16,766,108
 
Total supplies inventory
   
103,188
     
74,317
 
Total inventory
 
$
31,840,311
   
$
29,172,720
 

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

   
December 31,
2021
   
June 30,
2021
 
Short-term portion
 
$
12,492,151
   
$
11,450,141
 
Long-term portion
   
19,348,160
     
17,722,579
 
Total
 
$
31,840,311
   
$
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 December 31, 2021 and June 30, 2021, work-in-process inventories issued to active production jobs approximated $3.07 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:

   
December 31,
2021
   
June 30,
2021
 
Accrued sales tax
 
$
921,828
   
$
555,547
 
Accrued compensation and related benefits
   
585,782
     
866,705
 
Deferred revenue
   
548,311
     
774,891
 
Accrued cooperative advertising
   
415,324
     
68,185
 
Accrued income taxes
   
16,478
     
16,478
 
Other
   
1
     
1
 
Total accrued expenses and other liabilities
 
$
2,487,724
   
$
2,281,807
 
8.
INCOME TAXES

For each of the three and six months ended December 31, 2021, the Company’s statutory tax rate was 22.24% and consisted of the federal income tax rate of 21% and a blended state income tax rate of 1.24%, net of the federal benefit. For each of the three and six months ended December 31, 2020, the Company’s statutory tax rate was 22.11% and consisted of the federal income tax rate of 21% and a blended state income tax rate of 1.11%, net of the federal benefit. 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 quarter. For the six months ended December 31, 2021, the Company’s effective tax rate was 16.92%.

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 June 30, 2021, cumulative positive taxable income over the last three tax years had been generated in the U.S., as compared to the negative evidence of cumulative losses in previous years. The Company’s management also determined that its expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that included significant management estimates and assumptions, would be sufficient to result in full utilization of the Company’s federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, the Company’s management determined that sufficient positive evidence existed as of June 30, 2021, to conclude that it was more likely than not deferred tax assets of approximately $6.35 million would be realizable, and it reduced the Company’s valuation allowance accordingly.

Accordingly, the Company recognized a net income tax expense of approximately $283,000 and $406,000 for the three and six months ended December 31, 2021, respectively, compared with a net income tax expense of approximately $500 and $1,000 for the three and six months ended December 31, 2020, respectively. With the reduction of its valuation allowance during the fiscal year ended June 30, 2021, the Company recognized deferred income tax expense during the six months ended December 31, 2021 in the amount of approximately $405,000. Included in its tax provision, the Company records estimated taxes, penalties, and interest associated with uncertain tax positions as income tax expense and recognized such expense related to these items of approximately $500 for each of the three months ended December 31, 2021 and 2020, respectively, and approximately $1,000 for each of the six months ended December 31, 2021 and 2020, respectively.

As of December 31, 2021, the Company’s management determined that its expectations of future taxable income in upcoming tax years, including estimated growth rates applied to future expected taxable income that includes significant management estimates and assumptions, would continue to be sufficient to result in full utilization of the Company’s remaining federal net operating loss carryforwards and certain of the deferred tax assets prior to any statutory expiration. As a result, the Company’s management determined that sufficient positive evidence existed as of December 31, 2021, to conclude that it is more likely than not deferred tax assets of approximately $5.95 million remain realizable. Conversely, the Company’s management further determined that sufficient negative evidence continued to exist to conclude it was uncertain that the Company would have sufficient future taxable income to utilize certain of its deferred tax assets. Therefore, the Company continued to maintain a valuation allowance against the deferred tax assets relating to certain state net operating loss carryforwards from the Company’s e-commerce subsidiary due to the timing uncertainty of when it will generate positive taxable income to utilize the associated deferred tax assets. In addition, a valuation allowance remains against certain deferred tax assets relating to operating loss carryforwards relating to the Company’s dormant subsidiary located in Hong Kong.

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, 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 December 31, 2021, the Company’s balance sheet classifications of its leases are as follows:

Operating Leases:
     
Noncurrent operating lease ROU assets
 
$
3,605,817
 
 
       
Current operating lease liabilities
 
$
774,024
 
Noncurrent operating lease liabilities
   
3,230,281
 
Total operating lease liabilities
 
$
4,004,305
 

The Company’s total operating lease cost was approximately $214,000 and $128,000 for the three months ended December 31, 2021 and 2020, respectively. The Company’s total operating lease cost was approximately $413,000 and $260,000 for the six months ended December 31, 2021 and 2020, respectively.

As of December 31, 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 4.83 years.

As of December 31, 2021, the Company’s remaining future payments under operating leases for each fiscal year ending June 30 are as follows:

2022
 
$
355,868
 
2023
   
869,742
 
2024
   
893,660
 
2025
   
918,236
 
2026
   
943,487
 
2027
   
317,327
 
Total lease payments
   
4,298,320
 
Less: imputed interest
   
294,015
 
Present value of lease payments
   
4,004,305
 
Less: current lease obligations
   
774,024
 
Total long-term lease obligations
 
$
3,230,281
 

The Company makes cash payments for amounts included in the measurement of its lease liabilities. During the three months ended December 31, 2021 and 2020, cash paid for operating leases was approximately $8,000 and $170,000, respectively. During the six months ended December 31, 2021 and 2020, cash paid for operating leases was approximately $170,000 and $340,000, 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.

Purchase Commitments

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 $29.85 million remains to be purchased as of December 31, 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 six months ended December 31, 2021, the Company purchased approximately $3.00 million of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended. During the six months ended December 31, 2020, the Company purchased approximately $1.03 million SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended.

COVID-19 Update

The evolving COVID-19 pandemic continues to present unprecedented worldwide economic and 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, and support its community in addressing the challenges posed by the ongoing COVID-19 pandemic and its evolving viral variants.

The Company has experienced impacts on its business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, including at times using accelerated payments in some cases to the Company’s suppliers that are due by their terms in future periods. The Company expects to continue accelerating payments to certain suppliers through at least the remainder of Fiscal 2022. The Company is continuing to see a sharp increase in international and domestic 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 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, 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 encourage all employees to be fully vaccinated and to provide evidence of vaccination status 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 six months ended December 31, 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 boosters, 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

Line of Credit

Effective July 7, 2021, the Company obtained from JPMorgan Chase Bank, N.A. (“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 $5.05 million held by JPMorgan Chase as collateral for the line of credit facility.

Each advance accrues interest at a rate equal to JPMorgan Chase’s monthly LIBOR rate multiplied by a statutory reserve rate for eurocurrency funding to which JPMorgan Chase is subject with respect to the adjusted LIBOR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% 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.

As of December 31, 2021, the Company had not borrowed against the JPMorgan Chase Credit Facility.

Prior to obtaining the JPMorgan Chase Credit Facility, the Company and its wholly owned subsidiary, charlesandcolvard.com, LLC (collectively, the “Borrowers”), had a $5.00 million asset-based revolving credit facility (the “White Oak Credit Facility”) from White Oak Commercial Finance, LLC (“White Oak”), which was terminated by the Company in accordance with its terms as of July 9, 2021. The effective date of the White Oak Credit Facility was July 13, 2018, and it was scheduled to mature on July 13, 2021.

Available advances could have been in the form of either revolving or non-revolving. During the first year of the term of the White Oak Credit Facility, any revolving advances would have accrued interest at a rate equal to one-month LIBOR (reset monthly, and subject to a 1.25% floor) plus 3.75%, and any non-revolving advances would have accrued interest at such LIBOR rate plus 4.75%. Thereafter, the interest margins would have been reduced upon the Company’s achievement of a specified fixed charge coverage ratio during the period of any outstanding advances. However, any advances were in all cases subject to a minimum interest rate of 5.50% and interest would have been calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default, which did not occur during the term of the White Oak Credit Facility, would have accrued interest at a rate 2% in excess of the rate that would have been otherwise applicable.

The Company had not borrowed against the White Oak Credit Facility as of July 9, 2021, the date upon which the White Oak Credit Facility was terminated by the Company in accordance with its terms.

Paycheck Protection Program Loan

On June 18, 2020, the Company received the proceeds from a loan pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as administered by the U.S. Small Business Administration (the “SBA”). The loan in the principal amount of $965,000 (the “PPP Loan”) was disbursed by the Lender pursuant to a promissory note issued by the Company (the “Promissory Note”) on June 15, 2020. During the period of time that the principal under the Promissory Note was outstanding, the Company accounted for the Promissory Note as debt within the accompanying consolidated financial statements.

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.

The Company has no outstanding debt as of December 31, 2021.

11.
SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

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,
 
 
2021
 
2020
 
2021
 
2020
 
Employee stock options
 
$
57,448
   
$
50,176
   
$
127,014
   
$
141,216
 
Restricted stock awards
   
141,556
     
37,762
   
351,397
     
54,077
 
Totals
 
$
199,004
   
$
87,938
 
$
478,411
   
$
195,293
 

No stock-based compensation was capitalized as a cost of inventory during the three and six months ended December 31, 2021 and 2020.

Stock Options

The following is a summary of the stock option activity for the six months ended December 31, 2021:


 
Shares
   
Weighted Average Exercise Price
 
Outstanding, June 30, 2021
   
2,235,286
   
$
1.24
 
Granted
   
142,793
   
$
2.92
 
Exercised
   
(439,227
)
 
$
1.24
 
Forfeited
   
(14,584
)
 
$
0.89
 
Expired
   
(60,079
)
 
$
1.52
 
Outstanding, December 31, 2021
   
1,864,189
   
$
1.36
 

The total fair value of stock options that vested during the six months ended December 31, 2021 was approximately $166,000.

The following table summarizes information about stock options outstanding at December 31, 2021:

Options Outstanding
   
Options Exercisable
   
Options Vested or Expected to Vest
 
Balance
as of
12/31/2021
   
Weighted
Average Remaining
Contractual Life
(Years)
   
Weighted
Average Exercise
Price
   
Balance
as of
12/31/2021
   
Weighted
Average Remaining
Contractual Life
(Years)
   
Weighted
Average
Exercise
Price
   
Balance
as of
12/31/2021
   
Weighted
Average Remaining
Contractual Life
(Years)
   
Weighted
Average Exercise
Price
 
 
1,864,189
     
6.31
   
$
1.36
     
1,463,550
     
5.59
   
$
1.29
     
1,805,494
     
6.23
   
$
1.36
 

As of December 31, 2021, the unrecognized stock-based compensation expense related to unvested stock options was approximately $277,000, which is expected to be recognized over a weighted average period of approximately 20 months.

The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at December 31, 2021 was approximately $3.04 million. These amounts are before applicable income taxes and represent the closing market price of the Company’s common stock at December 31, 2021 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. During the six months ended December 31, 2021 and 2020, the aggregate intrinsic value of stock options exercised was approximately $717,000 and $48,000, respectively. During the six months ended December 31, 2021 and 2020, the total estimated tax benefit associated with certain stock options that were exercised was approximately $76,000 and $0, respectively.

Restricted Stock

The following is a summary of the restricted stock activity for the six months ended December 31, 2021:


 
Shares
   
Weighted
Average
Grant Date
Fair Value
 
Unvested, June 30, 2021
   
178,750
   
$
0.72
 
Granted
   
242,725
   
$
2.75
 
Vested
   
(242,725
)
 
$
1.25
 
Unvested, December 31, 2021
   
178,750
   
$
2.75
 

The unvested restricted shares as of December 31, 2021 are all performance-based restricted shares that are scheduled to vest, subject to achievement of the underlying performance goals, in July 2022. As of December 31, 2021, the estimated unrecognized stock-based compensation expense related to unvested restricted shares subject to achievement of performance goals was approximately $326,000, all of which is expected to be recognized over a weighted average period of approximately seven months.

Dividends

The Company has paid no cash dividends during the current fiscal year through December 31, 2021.

12.
NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods. Diluted net income 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.

The following table reconciles the differences between the basic and diluted net income per share presentations:

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2021
   
2020
   
2021
   
2020
 
Numerator:
                       
Net income
 
$
1,167,612
   
$
2,519,077
 
$
1,994,637
   
$