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, 2022

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 27, 2023, there were 30,523,705 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, 2022

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 2.
37
Item 6.
38
 
39

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS


 
December 31, 2022
(unaudited)
    June 30, 2022  
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
11,960,102
   
$
15,668,361
 
Restricted cash
   
5,065,189
     
5,510,979
 
Accounts receivable, net
   
2,086,868
     
2,220,816
 
Inventory, net
   
13,091,953
     
11,024,276
 
Note receivable
   
-
     
250,000
 
Prepaid expenses and other assets
   
1,241,712
     
1,190,012
 
Total current assets
   
33,445,824
     
35,864,444
 
Long-term assets:
               
Inventory, net
   
21,903,094
     
22,488,524
 
Property and equipment, net
   
2,215,274
     
1,901,176
 
Intangible assets, net
   
290,673
     
265,730
 
Operating lease right-of-use assets
   
2,488,052
     
2,787,419
 
Deferred income taxes, net
    6,286,797
      5,851,904
 
Note receivable
    250,000       -  
Other assets
   
50,300
     
49,658
 
Total long-term assets
   
33,484,190
     
33,344,411
 
TOTAL ASSETS
 
$
66,930,014
   
$
69,208,855
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
4,860,869
   
$
4,401,229
 
Operating lease liabilities, current portion
   
868,269
     
856,571
 
Accrued expenses and other liabilities
   
1,398,178
     
1,546,483
 
Total current liabilities
   
7,127,316
     
6,804,283
 
Long-term liabilities:
               
Noncurrent operating lease liabilities
   
2,453,994
     
2,846,805
 
Total long-term liabilities
   
2,453,994
     
2,846,805
 
Total liabilities
   
9,581,310
     
9,651,088
 
Commitments and contingencies (Note 9)
           
Shareholders’ equity:
               
Common stock, no par value; 50,000,000 shares authorized; 30,912,108 shares issued and 30,523,705 shares outstanding at December 31, 2022 and 30,778,046 shares issued and 30,747,759 shares outstanding at June 30, 2022
   
57,242,211
     
57,242,211
 
Additional paid-in capital
   
26,131,216
     
25,956,491
 
Treasury stock, at cost, 388,403 shares and 30,287 shares at December 31, 2022 and June 30, 2022, respectively
    (489,979 )     (38,164 )
Accumulated deficit
   
(25,534,744
)
   
(23,602,771
)
Total shareholders’ equity
   
57,348,704
     
59,557,767
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
66,930,014
   
$
69,208,855
 

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,
 
   
2022
   
2021
   
2022
   
2021
 
Net sales
 
$
10,366,122
   
$
13,753,135
   
$
17,740,204
   
$
24,033,446
 
Costs and expenses:
                               
Cost of goods sold
   
6,071,775
     
7,033,946
     
10,157,785
     
12,050,496
 
Sales and marketing
   
4,339,684
     
4,079,035
     
7,447,630
     
6,809,187
 
General and administrative
   
1,187,955
     
1,189,559
     
2,601,431
     
2,773,835
 
Total costs and expenses
   
11,599,414
     
12,302,540
     
20,206,846
     
21,633,518
 
(Loss) Income from operations
   
(1,233,292
)
   
1,450,595
     
(2,466,642
)
   
2,399,928
 
Other income (expense):
                               
Interest income
   
59,574
     
490
     
99,776
     
845
 
Loss on foreign currency exchange
   
-
     
-
     
-
     
(34
)
Total other income (expense), net
   
59,574
     
490
     
99,776
     
811
 
(Loss) Income before income taxes
   
(1,173,718
)
   
1,451,085
     
(2,366,866
)
   
2,400,739
 
Income tax benefit (expense)   
   
131,937
     
(283,473
)
   
434,893
     
(406,102
)
Net (loss) income
 
$
(1,041,781
)
 
$
1,167,612
   
$
(1,931,973
)
 
$
1,994,637
 
                                 
Net (loss) income per common share:
                               
Basic
 
$
(0.03
)
 
$
0.04
   
$
(0.06
)
 
$
0.07
 
Diluted
  $
(0.03
)
  $
0.04
    $
(0.06
)
  $
0.06
 
                                 
Weighted average number of shares used in computing net (loss) income per common share:
                               
Basic
   
30,344,954
     
30,287,677
     
30,408,018
     
30,159,543
 
Diluted
   
30,344,954
     
31,315,488
     
30,408,018
     
31,237,948
 

See Notes to Condensed Consolidated Financial Statements.

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

    Six Months Ended December 31, 2022  
   
Common Stock
   
   
         
 
   
Number of
Shares
   
Amount
   
Additional
Paid-in
Capital
    Treasury Stock
   
Accumulated
Deficit
   
Total
Shareholders’
Equity
 
Balance at June 30, 2022
   
30,747,759
   
$
57,242,211
   
$
25,956,491
    $ (38,164 )  
$
(23,602,771
)
 
$
59,557,767
 
Stock-based compensation
   
-
     
-
     
96,232
      -      
-
     
96,232
 
Cancellation of restricted stock
   
(44,688
)
   
-
     
-
      -      
-
     
-
 
Repurchases of common stock
   
(358,116
)
   
-
     
-
      (451,815 )    
-
     
(451,815
)
Net loss
   
-
     
-
     
-
      -      
(890,192
)
   
(890,192
)
Balance at September 30, 2022
   
30,344,955
   
$
57,242,211
   
$
26,052,723
    $ (489,979 )  
$
(24,492,963
)
 
$
58,311,992
 
Stock-based compensation
   
-
     
-
     
78,493
      -      
-
     
78,493
 
Issuance of restricted stock
   
178,750
     
-
     
-
      -      
-
     
-
 
Net loss
   
-
     
-
     
-
      -      
(1,041,781
)
   
(1,041,781
)
Balance at December 31, 2022
   
30,523,705
   
$
57,242,211
   
$
26,131,216
    $ (489,979 )  
$
(25,534,744
)
 
$
57,348,704
 


 
Six Months Ended December 31, 2021
 
   
Common Stock
   
               
 
   
Number of
Shares
   
Amount
   
Additional
Paid-in
Capital
    Treasury Stock    
Accumulated
Deficit
   
Total 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
 

See Notes to Condensed Consolidated Financial Statements.

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

   
Six Months Ended December 31,
 
   
2022
   
2021
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss) income
 
$
(1,931,973
)
 
$
1,994,637
 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
               
Depreciation and amortization
   
308,900
     
238,210
 
Stock-based compensation
   
174,725
     
478,411
 
Provision for uncollectible accounts
   
-
     
52,000
 
Provision for sales returns
   
422,000
     
652,000
 
Inventory write-downs
   
119,000
     
232,000
 
Provision for accounts receivable discounts
   
4,899
     
29,250
 
Deferred income taxes
    (434,893 )     405,159
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(292,951
)
   
(2,718,303
)
Inventory
   
(1,601,247
)
   
(2,899,591
)
Prepaid expenses and other assets, net
   
247,025
     
(483,054
)
Accounts payable
   
459,640
     
2,096,372
 
Accrued income taxes
   
-
     
943
 
Accrued expenses and other liabilities
   
(529,418
)
   
43,297
 
Net cash (used in) provided by operating activities
   
(3,054,293
)
   
121,331
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
   
(617,283
)
   
(775,705
)
Payments for intangible assets
   
(30,658
)
   
(27,730
)
Net cash used in investing activities
   
(647,941
)
   
(803,435
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Stock option exercises
   
-
     
545,918
 
Repurchases of common stock
    (451,815 )     -  
Net cash (used in) provided by financing activities
   
(451,815
)
   
545,918
 
                 
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
   
(4,154,049
)
   
(136,186
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
   
21,179,340
     
21,446,951
 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
 
$
17,025,291
   
$
21,310,765
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for income taxes
 
$
5,900
   
$
-
 

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 own Charles & Colvard Signature Showroom, which opened in October 2022, and also 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 through moissaniteoutlet.com, LLC, a wholly owned operating subsidiary of charlesandcolvard.com, LLC, and third-party online marketplaces.

2.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the six months ended December 31, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2023.

The condensed consolidated financial statements as of December 31, 2022 and for the three and six months ended December 31, 2022 and 2021 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of June 30, 2022 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 “2022 Annual Report”) for the fiscal year ended June 30, 2022 filed with the SEC on September 2, 2022.

The accompanying condensed consolidated financial statements as of December 31, 2022, for the three and six months ended December 31, 2022 and 2021, and as of the fiscal year ended June 30, 2022, include the accounts of the Company and its wholly owned subsidiaries charlesandcolvard.com, LLC, including its wholly-owned subsidiary, moissaniteoulet.com, LLC, which was formed and incorporated as of February 24, 2022; Charles & Colvard Direct, LLC; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was entered into dormancy as of September 30, 2020 following its re-activation in December 2017. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 and has had no operating activity since 2008. Charles & Colvard Direct, LLC, had no operating activity during the six-month periods ended December 31, 2022 or 2021. All intercompany accounts have been eliminated.

Significant Accounting Policies In the opinion of the Company’s management, the Company’s significant accounting policies used for the three and six months ended December 31, 2022, are consistent with those used for the fiscal year ended June 30, 2022. Accordingly, please refer to Note 2 to the Consolidated Financial Statements in the 2022 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, 2023, 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.”

Pursuant to the terms and conditions of the Company’s broker-dealer agreement with Oppenheimer & Co., Inc. (“Oppenheimer”), with whom the Company has engaged to transact common stock share repurchases in connection with its stock repurchase program, the Company is required to maintain a funded liquid margin account held by Oppenheimer for the benefit of the Company. The purpose of this account is to fund the Company’s common stock purchases and any underlying transaction costs and fees. Depending upon the level and timing of stock repurchase activity, the funded margin account cash balance will fluctuate from time to time. At December 31, 2022 and June 30, 2022, cash in the amount of approximately $30 and approximately $461,000, respectively, was held by Oppenheimer. Such cash amount held by Oppenheimer was classified as restricted cash for financial reporting purposes on the Company’s condensed consolidated balance sheets. For additional information regarding the Company’s stock repurchase program, see Note 11, “Shareholders’ Equity and Stock-Based Compensation.”

The reconciliation of cash, cash equivalents, and restricted cash, as presented on the Condensed Consolidated Statements of Cash Flows, consist of the following as of the dates presented:

   
December 31,
2022
   
June 30,
2022
 
Cash and cash equivalents
 
$
11,960,102
   
$
15,668,361
 
Restricted cash
   
5,065,189
     
5,510,979
 
Total cash, cash equivalents, and restricted cash
 
$
17,025,291
   
$
21,179,340
 

Reclassification Certain amounts in the Company’s condensed consolidated financial statements for the quarterly period ended December 31, 2022 have been reclassified to conform to current presentation, principally amounts presented in Note 7, “Accrued Expenses and Other Liabilities”, relating to the combination of accrued sales taxes and accrued franchise taxes, which had previously been presented separately. These reclassifications had no impact on the Company’s condensed consolidated financial position or condensed consolidated results of operations as of or for the three and six months ended December 31, 2022 and 2021 and as of the year ended June 30, 2022.

Recently Adopted/Issued Accounting Pronouncements 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), which provides guidance to ease the burden in accounting for or recognizing the effects of referenced interest rate reform on financial reporting. ASU 2020-04 is elective and may be applied as of March 12, 2020 through December 31, 2022. As described in more detail in Note 10, “Debt”, borrowings under the Company’s line of credit during the fiscal year ended June 30, 2022 would have been based on a rate equal to the one-month LIBOR. As of December 31, 2022, the Company had not borrowed against its line of credit, and therefore, did not elect to apply ASU 2020-04 as of or for the quarterly period then ended.

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, including its own Charles & Colvard Signature Showroom. The accounting policies of the Online Channels segment and Traditional segment are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies” of this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements in the 2022 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, 2022
 
   
Online
Channels
   
Traditional
   
Total
 
Net sales
                 
Finished jewelry
 
$
7,123,440
   
$
1,312,768
   
$
8,436,208
 
Loose jewels
   
722,388
     
1,207,526
     
1,929,914
 
Total
 
$
7,845,828
   
$
2,520,294
   
$
10,366,122
 
                         
Product line cost of goods sold
                       
Finished jewelry
 
$
3,446,197
   
$
739,134
   
$
4,185,331
 
Loose jewels
   
263,285
     
607,965
     
871,250
 
Total
 
$
3,709,482
   
$
1,347,099
   
$
5,056,581
 
                         
Product line gross profit
                       
Finished jewelry
 
$
3,677,243
   
$
573,634
   
$
4,250,877
 
Loose jewels
   
459,103
     
599,561
     
1,058,664
 
Total
 
$
4,136,346
   
$
1,173,195
   
$
5,309,541
 
                         
Operating loss
 
$
(346,102
)
 
$
(887,190
)
 
$
(1,233,292
)
                         
Depreciation and amortization
 
$
56,505
   
$
114,684
   
$
171,189
 
                         
Capital expenditures
 
$
22,620
   
$
164,263
   
$
186,883
 

   
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
 

   
Six Months Ended December 31, 2022
 
   
Online
Channels
   
Traditional
   
Total
 
Net sales
                 
Finished jewelry
 
$
11,527,029
   
$
2,449,585
   
$
13,976,614
 
Loose jewels
   
1,171,285
     
2,592,305
     
3,763,590
 
Total
 
$
12,698,314
   
$
5,041,890
   
$
17,740,204
 
                         
Product line cost of goods sold
                       
Finished jewelry
 
$
5,416,308
   
$
1,375,723
   
$
6,792,031
 
Loose jewels
   
425,984
     
1,270,889
     
1,696,873
 
Total
 
$
5,842,292
   
$
2,646,612
   
$
8,488,904
 
                         
Product line gross profit
                       
Finished jewelry
 
$
6,110,721
   
$
1,073,862
   
$
7,184,583
 
Loose jewels
   
745,301
     
1,321,416
     
2,066,717
 
Total
 
$
6,856,022
   
$
2,395,278
   
$
9,251,300
 
                         
Operating loss
 
$
(955,647
)
 
$
(1,510,995
)
 
$
(2,466,642
)
                         
Depreciation and amortization
 
$
119,892
   
$
189,008
   
$
308,900
 
                         
Capital expenditures
 
$
159,608
   
$
457,675
   
$
617,283
 

   
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
 

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,
 
   
2022
   
2021
   
2022
   
2021
 
Product line cost of goods sold
 
$
5,056,581
   
$
6,138,541
   
$
8,488,904
   
$
10,532,470
 
Non-capitalized manufacturing and production control expenses
   
686,834
     
416,828
     
1,063,887
     
759,229
 
Freight out
   
358,617
     
465,207
     
634,354
     
682,712
 
Inventory write-downs
   
-
     
-
     
119,000
     
232,000
 
Other inventory adjustments
   
(30,257
)
   
13,370
   
(148,360
)
   
(155,915
)
Cost of goods sold
 
$
6,071,775
   
$
7,033,946
   
$
10,157,785
   
$
12,050,496
 

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,
 

 
2022
   
2021
   
2022
   
2021
 
Net sales
                       
United States
 
$
9,989,702
   
$
13,021,717
   
$
17,085,074
   
$
22,846,447
 
International
   
376,420
     
731,418
     
655,130
     
1,186,999
 
Total
 
$
10,366,122
   
$
13,753,135
   
$
17,740,204
   
$
24,033,446
 

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 are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the 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, 2022 and 2021, 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,
2022
   
June 30,
2022
 
Finished jewelry:
           
Raw materials
 
$
1,427,479
   
$
1,697,361
 
Work-in-process
   
758,703
     
1,260,728
 
Finished goods
   
14,160,399
     
12,100,910
 
Finished goods on consignment
   
2,417,645
     
2,135,856
 
Total finished jewelry
 
$
18,764,226
   
$
17,194,855
 
Loose jewels:
               
Raw materials
 
$
1,455,749
   
$
1,985,355
 
Work-in-process
   
8,720,482
     
8,485,713
 
Finished goods
   
5,473,592
     
5,454,266
 
Finished goods on consignment
   
260,271
     
303,491
 
Total loose jewels
   
15,910,094
     
16,228,825
 
Total supplies inventory
   
320,727
     
89,120
 
Total inventory
 
$
34,995,047
   
$
33,512,800
 

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

   
December 31,
2022
   
June 30,
2022
 
Short-term portion
 
$
13,091,953
   
$
11,024,276
 
Long-term portion
   
21,903,094
     
22,488,524
 
Total
 
$
34,995,047
   
$
33,512,800
 

The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished goods set with moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of December 31, 2022 and June 30, 2022, work-in-process inventories issued to active production jobs approximated $1.37 million and $2.76 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, approximately one-half of the Company’s jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends. 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 include significant estimates by management, including the effect of market factors and sales trends. Changes to the Company’s inventory reserves and allowances are accounted for in the accounting period in which a change in such reserves and allowances is observed and deemed appropriate, including changes in management’s estimates used in the process to determine such reserves and valuation allowances.

6.
NOTE RECEIVABLE

On March 5, 2021, the Company entered into a $250,000 convertible promissory note agreement (the “Convertible Promissory Note”), with an unrelated third-party strategic marketing partner. The Convertible Promissory Note is unsecured and was scheduled originally to mature on March 5, 2022. In February 2022, the Company entered into an amendment to the Convertible Promissory Note that was effective as of December 9, 2021 and changed the maturity date to September 30, 2022. Effective September 26, 2022, the Company further amended the Convertible Promissory Note (the “September 2022 Amendment”) and changed the maturity date to June 20, 2024 (the “Maturity Date”). Prior to the September 2022 Amendment, the Company accounted for the Convertible Promissory Note as a current note receivable within the accompanying condensed consolidated financial statements. However, in accordance with the terms of the September 2022 Amendment, the note receivable is classified as a noncurrent note receivable within the accompanying condensed consolidated financial statements as of December 31, 2022.

Interest is accrued at a simple rate of 0.14% per annum and will continue to accrue until the Convertible Promissory Note is converted in accordance with the conversion privileges contained within the Convertible Promissory Note or is repaid. Principal outstanding during an event of default accrues interest at the rate of 5% per annum. Prior to the September 2022 Amendment, accrued and unpaid interest on the Convertible Promissory Note was classified as a current asset and included in prepaid expenses and other assets in the accompanying condensed consolidated financial statements. In accordance with the terms of the September 2022 Amendment, accrued and unpaid interest on the Convertible Promissory Note is classified as a noncurrent asset and included in other noncurrent assets in the accompanying condensed consolidated financial statements as of December 31, 2022.

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,
2022
   
June 30,
2022
 
Accrued compensation and related benefits
 
$
453,917
   
$
614,443
 
Deferred revenue
   
469,157
     
452,866
 
Accrued sales taxes and franchise taxes
   
266,773
     
341,706
 
Accrued cooperative advertising
   
208,330
     
137,467
 
Other accrued expenses
   
1
     
1
 
Total accrued expenses and other liabilities
 
$
1,398,178
   
$
1,546,483
 

8.
INCOME TAXES

For both the three and six months ended December 31, 2022, the Company’s average effective tax rate was 20.46% which consisted of the federal income tax rate of 21.00% and a blended state income tax rate benefit of 0.54%, net of the federal benefit. For both the three and six months ended December 31, 2021, the Company’s statutory tax rate was 22.24% which consisted of the federal income tax rate of 21% and a blended state income tax rate of 1.24%, 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, 2022 and 2021, the Company’s effective tax rate was 18.37% and 16.92%, respectively.

The Company recognized a net income tax benefit of approximately $132,000 and $435,000 for the three and six months ended December 31, 2022, respectively, compared with a net income tax expense of approximately $283,000 and $406,000 for the three and six months ended December 31, 2021, respectively.

As of each reporting date, management considers new evidence, both positive and negative, that could impact the Company’s view with regard to future realization of deferred tax assets. As of December 31, 2022, management determined that the Company’s 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, management determined that sufficient positive evidence existed as of December 31, 2022, to conclude that it is more likely than not deferred tax assets of approximately $6.29 million remain realizable. Conversely, 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, management continued to maintain a valuation allowance against the Company’s deferred tax assets relating to certain state net operating loss carryforwards from its 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 is October 31, 2026 and the terms of the Lease Agreement contain no early termination provisions. Provided there is no outstanding uncured event of default under the Lease Agreement, the Company has an option to extend the lease term for a period of five years. The Company’s option to extend the term of the Lease Agreement must be exercised in writing on or before 270 days prior to expiration of the then-current term. If the option is exercised, the monthly minimum rent for each of the extended terms will be adjusted to the then prevailing fair market rate.

The Company took possession of the leased property on May 23, 2014, once certain improvements to the leased space were completed and did not have access to the property before this date. Upon execution of the third amendment to the Lease Agreement (the “Lease Amendment”) on January 29, 2021, the Lease Amendment included a rent abatement in the amount of approximately $214,000, which is reflected in the rent payments used in the calculation of the right-of-use (“ROU”) asset and lease liability once remeasured upon the execution of the Lease Amendment to extend the lease term. The Lease Amendment also included an allowance for leasehold improvements offered by the landlord in an amount not to exceed approximately $545,000. As of the quarter ended December 31, 2022, the Company has been reimbursed approximately $506,000 by the landlord for qualified leasehold improvements in accordance with the terms of the Lease Amendment. This reimbursement by the landlord reduced the remaining ROU asset by the same amount and is being recognized prospectively over the remaining term of the lease.

The Company has no other material operating leases and is not party to leases that would qualify for classification as a finance lease, variable lease, or short-term lease.

As of December 31, 2022, the Company’s balance sheet classifications of its leases are as follows:

Operating Leases:
     
Noncurrent operating lease ROU assets
 
$
2,488,052
 
 
       
Current operating lease liabilities
 
$
868,269
 
Noncurrent operating lease liabilities
   
2,453,994
 
Total operating lease liabilities
 
$
3,322,263
 

The Company’s total operating lease cost was approximately $175,000 and $214,000 for the three months ended December 31, 2022 and 2021, respectively. The Company’s total operating lease cost was approximately $349,000 and $413,000 for the six months ended December 31, 2022 and 2021, respectively.

As of December 31, 2022, 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 3.83 years.

As of December 31, 2022, the Company’s remaining future payments under operating leases for each fiscal year ending June 30 are as follows:

2023
 
$
438,785
 
2024
   
893,660
 
2025
   
918,236
 
2026
   
943,487
 
2027
   
317,327
 
Total lease payments
   
3,511,495
 
Less: imputed interest
   
189,232
 
Present value of lease payments
   
3,322,263
 
Less: current lease obligations
   
868,269
 
Total long-term lease obligations
 
$
2,453,994
 

The Company makes cash payments for amounts included in the measurement of its lease liabilities. During the three months ended December 31, 2022 and 2021, cash paid for operating leases was approximately $235,000 and $8,000, respectively. During the six months ended December 31, 2022 and 2021, cash paid for operating leases was approximately $466,000 and $170,000, respectively.

Purchase Commitments

On December 12, 2014, the Company entered into an exclusive supply agreement (the “Supply Agreement”) with 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 $24.75 million remains to be purchased as of December 31, 2022. 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, 2022 and 2021, the Company purchased approximately $1.80 million and $3.00 million, respectively, of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended.  

Inflation

Heightened levels of inflation and the potential worsening of macro-economic conditions present a risk for the Company, its suppliers, and the stability of the broader retail and e-commerce industry. During the first six months of the Company’s fiscal year ending June 30, 2023 (“Fiscal 2023”), the Company has experienced impacts to its labor and overhead rates and suppliers have signaled inflation related cost pressures, which is expected to flow through to the Company’s costs and pricing. While the Company has seen some impact from inflation on its financial results in the first six months of Fiscal 2023, if inflation remains at current levels for an extended period, or increases, and the Company is unable to successfully mitigate the impact, the Company’s costs are likely to continue to increase, resulting in further pressure on its revenues, margins, and cash flows. In addition, inflation and the increases in the cost of borrowing from rising interest rates could constrain the overall purchasing power of the Company’s customers for its products and services, in particular in the near term to the extent inflation assumptions are less than current inflationary pressures.

10.
DEBT

Line of Credit

Effective July 7, 2021, the Company obtained from JPMorgan Chase a $5.00 million cash collateralized line of credit facility (the “JPMorgan Chase Credit Facility”). The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The JPMorgan Chase Credit Facility is secured by a cash deposit in the amount of $5.05 million held by JPMorgan Chase as collateral for the line of credit facility and was scheduled to mature on July 31, 2022. Effective July 28, 2022, the JPMorgan Chase Credit Facility was amended to, among other things, extend the maturity date to July 31, 2023, and append the Company’s obligations under the JPMorgan Chase Credit Facility to be guaranteed by the Company’s wholly owned subsidiaries, Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC, and moissaniteoutlet.com, LLC.

Each advance under the JPMorgan Chase Credit Facility, as amended, accrues interest at a rate equal to the sum of JPMorgan Chase’s monthly secured overnight financing rate (“SOFR rate”) to which JPMorgan Chase is subject with respect to the adjusted SOFR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum and an unsecured to secured interest rate adjustment of 0.10% per annum. Prior to its amendment, each advance under the JPMorgan Chase Credit Facility would have accrued 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, 2022, the Company had not borrowed against the JPMorgan Chase Credit Facility and had no outstanding debt as of the period then ended.

11.
SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Repurchases of Common Stock 

Pursuant to authority granted by the Company’s Board of Directors on April 29, 2022, the Company can repurchase up to approximately $5.00 million in shares outstanding of the Company’s common stock over the three-year period ending April 29, 2025. Pursuant to the terms of the repurchase authorization, the common stock share repurchases are generally at the discretion of the Company’s management. As the Company repurchases its common shares, which have no par value, the Company reports such shares held as treasury stock in the accompanying condensed consolidated balance sheets with the purchase price recorded within treasury stock.
 
During the six-month period ended December 31, 2022, the Company repurchased 358,116 shares of the Company’s common stock for an aggregate price of $451,815 pursuant to the repurchase authorization. The Company repurchased no shares of the Company’s common stock during the three-month period ended December 31, 2022.

Dividends
 
The Company has paid no cash dividends during the current fiscal year through December 31, 2022.

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,
 
 
2022
 
2021
 
2022
 
2021
 
Employee stock options
 
$
49,704
   
$
57,448
   
$
122,202
   
$
127,014
 
Restricted stock awards
   
28,789
     
141,556
   
52,523
     
351,397
 
Totals
 
$
78,493
   
$
199,004
 
$
174,725
   
$
478,411
 

No stock-based compensation was capitalized as a cost of inventory during the three and six months ended December 31, 2022 and 2021.

Stock Options

The following is a summary of the stock option activity for the six months ended December 31, 2022:


 
Shares
   
Weighted
Average
Exercise Price
 
Outstanding, June 30, 2022
   
1,658,803
   
$
1.32
 
Granted
   
270,787
   
$
1.02
 
Forfeited
   
(19,336
)
 
$
2.00
 
Expired
   
(2,664
)
 
$
0.98
 
Outstanding, December 31, 2022
   
1,907,590
   
$
1.27
 

The weighted average grant date fair value of stock options granted during the six months ended December 31, 2022 and 2021 was approximately $0.59 and $1.53, respectively. The total fair value of stock options that vested during the six months ended December 31, 2022 and 2021 was approximately $176,000 and $166,000, respectively.

The following table summarizes information about stock options outstanding at December 31, 2022:

Options Outstanding
   
Options Exercisable
   
Options Vested or Expected to Vest
 
Balance
as of
December 31,
2022
   
Weighted
Average
Remaining
Contractual
Life
(Years)
   
Weighted
Average
Exercise
Price
   
Balance
as of
December 31,
2022
   
Weighted
Average
Remaining
Contractual
Life
(Years)
   
Weighted
Average
Exercise
Price
   
Balance
as of
December 31,
2022
   
Weighted
Average
Remaining
Contractual
Life
(Years)
   
Weighted
Average
Exercise
Price
 
 
1,907,590
     
6.86
   
$
1.27
     
1,392,768
     
5.97
   
$
1.21
     
1,854,215
     
6.80
   
$
1.26
 

As of December 31, 2022, the unrecognized stock-based compensation expense related to unvested stock options was approximately $322,000, 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, 2022 and 2021 was approximately $57,000 and $3.04 million, respectively. These amounts are before applicable income taxes and represent the closing market price of the Company’s common stock at December 31, 2022 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, the aggregate intrinsic value of stock options exercised was approximately $717,000. During the six months ended December 31, 2021, the total estimated tax benefit associated with certain stock options that were exercised was approximately $76,000. No stock options were exercised during the six-month period ended December 31, 2022.

Restricted Stock

The following is a summary of the restricted stock activity for the six months ended December 31, 2022:


 
Shares
   
Weighted
Average
Grant Date
Fair Value
 
Unvested, June 30, 2022
   
178,750
   
$
2.75
 
Granted
   
178,750
   
$
0.97
 
Vested
    (134,063 )     2.75  
Cancelled
    (44,687 )   $
2.75
 
Unvested, December 31, 2022
   
178,750
   
$
0.97
 

The unvested restricted shares as of December 31, 2022 are all performance-based restricted shares that are scheduled to vest, subject to achievement of the underlying performance goals, in July 2023. As of December 31, 2022, the estimated unrecognized stock-based compensation expense related to unvested restricted shares subject to achievement of performance goals was approximately $144,000, all of which is expected to be recognized over a weighted average period of approximately seven months.

12.
NET (LOSS) INCOME PER COMMON SHARE

Basic net (loss) income per common share is computed by dividing net (loss) 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 (loss) income per share presentations:

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2022
   
2021
   
2022
   
2021
 
Numerator:
                       
Net (loss)income
 
$
(1,041,781
)
 
$
1,167,612