UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2023
OR
For the transition period from ______ to ______
Commission File Number: 000-23329
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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(919 ) 468-0399
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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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.
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Large accelerated filer
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Accelerated filer
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Smaller reporting company
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Emerging growth company
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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 April 28, 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 March 31, 2023
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Page
Number
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PART I – FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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1
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2
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3
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4
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Notes to Condensed Consolidated Financial Statements (unaudited) |
5
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Item 2.
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20
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Item 3.
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33
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Item 4.
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33
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PART II – OTHER INFORMATION
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Item 1.
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34
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Item 1A.
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34
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Item 2.
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34
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Item 6.
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35
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Signatures |
36
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PART I – FINANCIAL INFORMATION
| Item 1. |
Financial Statements
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CHARLES & COLVARD, LTD.
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March 31, 2023
(unaudited)
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June 30, 2022 | |||||||
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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$
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Restricted cash
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Accounts receivable, net
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Inventory, net
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Note receivable
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Prepaid expenses and other assets
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Total current assets
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Long-term assets:
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Inventory, net
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Property and equipment, net
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Intangible assets, net
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Operating lease right-of-use assets
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Deferred income taxes, net
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Note receivable
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Other assets
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Total long-term assets
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TOTAL ASSETS
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$
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$
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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$
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Operating lease liabilities, current portion
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Accrued expenses and other liabilities
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Total current liabilities
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Long-term liabilities:
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Noncurrent operating lease liabilities
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Total long-term liabilities
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Total liabilities
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Commitments and contingencies (Note 9)
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Shareholders’ equity:
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Common stock,
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Additional paid-in capital
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Treasury stock, at cost,
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( |
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Accumulated deficit
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(
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(
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)
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Total shareholders’ equity
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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$
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$
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See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
(unaudited)
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Three Months Ended March 31,
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Nine Months Ended March 31,
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2023
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2022
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2023
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2022
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Net sales
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$
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$
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$
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$
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Costs and expenses:
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Cost of goods sold
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Sales and marketing
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General and administrative
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Total costs and expenses
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(Loss) Income from operations
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(
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(
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Other income (expense):
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Interest income
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Loss on foreign currency exchange
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(
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)
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Total other income (expense), net
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(Loss) Income before income taxes
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(
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(
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Income tax expense
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(
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(
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(
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(
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Net (loss) income
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$
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(
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$
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$
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(
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$
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Net (loss) income per common share:
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Basic
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$
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(
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$
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$
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(
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$
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Diluted
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$
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(
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$ |
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$
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(
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$
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Weighted average number of shares used in computing net (loss) income per common share:
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Basic
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Diluted
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See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
(unaudited)
| Nine Months Ended March 31, 2023 | ||||||||||||||||||||||||
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Common Stock
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Number of
Shares
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Amount
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Additional
Paid-in
Capital
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Treasury Stock |
Accumulated
Deficit
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Total
Shareholders’
Equity
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Balance at June 30, 2022
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$
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$
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$ |
( |
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$
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(
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$
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Stock-based compensation
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-
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Cancellation of restricted stock
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Repurchases of common stock
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( |
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Net loss
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-
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(
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(
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Balance at September 30, 2022
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( |
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(
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Stock-based compensation
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-
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Issuance of restricted stock
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Net loss
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-
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(
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(
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Balance at December 31, 2022
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( |
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(
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Stock-based compensation
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-
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Net loss
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-
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(
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(
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Balance at March 31, 2023
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$
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$
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$ |
( |
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$
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(
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$
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Nine Months Ended March 31, 2022
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Common Stock
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Number of
Shares
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Amount
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Additional
Paid-in
Capital
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Treasury Stock |
Accumulated
Deficit
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Total
Shareholders’
Equity
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|||||||||||||||||||
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Balance at June 30, 2021
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$
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$
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$ |
$
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(
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)
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$
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Stock-based compensation
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-
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Issuance of restricted stock
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Stock option exercises
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(
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Net income
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-
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Balance at September 30, 2021
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(
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Stock-based compensation
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-
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Stock option exercises
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( |
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Net income
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-
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Balance at December 31, 2021
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(
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Stock-based compensation
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-
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Stock option exercises
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( |
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Net income
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-
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|||||||||||||||||||
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Balance at March 31, 2022
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$
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$
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$ |
$
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(
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)
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$
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See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
(unaudited)
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Nine Months Ended March 31,
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2023
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2022
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net (loss) income
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$
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(
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)
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$
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|||
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Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
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Depreciation and amortization
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Stock-based compensation
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(Recovery of) Provision for uncollectible accounts
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(
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)
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Provision for (Recovery of) sales returns
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(
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Inventory write-downs
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Provision for accounts receivable discounts
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Deferred income taxes
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Changes in operating assets and liabilities:
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Accounts receivable
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Inventory
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(
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)
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|||||
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Prepaid expenses and other assets, net
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Accounts payable
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(
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)
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Accrued income taxes
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Accrued expenses and other liabilities
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(
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)
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(
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Net cash (used in) provided by operating activities
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(
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)
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment
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(
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)
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(
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Payments for intangible assets
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(
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)
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(
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)
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Net cash used in investing activities
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(
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(
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CASH FLOWS FROM FINANCING ACTIVITIES:
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| Repurchases of common stock |
( |
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| Stock option exercises | ||||||||
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Net cash (used in) provided by financing activities
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(
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)
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NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
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(
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)
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CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
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||||||
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CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
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$
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$
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Supplemental disclosure of cash flow information:
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||||||||
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Cash paid during the period for income taxes
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$
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$
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See Notes to Condensed Consolidated Financial Statements.
CHARLES & COLVARD, LTD.
(unaudited)
| 1. |
DESCRIPTION OF BUSINESS
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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
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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 nine months ended March 31, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2023 (“Fiscal 2023”).
The condensed consolidated financial statements as of March 31, 2023 and for the three and nine months ended March 31, 2023 and 2022 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 March 31, 2023, for the three and nine months ended March 31, 2023 and 2022, 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 nine-month periods ended March 31, 2023 or 2022. 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 nine months ended March 31, 2023, 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 any 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 (including deferred tax asset
valuation allowances), 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 March 31, 2023 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:
|
March 31,
2023
|
June 30,
2022
|
|||||||
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Cash and cash equivalents
|
$
|
|
$
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|
||||
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Restricted cash
|
|
|
||||||
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Total cash, cash equivalents, and restricted cash
|
$
|
|
$
|
|
||||
Reclassification – Certain amounts in the Company’s
condensed consolidated financial statements as of June 30, 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 tax 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 nine months ended March 31, 2023 and 2022 and as of June 30, 2022.
| 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
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 for the periods presented is as follows:
|
Three Months Ended March 31, 2023
|
||||||||||||
|
Online
Channels
|
Traditional
|
Total
|
||||||||||
|
Net sales
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line cost of goods sold
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line gross profit
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Operating loss
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Depreciation and amortization
|
$
|
|
$
|
|
$
|
|
||||||
|
Capital expenditures
|
$
|
|
$
|
|
$
|
|
||||||
|
Three Months Ended March 31, 2022
|
||||||||||||
|
Online
Channels
|
Traditional
|
Total
|
||||||||||
|
Net sales
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line cost of goods sold
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line gross profit
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Operating income
|
$
|
|
$
|
|
$
|
|
||||||
|
Depreciation and amortization
|
$
|
|
$
|
|
$
|
|
||||||
|
Capital expenditures
|
$
|
|
$
|
|
$
|
|
||||||
|
Nine Months Ended March 31, 2023
|
||||||||||||
|
Online
Channels
|
Traditional
|
Total
|
||||||||||
|
Net sales
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line cost of goods sold
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line gross profit
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Operating income
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Depreciation and amortization
|
$
|
|
$
|
|
$
|
|
||||||
|
Capital expenditures
|
$
|
|
$
|
|
$
|
|
||||||
|
Nine Months Ended March 31, 2022
|
||||||||||||
|
Online
Channels
|
Traditional
|
Total
|
||||||||||
|
Net sales
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line cost of goods sold
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Product line gross profit
|
||||||||||||
|
Finished jewelry
|
$
|
|
$
|
|
$
|
|
||||||
|
Loose jewels
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Operating income
|
$
|
|
$
|
|
$
|
|
||||||
|
Depreciation and amortization
|
$
|
|
$
|
|
$
|
|
||||||
|
Capital expenditures
|
$
|
|
$
|
|
$
|
|
||||||
The Company does not allocate any assets to the reportable segments, and, therefore, no asset information is reported to the chief operating decision maker or disclosed in the financial
information for each segment.
A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:
|
Three Months Ended March 31,
|
Nine Months Ended March 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||
|
Product line cost of goods sold
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Non-capitalized manufacturing and production control expenses
|
|
|
|
|
||||||||||||
|
Freight out
|
|
|
|
|
||||||||||||
|
Inventory write-downs
|
|
|
|
|
||||||||||||
|
Other inventory adjustments
|
|
(
|
)
|
|
(
|
)
|
||||||||||
|
Cost of goods sold
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
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 March 31,
|
Nine Months Ended March 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||
|
Net sales
|
||||||||||||||||
|
United States
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
International
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|||||||
| 4. |
FAIR VALUE MEASUREMENTS
|
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value
hierarchy consists of three levels based on the reliability of inputs, as follows:
Level 1. Quoted prices in active markets for identical assets and liabilities;
Level 2. Inputs other than Level 1 quoted prices that are directly or indirectly observable; and
Level 3. Unobservable inputs that are not corroborated by market data.
The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each
reporting period. This determination requires significant judgments to be made by management of the Company. The financial instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, 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 nine months ended March 31, 2023 and 2022, no
| 5. |
INVENTORIES
|
The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:
|
March 31,
2023
|
June 30,
2022
|
|||||||
|
Finished jewelry:
|
||||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work-in-process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
Finished goods on consignment
|
|
|
||||||
|
Total finished jewelry
|
$
|
|
$
|
|
||||
|
Loose jewels:
|
||||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work-in-process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
Finished goods on consignment
|
|
|
||||||
|
Total loose jewels
|
|
|
||||||
|
Total supplies inventory
|
|
|
||||||
|
Total inventory
|
$
|
|
$
|
|
||||
As of the dates presented, the Company’s total inventories, net of reserves, are classified as follows:
|
March 31,
2023
|
June 30,
2022
|
|||||||
|
Short-term portion
|
$
|
|
$
|
|
||||
|
Long-term portion
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and
finished goods set with moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary
depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of March 31, 2023 and June
30, 2022, work-in-process inventories issued to active production jobs approximated $1.41 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 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 March 31, 2023.
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 March 31, 2023.
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 consist of the following as of the dates presented:
|
March 31,
2023
|
June 30,
2022
|
|||||||
|
Deferred revenue
|
$ |
|
$ |
|
||||
|
Accrued compensation and related benefits
|
||||||||
|
Accrued sales taxes and franchise taxes
|
|
|
||||||
|
Accrued cooperative advertising
|
|
|
||||||
|
Other accrued expenses
|
|
|
||||||
|
Total accrued expenses and other liabilities
|
$
|
|
$
|
|
||||
| 8. |
INCOME TAXES
|
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. During the three months ended March 31, 2023, management determined that due to the worsening global macro-economic conditions and heightened levels of inflation, including fears of recession, coupled with the
effects from worldwide political unrest and the ongoing economic impact from the COVID pandemic, the risks associated with these conditions led management to conclude that it was not more likely than not the Company would have sufficient
future taxable income to utilize its deferred tax assets. Additionally, the Company’s management determined that the positive evidence was no longer sufficient to offset available negative evidence, primarily as a result of the pre-tax
operating losses incurred during the three- and nine-month periods ended March 31, 2023. Consequently, management established a full valuation allowance against the Company’s deferred tax assets, resulting in an income tax expense of
approximately $6.29 million and $5.86
million for the three and nine months ended March 31, 2023, respectively. The Company recognized an income tax expense of approximately $78 ,000
and $485 ,000 for the three and nine months ended March 31, 2022, respectively.
The Company’s effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax
accounting arising primarily from the permanent tax benefits associated with stock-based compensation transactions during the quarter. Driven by the establishment of the valuation allowance during the quarter ended March 31, 2023, the
Company’s effective tax rate for the nine month-period then ended was a negative 131.06 %. For the nine months ended March 31,
2022, the Company’s effective tax rate was 17.20 %.
| 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 March 31, 2023, the Company has been reimbursed approximately $506 ,000 by the landlord for qualified leasehold improvements in accordance with the terms of the Lease Amendment. This reimbursement by the landlord reduced the remaining ROU asset by the
same amount and is being recognized prospectively over the remaining term of the lease.
The Company has no other material operating leases and is not party to leases that would qualify for
classification as a finance lease, variable lease, or short-term lease.
As of March 31, 2023, the Company’s balance sheet classifications of its leases are as follows:
|
Operating Leases:
|
||||
|
Noncurrent operating lease ROU assets
|
$
|
|
||
|
|
||||
|
Current operating lease liabilities
|
$
|
|
||
|
Noncurrent operating lease liabilities
|
|
|||
|
Total operating lease liabilities
|
$
|
|
||
The Company’s total operating lease cost was approximately $193 578 ,000 and $596 ,000 for the nine months ended March 31, 2023 and 2022,
respectively.
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 3.58 years.
As of March 31, 2023, Company’s remaining future payments under operating leases for each fiscal year
ending June 30 are as follows:
|
2023
|
$
|
|
||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
Total lease payments
|
|
|||
|
Less: imputed interest
|
|
|||
|
Present value of lease payments
|
|
|||
|
Less: current lease liability
|
|
|||
|
Total long-term lease liability
|
$
|
|
The Company makes cash payments for amounts included in the measurement of its lease liabilities.
During the three months ended March 31, 2023 and 2022, cash paid for operating leases was approximately $237 ,000 and $160 ,000, respectively. During the nine months ended March 31, 2023 and 2022, cash paid for operating leases was approximately $704 ,000 and $330 ,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 March 31, 2023. Over the life of the Supply Agreement, as amended, the Company’s future minimum annual purchase commitments of SiC crystals range from approximately $4.00 million to $10.00 million each
year.
During the nine months ended March 31, 2023 and 2022, the Company purchased approximately $1.80 million and $4.49 million,
respectively, of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended. The Company has made no
purchases of SiC crystals during the six-month period ended March 31, 2023 while currently in discussions regarding the terms of the Supply Agreement.
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 nine months of 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 adverse
impact from inflation on its financial results in the first nine 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 3.00 % 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 March 31, 2023, the Company had no t 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
During the nine-month period ended March 31, 2023, 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 March 31, 2023.
Dividends
The Company has paid no cash dividends during the current fiscal year through March 31, 2023.
Stock-Based Compensation
The following table summarizes the components of the Company’s stock-based compensation included in net income for the periods presented:
|
Three Months Ended
March 31,
|
Nine Months Ended
March 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||
|
Employee stock options
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Restricted stock awards
|
(
|
)
|
|
|
|
|||||||||||
|
Totals
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Stock Options –The following is a summary of the stock option activity for the nine months
ended March 31, 2023:
|
Shares
|
Weighted
Average
Exercise Price
|
|||||||
|
Outstanding, June 30, 2022
|
|
$
|
|
|||||
|
Granted
|
|
$
|
|
|||||
|
Forfeited
|
(
|
)
|
$
|
|
||||
|
Expired
|
(
|
)
|
$
|
|
||||
|
Outstanding, March 31, 2023
|
|
$
|
|
|||||
The weighted average grant date fair value of stock options granted during the nine months ended March 31, 2023 and 2022 was approximately $0.59
and $1.37 , respectively. The total fair value of stock options that vested during the nine months ended March 31, 2023 and 2022 was approximately $225 ,000 and $188 ,000, respectively.
The following table summarizes information about stock options outstanding at March 31, 2023:
|
Options Outstanding
|
Options Exercisable
|
Options Vested or Expected to Vest
|
||||||||||||||||||||||||||||||||
|
Balance
as of
March 31,
2023
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
March 31,
2023
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Balance
as of
March 31,
2023
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||||||
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|||||||||||||||||||||||
As of March 31, 2023, the unrecognized stock-based compensation expense related to unvested stock options was approximately $256 ,000, which is expected to be recognized over a weighted average period of approximately 18 months .
The aggregate intrinsic value of stock options outstanding, exercisable, and
vested or expected to vest at March 31, 2023 and 2022 was approximately $101