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, 2023

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 February 2, 2024, there were 30,344,955 shares of the registrant’s common stock, no par value per share, outstanding.



CHARLES & COLVARD, LTD.

FORM 10-Q
For the Quarterly Period Ended December 31, 2023
TABLE OF CONTENTS

 
  
Page
Number
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
 
 
1
 
2
 
3
 
4
 
5
Item 2.
20
Item 3.
33
Item 4.
33
 
PART II – OTHER INFORMATION
Item 1.
34
Item 1A.
34
Item 2.
34
Item 5.
Other Information
34
Item 6.
35
 
36

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

CHARLES & COLVARD, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS


 
December 31, 2023
(unaudited)
    June 30, 2023  
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
5,772,124
   
$
10,446,532
 
Restricted cash
   
5,315,063
     
5,122,379
 
Accounts receivable, net
   
1,528,476
     
380,085
 
Inventory, net
   
9,879,556
     
7,476,046
 
Note receivable
   
250,000
     
250,000
 
Prepaid expenses and other assets
   
937,767
     
901,354
 
Total current assets
   
23,682,986
     
24,576,396
 
Long-term assets:
               
Inventory, net
   
15,882,879
     
19,277,530
 
Property and equipment, net
   
2,638,983
     
2,491,569
 
Intangible assets, net
   
338,222
     
305,703
 
Operating lease right-of-use assets
   
1,872,832
     
2,183,232
 
Other assets
   
49,658
     
49,658
 
Total long-term assets
   
20,782,574
     
24,307,692
 
TOTAL ASSETS
 
$
44,465,560
   
$
48,884,088
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
6,049,022
   
$
4,786,155
 
Operating lease liabilities, current portion
   
892,147
     
880,126
 
Accrued expenses and other liabilities
   
1,404,825
     
1,395,479
 
Total current liabilities
   
8,345,994
     
7,061,760
 
Long-term liabilities:
               
Noncurrent operating lease liabilities
   
1,631,724
     
2,047,742
 
Total long-term liabilities
   
1,631,724
     
2,047,742
 
Total liabilities
   
9,977,718
     
9,109,502
 
Commitments and contingencies (Note 9)
           
Shareholders’ equity:
               
Common stock, no par value; 50,000,000 shares authorized; 30,733,358 shares issued and 30,344,955 shares outstanding at December 31, 2023 and 30,912,108 shares issued and 30,523,705 shares outstanding at June 30, 2023
   
57,242,211
     
57,242,211
 
Additional paid-in capital
   
26,324,537
     
26,205,919
 
Treasury stock, at cost, 388,403 shares at both December 31, 2023 and June 30, 2023
    (489,979 )     (489,979 )
Accumulated deficit
   
(48,588,927
)
   
(43,183,565
)
Total shareholders’ equity
   
34,487,842
     
39,774,586
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
44,465,560
   
$
48,884,088
 

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,
 
   
2023
   
2022
   
2023
   
2022
 
Net sales
 
$
7,905,639
   
$
10,366,122
   
$
12,858,662
   
$
17,740,204
 
Costs and expenses:
                               
Cost of goods sold
   
5,049,947
     
6,071,775
     
8,058,454
     
10,157,785
 
Sales and marketing
   
4,296,324
     
4,339,684
     
7,018,289
     
7,447,630
 
General and administrative
   
1,497,061
     
1,187,955
     
3,351,329
     
2,601,431
 
Total costs and expenses
   
10,843,332
     
11,599,414
     
18,428,072
     
20,206,846
 
Loss from operations
   
(2,937,693
)
   
(1,233,292
)
   
(5,569,410
)
   
(2,466,642
)
Other income (expense):
                               
Interest income
   
77,359
     
59,574
     
169,619
     
99,776
 
Interest expense
    (5,571 )     -       (5,571 )     -  
Total other income (expense), net
   
71,788
     
59,574
     
164,048
     
99,776
 
Loss before income taxes
   
(2,865,905
)
   
(1,173,718
)
   
(5,405,362
)
   
(2,366,866
)
Income tax benefit
   
-
     
131,937
     
-
     
434,893
 
Net loss
 
$
(2,865,905
)
 
$
(1,041,781
)
 
$
(5,405,362
)
 
$
(1,931,973
)
                                 
Net loss per common share:
                               
Basic
 
$
(0.09
)
 
$
(0.03
)
 
$
(0.18
)
 
$
(0.06
)
Diluted
 
$
(0.09
)
 
$
(0.03
)
 
$
(0.18
)
 
$
(0.06
)
                                 
Weighted average number of shares used in computing net loss per common share:
                               
Basic
   
30,344,955
     
30,344,954
     
30,344,955
     
30,408,018
 
Diluted
   
30,344,955
     
30,344,954
     
30,344,955
     
30,408,018
 

See Notes to Condensed Consolidated Financial Statements.

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

    Six Months Ended December 31, 2023  
   
Common Stock
   
                   
   
Number of
Shares
   
Amount
   
Additional
Paid-in
Capital
    Treasury Stock
   
Accumulated
Deficit
   
Total
Shareholders’
Equity
 
Balance at June 30, 2023
   
30,523,705
   
$
57,242,211
   
$
26,205,919
    $ (489,979 )  
$
(43,183,565
)
 
$
39,774,586
 
Stock-based compensation
   
-
     
-
     
51,444
      -      
-
     
51,444
 
Net loss
   
-
     
-
     
-
      -      
(2,539,457
)
   
(2,539,457
)
Balance at September 30, 2023
   
30,523,705
   
$
57,242,211
   
$
26,257,363
    $ (489,979 )  
$
(45,723,022
)
 
$
37,286,573
 
Stock-based compensation
   
-
     
-
     
67,174
      -      
-
     
67,174
 
Cancellation of restricted stock
   
(178,750
)
   
-
     
-
      -      
-
     
-
 
Net loss
   
-
     
-
     
-
      -      
(2,865,905
)
   
(2,865,905
)
Balance at December 31, 2023
   
30,344,955
   
$
57,242,211
   
$
26,324,537
    $ (489,979 )  
$
(48,588,927
)
 
$
34,487,842
 


 
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
 

See Notes to Condensed Consolidated Financial Statements.

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

   
Six Months Ended December 31,
 
   
2023
   
2022
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(5,405,362
)
 
$
(1,931,973
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
357,019
     
308,900
 
Stock-based compensation
   
118,618
     
174,725
 
Provision for uncollectible accounts
   
117,000
     
-
 
Provision for sales returns
   
154,000
     
422,000
 
Inventory write-downs
   
-
     
119,000
 
Provision for accounts receivable discounts
   
5,793
     
4,899
 
Deferred income taxes
    -       (434,893 )
Changes in operating assets and liabilities:
               
Accounts receivable
   
(1,425,184
)
   
(292,951
)
Inventory
   
991,141
     
(1,601,247
)
Prepaid expenses and other assets, net
   
273,987
     
247,025
 
Accounts payable
   
1,262,867
     
459,640
 
Accrued expenses and other liabilities
   
(394,651
)
   
(529,418
)
Net cash used in operating activities
   
(3,944,772
)
   
(3,054,293
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
   
(495,302
)
   
(617,283
)
Payments for intangible assets
   
(41,650
)
   
(30,658
)
Net cash used in investing activities
   
(536,952
)
   
(647,941
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from line of credit
    500,000       -  
Payments on line of credit
    (500,000 )     -  
Repurchases of common stock
    -       (451,815 )
Net cash used in financing activities
   
-
     
(451,815
)
                 
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
   
(4,481,724
)
   
(4,154,049
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
   
15,568,911
     
21,179,340
 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
 
$
11,087,187
   
$
17,025,291
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for income taxes
 
$
-
   
$
5,900
 
Cash paid during the period for interest expense
    2,875       -  

See Notes to Condensed Consolidated Financial Statements.

CHARLES & COLVARD, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
DESCRIPTION OF BUSINESS

Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation, was founded in 1995. The Company manufactures, markets, and distributes Charles & Colvard Created Moissanite® (hereinafter referred to as moissanite or moissanite jewels) and finished jewelry featuring moissanite, including Forever One™, the Company’s premium moissanite gemstone brand, for sale in the worldwide fine jewelry market. The Company also markets and distributes Caydia® lab grown diamonds and finished jewelry featuring lab grown diamonds and created color for sale in the worldwide fine jewelry market.

The Company sells loose moissanite jewels, loose lab grown diamonds, and finished jewelry featuring, moissanite, lab grown diamonds, and created color at wholesale prices to distributors, manufacturers, retailers, and designers, including some of the largest distributors and jewelry manufacturers in the world. In addition, in May 2023, the Company launched charlesandcolvarddirect.com, a direct-to-wholesaler sales portal, which is a gemstone product disposition wholesale outlet. The Company’s finished jewelry and loose moissanite jewels and lab grown diamonds that are mounted into fine jewelry by other manufacturers are sold at retail outlets and via the Internet. The Company sells at retail prices to end-consumers through its own Charles & Colvard Signature Showroom, which opened in October 2022, and through its wholly-owned operating subsidiary, charlesandcolvard.com, LLC, which includes the Company’s own transactional website madeshopping.com, third-party online marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets. The Company also sells at discount retail prices to end-consumers through moissaniteoutlet.com, LLC, a wholly-owned operating subsidiary of charlesandcolvard.com, LLC, and third-party online marketplaces.

2.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the six months ended December 31, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2024.

The condensed consolidated financial statements as of December 31, 2023 and for the three and six months ended December 31, 2023 and 2022 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of June 30, 2023 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes contained in Item 8 of the Company’s Annual Report on Form 10-K (the “2023 Annual Report”) for the fiscal year ended June 30, 2023 or Fiscal 2023 filed with the SEC on October 12, 2023.

The accompanying condensed consolidated financial statements as of December 31, 2023 and June 30, 2023 and for the three and six months ended December 31, 2023 and 2022, include the accounts of the Company and its wholly-owned subsidiaries charlesandcolvard.com, LLC, including its wholly-owned subsidiary, moissaniteoulet.com, LLC, which was formed and incorporated as of February 24, 2022; Charles & Colvard Direct, LLC; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was entered into dormancy as of September 30, 2020 following its re-activation in December 2017. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 and has had no operating activity since 2008. Charles & Colvard Direct, LLC, had no operating activity during the six-month periods ended December 31, 2023 or 2022. All intercompany accounts have been eliminated.

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

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As future events and their effects cannot be fully determined with precision, actual results of operations, cash flow, and financial position could differ significantly from estimates. The most significant estimates impacting the Company’s consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, stock-based compensation, and revenue recognition. Changes in estimates are reflected in the consolidated financial statements in the period in which the change in estimate occurs.

Restricted Cash – 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, 2024, the Company is required to keep cash in a cash deposit account held by JPMorgan Chase. Such amount is held as security for the Company’s credit facility from JPMorgan Chase. Accordingly, this cash deposit held by JPMorgan Chase is classified as restricted cash for financial reporting purposes on the Company’s condensed consolidated balance sheets. For additional information regarding the Company’s cash collateralized credit facility, see Note 10, “Debt.

Pursuant to the terms and conditions of the Company’s broker-dealer agreement with Oppenheimer & Co., Inc. (“Oppenheimer”), with whom the Company has engaged to transact common stock share repurchases in connection with its stock repurchase program, the Company is required to maintain a funded liquid margin account held by Oppenheimer for the benefit of the Company. The purpose of this account is to fund the Company’s common stock purchases and any underlying transaction costs and fees. Depending upon the level and timing of stock repurchase activity, the funded margin account cash balance will fluctuate from time to time. At December 31, 2023 and June 30, 2023, cash in the amount of approximately $250,000 and approximately $30, respectively, was held by Oppenheimer. Such cash amount held by Oppenheimer was classified as restricted cash for financial reporting purposes on the Company’s condensed consolidated balance sheets. For additional information regarding the Company’s stock repurchase program, see Note 11, “Shareholders’ Equity and Stock-Based Compensation.”

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

   
December 31,
2023
   
June 30,
2023
 
Cash and cash equivalents
 
$
5,772,124
   
$
10,446,532
 
Restricted cash
   
5,315,063
     
5,122,379
 
Total cash, cash equivalents, and restricted cash
 
$
11,087,187
   
$
15,568,911
 


Recently Adopted/Issued Accounting Pronouncements – In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant expenses. The updated standard is effective for annual periods beginning after December 15, 2023 and interim periods beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluation the effect of adopting this ASU.



In December, 2023 the FASB issued ASU No. 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” which requires two primary disclosure enhancements of 1) disaggregated information on a reporting entity’s effective tax rate reconciliation, and 2) information on income taxes paid. For public business entities, the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. The Company is currently evaluating the effect of adopting this ASU.

3.
SEGMENT INFORMATION AND GEOGRAPHIC DATA

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of the Company’s operating and reportable segments.
The Company manages its business through two operating and reportable segments based on its distribution channels to sell its product lines, loose jewels and finished jewelry: its “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, moissaniteoutlet.com, charlesandcolvarddirect.com, madeshopping.com, third-party online marketplaces, drop-ship retail, and other pure-play, exclusively e-commerce outlets; and its “Traditional” segment, which consists of wholesale and retail customers, including its own Charles & Colvard Signature Showroom. The accounting policies of the Online Channels segment and Traditional segment are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies” of this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements in the 2023 Annual Report.

The Company evaluates the financial performance of its segments based on net sales and product line gross profit, or the excess of product line sales over product line cost of goods sold. The Company’s product line cost of goods sold is defined as product cost of goods sold, excluding non-capitalized expenses from the Company’s manufacturing and production control departments, comprising personnel costs, depreciation, leases, utilities, and corporate overhead allocations; freight out; inventory write-downs; and other inventory adjustments, comprising costs of quality issues, and damaged goods.

Summary financial information by reportable segment is as follows:

   
Three Months Ended December 31, 2023
 
   
Online
Channels
   
Traditional
   
Total
 
Net sales
                 
Finished jewelry
 
$
6,343,510
   
$
1,047,842
   
$
7,391,352
 
Loose jewels
   
310,707
     
203,580
     
514,287
 
Total
 
$
6,654,217
   
$
1,251,422
   
$
7,905,639
 
                         
Product line cost of goods sold
                       
Finished jewelry
 
$
3,392,715
   
$
525,801
   
$
3,918,516
 
Loose jewels
   
96,448
     
104,545
     
200,993
 
Total
 
$
3,489,163
   
$
630,346
   
$
4,119,509
 
                         
Product line gross profit
                       
Finished jewelry
 
$
2,950,795
   
$
522,041
   
$
3,472,836
 
Loose jewels
   
214,259
     
99,035
     
313,294
 
Total
 
$
3,165,054
   
$
621,076
   
$
3,786,130
 
                         
Depreciation and amortization
 
$
45,392
   
$
133,337
   
$
178,729
 
                         
Capital expenditures
 
$
179,559
   
$
98,691
   
$
278,250
 

   
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
 
                         
Depreciation and amortization
 
$
56,505
   
$
114,684
   
$
171,189
 
                         
Capital expenditures
 
$
22,620
   
$
164,263
   
$
186,883
 
   
Six Months Ended December 31, 2023
 
   
Online
Channels
   
Traditional
   
Total
 
Net sales
                 
Finished jewelry
 
$
9,940,523
   
$
1,752,088
   
$
11,692,611
 
Loose jewels
   
630,381
     
535,670
     
1,166,051
 
Total
 
$
10,570,904
   
$
2,287,758
   
$
12,858,662
 
                         
Product line cost of goods sold
                       
Finished jewelry
 
$
4,968,315
   
$
909,368
   
$
5,877,683
 
Loose jewels
   
196,426
     
243,941
     
440,367
 
Total
 
$
5,164,741
   
$
1,153,309
   
$
6,318,050
 
                         
Product line gross profit
                       
Finished jewelry
 
$
4,972,208
   
$
842,720
   
$
5,814,928
 
Loose jewels
   
433,955
     
291,729
     
725,684
 
Total
 
$
5,406,163
   
$
1,134,449
   
$
6,540,612
 
                         
Depreciation and amortization
 
$
94,151
   
$
262,868
   
$
357,019
 
                         
Capital expenditures
 
$
299,704
   
$
195,598
   
$
495,302
 

   
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
 
                         
Depreciation and amortization
 
$
119,892
   
$
189,008
   
$
308,900
 
                         
Capital expenditures
 
$
159,608
   
$
457,675
   
$
617,283
 

The Company does not allocate any assets to the reportable segments, and, therefore, no asset information is reported to the chief operating decision maker or disclosed in the financial information for each segment.

A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:

   
Three Months Ended December 31,
    Six Months Ended December 31,  
   
2023
   
2022
    2023     2022  
Product line cost of goods sold
 
$
4,119,509
   
$
5,056,581
    $
6,318,050     $
8,488,904  
Non-capitalized manufacturing and production control expenses
   
664,578
     
686,834
      1,262,463       1,063,887  
Freight out
   
338,249
     
358,617
      542,465       634,354  
Inventory write-downs
   
-
     
-
      -       119,000  
Other inventory adjustments
   
(72,389
)
   
(30,257
)
    (64,524 )     (148,360 )
Cost of goods sold
 
$
5,049,947
   
$
6,071,775
    $
8,058,454     $
10,157,785  



A reconciliation of the Company’s consolidated product line gross profit to the Company’s consolidated net loss before income taxes is as follows:


   
Three Months Ended December 31,
    Six Months Ended December 31,
 
   
2023
   
2022
    2023
    2022  
Product line gross profit
 
$
3,786,130
   
$
5,309,541
    $
6,540,612     $
9,251,300  
Non-allocated cost of goods sold
   
(930,438
)
   
(1,015,194
)
    (1,740,404 )     (1,668,881 )
Sales and marketing
   
(4,296,324
)
   
(4,339,684
)
    (7,018,289 )     (7,447,630 )
General and administrative
   
(1,497,061
)
   
(1,187,955
)
    (3,351,329 )     (2,601,431 )
Other income (expense) net
   
71,788
     
59,574
      164,048       99,776  
Loss before income taxes
 
$
(2,865,905
)
 
$
(1,173,718
)
  $
(5,405,362 )   $
(2,366,866 )

The Company recognizes sales by geographic area based on the country in which the customer is based. Sales to international end consumers made through the Company’s transactional websites, charlesandcolvard.com and moissaniteoutlet.com, are included in international sales for financial reporting purposes. A portion of the Company’s Traditional segment sales made to international wholesale distributors represents products sold internationally that may be re-imported to U.S. retailers.

The following presents net sales data by geographic area:

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

 
2023
   
2022
    2023     2022  
Net sales
                       
United States
 
$
7,742,776
   
$
9,989,702
    $ 12,511,686     $ 17,085,074  
International
   
162,863
     
376,420
      346,976       655,130  
Total
 
$
7,905,639
   
$
10,366,122
    $ 12,858,662     $ 17,740,204  

4.
FAIR VALUE MEASUREMENTS

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy consists of three levels based on the reliability of inputs, as follows:

Level 1.  Quoted prices in active markets for identical assets and liabilities;
Level 2.  Inputs other than Level 1 quoted prices that are directly or indirectly observable; and
Level 3.  Unobservable inputs that are not corroborated by market data.

The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The financial instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, restricted cash, notes receivable, trade accounts receivable, and trade accounts payable. All financial instruments are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these financial instruments.

There were no assets measured at fair value on a non-recurring basis as of December 31, 2023 or June 30, 2023.

5.
INVENTORIES

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

   
December 31,
2023
   
June 30,
2023
 
Finished jewelry:
           
Raw materials
 
$
1,409,122
   
$
1,288,906
 
Work-in-process
   
623,300
     
1,223,670
 
Finished goods
   
12,914,517
     
12,772,611
 
Finished goods on consignment
   
2,095,443
     
2,039,506
 
Total finished jewelry
 
$
17,042,382
   
$
17,324,693
 
Loose jewels:
               
Raw materials
 
$
174,274
   
$
421,603
 
Work-in-process
   
5,450,946
     
6,131,853
 
Finished goods
   
2,627,706
     
2,294,270
 
Finished goods on consignment
   
198,235
     
254,323
 
Total loose jewels
   
8,451,161
     
9,102,049
 
Total supplies inventory
   
268,892
     
326,834
 
Total inventory
 
$
25,762,435
   
$
26,753,576
 

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

   
December 31,
2023
   
June 30,
2023
 
Short-term portion
 
$
9,879,556
   
$
7,476,046
 
Long-term portion
   
15,882,879
     
19,277,530
 
Total
 
$
25,762,435
   
$
26,753,576
 
The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished goods set with moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of December 31, 2023 and June 30, 2023, work-in-process inventories issued to active production jobs approximated $1.20 million and $1.99 million, respectively.

The Company’s moissanite and lab grown diamond jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. Product obsolescence is closely monitored and reviewed by management as of and for each financial reporting period.

The Company manufactures finished jewelry featuring moissanite, lab grown diamonds, and created color gemstones. Relative to loose moissanite jewels and lab grown diamonds, finished jewelry is more fashion-oriented and subject to styling trends that could render certain designs obsolete over time. The majority of the Company’s finished jewelry featuring moissanite and lab grown diamonds is held in inventory for resale and largely consists of such core designs as stud earrings, solitaire and side-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company generally holds smaller quantities of designer-inspired and trend fashion jewelry that is available for resale through retail companies and through its Online Channels segment. The Company also carries a limited amount of inventory as part of its sample line that the Company uses in the selling process to its customers.

The Company’s continuing operating subsidiaries carry no net inventories, and inventory is transferred without intercompany markup from the parent entity as product line cost of goods sold when sold to the end consumer.

The Company’s inventories are stated at the lower of cost or net realizable value on an average cost basis. Each accounting period the Company evaluates the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves, which include significant estimates by management, including the effect of market factors and sales trends. Changes to the Company’s inventory reserves and allowances are accounted for in the accounting period in which a change in such reserves and allowances is observed and deemed appropriate, including changes in management’s estimates used in the process to determine such reserves and valuation allowances.

6.
NOTE RECEIVABLE

On March 5, 2021, the Company entered into a $250,000 convertible promissory note agreement (the “Convertible Promissory Note”), with an unrelated third-party strategic marketing partner. The Convertible Promissory Note is unsecured and was scheduled originally to mature on March 5, 2022. In February 2022, the Company entered into an amendment to the Convertible Promissory Note that was effective as of December 9, 2021 and changed the maturity date to September 30, 2022. Effective September 26, 2022, the Company further amended the Convertible Promissory Note (the “September 2022 Amendment”) and changed the maturity date to June 20, 2024 (the “Maturity Date”).

Interest is accrued at a simple rate of 0.14% per annum and will continue to accrue until the Convertible Promissory Note is converted in accordance with the conversion privileges contained within the Convertible Promissory Note or is repaid. Principal outstanding during an event of default accrues interest at the rate of 5% per annum.

Subject to the borrower’s completion of a specified equity financing transaction (an “Equity Financing”) on or prior to the Maturity Date, the unpaid principal amount, including accrued and unpaid interest, automatically converts into equity units of the most senior class of equity securities issued to investors in the Equity Financing at the lesser of 80% of the per unit price of the units purchased by investors or the price equal to $33,500,000 divided by the aggregate number of outstanding units of the borrower immediately prior to the closing of the financing. Unless converted as provided in the Convertible Promissory Note, the principal amount, including accrued and unpaid interest, will, on the Maturity Date, at the Company’s option either (i) become due and payable to the Company, or (ii) convert into equity units at the specified conversion price in accordance with the terms of the Convertible Promissory Note.

7.
ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities, current, consist of the following as of the dates presented:

   
December 31,
2023
   
June 30,
2023
 
Deferred revenue
  $
432,235
    $
566,896
 
Accrued compensation and related benefits
    371,423       382,630  
Accrued sales taxes and franchise tax
   
246,163
     
202,091
 
Accrued cooperative advertising
   
352,295
     
243,861
 
Other accrued expenses
   
2,709
     
1
 
Total accrued expenses and other liabilities
 
$
1,404,825
   
$
1,395,479
 

8.
INCOME TAXES

For the three and six months ended December 31, 2023, the Company’s statutory tax rate was 22.94% and consisted of the federal income tax rate of 21.00% and a blended state income tax rate of 1.94%, net of the federal benefit. For both the three and six months ended December 31, 2023, the Company’s average effective tax rate was zero. For the three and six months ended December 31, 2022, the Company’s effective tax rate was 11.24% and 18.37%, respectively. The Company’s effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax accounting arising primarily from the permanent tax benefits associated with stock-based compensation transactions during the accounting period then ended.

The Company recognized zero net income tax benefit for the three and six months ended December 31, 2023, compared with a net income tax benefit of approximately $132,000 and $435,000 for the three and six months ended December 31, 2022, respectively.

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. As of December 31, 2023, the Company’s management determined that sufficient negative evidence continued to exist to conclude it was uncertain that the Company would have sufficient future taxable income to utilize its deferred tax assets, and therefore, the Company maintained a full valuation allowance against its deferred tax assets.

9.
COMMITMENTS AND CONTINGENCIES

Lease Arrangements

On December 9, 2013, the Company entered into a Lease Agreement, as amended on December 23, 2013, April 15, 2014, and January 29, 2021 (the “Lease Agreement”), for its corporate headquarters, which occupies approximately 36,350 square feet of office, storage and light manufacturing space and is classified as an operating lease for financial reporting purposes. The expiration date of the base term of the Lease Agreement in effect as of December 31, 2023 is October 31, 2026 and the terms of the Lease Agreement contain no early termination provisions. Provided there is no outstanding uncured event of default under the Lease Agreement, the Company has an option to extend the lease term for a period of five years. The Company’s option to extend the term of the Lease Agreement must be exercised in writing on or before 270 days prior to expiration of the then-current term. If the option is exercised, the monthly minimum rent for each of the extended terms will be adjusted to the then prevailing fair market rate.
The Company took possession of the leased property on May 23, 2014, once certain improvements to the leased space were completed and did not have access to the property before this date. Upon execution of the third amendment to the Lease Agreement (the “Lease Amendment”) on January 29, 2021, the Lease Amendment included a rent abatement in the amount of approximately $214,000, which is reflected in the rent payments used in the calculation of the right-of-use (“ROU”) asset and lease liability once remeasured upon the execution of the Lease Amendment to extend the lease term. The Lease Amendment also included an allowance for leasehold improvements offered by the landlord in an amount not to exceed approximately $545,000. As of the quarter ended December 31, 2023, the Company has been reimbursed approximately $506,000 by the landlord for qualified leasehold improvements in accordance with the terms of the Lease Amendment. This reimbursement by the landlord reduced the remaining ROU asset by the same amount and is being recognized prospectively over the remaining term of the lease.

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

As of December 31, 2023, the Company’s balance sheet classifications of its leases are as follows:

Operating Leases:
     
Noncurrent operating lease ROU assets
 
$
1,872,832
 
 
       
Current operating lease liabilities
 
$
892,147
 
Noncurrent operating lease liabilities
   
1,631,724
 
Total operating lease liabilities
 
$
2,523,871
 

The Company’s total operating lease cost for the three months ended December 31, 2023 and 2022 was approximately $175,000 for each period. The Company’s total operating lease cost for the six months ended December 31, 2023 and 2022 was approximately $349,000 for each period.

As of December 31, 2023, the Company’s estimated incremental borrowing rate used and assumed discount rate with respect to operating leases was 2.81% and the remaining operating lease term was 2.83 years.

As of December 31, 2023, the Company’s remaining future payments under operating leases for each fiscal year ending June 30 are as follows:

2024
 
$
450,852
 
2025
   
918,236
 
2026
   
943,487
 
2027
   
317,327
 
Total lease payments
  $
2,629,902
 
Less: imputed interest
   
106,031
 
Present value of lease payments
   
2,523,871
 
Less: current lease obligations
   
892,147
 
Total long-term lease obligations
 
$
1,631,724
 

The Company makes cash payments for amounts included in the measurement of its lease liabilities. During the three months ended December 31, 2023 and 2022, cash paid for operating leases was approximately $241,000 and $235,000, respectively. During the six months ended December 31, 2023 and 2022, cash paid for operating leases was approximately $479,000 and $466,000, respectively.

Purchase Commitments

On December 12, 2014, the Company entered into an exclusive supply agreement (the “Supply Agreement”) with Wolfspeed, Inc. (“Wolfspeed”), formerly known as Cree, Inc. Under the Supply Agreement, subject to certain terms and conditions, the Company agreed to exclusively purchase from Wolfspeed, and Wolfspeed agreed to exclusively supply, 100% of the Company’s required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties.
Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25, 2023. The Supply Agreement was also amended to (i) provide the Company with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following expiration of the initial term; (ii) establish a process by which Wolfspeed may begin producing alternate SiC material based on the Company’s specifications that will give the Company the flexibility to use the materials in a broader variety of its products; and (iii) permit the Company to purchase certain amounts of SiC materials from third parties under limited conditions.

Effective June 30, 2020, the Supply Agreement was further amended to extend the expiration date to June 29, 2025, which may be extended again by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread the Company’s total purchase commitment under the Supply Agreement in the amount of approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Wolfspeed has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit the Company to purchase revised amounts of SiC materials from third parties under limited conditions.

The Company’s total purchase commitment under the Supply Agreement, as amended, until June 2025 is approximately $52.95 million, of which approximately $24.75 million remains to be purchased as of December 31, 2023. Over the life of the Supply Agreement, as amended, the Company’s future minimum annual purchase commitments of SiC crystals range from approximately $4.00 million to $10.00 million each year.

During the six months ended December 31, 2023 the Company made no purchases of SiC crystals. During the six months ended December 31, 2022 the Company purchased $1.80 million of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended.

The Company has made no purchases of SiC crystals during the twelve-month period ended December 31, 2023. while engaged in discussions regarding the terms of the Supply Agreement.

On July 28, 2023, Wolfspeed initiated a confidential arbitration against the Company for breach of contract claiming damages, plus interest, costs, and attorneys’ fees. Wolfspeed has alleged that the Company failed to satisfy the purchase obligations provided in the Supply Agreement for Fiscal 2023 in the amount of $4.25 million and failed to pay for $3.30 million of SiC crystals Wolfspeed delivered to the Company. Wolfspeed further alleges that the Company intends to breach its remaining purchase obligations under the Supply Agreement, representing an additional $18.5 million in alleged damages.

While the Company is evaluating Wolfspeed’s claims, the Company disputes the amount sought, and intends to vigorously defend its position, including by asserting rights and defenses that the Company may have under the Supply Agreement at law and in equity. A hearing has been scheduled for September 30, 2024. The final determinations of liability arising from this matter will be made following comprehensive investigations, discovery and arbitration processes.

10.
DEBT

Line of Credit

Effective July 7, 2021, the Company obtained from JPMorgan Chase a $5.00 million cash collateralized line of credit facility (the “JPMorgan Chase Credit Facility”). The JPMorgan Chase Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions and certain additional indebtedness for borrowed money, installment obligations, and obligations under capital and operating leases. The JPMorgan Chase Credit Facility is secured by a cash deposit in the amount of $5.1 million held by JPMorgan Chase as collateral for the line of credit facility and was scheduled to mature on July 31, 2022. Effective July 28, 2022, the JPMorgan Chase Credit Facility was amended to, among other things, extend the maturity date to July 31, 2023, and append the Company’s obligations under the JPMorgan Chase Credit Facility to be guaranteed by the Company’s wholly-owned subsidiaries, Charles & Colvard Direct, LLC, charlesandcolvard.com, LLC, and moissaniteoutlet.com, LLC. Effective, June 21, 2023, the JPMorgan Chase Credit Facility was amended further to extend the maturity date to July 31, 2024.
Each advance under the JPMorgan Chase Credit Facility, as amended, accrues interest at a rate equal to the sum of JPMorgan Chase’s monthly secured overnight financing rate (“SOFR rate”) to which JPMorgan Chase is subject with respect to the adjusted SOFR rate as established by the U.S. Federal Reserve Board, plus a margin of 1.25% per annum and an unsecured to secured interest rate adjustment of 0.10% per annum. Interest is calculated monthly on an actual/360-day basis and payable monthly in arrears. Principal outstanding during an event of default, at JPMorgan Chase’s option, accrues interest at a rate of 3% per annum in excess of the above rate. Any advance may be prepaid in whole or in part without penalty at any time.

The JPMorgan Chase Credit Facility is evidenced by a credit agreement, as amended, between JPMorgan Chase and the Company (the “JPMorgan Chase Credit Agreement”), effective as of June 21, 2023, and customary ancillary documents, in the principal amount not to exceed $5.00 million at any one time outstanding and a line of credit note (the “JPMorgan Chase Line of Credit Note”) in which the Company promises to pay on or before July 31, 2024, the amount of $5.00 million or so much thereof as may be advanced and outstanding. In the event of default, JPMorgan Chase, at its option, may accelerate the maturity of advances outstanding under the JPMorgan Chase Credit Facility. The JPMorgan Chase Credit Agreement and ancillary documents contain customary covenants, representations, fees, debt, contingent obligations, liens, loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries, affiliate transactions, changes in control, as well as indemnity, expense reimbursement, and confidentiality provisions.

In connection with the JPMorgan Chase Credit Facility, effective July 7, 2021, the Company incurred a non-refundable origination fee in the amount of $10,000 that was paid in full to JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12, 2021. No origination fee was paid to JPMorgan Chase in connection with amending the JPMorgan Chase Credit Facility on July 28, 2022, and June 21, 2023. The Company also agreed to maintain its primary banking depository and disbursement relationship with JPMorgan Chase.

Events of default under the JPMorgan Chase Credit Facility include, without limitation, a default, event of default, or event that would constitute a default or event of default (pending giving notice or lapse of time or both), of any provision of the JPMorgan Chase Credit Agreement, the JPMorgan Chase Line of Credit Note, or any other instrument or document executed in connection with the JPMorgan Chase Credit Agreement or with any of the indebtedness, liabilities, and obligations of the Company to JPMorgan Chase or that would result from the extension of credit by JPMorgan Chase to the Company.

As of December 31, 2023 the Company had no outstanding debt.

11.
SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Repurchases of Common Stock

Pursuant to authority granted by the Company’s Board of Directors on April 29, 2022, the Company can repurchase up to approximately $5.00 million in shares outstanding of the Company’s common stock over the three-year period ending April 29, 2025. Pursuant to the terms of the repurchase authorization, the common stock share repurchases are generally at the discretion of the Company’s management. As the Company repurchases its common shares, which have no par value, the Company reports such shares held as treasury stock in the accompanying condensed consolidated balance sheets with the purchase price recorded within treasury stock.
 
During the six-month period ended December 31, 2023 the Company repurchased no shares of its common stock. During the six-month period ended December 31, 2022, the Company repurchased 358,116 shares of the Company’s common stock for an aggregate price of $451,815 pursuant to the repurchase authorization.

Dividends
 
The Company has paid no cash dividends during the current fiscal year through December 31, 2023.

Stock-Based Compensation

The following table summarizes the components of the Company’s stock-based compensation included in net income for the periods presented:

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2023
   
2022
   
2023
   
2022
 
Employee stock options
 
$
67,174
   
$
49,704
   
$
118,618
   
$
122,202
 
Restricted stock awards
   
-
     
28,789
     
-
     
52,523
 
Totals
 
$
67,174
   
$
78,493
   
$
118,618
   
$
174,725
 

No stock-based compensation was capitalized as a cost of inventory during the three and six months ended December 31, 2023 or 2022.

Stock Options –The following is a summary of the stock option activity for the six months ended December 31, 2023:


 
Shares
   
Weighted
Average
Exercise Price
 
Outstanding, June 30, 2023
   
1,817,665
   
$
1.24
 
Granted
   
1,058,612
   
$
0.35
 
Forfeited
   
(25,166
)
 
$
1.88
 
Expired
   
(99,334
)
 
$
2.05
 
Outstanding, December 31, 2023
   
2,751,777
   
$
0.86
 

The weighted average grant date fair value of stock options granted during the six-months ended December 31, 2023 and 2022 was approximately $0.21 and $0.59, respectively. The total fair value of stock options that vested during the six months ended December 31, 2023 and 2022 was approximately $188,000 and $176,000, respectively.

The following table summarizes information about stock options outstanding at December 31, 2023:

Options Outstanding
   
Options Exercisable
   
Options Vested or Expected to Vest
 
Balance
as of
12/31/2023
   
Weighted
Average Remaining
Contractual Life
(Years)
   
Weighted
Average
Exercise
Price
   
Balance
as of
12/31/2023
   
Weighted
Average Remaining
Contractual Life
(Years)
   
Weighted
Average
Exercise
Price
   
Balance
as of
12/31/2023
   
Weighted
Average Remaining
Contractual Life
(Years)
   
Weighted
Average
Exercise
Price
 
 
2,751,777
     
7.42
   
$
0.86
     
1,734,641
     
6.06
   
$
1.06
     
2,683,732
     
7.36
   
$
0.87
 

As of December 31, 2023, the unrecognized stock-based compensation expense related to unvested stock options was approximately $248,000, which is expected to be recognized over a weighted average period of approximately 15 months.

The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at December 31, 2023 and 2022 was approximately $59,000 and $57,000, respectively. These amounts are before applicable income taxes and represents the closing market price of the Company’s common stock at December 31, 2023 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. These values represent the amount that would have been received by the optionees had these stock options been exercised on that date. There were no stock options exercised during the six-month-periods ended December 31, 2023 and 2022.

Restricted Stock

During the six-month period ended December 31, 2023 there were no restricted stock shares awarded to plan participants. The unvested restricted shares as of December 31, 2022, totaled 178,750 with a weighted average grant date fair value of $0.97, were all performance-based restricted shares and were scheduled to vest in July 2023, subject to achievement of the underlying performance goals. None of these shares vested and during the three-month period ended December 31, 2023, these shares were cancelled as the underlying performance goals were not met .

12.
NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and unvested restricted shares that are computed using the treasury stock method. Anti-dilutive stock awards consist of stock options that would have been anti-dilutive in the application of the treasury stock method.

For the three and six months ended December 31, 2023, stock options to purchase approximately 2.75 million shares were excluded from the computation of diluted net loss per common share because the effect of inclusion of such amounts would be anti-dilutive to net loss per common share.

For the three and six months ended December 31, 2022, stock options to purchase approximately 1.91 million shares were excluded from the computation of diluted net loss per common share because the effect of inclusion of such amounts would be anti-dilutive to net loss per common share. Approximately 179,000 shares of unvested restricted stock are excluded from the computation of diluted net loss for the three and six months ended December 31, 2022 because the shares were performance-based and the underlying conditions had not been met as of December 31, 2022.

13.
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash on deposit and cash equivalents held with banks and trade accounts receivable. The Company places cash deposits with federally insured financial institutions and maintains its cash at banks and financial institutions it considers to be of high credit quality. However, the Company’s cash deposits may at times exceed the Federal Deposit Insurance Corporation’s insurable limits. Accordingly, balances in excess of federally insured limitations may not be insured. The Company has not experienced losses on these accounts, and management believes that the Company is not exposed to significant risks on such accounts.

Trade receivables potentially subject the Company to credit risk. Payment terms on trade receivables for the Company’s Traditional segment customers are generally between 30 and