Charles & Colvard(CTHR) - 2021 Q4 - Annual Report

Part I Business Charles & Colvard is a fine jewelry company specializing in lab-created gemstones, operating through Online and Traditional sales channels - The company's core business is manufacturing, marketing, and distributing lab-created gemstones, including its proprietary Charles & Colvard Created Moissanite® and the Caydia® brand of lab-grown diamonds, launched in September 2020[18] - Business operations are divided into two main segments: the Online Channels segment (direct-to-consumer websites like charlesandcolvard.com, marketplaces) and the Traditional segment (wholesale distributors and retail partners)[22] - A key strategic dependency is the exclusive supply agreement with Cree, Inc for silicon carbide (SiC) crystals, the raw material for moissanite, extending through June 2025 with a total purchase commitment of approximately $52.95 million[70][71] - Strategic goals for Fiscal 2022 include expanding brand presence globally, enhancing customer engagement, developing new products, and pursuing disciplined growth[29][33][34][35] Products The company's product portfolio is led by its premium Forever One™ moissanite and the Caydia® brand of lab-grown diamonds - The company's premier moissanite product is Forever One™, a colorless (D-E-F) to near-colorless (G-H-I) gemstone, complemented by a value-oriented line, Moissanite by Charles & Colvard®[64][65] - In September 2020, the company launched Caydia®, an exclusive brand of premium lab-grown diamonds available in E, F, and G color grades with a minimum VS1 clarity[73] Physical Properties of Moissanite vs. Other Gemstones | Description | Refractive Index | Dispersion | Hardness (Mohs) | Toughness | | :--- | :--- | :--- | :--- | :--- | | Charles & Colvard Created Moissanite® | 2.65-2.69 | 0.104 | 9.25 – 9.5 | Excellent | | Diamond (mined and lab grown) | 2.42 | 0.044 | 10 | Good to Excellent | | Ruby | 1.77 | 0.018 | 9 | Excellent | | Sapphire | 1.77 | 0.018 | 9 | Excellent | | Emerald | 1.58 | 0.014 | 7.50 | Poor to Good | Distribution Channels Sales are conducted through a dual-channel strategy, encompassing direct-to-consumer online platforms and traditional wholesale partners - Online Channels Segment: This segment includes direct-to-consumer sales via charlesandcolvard.com, marketplaces like Amazon, pure-play e-tailers, and drop-ship arrangements[39][40][42][45] - Traditional Segment: This legacy segment includes sales to manufacturers, distributors, and brick-and-mortar retailers, both domestically and internationally[46][49][50] Competition The company faces competition from other moissanite producers, the lab-grown diamond market, and established jewelry brands - The company faces competition from other moissanite producers, primarily from Far Eastern countries, which tend to be of lower quality and compete on price[117][119] - The lab-grown diamond market is a significant competitive space, and the company's own Caydia® line could potentially cannibalize sales of its core moissanite products[121][122] - In the finished jewelry space, competitors include well-known brands like James Allen® and Blue Nile Inc, which have strong brand recognition and greater financial resources[126] Risk Factors The company faces operational risks from the COVID-19 pandemic, supplier dependency, and intense competition, alongside financial and stock listing risks - COVID-19 Pandemic: The pandemic continues to pose risks by affecting workforces, supply chains, and consumer demand, with the full future impact remaining uncertain[140][146] - Supplier Dependency: The company depends on an exclusive supply agreement with Cree, Inc for substantially all of its silicon carbide (SiC) crystals, and any interruption could materially harm the business[178] - Competition: The company faces intense competition from other moissanite producers, the lab-grown diamond industry, and established jewelry companies, with pressure increasing since its core patents expired[156][158] - PPP Loan Review: The company's $965,000 PPP loan, though forgiven, remains subject to SBA review for six years, with potential for penalties and repayment[192][193] - Nasdaq Listing: The company's common stock could be delisted from The Nasdaq Capital Market if it fails to maintain listing requirements, such as the minimum $1.00 bid price[196] Properties The company's operations are centralized in a leased 36,350 square foot facility in Research Triangle Park, North Carolina - The company's principal property is a leased 36,350 sq ft facility in Research Triangle Park, NC, which serves as its headquarters for all major functions[198] Legal Proceedings The company is not currently a party to any material pending legal proceedings - There are no material pending legal proceedings involving the company[199] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Capital Market under the symbol "CTHR" and no dividends were paid in fiscal 2021 or 2020 - The company's common stock trades on The Nasdaq Capital Market under the ticker symbol "CTHR"[200] - No dividends were paid on common stock during the fiscal years ended June 30, 2021, and 2020[201] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal year 2021 marked a significant turnaround with a 34% increase in net sales, a return to profitability, and strengthened liquidity Results of Operations Net sales grew 34% to $39.2 million, driving a shift from a significant net loss in 2020 to a net income of $12.8 million in 2021 - The increase in net sales was driven by robust holiday sales, increased consumer awareness, and strong demand for both moissanite and lab-grown diamond products[234] - Cost of goods sold decreased by 2% despite a 34% increase in sales, primarily due to a $5.26 million write-off of legacy inventory in the prior year[242] - Sales and marketing expenses decreased by 10% to $8.48 million, mainly due to lower compensation-related expenses following a 2020 workforce reduction[246][247][248] - A significant income tax benefit of $6.33 million was recognized in FY 2021, primarily from the release of the valuation allowance against deferred tax assets[262][264] Consolidated Net Sales (Fiscal Year Ended June 30) | Category | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Finished jewelry | $24,401,546 | $16,777,628 | $7,623,918 | 45% | | Loose jewels | $14,834,293 | $12,411,392 | $2,422,901 | 20% | | Total Net Sales | $39,235,839 | $29,189,020 | $10,046,819 | 34% | Consolidated Statement of Operations Highlights (Fiscal Year Ended June 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | $39,235,839 | $29,189,020 | | Cost of Goods Sold | $20,809,690 | $21,200,207 | | Income (Loss) from Operations | $5,507,992 | ($6,315,728) | | Gain on extinguishment of debt | $974,328 | $0 | | Income tax benefit (expense) | $6,332,421 | ($1,733) | | Net Income (Loss) | $12,810,766 | ($6,162,083) | Liquidity and Capital Resources The company's liquidity improved substantially, with cash increasing to $21.5 million and the full forgiveness of its $965,000 PPP loan - As of June 30, 2021, the company's principal sources of liquidity were cash, cash equivalents, and restricted cash totaling $21.45 million, a significant increase from $14.62 million at June 30, 2020[280] - Working capital increased by $12.72 million to $30.14 million in FY 2021, driven by higher cash from operations and the forgiveness of the PPP loan[281] - The company's $965,000 PPP loan was forgiven in full by the SBA on June 23, 2021, resulting in a gain on debt extinguishment of approximately $974,000[271] - The company has a remaining purchase commitment of approximately $32.85 million under its exclusive Supply Agreement with Cree, which extends to June 2025[294] - Subsequent to year-end, the company secured a new $5.00 million cash-collateralized line of credit facility with JPMorgan Chase[297] Financial Statements and Supplementary Data The audited financial statements received an unqualified opinion, highlighting strong growth in assets, income, and operating cash flow - The report from the independent registered public accounting firm, BDO USA, LLP, expressed an unqualified opinion on the consolidated financial statements[338] - The auditor identified two Critical Audit Matters: the valuation of inventories and the realizability of deferred tax assets, both requiring significant management judgment[342][343][347] Consolidated Balance Sheet Highlights (as of June 30) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Cash, cash equivalents, and restricted cash | $21,446,951 | $14,617,234 | | Total Inventory, net | $29,172,720 | $30,633,959 | | Total Assets | $64,921,999 | $48,904,587 | | Total Current Liabilities | $5,622,263 | $6,486,060 | | Total Liabilities | $9,232,983 | $7,469,010 | | Total Shareholders' Equity | $55,689,016 | $41,435,577 | Consolidated Statement of Operations Highlights (Fiscal Year Ended June 30) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | $39,235,839 | $29,189,020 | | Net Income (Loss) | $12,810,766 | ($6,162,083) | | Diluted EPS | $0.42 | ($0.22) | Consolidated Statement of Cash Flows Highlights (Fiscal Year Ended June 30) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,473,092 | $249,185 | | Net cash used in investing activities | ($733,465) | ($535,976) | | Net cash provided by financing activities | $1,090,090 | $1,897,480 | | Net increase in cash, cash equivalents, and restricted cash | $6,829,717 | $1,610,689 | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of June 30, 2021 - Based on an evaluation as of June 30, 2021, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[518] - Management's report on internal control over financial reporting concluded that these controls were effective as of June 30, 2021, based on the COSO 2013 framework[520][524] - No material changes were made to internal control over financial reporting during the quarter ended June 30, 2021[519] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Related Matters Required disclosures for directors, officers, and governance are incorporated by reference from the company's 2021 Proxy Statement - Details regarding directors, executive officers, executive compensation, security ownership, and related transactions are incorporated by reference from the forthcoming 2021 Proxy Statement[528] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including material contracts and required Sarbanes-Oxley certifications - This section provides a comprehensive list of all exhibits filed as part of the Form 10-K, as required by Item 601 of Regulation S-K[533]