Charles & Colvard(CTHR) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents unaudited condensed consolidated financial statements and detailed notes on business, accounting, and financial commitments Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets Summary | Metric | March 31, 2023 (unaudited) | June 30, 2022 | | :----------------------------------- | :------------------------- | :------------ | | ASSETS | | | | Cash and cash equivalents | $10,914,584 | $15,668,361 | | Restricted cash | $5,056,044 | $5,510,979 | | Accounts receivable, net | $933,553 | $2,220,816 | | Inventory, net (current) | $7,889,917 | $11,024,276 | | Total current assets | $25,677,912 | $35,864,444 | | Inventory, net (long-term) | $25,439,369 | $22,488,524 | | Deferred income taxes, net | $- | $5,851,904 | | TOTAL ASSETS | $56,373,050 | $69,208,855 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Accounts payable | $3,116,810 | $4,401,229 | | Total current liabilities | $5,134,179 | $6,804,283 | | Total liabilities | $7,385,760 | $9,651,088 | | Total shareholders' equity | $48,987,290 | $59,557,767 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $56,373,050 | $69,208,855 | - Total assets decreased by approximately $12.84 million from $69.21 million at June 30, 2022, to $56.37 million at March 31, 2023, primarily driven by decreases in cash and cash equivalents, accounts receivable, and current inventory, alongside the establishment of a full valuation allowance against deferred tax assets[54] - Total shareholders' equity decreased by approximately $10.57 million from $59.56 million at June 30, 2022, to $48.99 million at March 31, 2023[54] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Summary | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net sales | $6,641,799 | $9,751,835 | $24,382,003 | $33,785,281 | | Cost of goods sold | $4,493,125 | $5,296,530 | $14,650,910 | $17,347,026 | | Sales and marketing | $3,267,436 | $2,932,587 | $10,715,066 | $9,741,774 | | General and administrative | $1,053,357 | $1,106,850 | $3,654,788 | $3,880,684 | | Total costs and expenses | $8,813,918 | $9,335,967 | $29,020,764 | $30,969,484 | | (Loss) Income from operations | $(2,172,119) | $415,868 | $(4,638,761) | $2,815,797 | | Interest income | $69,159 | $1,120 | $168,935 | $1,964 | | Income tax expense | $(6,293,048) | $(78,480) | $(5,858,155) | $(484,582) | | Net (loss) income | $(8,396,008) | $338,508 | $(10,327,981) | $2,333,145 | | Basic Net (loss) income per common share | $(0.28) | $0.01 | $(0.34) | $0.08 | | Diluted Net (loss) income per common share | $(0.28) | $0.01 | $(0.34) | $0.07 | - Net sales decreased by 32% for the three months ended March 31, 2023, and by 28% for the nine months ended March 31, 2023, compared to the prior year periods[55] - The company reported a significant net loss of $8.40 million for the three months and $10.33 million for the nine months ended March 31, 2023, primarily due to operating losses and a substantial income tax expense resulting from a deferred tax asset valuation allowance[25][55] Condensed Consolidated Statements of Changes in Shareholders' Equity Condensed Consolidated Statements of Changes in Shareholders' Equity Summary | Metric | June 30, 2022 | March 31, 2023 | | :----------------------------------- | :------------ | :------------- | | Common Stock (Number of Shares) | 30,747,759 | 30,523,705 | | Common Stock (Amount) | $57,242,211 | $57,242,211 | | Additional Paid-in Capital | $25,956,491 | $26,165,810 | | Treasury Stock | $(38,164) | $(489,979) | | Accumulated Deficit | $(23,602,771) | $(33,930,752) | | Total Shareholders' Equity | $59,557,767 | $48,987,290 | - Total shareholders' equity decreased by $10.57 million from June 30, 2022, to March 31, 2023, primarily due to a net loss of $10.33 million and share repurchases totaling $451,815[73] - The company repurchased 358,116 shares of common stock for $451,815 during the nine months ended March 31, 2023[73] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Summary | Cash Flow Activity | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | | Net cash (used in) provided by operating activities | $(3,827,470) | $1,102,980 | | Net cash used in investing activities | $(929,427) | $(1,289,163) | | Net cash (used in) provided by financing activities | $(451,815) | $650,917 | | NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | $(5,208,712) | $464,734 | | Cash, Cash Equivalents, and Restricted Cash, Beginning of Period | $21,179,340 | $21,446,951 | | Cash, Cash Equivalents, and Restricted Cash, End of Period | $15,970,628 | $21,911,685 | - Operating activities used $3.83 million in cash for the nine months ended March 31, 2023, a significant shift from $1.10 million provided in the prior year, primarily due to a net loss and decreases in accounts payable and accrued expenses[17][77] - Cash used in financing activities was $451,815 for the nine months ended March 31, 2023, driven by common stock repurchases, compared to $650,917 provided by stock option exercises in the prior year[14][77] Notes to Condensed Consolidated Financial Statements 1. Description of Business - The Company manufactures, markets, and distributes Charles & Colvard Created Moissanite® and Caydia® lab grown diamonds, along with finished jewelry featuring these gemstones, for the worldwide fine jewelry market[78] - Sales channels include wholesale to distributors, manufacturers, retailers, and designers, as well as direct retail to end-consumers through its Charles & Colvard Signature Showroom (opened October 2022), charlesandcolvard.com, moissaniteoutlet.com, and third-party online marketplaces[61] 2. Basis of Presentation and Significant Accounting Policies - The unaudited condensed consolidated financial statements are prepared in conformity with U.S. GAAP for interim financial information, with certain disclosures condensed or omitted per SEC rules[79] - Significant estimates impacting financial statements include valuation and classification of inventories, accounts receivable reserves, deferred tax assets (including valuation allowances), stock-based compensation, and revenue recognition[64] - Restricted cash includes $5.05 million held by JPMorgan Chase as security for a credit facility and approximately $30 held by Oppenheimer for the stock repurchase program[65][82] 3. Segment Information and Geographic Data - The company operates through two reportable segments: 'Online Channels' (e-commerce outlets) and 'Traditional' (wholesale and retail customers, including its showroom)[67] Net Sales by Segment and Product Line (Three Months Ended March 31) | Product Line | Online Channels (2023) | Traditional (2023) | Total (2023) | Online Channels (2022) | Traditional (2022) | Total (2022) | | :------------- | :--------------------- | :----------------- | :----------- | :--------------------- | :----------------- | :----------- | | Finished jewelry | $4,130,314 | $1,190,987 | $5,321,301 | $5,720,197 | $1,700,394 | $7,420,591 | | Loose jewels | $486,084 | $834,414 | $1,320,498 | $634,617 | $1,696,627 | $2,331,244 | | Total Net Sales | $4,616,398 | $2,025,401 | $6,641,799 | $6,354,814 | $3,397,021 | $9,751,835 | Net Sales by Segment and Product Line (Nine Months Ended March 31) | Product Line | Online Channels (2023) | Traditional (2023) | Total (2023) | Online Channels (2022) | Traditional (2022) | Total (2022) | | :------------- | :--------------------- | :----------------- | :----------- | :--------------------- | :----------------- | :----------- | | Finished jewelry | $15,657,343 | $3,640,572 | $19,297,915 | $18,659,690 | $4,986,354 | $23,646,044 | | Loose jewels | $1,657,369 | $3,426,719 | $5,084,088 | $2,388,584 | $7,750,653 | $10,139,237 | | Total Net Sales | $17,314,712 | $7,067,291 | $24,382,003 | $21,048,274 | $12,737,007 | $33,785,281 | Net Sales by Geographic Area (Three and Nine Months Ended March 31) | Geographic Area | Three Months 2023 | Three Months 2022 | Nine Months 2023 | Nine Months 2022 | | :---------------- | :---------------- | :---------------- | :--------------- | :--------------- | | United States | $6,545,336 | $9,390,774 | $23,630,410 | $32,237,221 | | International | $96,463 | $361,061 | $751,593 | $1,548,060 | | Total | $6,641,799 | $9,751,835 | $24,382,003 | $33,785,281 | 4. Fair Value Measurements - Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants[91] - The fair value hierarchy consists of three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[113] - Financial instruments like cash, notes receivable, trade accounts receivable, and trade accounts payable are reflected at carrying value, approximating fair value. No impairment was recorded for non-recurring assets (property, equipment, intangible assets) for the periods presented[91] 5. Inventories Total Inventories, Net of Reserves | Inventory Type | March 31, 2023 | June 30, 2022 | | :-------------------------- | :------------- | :------------ | | Finished jewelry | $17,388,518 | $17,194,855 | | Loose jewels | $15,563,938 | $16,228,825 | | Total supplies inventory | $376,830 | $89,120 | | Total inventory | $33,329,286 | $33,512,800 | Inventory Classification | Classification | March 31, 2023 | June 30, 2022 | | :--------------- | :------------- | :------------ | | Short-term portion | $7,889,917 | $11,024,276 | | Long-term portion | $25,439,369 | $22,488,524 | | Total | $33,329,286 | $33,512,800 | - Inventories are stated at the lower of cost or net realizable value on an average cost basis. The company evaluates valuation and classification, including adjustments to inventory-related reserves, each accounting period[94] - The increase in lab grown diamond inventory, which has a higher carrying value, contributed to the growth in overall inventory levels compared to prior periods[3] 6. Note Receivable - A $250,000 convertible promissory note with a strategic marketing partner was amended to extend its maturity date to June 20, 2024, resulting in its reclassification from a current to a noncurrent note receivable as of March 31, 2023[95] - The note accrues interest at a simple rate of 0.14% per annum, with a 5% per annum rate during an event of default. Accrued interest is now classified as a noncurrent asset[142] 7. Accrued Expenses and Other Liabilities Accrued Expenses and Other Liabilities | Category | March 31, 2023 | June 30, 2022 | | :----------------------------------- | :------------- | :------------ | | Deferred revenue | $434,132 | $452,866 | | Accrued compensation and related benefits | $275,465 | $614,443 | | Accrued sales taxes and franchise taxes | $233,351 | $341,706 | | Accrued cooperative advertising | $200,243 | $137,467 | | Other accrued expenses | $1 | $1 | | Total | $1,143,192 | $1,546,483 | - Total accrued expenses and other liabilities decreased by approximately $403,000 from June 30, 2022, to March 31, 2023, primarily due to decreases in accrued compensation and sales/franchise taxes[143] 8. Income Taxes - Due to worsening global macro-economic conditions, heightened inflation, recession fears, political unrest, and COVID-19 impact, management established a full valuation allowance against deferred tax assets[97] - This resulted in an income tax expense of approximately $6.29 million for the three months and $5.86 million for the nine months ended March 31, 2023, compared to $78,000 and $485,000 in the prior year periods, respectively[97] - The effective tax rate for the nine months ended March 31, 2023, was a negative 131.06%, driven by the valuation allowance, compared to 17.20% in the prior year[144] 9. Commitments and Contingencies - The company's corporate headquarters lease agreement expires October 31, 2026, with an option to extend for five years. Total operating lease cost was approximately $193,000 for the three months ended March 31, 2023[98][126] Future Operating Lease Payments (as of March 31, 2023) | Fiscal Year Ending June 30 | Amount | | :------------------------- | :----------- | | 2023 | $219,393 | | 2024 | $893,660 | | 2025 | $918,236 | | 2026 | $943,487 | | 2027 | $317,327 | | Total lease payments | $3,292,103 | - The exclusive supply agreement with Wolfspeed for SiC materials was amended to extend to June 29, 2025, with a total purchase commitment of approximately $52.95 million, of which $24.75 million remains to be purchased as of March 31, 2023[129][150] - The company purchased approximately $1.80 million of SiC crystals during the nine months ended March 31, 2023, but made no purchases during the six-month period ended March 31, 2023, while discussing terms[151] 10. Debt - The company has a $5.00 million cash collateralized line of credit facility with JPMorgan Chase, secured by a $5.05 million cash deposit, which was extended to mature on July 31, 2023[154] - As of March 31, 2023, the company had not borrowed against this credit facility and had no outstanding short- or long-term debt[33][155] 11. Shareholders' Equity and Stock-Based Compensation - The Board of Directors authorized a share repurchase program of up to $5.00 million in common stock over three years ending April 29, 2025. During the nine months ended March 31, 2023, 358,116 shares were repurchased for $451,815, but no shares were repurchased in the three months ended March 31, 2023[19][133][156] Stock-Based Compensation Expense | Component | Three Months 2023 | Three Months 2022 | Nine Months 2023 | Nine Months 2022 | | :------------------------ | :---------------- | :---------------- | :--------------- | :--------------- | | Employee stock options | $63,383 | $60,045 | $185,585 | $187,059 | | Restricted stock awards | $(28,789) | $138,478 | $23,734 | $489,875 | | Totals | $34,594 | $198,523 | $209,319 | $676,934 | - For the nine months ended March 31, 2023, the estimated unrecognized stock-based compensation expense related to unvested restricted shares was approximately $173,000, none of which is expected to be recognized due to non-achievement of performance goals[162] 12. Net (Loss) Income Per Common Share Net (Loss) Income Per Common Share | Metric | Three Months 2023 | Three Months 2022 | Nine Months 2023 | Nine Months 2022 | | :------------------------------------------ | :---------------- | :---------------- | :--------------- | :--------------- | | Net (loss) income | $(8,396,008) | $338,508 | $(10,327,981) | $2,333,145 | | Weighted average common shares outstanding (Basic) | 30,344,954 | 30,484,897 | 30,387,303 | 30,286,195 | | Weighted average common shares outstanding (Diluted) | 30,344,954 | 31,268,410 | 30,387,303 | 31,271,677 | | Basic Net (loss) income per common share | $(0.28) | $0.01 | $(0.34) | $0.08 | | Diluted Net (loss) income per common share | $(0.28) | $0.01 | $(0.34) | $0.07 | - For the three and nine months ended March 31, 2023, stock options to purchase approximately 1.90 million shares were excluded from diluted EPS computation as their inclusion would be anti-dilutive due to net loss[163] 13. Major Customers and Concentration of Credit Risk - The company's largest U.S. customer accounted for 13% and 14% of total consolidated net sales for the three and nine months ended March 31, 2023, respectively[182][189] Customer Concentration (10% or more of total gross accounts receivable) | Customer | March 31, 2023 | June 30, 2022 | | :--------- | :------------- | :------------ | | Customer A | 24% | 20% | | Customer B | 18% | 29% | | Customer C | 15% | **% | | Customer D | *% | 13% | - Trade receivables are subject to credit risk, with payment terms generally 30-90 days, though extended terms may be offered to credit-worthy customers. An allowance for doubtful accounts is determined based on credit risk factors and historical trends[187] 14. Subsequent Event - On April 20, 2023, the company regained compliance with Nasdaq's minimum bid price requirement, and the matter is now closed[32][167] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion covers financial condition, operating results, macroeconomic impacts, strategic initiatives, sales, expenses, and liquidity Forward-Looking Statements - The report contains forward-looking statements regarding future expectations for products, sales, revenues, and earnings, subject to inherent risks and uncertainties[168] - Key risk factors include general economic conditions, competition, cybersecurity, privacy regulations, international operations, supply chain disruptions, dependence on limited partners, quality control, seasonality, COVID-19 impacts, natural disasters, precious metal pricing, intellectual property protection, and Nasdaq listing compliance[169] Overview - Charles & Colvard's mission is to provide a conscious and conflict-free fine jewelry experience with Made, Not Mined™ gemstones, specializing in lab-created moissanite and Caydia® lab grown diamonds[194][195] - The company operates through Online Channels (websites, e-commerce marketplaces) and a Traditional segment (distributors, retail customers, Signature Showroom), employing an omni-channel sales strategy[172] - Strategic focus includes building a globally revered and accessible brand, improving product quality and delivery, expanding product portfolio, focusing on affordability, and investing in lab-created gemstone technologies[196] Strategic Goals and Market Conditions - Fiscal 2023 strategic goals focus on expanding the Charles & Colvard brand globally and increasing business size through top-line growth, targeting emerging generations embracing lab-created gemstones[174] - Marketing activities included commercial advertisements on NBC Universal's Peacock Streaming Service, participation in the Wedding Venue at Raleigh's Maxwell Winter Showcase, and sponsorship of the 2023 Carolina Hurricanes Stadium Series' Day-to-Day Event Guide[175][198] - The company faces significant challenges from domestic and global inflation, rising interest rates, recession fears, and worsening macroeconomic conditions, which erode consumer confidence and shift spending away from luxury items, impacting revenues, margins, and cash flows[176][177] - The full impact of the ongoing COVID-19 pandemic on operations and financial performance remains uncertain, with anticipated impacts on business, financial condition, results of operations, and cash flows in Fiscal 2023[178] Critical Accounting Policies and Estimates - No significant changes have occurred in the company's critical accounting policies and estimates during the first nine months of Fiscal 2023[218] - The most significant estimates impacting consolidated financial statements relate to the valuation and classification of inventories, accounts receivable reserves, deferred tax assets, stock-based compensation, and revenue recognition[179] Results of Operations Consolidated Net Sales Consolidated Net Sales | Product Line | Three Months 2023 | Three Months 2022 | Change Dollars | Change Percent | Nine Months 2023 | Nine Months 2022 | Change Dollars | Change Percent | | :--------------- | :---------------- | :---------------- | :------------- | :------------- | :--------------- | :--------------- | :------------- | :------------- | | Finished jewelry | $5,321,301 | $7,420,591 | $(2,099,290) | (28)% | $19,297,915 | $23,646,044 | $(4,348,129) | (18)% | | Loose jewels | $1,320,498 | $2,331,244 | $(1,010,746) | (43)% | $5,084,088 | $10,139,237 | $(5,055,149) | (50)% | | Total | $6,641,799 | $9,751,835 | $(3,110,036) | (32)% | $24,382,003 | $33,785,281 | $(9,403,278) | (28)% | - Consolidated net sales decreased by 32% for the three months and 28% for the nine months ended March 31, 2023, primarily due to weakening consumer confidence, general economic uncertainties, inflation, and rising interest rates impacting demand in both Online Channels and Traditional segments[221] - Finished jewelry sales decreased by 28% for the three months and 18% for the nine months, while loose jewel sales decreased by 43% and 50% for the respective periods, reflecting lower demand across all product categories[206][222] - U.S. net sales decreased by 30% and 27% for the three and nine months, respectively, due to decreased sales to U.S. customers in both segments. International net sales decreased significantly by 73% and 51% for the respective periods, attributed to lower demand in the international distributor market, Asia Pacific shutdowns, and the strong U.S. dollar[207][223] Costs and Expenses Cost of Goods Sold Cost of Goods Sold | Category | Three Months 2023 | Three Months 2022 | Change Dollars | Change Percent | Nine Months 2023 | Nine Months 2022 | Change Dollars | Change Percent | | :-------------------------- | :---------------- | :---------------- | :------------- | :------------- | :--------------- | :--------------- | :------------- | :------------- | | Finished jewelry | $2,840,321 | $3,709,864 | $(869,543) | (23)% | $9,632,352 | $10,748,323 | $(1,115,971) | (10)% | | Loose jewels | $645,259 | $1,013,986 | $(368,727) | (36)% | $2,342,133 | $4,507,997 | $(2,165,864) | (48)% | | Total product line cost of goods sold | $3,485,580 | $4,723,850 | $(1,238,270) | (26)% | $11,974,485 | $15,256,320 | $(3,281,835) | (22)% | | Non-product line cost of goods sold | $1,007,545 | $572,680 | $434,865 | 76% | $2,676,425 | $2,090,706 | $585,719 | 28% | | Total cost of goods sold | $4,493,125 | $5,296,530 | $(803,405) | (15)% | $14,650,910 | $17,347,026 | $(2,696,116) | (16)% | - Total cost of goods sold decreased by 15% for the three months and 16% for the nine months ended March 31, 2023, primarily driven by decreased sales of finished jewelry and loose jewels[210][225] - Non-product line cost of goods sold increased by 76% for the three months and 28% for the nine months, mainly due to increases in non-capitalized manufacturing production control expenses and other inventory adjustments, partially offset by decreases in freight out and inventory write-downs[209][211][226] Sales and Marketing Sales and Marketing Expenses | Metric | Three Months 2023 | Three Months 2022 | Change Dollars | Change Percent | Nine Months 2023 | Nine Months 2022 | Change Dollars | Change Percent | | :---------------- | :---------------- | :---------------- | :------------- | :------------- | :--------------- | :--------------- | :------------- | :------------- | | Sales and marketing | $3,267,436 | $2,932,587 | $334,849 | 11% | $10,715,066 | $9,741,774 | $973,292 | 10% | - Sales and marketing expenses increased by 11% for the three months and 10% for the nine months ended March 31, 2023[36] - The increase for the three months was primarily due to a $274,000 net increase in advertising and digital marketing expenses (driven by a $332,000 increase in digital advertising spend), a $75,000 increase in general business taxes, and a $30,000 increase in compensation expenses[37][38][39] - For the nine months, the increase was mainly due to a $420,000 increase in advertising and digital marketing expenses (driven by a $604,000 increase in digital advertising spend), a $196,000 increase in compensation expenses, and a $193,000 increase in general business taxes[40][41][42] General and Administrative General and Administrative Expenses | Metric | Three Months 2023 | Three Months 2022 | Change Dollars | Change Percent | Nine Months 2023 | Nine Months 2022 | Change Dollars | Change Percent | | :------------------------- | :---------------- | :---------------- | :------------- | :------------- | :--------------- | :--------------- | :------------- | :------------- | | General and administrative | $1,053,357 | $1,106,850 | $(53,493) | (5)% | $3,654,788 | $3,880,684 | $(225,896) | (6)% | - General and administrative expenses decreased by 5% for the three months and 6% for the nine months ended March 31, 2023[16] - The decrease for the three months was primarily due to a $147,000 decrease in compensation expenses (driven by lower stock-based compensation and bonus expense), partially offset by increases in depreciation and amortization, travel, and professional services[7][8][9] - For the nine months, the decrease was mainly due to a $396,000 decrease in compensation expenses (driven by lower stock-based compensation and bonus expense) and a $146,000 decrease in bank fees, partially offset by increases in depreciation and amortization, general business taxes, and travel[10][11][12] Other Income (Expense) Other Income (Expense) | Metric | Three Months 2023 | Three Months 2022 | Nine Months 2023 | Nine Months 2022 | | :-------------------------- | :---------------- | :---------------- | :--------------- | :--------------- | | Interest income | $69,159 | $1,120 | $168,935 | $1,964 | | Loss on foreign currency exchange | $- | $- | $- | $(34) | | Total other income (expense), net | $69,159 | $1,120 | $168,935 | $1,930 | - Interest income significantly increased to $69,159 for the three months and $168,935 for the nine months ended March 31, 2023, from $1,120 and $1,964 in the prior year periods, respectively. This increase reflects movement of invested funds into a higher-yield money market fund and overall rising interest rates[23] - No loss on foreign currency exchange was recorded for the three and nine months ended March 31, 2023, compared to a $34 loss in the prior nine-month period, as there were no international sales transactions denominated in foreign currencies in the current period[24] Provision for Income Taxes - The company recognized a substantial income tax expense of approximately $6.29 million for the three months and $5.86 million for the nine months ended March 31, 2023, due to establishing a full valuation allowance against deferred tax assets[25] - This valuation allowance was deemed necessary due to worsening global macroeconomic conditions, heightened inflation, recession fears, political unrest, and pre-tax operating losses incurred during the period, leading management to conclude that sufficient future taxable income to utilize deferred tax assets was not more likely than not[25] - The effective tax rate for the nine months ended March 31, 2023, was a negative 131.06%, compared to 17.20% in the prior year[26] Liquidity and Capital Resources General Liquidity Overview - The company's business depends on consumer demand and is adversely impacted by unfavorable economic conditions, including declines in consumer confidence and disposable income, rising inflation, recession fears, and increased interest rates[28] - The full impact of the ongoing COVID-19 pandemic on the business remains uncertain, leading to a continued focus on macroeconomic conditions and their potential effect on liquidity and capital resources[28] Capital Structure and Long-Term Debt - The company believes it may qualify for Employee Retention Credit (ERC) tax benefits and is working with a third-party firm to amend payroll tax returns[29] - An effective shelf registration statement on Form S-3 allows for periodic equity security offerings up to $25.00 million, but the ability to issue is subject to market conditions and macroeconomic effects of COVID-19[30] - The company regained compliance with Nasdaq's minimum bid price requirement on April 20, 2023, after previously receiving a non-compliance notice[31][32] Operating Activities and Cash Flows - Working capital decreased by approximately $8.52 million to $20.54 million at March 31, 2023, from $29.06 million at June 30, 2022[14] - The decrease in working capital is primarily attributed to a net decrease in cash, cash equivalents, and restricted cash, a decrease in accounts receivable, and a decrease in current inventory, partially offset by decreases in accounts payable and accrued expenses[14] - Approximately $3.83 million of cash was used by operations during the nine months ended March 31, 2023, driven by a net loss of $10.33 million and decreases in accounts payable and accrued expenses, partially offset by non-cash expenses (deferred tax valuation allowance) and decreases in accounts receivable and prepaid expenses[17] Inventory and Production - The company manufactured approximately $10.57 million in finished jewelry and $5.88 million in loose jewels during the nine months ended March 31, 2023[34] - Purchases of precious metals and labor are expected to increase with the growth of the finished jewelry business. Fluctuations in gold and other precious metal prices could negatively impact operating cash flow[34] - The level of lab grown diamond inventory has increased to support business and expected sales, contributing to overall inventory growth[3] Short-Term Capital Resources - The company believes its existing cash and cash equivalents, combined with cash from operating activities, will be sufficient to meet working capital and capital expenditure needs over the next twelve months[232] - The $5.00 million cash collateralized JPMorgan Chase Credit Facility, extended to July 31, 2023, remains unused as of March 31, 2023[228][230] - The company's total purchase commitment under the SiC Supply Agreement with Wolfspeed is approximately $52.95 million until June 2025, with $24.75 million remaining to be purchased as of March 31, 2023[240] Long-Term Contractual Commitment - The exclusive supply agreement with Wolfspeed for SiC materials was amended to extend its expiration date to June 29, 2025, with a total purchase commitment of approximately $52.95 million[240] - As of March 31, 2023, approximately $24.75 million of the total purchase commitment remains to be purchased[240] - The company purchased approximately $1.80 million of SiC crystals during the nine months ended March 31, 2023, but made no purchases during the six-month period ended March 31, 2023, while currently in discussions regarding the purchase commitment terms[241] Liquidity and Capital Trends - The company believes ongoing access to capital markets (equity or debt securities) and future cash from operating activities will provide necessary long-term liquidity[214] - Future capital requirements depend on sales growth, expansion of marketing, timing of raw material and labor purchases, capital expenditures, and various risk factors, including the ongoing uncertainty of COVID-19[233] - The ability to issue equity securities under the $25.00 million shelf registration statement is subject to market conditions and potential disruption from macroeconomic effects of the COVID-19 pandemic[243] Item 3. Quantitative and Qualitative Disclosures About Market Risk Inflation is a key market risk, impacting costs, revenues, margins, and customer purchasing power, and mitigation efforts are outlined - Heightened inflation and worsening macroeconomic conditions pose a risk to the company, its suppliers, and the retail/e-commerce industry, impacting labor and overhead rates and leading to increased costs[130][153] - If inflation persists or increases, and mitigation efforts are unsuccessful, costs are likely to continue rising, pressuring revenues, margins, and cash flows. Rising interest rates could also constrain customer purchasing power[130][177] - The company is committed to increasing operational efficiency and improving cost competitiveness to offset inflationary effects[177] Item 4. Controls and Procedures Management, including CEO and CFO, affirmed effective disclosure controls and procedures, reporting no material changes to internal financial controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2023[234] - No changes were made to internal control over financial reporting during the three months ended March 31, 2023, that materially affected or are reasonably likely to materially affect it[235] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company reports no material pending legal proceedings - There are no material pending legal proceedings to which the company is a party or to which any of its property is subject[248] Item 1A. Risk Factors Updates on risk factors include uncertain COVID-19 impacts on operations and the risk of failing to maintain Nasdaq listing requirements - The effects of COVID-19 on the company's business, operating results, and cash flows remain uncertain, with performance affected by supply chain disruptions, labor challenges, and potential long-term impacts on consumer spending patterns[236] - Failure to maintain compliance with Nasdaq's continued listing requirements, such as the minimum bid price, could result in delisting, adversely affecting trading, financing, and investor confidence[250] - The company has previously received Nasdaq non-compliance notices regarding bid price but has subsequently regained compliance[250] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares of its common stock during the three months ended March 31, 2023, under its publicly announced share repurchase program Issuer Purchases of Equity Securities (January 1, 2023 – March 31, 2023) | Period | Shares Purchased | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans (1) or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :-------------------------------------- | :--------------- | :---------------------- | :------------------------------------------------------------------- | :------------------------------------------------------------------- | | January 1, 2023 – January 31, 2023 | - | - | - | $4,510,021 | | February 1, 2023 – February 28, 2023 | - | - | - | $4,510,021 | | March 1, 2023 – March 31, 2023 | - | - | - | $4,510,021 | | Total | - | - | - | $4,510,021 | - The Board of Directors approved a share repurchase program on May 5, 2022, allowing for repurchases of up to $5.00 million worth of common stock over a three-year period ending April 29, 2025[237] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications by the CEO and CFO and Inline XBRL documents - Exhibits include certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350, as well as various Inline XBRL documents[238] Signatures The report is duly signed on behalf of the registrant by the President and Chief Executive Officer, Don O'Connell, and the Chief Financial Officer, Clint J. Pete - The report is signed by Don O'Connell, President and Chief Executive Officer, and Clint J. Pete, Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer), on May 4, 2023[255]