CHARLES & COLVARD, LTD. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "continue," and similar words, although some forward-looking statements are expressed differently. All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. You should be aware that although the forward-looking statements included herein represent management's current judgment and expectations, our actual results may differ materially from those projected, stated, or implied in these forward-looking statements as a result of many factors including, but not limited to, the following:
1. Our business, financial condition and results of operations could continue to
be adversely affected by an ongoing COVID-19 pandemic and related global
economic conditions;
2. Our future financial performance depends upon increased consumer acceptance,
growth of sales of our products, and operational execution of our strategic
initiatives;
3. The execution of our business plans could significantly impact our liquidity;
4. Our business and our results of operations could be materially adversely
affected as a result of general and economic conditions;
5. The financial difficulties or insolvency of one or more of our major customers
or their lack of willingness and ability to market our products could
adversely affect results;
6. We face intense competition in the worldwide gemstone and jewelry industry;
7. We are subject to certain risks due to our international operations,
distribution channels and vendors;
8. Our business and our results of operations could be materially adversely
affected as a result of our inability to fulfill orders on a timely basis;
9. We are currently dependent on a limited number of distributor and retail
partners in our Traditional segment for the sale of our products;
10. We rely on assumptions, estimates, and data to calculate certain of our key
metrics and real or perceived inaccuracies in such metrics may harm our
reputation and negatively affect our business;
11. We may experience quality control challenges from time to time that can
result in lost revenue and harm to our brands and reputation;
12. Seasonality of our business may adversely affect our net sales and operating
income;
13. Our operations could be disrupted by natural disasters;
14. Our loan, pursuant to the Paycheck Protection Program, or the PPP Loan, under
the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as
administered by the
be forgiven or may subject us to challenges and investigations regarding
qualification for the loan;
15. We may not be able to adequately protect our intellectual property, which
could harm the value of our products and brands and adversely affect our
business;
16. Negative or inaccurate information on social media could adversely impact our
brand and reputation;
17. Sales of moissanite and lab grown diamond jewelry could be dependent upon the
pricing of precious metals, which is beyond our control;
18. Our current customers may potentially perceive us as a competitor in the
finished jewelry business;
19. Our failure to maintain compliance with
listing requirements could result in the delisting of our common stock;
20. We depend on an exclusive supply agreement, or the Supply Agreement, withCree, Inc., or Cree, for substantially all of our silicon carbide, or SiC,
crystals, the raw materials we use to produce moissanite jewels; if our
supply of high-quality SiC crystals is interrupted, our business may be
materially harmed;
21. If the e-commerce opportunity changes dramatically or if e-commerce
technology or providers change their models, our results of operations may be
adversely affected;
22. A failure of our information technology infrastructure or a failure to
protect confidential information of our customers and our network against
security breaches could adversely impact our business and operations;
23. If we fail to evaluate, implement, and integrate strategic acquisition or
disposition opportunities successfully, our business may suffer;
24. Governmental regulation and oversight might adversely impact our operations;
and
25. Some anti-takeover provisions of our charter documents may delay or prevent a
takeover of our company.
21-------------------------------------------------------------------------------- Table of Contents Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur except as required by the federal securities laws, and you are urged to review and consider disclosures that we make in the reports that we file with theSecurities and Exchange Commission , orSEC , that discuss other factors relevant to our business. The following discussion is designed to provide a better understanding of our unaudited condensed consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. This information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 , or the 2020 Annual Report. Historical results and percentage relationships related to any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for future periods. Overview Our Mission
At
About Charles & Colvard
Charles & Colvard, Ltd. , aNorth Carolina corporation founded in 1995 (which may be referred to as Charles & Colvard, we, us, or our) is a globally recognized lab created gemstone company specializing in fine jewelry. We manufacture, market, and distribute Charles & Colvard Created Moissanite® (which we refer to as moissanite or moissanite jewels) and onSeptember 14, 2020 , we announced our expansion into the lab grown diamond market with the launch of Caydia™, an exclusive brand of premium lab grown diamonds. We offer gemstones and finished jewelry featuring our proprietary moissanite jewels and premium lab grown diamonds for sale in the worldwide fine jewelry market. Charles & Colvard is the original source of created moissanite, and in 2015, we debuted Forever One™, our premium moissanite gemstone brand. As an e-commerce and multi-channel destination for fine jewelry featuring lab grown gemstones, we believe that the addition of lab grown diamonds is a natural progression for the Charles & Colvard brand. One of our unique differentiators, moissanite - The World's Most Brilliant Gem® - is core to our ambition to create a movement around environmentally and socially responsible fine jewelry. We believe that we are leading the way in delivering the premium moissanite brand through technological advances in gemstone manufacturing, cutting, polishing, and setting. By coupling what we believe to be unprecedented moissanite jewels with responsibly sourced precious metals, we are delivering a uniquely positioned product line for the conscientious consumer. Our Caydia™ lab grown diamonds are hand selected by ourGemological Institute of America , or GIA, certified gemologists to meet Charles & Colvard's uncompromising standards and validated by independent third-party experts. Our Caydia™ lab grown diamonds are available currently in E, F, and G color grades (based on the GIA's color grading scale) with a minimum clarity in accordance with the GIA's VS1 clarity classification along with excellent cut, polish, and symmetry. All of our Caydia™ lab grown diamonds are set with responsibly sourced precious metals. Our strategy is to build a globally revered brand of lab created gemstones and finished jewelry that appeal to a wide consumer audience. We believe this strategy leverages our advantages of being the original and leading worldwide source of Charles & Colvard Created Moissanite® and offering a curated assortment of jewelry featuring Caydia™ lab grown diamonds, which we believe offers an ideal combination of quality and value. We believe a direct relationship with consumers is important to this strategy, which entails delivering tailored educational content, engaging in dialogue with our audience, and positioning our brand to meet the demands of today's discerning consumer. 22 -------------------------------------------------------------------------------- Table of Contents COVID-19 Update The global outbreak of the coronavirus disease 2019, or COVID-19, was declared a pandemic by theWorld Health Organization and a national emergency by theU.S. Government inMarch 2020 and has negatively affected theU.S. and global economies, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to "shelter-in-place" and quarantine restrictions, and created significant disruption of the financial markets. Certain countries and jurisdictions, including some geographic areas of theU.S. , have begun to return to significantly more stringent social, business, and travel-related restrictions due to the dramatic increase in new and variant strains of COVID-19 cases. Even in the absence of legal restrictions, businesses and individuals may voluntarily continue to limit in-person interactions and practice social distancing, and such behaviors may continue beyond the formal end of the pandemic. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location. We have taken measures to protect the health and safety of our employees, work with our customers and suppliers to minimize disruptions, reduce our expenses, and support our community in addressing the challenges posed by this ongoing COVID-19 pandemic. The pandemic continues to present unprecedented business challenges, and we have experienced impacts on our business related to the COVID-19 pandemic, primarily in increased coronavirus-related costs, delays in supplier deliveries, impacts of travel restrictions, access to some customer locations, the effects to net revenue related to reduced demand and store closures, and the impacts of remote work and adjusted work schedules. The impact of the COVID-19 pandemic on the global and domestic economy is currently not fully known. Our operations have, to date, been operating under applicable governmental orders that have restricted activities in an effort to prevent further outbreak of COVID-19. As such, we are conducting business with certain modifications, including having non-operational personnel working remotely where applicable; limiting site access to necessary employees and critical third parties; enhancing the cleaning and disinfection of equipment and common areas, including engaging third-party specialists to disinfect personal workspaces; and issuing a quarantine policy regarding employees with COVID-19 symptoms or potential exposure, among other things. We continue to actively monitor the situation and may take further actions that alter our business operations including any that may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers, vendors, communities and other stakeholders. Despite these challenges, our efforts, especially with regard to product fulfillment and supply chain management, helped to partially mitigate the disruptions caused by the COVID-19 pandemic on our operations in the second quarter of our fiscal year endingJune 30, 2021 , or Fiscal 2021. In addition, strong net sales performance in our Online Channels segment during the calendar year-end 2020 holiday season and an overall reduction in costs and operating expenses resulting from cost-savings initiatives implemented by us have helped to offset the adverse impacts of the COVID-19 pandemic on our financial results in our second fiscal quarter. However, the ultimate impact of the COVID-19 pandemic on our operations and financial performance in Fiscal 2021 and future periods, including our ability to execute our business plan and strategic initiatives in the expected timeframe, remains uncertain and will depend on future developments, including the duration and recent increased spread of the coronavirus disease and related actions taken by theU.S. Government , state and local government officials, and international governments to prevent and manage disease spread, including the global roll-out of COVID-19 vaccines, all of which are uncertain and cannot be predicted. The long-term impacts of the COVID-19 pandemic on global consumer buying behaviors, which impacts demand for our products and services, are also difficult to predict.
For additional risks to the Company related to the COVID-19 pandemic, see "Part II, Item 1A. Risk Factors", contained in our 2020 Annual Report.
Fiscal 2021 Financial Trends
Currently, our financial outlook for Fiscal 2021 is subject to various risks and uncertainties and is based on assumptions that we believe in good faith are reasonable, but which may be materially different from actual results. The full extent of the impact of the COVID-19 pandemic on our operational and financial performance remains uncertain and continues to depend on many factors outside of our control, including, without limitation: the timing, extent, trajectory and duration of the pandemic particularly in light of the recent dramatic increases in new and variant strains of COVID-19 cases in theU.S. to the extent such outbreak would impact the local geographic region in which our business principally operates; the development and availability of effective treatments and the long-term effects of the recently implemented global vaccine rollout; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for consumer products. We expect the COVID-19 pandemic will continue to have an adverse impact on our business, results of operations, financial condition, and liquidity during Fiscal 2021. Due to the potentially significant impact on our operations of the COVID-19 pandemic, including governmental responses to prevent further outbreak of COVID-19, current period results are not necessarily indicative of expected performance for other interim periods or our full Fiscal 2021. We expect the COVID-19 pandemic will continue to have an adverse impact on our business, results of operations, financial condition, and liquidity during Fiscal 2021. 23 -------------------------------------------------------------------------------- Table of Contents As we manage through these challenging times, our strategic focus for Fiscal 2021 remains centered on the expansion of Charles & Colvard's brand on a global scale and to continue increasing the size of our business through top-line disciplined growth by leveraging existing resources. We believe that lab-created gemstones, including our premier moissanite products, Forever One™ and Moissanite by Charles & Colvard® and our lab grown diamond product line, Caydia™, are now being embraced by worldwide markets. We also believe that our ability to elevate our own lab-created gemstones - including both moissanite jewels and lab grown diamonds - and the Charles & Colvard brand directly with consumers is key to our future success and ability to continue fueling our growth. We intend to elevate the Charles & Colvard name by making it synonymous with quality, value, and price. Notwithstanding the global challenges we face in Fiscal 2021, we plan to execute on our key strategies with an ongoing commitment to spending judiciously and generating sustainable earnings improvement.
We discuss our key strategies for Fiscal 2021 in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", contained in our 2020 Annual Report.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which we prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. "Critical accounting policies and estimates" are defined as those most important to the financial statement presentation and that require the most difficult, subjective, or complex judgments. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions and/or conditions, including the impact of the COVID-19 pandemic and the related responses, those actual results of operations may materially differ. We have disclosed our critical accounting policies and estimates in our 2020 Annual Report, and that disclosure should be read in conjunction with this Quarterly Report on Form 10-Q. Except as set forth below, there have been no significant changes in our critical accounting policies and estimates during the first six months of Fiscal 2021. For a discussion regarding our adoption of the new accounting standard related to the measurement and disclosure of credit losses on financial instruments, see Note 2 to our condensed consolidated financial statements in Item 1, "Financial Statements", of this Quarterly Report on Form 10-Q. 24 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table sets forth certain consolidated statements of operations
data for the three and six months ended
Three Months Ended December 31, Six Months Ended December 31,
2020 2019 2020 2019
Net sales $ 12,146,790 $ 10,659,090 $ 20,073,083 $ 18,267,511
Costs and expenses:
Cost of goods sold 6,167,708 5,530,514 10,363,763 9,407,138
Sales and marketing 2,480,571 3,160,965 4,128,503 5,390,556
General and administrative 977,528 1,203,686 2,185,564 2,553,187
Total costs and expenses 9,625,807 9,895,165 16,677,830 17,350,881
Income from operations 2,520,983 763,925 3,395,253 916,630
Other income (expense):
Interest income 1,126 45,379 4,586 106,758
Interest expense (2,466 ) (277 ) (4,905 ) (419 )
Loss on foreign currency exchange (72 ) (314 ) (603 ) (853 )
Total other (expense) income, net (1,412 ) 44,788 (922 ) 105,486
Income before income taxes 2,519,571 808,713 3,394,331 1,022,116
Income tax (expense) benefit (494 ) 5,337 (988 ) (747 )
Net income $ 2,519,077 $ 814,050 $ 3,393,343 $ 1,021,369 Consolidated
Consolidated net sales for the three and six months ended
Three Months Ended December 31, Change Six Months Ended December 31, Change
2020 2019 Dollars Percent 2020 2019 Dollars Percent
Finished jewelry $ 8,265,197 $ 6,438,347 $ 1,826,850 28 % $ 12,600,534 $ 10,296,342 $ 2,304,192 22 %
Loose jewels 3,881,593 4,220,743 (339,150 ) -8 % 7,472,549 7,971,169 (498,620 ) -6 %
Total consolidated
net sales $ 12,146,790 $ 10,659,090 $ 1,487,700 14 % $ 20,073,083 $ 18,267,511 $ 1,805,572 10 %
Consolidated net sales were $12.15 million for the three months ended December
31, 2020 compared to $10.66 million for the three months ended December 31,
2019 , an increase of approximately $1.49 million , or 14%. Consolidated net
sales were $20.07 million for the six months ended December 31, 2020 compared to
$18.27 million for the six months ended December 31, 2019 , an increase of
approximately $1.81 million , or 10%. The increase in consolidated net sales for
the three and six months ended December 31, 2020 was due primarily to strong
calendar year-end holiday sales and increased consumer awareness and strong
demand for our moissanite jewels, lab grown diamonds, and finished jewelry
featuring both moissanite and lab grown diamonds. These increases resulted in
higher finished jewelry product net sales during the three and six months ended
December 31, 2020 in our Online Channels segment and Traditional segment. The
increases in our Online Channels segment net sales in the three and six months
ended December 31, 2020 were partially offset by lower net sales in our
Traditional segment driven by lower loose jewels sales and decreased
international sales during the three and six months ended December 31, 2020 .
Sales of finished jewelry represented 68% and 63% of total consolidated net
sales for the three and six months ended December 31, 2020 , respectively,
compared to 60% and 56%, respectively, of total consolidated net sales for the
corresponding periods of the prior year. For the three months ended December 31,
2020 , finished jewelry sales were $8.27 million compared to $6.44 million for
the corresponding period of the prior year, an increase of approximately $1.83
million , or 28%. For the six months ended December 31, 2020 , finished jewelry
sales were $12.60 million compared to $10.30 million for the corresponding
period of the prior fiscal year, an increase of approximately $2.30 million , or
22%. The increase in finished jewelry sales for the three- and six-month periods
ended December 31, 2020 was due primarily to higher finished jewelry sales of
Forever One™ and Moissanite by Charles & Colvard® in our Online Channels segment
as well as in our Traditional segment.
25
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Sales of loose jewels represented 32% and 37% of total consolidated net sales
for the three and six months ended December 31, 2020 , respectively, compared to
40% and 44%, respectively, of total consolidated net sales for the corresponding
periods of the prior fiscal year. For the three months ended December 31, 2020 ,
loose jewel sales were $3.88 million compared to $4.22 million for the
corresponding period of the prior year, a decrease of $339,000 , or 8%. For the
six months ended December 31, 2020 , loose jewel sales were $7.47 million
compared to $7.97 million for the corresponding period of the prior fiscal year,
a decrease of $500,000 , or 6%. The decrease in loose jewels sales for the three-
and six-month periods ended December 31, 2020 was primarily due to lower levels
of sales principally through the international distributor network in our
Traditional segment.
U.S. net sales accounted for approximately 94% of total consolidated net sales
for each of the three- and six-month periods ended December 31, 2020 , compared
to 90% of total consolidated net sales for each of the corresponding periods of
the prior year. U.S. net sales increased to $11.39 million , or 18%, during the
three months ended December 31, 2020 from the corresponding period of the prior
fiscal year. U.S. net sales increased to $18.89 million , or 15%, during the six
months ended December 31, 2020 from the corresponding period of the prior year.
U.S. net sales increased during the three and six months ended December 31, 2020
primarily as a result of increased sales to U.S. customers in both our Online
Channels segment and Traditional segment.
Our largest U.S. customer during the three and six months ended December 31,
2020 accounted for 14% and 12% of total consolidated net sales during each
respective period. This same customer was also one of our two largest U.S.
customers during the three and six months ended December 31, 2019 when this
customer accounted for 13% of total consolidated net sales during each of the
respective three- and six-month periods. Our second largest U.S. customer during
the six months ended December 31, 2020 accounted for 10% of total consolidated
net sales during the period then ended. This same customer was also one of our
two largest U.S. customers during the three and six months ended December 31,
2019 , when this customer accounted for 13% of total consolidated net sales
during each of the respective three- and six-month periods. We expect that we
will remain dependent on our ability, and that of our largest customers, to
maintain and enhance retail programs. A change in or loss of any of these
customer or retailer relationships could have a material adverse effect on our
results of operations.
International net sales accounted for approximately 6% of total consolidated net
sales for each of the three- and six-month periods ended December 31, 2020 ,
respectively, compared to 10% of total consolidated net sales for each of the
corresponding periods of the prior year. International net sales decreased 25%
and 36% during the three and six months ended December 31, 2020 , respectively,
from the corresponding periods of the prior fiscal year principally as a result
of lower demand in our international distributor market, which was partially
offset by growth in our direct-to-consumer presence internationally reflecting
solid direct-to-consumer sales from our Online Channels segment in international
markets. In light of the effects of ongoing global economic conditions, we
continue to evaluate these and other potential distributors in international
markets to determine the best long-term partners. As a result, and in light of
the ongoing worldwide pandemic and international trade challenges, we expect our
sales in these markets to continue to fluctuate significantly each reporting
period.
We did not have an international customer account for 10% or more of total
consolidated sales during the three and six months ended December 31, 2020 or
2019. A portion of our international consolidated sales represents jewels sold
internationally that may be re-imported to U.S. retailers.
26
--------------------------------------------------------------------------------Table of Contents Costs and Expenses Cost of Goods Sold
Cost of goods sold for the three and six months ended
Three Months Ended Six Months Ended
December 31, Change December 31, Change
2020 2019 Dollars Percent 2020 2019 Dollars Percent
Product line cost of
goods sold:
Finished jewelry $ 4,002,146 $ 2,964,114 $ 1,038,032 35 % $ 5,756,435 $ 4,667,024 $ 1,089,411 23 %
Loose jewels 1,805,603 2,081,654 (276,051 ) -13 % 3,549,525 3,881,106 (331,581 ) -9 %
Total product line
cost of goods sold 5,807,749 5,045,768 761,981 15 % 9,305,960 8,548,130 757,830 9 %
Non-product line
cost of goods sold 359,959 484,746 (124,787 ) -26 % 1,057,803 859,008 198,795 23 %
Total cost of goodssold$ 6,167,708 $ 5,530,514 $ 637,194 12 %$ 10,363,763 $ 9,407,138 $ 956,625 10 % Total cost of goods sold was$6.17 million for the three months endedDecember 31, 2020 compared to$5.53 million for the three months endedDecember 31, 2019 , a net increase of approximately$637,000 , or 12%. Total cost of goods sold was$10.36 million for the six months endedDecember 31, 2020 compared to$9.41 million for the six months endedDecember 31, 2019 , an increase of approximately$957,000 , or 10%. Product line cost of goods sold is defined as product cost of goods sold in each of our Online Channels segment and Traditional segment excluding non-capitalized expenses from our manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory write-offs; and other inventory adjustments, comprising costs of quality issues, and damaged goods. The increase in cost of goods sold for the three months endedDecember 31, 2020 compared to the same period in 2019 was primarily driven by increased sales of finished jewelry, which reflect higher material and labor costs, in both our Online Channels segment and Traditional segment as a result of strong demand during the calendar year-end 2020 holiday season. Our finished jewelry products cost more to produce due to higher material and labor costs when compared to the production of loose jewels. The net decrease in non-product line cost of goods sold for the three months endedDecember 31, 2020 , comprises a favorable$167,000 change in other inventory adjustments principally relating to positive changes in production standard cost variances compared to the three months endedDecember 31, 2019 . The net decrease in non-product line cost of goods sold was also related to an approximate$101,000 change in inventory valuation adjustments primarily related to favorable changes in obsolescence reserves in the current period compared to those in the comparable prior year period as well as an approximate$32,000 decrease in non-capitalized manufacturing and production control expenses principally due to the timing when work-in-process is received into inventory and overhead costs are allocated. These decreases in non-product line cost of goods sold were offset in part by an approximate$175,000 increase in freight out from increased shipments resulting from Online Channels segment sales growth during the quarter endedDecember 31, 2020 . The increase in cost of goods sold for the six months endedDecember 31, 2020 compared to the same period in 2019 was also primarily driven by the increased finished jewelry sales in both our Online Channels segment and Traditional segment as a result of strong sales during the calendar year-end 2020 holiday season. The net increase in non-product line cost of goods sold for the six months endedDecember 31, 2020 , comprises an unfavorable$116,000 change in other inventory adjustments principally related to adverse changes in production standard cost variances compared to the six months endedDecember 31, 2019 . The net increase in non-product line cost of goods sold was also related to an approximate$220,000 increase in freight out from increased shipments resulting from Online Channels segment sales growth during the six months endedDecember 31, 2020 . These increases in non-product line cost of goods sold were offset in part by an approximate$93,000 decrease in non-capitalized manufacturing and production control expenses principally due to the timing when work-in-process is received into inventory and overhead costs are allocated as wells as an approximate$44,000 change in inventory valuation allowances primarily related to favorable changes in obsolescence reserves in the six months endedDecember 31, 2020 , compared to those in the comparable prior year period. 27 -------------------------------------------------------------------------------- Table of Contents For additional disclosure relating to non-product line cost of goods sold, see Note 3 to our condensed consolidated financial statements in Item 1, "Financial Statements", of this Quarterly Report on Form 10-Q.
Sales and Marketing
Sales and marketing expenses for the three and six months ended
Three Months Ended Six Months Ended
December 31, Change December 31, Change
2020 2019 Dollars Percent 2020 2019 Dollars Percent
Sales and marketing $ 2,480,571 $ 3,160,965 $ (680,394 ) -22 % $ 4,128,503 $ 5,390,556 $ (1,262,053 ) -23 %
Sales and marketing expenses were $2.48 million for the three months ended
December 31, 2020 compared to $3.16 million for the three months ended December
31, 2019 , a decrease of approximately $680,000 , or 22%. Sales and marketing
expenses were $4.13 million for the six months ended December 31, 2020 compared
to $5.39 million for the six months ended December 31, 2019 , a decrease of
approximately $1.26 million , or 23%.
The decrease in sales and marketing expenses for the three months ended December
31, 2020 compared to the same period in 2019 was primarily due to a $418,000
decrease in compensation-related expenses; a $321,000 decrease in advertising
and digital marketing expenses; a $14,000 decrease in travel expenses as a
result of COVID-19 cost-control measures; and a $6,000 decrease in
software-related costs compared with those incurred in the prior year associated
with upgraded operating system maintenance agreements. These decreases were
partially offset by a $51,000 increase in general office-related expenses
primarily due to increased credit card transaction fees associated with a higher
level of online sales; a $26,000 increase in depreciation and amortization
principally associated with the capitalization of costs relating to information
technology-related upgrades; and a $2,000 increase in professional services
principally comprising non-recurring consulting information technology services.
Compensation expenses for the three months ended December 31, 2020 compared to
the same period in 2019 decreased primarily due to a $337,000 decrease in
salaries, commissions, and related employee benefits in the aggregate; a $67,000
decrease in bonus expense; and a $14,000 decrease in employee stock-based
compensation expense. All three of these compensation-related expense decreases
reflect our June 2020 management reorganization and workforce reduction.
The decrease in advertising and digital marketing expenses for the three months
ended December 31, 2020 compared to the same period in 2019 comprises a $148,000
decrease in Internet marketing; a $98,000 decrease in outside agency fees; a
$55,000 decrease in cooperative advertising; and a $20,000 decrease in
promotion-related expenses.
The decrease in sales and marketing expenses for the six months ended December
31, 2020 compared to the same period in 2019 was primarily due to an $819,000
decrease in compensation-related expenses; a $457,000 decrease in advertising
and digital marketing expenses; a $56,000 decrease in professional services fees
principally comprising non-recurring consulting services for cybersecurity and
merchandising imaging in the prior year period; and a $21,000 decrease in travel
expenses as a result of COVID-19 cost-control measures. These decreases were
partially offset by a $49,000 increase in general office-related expenses, which
are principally related to higher credit card transaction fees from increased
online sales levels; a $30,000 increase in depreciation and amortization expense
relating to capitalized costs associated with information technology-related
upgrades; and a $12,000 increase in software-related costs principally in
connection with maintenance agreements as well as other software-related
agreements.
Compensation expenses for the six months ended December 31, 2020 compared to the
same period in 2019 decreased primarily as a result of a $655,000 decrease in
salaries, commissions, and related employee benefits in the aggregate; a
$114,000 decrease in bonus expense; and a $52,000 decrease in employee
stock-based compensation expense. All three of these compensation-related
expense decreases reflect our June 2020 management reorganization and workforce
reduction. These decreases were partially offset by a $2,000 increase in
employee-related severance costs.
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The decrease in advertising and digital marketing expenses for the six months
ended December 31, 2020 compared to the same period in 2019 comprises a $190,000
decrease in Internet marketing; a $174,000 decrease in cooperative advertising;
an $88,000 decrease in outside agency fees; and an $8,000 decrease in print
media expenses. These decreases were partially offset by a $3,000 increase in
promotion-related expenses.
General and Administrative
General and administrative expenses for the three and six months ended
Three Months Ended Six Months Ended
December 31, Change December 31, Change
2020 2019 Dollars Percent 2020 2019 Dollars PercentGeneral and administrative$ 977,528 $ 1,203,686 $ (226,158 ) -19 %$ 2,185,564 $ 2,553,187 $ (367,623 ) -14 % General and administrative expenses were$978,000 for the three months endedDecember 31, 2020 compared to$1.20 million for the three months endedDecember 31, 2019 , a decrease of approximately$226,000 , or 19%. General and administrative expenses were$2.19 million for the six months endedDecember 31, 2020 compared to$2.55 million for the six months endedDecember 31, 2019 , a decrease of approximately$368,000 , or 14%. The decrease in general and administrative expenses for the three months endedDecember 31, 2020 compared to the same period in 2019 was primarily due to a$118,000 decrease in professional services; an$83,000 decrease in compensation expenses; and a$45,000 decrease in bad debt expense associated with our allowance for doubtful accounts reserve policy. These decreases were partially offset by a$7,000 increase in insurance expenses, principally related to higher renewal premiums; a$3,000 increase in depreciation and amortization expense; a$2,000 increase in equipment-related rental expense; a$2,000 increase in business taxes and licenses; and a$6,000 net increase in miscellaneous other general and administrative expenses. Professional services fees decreased for the three months endedDecember 31, 2020 compared to the same period in 2019 primarily due to a$73,000 decrease in legal fees resulting from non-recurring non-capitalized fees incurred in connection with our underwritten public offering and corporate governance matters in the prior year; a$30,000 decrease in investor relations fees; a$12,000 decrease in accounting services also principally related to non-recurring fees associated with our underwritten public offering in the prior year; and a$3,000 decrease in consulting and other professional services. Compensation expenses decreased for the three months endedDecember 31, 2020 compared to the same period in 2019 principally due to a$39,000 decrease in salaries and related employee benefits in the aggregate; a$22,000 decrease in bonus expense; and a$22,000 decrease in employee stock-based compensation expense. All three of these compensation-related expense decreases reflect ourJune 2020 management reorganization and workforce reduction. The decrease in general and administrative expenses for the six months endedDecember 31, 2020 compared to the same period in 2019 was primarily due to a$247,000 decrease in professional services; a$197,000 decrease in compensation expenses; and a$9,000 decrease in Board retainer fees as a result of the resignation of a former Director inSeptember 2019 . These decreases were partially offset by a$24,000 increase in insurance expenses principally related to higher renewal premiums; a$16,000 increase in bad debt expense associated with our allowance for doubtful accounts reserve policy; a$14,000 increase in software-related costs principally in connection with maintenance agreements as well as other software-related agreements; an$8,000 increase in travel-related expenses; a$7,000 increase in bank charges as a result of transaction fees associated with increased online transactions; a$6,000 increase in business taxes and licenses; a$4,000 increase in equipment-related rental expense; a$4,000 increase in depreciation and amortization expense; and a$2,000 net increase in miscellaneous other general and administrative expenses.
Professional services fees decreased for the six months ended
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Compensation expenses decreased for the six months ended December 31, 2020
compared to the same period in 2019 principally due to a $93,000 decrease in
salaries and related employee benefits in the aggregate; a $55,000 decrease in
employee stock-based compensation expense; and a $49,000 decrease in bonus
expense. All three of these compensation-related expense decreases reflect our
June 2020 management reorganization and workforce reduction.
Interest Income
Interest income for the three and six months endedDecember 31, 2020 and 2019 is as follows: Three Months Ended Six Months Ended December 31, Change December 31, Change 2020 2019 Dollars Percent
2020 2019 Dollars Percent Interest income$ 1,126 $ 45,379 $ (44,253 ) -98 %$ 4,586 $ 106,758 $ (102,172 ) -96 % InJune 2019 , we completed an underwritten public offering of 6,250,000 shares of our common stock, which together with the partial exercise of the underwriters' overallotment option for an additional 630,500 shares inJuly 2019 , resulted in net proceeds of approximately$9.99 million . The net proceeds from this offering, along with excess operating cash, are deposited into and maintained in an interest-bearing account with a federally insured commercial bank. Accordingly, during the three and six months endedDecember 31, 2020 and 2019, we earned interest from cash on deposit in this interest-bearing account. The decrease in earned interest reflects adverse changes in interest rate fluctuations during the first half of Fiscal 2021 compared with the first half of Fiscal 2020. Interest Expense
Interest expense for the three and six months ended
Three Months Ended Six Months Ended
December 31, Change December 31, Change
2020 2019 Dollars Percent 2020 2019 Dollars Percent
Interest expense $ 2,466 $ 277 $ 2,189 790 % $ 4,905 $ 419 $ 4,486 1,071 %
On June 18, 2020 , we received the proceeds from our Paycheck Protection Program
Loan, or the PPP Loan, pursuant to the Paycheck Protection Program under the
Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as
administered by the U.S. Small Business Administration , or SBA. The PPP Loan in
the principal amount of $965,000 was disbursed by Newtek Small Business Finance,
LLC , or the Lender, pursuant to a promissory note, or the Promissory Note, dated
June 15, 2020 . We accounted for the Promissory Note as debt within the
accompanying consolidated financial statements. Accordingly, during the three
and six months ended December 31, 2020 , we incurred interest on the Promissory
Note. We had no debt during the comparable periods in the prior fiscal year.
Loss on Foreign Currency Exchange
Losses on foreign currency exchange related to foreign sales transacted in
functional currencies other than the
Three Months Ended Six Months Ended
December 31, Change December 31, Change
2020 2019 Dollars Percent 2020 2019 Dollars PercentLoss on foreign currency exchange$ 72 $ 314 $ (242 ) -77 %$ 603 $ 853 $ (250 ) -29 % During the three and six months endedDecember 31, 2020 and 2019, we had international sales transactions denominated in currencies other than theU.S dollar that resulted in foreign currency exchange net losses. The decrease in these losses reflects the lower level of international sales during the three and six months endedDecember 31, 2020 compared with the same periods in the prior year. 30 -------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes We recognized income tax net expense of$500 and income tax net benefit of approximately$5,000 for the three-month periods endedDecember 31, 2020 and 2019, respectively. We recognized income tax net expense of approximately$1,000 and$1,000 for the six-month periods endedDecember 31, 2020 and 2019, respectively. Income tax provisions in these periods primarily relate to estimated taxes, penalties, and interest associated with uncertain tax positions. As of each reporting date, management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. Beginning in 2014, management determined that negative evidence outweighed positive evidence and established a full valuation allowance against our deferred tax assets. We maintained a full valuation allowance against our deferred taxes as ofDecember 31, 2020 andJune 30, 2020 .
Liquidity and Capital Resources
The impact of the COVID-19 pandemic on the global and domestic economy is currently not fully known. With the dramatic increase in new and variant strains of COVID-19 infection levels around the world, many geographical regions, including some parts of theU.S. , are reimposing tighter social and business restrictions in an effort to prevent further outbreak of COVID-19. Accordingly, the world continues to adapt to the ongoing COVID-19 pandemic and its adverse effects on global economics and business operations. The impact of the COVID-19 pandemic continues to place unprecedented pressures on global andU.S. businesses including our own. The ongoing spread of the coronavirus disease continues to lead to business disruption and volatility in the global capital markets, which, depending on future developments, including the success of the global vaccine efforts to control the spread of the underlying virus, could further adversely impact our capital resources and liquidity in the future. We remain increasingly focused on the COVID-19 pandemic and are continually evaluating its potential effect on our business and liquidity and capital resources.
Capital Structure and Long-Term Debt
As disclosed above, on
Under the CARES Act and the Promissory Note, loan forgiveness is available, subject to certain conditions, for the sum of documented payroll costs, covered rent payments, and covered utilities during the 24-week period beginning on the date of first disbursement of the PPP Loan. For purposes of the CARES Act, payroll costs exclude cash compensation of an individual employee in excess of$100,000 , prorated annually. Not more than 40% of the forgiven amount can be attributable to non-payroll costs. Although we currently believe that our use of the PPP Loan will meet the conditions for forgiveness for a portion of the PPP Loan, we cannot assure our future adherence to the forgiveness criteria and that the PPP Loan will be forgiven, in whole or in part. The CARES Act provides that existing AMT credit carryforwards are now eligible for acceleration and refundable AMT credits are to be completely refunded to companies for taxable years beginning in 2019, or by election, taxable years beginning in 2018. Accordingly, we elected to have the AMT tax completely refunded and filed a refund claim for the remaining AMT tax credit. The full amount of the remaining balance of our AMT credit refund in the amount of approximately$272,000 was refunded by the Internal Revenue Service inOctober 2020 . We also intend to take advantage of COVID-19 related tax credits for required paid leave provided by us. These eligible tax credits are determined by qualified emergency paid sick and expanded family and medical leave wages pursuant to the Families First Coronavirus Response Act, or FFCRA. Under FFCRA, we have provided employees with paid federal sick and expanded family and medical leave benefits for which we may be reimbursed by the government through payroll tax credits. Qualifying wages for tax credit purposes under FFCRA are those paid to an employee who takes leave under FFCRA for a qualifying reason, up to the applicable per diem and aggregate payment caps. Applicable tax credits also extend to the employer's share of amounts paid or incurred to maintain a group health plan. 31 -------------------------------------------------------------------------------- Table of Contents The Consolidated Appropriations Act, 2021, or the Act, which is the latest federal stimulus relief bill for the COVID-19 pandemic, was signed into law onDecember 27, 2020 . Notably, this legislation provides that employers who received a PPP loan may also qualify for the Employee Retention Credit, or ERC, once certain shutdown-related gross receipts decline eligibility hurdles are met. Previously, pursuant to the CARES Act, taxpayers that received a PPP loan were not eligible for the ERC and this change is retroactive toMarch 27, 2020 . While we have had minimal short-term shutdowns related to the COVID-19 pandemic such that we have not utilized this aid, if future shutdowns are mandated and more extensive, we may be eligible to claim the ERC.
Finally, as permitted by the NC COVID-19 Relief Act, we will receive a tax
credit towards our contributions to the
As a component of our liquidity and capital structure, we have an effective shelf registration statement on Form S-3 on file with theSEC which allows us to periodically offer and sell, individually or in any combination, shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, and units consisting of any combination of the foregoing types of securities, up to a total of$25.00 million , of which approximately$13.99 million remains available after giving effect to ourJune 2019 public offering, including the impact of the partial exercise of the underwriters' over-allotment option, described below. However, we may offer and sell no more than one-third of our public float (which is the aggregate market value of our outstanding common stock held by non-affiliates) in any 12-month period. Our ability to issue equity securities under the shelf registration statement is subject to market conditions, which are in turn, subject to the disruption and volatility being caused by the ongoing COVID-19 pandemic. Any capital raise is not assured and may not be at terms that would be acceptable to us. Financing Activities InJune 2019 , we completed an underwritten public offering of 6,250,000 newly issued shares of common stock, at a price to the public of$1.60 per share, pursuant to our effective shelf registration statement on Form S-3. Net proceeds from the offering were approximately$9.06 million , net of the underwriting discount and fees and expenses. Pursuant to the terms of the underwriting agreement entered into in connection with this offering, the underwriters were granted a 30-day option to buy up to an additional 937,500 shares of our common stock to cover over-allotments. Pursuant to the partial exercise of the underwriters' over-allotment option, inJuly 2019 , we issued an additional 630,500 shares of our common stock at a price of$1.60 per share for net proceeds of approximately$932,000 , net of the underwriting discount and fees and expenses of approximately$77,000 . After giving effect to the partial exercise of the over-allotment option, we sold an aggregate of 6,880,500 shares of our common stock at a price of$1.60 per share with total gross proceeds of approximately$11.01 million , before deducting the underwriting discount and fees and expenses of approximately$1.02 million . Early during Fiscal 2020, we began using the aggregate net proceeds of approximately$9.99 million from the offering for marketing and for general corporate and working capital purposes. However, in response to the COVID-19 pandemic and its impact on consumer confidence and spending, management drastically reduced related advertising and digital marketing expenditures inmid-March 2020 . We will continue to monitor and adjust our advertising and digital marketing and professional services expenditure levels to correspond to the e-commerce market disruption and volatility being caused by the ongoing COVID-19 pandemic. However, we plan to maintain these reduced advertising and digital marketing expenditure levels for the foreseeable future. As discussed above, onJune 18, 2020 we received a PPP Loan in the principal amount of$965,000 from the Lender pursuant to a Promissory Note datedJune 15, 2020 . The Promissory Note maturesJune 18, 2022 and may be extended with the consent of the Lender under the provisions of the CARES Act. The Promissory Note bears interest at a fixed rate of 1% per annum. Pursuant to the terms of the Promissory Note, monthly principal and interest payments in the amount of approximately$41,000 will commence onApril 1, 2021 . For financial reporting purposes as ofDecember 31, 2020 , the classification of the current maturity of this long-term debt assumes there will be no principal forgiveness and principal repayment for the full outstanding principal amount of the PPP Loan will be spread in equal monthly installments over the period fromApril 1, 2021 through the maturity date of the Promissory Note. We did not provide any collateral or guarantees for the PPP Loan, nor did we pay any facility charge to obtain the PPP Loan. The Promissory Note provides for customary events of default, including, among others, those relating to failure to make payment and breaches of representations. We may prepay the principal of the PPP Loan at any time without incurring any prepayment charges. 32 -------------------------------------------------------------------------------- Table of Contents Operating Activities and Cash Flows We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As ofDecember 31, 2020 , our principal sources of liquidity were cash, cash equivalents and restricted cash totaling$16.87 million , trade accounts receivable of$3.06 million , and net current inventory of$12.07 million , as compared to cash and cash equivalents totaling$14.62 million , trade accounts receivable of$671,000 , and net current inventory of$7.44 million as ofJune 30, 2020 . As described more fully herein, we also have long-term debt in the amount of$965,000 , of which$579,000 is classified as its current maturity as ofDecember 31, 2020 , and access to a$5.00 million asset-based revolving credit facility withWhite Oak , or the White Oak Credit Facility. During the six months endedDecember 31, 2020 , our working capital increased by approximately$9.94 million to$27.36 million from$17.42 million atJune 30, 2020 . As described more fully below, the increase in working capital atDecember 31, 2020 is primarily attributable to an increase in our allocation of inventory from long-term to short-term, an increase in our accounts receivable, an increase in our cash, cash equivalents, and restricted cash resulting from cash provided by our operations, a decrease in our accounts payable, an increase in our prepaid expenses and other assets, and a decrease in our short-term operating lease liabilities. These factors were offset partially by an increase in the current maturity of our long-term debt and an increase in our accrued expenses and other liabilities. During the six months endedDecember 31, 2020 , approximately$2.41 million of cash was provided by our operations. The primary drivers of our cash flows from operations were the favorable effect of net income in the amount of$3.39 million ; a decrease in inventory of$1.86 million ; a decrease in prepaid expenses and other assets of$62,000 ; and an increase in accrued income taxes in the amount of$1,000 . In addition, the net effect of non-cash items included in net income totaling$1.25 million also favorably impacted net cash provided by operating activities during the six months endedDecember 31, 2020 . These factors were offset partially by an increase in accounts receivable of$3.07 million ; a decrease in accounts payable of$816,000 ; and a decrease in accrued expenses and other liabilities of$274,000 . Accounts receivable increased principally due to the increased level of sales during the six months endedDecember 31, 2020 as compared with the sales during the period leading up toJune 30, 2020 . As a result of the COVID-19 pandemic, we offered extended Traditional segment customer payment terms beyond 90 days to certain credit-worthy customers during the first half of Fiscal 2021 and second half of Fiscal 2020. Because of the ongoing impact of the pandemic on the global economy, the extension of these terms may not immediately increase liquidity as a result of ongoing current-period sales, which we expect to continue to be pressured due to the effects of the ongoing COVID-19 pandemic. In addition, we believe our competitors and other vendors in the wholesale jewelry industry have expanded their use of extended payment terms and, in aggregate, we believe that, through our use of extended payment terms, we provide a competitive response in our market during the current global economic environment. We believe that we are unable to estimate the impact of these actions on our net sales, but we believe that if we ceased providing extended payment terms, we would be at a competitive disadvantage for some Traditional segment customers in the marketplace during this economic period and that our net sales and profits would likely be adversely impacted. We manufactured approximately$6.36 million in finished jewelry and$3.76 million in loose jewels, which includes the cost of the loose jewels and the purchase of precious metals and labor in connection with jewelry production, during the six months endedDecember 31, 2020 . We expect our purchases of precious metals and labor to increase as we increase our finished jewelry business. In addition, the price of gold has increased significantly over the past decade, and more significantly over the last 12 months, resulting in higher retail price points for gold jewelry. Because the market price of gold and other precious metals is beyond our control, the upward price trends could continue and have a negative impact on our operating cash flow as we manufacture finished jewelry. Historically, our raw material inventories of SiC crystals had been purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restricted the sale of these crystals exclusively to us, the suppliers negotiated minimum purchase commitments with us that, when combined with reduced sales levels during prior periods in which the purchase commitments were in effect, have resulted in levels of inventories that are higher than we might otherwise maintain. As ofDecember 31, 2020 andJune 30, 2020 ,$16.59 million and$23.19 million , respectively, of our inventories were classified as long-term assets. Loose jewel sales and finished jewelry that we manufacture will utilize both the finished goods loose jewels currently on-hand and, as we deplete certain shapes and sizes, our on-hand raw material SiC crystals of$2.06 million and new raw material that we purchase pursuant to the Supply Agreement. 33 -------------------------------------------------------------------------------- Table of Contents Our more detailed description of our inventories is included in Note 5 to our condensed consolidated financial statements in Part I, Item 1, "Financial Statements", of this Quarterly Report on Form 10-Q. As ofDecember 31, 2020 , we had approximately$309 of remaining federal income tax credits that expire in 2021 and can be carried forward to offset future income taxes. As ofDecember 31, 2020 , we also had a federal tax net operating loss carryforward of approximately$23.72 million expiring between 2022 and 2037, which can be used to offset against future federal taxable income;North Carolina tax net operating loss carryforwards of approximately$20.12 million expiring between 2023 and 2033; and various other state tax net operating loss carryforwards expiring between 2021 and 2040, which can be used to offset against future state taxable income.
Contractual Commitment
OnDecember 12, 2014 , we entered into the Supply Agreement with Cree. Under the Supply Agreement, subject to certain terms and conditions, we agreed to exclusively purchase from Cree, and Cree agreed to exclusively supply, 100% of our 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 onJune 24, 2018 , unless extended by the parties. EffectiveJune 22, 2018 , the Supply Agreement was amended to extend the expiration date toJune 25, 2023 . The Supply Agreement, as amended, also provides for the exclusive production of our premium moissanite product, Forever One™ and provided us with one option, subject to certain conditions, to unilaterally extend the term of the Supply Agreement for an additional two-year period following the expiration of the initial term. In addition, the amendment to the Supply Agreement established a process by which Cree may begin producing alternate SiC material based on our specifications that will give us the flexibility to use the materials in a broader variety of our products, as well as to permit us to purchase certain amounts of SiC materials from third parties under limited conditions. OnAugust 26, 2020 , the Supply Agreement was further amended, effectiveJune 30, 2020 , to extend the expiration date toJune 29, 2025 , which may be further extended by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread our 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 Cree has agreed to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit us to purchase revised amounts of SiC materials from third parties under limited conditions. Our total purchase commitment under the Supply Agreement, as amended, untilJune 2025 is approximately$52.95 million , of which approximately$35.57 million remains to be purchased as ofDecember 31, 2020 . During the six months endedDecember 31, 2020 , we purchased approximately$1.03 million of SiC crystals from Cree pursuant to the terms of the Supply Agreement, as amended. Going forward, we expect to use existing cash and cash equivalents and access to other working capital resources, including but not limited to the issuance of equity securities, together with future cash expected to be provided by operating activities and, if necessary, our White Oak Credit Facility, to finance our purchase commitment under the Supply Agreement, as amended.
Line of Credit
OnJuly 13, 2018 , we and our wholly-owned subsidiary, charlesandcolvard.com, LLC, collectively referred to as the Borrowers, obtained the$5.00 million asset-based revolving White Oak Credit Facility. The White Oak Credit Facility may be used for general corporate and working capital purposes, including permitted acquisitions. The White Oak Credit Facility, which matures onJuly 13, 2021 , is guaranteed byCharles & Colvard Direct, LLC , another of our wholly-owned subsidiaries. Under the terms of the White Oak Credit Facility, the Borrowers must maintain at least$500,000 in excess borrowing availability at all times. The White Oak Credit Facility contains no other financial covenants. Advances under the White Oak Credit Facility may be either revolving or non-revolving. During the first year of the term of the White Oak Credit Facility, revolving advances accrued interest at a rate equal to one-month LIBOR (reset monthly, and subject to a 1.25% floor) plus 3.75%, and non-revolving advances accrued interest at such LIBOR rate plus 4.75%. Thereafter, the interest margins will reduce upon our achievement of a specified fixed charge coverage ratio. However, advances are in all cases subject to a minimum interest rate of 5.50%. Interest is calculated on an actual/360 basis and payable monthly in arrears. Principal outstanding during an event of default accrues interest at a rate 2% in excess of the rate otherwise applicable. As ofDecember 31, 2020 , we had not borrowed against the White Oak Credit Facility. As a result of our diminished borrowing base as ofDecember 31, 2020 , which is tied to our accounts receivable, our ability to draw down funds from the White Oak Credit Facility may from time to time be restricted. 34 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Trends We believe that our existing cash and cash equivalents and access to other working capital resources, including but not limited to the access to federal government economic relief programs pursuant to the CARES Act, including our existing PPP Loan and the available conditional forgiveness of the PPP Loan in whole or in part, access to available federal and state tax-related considerations, the issuance of equity securities, and future cash expected to be provided by operating activities combined will be sufficient to meet our working capital and capital expenditure needs over the next twelve months. Our future capital requirements and the adequacy of available funds will depend on many factors, including the ongoing spread of COVID-19 that could lead to further disruption and volatility in the global capital markets as well as its impact on our rate of sales growth; the expansion of our sales and marketing activities; the timing and extent of raw materials and labor purchases in connection with loose jewel production to support our moissanite jewels and lab grown diamonds business and precious metals and labor purchases in connection with jewelry production to support our finished jewelry business; the timing of capital expenditures; and the risk factors described in more detail in "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2020 , and in Part I, Item 1A of our 2020 Annual Report on Form 10-K. Currently, we have the White Oak Credit Facility through its expiration onJuly 13, 2021 , that we believe would mitigate these risks to our cash and liquidity position. Also, we may make investments in, or acquisitions of, complementary businesses, which could also require us to seek additional equity or debt financing.
As of
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