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CHARLES & COLVARD, LTD.

(CTHR)
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Delayed Nasdaq  -  04:00 2022-12-02 pm EST
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11/21Charles & Colvard Ltd : Submission of Matters to a Vote of Security Holders (form 8-K)
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Charles lvard : & COLVARD LTD Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

09/03/2021 | 06:04am EST
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations, or MD&A, is intended to provide a better understanding of
our 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
Item 1A, "Risk Factors" and our consolidated financial statements and the notes
thereto included in Item 8, "Financial Statements and Supplementary Data" of
this Annual Report on Form 10-K. Historical results and percentage relationships
among any amounts in the consolidated financial statements are not necessarily
indicative of trends in operating results for future periods.

Business Overview

Our Mission

At Charles & Colvard, Ltd., our mission is to redefine the definition of real within the jewelry industry and for consumers everywhere. We believe fine jewelry can be accessible, beautiful, and conscientious.

About Charles & Colvard


Charles & Colvard, Ltd., a North Carolina corporation founded in 1995 (which may
be referred to as Charles & Colvard, we, us, or our) is a globally recognized
fine jewelry company specializing in lab created gemstones. We manufacture,
market, and distribute Charles & Colvard Created Moissanite® (which we refer to
as moissanite or moissanite jewels) and in September 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.

We sell loose moissanite jewels, lab grown diamonds, and finished jewelry set
with these gems through two operating segments: our Online Channels segment,
which encompasses our digital properties components, comprised of our
charlesandcolvard.com and moissaniteoutlet.com websites, e-commerce outlets,
including marketplaces, drop-ship customers, and other pure-play, exclusively
e-commerce customers; and our Traditional segment, which consists of domestic
and international distributors and retail customers. We report segment
information based on the "management" approach. This segment reporting approach
designates the internal reporting used by management for making operating
decisions and assessing performance as the source of our operating and
reportable segments.

We operate in an e-commerce environment characterized by both complexity in
global markets and ongoing economic uncertainties in the U.S. and
internationally. Our strategy is to build a globally revered and accessible
brand of gemstones and finished fine jewelry products set with moissanite and
lab grown diamonds. We believe that our goods appeal to a wide consumer audience
and leverage our advantage of being the original and leading worldwide source of
moissanite and purveyor of premium lab grown diamonds. We believe a direct
relationship with consumers is an important component to this strategy, which
entails delivering tailored educational content, engaging in interactive
dialogue with our audience, and positioning our brand to meet the demands of
today's discerning consumer. A significant component of our strategy in this
environment is to focus on our core products, improving the quality and
predictability of the delivery of our products and services, and placing those
products quickly into the hands of our U.S. and international customers at
affordable prices. Moreover, recognizing today that our customers and vendors
are resource constrained, we are endeavoring to develop and extend our portfolio
of products in a disciplined manner with a focus on domestic markets close to
our core capabilities, as well as growing our global marketplace sales. We
continue to focus on affordability initiatives. We also expect to continue
innovating and investing in lab created gemstone technologies to fulfill
evolving product requirements for our customers and investing in our people so
that we have the technical and production skills necessary to succeed without
limiting our ability to build sound financial returns to our investors.

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We believe our expanding application of an omni-channel sales strategy across
the fine jewelry trade and to the end consumer with accessible gemstones and
value branded finished jewelry featuring Charles & Colvard Created Moissanite®
and Caydia® lab grown diamonds positions our products at the many touchpoints
where consumers are when they are making their buying decisions - thereby
continuing to create greater exposure for our brand and increasing consumer
demand.

COVID-19


In March 2020, the novel strain of coronavirus, known as COVID-19, was declared
a pandemic by the World Health Organization and declared a national emergency by
the U.S. Government, and has continued to negatively affect the U.S. and global
economies. In response to the pandemic, federal, state, county and local
governments, and public health organizations and authorities around the world
have implemented a variety of measures intended to control the spread of the
virus including quarantines, "stay-at-home" orders, travel restrictions, school
closures, business limitations and closures, social distancing, and hygiene
requirements. While some of these measures have been lifted or eased in certain
jurisdictions, other jurisdictions have seen increases in new COVID-19 cases,
resulting in restrictions being reinstated or new restrictions being imposed.
There continues to be considerable uncertainty regarding such measures and
potential future measures.

We have continued taking measures to protect the health and safety of our
employees, including updating our return-to-work policies, as necessary, working
with our customers and suppliers to minimize disruptions, and supporting our
community in addressing the challenges posed by this ongoing global pandemic.
During Fiscal 2021, we experienced impacts in our business related to COVID-19,
primarily in continued increased coronavirus-related costs, interruptions in
supplier deliveries, impacts of travel and delivery restrictions, site access
and quarantine restrictions, and the impacts of remote work and adjusted work
schedules.

The COVID-19 pandemic continues to present business challenges and we expect
these to continue into Fiscal 2022. We have executed plans to reintroduce
employees to the workplace as vaccine rates increase and COVID-19 cases
decrease. Although, in light of the recent increase in infections due to
evolving viral variants, we have not yet returned to pre-pandemic workforce
levels in our workplace, and we are experiencing stabilization of employee
attendance in our operations and distribution facilities and throughout our
supply chain. A segment of our corporate staff continues working a blend of
remote and in-person work schedules and we are taking measures to facilitate the
provision of vaccines to our employees in line with state and local guidelines.
We also continue working with our customers and suppliers to minimize
disruptions, including at times accelerating payments to key suppliers that are
due by their terms in future periods. We expect to continue accelerating
payments to our suppliers in some cases into Fiscal 2022.

Although the COVID-19 pandemic did not have a significant adverse impact on our
financial results in Fiscal 2021, the ultimate impact of COVID-19 on our
operations and financial performance in future periods, including our ability to
execute our strategic initiatives in the expected timeframes, remains uncertain
and will depend on future pandemic related developments, including the duration
of the pandemic, any potential subsequent waves of COVID-19 and its variant
viral infections, the effectiveness, distribution and acceptance of COVID-19
vaccines, and related government actions to prevent and manage disease spread,
all of which are uncertain and cannot be predicted. We cannot at this time
predict the full impact of the COVID-19 pandemic, but we anticipate that the
COVID-19 pandemic is likely to continue to impact our business, financial
condition, results of operations and/or cash flows in the fiscal year ending
June 30, 2022.

At the onset of the pandemic, we successfully applied for and received the
proceeds from a PPP Loan pursuant to the Paycheck Protection Program under the
CARES Act, as administered by the SBA. Our PPP Loan in the principal amount of
$965,000 was disbursed by our Lender pursuant to a Promissory Note issued by us
on June 15, 2020. In accordance with applicable provisions of the CARES Act,
effective June 23, 2021, our PPP Loan forgiveness was approved and processed by
the SBA for the full principal of the PPP Loan in the amount of $965,000. The
full amount of the gain in connection with the extinguishment of the underlying
debt, including the forgiveness of accrued and unpaid interest in the amount of
approximately $9,000, was recognized in the fiscal year ended June 30, 2021.

We took advantage of available COVID-19 related payroll tax credits for certain
wages and paid leave provided by us during the pandemic. A portion of 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, which had positive impact on our cash from
operations in Fiscal 2021. In addition, the Consolidated Appropriations Act,
2021, provides that employers who received a PPP loan may also qualify for the
Employee Retention Credit (the "ERC"). Previously, pursuant to the CARES Act,
taxpayers that received a PPP loan were not eligible for the ERC and this change
is retroactive to March 27, 2020. We believe that we qualify for certain
employer-related tax benefits pursuant to the ERC and expect to amend our
applicable federal payroll tax returns for such benefit. Further, as permitted
by the NC COVID-19 Relief Act, we expect to receive an incremental tax credit
towards our contributions to the North Carolina Unemployment Insurance Fund.
Accordingly, we will recognize any payroll tax credits related to these federal
and state legislative actions in the period such benefits are received.

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Currently, we are conducting business with certain modifications. In accordance
with recent Centers for Disease Control and Prevention, or CDC, and the North
Carolina Department of Health and Human Services, or the NCDHHS, guidelines
related to maximizing protection from the spread and infection of the Delta
variant of COVID-19, we are requiring all employees, contractors, and visitors
to wear masks and practice physical distancing while onsite, regardless of
vaccination status. We believe that our employees and contractors continue to
play a critical role in our COVID-19 prevention and mitigation efforts for the
Company as well as for our community at large.

Recent modifications to our COVID-19 return-to-work policy include but are not
limited to the following: all employees, contractors, and visitors are
encouraged to clean and sanitize all work surfaces, including personal office or
cubicle areas; office common areas will be cleaned nightly, and floors and
carpets will be cleaned as necessary; and currently, we are not mandating that
employees, contractors, and visitors receive the COVID-19 vaccine or that
non-fully vaccinated individuals provide evidence of negative COVID-19 test
results in order to enter our facilities.

At this time, and until further notice, the following precautionary steps and
procedures within our policy remain in place. Prior to entry to our facilities,
all employees, contractors, and visitors (regardless of vaccination status) are
required to comply with the following: complete a COVID-19 symptom screening
questionnaire; properly wear a mask; take a thermal body temperature scan; and
practice social distancing at all times within the facility, including
designated common areas. We are supplying all employees, contractors, and
visitors with face masks and latex gloves for their personal use, and we have
established a designated quarantine room to isolate any employee, contractor, or
visitor who may be experiencing COVID-19-like symptoms while in our facilities.
Given our office's square footage, we intend to continue to observe recommended
governmental guidelines related to occupancy and capacity restrictions.

Regardless of vaccination status, any employees, contractors, or visitors
presenting with symptoms of COVID-19 or who have tested positive for the
COVID-19 virus may only return to our facilities once ten days have passed since
symptoms of COVID-19 first appeared, at least 24 hours have passed with no fever
(without the use of fever-reducing medications), and any other COVID-19 symptoms
(i.e., loss of taste or smell) continue improving. Employees, contractors, or
visitors who may have been exposed to COVID-19, but remain asymptomatic, are
able to return to work after receiving a negative COVID-19 test result
three-to-five days following a known exposure or 14 days since the last contact
with an individual who was presumed to have or had COVID-19.

Our current return-to-work policy is tentative and subject to change based on
federal, state, or local governmental guidance as well as the evolution of the
pandemic itself. Going forward, we plan to continue monitoring the development
and progression of COVID-19 and its variant infections in our state and local
geographical area. If we believe such policy changes are warranted, we intend to
consider and plan to take appropriate actions at that time.

As global and U.S economic activity continues evolving in response to the
ongoing COVID-19 pandemic, the risk of constraints on our cash and working
capital, including experiencing potential liquidity challenges, remains in the
forefront of our working capital management practices. Despite our cost-saving
efforts, many business and operating expenses have remained flat or continued to
rise. Cash flow management will remain crucial for our business in the months
ahead and we intend to monitor fluctuations in our revenues that could impact
our ongoing cash flow from operations We continue to focus on being more nimble
in managing our inventory levels given the uncertainty in the supply chain,
which may also place further demands on working capital.

Our outlook remains subject to the various risks and uncertainties in connection
with the pandemic and is based on assumptions that management believes in good
faith are reasonable, but which may be materially different from actual results.
Currently, we believe there are multiple factors that could cause actual results
to differ materially from the forward-looking statements in this Form 10-K,
including our strategic goals for Fiscal 2022 set forth in Our Strategic
Outlook, included in Part I, Item 1, "Business", of this Annual Report on Form
10-K. These factors include, but are not limited to: our ability to face the
challenges posed by the COVID-19 pandemic and implementation of any such related
response plans; fluctuations in COVID-19 cases in the U.S. and the extent that
geography of outbreak primarily matches the regions in which we and our
principal business partners operate; the resiliency and potential adverse
impacts on our various consumer end-use markets; the potential negative impact
of the COVID-19 pandemic on our ability to continue producing and supplying
finished goods and related services at normal levels or at all; the duration,
impact and severity of the impact of the COVID-19 pandemic on our operations,
including the markets in which we do business, our suppliers, customers or other
business partners as well as our employees; the economic impact of government
responses to the pandemic; the performance of the U.S. economy, including the
impact on the economy of the COVID-19 pandemic and governmental orders
restricting activities imposed to prevent further outbreak of viral infections;
and the resulting economic events beyond our control.

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We believe that our management has taken - and continues to take - swift and
appropriate action designed to hedge against the overall impact that the
pandemic may have on our business, to prepare for a potential recessionary
environment, and to efficiently manage the business while maintaining adequate
liquidity and maximum operating flexibility. We remain focused on three critical
areas of wellbeing, including safeguarding the health and safety of our
employees, streamlining operations while ensuring support of our brand and
customers, and maintaining our financial strength and stability as we move
forward into Fiscal 2022.

Highlights of the Fiscal Year Ended June 30, 2021

During the fiscal year ended June 30, 2021, we delivered on several key initiatives, which we believe leaves us well poised for future growth as we move forward into the fiscal year ending June 30, 2022. These accomplishments in fiscal year ended June 30, 2021, include the following:

• Expansion of Digital Presence. During Fiscal 2021, we remained focused on our

digital marketing advertising strategy that includes a high-conversion consumer

targeting plan coupled with lower marketing funnel activities. We believe that

the success we've seen targeting consumers with whom we have already engaged -

and who have expressed interest in our products - continues to be a more

effective use of our digital advertising spend and provides a more immediate

return on our marketing investment. We believe this strategy is critical to our

top line growth as we move forward into Fiscal 2022. In addition, during Fiscal

2021, we expanded our presence on available social media channels such as

TikTok, and rolled out new social media programming shows on Facebook Live and

Instagram Live. In March 2021, we launched moissaniteoutlet.com, which is a

product disposition channel that we believe complements our global positioning

and dominance in the moissanite gemstone market. Our website,

moissaniteoutlet.com, is an e-commerce shopping destination that caters to the

opportunistic and bargain-seeking consumer base for our moissanite products;

• Enhanced Customer Experience. This fiscal year we expanded our virtual

consultation services that we introduced last year, by adding additional expert

jewelry consultants to our team that provides us with broader availability to

make it easier for consumers to schedule personal consultive services. This is

a personal shopping concierge service where we offer a customized virtual

experience designed to simplify the ring buying process for our customers. This

customer support service offers deeper personalization and a more immersive

shopping experience for our consumers. We also launched our Macy's in-store

program in Fiscal 2021 to reach and service more customers who are seeking to

see, touch, and feel our products when shopping. As consumers are returning to

in-store shopping, we believe this is a critical component of our omnichannel

marketing strategy, which places our products where the customer is actually

shopping. Lastly, in September we upgraded the online shopping experience on

charlesandcolvard.com, our primary transactional website. These online

modifications provide new and improved functionality as well as a new look and

feel to our website. We believe that offering these ongoing enhanced customer

experiences, particularly those featuring virtual personal shopping

opportunities, are important for the growth of our brand. We also believe that

these options remain relevant and important to our customers when social

distancing practices are - and will likely remain - in place throughout the

U.S. and much of the world;

• Product Development. In Fiscal 2021, we expanded our patented Signature

Collection of Forever One™ moissanite jewelry assortment to include emerald,

elongated cushion, and radiant cut gemstones. Previously, these gems and unique

cuts were not available in our Signature Collection line of products. In

September 2020 we launched Caydia®, an exclusive brand of premium lab grown

diamonds and jewelry. We believe our premium lab grown diamonds provide us

access to serve a broader and completely new segment of the gemstone audience

and customer base that is predisposed to shopping for a real diamond.

Throughout Fiscal 2021, we continued to expand our Caydia® lab grown diamond

jewelry assortment with new styles as well as additional gemstone cuts.

Currently, our exclusive brand of Caydia® lab grown diamonds are available in

   round, oval, cushion, emerald, and princess cuts; and



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• Disciplined Growth. We capitalized on the change in the global consumer

behavior and buying habits that developed during the past year as shoppers

turned to online shopping and e-commerce purchasing opportunities as the world

evolved and learned to live with the restrictions imposed by the COVID-19

pandemic. We achieved stability and improved technical access to our shopping

platforms, which resulted in a strong shopping foundation that supports our

omnichannel marketing strategy. We also developed and initiated a new strategic

relationship and business partnership with JPMorgan Chase Bank, N.A., that

includes a new $5.00 million cash collateralized line of credit facility that

may be used for general corporate and working capital purposes. We believe this

new commercial banking and financial relationship provides a foundation for us

to solidify our strategic and financial objectives and is a basis for us to

expand our financial capabilities going forward.




As we move forward into Fiscal 2022, our strategic focus remains centered on the
health and growth of our brand on a global scale. We will continue to execute on
our key strategies with an ongoing commitment to measured spending and
generating sustainable earnings improvement.

Further, as we continue managing through these challenging and unprecedented
times, we plan to remain highly focused on prudently developing the reach of our
brand - both domestically and internationally - through select digital marketing
initiatives that align with consumer engagement and demand. We continue to
believe that our long-term mission will ultimately be accomplished through our
ability to remain fluid and shift brand awareness strategies that are sensitive
and responsive to these ever-changing times.

Our MD&A generally discusses Fiscal 2021 and Fiscal 2020 items and year-to-year
comparisons between Fiscal 2021 and Fiscal 2020. Discussions of Fiscal 2020
items and year-to-year comparisons between Fiscal 2020 and the fiscal year ended
June 30, 2019, or Fiscal 2019, that are not included in this Form 10-K can be
found in "Management's Discussion and Analysis of Financial Condition and
Results or Operations" in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2020 filed with the SEC on September 4, 2020.

Results of Operations

The following table sets forth certain consolidated statements of operations data for the fiscal years ended June 30, 2021 and 2020:

                                         Year Ended June 30,
                                        2021             2020
Net sales                           $ 39,235,839     $ 29,189,020
Costs and expenses:
Cost of goods sold                    20,809,690       21,200,207
Sales and marketing                    8,476,716        9,443,244
General and administrative             4,441,441        4,861,297
Total costs and expenses              33,727,847       35,504,748

Income (Loss) from operations 5,507,992 (6,315,728 ) Other income (expense): Gain on extinguishment of debt

           974,328                -
Interest income                            5,581          158,091
Interest expense                          (8,953 )           (884 )
Loss on foreign currency exchange           (603 )         (1,829 )
Total other income (expense), net        970,353          155,378
Income (Loss) before income taxes      6,478,345       (6,160,350 )
Income tax benefit (expense)           6,332,421           (1,733 )
Net income (loss)                   $ 12,810,766     $ (6,162,083 )



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Consolidated Net Sales

Consolidated net sales for the fiscal years ended June 30, 2021 and 2020
comprise the following:

                                    Year Ended June 30,                    Change
                                   2021             2020           Dollars         Percent
Finished jewelry               $ 24,401,546     $ 16,777,628     $  7,623,918            45 %
Loose jewels                     14,834,293       12,411,392        2,422,901            20 %
Total consolidated net sales   $ 39,235,839     $ 29,189,020     $ 10,046,819            34 %



Consolidated net sales were $39.24 million for the fiscal year ended June 30,
2021 compared to $29.19 million for the fiscal year ended June 30, 2020, an
increase of $10.05 million, or 34%. In addition to the adverse impact that the
COVID-19 pandemic had on consolidated net sales for the fiscal year ended June
30, 2020, the increase in consolidated net sales for the fiscal year ended June
30, 2021 compared with consolidated net sales for the prior fiscal year was also
principally due to robust calendar year-end holiday sales during our fiscal
quarter ended December 31, 2020, coupled with strong February Valentine's Day
sales and March St. Patrick's Day sales during our fiscal quarter ended March
31, 2021. These higher sales for Fiscal 2021 were also related to increased
consumer awareness and ongoing 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 fiscal year ended June 30, 2021 in both our Online Channels segment
and Traditional segment. One of the most profound changes in consumer buying
habits over the past fiscal year was the shift to digital channels shopping from
the more traditional brick-and-mortar platforms. We believe the COVID-19
pandemic accelerated this shift toward e-commerce, as consumers worldwide became
more reliant on the digital channel while in isolation. Accordingly, we saw
strong increases in our Online Channels segment net sales in the fiscal year
ended June 30, 2021. As consumer confidence strengthened during the second half
of Fiscal 2021, net sales in our Traditional segment increased over this period
driven by stronger loose jewel sales in our distributor network. However, these
increased loose jewel net sales in our Traditional segment were offset in part
due to lower international sales during the fiscal year ended June 30, 2021.

Sales of finished jewelry represented 62% and 57% of total consolidated net
sales for the fiscal years ended June 30, 2021 and 2020, respectively. For the
fiscal year ended June 30, 2021, finished jewelry sales were $24.40 million
compared to $16.78 million for the fiscal year ended June 30, 2020, an increase
of $7.62 million, or 45%. This increase in finished jewelry sales was due
primarily to higher finished jewelry sales of Moissanite by Charles & Colvard®
and our Signature Collection line of products in our Online Channels segment as
well as in our Traditional segment. Net sales of our Moissanite by Charles &
Colvard® and our Signature Collection finished jewelry and loose jewels
represented 15% and 9%, respectively, of total net sales for the fiscal year
ended June 30, 2021, compared to that of 11% and 7%, respectively, for the prior
fiscal year.

Sales of loose jewels represented 38% and 43% of total consolidated net sales
for the fiscal years ended June 30, 2021 and 2020, respectively. For the fiscal
year ended June 30, 2021, loose jewel sales were $14.83 million compared to
$12.41 million for the fiscal year ended June 30, 2020, an increase of $2.42
million, or 20%. The increase for the fiscal year ended June 30, 2021 was
primarily a result of higher sales of loose jewels through our domestic
distributors. However, these increased loose jewel sales were offset somewhat by
lower sales of loose jewels through the international distribution network in
our Traditional segment.

U.S. net sales accounted for approximately 95% and 92% of total consolidated net
sales during the fiscal years ended June 30, 2021 and 2020, respectively. U.S.
net sales increased during the fiscal year ended June 30, 2021 principally 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 fiscal years ended June 30, 2021 and 2020
accounted for 13% of total consolidated net sales during each of the respective
periods then ended. Likewise, our second largest U.S. customer during the fiscal
years ended June 30, 2021 and 2020 accounted for 12% of total consolidated net
sales during each of the respective periods. It should be noted that our largest
and second largest customers in Fiscal 2021 were our second largest and largest
customers, respectively, in Fiscal 2020. We expect that we will remain dependent
on our ability, and that of our largest customers, to maintain and enhance
retail and wholesale programs. A change in or loss of any of these customers or
retailer relationships could have a material adverse effect on our results of
operations.

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International net sales accounted for approximately 5% and 8% of total
consolidated net sales during the fiscal years ended June 30, 2021 and 2020,
respectively. International net sales decreased to $2.01 million, or 15%, during
the fiscal year ended June 30, 2021 compared to $2.37 million in the fiscal year
ended June 30, 2020. International sales decreased during the fiscal year ended
June 30, 2021, compared to the prior fiscal year primarily 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 and as
the world continues to recover from the COVID-19 pandemic, 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 fiscal years ended June 30, 2021 and 2020. A portion of our international consolidated sales represents jewels sold internationally that may be re-imported to U.S. retailers.

Costs and Expenses

Cost of Goods Sold


Cost of goods sold for the fiscal years ended June 30, 2021 and 2020 are as
follows:

                                                Year Ended June 30,                    Change
                                               2021             2020           Dollars         Percent
Product line cost of goods sold:
Finished jewelry                           $ 11,272,012     $  7,469,790     $  3,802,222             51 %
Loose jewels                                  6,857,755        6,062,186          795,569             13 %

Total product line cost of goods sold 18,129,767 13,531,976

     4,597,791             34 %
Non-product line cost of goods sold           2,679,923        7,668,231       (4,988,308 )          (65 )%
Total cost of goods sold                   $ 20,809,690     $ 21,200,207     $   (390,517 )           (2 )%



Total cost of goods sold was $20.81 million for the fiscal year ended June 30,
2021 compared to $21.20 million for the fiscal year ended June 30, 2020, a net
decrease of approximately $391,000, or 2%. 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 decrease in total cost of goods sold for the fiscal year ended June 30, 2021
as compared to the fiscal year ended June 30, 2020 was driven primarily by the
prior year write-off during the quarter ended March 31, 2020, of approximately
$5.26 million representing the carrying value of our legacy loose jewel
inventory and finished goods inventory set with these legacy gemstones. This
decrease in cost of goods sold for the fiscal year ended June 30, 2021, was
offset in part by higher cost of goods sold principally 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
product demand during the year.

The net decrease in non-product line cost of goods sold for the fiscal year
ended June 30, 2021 comprises a $5.71 million lower change in inventory
valuation adjustments principally related to the prior fiscal year's write-off
of the carrying cost of the Company's legacy material inventory of $5.26 million
during the quarter ended March 31, 2020, as well as other inventory valuation
adjustments related to changes in obsolescence reserves in the fiscal year ended
June 30, 2021, compared to those in the prior fiscal year. This decrease in
non-product line cost of goods sold was offset in part by a $503,000 increase in
freight out principally from increased shipments resulting from substantial
Online Channels segment sales growth during the fiscal year ended June 30, 2021;
a $147,000 increase in non-capitalized manufacturing and production control
expenses in the current year principally due to the timing when work-in-process
goods are received into inventory and applicable overhead costs are allocated;
and an approximate $76,000 change in other inventory adjustments primarily
relating to adverse changes in production standard cost variances compared to
those during the fiscal year ended June 30, 2020.

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For further discussion of non-product line cost of goods sold, see Note 3 to our
consolidated financial statements in Item 8, "Financial Statements and
Supplementary Data", of this Annual Report on Form 10-K.

Sales and Marketing


Sales and marketing expenses for the fiscal years ended June 30, 2021 and 2020
are as follows:

                          Year Ended June 30,                  Change
                         2021            2020          Dollars        Percent

Sales and marketing   $ 8,476,716     $ 9,443,244     $ (966,528 )         (10 )%



Sales and marketing expenses were $8.48 million for the fiscal year ended June
30, 2021 compared to $9.44 million for the fiscal year ended June 30, 2020, a
decrease of approximately $967,000, or 10%.

The decrease in sales and marketing expenses for the fiscal year ended June 30,
2021 compared to the fiscal year ended June 30, 2020 was primarily due to a
$1.31 million decrease in compensation-related expenses; a $164,000 decrease in
professional services fees principally comprising non-recurring consulting
services for cybersecurity and merchandising imaging incurred in the prior year;
a $26,000 decrease in travel expenses as a result of COVID-19 cost-control
measures; and a $1,000 net decrease in miscellaneous other general sales and
marketing expenses. These decreases were partially offset by a $282,000 increase
in advertising and digital marketing expenses; an $84,000 increase in
software-related costs principally in connection with maintenance agreements as
well as other software-related agreements; an $83,000 increase in general
office-related expenses, which are principally related to higher credit card
transaction fees from increased online sales levels; a $69,000 increase in
depreciation and amortization expense relating to capitalized costs associated
with information technology-related upgrades; and a $17,000 increase in
employment-related recruiting fees.

Compensation expenses for the fiscal year ended June 30, 2021 compared to the
fiscal year ended June 30, 2020 decreased primarily as a result of a $1.25
million decrease in salaries, commissions, and related employee benefits in the
aggregate as a result of our June 2020 management reorganization and workforce
reduction; a $76,000 decrease in employee-related severance costs recognized in
the prior year which also was a result of our June 2020 management
reorganization and workforce reduction; and a $68,000 decrease in employee
stock-based compensation expense associated with the modification of terms for
certain participant stock options in Fiscal 2020 that resulted in the
recognition of higher stock compensation expense in the prior fiscal year. These
decreases were partially offset by an $84,000 increase in bonus expense
reflecting improved operating results in the current year that impacts this
performance-based compensation-related benefit.

The increase in digital marketing expenses for the fiscal year ended June 30,
2021 compared to the fiscal year ended June 30, 2020 was primarily due to a
$766,000 increase in Internet marketing costs and a $20,000 increase in print
media expenses. Both increases reflect changes in our overall social media and
print marketing strategies during Fiscal 2021 compared with those in Fiscal
2020. These increases were partially offset by a $386,000 decrease in outside
agency fees, also as a consequence of modifications in our marketing strategy
and reliance on internal resources during the current year; a $111,000 decrease
in cooperative advertising; and a $7,000 decrease in promotion-related expenses.

General and Administrative


General and administrative expenses for the fiscal years ended June 30, 2021 and
2020 are as follows:

                                 Year Ended June 30,                  Change
                                2021            2020          Dollars        Percent

General and administrative   $ 4,441,441     $ 4,861,297     $ (419,856 )          (9 )%



General and administrative expenses were $4.44 million for the fiscal year ended
June 30, 2021 compared to $4.86 million for the fiscal year ended June 30, 2020,
a decrease of approximately $420,000, or 9%.

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The decrease in general and administrative expenses for the fiscal year ended
June 30, 2021 compared to the fiscal year ended June 30, 2020 was primarily due
to a $428,000 decrease in professional services; a $206,000 decrease in
compensation-related expenses; a $7,000 decrease in bad debt expense associated
with our allowance for doubtful accounts reserve policy; and a $1,000 net
decrease in miscellaneous other general and administrative expenses. These
decreases were partially offset by a $58,000 increase in rent expense, primarily
related to our corporate headquarters operating lease amendment that was
executed in January 2021; a $50,000 increase in software-related costs
principally in connection with maintenance agreements as well as other
software-related agreements; a $38,000 increase in housing allowances and
travel-related expenditures; a $30,000 increase in insurance expenses
principally related to higher renewal premiums; a $20,000 increase in bank
charges as a result of transaction fees associated with increased online
transactions; a $14,000 increase in Board member retainer fees due to the
temporary reduction in fees paid to our Board of Directors in connection with
cost control measures implemented during the COVID-19 pandemic in the prior
year; a $9,000 increase in depreciation and amortization expense; and a $3,000
increase in business taxes and licenses.

Professional services fees decreased for the fiscal year ended June 30, 2021
compared to the fiscal year ended June 30, 2020 primarily due to a $283,000
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 $101,000 decrease in consulting and
other professional services primarily in connection with accounting department
support in the prior year; and a $66,000 decrease in investor relations fees.
These decreases were partially offset by a $22,000 increase in fees associated
with audit and tax services in the current year.

Compensation expenses decreased for the fiscal year ended June 30, 2021 compared
to the fiscal year ended June 30, 2020 primarily due to a $282,000 decrease in
severance expenses recognized in the prior year related to our June 2020
management reorganization and workforce reduction; a $184,000 decrease in
salaries and related employee benefits in the aggregate which also was a result
of our June 2020 management reorganization and workforce reduction; and a
$54,000 decrease in employee stock-based compensation expense associated with
the modification of terms for certain participant stock options in Fiscal 2020
that resulted in the recognition of higher stock compensation expense in the
prior fiscal year. These decreases were offset in part by a $314,000 increase in
bonus expense reflecting improved operating results in Fiscal 2021 that impacts
this performance-based compensation-related benefit.

Gain on Extinguishment of Debt


Gain on extinguishment of debt for the fiscal years ended June 30, 2021 and 2020
is as follows:

                                    Year Ended June 30,                 Change
                                      2021            2020       Dollars       Percent

Gain on extinguishment of debt $ 974,328 $ - $ 974,328

100 %




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. During the period of time that the principal under the Promissory
Note was outstanding, we accounted for the Promissory Note as debt within the
accompanying consolidated financial statements. In accordance with applicable
provisions of the CARES Act, effective June 23, 2021, our PPP Loan forgiveness
was approved and processed by the SBA for the full principal of the PPP Loan in
the amount of $965,000. The full amount of interest expense to-date in the
amount of approximately $9,000 that the Company recognized during the period the
principal of the PPP Loan was outstanding was also forgiven by the SBA.
Accordingly, the full amount of the gain in connection with the extinguishment
of this debt, including the benefit from the forgiveness of the inception
to-date interest expense, was recognized in the fiscal year ended June 30, 2021.

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Interest Income

Interest income for the fiscal years ended June 30, 2021 and 2020 is as follows:


                    Year Ended June 30,                 Change
                    2021           2020         Dollars        Percent
Interest income   $   5,581      $ 158,091     $ (152,510 )         (96 )%



In June 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 in July
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 fiscal years ended June 30, 2021 and 2020, 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 Fiscal 2021 compared with Fiscal 2020.

Interest Expense

Interest expense for the fiscal years ended June 30, 2021 and 2020 is as follows:


                     Year Ended June 30,                Change
                      2021            2020      Dollars       Percent
Interest expense   $     8,953       $  884     $  8,069           913 %



In accordance with the terms of the Promissory Note, during the period of time
the principal of the PPP Loan was outstanding through June 23, 2021, we accrued
interest at a fixed rate of 1% per annum. Our accrual for interest expense
associated with the PPP Loan began June 18, 2020, the date we received the
proceeds for the PPP Loan from our Lender. Likewise, we accrued interest on the
PPP Loan during the fiscal year ended June 30, 2021, through June 23, 2021, the
date our PPP Loan was forgiven by the SBA.

Loss on Foreign Currency Exchange

Loss on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the fiscal years ended June 30, 2021 and 2020 are as follows:


                                       Year Ended June 30,                 

Change

                                      2021            2020         Dollars  

Percent

Loss on foreign currency exchange $ 603 $ 1,829 $ (1,226 ) (67 )%




During the fiscal years ended June 30, 2021 and 2020, we had international sales
transactions denominated in currencies other than the U.S dollar that resulted
in foreign currency exchange net losses. The decrease in these losses reflects
the lower level of international sales denominated in foreign currencies as well
as foreign currency exchange rate fluctuations during fiscal year ended June 30,
2021 compared with those of the prior fiscal year.

Provision for Income Taxes


We recognized a net income tax benefit of approximately $6.33 million and a net
income tax expense of approximately $2,000 for the fiscal years ended June 30,
2021 and 2020, respectively. Our income tax provisions in these periods contain
estimated taxes, penalties, and interest associated with uncertain tax
positions.

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As of each reporting date, we consider new evidence, both positive and negative,
that could impact our view with regard to future realization of deferred tax
assets. Beginning in 2014, we determined that negative evidence outweighed the
positive and established a full valuation allowance against our deferred tax
assets and we maintained such full valuation allowance through the period ended
June 30, 2020. However, as of June 30, 2021, cumulative positive taxable income
over the last three tax years had been generated in the U.S., as compared to the
negative evidence of cumulative losses in previous years. We also determined
that our expectations of future taxable income in upcoming tax years, including
estimated growth rates applied to future expected taxable income that includes
significant management estimates and assumptions, would be sufficient to result
in full utilization of our federal net operating loss carryforwards and certain
of the deferred tax assets prior to any statutory expiration. As a result, we
determined that sufficient positive evidence exists as of June 30, 2021, to
conclude that it is more likely than not deferred tax assets of approximately
$6.35 million are realizable, and we reduced our valuation allowance
accordingly. The reduction of the valuation allowances against these deferred
tax assets was the main driver of the income tax benefit during the fiscal year
ended June 30, 2021 of approximately $6.33 million. A valuation allowance
remains against certain deferred tax assets primarily relating to state net
operating loss carryforwards from our e-commerce subsidiary due to the timing
uncertainty of when it will generate positive taxable income to utilize the
associated deferred tax assets. In addition, a valuation allowance also remains
against certain deferred tax assets relating to operating loss carryforwards
relating to our dormant subsidiary located in Hong Kong.

Our statutory tax rate as of the fiscal year ended June 30, 2021 is 22.24% and
consists of the federal income tax rate of 21% and a blended state income tax
rate of 1.24%, net of the federal benefit.

Certain Operating Metrics


We believe that certain metrics are key to our business, including but not
limited to monitoring our average order value, or AOV. We use the AOV
computation in part to make strategic digital marketing related decisions and to
monitor the performance and return on investment of our marketing activities.
Our AOV is based on financial results and customer-related data for
charlesandcolvard.com, LLC, our wholly owned subsidiary and through which we
operate our primary transactional website. Our calculation for AOV is sensitive
to several factors, including sales volume and product mix. Therefore, we
believe that this metric may vary widely going forward as we respond to ever
changing consumer demand and provide the products - that may have widely
variable price points - which our audiences are seeking.

For the fiscal year ended June 30, 2021, our AOV, based on charlesandcolvard.com revenue, net of returns, divided by the total number of customer orders, is estimated to be approximately $1,000.


An additional metric that we use to manage charlesandcolvard.com operations and
to make strategic digital marketing decisions for our transactional website is
period-over-period revenue growth. Accordingly, we believe this level of growth
reinforces our current year's digital marketing program and affirms our decision
to increase our investment in consumer-driven marketing efforts in
charlesandcolvard.com during Fiscal 2021. While we believe this metric is
sensitive to many factors and may vary in future periods, we expect to continue
to monitor and base our marketing-related investments in part on
charlesandcolvard.com revenue growth going forward.

For the fiscal year ended June 30, 2021, we experienced a 45% year-over-year
growth in charlesandcolvard.com revenue compared to revenue for the fiscal year
ended June 30, 2020.

Liquidity and Capital Resources


The full impact of the COVID-19 pandemic on the global and domestic economy
remains uncertain and the world continues adapting to the ongoing pandemic and
evolving viral variants and its adverse effects on global economics and
worldwide business operations. The impact of the COVID-19 pandemic continues to
place unprecedented pressures on global and U.S. businesses including our own.
Depending on future developments, including the success of the global vaccine
efforts to control the spread of the underlying virus and evolving variants, the
pandemic could materially 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


On June 18, 2020, we received the proceeds from the PPP Loan pursuant to the
Paycheck Protection Program under the CARES Act, as administered by the SBA. The
PPP Loan in the principal amount of $965,000 was disbursed by the Lender
pursuant to a promissory note, or the Promissory Note, issued by us on June 15,
2020. In accordance with applicable provisions of the CARES Act, effective June
23, 2021, our PPP Loan forgiveness was approved and processed by the SBA for the
full principal of the PPP Loan in the amount of $965,000. The full amount of the
gain in connection with the extinguishment of this debt, including the
forgiveness of accrued and unpaid interest of approximately $9,000, was
recognized in the fiscal year ended June 30, 2021.

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The CARES Act provided that existing AMT credit carryforwards were eligible for
acceleration and refundable AMT credits were 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 our then existing AMT tax
completely refunded and filed a refund claim for the remaining portion of our
AMT tax credit. Accordingly, the remaining balance of our AMT credit refund in
the amount of approximately $270,000 was completely refunded during the fiscal
year ended June 30, 2021.

We took advantage of available COVID-19 related payroll tax credits for certain
wages and paid leave provided by us during the pandemic. A portion of these
eligible tax credits are determined by qualified emergency paid sick and
expanded family and medical leave wages pursuant to FFCRA. In addition, the
Consolidated Appropriations Act, 2021, provides that employers who received a
PPP loan may also qualify for the Employee Retention Credit (the "ERC").
Previously, pursuant to the CARES Act, taxpayers that received a PPP loan were
not eligible for the ERC and this change is retroactive to March 27, 2020. We
believe that we qualify for certain employer-related tax benefits pursuant to
the ERC and expect to amend our applicable federal payroll tax returns for such
benefit. Further, as permitted by the NC COVID-19 Relief Act, we expect to
receive an incremental tax credit towards our contributions to the North
Carolina Unemployment Insurance Fund. Accordingly, we will recognize any payroll
tax credits related to these federal and state legislative actions in the period
such benefits are received.

For further discussion of the effects of the CARES Act, the Consolidated
Appropriations Act, 2021, and the NC COVID-19 Relief Act on our provision for
income taxes and deferred tax assets, see Note 13 to our consolidated financial
statements in Item 8, "Financial Statements and Supplementary Data", of this
Annual Report on Form 10-K.

As a component of our liquidity and capital structure, we have an effective
shelf registration statement on Form S-3 on file with the SEC that 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 all is
available. 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 may be in turn, subject to, among other things, the potential
disruption and volatility that may be caused by ongoing effects of the COVID-19
pandemic. Any capital raise is not assured and may not be at terms that would be
acceptable to us.

Financing Activities

In June 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, in July 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.
In response to the COVID-19 pandemic and its impact on consumer confidence and
spending, management drastically reduced related advertising and digital
marketing expenditures in mid-March 2020. However, we continue to monitor and
adjust our advertising and digital marketing and professional services
expenditure levels to correspond to market changes. As a result, we increased
these expenditures during the fiscal year ended June 30, 2021, and may continue
seeing an increase in these expenditure levels during Fiscal 2022 and beyond.

As discussed above, on June 18, 2020, we received the proceeds from the PPP Loan
pursuant to the Paycheck Protection Program under the CARES Act, as administered
by the SBA. The PPP Loan in the principal amount of $965,000 was disbursed by
the Lender pursuant to a Promissory Note issued by us on June 15, 2020. In
accordance with applicable provisions of the CARES Act, effective June 23, 2021,
our PPP Loan forgiveness was approved and processed by the SBA for the full
principal of the PPP Loan in the amount of $965,000. The full amount of the gain
in connection with the extinguishment of this debt, including the forgiveness of
accrued and unpaid interest of approximately $9,000, was recognized in the
fiscal year ended June 30, 2021.

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Operating Activities and Cash Flows

We require cash to fund our operating expenses and working capital requirements,
including outlays for capital expenditures. As of June 30, 2021, our principal
sources of liquidity were cash, cash equivalents, and restricted cash totaling
$21.45 million, trade accounts receivable of $1.66 million, and net current
inventory of $11.45 million, as compared to cash, cash equivalents, and
restricted cash totaling $14.62 million, trade accounts receivable of $671,000,
and net current inventory of $7.44 million as of June 30, 2020. We also had
access during Fiscal 2021 to a $5.00 million asset-based revolving credit
facility with White Oak, or the White Oak Credit Facility, which we terminated
in accordance with its terms as of July 9, 2021. As described more fully herein,
effective July 7, 2021, we obtained from JPMorgan Chase Bank, N.A., or JPMorgan
Chase, a $5.00 million cash collateralized line of credit facility, or the
JPMorgan Chase Credit Facility. Also as described more fully herein, we had
long-term debt in the form of a PPP Loan in the amount of $965,000, of which
$193,000 was classified as current as of June 30, 2020. Effective June 23, 2021,
the Company's PPP Loan forgiveness was approved and processed by the SBA for the
full principal of the PPP Loan in the amount of $965,000 as well as forgiveness
of accrued and unpaid interest of approximately $9,000.

During the fiscal year ended June 30, 2021, our working capital increased by
approximately $12.72 million to $30.14 million from $17.42 million at June 30,
2020. As described more fully below, the increase in working capital at June 30,
2021 is primarily attributable to an increase in our cash, cash equivalents, and
restricted cash, principally resulting from cash provided by our operations,
increase in our allocation of inventory from long-term to short-term due to a
higher expected sell through of inventory on hand in the upcoming period, an
increase in our accounts receivable, a decrease in our accounts payable, an
increase in connection with the issuance of a short-term note receivable, a
decrease in the current portion of our long-term debt, resulting from the
forgiveness of our PPP Loan, and a decrease in our short-term operating lease
liabilities. These factors were offset partially by an increase in our accrued
expenses and other liabilities and a decrease in our prepaid expenses and other
assets.

During the fiscal year ended June 30, 2020, our working capital decreased by
approximately $5.75 million to $17.42 million from $23.17 million at June 30,
2019. As described more fully below, the decrease in working capital at June 30,
2020 is primarily attributable to a decrease in our allocation of inventory from
long-term to short-term, a decrease in accounts receivable, an increase in
short-term operating lease liabilities resulting from the adoption of the new
lease accounting standard as of July 1, 2019, an increase in accrued expenses
and other liabilities, an increase in accounts payable, and an increase in the
current maturity of our long-term debt. These factors were offset partially by
an increase in our cash, cash equivalents, and restricted cash resulting from
cash provided by operating and financing activities and an increase in prepaid
expenses and other assets.

During the fiscal year ended June 30, 2021, approximately $6.47 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 $12.81
million; an increase in accrued expenses and other liabilities of $3.71 million;
a decrease in inventory of $1.31 million; and an increase in accrued income
taxes in the amount of $2,000. These factors were offset partially by an
increase in prepaid expenses and other assets of $3.14 million; an increase in
accounts receivable of $955,000; and a decrease in accounts payable of $974,000.
In addition, the net effect of non-cash items included in net income totaling
$6.29 million, driven by the benefit recognized for deferred income taxes in the
amount of approximately $6.35 million in connection with the release of our
valuation allowance and the gain on extinguishment of debt resulting from the
forgiveness of our PPP Loan, including forgiveness of accrued and unpaid
interest, in the amount of approximately $974,000, also unfavorably impacted net
cash provided by operating activities during the fiscal year ended June 30,
2021.

During the fiscal year ended June 30, 2020, approximately $249,000 of cash was
provided by our operations. The primary drivers underlying the cash provided by
our operating activities were a decrease in accounts receivable of $1.32
million; a decrease in prepaid expenses and other assets of $490,000; an
increase in accounts payable of $469,000; and an increase in accrued expenses
and other liabilities of $109,000. In addition, non-cash items totaling $6.78
million also had a favorable impact on our cash flow from operations during the
fiscal year ended June 30, 2020. These factors were offset partially by the
unfavorable effect of our net loss in the amount of $6.16 million and an
increase in inventory of approximately $2.76 million resulting from lower
quantities of inventory items sold as a result of lower period sales stemming
from the impact of the COVID-19 pandemic.

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During the fiscal year ended June 30, 2021, accounts receivable increased
principally due to the increased level of sales during the three months ended
June 30, 2021, as compared with the sales during the period leading up to June
30, 2020. As a result of the COVID-19 pandemic, from time to time we offered
extended Traditional segment customer payment terms beyond 90 days to certain
credit-worthy customers during Fiscal 2021 and the 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 may continue to be pressured due
to the effects of the ongoing 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.

During the fiscal year ended June 30, 2021, prepaid expenses and other assets
decreased principally as a result of the timing of payments, primarily for
insurance-related premium expenses, in advance of goods or services received.
During the fiscal year ended June 30, 2021, accrued expenses and other
liabilities increased principally as a result of the increase in our operating
lease liability associated with the new lease amendment for our corporate
headquarters facilities that was executed in January 2021. During the fiscal
year ended June 30, 2021, accounts payable decreased primarily as a result of
the timing of payments for costs associated with inventory-related purchases and
professional services incurred. As a result of the pandemic, we have from
time-to-time paid certain vendor business partners in advance of their payment
terms to secure and achieve supply chain needs.

During the fiscal year ended June 30, 2020, prepaid expenses and other assets
increased principally as a result of the timing of payments, principally for
insurance-related expenses, in advance of goods or services received. During the
fiscal year ended June 30, 2020, accounts payable increased primarily as a
result of the timing of payment for costs associated with inventory-related
purchases and professional services incurred and due under our vendors' payment
terms. Likewise, accrued expenses and other liabilities increased principally
due to the severance accrual in connection with our June 2020 management
reorganization and workforce reduction as well as increases in deferred revenue
related to payments received prior to shipment of good from customers.

We manufactured approximately $7.63 million and $10.64 million in loose jewels
and $12.72 million and $7.82 million in finished jewelry, which includes the
cost of the loose jewels and the purchase of precious metals and labor in
connection with jewelry production, during the fiscal years ended June 30, 2021
and 2020, respectively. We expect our purchases of precious metals and labor to
fluctuate in conjunction with the levels of our finished jewelry business. In
addition, the price of gold has increased significantly over the past decade,
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 of June 30, 2021 and 2020, $17.72
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 $1.78
million and new raw material that we purchase pursuant to the Supply Agreement.

A more detailed description of our inventories is included in Note 6 to our consolidated financial statements in Item 8, "Financial Statements and Supplementary Data", of this Annual Report on Form 10-K.

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We made income tax payments of approximately $15,000 and $2,000 during the
fiscal years ended June 30, 2021 and 2020, respectively. As of June 30, 2021,
all of our remaining federal income tax credits had expired or been utilized,
and therefore, are not available to be carried forward to offset future income
taxes. As of June 30, 2021 and 2020, we had federal tax net operating loss
carryforwards of approximately $19.00 million and $23.72 million, respectively,
expiring between 2034 and 2037, or that have no expiration, which can be used to
offset against future federal taxable income; North Carolina tax net operating
loss carryforwards of approximately $19.87 million and  $20.12 million,
respectively, expiring between 2023 and 2035; and various other state tax net
operating loss carryforwards expiring between 2023 and 2040, which can be used
to offset against future state taxable income.

Contractual Commitment


On December 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 on June 24, 2018, unless extended by the parties. Effective
June 22, 2018, the Supply Agreement was amended to extend the expiration date to
June 25, 2023. The Supply Agreement, 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. On August 26, 2020, the Supply Agreement was further amended,
effective June 30, 2020, to extend the expiration date to June 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, until June 2025 is approximately $52.95 million, of which
approximately $32.85 million remains to be purchased as of June 30, 2021.

For more information regarding the second amendment to our Supply Agreement,
executed on August 26, 2020, see Note 10 to our consolidated financial
statements in Item 8, "Financial Statements and Supplementary Data", of this
Annual Report on Form 10-K.

During the fiscal years ended June 30, 2021 and 2020, we purchased approximately
$3.78 million and $7.47 million, respectively, of SiC crystals from Cree. 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 to finance our purchase commitment under the Supply Agreement, as
amended.

Line of Credit

Effective July 7, 2021, we obtained from JPMorgan Chase our $5.00 million cash
collateralized JPMorgan Chase Credit Facility. The JPMorgan Chase Credit
Facility may be used for general corporate and working capital purposes,
including permitted acquisitions and certain additional indebtedness for
borrowed money, installment obligations, and obligations under capital and
operating leases. The JPMorgan Chase Credit Facility is secured by a cash
deposit in the amount of $5.05 million held by JPMorgan Chase as collateral for
the line of credit facility.

Each advance accrues interest at a rate equal to JPMorgan Chase's monthly London
Interbank Offered Rate, or LIBOR, multiplied by a statutory reserve rate for
eurocurrency funding to which JPMorgan Chase is subject with respect to the
adjusted LIBOR rate as established by the U.S. Federal Reserve Board, plus a
margin of 1.25% per annum. Interest is calculated monthly on an actual/360 day
basis and payable monthly in arrears. Principal outstanding during an event of
default, at JPMorgan Chase's option, accrues interest at a rate of 3% per annum
in excess of the above rate. Any advance may be prepaid in whole or in part at
any time. See Note 2, under the caption of Recently Issued Accounting
Pronouncements, to our consolidated financial statements in Item 8, "Financial
Statements and Supplementary Data," of this Annual Report on Form 10-K for more
detailed information relating to concerns about structural risks of interbank
offered rates, or IBORs, and, particularly, the risk of cessation of the LIBOR.

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The JPMorgan Chase Credit Facility is evidenced by a credit agreement between us
and JPMorgan Chase, or the JPMorgan Chase Credit Agreement, dated as of July 12,
2021, and customary ancillary documents, in the principal amount not to exceed
$5.00 million at any one time outstanding and a line of credit note, or the
JPMorgan Chase Line of Credit Note, in which we promise to pay on or before July
31, 2022, the amount of $5.00 million or so much thereof as may be advanced and
outstanding. In the event of default, JPMorgan Chase, at its option, may
accelerate the maturity of advances outstanding under the JPMorgan Chase Credit
Facility. The JPMorgan Chase Credit Agreement and ancillary documents contain
customary covenants, representations, fees, debt, contingent obligations, liens,
loans, leases, investments, mergers, acquisitions, divestitures, subsidiaries,
affiliate transactions, and changes in control.

In connection with the JPMorgan Chase Credit Facility, we incurred a
non-refundable origination fee in the amount of $10,000 that was paid in full to
JPMorgan Chase upon execution of the JPMorgan Chase Credit Facility on July 12,
2021. We also agreed to maintain our primary banking depository and disbursement
relationship with JPMorgan Chase.

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

On July 12, 2021, upon its execution, we did not request any advances pursuant to the terms of the JPMorgan Chase Credit Facility.


Prior to obtaining the JPMorgan Chase Credit Facility, we and our wholly owned
subsidiary, charlesandcolvard.com, LLC, collectively referred to as the
Borrowers, had a $5.00 million asset-based revolving credit facility, or the
White Oak Credit Facility, from White Oak Commercial Finance, LLC, or White Oak,
which we terminated in accordance with its terms as of July 9, 2021. The
effective date of the White Oak Credit Facility was July 13, 2018, and it was
scheduled to mature on July 13, 2021.

The White Oak Credit Facility was available for general corporate and working
capital purposes, including permitted acquisitions and was guaranteed by the
Borrowers. Under the terms of the White Oak Credit Facility, the Borrowers were
required to maintain at least $500,000 in excess availability at all times. The
White Oak Credit Facility contained no other financial covenants.

Advances under the White Oak Credit Facility could have been either revolving or
non-revolving. During the first year of the term of the White Oak Credit
Facility, any revolving advances would have accrued interest at a rate equal to
one-month LIBOR (reset monthly, and subject to a 1.25% floor) plus 3.75%, and
any non-revolving advances would have accrued interest at such LIBOR rate plus
4.75%. Thereafter, the interest margins would have been reduced upon the
Company's achievement of a specified fixed charge coverage ratio during the
period of any outstanding advances. However, any advances were in all cases
subject to a minimum interest rate of 5.50% and interest would have been
calculated on an actual/360 basis and payable monthly in arrears. Principal
outstanding during an event of default, which again did not occur during the
term of the White Oak Credit Facility, would have accrued interest at a rate 2%
in excess of the rate that would have been otherwise applicable.

We had not borrowed against the White Oak Credit Facility as of July 9, 2021,
the date upon which we terminated the White Oak Credit Facility in accordance
with its terms.

More detailed descriptions of both our JPMorgan Chase Credit Facility and former
White Oak Credit Facility are included in Note 11 to our consolidated financial
statements in Item 8, "Financial Statements and Supplementary Data", of this
Annual Report on Form 10-K.

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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 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 uncertainty surrounding 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 diamond 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 I, Item 1A of this Annual Report on Form 10-K. Currently, we
have the JPMorgan Chase Credit Facility through its expiration on July 31, 2022,
which 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.

Critical Accounting Policies and Estimates


Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which we prepared in
accordance with accounting principles generally accepted in the United States,
or U.S. GAAP. The future effects of the COVID-19 pandemic on our results of
operations, cash flows, and financial position remain unclear. The preparation
of these 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. The most significant estimates impacting
our consolidated financial statements relate to the valuation and classification
of inventories, accounts receivable reserves, deferred tax assets, and revenue
recognition. We also have other policies that we consider key accounting
policies, but these policies typically do not require us to make estimates or
judgments that are difficult or subjective.

Valuation and Classification of Inventories


Inventories are stated at the lower of cost or net realizable value on an
average cost basis. Inventory costs include direct material and labor, inbound
freight, purchasing and receiving costs, inspection costs, and warehousing
costs.
Any inventory on hand at the measurement date in excess of our current
requirements based on historical and anticipated levels of sales is classified
as long-term on our Consolidated Balance Sheets. The classification of our
inventory as either current or long-term inventory requires us to estimate the
portion of on-hand inventory that can be realized over the next 12 months and
does not include precious metal, labor, and other inventory purchases expected
to be both purchased and realized in cost of sales over the next 12 months.

Our work-in-process inventories include raw SiC crystals on which processing
costs, such as labor and sawing, have been incurred; and components, such as
metal castings and finished good moissanite jewels, that have been issued to
jobs in the manufacture of finished jewelry. Our moissanite jewel manufacturing
process involves the production of intermediary shapes, called "preforms", that
vary depending upon the expected size and shape of the finished jewel. To
maximize manufacturing efficiencies, preforms may be made in advance of current
finished inventory needs but remain in work-in-process inventories. As of June
30, 2021 and 2020, work-in-process inventories issued to active production jobs
approximated $2.23 million and $1.34 million, respectively.

Each accounting period we evaluate the valuation and classification of
inventories including the need for potential adjustments to inventory-related
reserves and valuation allowances, which also include significant estimates by
management.

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See Note 2 to our consolidated financial statements in Item 8, "Financial
Statements and Supplementary Data," of this Annual Report on Form 10-K under the
Inventories caption for a further description of our inventories accounting
policy and see Note 6 to our consolidated financial statements in Item 8,
"Financial Statements and Supplementary Data," of this Annual Report on Form
10-K for more detailed information relating to our accounting for
inventory-related reserves and valuation allowances.

Revenue Recognition


Revenue is recognized to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which we expect to be
entitled in exchange for those goods or services. To achieve this principle, we
perform the following five steps: (i) identification of a contract with a
customer; (ii) identification of any separate performance obligations; (iii)
determination of the transaction price; (iv) allocation of the transaction price
to the performance obligations in the contract; and (v) recognition of revenue
when we have satisfied the underlying performance obligations. We recognize
substantially all of our revenue at a point in time when control of our goods
has passed to the customer with the exception of consigned goods. We consider
our performance obligation related to the shipment of goods satisfied at the
time this control is transferred. We also have a variable consideration element
related to most of our contracts in the form of product return rights. At the
time revenue is recognized, an allowance for estimated returns is established
and any change in the allowance for returns is charged against net sales in the
current period. For our customers (excluding those of charlesandcolvard.com),
the returns policy generally allows for the return of jewels and finished
jewelry with a valid reason for credit within 30 days of shipment, except for
returns during the COVID-19 pandemic during which we generally extended the
return period for an additional 30 days. Customers in both our
charlesandcolvard.com and moissaniteoutlet.com websites may generally return
purchases within 60 days and 30 days, respectively, of the shipment date in
accordance with our returns policies as disclosed on our charlesandcolvard.com
and moissaniteoutlet.com websites. Periodically, we ship loose jewel goods and
finished goods to Traditional segment customers on consignment terms. Under
these consignment terms, the customer assumes the risk of loss and has an
absolute right of return for a specified period that typically ranges from six
months to one year. Our Online Channels segment and Traditional segment
customers are generally required to make payments on consignment shipments
within 30 to 60 days upon the customer informing us that such inventory will be
kept by the customer. Accordingly, we do not recognize revenue on these
consignment transactions until the earlier of (i) the customer informing us that
the inventory will be kept by the customer; (ii) the expiration of the right of
returns period; or (iii) the customer informing us that the inventory has been
sold.

See Note 2 to our consolidated financial statements in Item 8, "Financial
Statements and Supplementary Data", of this Annual Report on Form 10-K under the
Revenue Recognition caption for additional information regarding the underlying
required disclosures arising from contracts with customers as well as a more
detailed description of our revenue recognition accounting policy.

Accounts Receivable Reserves


Estimates are used to determine the amount of two reserves against trade
accounts receivable. The first reserve is an allowance for sales returns. At the
time revenue is recognized, we estimate future returns using a historical return
rate that is reviewed quarterly with consideration of any contractual return
privileges granted to customers, including any current extenuating economic
conditions resulting from the COVID-19 pandemic, and we reduce sales and trade
accounts receivable by this estimated amount. Our allowance for sales returns
was $675,000 and $704,000 at June 30, 2021 and 2020, respectively.

The second reserve is an allowance for uncollectible accounts for the
measurement of estimated credit losses resulting from the failure of our
customers to make required payments. This allowance reduces trade accounts
receivable to an amount expected to be collected. We use a current expected
credit loss ("CECL") model whereby we estimate credit losses expected over the
life of our pool of exposures based on historical percentages of uncollectible
accounts, changes in payment history, and facts and circumstances, including any
current extenuating economic conditions, for example those resulting from the
COVID-19 pandemic, regarding specific accounts that become known to, or
forecasted by, us when evaluating the adequacy of the allowance for
uncollectible accounts. We determine a credit loss percentage based on the age
of the receivable that we deem uncollectible related to potential credit losses.
We record an allowance for such credit losses, which includes a provision for
expected losses based on historical write-offs, adjusted for current conditions
as deemed necessary, reasonable and supportable forecasts about future
conditions, and a specific reserve for accounts deemed at risk. The allowance is
our estimate for accounts receivable as of the balance sheet date that
ultimately will not be collected. Any changes in the allowance are reflected in
the results of operations in the period in which the change occurs. We write-off
accounts receivable and the related allowance recorded previously when it
becomes probable, based upon customer facts and circumstances, that such amounts
will not be collected. We generally use internal collection efforts, which may
include our sales personnel as deemed appropriate. After all internal collection
efforts have been exhausted, we generally write-off the underlying account
receivable.

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Any accounts with significant balances are reviewed separately to determine an
appropriate allowance based on the facts and circumstances of the specific
underlying customer account. During our review for the fiscal years ended June
30, 2021 and 2020, we determined no additional reserves were necessary for
specific accounts. Based on these criteria, we determined that allowances for
uncollectible accounts receivable of $71,000 and $79,000 at June 30, 2021 and
2020, respectively, were required.

Deferred Tax Assets


As of each reporting date, management considers new evidence, both positive and
negative, that could impact its view with regard to future realization of
available deferred tax assets. As of the fiscal year ended June 30, 2020, we did
not recognize an income tax benefit for any of our deferred tax assets,
primarily related to net operating loss carryforwards and inventory valuation
reserves, because management determined that sufficient negative evidence
continued to exist to conclude it was uncertain that we would have sufficient
future taxable income to utilize our deferred tax assets.

However, as of June 30, 2021, cumulative positive taxable income over the last
three tax years had been generated in the U.S., as compared to the negative
evidence of cumulative losses in previous years. We also determined that our
expectation of future taxable income in upcoming tax years, including estimated
growth rates applied to future expected taxable income that includes significant
management estimates and assumptions, would be sufficient to result in full
utilization of our federal net operating loss carryforwards and certain of the
deferred tax assets prior to any statutory expiration. As a result, we
determined that sufficient positive evidence exists as of June 30, 2021, to
conclude that it is more likely than not deferred tax assets of approximately
$6.35 million are realizable, and we reduced our valuation allowance
accordingly. The reduction of the valuation allowances against these deferred
tax assets was the main driver of the income tax benefit during the fiscal year
ended June 30, 2021 of approximately $6.33 million. A valuation allowance
remains against certain deferred tax assets primarily relating to state net
operating loss carryforwards from our e-commerce subsidiary due to the timing
uncertainty of when it will generate positive taxable income to utilize the
associated deferred tax assets. In addition, as detailed below, a valuation
allowance also remains against certain deferred tax assets relating to operating
loss carryforwards relating to our dormant subsidiary located in Hong Kong.

As of June 30, 2021, all of our remaining federal income tax credits had expired
or been utilized, and therefore, are not available to be carried forward to
offset future income taxes. As of June 30, 2021 and 2020, we had federal tax net
operating loss carryforwards of approximately $19.00 million and $23.72 million,
respectively, expiring between 2034 and 2037, or that have no expiration, which
can be used to offset against future federal taxable income; North Carolina tax
net operating loss carryforwards of approximately $19.87 million and  $20.12
million, respectively, expiring between 2023 and 2035; and various other state
tax net operating loss carryforwards expiring between 2023 and 2040, which can
be used to offset against future state taxable income.

As of each of June 30, 2021 and 2020, there was approximately $6.03 million in
net operating loss carryforwards in Hong Kong. In accordance with the Hong Kong
tax code, these amounts can be carried forward indefinitely to offset future
taxable income in Hong Kong. Our deferred tax assets in Hong Kong were fully
reserved with a valuation allowance of $996,000 as of each of June 30, 2021 and
2020, and had been fully reserved in all prior fiscal periods due to the
uncertainty of future taxable income in this jurisdiction to utilize the
deferred tax assets. Charles & Colvard (HK) Ltd., our Hong Kong subsidiary, was
entered into dormancy as of September 30, 2020, following its re-activation in
December 2017. Charles & Colvard (HK) Ltd. previously became dormant in the
second quarter of 2009 and has had no operating activity since 2008. If we use
any portion of our deferred tax assets in future periods, the valuation
allowance would need to be reversed and may impact our future operating results.

For discussion of the effects of the CARES Act, the Consolidated Appropriations
Act, 2021, and the NC COVID-19 Relief Act on our provision for income taxes and
deferred tax assets, see Note 13 to our consolidated financial statements in
Item 8, "Financial Statements and Supplementary Data", of this Annual Report on
Form 10-K.

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Uncertain Tax Positions

We account for the de-recognition, classification, accounting in interim
periods, and disclosure requirements for uncertain tax positions in accordance
with U.S. GAAP. Determining which tax positions qualify as uncertain positions
and the subsequent accounting for these positions requires significant estimates
and assumptions. Our net accrued income tax liability under the provisions of
this guidance was approximately $10,000 and $8,000 at June 30, 2021 and 2020,
respectively. This liability is only resolved when we obtain an official ruling
from the tax authority on the positions or when the statute of limitations
expires. Our liability for accrued interest on these uncertain tax positions has
increased by approximately $2,000 for each of the fiscal years ended June 30,
2021 and 2020.

Recent Accounting Pronouncements


See Note 2 to our consolidated financial statements in Item 8, "Financial
Statements and Supplementary Data", of this Annual Report on Form 10-K under the
Recently Issued Accounting Pronouncements caption for the description of recent
accounting pronouncements, including the expected date of adoption and estimated
effects, on our consolidated financial statements.

Off-Balance Sheet Arrangements


We do not use off-balance sheet arrangements with unconsolidated entities or
related parties, nor do we use other forms of off-balance sheet arrangements.
Accordingly, our liquidity and capital resources are not subject to off-balance
sheet risks from unconsolidated entities. As of June 30, 2021 and 2020, we did
not have any off-balance sheet arrangements.

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