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Dynamic quotes 
OFFON

CHARLES & COLVARD, LTD.

(CTHR)
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Charles lvard : & COLVARD LTD Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

02/04/2021 | 04:52pm EDT
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Statements expressing expectations regarding our future and projections
relating to products, sales, revenues, and earnings are typical of such
statements and are made under the Private Securities Litigation Reform Act of
1995. These forward-looking statements include, but are not limited to,
statements about our plans, objectives, representations, and contentions and are
not historical facts and typically are identified by use of terms such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "continue," and similar words, although some
forward-looking statements are expressed differently.

All forward-looking statements are subject to the risks and uncertainties
inherent in predicting the future. You should be aware that although the
forward-looking statements included herein represent management's current
judgment and expectations, our actual results may differ materially from those
projected, stated, or implied in these forward-looking statements as a result of
many factors including, but not limited to, the following:

1. Our business, financial condition and results of operations could continue to

be adversely affected by an ongoing COVID-19 pandemic and related global

economic conditions;

2. Our future financial performance depends upon increased consumer acceptance,

growth of sales of our products, and operational execution of our strategic

initiatives;

3. The execution of our business plans could significantly impact our liquidity;

4. Our business and our results of operations could be materially adversely

affected as a result of general and economic conditions;

5. The financial difficulties or insolvency of one or more of our major customers

or their lack of willingness and ability to market our products could

adversely affect results;

6. We face intense competition in the worldwide gemstone and jewelry industry;

7. We are subject to certain risks due to our international operations,

distribution channels and vendors;

8. Our business and our results of operations could be materially adversely

affected as a result of our inability to fulfill orders on a timely basis;

9. We are currently dependent on a limited number of distributor and retail

partners in our Traditional segment for the sale of our products;

10. We rely on assumptions, estimates, and data to calculate certain of our key

metrics and real or perceived inaccuracies in such metrics may harm our

reputation and negatively affect our business;

11. We may experience quality control challenges from time to time that can

result in lost revenue and harm to our brands and reputation;

12. Seasonality of our business may adversely affect our net sales and operating

income;

13. Our operations could be disrupted by natural disasters;

14. Our loan, pursuant to the Paycheck Protection Program, or the PPP Loan, under

the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as

administered by the U.S. Small Business Administration, or the SBA, may not

be forgiven or may subject us to challenges and investigations regarding

qualification for the loan;

15. We may not be able to adequately protect our intellectual property, which

could harm the value of our products and brands and adversely affect our

business;

16. Negative or inaccurate information on social media could adversely impact our

brand and reputation;

17. Sales of moissanite and lab grown diamond jewelry could be dependent upon the

pricing of precious metals, which is beyond our control;

18. Our current customers may potentially perceive us as a competitor in the

finished jewelry business;

19. Our failure to maintain compliance with The Nasdaq Stock Market's continued

     listing requirements could result in the delisting of our common stock;


 20. We depend  on an exclusive supply agreement, or the Supply Agreement, with

Cree, Inc., or Cree, for substantially all of our silicon carbide, or SiC,

crystals, the raw materials we use to produce moissanite jewels; if our

supply of high-quality SiC crystals is interrupted, our business may be

materially harmed;

21. If the e-commerce opportunity changes dramatically or if e-commerce

technology or providers change their models, our results of operations may be

adversely affected;

22. A failure of our information technology infrastructure or a failure to

protect confidential information of our customers and our network against

security breaches could adversely impact our business and operations;

23. If we fail to evaluate, implement, and integrate strategic acquisition or

disposition opportunities successfully, our business may suffer;

24. Governmental regulation and oversight might adversely impact our operations;

and



 25. Some anti-takeover provisions of our charter documents may delay or prevent a
     takeover of our company.



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Forward-looking statements speak only as of the date they are made. We undertake
no obligation to update or revise such statements to reflect new circumstances
or unanticipated events as they occur except as required by the federal
securities laws, and you are urged to review and consider disclosures that we
make in the reports that we file with the Securities and Exchange Commission, or
SEC, that discuss other factors relevant to our business.

The following discussion is designed to provide a better understanding of our
unaudited condensed consolidated financial statements, including a brief
discussion of our business and products, key factors that impacted our
performance, and a summary of our operating results. This information should be
read in conjunction with the unaudited condensed consolidated financial
statements and notes thereto included in Part I, Item 1 of this Quarterly Report
on Form 10-Q, and the consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2020, or the 2020 Annual Report. Historical results and percentage
relationships related to any amounts in the condensed consolidated financial
statements are not necessarily indicative of trends in operating results for
future periods.

Overview

Our Mission

At 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
lab created gemstone company specializing in fine jewelry. We manufacture,
market, and distribute Charles & Colvard Created Moissanite® (which we refer to
as moissanite or moissanite jewels) and on September 14, 2020, we announced our
expansion into the lab grown diamond market with the launch of Caydia™, an
exclusive brand of premium lab grown diamonds. We offer gemstones and finished
jewelry featuring our proprietary moissanite jewels and premium lab grown
diamonds for sale in the worldwide fine jewelry market. Charles & Colvard is the
original source of created moissanite, and in 2015, we debuted Forever One™, our
premium moissanite gemstone brand. As an e-commerce and multi-channel
destination for fine jewelry featuring lab grown gemstones, we believe that the
addition of lab grown diamonds is a natural progression for the Charles &
Colvard brand.

One of our unique differentiators, moissanite - The World's Most Brilliant Gem®
- is core to our ambition to create a movement around environmentally and
socially responsible fine jewelry. We believe that we are leading the way in
delivering the premium moissanite brand through technological advances in
gemstone manufacturing, cutting, polishing, and setting. By coupling what we
believe to be unprecedented moissanite jewels with responsibly sourced precious
metals, we are delivering a uniquely positioned product line for the
conscientious consumer. Our Caydia™ lab grown diamonds are hand selected by our
Gemological Institute of America, or GIA, certified gemologists to meet Charles
& Colvard's uncompromising standards and validated by independent third-party
experts. Our Caydia™ lab grown diamonds are available currently in E, F, and G
color grades (based on the GIA's color grading scale) with a minimum clarity in
accordance with the GIA's VS1 clarity classification along with excellent cut,
polish, and symmetry. All of our Caydia™ lab grown diamonds are set with
responsibly sourced precious metals.

Our strategy is to build a globally revered brand of lab created gemstones and
finished jewelry that appeal to a wide consumer audience. We believe this
strategy leverages our advantages of being the original and leading worldwide
source of Charles & Colvard Created Moissanite® and offering a curated
assortment of jewelry featuring Caydia™ lab grown diamonds, which we believe
offers an ideal combination of quality and value. We believe a direct
relationship with consumers is important to this strategy, which entails
delivering tailored educational content, engaging in dialogue with our audience,
and positioning our brand to meet the demands of today's discerning consumer.

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COVID-19 Update

The global outbreak of the coronavirus disease 2019, or COVID-19, was declared a
pandemic by the World Health Organization and a national emergency by the U.S.
Government in March 2020 and has negatively affected the U.S. and global
economies, disrupted global supply chains, resulted in significant travel and
transport restrictions, including mandated closures and orders to
"shelter-in-place" and quarantine restrictions, and created significant
disruption of the financial markets. Certain countries and jurisdictions,
including some geographic areas of the U.S.,  have begun to return to
significantly more stringent social, business, and travel-related restrictions
due to the dramatic increase in new and variant strains of COVID-19 cases. Even
in the absence of legal restrictions, businesses and individuals may voluntarily
continue to limit in-person interactions and practice social distancing, and
such behaviors may continue beyond the formal end of the pandemic. The level and
nature of the disruption caused by COVID-19 is unpredictable, may be cyclical
and long-lasting and may vary from location to location. We have taken measures
to protect the health and safety of our employees, work with our customers and
suppliers to minimize disruptions, reduce our expenses, and support our
community in addressing the challenges posed by this ongoing COVID-19 pandemic.
The pandemic continues to present unprecedented business challenges, and we have
experienced impacts on our business related to the COVID-19 pandemic, primarily
in increased coronavirus-related costs, delays in supplier deliveries, impacts
of travel restrictions, access to some customer locations, the effects to net
revenue related to reduced demand and store closures, and the impacts of remote
work and adjusted work schedules.

The impact of the COVID-19 pandemic on the global and domestic economy is
currently not fully known. Our operations have, to date, been operating under
applicable governmental orders that have restricted activities in an effort to
prevent further outbreak of COVID-19. As such, we are conducting business with
certain modifications, including having non-operational personnel working
remotely where applicable; limiting site access to necessary employees and
critical third parties; enhancing the cleaning and disinfection of equipment and
common areas, including engaging third-party specialists to disinfect personal
workspaces; and issuing a quarantine policy regarding employees with COVID-19
symptoms or potential exposure, among other things. We continue to actively
monitor the situation and may take further actions that alter our business
operations including any that may be required by federal, state or local
authorities or that we determine are in the best interests of our employees,
customers, suppliers, vendors, communities and other stakeholders.

Despite these challenges, our efforts, especially with regard to product
fulfillment and supply chain management, helped to partially mitigate the
disruptions caused by the COVID-19 pandemic on our operations in the second
quarter of our fiscal year ending June 30, 2021, or Fiscal 2021. In addition,
strong net sales performance in our Online Channels segment during the calendar
year-end 2020 holiday season and an overall reduction in costs and operating
expenses resulting from cost-savings initiatives implemented by us have helped
to offset the adverse impacts of the COVID-19 pandemic on our financial results
in our second fiscal quarter. However, the ultimate impact of the COVID-19
pandemic on our operations and financial performance in Fiscal 2021 and future
periods, including our ability to execute our business plan and strategic
initiatives in the expected timeframe, remains uncertain and will depend on
future developments, including the duration and recent increased spread of the
coronavirus disease and related actions taken by the U.S. Government, state and
local government officials, and international governments to prevent and manage
disease spread, including the global roll-out of COVID-19 vaccines, all of which
are uncertain and cannot be predicted. The long-term impacts of the COVID-19
pandemic on global consumer buying behaviors, which impacts demand for our
products and services, are also difficult to predict.

For additional risks to the Company related to the COVID-19 pandemic, see "Part II, Item 1A. Risk Factors", contained in our 2020 Annual Report.

Fiscal 2021 Financial Trends


Currently, our financial outlook for Fiscal 2021 is subject to various risks and
uncertainties and is based on assumptions that we believe in good faith are
reasonable, but which may be materially different from actual results. The full
extent of the impact of the COVID-19 pandemic on our operational and financial
performance remains uncertain and continues to depend on many factors outside of
our control, including, without limitation: the timing, extent, trajectory and
duration of the pandemic particularly in light of the recent dramatic increases
in new and variant strains of COVID-19 cases in the U.S. to the extent such
outbreak would impact the local geographic region in which our business
principally operates; the development and availability of effective treatments
and the long-term effects of the recently implemented global vaccine rollout;
the imposition of protective public safety measures; and the impact of the
pandemic on the global economy and demand for consumer products. We expect the
COVID-19 pandemic will continue to have an adverse impact on our business,
results of operations, financial condition, and liquidity during Fiscal 2021.
Due to the potentially significant impact on our operations of the COVID-19
pandemic, including governmental responses to prevent further outbreak of
COVID-19, current period results are not necessarily indicative of expected
performance for other interim periods or our full Fiscal 2021. We expect the
COVID-19 pandemic will continue to have an adverse impact on our business,
results of operations, financial condition, and liquidity during Fiscal 2021.

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As we manage through these challenging times, our strategic focus for Fiscal
2021 remains centered on the expansion of Charles & Colvard's brand on a global
scale and to continue increasing the size of our business through top-line
disciplined growth by leveraging existing resources. We believe that lab-created
gemstones, including our premier moissanite products, Forever One™ and
Moissanite by Charles & Colvard® and our lab grown diamond product line,
Caydia™, are now being embraced by worldwide markets. We also believe that our
ability to elevate our own lab-created gemstones - including both moissanite
jewels and lab grown diamonds - and the Charles & Colvard brand directly with
consumers is key to our future success and ability to continue fueling our
growth. We intend to elevate the Charles & Colvard name by making it synonymous
with quality, value, and price. Notwithstanding the global challenges we face in
Fiscal 2021, we plan to execute on our key strategies with an ongoing commitment
to spending judiciously and generating sustainable earnings improvement.

We discuss our key strategies for Fiscal 2021 in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", contained in our 2020 Annual Report.

Critical Accounting Policies and Estimates


Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which we
prepared in accordance with accounting principles generally accepted in the
United States, or U.S. GAAP. The preparation of these condensed consolidated
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses and related
disclosures of contingent assets and liabilities. "Critical accounting policies
and estimates" are defined as those most important to the financial statement
presentation and that require the most difficult, subjective, or complex
judgments. We base our estimates on historical experience and on various other
factors that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Under different
assumptions and/or conditions, including the impact of the COVID-19 pandemic and
the related responses, those actual results of operations may materially differ.
We have disclosed our critical accounting policies and estimates in our 2020
Annual Report, and that disclosure should be read in conjunction with this
Quarterly Report on Form 10-Q. Except as set forth below, there have been no
significant changes in our critical accounting policies and estimates during the
first six months of Fiscal 2021.

For a discussion regarding our adoption of the new accounting standard related
to the measurement and disclosure of credit losses on financial instruments, see
Note 2 to our condensed consolidated financial statements in Item 1, "Financial
Statements", of this Quarterly Report on Form 10-Q.

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Results of Operations

The following table sets forth certain consolidated statements of operations data for the three and six months ended December 31, 2020 and 2019:

                                             Three Months Ended December 31,          Six Months Ended December 31,
                                                 2020                 2019                2020                2019
Net sales                                  $     12,146,790       $  10,659,090     $     20,073,083      $ 18,267,511
Costs and expenses:
Cost of goods sold                                6,167,708           5,530,514           10,363,763         9,407,138
Sales and marketing                               2,480,571           3,160,965            4,128,503         5,390,556
General and administrative                          977,528           1,203,686            2,185,564         2,553,187
Total costs and expenses                          9,625,807           9,895,165           16,677,830        17,350,881
Income from operations                            2,520,983             763,925            3,395,253           916,630
Other income (expense):
Interest income                                       1,126              45,379                4,586           106,758
Interest expense                                     (2,466 )              (277 )             (4,905 )            (419 )
Loss on foreign currency exchange                       (72 )              (314 )               (603 )            (853 )
Total other (expense) income, net                    (1,412 )            44,788                 (922 )         105,486
Income before income taxes                        2,519,571             808,713            3,394,331         1,022,116
Income tax (expense) benefit                           (494 )             5,337                 (988 )            (747 )
Net income                                 $      2,519,077       $     814,050     $      3,393,343      $  1,021,369


Consolidated Net Sales

Consolidated net sales for the three and six months ended December 31, 2020 and 2019 comprise the following:

                          Three Months Ended December 31,                  Change                  Six Months Ended December 31,                  Change
                              2020                 2019            Dollars         Percent             2020                2019           Dollars         Percent
Finished jewelry        $      8,265,197       $   6,438,347     $ 1,826,850              28 %   $     12,600,534      $ 10,296,342     $ 2,304,192              22 %
Loose jewels                   3,881,593           4,220,743        (339,150 )            -8 %          7,472,549         7,971,169        (498,620 )            -6 %
Total consolidated
net sales               $     12,146,790       $  10,659,090     $ 1,487,700              14 %   $     20,073,083      $ 18,267,511     $ 1,805,572              10 %



Consolidated net sales were $12.15 million for the three months ended December
31, 2020 compared to $10.66 million for the three months ended December 31,
2019, an increase of approximately $1.49 million, or 14%.  Consolidated net
sales were $20.07 million for the six months ended December 31, 2020 compared to
$18.27 million for the six months ended December 31, 2019, an increase of
approximately $1.81 million, or 10%. The increase in consolidated net sales for
the three and six months ended December 31, 2020 was due primarily to strong
calendar year-end holiday sales and increased consumer awareness and strong
demand for our moissanite jewels, lab grown diamonds, and finished jewelry
featuring both moissanite and lab grown diamonds. These increases resulted in
higher finished jewelry product net sales during the three and six months ended
December 31, 2020 in our Online Channels segment and Traditional segment. The
increases in our Online Channels segment net sales in the three and six months
ended December 31, 2020 were partially offset by lower net sales in our
Traditional segment driven by lower loose jewels sales and decreased
international sales during the three and six months ended December 31, 2020.

Sales of finished jewelry represented 68% and 63% of total consolidated net
sales for the three and six months ended December 31, 2020, respectively,
compared to 60% and 56%, respectively, of total consolidated net sales for the
corresponding periods of the prior year. For the three months ended December 31,
2020, finished jewelry sales were $8.27 million compared to $6.44 million for
the corresponding period of the prior year, an increase of approximately $1.83
million, or 28%.  For the six months ended December 31, 2020, finished jewelry
sales were $12.60 million compared to $10.30 million for the corresponding
period of the prior fiscal year, an increase of approximately $2.30 million, or
22%. The increase in finished jewelry sales for the three- and six-month periods
ended December 31, 2020 was due primarily to higher finished jewelry sales of
Forever One™ and Moissanite by Charles & Colvard® in our Online Channels segment
as well as in our Traditional segment.

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Sales of loose jewels represented 32% and 37% of total consolidated net sales
for the three and six months ended December 31, 2020, respectively, compared to
40% and 44%, respectively, of total consolidated net sales for the corresponding
periods of the prior fiscal year. For the three months ended December 31, 2020,
loose jewel sales were $3.88 million compared to $4.22 million for the
corresponding period of the prior year, a decrease of $339,000, or 8%. For the
six months ended December 31, 2020, loose jewel sales were $7.47 million
compared to $7.97 million for the corresponding period of the prior fiscal year,
a decrease of $500,000, or 6%. The decrease in loose jewels sales for the three-
and six-month periods ended December 31, 2020 was primarily due to lower levels
of sales principally through the international distributor network in our
Traditional segment.

U.S. net sales accounted for approximately 94% of total consolidated net sales
for each of the three- and six-month periods ended December 31, 2020, compared
to 90% of total consolidated net sales for each of the corresponding periods of
the prior year. U.S. net sales increased to $11.39 million, or 18%, during the
three months ended December 31, 2020 from the corresponding period of the prior
fiscal year. U.S. net sales increased to $18.89 million, or 15%, during the six
months ended December 31, 2020 from the corresponding period of the prior year.
U.S. net sales increased during the three and six months ended December 31, 2020
primarily as a result of increased sales to U.S. customers in both our Online
Channels segment and Traditional segment.

Our largest U.S. customer during the three and six months ended December 31,
2020 accounted for 14% and 12% of total consolidated net sales during each
respective period. This same customer was also one of our two largest U.S.
customers during the three and six months ended December 31, 2019 when this
customer accounted for 13% of total consolidated net sales during each of the
respective three- and six-month periods. Our second largest U.S. customer during
the six months ended December 31, 2020 accounted for 10% of total consolidated
net sales during the period then ended. This same customer was also one of our
two largest U.S. customers during the three and six months ended December 31,
2019, when this customer accounted for 13% of total consolidated net sales
during each of the respective three- and six-month periods. We expect that we
will remain dependent on our ability, and that of our largest customers, to
maintain and enhance retail programs. A change in or loss of any of these
customer or retailer relationships could have a material adverse effect on our
results of operations.

International net sales accounted for approximately 6% of total consolidated net
sales for each of the three- and six-month periods ended December 31, 2020,
respectively, compared to 10% of total consolidated net sales for each of the
corresponding periods of the prior year. International net sales decreased 25%
and 36% during the three and six months ended December 31, 2020, respectively,
from the corresponding periods of the prior fiscal year principally as a result
of lower demand in our international distributor market, which was partially
offset by growth in our direct-to-consumer presence internationally reflecting
solid direct-to-consumer sales from our Online Channels segment in international
markets. In light of the effects of ongoing global economic conditions, we
continue to evaluate these and other potential distributors in international
markets to determine the best long-term partners. As a result, and in light of
the ongoing worldwide pandemic and international trade challenges, we expect our
sales in these markets to continue to fluctuate significantly each reporting
period.

We did not have an international customer account for 10% or more of total
consolidated sales during the three and six months ended December 31, 2020 or
2019. A portion of our international consolidated sales represents jewels sold
internationally that may be re-imported to U.S. retailers.

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Costs and Expenses

Cost of Goods Sold

Cost of goods sold for the three and six months ended December 31, 2020 and 2019 are as follows:

                           Three Months Ended                                               Six Months Ended
                              December 31,                       Change                       December 31,                       Change
                          2020            2019           Dollars        Percent           2020            2019           Dollars         Percent
Product line cost of
goods sold:
Finished jewelry       $ 4,002,146     $ 2,964,114     $ 1,038,032             35 %   $  5,756,435     $ 4,667,024     $ 1,089,411              23 %
Loose jewels             1,805,603       2,081,654        (276,051 )          -13 %      3,549,525       3,881,106        (331,581 )            -9 %
Total product line
cost of goods sold       5,807,749       5,045,768         761,981             15 %      9,305,960       8,548,130         757,830               9 %
Non-product line
cost of goods sold         359,959         484,746        (124,787 )          -26 %      1,057,803         859,008         198,795              23 %
Total cost of goods
sold                   $ 6,167,708     $ 5,530,514     $   637,194             12 %   $ 10,363,763     $ 9,407,138     $   956,625              10 %



Total cost of goods sold was $6.17 million for the three months ended December
31, 2020 compared to $5.53 million for the three months ended December 31, 2019,
a net increase of approximately $637,000, or 12%. Total cost of goods sold was
$10.36 million for the six months ended December 31, 2020 compared to $9.41
million for the six months ended December 31, 2019, an increase of approximately
$957,000, or 10%. Product line cost of goods sold is defined as product cost of
goods sold in each of our Online Channels segment and Traditional segment
excluding non-capitalized expenses from our manufacturing and production control
departments, comprising personnel costs, depreciation, rent, utilities, and
corporate overhead allocations; freight out; inventory write-offs; and other
inventory adjustments, comprising costs of quality issues, and damaged goods.

The increase in cost of goods sold for the three months ended December 31, 2020
compared to the same period in 2019 was primarily driven by increased sales of
finished jewelry, which reflect higher material and labor costs, in both our
Online Channels segment and Traditional segment as a result of strong demand
during the calendar year-end 2020 holiday season. Our finished jewelry products
cost more to produce due to higher material and labor costs when compared to the
production of loose jewels.

The net decrease in non-product line cost of goods sold for the three months
ended December 31, 2020, comprises a favorable $167,000 change in other
inventory adjustments principally relating to positive changes in production
standard cost variances compared to the three months ended December 31, 2019.
The net decrease in non-product line cost of goods sold was also related to an
approximate $101,000 change in inventory valuation adjustments primarily related
to favorable changes in obsolescence reserves in the current period compared to
those in the comparable prior year period as well as an approximate $32,000
decrease in non-capitalized manufacturing and production control expenses
principally due to the timing when work-in-process is received into inventory
and overhead costs are allocated. These decreases in non-product line cost of
goods sold were offset in part by an approximate $175,000 increase in freight
out from increased shipments resulting from Online Channels segment sales growth
during the quarter ended December 31, 2020.

The increase in cost of goods sold for the six months ended December 31, 2020
compared to the same period in 2019 was also primarily driven by the increased
finished jewelry sales in both our Online Channels segment and Traditional
segment as a result of strong sales during the calendar year-end 2020 holiday
season.

The net increase in non-product line cost of goods sold for the six months ended
December 31, 2020, comprises an unfavorable $116,000 change in other inventory
adjustments principally related to adverse changes in production standard cost
variances compared to the six months ended December 31, 2019. The net increase
in non-product line cost of goods sold was also related to an approximate
$220,000 increase in freight out from increased shipments resulting from Online
Channels segment sales growth during the six months ended December 31, 2020.
These increases in non-product line cost of goods sold were offset in part by an
approximate $93,000 decrease in non-capitalized manufacturing and production
control expenses principally due to the timing when work-in-process is received
into inventory and overhead costs are allocated as wells as an approximate
$44,000 change in inventory valuation allowances primarily related to favorable
changes in obsolescence reserves in the six months ended December 31, 2020,
compared to those in the comparable prior year period.

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For additional disclosure relating to non-product line cost of goods sold, see
Note 3 to our condensed consolidated financial statements in Item 1, "Financial
Statements", of this Quarterly Report on Form 10-Q.

Sales and Marketing

Sales and marketing expenses for the three and six months ended December 31, 2020 and 2019 are as follows:

                           Three Months Ended                                             Six Months Ended
                              December 31,                      Change                      December 31,                       Change
                          2020            2019          Dollars        Percent          2020            2019           Dollars         Percent
Sales and marketing    $ 2,480,571     $ 3,160,965     $ (680,394 )          -22 %   $ 4,128,503     $ 5,390,556     $ (1,262,053 )          -23 %



Sales and marketing expenses were $2.48 million for the three months ended
December 31, 2020 compared to $3.16 million for the three months ended December
31, 2019, a decrease of approximately $680,000, or 22%. Sales and marketing
expenses were $4.13 million for the six months ended December 31, 2020 compared
to $5.39 million for the six months ended December 31, 2019, a decrease of
approximately $1.26 million, or 23%.

The decrease in sales and marketing expenses for the three months ended December
31, 2020 compared to the same period in 2019 was primarily due to a $418,000
decrease in compensation-related expenses; a $321,000 decrease in advertising
and digital marketing expenses; a $14,000 decrease in travel expenses as a
result of COVID-19 cost-control measures; and a $6,000 decrease in
software-related costs compared with those incurred in the prior year associated
with upgraded operating system maintenance agreements. These decreases were
partially offset by a $51,000 increase in general office-related expenses
primarily due to increased credit card transaction fees associated with a higher
level of online sales; a $26,000 increase in depreciation and amortization
principally associated with the capitalization of costs relating to information
technology-related upgrades; and a $2,000 increase in professional services
principally comprising non-recurring consulting information technology services.

Compensation expenses for the three months ended December 31, 2020 compared to
the same period in 2019 decreased primarily due to a $337,000 decrease in
salaries, commissions, and related employee benefits in the aggregate; a $67,000
decrease in bonus expense; and a $14,000 decrease in employee stock-based
compensation expense. All three of these compensation-related expense decreases
reflect our June 2020 management reorganization and workforce reduction.

The decrease in advertising and digital marketing expenses for the three months
ended December 31, 2020 compared to the same period in 2019 comprises a $148,000
decrease in Internet marketing; a $98,000 decrease in outside agency fees; a
$55,000 decrease in cooperative advertising; and a $20,000 decrease in
promotion-related expenses.

The decrease in sales and marketing expenses for the six months ended December
31, 2020 compared to the same period in 2019 was primarily due to an $819,000
decrease in compensation-related expenses; a $457,000 decrease in advertising
and digital marketing expenses; a $56,000 decrease in professional services fees
principally comprising non-recurring consulting services for cybersecurity and
merchandising imaging in the prior year period; and a $21,000 decrease in travel
expenses as a result of COVID-19 cost-control measures. These decreases were
partially offset by a $49,000 increase in general office-related expenses, which
are principally related to higher credit card transaction fees from increased
online sales levels; a $30,000 increase in depreciation and amortization expense
relating to capitalized costs associated with information technology-related
upgrades; and a $12,000 increase in software-related costs principally in
connection with maintenance agreements as well as other software-related
agreements.

Compensation expenses for the six months ended December 31, 2020 compared to the
same period in 2019 decreased primarily as a result of a $655,000 decrease in
salaries, commissions, and related employee benefits in the aggregate; a
$114,000 decrease in bonus expense; and a $52,000 decrease in employee
stock-based compensation expense. All three of these compensation-related
expense decreases reflect our June 2020 management reorganization and workforce
reduction. These decreases were partially offset by a $2,000 increase in
employee-related severance costs.

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The decrease in advertising and digital marketing expenses for the six months
ended December 31, 2020 compared to the same period in 2019 comprises a $190,000
decrease in Internet marketing; a $174,000 decrease in cooperative advertising;
an $88,000 decrease in outside agency fees; and an $8,000 decrease in print
media expenses. These decreases were partially offset by a $3,000 increase in
promotion-related expenses.

General and Administrative

General and administrative expenses for the three and six months ended December 31, 2020 and 2019 are as follows:

                          Three Months Ended                                            Six Months Ended
                             December 31,                     Change                      December 31,                      Change
                         2020           2019          Dollars        Percent          2020            2019          Dollars        Percent
General and
administrative         $ 977,528     $ 1,203,686     $ (226,158 )          -19 %   $ 2,185,564     $ 2,553,187     $ (367,623 )          -14 %



General and administrative expenses were $978,000 for the three months ended
December 31, 2020 compared to $1.20 million for the three months ended December
31, 2019, a decrease of approximately $226,000, or 19%. General and
administrative expenses were $2.19 million for the six months ended December 31,
2020 compared to $2.55 million for the six months ended December 31, 2019, a
decrease of approximately $368,000, or 14%.

The decrease in general and administrative expenses for the three months ended
December 31, 2020 compared to the same period in 2019 was primarily due to a
$118,000 decrease in professional services; an $83,000 decrease in compensation
expenses; and a $45,000 decrease in bad debt expense associated with our
allowance for doubtful accounts reserve policy. These decreases were partially
offset by a $7,000 increase in insurance expenses, principally related to higher
renewal premiums; a $3,000 increase in depreciation and amortization expense; a
$2,000 increase in equipment-related rental expense; a $2,000 increase in
business taxes and licenses; and a $6,000 net increase in miscellaneous other
general and administrative expenses.

Professional services fees decreased for the three months ended December 31,
2020 compared to the same period in 2019 primarily due to a $73,000 decrease in
legal fees resulting from non-recurring non-capitalized fees incurred in
connection with our underwritten public offering and corporate governance
matters in the prior year; a $30,000 decrease in investor relations fees; a
$12,000 decrease in accounting services also principally related to
non-recurring fees associated with our underwritten public offering in the prior
year; and a $3,000 decrease in consulting and other professional services.

Compensation expenses decreased for the three months ended December 31, 2020
compared to the same period in 2019 principally due to a $39,000 decrease in
salaries and related employee benefits in the aggregate; a $22,000 decrease in
bonus expense; and a $22,000 decrease in employee stock-based compensation
expense. All three of these compensation-related expense decreases reflect our
June 2020 management reorganization and workforce reduction.

The decrease in general and administrative expenses for the six months ended
December 31, 2020 compared to the same period in 2019 was primarily due to a
$247,000 decrease in professional services; a $197,000 decrease in compensation
expenses; and a $9,000 decrease in Board retainer fees as a result of the
resignation of a former Director in September 2019. These decreases were
partially offset by a $24,000 increase in insurance expenses principally related
to higher renewal premiums; a $16,000 increase in bad debt expense associated
with our allowance for doubtful accounts reserve policy; a $14,000 increase in
software-related costs principally in connection with maintenance agreements as
well as other software-related agreements; an $8,000 increase in travel-related
expenses; a $7,000 increase in bank charges as a result of transaction fees
associated with increased online transactions; a $6,000 increase in business
taxes and licenses; a $4,000 increase in equipment-related rental expense; a
$4,000 increase in depreciation and amortization expense; and a $2,000 net
increase in miscellaneous other general and administrative expenses.

Professional services fees decreased for the six months ended December 31, 2020 compared to the same period in 2019 primarily due to a $159,000 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 $45,000 decrease in accounting services also principally related to non-recurring fees associated with our underwritten public offering in the prior year; a $33,000 decrease in investor relations fees; and a $10,000 decrease in consulting and other professional services.

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Compensation expenses decreased for the six months ended December 31, 2020
compared to the same period in 2019 principally due to a $93,000 decrease in
salaries and related employee benefits in the aggregate; a $55,000 decrease in
employee stock-based compensation expense; and a $49,000 decrease in bonus
expense. All three of these compensation-related expense decreases reflect our
June 2020 management reorganization and workforce reduction.

Interest Income


Interest income for the three and six months ended December 31, 2020 and 2019 is
as follows:

                     Three Months Ended                                      Six Months Ended
                        December 31,                   Change                  December 31,                   Change
                     2020           2019        Dollars       Percent      
2020         2019         Dollars        Percent
Interest income    $   1,126      $ 45,379     $ (44,253 )         -98 %   $ 4,586     $ 106,758     $ (102,172 )         -96 %



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 three and six months ended December 31, 2020 and
2019, we earned interest from cash on deposit in this interest-bearing account.
The decrease in earned interest reflects adverse changes in interest rate
fluctuations during the first half of Fiscal 2021 compared with the first half
of Fiscal 2020.

Interest Expense

Interest expense for the three and six months ended December 31, 2020 and 2019 is as follows:

                      Three Months Ended                                       Six Months Ended
                         December 31,                    Change                  December 31,                  Change
                      2020            2019       Dollars       Percent         2020          2019       Dollars      Percent
Interest expense   $     2,466       $   277     $  2,189           790 %   $    4,905      $   419     $  4,486        1,071 %



On June 18, 2020, we received the proceeds from our Paycheck Protection Program
Loan, or the PPP Loan, pursuant to the Paycheck Protection Program under the
Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as
administered by the U.S. Small Business Administration, or SBA. The PPP Loan in
the principal amount of $965,000 was disbursed by Newtek Small Business Finance,
LLC, or the Lender, pursuant to a promissory note, or the Promissory Note, dated
June 15, 2020. We accounted for the Promissory Note as debt within the
accompanying consolidated financial statements. Accordingly, during the three
and six months ended December 31, 2020, we incurred interest on the Promissory
Note. We had no debt during the comparable periods in the prior fiscal year.

Loss on Foreign Currency Exchange

Losses on foreign currency exchange related to foreign sales transacted in functional currencies other than the U.S. dollar for the three and six months ended December 31, 2020 and 2019 are as follows:

                      Three Months Ended                                       Six Months Ended
                         December 31,                   Change                   December 31,                   Change
                     2020           2019         Dollars       Percent        2020           2019        Dollars       Percent
Loss on foreign
currency
exchange           $     72       $     314     $    (242 )         -77 %   $    603       $    853     $    (250 )         -29 %



During the three and six months ended December 31, 2020 and 2019, 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 during the three
and six months ended December 31, 2020 compared with the same periods in the
prior year.

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Provision for Income Taxes

We recognized income tax net expense of $500 and income tax net benefit of
approximately $5,000 for the three-month periods ended December 31, 2020 and
2019, respectively. We recognized income tax net expense of approximately $1,000
and $1,000 for the six-month periods ended December 31, 2020 and 2019,
respectively. Income tax provisions in these periods primarily relate to
estimated taxes, penalties, and interest associated with uncertain tax
positions.

As of each reporting date, management considers new evidence, both positive and
negative, that could impact its view with regard to future realization of
deferred tax assets. Beginning in 2014, management determined that negative
evidence outweighed positive evidence and established a full valuation allowance
against our deferred tax assets. We maintained a full valuation allowance
against our deferred taxes as of December 31, 2020 and June 30, 2020.

Liquidity and Capital Resources


The impact of the COVID-19 pandemic on the global and domestic economy is
currently not fully known. With the dramatic increase in new and variant strains
of COVID-19 infection levels around the world, many geographical regions,
including some parts of the U.S., are reimposing tighter social and business
restrictions in an effort to prevent further outbreak of COVID-19. Accordingly,
the world continues to adapt to the ongoing COVID-19 pandemic and its adverse
effects on global economics and business operations. The impact of the COVID-19
pandemic continues to place unprecedented pressures on global and U.S.
businesses including our own. The ongoing spread of the coronavirus disease
continues to lead to business disruption and volatility in the global capital
markets, which, depending on future developments, including the success of the
global vaccine efforts to control the spread of the underlying virus, could
further adversely impact our capital resources and liquidity in the future. We
remain increasingly focused on the COVID-19 pandemic and are continually
evaluating its potential effect on our business and liquidity and capital
resources.

Capital Structure and Long-Term Debt

As disclosed above, on June 18, 2020, we received the proceeds from our PPP Loan, pursuant to 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 the Promissory Note, dated June 15, 2020.


Under the CARES Act and the Promissory Note, loan forgiveness is available,
subject to certain conditions, for the sum of documented payroll costs, covered
rent payments, and covered utilities during the 24-week period beginning on the
date of first disbursement of the PPP Loan. For purposes of the CARES Act,
payroll costs exclude cash compensation of an individual employee in excess of
$100,000, prorated annually. Not more than 40% of the forgiven amount can be
attributable to non-payroll costs. Although we currently believe that our use of
the PPP Loan will meet the conditions for forgiveness for a portion of the PPP
Loan, we cannot assure our future adherence to the forgiveness criteria and that
the PPP Loan will be forgiven, in whole or in part.

The CARES Act provides that existing AMT credit carryforwards are now eligible
for acceleration and refundable AMT credits are to be completely refunded to
companies for taxable years beginning in 2019, or by election, taxable years
beginning in 2018. Accordingly, we elected to have the AMT tax completely
refunded and filed a refund claim for the remaining AMT tax credit. The full
amount of the remaining balance of our AMT credit refund in the amount of
approximately $272,000 was refunded by the Internal Revenue Service in October
2020.

We also intend to take advantage of COVID-19 related tax credits for required
paid leave provided by us. These eligible tax credits are determined by
qualified emergency paid sick and expanded family and medical leave wages
pursuant to the Families First Coronavirus Response Act, or FFCRA. Under FFCRA,
we have provided employees with paid federal sick and expanded family and
medical leave benefits for which we may be reimbursed by the government through
payroll tax credits. Qualifying wages for tax credit purposes under FFCRA are
those paid to an employee who takes leave under FFCRA for a qualifying reason,
up to the applicable per diem and aggregate payment caps. Applicable tax credits
also extend to the employer's share of amounts paid or incurred to maintain a
group health plan.

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The Consolidated Appropriations Act, 2021, or the Act, which is the latest
federal stimulus relief bill for the COVID-19 pandemic, was signed into law on
December 27, 2020. Notably, this legislation provides that employers who
received a PPP loan may also qualify for the Employee Retention Credit, or ERC,
once certain shutdown-related gross receipts decline eligibility hurdles are
met. Previously, pursuant to the CARES Act, taxpayers that received a PPP loan
were not eligible for the ERC and this change is retroactive to March 27, 2020.
While we have had minimal short-term shutdowns related to the COVID-19 pandemic
such that we have not utilized this aid, if future shutdowns are mandated and
more extensive, we may be eligible to claim the ERC.

Finally, as permitted by the NC COVID-19 Relief Act, we will receive a tax credit towards our contributions to the North Carolina Unemployment Insurance Fund, which will also serve to further enhance future cash flow.


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 which allows us to
periodically offer and sell, individually or in any combination, shares of
common stock, shares of preferred stock, warrants to purchase shares of common
stock or preferred stock, and units consisting of any combination of the
foregoing types of securities, up to a total of $25.00 million, of which
approximately $13.99 million remains available after giving effect to our June
2019 public offering, including the impact of the partial exercise of the
underwriters' over-allotment option, described below. However, we may offer and
sell no more than one-third of our public float (which is the aggregate market
value of our outstanding common stock held by non-affiliates) in any 12-month
period. Our ability to issue equity securities under the shelf registration
statement is subject to market conditions, which are in turn, subject to the
disruption and volatility being caused by the ongoing COVID-19 pandemic. Any
capital raise is not assured and may not be at terms that would be acceptable to
us.

Financing Activities

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.
However, in response to the COVID-19 pandemic and its impact on consumer
confidence and spending, management drastically reduced related advertising and
digital marketing expenditures in mid-March 2020. We will continue to monitor
and adjust our advertising and digital marketing and professional services
expenditure levels to correspond to the e-commerce market disruption and
volatility being caused by the ongoing COVID-19 pandemic. However, we plan to
maintain these reduced advertising and digital marketing expenditure levels for
the foreseeable future.

As discussed above, on June 18, 2020 we received a PPP Loan in the principal
amount of $965,000 from the Lender pursuant to a Promissory Note dated June 15,
2020. The Promissory Note matures June 18, 2022 and may be extended with the
consent of the Lender under the provisions of the CARES Act. The Promissory Note
bears interest at a fixed rate of 1% per annum. Pursuant to the terms of the
Promissory Note, monthly principal and interest payments in the amount of
approximately $41,000 will commence on April 1, 2021. For financial reporting
purposes as of December 31, 2020, the classification of the current maturity of
this long-term debt assumes there will be no principal forgiveness and principal
repayment for the full outstanding principal amount of the PPP Loan will be
spread in equal monthly installments over the period from April 1, 2021 through
the maturity date of the Promissory Note.

We did not provide any collateral or guarantees for the PPP Loan, nor did we pay
any facility charge to obtain the PPP Loan. The Promissory Note provides for
customary events of default, including, among others, those relating to failure
to make payment and breaches of representations. We may prepay the principal of
the PPP Loan at any time without incurring any prepayment charges.

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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 December 31, 2020, our
principal sources of liquidity were cash, cash equivalents and restricted cash
totaling $16.87 million, trade accounts receivable of $3.06 million, and net
current inventory of $12.07 million, as compared to cash and cash equivalents
totaling $14.62 million, trade accounts receivable of $671,000, and net current
inventory of $7.44 million as of June 30, 2020. As described more fully herein,
we also have long-term debt in the amount of $965,000, of which $579,000 is
classified as its current maturity as of December 31, 2020, and access to a
$5.00 million asset-based revolving credit facility with White Oak, or the White
Oak Credit Facility.

During the six months ended December 31, 2020, our working capital increased by
approximately $9.94 million to $27.36 million from $17.42 million at June 30,
2020. As described more fully below, the increase in working capital at December
31, 2020 is primarily attributable to an increase in our allocation of inventory
from long-term to short-term, an increase in our accounts receivable, an
increase in our cash, cash equivalents, and restricted cash resulting from cash
provided by our operations, a decrease in our accounts payable, an increase in
our prepaid expenses and other assets, and a decrease in our short-term
operating lease liabilities. These factors were offset partially by an increase
in the current maturity of our long-term debt and an increase in our accrued
expenses and other liabilities.

During the six months ended December 31, 2020, approximately $2.41 million of
cash was provided by our operations. The primary drivers of our cash flows from
operations were the favorable effect of net income in the amount of $3.39
million; a decrease in inventory of $1.86 million; a decrease in prepaid
expenses and other assets of $62,000; and an increase in accrued income taxes in
the amount of $1,000. In addition, the net effect of non-cash items included in
net income totaling $1.25 million also favorably impacted net cash provided by
operating activities during the six months ended December  31, 2020. These
factors were offset partially by an increase in accounts receivable of $3.07
million; a decrease in accounts payable of $816,000; and a decrease in accrued
expenses and other liabilities of $274,000.

Accounts receivable increased principally due to the increased level of sales
during the six months ended December 31, 2020 as compared with the sales during
the period leading up to June 30, 2020. As a result of the COVID-19 pandemic, we
offered extended Traditional segment customer payment terms beyond 90 days to
certain credit-worthy customers during the first half of Fiscal 2021 and second
half of Fiscal 2020. Because of the ongoing impact of the pandemic on the global
economy, the extension of these terms may not immediately increase liquidity as
a result of ongoing current-period sales, which we expect to continue to be
pressured due to the effects of the ongoing COVID-19 pandemic. In addition, we
believe our competitors and other vendors in the wholesale jewelry industry have
expanded their use of extended payment terms and, in aggregate, we believe that,
through our use of extended payment terms, we provide a competitive response in
our market during the current global economic environment. We believe that we
are unable to estimate the impact of these actions on our net sales, but we
believe that if we ceased providing extended payment terms, we would be at a
competitive disadvantage for some Traditional segment customers in the
marketplace during this economic period and that our net sales and profits would
likely be adversely impacted.

We manufactured approximately $6.36 million in finished jewelry and $3.76
million in loose jewels, which includes the cost of the loose jewels and the
purchase of precious metals and labor in connection with jewelry production,
during the six months ended December 31, 2020. We expect our purchases of
precious metals and labor to increase as we increase our finished jewelry
business. In addition, the price of gold has increased significantly over the
past decade, and more significantly over the last 12 months, resulting in higher
retail price points for gold jewelry. Because the market price of gold and other
precious metals is beyond our control, the upward price trends could continue
and have a negative impact on our operating cash flow as we manufacture finished
jewelry.

Historically, our raw material inventories of SiC crystals had been purchased
under exclusive supply agreements with a limited number of suppliers. Because
the supply agreements restricted the sale of these crystals exclusively to us,
the suppliers negotiated minimum purchase commitments with us that, when
combined with reduced sales levels during prior periods in which the purchase
commitments were in effect, have resulted in levels of inventories that are
higher than we might otherwise maintain. As of December 31, 2020 and June 30,
2020, $16.59 million and $23.19 million, respectively, of our inventories were
classified as long-term assets. Loose jewel sales and finished jewelry that we
manufacture will utilize both the finished goods loose jewels currently on-hand
and, as we deplete certain shapes and sizes, our on-hand raw material SiC
crystals of $2.06 million and new raw material that we purchase pursuant to the
Supply Agreement.

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Our more detailed description of our inventories is included in Note 5 to our
condensed consolidated financial statements in Part I, Item 1, "Financial
Statements", of this Quarterly Report on Form 10-Q.

As of December 31, 2020, we had approximately $309 of remaining federal income
tax credits that expire in 2021 and can be carried forward to offset future
income taxes. As of December  31, 2020, we also had a federal tax net operating
loss carryforward of approximately $23.72 million expiring between 2022 and
2037, which can be used to offset against future federal taxable income; North
Carolina tax net operating loss carryforwards of approximately $20.12 million
expiring between 2023 and 2033; and various other state tax net operating loss
carryforwards expiring between 2021 and 2040, which can be used to offset
against future state taxable income.

Contractual Commitment


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 $35.57 million remains to be purchased as of December 31, 2020.

During the six months ended December 31, 2020, we purchased approximately $1.03
million of SiC crystals from Cree pursuant to the terms of the Supply Agreement,
as amended. Going forward, we expect to use existing cash and cash equivalents
and access to other working capital resources, including but not limited to the
issuance of equity securities, together with future cash expected to be provided
by operating activities and, if necessary, our White Oak Credit Facility, to
finance our purchase commitment under the Supply Agreement, as amended.

Line of Credit


On July 13, 2018, we and our wholly-owned subsidiary, charlesandcolvard.com,
LLC, collectively referred to as the Borrowers, obtained the $5.00 million
asset-based revolving White Oak Credit Facility. The White Oak Credit Facility
may be used for general corporate and working capital purposes, including
permitted acquisitions. The White Oak Credit Facility, which matures on July 13,
2021, is guaranteed by Charles & Colvard Direct, LLC, another of our
wholly-owned subsidiaries. Under the terms of the White Oak Credit Facility, the
Borrowers must maintain at least $500,000 in excess borrowing availability at
all times. The White Oak Credit Facility contains no other financial covenants.

Advances under the White Oak Credit Facility may be either revolving or
non-revolving. During the first year of the term of the White Oak Credit
Facility, revolving advances accrued interest at a rate equal to one-month LIBOR
(reset monthly, and subject to a 1.25% floor) plus 3.75%, and non-revolving
advances accrued interest at such LIBOR rate plus 4.75%. Thereafter, the
interest margins will reduce upon our achievement of a specified fixed charge
coverage ratio. However, advances are in all cases subject to a minimum interest
rate of 5.50%. Interest is calculated on an actual/360 basis and payable monthly
in arrears. Principal outstanding during an event of default accrues interest at
a rate 2% in excess of the rate otherwise applicable.

As of December 31, 2020, we had not borrowed against the White Oak Credit
Facility. As a result of our diminished borrowing base as of December  31, 2020,
which is tied to our accounts receivable, our ability to draw down funds from
the White Oak Credit Facility may from time to time be restricted.

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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 access to federal
government economic relief programs pursuant to the CARES Act, including our
existing PPP Loan and the available conditional forgiveness of the PPP Loan in
whole or in part, access to available federal and state tax-related
considerations, the issuance of equity securities, and future cash expected to
be provided by operating activities combined will be sufficient to meet our
working capital and capital expenditure needs over the next twelve months.

Our future capital requirements and the adequacy of available funds will depend
on many factors, including the ongoing spread of COVID-19 that could lead to
further disruption and volatility in the global capital markets as well as its
impact on our rate of sales growth; the expansion of our sales and marketing
activities; the timing and extent of raw materials and labor purchases in
connection with loose jewel production to support our moissanite jewels and lab
grown diamonds business and precious metals and labor purchases in connection
with jewelry production to support our finished jewelry business; the timing of
capital expenditures; and the risk factors described in more detail in "Risk
Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q, in Part II,
Item 1A of our Quarterly Report on Form 10-Q for the quarter ended September 30,
2020, and in Part I, Item 1A of our 2020 Annual Report on Form 10-K. Currently,
we have the White Oak Credit Facility through its expiration on July 13, 2021,
that we believe would mitigate these risks to our cash and liquidity position.
Also, we may make investments in, or acquisitions of, complementary businesses,
which could also require us to seek additional equity or debt financing.

As of December 31, 2020, we had not borrowed against the White Oak Credit Facility.

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05/11Charles & Colvard, Ltd. to Present at the Q2 Virtual Investor Summit
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05/07CHARLES LVARDá : & COLVARD LTD Management's Discussion and Analysis of Financial..
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05/06CHARLES LVARDá : Earnings Flash (CTHR) CHARLES & COLVARD Posts Q3 Revenue $9.4M
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05/06CHARLES & COLVARD LTDá : Results of Operations and Financial Condition, Financia..
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05/06CHARLES LVARDá : Reports Third Quarter Fiscal Year 2021 Financial Results
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04/22CHARLES & COLVARD TO HOST ITS THIRD : 30 Pm ET
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04/13CHARLES & COLVARD TO PRESENT AT THE : VIRTUAL on Wednesday, April 21, 2021
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03/18INSIDER TRENDS : Insider Buying Continued with Purchase of Charles & Colvard Sto..
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03/11Charles & Colvard, Ltd. to Present at the Q1 Virtual Investor Summit
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03/03INSIDER TRENDS : Charles & Colvard Insider Buys Stock, Exercises Options, Extend..
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