SEGMENT INFORMATION AND GEOGRAPHIC DATA

3 Months Ended

Mar. 31, 2014

SEGMENT INFORMATION AND GEOGRAPHIC DATA [Abstract]

SEGMENT INFORMATION AND GEOGRAPHIC DATA

3. SEGMENT INFORMATION AND GEOGRAPHIC DATA

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of the Company’s operating and reportable segments.

The Company manages its business primarily by its two distribution channels that it uses to sell its product lines, loose jewels and finished jewelry. Accordingly, the Company determined its two operating and reporting segments to be wholesale distribution transacted through the parent entity and direct-to-consumer distribution transacted through the Company’s wholly owned operating subsidiaries, Moissanite.com, LLC and Charles & Colvard Direct, LLC. The accounting policies of these segments are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies,” of this Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in the 2013 Annual Report.

The Company evaluates the financial performance of its segments based on net sales; product line gross profit, or the excess of product line sales over product line cost of goods sold; and operating income (loss). The Company’s inventories are maintained in the parent entity’s wholesale distribution segment and are transferred without intercompany markup to the operating subsidiaries as product line cost of goods sold when sold to the end consumer. Product line cost of goods sold is defined as product cost of goods sold in each of the Company’s wholesale distribution and direct-to-consumer distribution operating segments excluding non-capitalized expenses from the Company’s manufacturing and production control departments, comprising personnel costs, depreciation, rent, utilities, and corporate overhead allocations; freight out; inventory valuation allowance adjustments; and other inventory adjustments, comprising costs of quality issues, damaged goods, and inventory write-offs.

The Company allocates certain general and administrative and information technology-related expenses from its parent entity to its two direct-to-consumer operating subsidiaries primarily based on net sales and headcount, respectively. Unallocated expenses, which also include interest and taxes, remain in the parent entity’s wholesale distribution segment.

Summary financial information by reporting segment is as follows:

	Three Months Ended March 31, 2014
	Wholesale			Direct-to- Consumer			Total
Net sales
Loose jewels	$	3,533,784		$	146,940		$	3,680,724
Finished jewelry		1,619,831			766,998			2,386,829
Total	$	5,153,615		$	913,938		$	6,067,553
Product line cost of goods sold
Loose jewels	$	1,775,135		$	22,272		$	1,797,407
Finished jewelry		1,280,101			358,148			1,638,249
Total	$	3,055,236		$	380,420		$	3,435,656
Product line gross profit
Loose jewels	$	1,758,649		$	124,668		$	1,883,317
Finished jewelry		339,730			408,850			748,580
Total	$	2,098,379		$	533,518		$	2,631,897
Operating loss	$	(124,858	)	$	(1,045,645	)	$	(1,170,503	)
Depreciation and amortization	$	179,673		$	98,125		$	277,798
Capital expenditures	$	28,325		$	-		$	28,325

	Three Months Ended March 31, 2013
	Wholesale		Direct-to- Consumer			Total
Net sales
Loose jewels	$	4,293,076	$	55,220		$	4,348,296
Finished jewelry		1,729,149		427,629			2,156,778
Total	$	6,022,225	$	482,849		$	6,505,074
Product line cost of goods sold
Loose jewels	$	1,714,826	$	7,860		$	1,722,686
Finished jewelry		586,726		196,895			783,621
Total	$	2,301,552	$	204,755		$	2,506,307
Product line gross profit
Loose jewels	$	2,578,250	$	47,360		$	2,625,610
Finished jewelry		1,142,423		230,734			1,373,157
Total	$	3,720,673	$	278,094		$	3,998,767
Operating income (loss)	$	1,698,148	$	(1,176,621	)	$	521,527
Depreciation and amortization	$	90,979	$	101,408		$	192,387
Capital expenditures	$	80,671	$	7,326		$	87,997

	March 31, 2014
	Wholesale			Direct-to- Consumer			Total
Total assets		$	61,114,337		$	880,978		$	61,995,315

	December 31, 2013
	Wholesale			Direct-to- Consumer			Total
Total assets		$	61,702,449		$	621,403		$	62,323,852

A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the consolidated financial statements is as follows:

	Three Months Ended March 31,
	2014			2013
Product line cost of goods sold	$	3,435,656		$	2,506,307
Non-capitalized manufacturing and production control expenses		155,023			400,251
Freight out		59,899			36,510
Inventory valuation allowances		24,000			(19,000	)
Other inventory adjustments		(11,536	)		(42,090	)
Cost of goods sold	$	3,663,042		$	2,881,978

The Company’s net inventories by product line maintained in the parent entity’s wholesale distribution segment are as follows:

	March 31, 2014		December 31, 2013
Loose jewels
Raw materials	$	4,770,590	$	3,311,375
Work-in-process		7,817,165		9,526,769
Finished goods		21,440,265		20,002,881
Finished goods on consignment		53,409		32,948
Total	$	34,081,429	$	32,873,973
Finished jewelry
Raw materials	$	288,090	$	270,043
Work-in-process		665,525		764,355
Finished goods		8,391,377		8,117,035
Finished goods on consignment		233,262		299,514
Total	$	9,578,254	$	9,450,947

Supplies inventories of approximately $76,000 and $87,000 at March 31, 2014 and December 31, 2013, respectively, included in finished goods inventories in the consolidated financial statements are omitted from inventories by product line because they are used in both product lines and are not maintained separately.

The Company recognizes sales by geographic area based on the country in which the customer is based. A portion of the Company’s international wholesale distribution segment sales represents products sold internationally that may be re-imported to United States (“U.S.”) retailers. Sales to international end consumers made by the Company’s direct-to-consumer distribution segment are included in U.S. sales because products are shipped and invoiced to a U.S.-based intermediary party that assumes all international shipping and credit risks. The following presents certain data by geographic area:

	Three Months Ended March 31,
	2014		2013
Net sales
United States	$	5,709,033	$	5,112,289
International		358,520		1,392,785
Total	$	6,067,553	$	6,505,074

	March 31, 2014		December 31, 2013
Property and equipment, net
United States	$	1,504,959	$	1,717,692
International		-		-
Total	$	1,504,959	$	1,717,692

	March 31, 2014		December 31, 2013
Intangible assets, net
United States	$	60,913		70,830
International		233,681		255,037
Total	$	294,594		325,867