SEGMENT INFORMATION AND GEOGRAPHIC DATA

3 Months Ended

Mar. 31, 2015

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.

During 2014, the Company began managing its business primarily through the three distribution channels that it uses to sell its product lines, loose jewels and finished jewelry. Accordingly, the Company determined its three operating and reportable segments to be wholesale distribution transacted through the parent entity, and the two direct-to-consumer distribution channels transacted through the Company’s wholly owned operating subsidiaries, Moissanite.com, LLC and Charles & Colvard Direct, LLC.  The accounting policies of these three 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 the Consolidated Financial Statements in the 2014 Annual Report.

Previously, the Company determined it managed its business through two distribution channels, wholesale distribution and direct-to-consumer.  While the Company has always managed its businesses as three separate operating segments, it previously aggregated the Moissanite.com, LLC and Charles & Colvard Direct, LLC operating segments into a single reportable segment for reporting purposes.  The two wholly owned operating subsidiaries that previously were aggregated under the direct-to-consumer segment are now each being presented as a separate reportable segment.  The Company believes aggregation of the two subsidiaries into one reportable segment for reporting purposes is no longer warranted due to changes in how it sources product and sells directly to consumers, including changes in the management structure, strategic initiatives and changes in sales models, made during the year ended December 31, 2014 for each of the two wholly owned subsidiaries.  Certain amounts for the three months ended March 31, 2014 have been reclassified to conform to the current period presentation as a result of this change in reportable segments.

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). Product line cost of goods sold is defined as product cost of goods sold in each of the Company’s wholesale distribution and two 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 expenses from its parent entity to its two direct-to-consumer distribution segments primarily based on net sales and number of employees. Unallocated expenses, which also include interest and taxes, remain in the parent entity’s wholesale distribution segment.

Summary financial information by reportable segment is as follows:

	Three Months Ended March 31, 2015
	Wholesale			Moissanite.com			Charles & Colvard Direct			Total
Net sales
Loose jewels	$	3,687,893		$	133,266		$	-		$	3,821,159
Finished jewelry		2,224,267			970,660			1,360,978			4,555,905
Total	$	5,912,160		$	1,103,926			1,360,978			8,377,064
Product line cost of goods sold
Loose jewels	$	2,202,103		$	19,071		$	-		$	2,221,174
Finished jewelry		1,227,810			480,360			319,775			2,027,945
Total	$	3,429,913		$	499,431		$	319,775		$	4,249,119
Product line gross profit
Loose jewels	$	1,485,790		$	114,195		$	-		$	1,599,985
Finished jewelry		996,457			490,300			1,041,203			2,527,960
Total	$	2,482,247		$	604,495		$	1,041,203		$	4,127,945
Operating loss	$	(234,485	)		(403,420	)		(1,038,572	)	$	(1,676,477	)
Depreciation and amortization	$	160,640			31,707			26,381		$	218,728
Capital expenditures	$	109,564			533			7,007		$	117,104

	Three Months Ended March 31, 2014
	Wholesale			Moissanite.com			Charles & Colvard Direct			Total
Net sales
Loose jewels	$	3,533,784		$	146,940		$	-		$	3,680,724
Finished jewelry		1,619,831			561,268			205,730			2,386,829
Total	$	5,153,615		$	708,208		$	205,730		$	6,067,553
Product line cost of goods sold
Loose jewels	$	1,775,135		$	22,272		$	-		$	1,797,407
Finished jewelry		1,280,101			294,886			63,262			1,638,249
Total	$	3,055,236		$	317,158		$	63,262		$	3,435,656
Product line gross profit
Loose jewels	$	1,758,649		$	124,668		$	-		$	1,883,317
Finished jewelry		339,730			266,382			142,468			748,580
Total	$	2,098,379		$	391,050		$	142,468		$	2,631,897
Operating loss	$	(124,858	)		(404,771	)		(640,874	)	$	(1,170,503	)
Depreciation and amortization	$	179,673			73,159			24,966		$	277,798
Capital expenditures	$	28,325			-			-		$	28,325

	March 31, 2015
	Wholesale		Moissanite.com		Charles & Colvard Direct		Total
Total assets	$	50,746,106		106,794		93,559		$	50,946,459

	December 31, 2014
	Wholesale		Moissanite.com		Charles & Colvard Direct		Total
Total assets	$	51,183,888		128,049		114,460		$	51,426,397

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

	Three months ended March 31,
	2015		2014
Product line cost of goods sold	$	4,249,119	$	3,435,656
Non-capitalized manufacturing and production control expenses		147,112		155,023
Freight out		90,734		59,899
Inventory valuation allowances		204,000		24,000
Other inventory adjustments		152,938		(11,536	)
Cost of goods sold	$	4,843,903	$	3,663,042

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

	March 31, 2015		December 31, 2014
Loose jewels
Raw materials	$	5,156,656	$	4,658,692
Work-in-process		5,615,277		5,752,103
Finished goods		20,192,696		21,495,873
Finished goods on consignment		3,585		46,284
Total	$	30,968,214	$	31,952,952
Finished jewelry
Raw materials	$	253,360	$	258,707
Work-in-process		526,334		540,576
Finished goods		5,533,173		5,557,417
Finished goods on consignment		190,184		578,200
Total	$	6,503,051	$	6,934,900

Supplies inventories of approximately $53,000 and $51,000 at March 31, 2015 and December 31, 2014, respectively, included in finished goods inventories in the condensed 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’s two operating subsidiaries comprising the two direct-to-consumer distribution segments carry no net inventories, and inventory is transferred without intercompany markup from the parent entity’s wholesale distribution segment as product line cost of goods sold when sold to the end consumer.

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 two direct-to-consumer distribution segments 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,
	2015		2014
Net sales
United States	$	7,762,346	$	5,709,033
International		614,718		358,520
Total	$	8,377,064	$	6,067,553

	March 31, 2015		December 31, 2014
Property and equipment, net
United States	$	1,800,466	$	1,859,355
International		-		-
Total	$	1,800,466	$	1,859,355

	March 31, 2015		December 31, 2014
Intangible assets, net
United States	$	31,907	$	39,050
International		148,794		177,897
Total	$	180,701	$	216,947