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.

Previously, the Company managed its business primarily through the three distribution channels that it used to sell its product lines, loose jewels and finished jewelry, which included Charles and Colvard Direct, LLC. 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. On March 4, 2016, the Company divested its direct-to-consumer home party business previously operated through its Charles & Colvard Direct, LLC (dba Lulu Avenue^®) subsidiary. As a result, during the three months ended March 31, 2016, the Company began managing its business primarily through its two continuing distribution channels. Accordingly, the Company is presenting segment results for the two continuing operating and reportable segments within this footnote and the segment results for Charles & Colvard Direct, LLC within Note 12, “Discontinued Operations” of this Quarterly Report on Form 10-Q. 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 the Consolidated Financial Statements in the 2015 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). 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 segment 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 direct-to-consumer distribution segment primarily based on net sales and number of employees to arrive at segment operating loss. 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 June 30, 2016
	Wholesale			Moissanite.com			Total
Net sales
Loose jewels	$	4,826,839		$	129,986		$	4,956,825
Finished jewelry		544,816			1,025,363			1,570,179
Total	$	5,371,655		$	1,155,349		$	6,527,004

Product line cost of goods sold
Loose jewels	$	2,351,579		$	18,244		$	2,369,823
Finished jewelry		775,670			420,004			1,195,674
Total	$	3,127,249		$	438,248		$	3,565,497

Product line gross profit
Loose jewels	$	2,475,260		$	111,742		$	2,587,002
Finished jewelry		(230,854	)		605,359			374,505
Total	$	2,244,406		$	717,101		$	2,961,507

Operating loss	$	(268,076	)	$	(596,127	)	$	(864,203	)

Depreciation and amortization	$	167,553		$	16,103		$	183,656

Capital expenditures	$	51,648		$	28,280		$	79,928

	Three Months Ended June 30, 2015
	Wholesale			Moissanite.com			Total
Net sales
Loose jewels	$	3,628,161		$	138,148		$	3,766,309
Finished jewelry		1,294,494			1,122,732			2,417,226
Total	$	4,922,655		$	1,260,880		$	6,183,535

Product line cost of goods sold
Loose jewels	$	3,040,470		$	21,748		$	3,062,218
Finished jewelry		1,204,174			533,659			1,737,833
Total	$	4,244,644		$	555,407		$	4,800,051

Product line gross profit
Loose jewels	$	587,691		$	116,400		$	704,091
Finished jewelry		90,320			589,073			679,393
Total	$	678,011		$	705,473		$	1,383,484

Operating loss	$	(2,617,570	)	$	(278,605	)	$	(2,896,175	)

Depreciation and amortization	$	163,209		$	31,987		$	195,196

Capital expenditures	$	35,636		$	-		$	35,636

	Six Months Ended June 30, 2016
	Wholesale			Moissanite.com			Total
Net sales
Loose jewels	$	14,351,193		$	246,449		$	14,597,642
Finished jewelry		1,081,286			2,241,347			3,322,633
Total	$	15,432,479		$	2,487,796		$	17,920,275

Product line cost of goods sold
Loose jewels	$	10,158,834		$	25,049		$	10,183,883
Finished jewelry		1,019,882			940,899			1,960,781
Total	$	11,178,716		$	965,948		$	12,144,664

Product line gross profit
Loose jewels	$	4,192,359		$	221,400		$	4,413,759
Finished jewelry		61,404			1,300,448			1,361,852
Total	$	4,253,763		$	1,521,848		$	5,775,611

Operating loss	$	(797,562	)	$	(810,406	)	$	(1,607,968	)

Depreciation and amortization	$	299,601		$	30,546		$	330,147

Capital expenditures	$	88,551		$	29,882		$	118,433

	Six Months Ended June 30, 2015
	Wholesale			Moissanite.com			Total
Net sales
Loose jewels	$	7,316,034		$	271,404		$	7,587,438
Finished jewelry		3,518,781			2,093,402			5,612,183
Total	$	10,834,815		$	2,364,806		$	13,199,621

Product line cost of goods sold
Loose jewels	$	5,242,573		$	40,819		$	5,283,392
Finished jewelry		2,431,984			1,014,019			3,446,003
Total	$	7,674,557		$	1,054,838		$	8,729,395

Product line gross profit
Loose jewels	$	2,073,461		$	230,585		$	2,304,046
Finished jewelry		1,086,797			1,079,383			2,166,180
Total	$	3,160,258		$	1,309,968		$	4,470,226

Operating loss	$	(2,851,346	)	$	(682,734	)	$	(3,534,080	)

Depreciation and amortization	$	323,849		$	63,694		$	387,543

Capital expenditures	$	145,200		$	533		$	145,733

	June 30, 2016
	Wholesale		Moissanite.com		Total

Total assets	$	41,674,640	$	158,271	$	41,832,911

	December 31, 2015
	Wholesale		Moissanite.com		Total

Total assets	$	43,882,939	$	174,899	$	44,057,838

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 June 30,					Six Months Ended June 30,
	2016			2015		2016			2015
Product line cost of goods sold	$	3,565,497		$	4,800,051	$	12,144,664		$	8,729,395
Non-capitalized manufacturing and production control expenses		331,533			500,460		742,299			647,572
Freight out		91,031			79,534		163,089			147,998
Inventory valuation allowances		-			411,000		55,000			615,000
Other inventory adjustments		(93,967	)		301,813		(47,040	)		381,516
Cost of goods sold	$	3,894,094		$	6,092,858	$	13,057,982		$	10,521,481

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

	June 30, 2016		December 31, 2015
Loose jewels
Raw materials	$	4,550,319	$	6,741,712
Work-in-process		8,014,873		5,516,799
Finished goods		9,438,017		15,877,436
Finished goods on consignment		44,861		55,388
Total	$	22,048,070	$	28,191,335

Finished jewelry
Raw materials	$	308,415	$	190,427
Work-in-process		473,846		514,946
Finished goods		3,050,221		3,193,569
Finished goods on consignment		162,555		200,613
Total	$	3,995,037	$	4,099,555

Supplies inventories of approximately $40,000 and $38,000 at June 30, 2016 and December 31, 2015, 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 continuing operating subsidiary carries 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 direct-to-consumer distribution segment, Moissanite.com LLC, is 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 June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Net sales
United States	$	5,450,060	$	5,662,932	$	16,092,042	$	12,064,300
International		1,076,944		520,603		1,828,233		1,135,321
Total	$	6,527,004	$	6,183,535	$	17,920,275	$	13,199,621

	June 30, 2016		December 31, 2015
Property and equipment, net
United States	$	1,317,659	$	1,615,683
International		-		-
Total	$	1,317,659	$	1,615,683

	June 30, 2016		December 31, 2015
Intangible assets, net
United States	$	5,564	$	15,362
International		-		55,724
Total	$	5,564	$	71,086