5.	INVENTORIES

The Company’s total inventories, net of reserves, consisted of the following as of December 31, 2016 and 2015:

	December 31,
	2016			2015
Raw materials	$	3,106,617		$	6,932,139
Work-in-process		11,048,126			6,031,745
Finished goods		15,074,896			20,441,535
Finished goods on consignment		467,778			293,001
Less inventory reserves		(1,567,000	)		(1,370,000	)
Total	$	28,130,417		$	32,328,420

Short-term portion	$	9,770,206		$	10,739,798
Long-term portion		18,360,211			21,588,622
Total	$	28,130,417		$	32,328,420

Inventories are stated at the lower of cost or market on an average cost basis. Inventory costs include direct material and labor, inbound freight, purchasing and receiving costs, inspection costs, and warehousing costs. Any inventory on hand at the measurement date in excess of the Company’s current requirements based on historical and anticipated levels of sales is classified as long-term on the Company’s consolidated balance sheets. The Company’s classification of its inventory as either short- or long-term inventory requires it to estimate the portion of on-hand inventory that can be realized over the next 12 months and does not include precious metal, labor, and other inventory purchases expected to be both purchased and realized in cost of goods sold over the next 12 months.

The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred and components, such as metal castings and finished good moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of December 31, 2016 and December 31, 2015, work-in-process inventories issued to active production jobs approximated $7.18 million and $3.02 million, respectively.

The Company’s jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. In addition, the majority of jewel inventory is not mounted in finished jewelry settings and is therefore not subject to fashion trends nor is obsolescence a significant factor. Presently, the Company has very small market penetration in the worldwide jewelry market, and the Company had the exclusive right in the U.S. through August 2015 and had the exclusive right in many other countries into the third quarter of 2016 to produce and sell created SiC for use in jewelry applications. During the years ended December 31, 2016 and 2015, management identified an opportunity to sell approximately $6.77 million and $2.28 million, respectively, of legacy loose jewel inventory of less desirable quality. As a result of these sales and feedback from customers on the value of some of these goods, the Company determined a lower of cost or market reserve of $517,000 and $352,000 as of December 31, 2016 and December 31, 2015, respectively, was required on some of the remaining inventory of these lower quality goods.

The Company manufactures finished jewelry featuring moissanite. Relative to loose moissanite jewels, finished jewelry is more fashion oriented and subject to styling trends that could render certain designs obsolete. The majority of the Company’s finished jewelry featuring moissanite is held in inventory for resale and consists of such basic designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company manufactures small individual quantities of designer-inspired moissanite fashion jewelry as part of its sample line that are used in the selling process to its wholesale customers.

Prior to March 2016, the Company purchased fashion finished jewelry comprising base metals and non-precious gemstones for sale through Lulu Avenue^®, the Company’s former direct-to-consumer home party division of the Company’s wholly owned operating subsidiary, Charles & Colvard Direct, LLC. This finished jewelry was fashion oriented and subject to styling trends that could change with each catalog season, of which there are generally two each year. Typically, in the jewelry industry, slow-moving or discontinued lines are sold as closeouts or liquidated in alternative sales channels. Management reviews the finished jewelry inventory on an ongoing basis for any lower of cost or market and obsolescence issues. Management identified certain fashion finished jewelry inventory that could not be sold due to damage or branding issues and established an obsolescence reserve of $169,000 as of December 31, 2016 and $164,000 as of December 31, 2015, for the carrying costs in excess of any estimated scrap values. As of December 31, 2016 and December 31, 2015, management identified certain finished jewelry featuring moissanite that was obsolete due to damage and other factors that indicate the finished jewelry is unsaleable, and established an obsolescence reserve of $258,000 and $225,000, respectively, for the carrying costs in excess of any estimated scrap values.

Periodically, the Company ships finished goods inventory to wholesale customers on consignment terms. Under these terms, the customer assumes the risk of loss and has an absolute right of return for a specified period. Finished goods on consignment at December 31, 2016 and December 31, 2015 are net of shrinkage reserves of $46,000 and $36,000, respectively, to allow for certain loose jewels and finished jewelry on consignment with wholesale customers that may not be returned or may be returned in a condition that does not meet the Company’s current grading or quality standards.

Total net loose jewel inventories at December 31, 2016 and December 31, 2015, including inventory on consignment net of reserves, were $22.64 million and $28.19 million, respectively. The loose jewel inventories at December 31, 2016 and December 31, 2015 include shrinkage reserves of $67,000 and $50,000, respectively, which includes $7,000 and $10,000 of shrinkage reserves on inventory on consignment at December 31, 2016 and December 31, 2015, respectively. Loose jewel inventories at December 31, 2016 and December 31, 2015 also include recut reserves of $425,000 and $449,000, respectively.

Total net jewelry inventories at December 31, 2016 and December 31, 2015, including inventory on consignment net of reserves, finished jewelry featuring moissanite manufactured by the Company, and fashion finished jewelry purchased and owned by the Company which was made for sale through Lulu Avenue^®, were $5.48 million and $4.10 million, respectively. The finished jewelry inventories at December 31, 2016 and December 31, 2015 also include shrinkage reserves of $102,000 and $95,000, respectively, including shrinkage reserves of $39,000 and $27,000 on inventory on consignment, respectively; and a repairs reserve of $29,000 and $31,000, respectively.

The need for adjustments to inventory reserves is evaluated on a period-by-period basis.