5.	INVENTORIES

The Company’s total inventories, net of reserves, are as follows as of the dates presented:

				December 31,
	June 30, 2018			2017			2016
Raw materials	$	5,083,436		$	4,853,049		$	3,106,617
Work-in-process		10,659,786			9,219,383			11,048,126
Finished goods		17,483,773			17,896,992			15,057,668
Finished goods on consignment		523,971			1,093,752			467,778
Supplies inventory		45,572			75,441			17,228
Less inventory reserves		(1,968,000	)		(2,165,000	)		(1,567,000	)
Total inventories	$	31,828,538		$	30,973,617		$	28,130,417

Short-term portion		10,979,891		11,208,658		9,770,206
Long-term portion		20,848,647		19,764,959		18,360,211
Total inventories	$	31,828,538	$	30,973,617	$	28,130,417

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 June 30, 2018, December 31, 2017 and December 31, 2016, work-in-process inventories issued to active production jobs approximated $2.45 million, $2.99 million and $7.18 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. Prior to the expiration of certain patent rights, the Company had the exclusive right in the U.S. through August 2015 and in many other countries into the third quarter of 2016 to produce and sell created SiC for use in jewelry applications.

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 over time. The majority of the Company’s finished jewelry featuring moissanite is held in inventory for resale and largely consists of such core 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 generally holds smaller quantities of designer-inspired and trend moissanite fashion jewelry that is available for resale through retail companies and through its Online Channels segment. The Company also carries a limited amount of inventory as part of its sample line that is used in the selling process to its customers.

The Company’s continuing operating subsidiary carries no net inventories, and inventory is transferred without intercompany markup from the parent entity as product line cost of goods sold when sold to the end consumer.

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.

The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:

			December 31,
	June 30, 2018		2017		2016
Loose jewels:
Raw materials	$	4,487,787	$	4,288,360	$	2,586,045
Work-in-process		9,463,518		8,328,719		10,589,424
Finished goods		10,015,822		9,487,245		9,455,393
Finished goods on consignment		29,323		26,281		5,473
Total loose jewels		23,996,450		22,130,605		22,636,335
Finished jewelry:
Raw materials		595,649		564,689		520,572
Work-in-process		1,196,268		890,664		458,702
Finished goods		5,517,951		6,304,747		4,081,275
Finished goods on consignment		476,648		1,007,471		416,305
Total finished jewelry		7,786,516		8,767,571		5,476,854
Total supplies inventory		45,572		75,441		17,228
Total inventory	$	31,828,538	$	30,973,617	$	28,130,417

Total net loose jewel inventories at June 30, 2018, December 31, 2017 and December 31, 2016, including inventory on consignment net of reserves, were $24.00 million, $22.13 million and $22.64 million, respectively. Total net finished jewelry inventories at June 30, 2018, December 31, 2017 and December 31, 2016, including inventory on consignment net of reserves and finished jewelry featuring moissanite manufactured by the Company, were $7.79 million, $8.77 million and $5.48 million, respectively.

As of June 30, 2018, December 31, 2017 and December 31, 2016, management established an obsolescence reserve of $1.30 million, $1.42 million and $944,000, respectively. Typically, in the jewelry industry, slow-moving or discontinued lines are sold as closeouts or liquidated in alternative sales channels. During the year ended December 31, 2016, management identified an opportunity to sell approximately $6.77 million of legacy loose jewel inventory of less desirable quality. The Company had no bulk sales of such inventory during the transition period ended June 30, 2018 or the year ended December 31, 2017. Regularly, management reviews the legacy loose jewel inventory for any lower of cost or net realizable value and obsolescence issues. Accordingly, based on current demand during the transition period ended June 30, 2018, and ongoing feedback from customers on the value of some of these goods, management identified some of the remaining inventory of these lower quality goods that could not be sold at its current carrying value. Accordingly, management’s analysis revealed that some of these items were sold during transition period ended June 30, 2018 that resulted in a decrease in the lower of cost or net realizable value reserve on this remaining inventory to approximately $1.29 million as of June 30, 2018 from $1.33 million as of December 31, 2017. This reserve had been increased from $517,000 as of December 31, 2016. As of June 30, 2018, December 31, 2017 and December 31, 2016, management identified certain finished jewelry that was obsolete due to damage and other factors that indicate the finished jewelry is unsaleable, and established an obsolescence reserve of $7,000, $91,000 and $427,000, respectively, for the carrying costs in excess of any estimated scrap values. Management reviews the finished jewelry inventory on an ongoing basis for any lower of cost or net realizable value and obsolescence issues.

As of June 30, 2018, December 31, 2017 and December 31, 2016 management established a rework reserve for recut and repairs of $534,000, $557,000 and $454,000, respectively. Loose jewel inventories at June 30, 2018, December 31, 2017 and December 31, 2016 included recut reserves of $418,000, $468,000 and $425,000, respectively. The finished jewelry inventories at June 30, 2018, December 31, 2017 and December 31, 2016 include a repairs reserve of $116,000, $89,000 and $29,000, respectively.

As of June 30, 2018, December 31, 2017 and December 31, 2016 management established a shrinkage reserve of $136,000, $191,000 and $169,000, respectively. The loose jewel inventories at June 30, 2018, December 31, 2017 and December 31, 2016 include shrinkage reserves of $48,000, $18,000 and $67,000, respectively. The finished jewelry inventories at June 30, 2018, December 31, 2017 and December 31, 2016 include shrinkage reserves of $88,000, $173,000 and $102,000, respectively.

Periodically, the Company ships finished goods inventory to certain Traditional segment 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. Included in the total shrinkage reserve is the shrinkage reserve for finished goods on consignment of $18,000, $60,000 and $46,000 as of June 30, 2018, December 31, 2017 and December 31, 2016, respectively, to allow for certain loose jewels and finished jewelry on consignment with certain Traditional segment 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. The loose jewel inventories on consignment at June 30, 2018, December 31, 2017 and December 31, 2016 include shrinkage reserves of $11,000, $5,000 and $7,000, respectively. The finished jewelry inventories on consignment at June 30, 2018, December 31, 2017 and December 31, 2016 include shrinkage reserves of $7,000, $55,000 and $39,000, respectively.

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