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.

Previously, the Company managed its business through two operating and reportable segments: wholesale distribution transacted through the parent entity, and the direct-to-consumer distribution channel transacted through the Company’s wholly owned operating subsidiary, charlesandcolvard.com, LLC (formerly Moissanite.com, LLC). During the first quarter of 2017, the Company began managing its business through two newly defined operating and reportable segments based on its distribution channels to sell its product lines, loose jewels and finished jewelry: its “Traditional” segment, which consists of wholesale, retail, and television customers; and its “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets. The accounting policies of the Traditional segment and Online Channels segment are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies.”

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 product line cost of goods sold is defined as product cost of goods sold, 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-downs.

The Company allocates certain general and administrative expenses from its Traditional segment to its Online Channels 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 its Traditional segment.

Summary financial information by reportable segment for the periods presented is as follows:

	Six Months Ended June 30, 2018
	Traditional			Online Channels			Total
Net sales
Loose jewels	$	5,121,660		$	1,878,338		$	6,999,998
Finished jewelry		1,672,066			4,490,984			6,163,050
Total	$	6,793,726		$	6,369,322		$	13,163,048

Product line cost of goods sold
Loose jewels	$	2,688,560		$	951,664		$	3,640,224
Finished jewelry		1,462,371			1,972,862			3,435,233
Total	$	4,150,931		$	2,924,526		$	7,075,457

Product line gross profit
Loose jewels	$	2,433,100		$	926,674		$	3,359,774
Finished jewelry		209,695			2,518,122			2,727,817
Total	$	2,642,795		$	3,444,796		$	6,087,591

Operating loss	$	(1,349,756	)	$	(243,832	)	$	(1,593,588	)

Depreciation and amortization	$	170,584		$	59,409		$	229,993

Capital expenditures	$	100,960		$	29,689		$	130,649

	Six Months Ended June 30, 2017
	Traditional			Online Channels			Total
	(unaudited)			(unaudited)			(unaudited)
Net sales
Loose jewels	$	7,099,363		$	1,573,000		$	8,672,363
Finished jewelry		785,326			2,829,485			3,614,811
Total	$	7,884,689		$	4,402,485		$	12,287,174

Product line cost of goods sold
Loose jewels	$	3,669,406		$	733,868		$	4,403,274
Finished jewelry		514,801			1,101,966			1,616,767
Total	$	4,184,207		$	1,835,834		$	6,020,041

Product line gross profit
Loose jewels	$	3,429,957		$	839,132		$	4,269,089
Finished jewelry		270,525			1,727,519			1,998,044
Total	$	3,700,482		$	2,566,651		$	6,267,133

Operating loss	$	(585,838	)	$	(357,902	)	$	(943,740	)

Depreciation and amortization	$	151,625		$	62,539		$	214,164

Capital expenditures	$	223,012		$	3,621		$	226,633

	Year Ended December 31, 2017
	Traditional			Online Channels		Total
Net sales
Loose jewels	$	13,430,776		$	3,149,972	$	16,580,748
Finished jewelry		2,515,443			7,936,773		10,452,216
Total	$	15,946,219		$	11,086,745	$	27,032,964

Product line cost of goods sold
Loose jewels	$	6,998,485		$	1,526,358	$	8,524,843
Finished jewelry		1,610,845			3,615,815		5,226,660
Total	$	8,609,330		$	5,142,173	$	13,751,503

Product line gross profit
Loose jewels	$	6,432,291		$	1,623,614	$	8,055,905
Finished jewelry		904,598			4,320,958		5,225,556
Total	$	7,336,889		$	5,944,572	$	13,281,461

Operating (loss) income	$	(836,797	)	$	228,253	$	(608,544	)

Depreciation and amortization	$	300,308		$	121,710	$	422,018

Capital expenditures	$	123,944		$	147,446	$	271,390

	Year Ended December 31, 2016
	Traditional			Online Channels			Total
Net sales
Loose jewels	$	19,231,534		$	2,220,194		$	21,451,728
Finished jewelry		1,075,157			6,641,243			7,716,400
Total	$	20,306,691		$	8,861,437		$	29,168,128

Product line cost of goods sold
Loose jewels	$	13,107,366		$	809,383		$	13,916,749
Finished jewelry		1,195,640			2,953,148			4,148,788
Total	$	14,303,006		$	3,762,531		$	18,065,537

Product line gross profit (loss)
Loose jewels	$	6,124,168		$	1,410,811		$	7,534,979
Finished jewelry		(120,483	)		3,688,095			3,567,612
Total	$	6,003,685		$	5,098,906		$	11,102,591

Operating loss	$	(3,089,559	)	$	(847,259	)	$	(3,936,818	)

Depreciation and amortization	$	479,517		$	77,876		$	557,393

Capital expenditures	$	158,702		$	263,059		$	421,761

The Company does not allocate any assets to the reportable segments, and therefore, no asset information is reported to the chief operating decision-maker or disclosed in the financial information for each segment.

The reconciliations of the Company’s product line cost of goods sold to cost of goods sold, as reported in the consolidated financial statements for the periods presented, are as follows:

	Six Months Ended June 30,				Year Ended December 31,
	2018		2017		2017			2016
			(unaudited)
Product line cost of goods sold	$	7,075,457	$	6,020,041	$	13,751,503		$	18,065,537
Non-capitalized manufacturing and production control expenses		805,400		722,818		1,352,311			1,427,924
Freight out		272,790		173,071		417,074			376,726
Inventory valuation allowances		-		47,000		598,000			200,000
Other inventory adjustments		144,639		97,771		(648,271	)		331,252
Cost of goods sold	$	8,298,286	$	7,060,701	$	15,470,617		$	20,401,439

The Company recognizes sales by geographic area based on the country in which the customer is based. A portion of the Company’s Traditional segment sales made to international wholesale distributors represents products sold internationally that may be re-imported to U.S. retailers. Sales to international end consumers made by the Company’s Online Channels 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. All intangible assets and property and equipment as of June 30, 2018, December 31, 2017 and December 31, 2016 are held and located in the United States.

The following presents net sales data by geographic area for the periods presented:

	Six Months Ended June 30,					Year Ended December 31,
	2018			2017		2017		2016
			(unaudited)
Net sales:
United States	$	12,121,003		$	11,455,660	$	25,176,220	$	26,164,660
International		1,042,045			831,514		1,856,744		3,003,468
Total	$	13,163,048		$	12,287,174	$	27,032,964	$	29,168,128