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.

The Company manages its business through two operating and reportable segments based on its distribution channels to sell its product lines, loose jewels and finished jewelry: its “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, third-party online marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets; and its “Traditional” segment, which consists of wholesale, retail, and historically television customers. The accounting policies of the Online Channels segment and Traditional segment 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 2018 Transition 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). 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 between its Online Channels segment and its Traditional segment based on net sales and number of employees to arrive at segment operating income (loss). Unallocated expenses remain in its Traditional segment.

Summary financial information by reportable segment is as follows:

	Three Months Ended March 31, 2019
	Online Channels		Traditional		Total
Net sales
Finished jewelry	$	3,189,083	$	768,978	$	3,958,061
Loose jewels		973,799		2,970,382		3,944,181
Total	$	4,162,882	$	3,739,360	$	7,902,242

Product line cost of goods sold
Finished jewelry	$	1,303,914	$	329,465	$	1,633,379
Loose jewels		435,050		1,471,133		1,906,183
Total	$	1,738,964	$	1,800,598	$	3,539,562

Product line gross profit
Finished jewelry	$	1,885,169	$	439,513	$	2,324,682
Loose jewels		538,749		1,499,249		2,037,998
Total	$	2,423,918	$	1,938,762	$	4,362,680

Operating income	$	502,675	$	294,806	$	797,481

Depreciation and amortization	$	52,806	$	72,993	$	125,799

Capital expenditures	$	725	$	51,168	$	51,893

	Three Months Ended March 31, 2018
	Online Channels			Traditional			Total
Net sales
Finished jewelry	$	2,157,503		$	1,087,823		$	3,245,326
Loose jewels		864,468			2,652,956			3,517,424
Total	$	3,021,971		$	3,740,779		$	6,762,750

Product line cost of goods sold
Finished jewelry	$	985,209		$	1,049,192		$	2,034,401
Loose jewels		474,910			1,412,983			1,887,893
Total	$	1,460,119		$	2,462,175		$	3,922,294

Product line gross profit
Finished jewelry	$	1,172,294		$	38,631		$	1,210,925
Loose jewels		389,558			1,239,973			1,629,531
Total	$	1,561,852		$	1,278,604		$	2,840,456

Operating loss	$	(211,073	)	$	(362,075	)	$	(573,148	)

Depreciation and amortization	$	30,905		$	92,218		$	123,123

Capital expenditures	$	3,289		$	66,421		$	69,710

	Nine Months Ended March 31, 2019
	Online Channels		Traditional		Total
Net sales
Finished jewelry	$	9,662,737	$	2,047,218	$	11,709,955
Loose jewels		3,039,410		9,887,044		12,926,454
Total	$	12,702,147	$	11,934,262	$	24,636,409

Product line cost of goods sold
Finished jewelry	$	4,050,505	$	1,110,541	$	5,161,046
Loose jewels		1,357,084		5,068,277		6,425,361
Total	$	5,407,589	$	6,178,818	$	11,586,407

Product line gross profit
Finished jewelry	$	5,612,232	$	936,677	$	6,548,909
Loose jewels		1,682,326		4,818,767		6,501,093
Total	$	7,294,558	$	5,755,444	$	13,050,002

Operating income	$	1,393,013	$	714,284	$	2,107,297

Depreciation and amortization	$	123,945	$	231,867	$	355,812

Capital expenditures	$	63,575	$	273,695	$	337,270

	Nine Months Ended March 31, 2018
	Online Channels		Traditional			Total
Net sales
Finished jewelry	$	7,264,791	$	2,817,940		$	10,082,731
Loose jewels		2,441,440		8,984,369			11,425,809
Total	$	9,706,231	$	11,802,309		$	21,508,540

Product line cost of goods sold
Finished jewelry	$	3,499,058	$	2,145,236		$	5,644,294
Loose jewels		1,267,400		4,742,062			6,009,462
Total	$	4,766,458	$	6,887,298		$	11,653,756

Product line gross profit
Finished jewelry	$	3,765,733	$	672,704		$	4,438,437
Loose jewels		1,174,040		4,242,307			5,416,347
Total	$	4,939,773	$	4,915,011		$	9,854,784

Operating income (loss)	$	375,082	$	(613,034	)	$	(237,952	)

Depreciation and amortization	$	90,077	$	240,901		$	330,978

Capital expenditures	$	4,837	$	109,630		$	114,467

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.

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,						Nine Months Ended March 31,
	2019			2018			2019			2018
Product line cost of goods sold	$	3,539,562		$	3,922,294		$	11,586,407		$	11,653,756
Non-capitalized manufacturing and production control expenses		375,901			452,460			1,029,669			1,081,953
Freight out		126,438			129,182			429,227			373,185
Inventory valuation allowances		325,000			(248,000	)		377,000			303,000
Other inventory adjustments		(216,672	)		(140,388	)		(312,118	)		(886,429	)
Cost of goods sold	$	4,150,229		$	4,115,548		$	13,110,185		$	12,525,465

The Company recognizes sales by geographic area based on the country in which the customer is based. Sales to international end consumers made through our transactional website, charlesandcolvard.com, are included in international sales for financial reporting purposes. During periods prior to the quarter ended December 31, 2018, sales to international end consumers made through charlesandcolvard.com were included in U.S. sales because products were shipped and invoiced to a U.S.-based intermediary party that assumed all international shipping and credit risks. 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. All intangible assets, as well as property and equipment, as of March 31, 2019 and June 30, 2018, are held and located in the United States.

The following presents net sales by geographic area:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2019		2018		2019		2018
Net sales
United States	$	6,991,720	$	6,321,849	$	21,684,906	$	20,042,409
International		910,522		440,901		2,951,503		1,466,131
Total	$	7,902,242	$	6,762,750	$	24,636,409	$	21,508,540