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 retail, and other pure-play, exclusively e-commerce outlets; and its “Traditional” segment, which consists of wholesale and retail 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 2019 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. 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, leases, 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. Unallocated expenses remain in its Traditional segment.

Summary financial information by reportable segment is as follows:

	Three Months Ended September 30, 2019
	Online Channels		Traditional		Total
Net sales
Finished jewelry	$	2,977,348	$	880,647	$	3,857,995
Loose jewels		728,282		3,022,144		3,750,426
Total	$	3,705,630	$	3,902,791	$	7,608,421

Product line cost of goods sold
Finished jewelry	$	1,212,873	$	490,037	$	1,702,910
Loose jewels		265,194		1,534,258		1,799,452
Total	$	1,478,067	$	2,024,295	$	3,502,362

Product line gross profit
Finished jewelry	$	1,764,475	$	390,610	$	2,155,085
Loose jewels		463,088		1,487,886		1,950,974
Total	$	2,227,563	$	1,878,496	$	4,106,059

Operating income	$	45,665	$	107,040	$	152,705

Depreciation and amortization	$	49,250	$	75,387	$	124,637

Capital expenditures	$	73,725	$	37,592	$	111,317

	Three Months Ended September 30, 2018
	Online Channels		Traditional		Total
Net sales
Finished jewelry	$	2,115,940	$	438,697	$	2,554,637
Loose Jewels		967,160		3,072,909		4,040,069
Total	$	3,083,100	$	3,511,606		6,594,706

Product line cost of goods sold
Finished jewelry	$	833,389	$	222,649	$	1,056,038
Loose jewels		488,285		1,560,480		2,048,765
Total	$	1,321,674	$	1,783,129	$	3,104,803

Product line gross profit
Finished jewelry	$	1,282,551	$	216,048	$	1,498,599
Loose jewels		478,875		1,512,429		1,991,304
Total	$	1,761,426	$	1,728,477	$	3,489,903

Operating income	$	83,747	$	31,311	$	115,058

Depreciation and amortization	$	28,076	$	80,140	$	108,216

Capital expenditures	$	1,250	$	162,849	$	164,099

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 September 30,
	2019			2018
Product line cost of goods sold	$	3,502,362		$	3,104,803
Non-capitalized manufacturing and production control expenses		389,877			346,604
Freight out		131,119			99,119
Inventory valuation allowances		23,000			49,000
Other inventory adjustments		(169,734	)		14,222
Cost of goods sold	$	3,876,624		$	3,613,748

The Company recognizes sales by geographic area based on the country in which the customer is based. Sales to international end consumers made through the Company's 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 during those prior periods products were shipped and invoiced to a U.S.-based intermediary that assumed all international shipping and credit risks. Currently, sales to international end consumers are made directly by the Company's own transactional website. 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 September 30, 2019 and June 30, 2019, are held and located in the United States.

The following presents net sales data by geographic area:

	Three Months Ended September 30,
	2019		2018
Net sales:
United States	$	6,763,876	$	5,822,870
International		844,545		771,836
Total	$	7,608,421	$	6,594,706