Although the Company issued dividends in prior years, a dividend yield of zero was used due to the uncertainty of future dividend payments. Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration to the historical volatility of its common stock.stock. The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option. The expected lives of the stock options issued since 2014 represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term. Stock options issued prior to 2014 were expensed using expected lives that represented the time until exercise or forfeiture using historical informationinformation. Expected forfeitures are based on the historical forfeiture rates by employee class.

The following table summarizes information about stock options outstanding at March 31, 2016:2017:

As of March 31, 2016,2017, the unrecognized stock-based compensation expense related to unvested stock options was approximately $683,000,$281,000, which is expected to be recognized over a weighted average period of approximately 1922 months.

The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at March 31, 2016 were each2017 was approximately $30,000.$11,000. This amount is before applicable income taxes and represents the closing market price of the Company’s common stock at March 31, 20162017 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. This amount represents the amount that would have been received by the optionees had these stock options been exercised on that date. During the three months ended March 31, 2016,2017, no stock options were exercised.

Restricted Stock - The following is a summary of the restricted stock activity for the three months ended March 31, 2016:2017:

As of March 31, 2016,2017, the estimated unrecognized stock-based compensation expense related to unvested restricted stockshares subject to achievement of performance goals was approximately $517,000,$427,000, all of which is expected to be recognized over a weighted average period of approximately ten11 months.

Dividends - The Company has not paid any cash dividends in the current year through March 31, 2016.2017.

Basic net loss from continuing and discontinued operations per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss from continuing and discontinued operations per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options that are computed using the treasury stock method. Antidilutive stock awards consist of stock options and unvested restricted shares that would have been antidilutive in the application of the treasury stock method in accordance with the “Earnings Per Share” topic of the FASB Accounting Standards Codification.

 

The following table reconciles the differences between the basic and diluted earningsnet loss per share presentations:

For the three months ended March 31, 20162017 and 2015,2016, stock options to purchase approximately 2.371.82 and 1.952.37 million shares, respectively, were excluded from the computation of diluted net loss per common share because the exercise price of the stock options was greater than the average market price of the common shares or the effect of inclusion of such amounts would be anti-dilutive to net loss per common share.  For the three months ended March 31, 2017 and 2016, approximately 416,000 and 2015, approximately 564,000, and 347,000 unvestedrespectively, of restricted shares respectively, werethat have been issued but not yet vested have been excluded becausefrom the inclusioncomputation of such amounts would be anti-dilutive todiluted net loss per common share.

Trade receivables potentially subject the Company to credit risk. The Company’s standard wholesale customer payment terms on trade receivables are generally between 30 and 90 days, though it may offer extended terms with specific customers and on significant orders from time to time. The Company believes its competitors and other vendors in the wholesale jewelry industry have also expanded their use of extended payment terms and, in aggregate, the Company believes that by expanding its use of extended payment terms, it has provided a competitive response in its market and that its net sales have been favorably impacted. The Company is unable to estimate the impact of this program on its net sales, but if it ceased providing extended payment terms in select instances, the Company believes it would not be competitive for some wholesale customers in the marketplace and that its net sales and profits would likely decrease. The Company extends credit to its customers based upon a number of factors, including an evaluation of the customer’s financial condition and credit history that is verified through trade association reference services, the customer’s payment history with the Company, the customer’s reputation in the trade, and/or an evaluation of the Company’s opportunity to introduce its moissanite jewels or finished jewelry featuring moissanite to new or expanded markets. Collateral is not generally required from customers. The need for an allowance for doubtful accounts is determined based upon factors surrounding the credit risk of specific customers, historical trends, and other information. During the year ended December 31, 2016, the Company wrote off $815,000 in accounts receivable related to one international customer that was past due on its payment arrangement as it determined that the benefits of continued collections efforts did not outweigh the cost of legal proceedings.  The Company does not believe its commercial terms were a factor with this customer’s non-payment. The Company’s allowance for doubtful accounts previously included an allowance for this accounts receivable, and therefore, this write-off did not have an impact on net loss for the year ended December 31, 2016. The Company has not experienced any other significant accounts receivable write-offs related to revenue arrangements with extended payment terms. However, the Company’s allowance for doubtful accounts includes approximately $815,000 related to one customer that has become past due on its payment arrangement.

 

At times, a portion of the Company’s accounts receivable will be due from customers that have individual balances in excess of 10% or more of the Company’s total netgross accounts receivable.  The following is a summary of customers that represent greater than10% or equal to 10%more of total netgross accounts receivable:

*Customer DB did not have individual balancesa balance that represented a significant portion10% or more of the total netgross accounts receivable as of March 31, 2017.

**Customer A did not have a balance that represented 10% or more of the total gross accounts receivable as of December 31, 2016.

A significant portion of sales is derived from certain customer relationships. The following is a summary of customers that represent greater than10% or equal tomore of total gross sales:

*Customer D did not have a balance that represented 10% or more of total gross sales from continuing operations:

*Customer B*Customers A and C did not represent a significant portionhave individual balances that represented 10% or more of total gross sales for the three months ended March 31, 2016.

On March 4, 2016, the Company and Charles & Colvard Direct, LLC (“Direct”) a wholly-owned subsidiary of the Company, entered into an asset purchase agreement (the “Purchase Agreement”) with Yanbal, pursuant to which Yanbal agreed to purchase certain assets of Direct (the “Transferred Assets”). The transactions contemplated by the Purchase Agreement also closed on March 4, 2016 (the “Closing Date”).  The Company determined that the sale of these assets represented a strategic shift that will have a major effect on the Company’s operations and financial results.  The Company made the decision to divest of these assets after careful analysis of the Company’s core competencies, go-to-market strategies, and intent to advance toward profitability.

Pursuant to the terms of the Purchase Agreement, the Transferred Assets included, among other things, (i) an inventory credit to be used towards $250,000 in existing non-moissanite and moissanite inventory as of the Closing Date, consisting of Direct’s current jewelry offered under the “Lulu Avenue” trademarks, (ii) all existing marketing collateral such as packaging and catalogs for Direct’s current jewelry offered under the “Lulu Avenue” trademarks as of the Closing Date, (iii) certain assigned contracts, (iv) style advisor and customer lists, and (v) all intellectual property rights owned by the Company and Direct and used solely in connection with the operation of Direct’s direct-to-consumer home party business offor the sale of fashion jewelry and related products and services in the United States, excluding the “Lulu Avenue” and “Love Knot” trademarks and other “Lulu Avenue” specific intellectual property such as the domain name www.luluavenue.com and all content located on such website (the “Lulu Intellectual Property”). The inventory credit and an exclusive, nontransferable license to use the Lulu Intellectual Property that was also granted to Yanbal on the Closing Date will expireexpired on July 31, 2016. After the Closing Date, the Company and Direct may not engage in the direct-to-consumer home party business and may not solicit style advisors or customers of the direct-to-consumer home party business. The Company hashad also agreed to provide to Yanbal certain transition services.services, which services ended August 31, 2016.

The purchase price for the Transferred Assets was $500,000 with selling expenses of approximately $131,000, resulting in a net purchase price of approximately $369,000.  The Company recorded a liability associated with $35,000 of expense related to certain style advisor incentives and reduced prepaid expenses by $60,000 related to contracts acquired by Yanbal.

The following table presents the major classes of line items constituting pretax loss from discontinued operations:

The following discussion is designed to provide a better understanding of our unaudited condensed consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. This information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Historical results and percentage relationships among any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for future periods.

We manufacture, market and distribute Charles & Colvard Created Moissanite^® (which we refer to as moissanite or moissanite jewels) and finished jewelry featuring moissanite for sale in the worldwide jewelry market.  Moissanite, also known by its chemical name silicon carbide, or SiC, is a rare mineral first discovered in a meteormeteorite crater. Because naturally occurring SiC crystals are too small for commercial use, larger crystals must be grown in a laboratory. Leveraging our advantage of being the original and leading worldwide source of created moissanite jewels, our strategy is to establish Charles & Colvard with reputable, high-quality, and sophisticated brands across multiple channels, and to position moissanite as an ethically-sourced, affordable, and luxurious alternative to other gemstones such as diamond. We believe this is possible due to moissanite’s exceptional brilliance, fire, durability, and rarity like no other jewel available on the market. We sell loose moissanite jewels and finished jewelry at wholesale to distributors, manufacturers, retailers, TV shopping networks, and retailersdesigners, and at retail to end consumers through our wholly owned operating subsidiaries, charlesandcolvard.com, LLC (formerly Moissanite.com, LLCLLC) and Charles & Colvard Direct, LLC (until March 2016), and through third-party marketplaces. As of September 30, 2016, we changed the name of our wholly owned subsidiary Moissanite.com, LLC to charlesandcolvard.com, LLC.

In February 2016, we made the strategic decision to explore a potential divestiture of our direct-to-consumer home party business previously operated through our Charles & Colvard Direct, LLC (dba Lulu Avenue^®) subsidiary.  After careful analysis of our core competencies, go-to-market strategies, and intent to advance toward profitability, the management team and Board of Directors determined a divestiture of this distribution channel to be in our best interest and our shareholders’ best interests.interest. On March 4, 2016, we and Charles & Colvard Direct, LLC entered into an asset purchase agreement with Yanbal USA, Inc., or Yanbal, under which Yanbal purchased certain assets related to our direct-to-consumer home party business for $500,000 and assumed certain liabilities related to such assets. The operating results of Charles & Colvard Direct, LLC are being presented as a discontinued operation. A more detailed description of this transaction is included in Note 12, “Discontinued Operations”, in the Notes to Condensed Consolidated Financial Statements.

Previously, we managed our business through two operating and reportable segments: wholesale distribution transacted through the parent entity, and the direct-to-consumer distribution channel transacted through our wholly owned operating subsidiary, charlesandcolvard.com, LLC (formerly Moissanite.com, LLC). During the three months ended March 31, 2016 and 2015,2017, we managedbegan managing our business primarily through two newly defined operating and reportable segments based on our three distribution channels that we used to sell our product lines, loose jewels and finished jewelry,jewelry:  our “Traditional” segment, which included Charlesconsists of wholesale, retail, and Colvard Direct, LLC.  As a result of the divestiture of our direct-to-consumer home party business operated through our Charles & Colvard Direct, LLC (dba Lulu Avenue^®) subsidiary, during the three months ended March 31, 2016, we began managing our business primarily through our two continuing distribution channels. Accordingly, for the three months ended March 31, 2016 and 2015, our reportable segments are our wholesale distribution channel transacted through our parent entity,television customers; and our direct-to-consumer distribution channel transacted through the wholly owned operating subsidiary, Moissanite.com, LLC.  We are now presenting the operating results“Online Channels” segment, which consists of Charlese-commerce customers including charlesandcolvard.com, marketplaces, drop-ship, and Colvard Direct, LLC as a discontinued operation.other pure-play, exclusively e-commerce customers.

We sell our loose moissanite jewels at wholesale to some of the largest distributors and jewelry manufacturers in the world, which mount them into fine jewelry to be sold at retail outlets and via the Internet. We also sell loose moissanite jewels and finished jewelry featuring moissanite at wholesale to retailers, TV shopping networks, and designers to be sold to end consumers and directly to consumers through our e-commerce sales channel Moissanite.comcharlesandcolvard.com, third-party marketplaces, and other third-party marketplaces.e-commerce channels. We believe our continued and expanding use of multiple sales channels to the jewelry trade and the end consumer with branded finished jewelry featuring moissanite creates a compellingpositions Charles & Colvard goods at the many touchpoints where consumers are when they are making their buying decisions – thereby creating greater exposure for our brand and increasing consumer value proposition with the potential to drive increased demand.

 

Our future growthgo-forward strategy is closely linked toone of optimization and growth. Our future success will be measured on our vision statement:  “To be an innovative, disruptive leader in the jewelry industry by offering a socially responsible created jewel that will last forever at a revolutionary value.” We plan to accomplish this vision by growing our core loose jewel and finished jewelry wholesale distribution segment with key distributors, jewelry manufacturers, and retailers while working to develop and expand our continuing direct-to-consumer distribution segment, which is conducted through our e-commerce subsidiary, Moissanite.com, LLC.  We also intendability to expand our multi-channel e-commerce footprintexisting channels while discovering new channel partners and new markets through third-party marketplaces, comparison shopping engines, affiliate networks, social commerce sitescalculated sales and more. We plan to support these initiatives by increasing consumer awareness through a broad digital marketing footprint, clearly communicating to the consumer the value proposition of our products, and developing and distributing leading global brands for our moissanite jewel and finished jewelry featuring moissanite with an unrelenting focus on quality and design.efforts. Our key strategies for 20162017 are as follows:

As we execute our strategy to build and reinvest in our businesses, significant expenses and investment of cash will be required ahead of the revenue streams we expect in the future, and this will likely result in some unprofitable reporting periods in 2016.2017.  Despite this, we have maintained as one of our primary goals to generate positive cash flow from continuing operations to protect our cash position. We were successful in achieving this goal during 2015 and in the first three months of 2016 as we were able to reduce our inventories and aggressively collect on our trade accounts receivable balances. We will continue to monitor our cash burn rate and collection efforts as we grow the business.

Our total consolidated net sales for the three months ended March 31, 20162017 of $11.39$5.65 million were 62% greater50% less than total consolidated net sales during the three months ended March 31, 2015. Wholesale distribution2016. The decrease in consolidated net sales for the three months ended March 31, 2017 was due primarily to the sale, in a single transaction, during the three months ended March 31, 2016 of approximately $6.77 million of legacy loose gemstone inventory, or the Legacy Inventory Sale, at low margins, as a result of our efforts to reduce inventories. Traditional segment net sales for the three months ended March 31, 20162017 of $10.06$3.49 million were 70% greater63% lower than wholesale distributionTraditional segment net sales during the three months ended March 31, 2015. Direct-to-consumer e-commerce distribution2016, primarily due to the Legacy Inventory Sale. Online Channels segment net sales for the three months ended March 31, 20162017 of $1.33$2.16 million were 21% greater5% higher than direct-to-consumer e-commerce distributionOnline Channels segment net sales during the three months ended March 31, 2015.  Our direct-to-consumer home party distribution segment that is now a discontinued operation had net sales during2016, primarily due to the three months ended March 31, 2016 of $717,000, which were 47% lower than direct-to-consumer home party distribution segment sales during the three months ended March 31, 2015.increase in marketplaces, drop-ship, and other pure-play, exclusively ecommerce customers.

Loose jewel sales comprised 85%70% of our total consolidated net sales for the three months ended March 31, 20162017 and increased 152%decreased 59% to $9.64$3.93 million, compared with $3.82$9.64 million in the same period of 2015.2016. Finished jewelry sales for the three months ended March 31, 20162017 comprised 15%30% of our total consolidated net sales and decreased 45%2% to $1.75$1.72 million, compared with $3.19$1.75 million in the same period of 2015.2016.

Operating expenses from continuing operations decreased by $252,000, or 8%, towere $2.97 million for the three months ended March 31, 2016,2017, compared with $3.23$2.97 million in the same period of 2015. Of this decrease, general2016. Sales and marketing expenses increased $387,000, or 25%, to $1.92 million, primarily as a result of an increase in compensation expenses related to severance in connection with the departure of our former Chief Revenue Officer. General and administrative expenses decreased $423,000,$388,000, or 23%27%, to $1.44$1.05 million primarily as a result of the transition of our Presidenta decrease in compensation expenses and Chief Executive Officer and increased legal expensesprofessional services, partially offset by an increase in bad debt expense associated with the transition in March 2015. Sales and marketing expenses increased $171,000, or 13%, to $1.53 million, primarily as a result of increased cooperative advertising with our wholesale distribution customers.  As we grow our business, we intend to continue to closely manage our operating expenses by seeking the most cost effective and efficient solutionsallowance for our operating requirements.doubtful accounts reserve policy.

We recorded a net loss of $560,000, or $0.03 per diluted share, for the three months ended March 31, 2017, compared to a net loss of $1.31 million, or $0.06 per diluted share, in the same period of 2016. The decreased net loss was primarily due to the discontinuance of our direct-to-consumer home party business and an increased gross profit margin. We recorded a net loss from continuing operations of $560,000 for the three months ended March 31, 2016, primarily due2017, compared to lower margins on greater sales, and increased sales and marketing expenses as we implement our new sales and marketing strategies.  These increases were offset bya net loss from continuing operations of $749,000 in the decreased general and administrative expenses.same period of 2016.

The execution of our strategy to grow our company, with the ultimate goal of increasing consumer awareness and clearly communicating the value proposition of moissanite directly to consumers, is challenging and not without risk. As such, there can be no assurance that future results for each reporting period will exceed past results in sales, operating cash flow, and/or net income due to the challenging business environment in which we operate and our investment in various initiatives to support our growth strategies. However, as we execute our growth strategy and messaging initiatives, we remain committed to our current priorities of generating positive cash flow and strengthening our financial position while both monetizing our existing inventory and manufacturing our created moissanite loose jewels and finished jewelry featuring moissanite to meet sales demand. We believe the results of these efforts will propel our revenue growth and profitability and further enhance shareholder value in coming years, but we fully recognize the business and economic challenges that we face.