10.	SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Common Stock

The Company is authorized to issue 50,000,000 shares of common stock, no par value. As of December 31, 2014 and 2013, it had 20,382,333 and 20,197,301 shares of common stock outstanding, respectively. Holders of common stock are entitled to one vote for each share held.

In November 2009, the Board of Directors authorized a repurchase program for up to 1,000,000 shares of the Company’s common stock. On August 6, 2013, the Board authorized the extension of the Company’s share repurchase program for an additional 12 months. The program, which was originally authorized on November 13, 2009, authorized the Company to repurchase up to 1,000,000 shares of the Company’s common stock until August 12, 2014 in open market or in privately negotiated transactions. The Company expected to use available cash to finance these purchases and would determine the timing and amount of stock repurchases based on the Company’s evaluation of market conditions, the market price of the Company’s common stock, and management’s assessment of the Company’s liquidity and cash flow needs. The Company had no obligations to repurchase shares under the program and the program could be suspended or terminated at any time. As of December 31, 2013, the Company had repurchased an aggregate of 190,787 shares, and 809,213 shares of the Company’s common stock remained available for repurchase under the program. The Company did not repurchase any shares under this program during the years ended December 31, 2014 or 2013. The Company did not extend the plan past its expiration due to covenants within the Credit Facility described in Note 9, “Line of Credit.”

Preferred Stock

The Board of Directors is authorized, without further shareholder approval, to issue up to 10,000,000 shares of preferred stock, no par value. The preferred stock may be issued from time to time in one or more series. No shares of preferred stock had been issued as of December 31, 2014.

Equity Compensation Plans

1997 Omnibus Stock Plan

In 1997, the Company adopted the 1997 Omnibus Stock Plan of Charles & Colvard, Ltd. (the “1997 Omnibus Plan”). The 1997 Omnibus Plan authorized the Company to grant stock options, stock appreciation rights, and restricted stock awards (collectively, “awards”) to selected employees, independent contractors, and directors of the Company and related corporations in order to promote a closer identification of their interests with those of the Company and its shareholders. All stock options granted under the 1997 Omnibus Plan have an exercise price equal to the market price of the Company’s common stock on the date the stock option was granted. Stock options granted to employees under the 1997 Omnibus Plan generally vest over three years and have terms of up to 10 years, with the exception of stock options granted in 2005 under the Executive Compensation Plan (which is governed by and subject to the 1997 Omnibus Plan) that vested immediately and stock options granted in 2006 under the Executive Compensation Plan that vested at the end of three years. Stock options granted to the Board of Directors under the 1997 Omnibus Plan generally vested over one year and have terms of up to 10 years. The terms of stock options granted to independent contractors varied depending on the specific grant, but the terms are no longer than 10 years. Restricted stock awards granted to members of the Board of Directors vested at the end of one year. The 1997 Omnibus Plan expired (with respect to future grants) on September 30, 2007. As of December 31, 2014 and 2013, there were 11,776 and 20,051 stock options outstanding under the 1997 Omnibus Plan, respectively.

2008 Stock Incentive Plan

In May 2008, the shareholders of the Company approved the adoption of the Charles & Colvard, Ltd. 2008 Stock Incentive Plan (the “2008 Plan”), which replaced the 1997 Omnibus Plan. The 2008 Plan authorizes the Company to grant stock options, stock appreciation rights, restricted stock, and other equity awards to selected employees, directors, and independent contractors. The aggregate number of shares of the Company’s common stock that may be issued pursuant to awards granted under the 2008 Plan shall not exceed the sum of 3,000,000 plus any shares of common stock subject to an award granted under the 1997 Omnibus Plan or any other stock incentive plan maintained by the Company prior to the 2008 Plan (each, a “Prior Plan”) that is forfeited, cancelled, terminated, expires, or lapses for any reason without the issuance of shares pursuant to the award, or shares subject to an award granted under a Prior Plan which shares are forfeited to, or repurchased or reacquired by, the Company. Stock options granted to employees under the 2008 Plan generally vest over three years and have terms of up to 10 years. The vesting schedules and terms of stock options granted to independent contractors vary depending on the specific grant, but the terms are no longer than 10 years. Restricted stock awards granted to members of the Board of Directors vest at the end of one year on the date of the Annual Meeting of Shareholders. The vesting schedules of restricted stock awards granted to employees or independent contractors vary depending on the specific grant but are generally three years or less. Only stock options and restricted stock have been granted under the 2008 Plan. As of December 31, 2014 and 2013, there were 1,654,170 and 1,186,846 stock options outstanding under the 2008 Plan, respectively.

Stock-Based Compensation

The following table summarizes the components of the Company’s stock-based compensation included in net loss:

	Year Ended December 31,
	2014		2013
Employee stock options	$	840,568	$	791,833
Restricted stock awards		846,955		886,274
Income tax benefit		-		(309,607	)
Total	$	1,687,523	$	1,368,500

Due to the Company’s valuation allowance against deferred tax assets as discussed further in Note 11, “Income Taxes,” the income tax benefit for 2014 was fully reserved.

No stock-based compensation was capitalized as a cost of inventory during the years ended December 31, 2014 and 2013.

Stock Options

The following is a summary of the stock option activity for the years ended December 31, 2014 and 2013:

	Shares			Weighted Average Exercise Price
Outstanding, December 31, 2012		1,147,847		$	2.31
Granted		436,002		$	4.59
Exercised		(197,848	)	$	2.13
Forfeited		(101,831	)	$	2.47
Expired		(79,873	)	$	2.36
Outstanding, December 31, 2013		1,204,297		$	3.14
Granted		535,000		$	2.49
Exercised		-		$	-
Forfeited		(30,775	)	$	2.51
Expired		(42,576	)	$	3.64
Outstanding, December 31, 2014		1,665,946		$	2.93

The weighted average grant date fair value of stock options granted during the years ended December 31, 2014 and 2013 was $1.67 and $3.25, respectively. The total fair value of stock options that vested during the years ended December 31, 2014 and 2013 was approximately $805,000 and $691,000, respectively. The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the years ended December 31, 2014 and 2013:

	Year Ended December 31,
	2014			2013
Dividend yield		0.0	%		0.0	%
Expected volatility		81.1	%		92.9	%
Risk-free interest rate		1.77	%		1.01	%
Expected lives (years)		5.8			5.0

The following table summarizes information about stock options outstanding at December 31, 2014:

Options Outstanding					Options Exercisable						Options Vested or Expected to Vest
Balance as of 12/31/2014	Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 12/31/2014		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Balance as of 12/31/2014		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
1,665,946		7.66	$	2.93		1,056,203		6.85	$	2.73		1,585,478		7.57	$	2.93

As of December 31, 2014, the unrecognized stock-based compensation expense related to unvested stock options was approximately $1.09 million, which is expected to be recognized over a weighted average period of approximately 23 months.

The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at December 31, 2014 was approximately $301,000, $288,000, and $298,000, respectively. These amounts are before applicable income taxes and represent the closing market price of the Company’s common stock at December 31, 2014 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 years ended December 31, 2014 and 2013, the aggregate intrinsic value of stock options exercised was approximately $0 and $819,000, respectively.

Restricted Stock

The following is a summary of the restricted stock activity for the years ended December 31, 2014 and 2013:

	Shares			Weighted Average Grant Date Fair Value
Unvested, December 31, 2012		191,843		$	3.38
Granted		345,403		$	4.48
Vested		(186,343	)	$	3.76
Canceled		-		$	-
Unvested, December 31, 2013		350,903		$	4.26
Granted		185,032		$	2.09
Vested		(248,929	)	$	3.77
Canceled		-		$	-
Unvested, December 31, 2014		287,006		$	3.29

As of December 31, 2014, the unrecognized stock-based compensation expense related to unvested restricted stock was approximately $570,000, which is expected to be recognized over a weighted average period of approximately 14 months.

Dividends

The Company has not paid any cash dividends during the years ended December 31, 2014 and 2013.