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10. Stockholders' Equity
 12 Months Ended
Dec. 31, 2012
Stockholders Equity  
NOTE 10. Stockholders' Equity

Rights Offering

 

In February 2012, the Company completed a rights offering to its stockholders of record as of February 2, 2012. The Company issued a total of 2,070,719 shares of its common stock at a subscription price of $0.25 per share. In connection with the rights offering, the Company entered into an investment agreement with Matador Capital Partners, LP, or Matador. Mr. Jeffrey A. Berg, one of the Company’s directors and its Interim Chief Executive Officer, is the managing member of the general partner of Matador. Under the terms of the investment agreement, upon expiration of the rights offering, Matador purchased for $0.25 per share 8,000,000 shares of our common stock not subscribed for and purchased by holders upon exercise of their subscription rights. The Company received gross proceeds of $2.5 million from the rights offering and under the investment agreement.

 

Equity Incentive Plans

 

2004 Performance Incentive Plan

 

In September 2004 at a Special Meeting of Stockholders, the Company’s stockholders approved the 2004 Performance Incentive Plan (the “2004 Plan”). The 2004 Plan provided for the issuance of up to 2,500,000 shares of NTN common stock. In addition, all shares that remained unissued under the 1995 Employee Stock Option Plan (the “1995 Plan”) on the effective date of the 2004 Plan, and all shares issuable upon exercise of options granted pursuant to the 1995 Plan that expire or become unexercisable for any reason without having been exercised in full, were available for issuance under the 2004 Plan. On the effective date, the 1995 Plan had approximately 77,000 options available for grant. Options under both the 1995 Plan and the 2004 Plan have a term of up to ten years, and are exercisable at a price per share not less than the fair market value on the date of grant. In September 2009, the 2004 Plan expired. All awards that were granted under the 2004 Plan will continue to be governed by the 2004 Plan until they are exercised or expire in accordance with that plan’s terms. As of December 31, 2012, there were approximately 850,000 options outstanding under the 2004 Plan.

 

2010 Performance Incentive Plan

 

In June 2010, the Company’s shareholders approved the 2010 Performance Incentive Plan (the “2010 Plan”). The 2010 Plan provides for the issuance of up to 6,000,000 shares of NTN common stock. Under the 2010 Plan, options for the purchase of NTN common stock or other instruments such as restricted stock units may be granted to officers, directors, employees and consultants. The Board of Directors designated its Nominating and Corporate Governance/Compensation Committee as the 2010 Plan Committee. Stock options granted under the 2010 Plan may either be incentive stock options or nonqualified stock options. A stock option granted under the 2010 Plan generally cannot be exercised until it becomes vested. The 2010 Plan Committee establishes the vesting schedule of each stock option at the time of grant. At its discretion, the 2010 Plan Committee can accelerate the vesting, extend the post-termination exercise term or waive restrictions of any stock options or other awards under the 2010 Plan. Options under the 2010 Plan have a term of up to ten years, and are exercisable at a price per share not less than the fair market value on the date of grant. As of December 31, 2012, there were approximately 964,000 options outstanding under the 2010 Plan.

 

Stock-Based Compensation Valuation Assumptions

 

The Company records stock-based compensation in accordance with ASC No. 718, Compensation – Stock Compensation. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method.

 

The Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate, the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

 

The following weighted-average assumptions were used for grants issued during 2012 and 2011 under the ASC No. 718 requirements:

 

            2012   2011
Weighted average risk-free rate 0.53%   1.54%
Weighted average volatility 95.21%   97.70%
Dividend yield 0.00%   0.00%
Expected life 5.71 years   5.22 years

  

ASC No. 718 requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeiture rates differ from those estimates. Forfeitures were estimated based on historical activity for the Company. Stock-based compensation expense for employees in 2012 and 2011 was $185,000 and $332,000, respectively, and is expensed in selling, general and administrative expenses and credited to the additional paid-in-capital account.

 

Stock Option Activity

 

The following table summarizes stock option activity for the year ended December 31, 2012:

 

    Outstanding
Options		     Weighted
Average Exercise
Price per Share		     Weighted
Average
Remaining
Contractual
Life (in years)		     Aggregate Intrinsic
Value		  
Outstanding December 31, 2011     4,314,000     $ 0.59       7.74     $ 2,000  
Granted     452,000       0.15       –       –  
Cancelled     (1,351,000 )     0.51       –       –  
Forfeited     (1,596,000 )     0.45                  
Expired     (5,000 )     0.98       –       –  
Outstanding December 31, 2012     1,814,000     $ 0.66       6.37     $ 25,000  
                                 
Options vested and exercisable at December 31, 2012     1,330,000     $ 0.82       5.39     $ 2,000  

  

The aggregate intrinsic value of options at December 31, 2012 is based on the company’s closing stock price on that date of $0.21 per share as reported by the NYSE MKT. The total intrinsic value of options exercised during the year ended December 31, 2011 was $26,000, and the total cash received as a result of stock option exercises was approximately $36,000. There were no stock options exercised during the year ended December 31, 2012.

 

The per share weighted average grant-date fair value of stock options granted during 2012 and 2011 was $0.15 and $0.32, respectively.

 

As of December 31, 2012, the unamortized compensation expense related to outstanding unvested options was approximately $46,000 with a weighted average remaining requisite service period of 2.25 years. The Company expects to amortize this expense over the remaining requisite service period of these stock options. A deferred tax asset generally would be recorded related to the expected future tax benefit from the exercise of the non-qualified stock options. However, due to a history of net operating losses, a full valuation allowance has been recorded related to the tax benefit for non-qualified stock options.

 

Restricted Stock Unit Activity

 

Grants of restricted stock units are paid in an equal number of shares of common stock on the vesting date of the award, subject to any deferred payment date that the holder may elect. A stock unit award is paid only to the extent vested. Vesting generally requires the continued employment by the award recipient through the respective vesting date. Restricted stock units outstanding as of December 31, 2012 are not subject to accelerated vesting provisions. Since the restricted stock units are paid in an equal number of shares of common stock without any kind of offsetting payment by the employee, the measurement of cost is based on the quoted market price of the stock at the measurement date which is the date of grant.

 

The following table summarizes restricted stock unit activity during 2012:

 

        Outstanding Restricted Stock Units     Weighted Average Fair Value per Share  
December 31, 2011       49,000     $ 0.31  
  Granted       620,000       –  
  Released       (44,000 )     –  
  Cancelled       (65,000 )     –  
December 31, 2012       560,000     $ 0.14  
                     
Balance exercisable at December 31, 2012       –          

  

Warrant Activity

 

The following summarizes warrant activity during 2012:

 

      Outstanding
Warrants		     Weighted
Average Exercise
Price per Share		     Weighted
Average
Remaining
Contractual
Life (in years)		  
Outstanding December 31, 2011       4,500,000     $ 0.79       5.35  
  Granted       –       –       –  
  Exercised       –       –       –  
  Forfeited       –       –       –  
Outstanding December 31, 2012       4,500,000     $ 0.79       4.35  
                             
Balance exercisable at December 31, 2012       4,500,000     $ 0.79       4.35  

  

The 4,500,000 warrants outstanding were issued during 2009 in connection with asset acquisitions of iSports and i-am TV. The fair values of the warrants were approximately $908,000 in aggregate and were determined using the Black-Scholes model using the following weighted-average assumptions: risk-free interest rates of 2.79%; dividend yield of 0%; expected volatility of 78.1%; and a term of 8 years.

 

Cumulative Convertible Preferred Stock

 

The Company has authorized 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series. The only series currently designated is a series of 5,000,000 shares of Series A Cumulative Convertible Preferred Stock (Series A Preferred Stock).

 

As of December 31, 2012 and 2011, there were 156,000 and 161,000 shares of Series A Preferred Stock issued and outstanding, respectively. The Series A Preferred Stock provides for a cumulative annual dividend of 10 cents per share, payable in semi-annual installments in June and December. Dividends may be paid in cash or with shares of common stock. During the years ended December 31, 2012 and 2011, the Company issued approximately 73,000 and 37,000 common shares, respectively, for payment of dividends.

 

The Series A Preferred Stock has no voting rights and has a $1.00 per share liquidation preference over common stock. The registered holder has the right at any time to convert shares of Series A Preferred Stock into that number of shares of common stock that equals the number of shares of Series A Preferred Stock that are surrendered for conversion divided by the conversion rate. The conversion rate is subject to adjustment in certain events and is established at the time of each conversion. During the year ended December 31, 2012, 5,000 shares of cumulative convertible preferred stock were converted into approximately 15,000 shares of common stock at a conversion rate of 0.3276. There were no conversions for year ended December 31, 2011. There is no mandatory conversion term, date or any redemption features associated with the Series A Preferred Stock.