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10. Stockholders' Equity
 12 Months Ended
Dec. 31, 2013
Shareholders' Equity:  
10. Stockholders' Equity

Capital Stock

 

At the Company’s 2013 annual meeting of stockholders, the Company’s stockholders approved an amendment to the Company’s restated certificate of incorporation to increase the number of total authorized shares from 94,000,000 to 178,000,000 and to increase the number of authorized shares of common stock from 84,000,000 to 168,000,000. The Company filed a certificate of amendment of the restated certificate of incorporation of the Company with the Delaware Secretary of State on June 11, 2013 to effect such amendment and it was effective on that same date.

 

Private Placement

 

In November 2013, the Company completed a private placement of units (consisting of shares of common stock and warrants to purchase shares of common stock) to accredited investors. The purchase price of each unit was $0.40 for gross proceeds of $2,400,000. In the aggregate, the Company issued 6,000,000 shares of common stock and warrants to purchase 3,600,000 shares. The warrants have an exercise price of $0.40 per share and are exercisable beginning on the six-month anniversary of the issuance date and expire on the five-year anniversary of the issuance date.

 

Pursuant to the registration rights agreement entered into in connection with the private placement, the Company filed a registration statement with the Securities and Exchange Commission under the Securities Act of 1933 to register for resale by the investors the shares of common stock, and the shares of common stock issuable upon exercise of the warrants, sold to the investors in the private placement. The registration statement was declared effective on December 5, 2013.

 

Also pursuant to the registration rights agreement, the Company is obligated to pay to each investor a monthly payment of 1% (not to exceed 10%) of the aggregate purchase price paid by such investor as liquidation damages for as long as the following circumstances are in effect:

 

·In the event the Company does not file the registration statement within the timeframe indicated in the Agreement;
·If the registration statement is not declared effective; or
·After the effective date, the registration statement ceases to be effective for more than 15 consecutive calendar days or more than an aggregate of 30 calendar days (which need not be consecutive calendar days) during any 12-month period, unless the Company is required to suspend the effectiveness, in which case, such aggregate of 30 calendar days shall be extended to an aggregate of 60 calendar days.

  

As indicated above, the Company filed the registration statement, and it was declared effective within the timeframe indicated in the registration rights agreement. The Company has determined that the likelihood of the effective registration statement becoming ineffective is remote. Accordingly, the Company did not record a loss contingency for the 1% liquidation damages payments.

 

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, 2013, there were approximately 773,000 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, 2013, there were approximately 1,891,000 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 and ASC No. 505-50, Equity – Equity-Based Payments to Non-Employees. 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 share-based payment awards to employees is recognized using the straight-line single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair value on the grant date and is periodically re-measured as the underlying awards vest.

 

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 2013 and 2012 under the ASC No. 718 requirements:

 

    2013   2012
Weighted average risk-free rate   0.60%   0.53%
Weighted average volatility   79.82%   95.21%
Dividend yield   0.00%   0.00%
Expected life   4.80 years   5.71 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 2013 and 2012 was $132,000 and $185,000, 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, 2013 and 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 
Granted   1,280,000    0.27    –    – 
Exercised   (30,000)   0.17    –     – 
Cancelled   (245,000)   0.49    –    – 
Forfeited   (102,000)   0.19     –     – 
Expired   (53,000)   1.09    –    – 
Outstanding December 31, 2013   2,664,000   $0.50    7.14   $706,000 
                     
Options vested and exercisable at December 31, 2013   1,315,000   $0.76    5.14   $201,000 

 

The aggregate intrinsic value of options at December 31, 2013 is based on the company’s closing stock price on that date of $0.56 per share as reported by the NYSE MKT. The total intrinsic value of options exercised during the year ended December 31, 2013 was $6,000. Pursuant to the 2004 Plan and the 2010 Plan, stock option exercises could be made on a net-exercise arrangement, where shares of common stock are withheld in the amount of the exercise price as payment of the exercise price instead of cash. Under such net-exercise arrangements, options to purchase approximately 25,000 shares of common stock were exercised and approximately 13,000 shares of common stock were issued. The Company received approximately $1,400 in cash payments for the exercise of options to purchase approximately 4,000 shares. 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 2013 and 2012 was $0.18 and $0.15, respectively.

 

As of December 31, 2013, the unamortized compensation expense related to outstanding unvested options was approximately $150,000 with a weighted average remaining requisite service period of 2.31 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, 2013 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 for the year ended December 31, 2013 and 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 
 Granted     –    – 
 Released    (373,000)   – 
 Cancelled     –    – 
December 31, 2013    187,000   $0.14 
             
Balance exercisable at December 31, 2013     –      

 

Under the 2010 Plan, employees may elect to have shares of common stock withheld on the vesting date in lieu of the employees paying cash for withholding taxes. As a result of employees making this election, approximately 373,000 restricted stock units vested and approximately 326,000 shares of common stock were issued.

 

Warrant Activity

 

The following summarizes warrant activity for the year ended December 31, 2013 and 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 
 Granted     3,600,000    0.40    – 
 Exercised     (1,500,000)   0.37    – 
 Forfeited     –    –    – 
Outstanding December 31, 2013    6,600,000   $0.67    4.18 
                  
Balance exercisable at December 31, 2013    3,000,000   $0.40    3.36 

 

During 2009, the Company issued warrants to purchase an aggregate of 4,500,000 shares of common stock 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. During the year ended December 31, 2013, the warrants issued in connection with the iSports acquisition (which were warrants to purchase 1,500,000 shares) were exercised on a net-exercise arrangement, resulting in the issuance of approximately 798,000 shares of common stock.

 

During 2013, the Company issued warrants to purchase an aggregate of 3,600,000 shares of common stock in connection with a private placement. The fair value of the warrants was approximately $1,379,000 in aggregate and was determined using the Black-Scholes model using the following weighted-average assumptions: risk-free interest rates of 1.06%; dividend yield of 0%; expected volatility of 80.25%; and a term of 5 years. The Company has concluded that these warrants qualify as equity instruments and not liabilities.

  

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, 2013 and 2012, there were 156,000 shares of Series A Preferred Stock issued and outstanding. 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, 2013 and 2012, the Company issued approximately 35,000 and 73,000 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, 2013. There is no mandatory conversion term, date or any redemption features associated with the Series A Preferred Stock.