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Stockholders' Equity
 12 Months Ended
Dec. 31, 2016
Shareholders' Equity:  
Stockholders' Equity

  9. Stockholders’ Equity

 

Registered Direct Offering

 

On November 1, 2016, the Company entered into a subscription agreement with certain investors relating to the issuance and sale of shares of the Company’s common stock at a purchase price of $6.64 per share, which was the closing price of its common stock on October 31, 2016. The offering closed on November 4, 2016. The Company sold 412,071 shares of its common stock and received net proceeds of approximately $2.7 million, after deducting estimated offering expenses.

 

The Company intends to use the net proceeds of the offering for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities.

 

The terms of the offering were approved by a committee of the Company’s board of directors comprised solely of independent directors, none of whom invested in the offering. The Company’s board of directors gave that committee the power and authority to direct the process and procedures related to the review and evaluation of possible offerings, including the authority to determine not to proceed with any particular offering, to review, evaluate and negotiate, or designate officers of the Company to review, evaluate and negotiate, the terms of one or more offerings, and to authorize and approve one or more offerings and its terms. The investors in the offering included certain existing stockholders and the Company’s chief executive officer, chief financial officer and senior vice president marketing, Ram Krishnan, Allen Wolff and Dave Miller, respectively.

 

The shares were offered and sold pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration Statement No. 333-193012) filed with the Securities and Exchange Commission on December 20, 2013 and declared effective by the SEC on January 9, 2014, and the base prospectus included therein, as supplemented by a prospectus supplement filed with the SEC in connection with the takedown relating to the offering.

 

Reverse/Forward Split of Common Stock

 

At the Company’s annual meeting of stockholders held on June 3, 2016, the Company’s stockholders approved an amendment to the Company’s restated certificate of incorporation to give effect to, first, a reverse split of the Company’s outstanding common stock at an exchange ratio of 1-for-100 and, then, immediately following such reverse split, a forward split of its outstanding common stock at a ratio that is not less than 2-for-1 nor greater than 4-for-1, with the final ratio to be selected by the Company’s board of directors in its sole discretion. The board of directors set the final ratio of the forward split at 2-for-1. The Company refers to the reverse split and to the forward split, together, as the “reverse/forward split.”

 

On June 16, 2016 (the “Effective Date”), the Company filed with the Secretary of State of Delaware the amendment to its restated certificate of incorporation to effect the reverse/forward split. The 1-100 reverse split was effective at 6:00 p.m. Eastern Time on the Effective Date and the 2-for-1 forward split was effective at 6:01 p.m. Eastern Time on the Effective Date. Any fractional share of common stock resulting from the forward split was rounded up to the nearest whole share. Any stockholder who, as of immediately prior to 6:00 p.m. Eastern Time on the Effective Date, held fewer than 100 shares of the Company’s common stock in one account and, subsequent to the reverse split, would otherwise have been entitled to less than one full share of common stock, received, instead of the fractional share, $0.12 in cash for each such share held in that account, which was equal to the average of the closing price per share of the Company’s common stock on the NYSE MKT over the five trading days immediately before and including the Effective Date. As of immediately prior to the reverse split/forward split on the Effective Date, the Company had 92,439,174 of common stock outstanding, and subsequent to the reverse/forward split, it had 1,848,597 shares of common stock outstanding. Approximately $3,000 was paid to cashed-out stockholders who owned less than 100 shares immediately prior to the reverse split on the Effective Date.

 

The number of shares of the Company’s authorized common stock did not change in connection with the reverse/forward split. However, upon the effectiveness of the reverse/forward split, the number of authorized shares of the Company’s common stock that were not issued or outstanding increased due to the reduction in the number of shares of its common stock issued and outstanding as a result of the reverse/forward split.

 

The reverse/forward split did not affect the par value of a share of the Company’s common stock, which remains at $0.005 per share. As a result, the stated capital attributable to common stock on the Company’s consolidated balance sheet has been reduced proportionately based on the reverse/forward split exchange ratio, and the additional paid-in capital account was credited with the amount by which the stated capital was reduced. Comparative financial statements have been retroactively adjusted. There are no other accounting consequences arising from the reverse/forward split.

 

As provided for in the Company’s equity incentive plans and outstanding warrant agreements, the number of shares subject to the equity plans and warrant agreements along with any exercise prices of outstanding awards, were equitably and proportionately adjusted and are reflected. Additionally, the conversion rate for the Company’s Series A convertible preferred stock was also equitably and proportionately adjusted so that holders of the Series A convertible preferred stock would be entitled to receive, upon conversion, the number of shares of the Company’s common stock that such holders would have been entitled to receive immediately following the reverse/forward split, had such shares of the Series A convertible preferred stock been converted into shares of the Company’s common stock immediately prior to the reserve/forward split.

 

Equity Incentive Plans

 

All amounts reported below have been proportionately adjusted as a result of the reverse/forward split discussed above, when applicable.

 

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 50,000 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. 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, 2016, there were approximately 1,000 options outstanding under the 2004 Plan.

 

2010 Amended Performance Incentive Plan

 

In June 2010, the Company’s stockholders approved the 2010 Performance Incentive Plan (the “2010 Plan”). The 2010 Plan provided for the issuance of up to 120,000 shares of the Company’s common stock. At the Company’s 2015 Annual Meeting of Stockholders, the Company’s stockholders approved the Amended 2010 Performance Plan (the “Amended 2010 Plan”), which, among other things, amended the 2010 Plan to increase the authorized shares to be issued thereunder from 120,000 to 240,000. The Amended 2010 Plan expires in February 2020. Under the Amended 2010 Plan, options to the purchase the Company’s common stock or other instruments such as restricted stock units may be granted to officers, directors, employees and consultants. The Company’s Board of Directors designated its Nominating and Corporate Governance/Compensation Committee as the Amended 2010 Plan Committee. Stock options granted under the Amended 2010 Plan may either be incentive stock options or nonqualified stock options. A stock option granted under the Amended 2010 Plan generally cannot be exercised until it becomes vested. The Amended 2010 Plan Committee establishes the vesting schedule of each stock option at the time of grant. At its discretion, the Amended 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 Amended 2010 Plan. Options under the Amended 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, 2016, there were options to purchase approximately 79,000 shares of the Company’s common stock outstanding under the Amended 2010 Plan.

 

2014 Inducement Plan

 

In August 2014, the Nominating and Corporate Governance/Compensation Committee of the Company’s Board of Directors (the “Committee”) approved the 2014 Inducement Plan (the “2014 Plan”) in reliance on Section 771(a) of the NYSE MKT Company Guide as an inducement material to Ram Krishnan entering into employment with the Company as its Chief Executive Officer. The 2014 Plan provides for the issuance of up to 85,000 shares of the Company’s common stock, of which, an option to purchase 70,000 shares of common stock was issued to Mr. Krishnan in September 2014. In accordance with the terms of his employment agreement, in April 2015, Mr. Krishnan was granted another performance-based option to purchase 15,000 shares of common stock. Options under the 2014 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. Both of the option grants described above will, subject to Mr. Krishnan’s continued employment through the applicable vesting date and, with respect to the performance-based option granted in April 2015, subject to meeting performance goals, vest as to 25% of the total number of shares subject to the option on the first anniversary of the grant date and the remaining 75% of the total number of shares subject to the option will vest in 36 substantially equal monthly installments thereafter. There are no share-based awards available to be granted under the 2014 Plan. The 2014 Plan expires in September 2024.

 

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 2016 and 2015 under the ASC No. 718 requirements:

 

    2016     2015  
Weighted average risk-free rate     1.20 %     1.20 %
Weighted average volatility     111.02 %     82.80 %
Dividend yield     0.00 %     0.00 %
Expected life     6.17 years       4.31 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 2016 and 2015 was $419,000 and $456,000, 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, 2016 and 2015:

 

    Outstanding
Options		     Weighted
Average Exercise
Price per Share		     Weighted
Average
Remaining
Contractual
Life (in years)		     Aggregate Intrinsic
Value		  
Outstanding January 1, 2015     144,000     $ 24.99       8.60     $ 285,000  
Granted     43,000       20.59       -       -  
Exercised     (2,000 )     14.32       -       -  
Cancelled     (26,000 )     37.56       -       -  
Forfeited     (23,000 )     29.20       -       -  
Expired     -       -       -       -  
Outstanding December 31, 2015     136,000       20.38       8.67       2,000  
Granted     35,000       7.73       -       -  
Exercised     -       -       -       -  
Cancelled     (3,000 )     21.49       -       -  
Forfeited     (3,000 )     15.51       -       -  
Expired     -       -       -       -  
Outstanding December 31, 2016     165,000     $ 17.78       8.02     $ 36,000  
                                 
Options vested and exercisable at December 31, 2016     75,000     $ 20.06       7.55     $ 4,000  

 

The aggregate intrinsic value of options at December 31, 2016 is based on the Company’s closing stock price on that date of $8.50 per share as reported by the NYSE MKT. The total intrinsic value of options exercised during the year ended December 31, 2015 was approximately $7,000. Under the 2004 Plan and the Amended 2010 Plan, stock options may be exercised on a net-exercise arrangement, where shares of common stock with a value equal to the exercise price are withheld as payment therefor. Under such net-exercise arrangements, options to purchase approximately 2,000 shares of common stock were exercised and approximately 360 shares of common stock were issued during the year ended December 31, 2015. The Company received less than $1,000 in cash payments for the exercise of options to purchase approximately 43 shares during the years ended December 31, 2015. No options were exercised during the year ended December 31, 2016.

 

The per share weighted average grant-date fair value of stock options granted during the years ended December 31, 2016 and 2015 was $6.48 and $12.74, respectively.

 

As of December 31, 2016, the unamortized compensation expense related to outstanding unvested options was approximately $647,000 with a weighted average remaining requisite service period of 2.09 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.

 

Warrant Activity

 

The following summarizes warrant activity for the year ended December 31, 2016 and 2015:

 

    Outstanding
Warrants		     Weighted
Average Exercise
Price per Share		     Weighted
Average
Remaining
Contractual
Life (in years)		  
Outstanding January 1, 2015     132,000     $ 33.64       3.18  
Granted     -       -       -  
Exercised     -       -       -  
Forfeited     -       -       -  
Outstanding December 31, 2015     132,000     $ 33.64       2.18  
Granted     -       -       -  
Exercised     -       -       -  
Forfeited     -       -       -  
Outstanding December 31, 2016     132,000     $ 33.64       1.18  
                         
Balance exercisable at December 31, 2016     132,000     $ 33.64       1.18  

 

During 2009, the Company issued warrants to purchase an aggregate of 60,000 shares of common stock in connection with asset acquisitions of i-am TV. The fair value of the warrants was approximately $537,000 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. None of these warrants were exercised as of December 31, 2016.

 

During 2013, the Company issued warrants to purchase an aggregate of 72,000 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. None of these warrants were exercised as of December 31, 2016.

 

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, 2016 and 2015, 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 $0.10 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 year ended December 31, 2016, the Company paid approximately $16,000 in cash for payment of dividends. During the year ended December 31, 2015, the Company issued approximately 1,000 shares of common stock 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. There were no conversions during either of the years ended December 31, 2016 and 2015. There is no mandatory conversion term, date or any redemption features associated with the Series A Preferred Stock.