STLY Stanley Furniture Company Inc (QB)

EXECUTIVE COMPENSATION

Executive Compensation Program 

Our named executive officers for 2019 were Steven A. Hale II, our Chairman and Chief Executive Officer, Brad G. Garner, our Principal Financial and Accounting Officer.

During 2019, our executive compensation program had two major components: salary and equity awards. The program was designed to promote the development and implementation of an acquisition strategy focused on non-furniture related assets that will allow us to potentially derive a benefit from our net operating loss carryforwards.

Our executive compensation program is administered by the compensation and benefits committee of our board of directors (the “Committee”).

Salary. Our two executive officers who received the following compensation in 2019:

Long-Term Incentives. On June 28, 2019, the Committee granted Mr. Hale a restricted stock award for 333,333 shares ($200,000 at the closing price per share of $0.60 on June 27, 2019) and the Committee granted Mr. Garner a restricted stock award for 83,333 shares ($50,000 at the closing price per share of $0.60 on June 27, 2019). These awards will vest on June 28, 2022.

Summary Compensation Table 

The following table sets forth compensation received by the Named Executive Officers for the years ended December 31, 2019 and 2018.

Outstanding Equity Awards at Fiscal Year-End Table 

The following table sets forth information concerning the year-end number and value of unexercised options, restricted stock that has not vested and equity incentive plan awards for each of the Named Executive Officers.

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ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires us to periodically seek a non-binding advisory vote from our stockholders to approve the compensation as disclosed under “Executive Compensation”, including tabular disclosures and narrative sections accompanying the tabular disclosures in this proxy statement. Since the required vote is advisory, the result of the vote is not binding upon the board of directors.

Our board of directors has adopted a policy for an annual “say-on-pay” advisory vote. In accordance with this policy, stockholders are asked to approve the following advisory resolution at the 2020 Annual Meeting:

“RESOLVED, that the stockholders approve, on an advisory basis, the compensation awarded by the company to the named executive officers, as disclosed under “Executive Compensation”, including the tabular disclosures and other narrative executive compensation disclosures in the proxy statement for the 2020 Annual Meeting of Stockholders as required by the rules of the Securities and Exchange Commission.”

Our board of directors believes that approval of the compensation paid to certain officers is in the best interest of all stockholders and, accordingly, unanimously recommends a vote “FOR” approval, on an advisory basis, of the compensation paid to certain executive officers.

APPROVAL OF AMENDMENT TO THE STANLEY FURNITURE COMPANY, INC.

RIGHTS AGREEMENT EXTENDING TERM

On December 5, 2016, we entered into a Rights Agreement in an effort to protect against a possible limitation on our ability to use our net operating loss carryforwards (“NOLs”). As of December 31, 2019, we had federal NOLs of approximately $33.8 million. The Rights Agreement was approved by stockholders at our 2017 Annual Meeting of Stockholders and was scheduled to expire in December 2019.  On December 5, 2019, we entered into Amendment No. 2 to the Rights Agreement to extend the term of the Rights Agreement.  Amendment No. 2 amends the definition of “Expiration Time” to provide that unless otherwise expiring under the terms of the existing definition, the Rights Agreement will expire (i) at the close of business on the day after our 2020 Annual Meeting of Stockholders unless the stockholders approve the amendment to the definition of “Expiration Time” in Amendment No. 2 or (ii) the close of business on December 5, 2022. Our board of directors unanimously recommends that stockholders vote “FOR” approval of the amendment to the Rights Agreement set forth in Amendment No 2 thereto extending the term of the Rights Agreement.

Background and Reasons for the Proposal

Our board of directors approved the Rights Agreement and Amendment No. 2 thereto in an effort to protect against a possible limitation on our ability to use our NOLs. Our federal NOLs totaled approximately $33.8 million as of December 31, 2019. We may utilize these NOLs in certain circumstances to offset future U.S. taxable income and reduce its U.S. federal income tax liability, which may arise even if we incur an accounting loss in a given period for reporting purposes.

Our ability to utilize our NOLs, however, could be substantially limited if an “ownership change,” as defined under Section 382 of the Internal Revenue Code (“Code”), occurred. In general, an ownership change would occur if and when the percentage of ownership of our common stock, by one or more “5-percent shareholders” (as defined under Code Section 382) has increased by more than 50 percentage points over their lowest ownership percentage at any time during the prior three years (calculated on a rolling basis). These provisions can be triggered not only by merger and acquisition activity but by trading as well. The Rights Agreement is designed to deter trading that would result in an ownership change that could lead to the loss of the NOLs and a resulting reduction in our company’s value.

In connection with the approving the Rights Agreement in 2016, our board authorized and declared a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of our common stock to stockholders of record as of the close of business on December 15, 2016. Each share of our common stock issued after December 15, 2016 until the Separation Time (as defined below) will have a Right associated with it. In general, the Rights will work to impose a significant penalty upon any person or group which becomes the beneficial owner of 4.9% or more of our outstanding common stock or upon any 4.9% or greater holder which becomes the beneficial owner of an additional 1% or more of our outstanding common stock. There is no guarantee, however, that the Rights Agreement will prevent us from experiencing an ownership change and, therefore, having a limitation on its ability to utilize our NOLs.

Description of the Rights Agreement

The following description of the Rights Agreement is qualified in its entirety by reference to the text of the Rights Agreement, which was filed as Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on December 6, 2016, and amended by (i) Amendment No. 1 thereto dated as of January 30, 2016, which was filed as Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on January 31, 2016 and (ii) Amendment No. 2 thereto dated as of December 4, 2019, which was filed as Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on December 5, 2019, each of which is available on the SEC’s web site (www.sec.gov) and our web site (www.hgholdings.net). Please read the Rights Agreement, Amendment No. 1 thereto and Amendment No. 2 thereto in their entirety as the discussion below is only a summary.

The Rights. Until the Separation Time, each Right will be evidenced by either the registration of the associated share of our common stock on our stock transfer books or the certificate for the associated share of our common stock and may only be transferred with the associated share of our common stock. Following the Separation Time, separate certificates evidencing the Rights will be delivered to holders of record of our common stock as of the Separation Time and the Rights may be transferred independent of our common stock.

Holders’ Rights as Stockholders. The holders of Rights will, solely by reason of their ownership of Rights, have no rights as stockholders of our company, including, without limitation, the right to vote or to receive dividends.

Exercisability of the Rights. The Rights are not exercisable until the close of business on the earlier of (i) the tenth business day (subject to adjustment by our board) after the date on which any person commences a tender or exchange offer that, if consummated, would result in such person becoming an Acquiring Person (as defined in the Rights Agreement) (provided that if any tender or exchange offer is cancelled, terminated or otherwise withdrawn prior to the close of business on the tenth business day following its commencement without the purchase of any shares of our common stock, such offer shall be deemed, for these purposes, to never have been made) and (ii) the next business day after the first date of public announcement by us or by an Acquiring Person that a person has become an Acquiring Person (such date being the “Stock Acquisition Announcement Date” and the close of business on the earlier of (i) or (ii) being the “Separation Time”). On or after the Separation Time and prior to the Expiration Time (as defined below), the Rights will be exercisable and each Right will entitle the holder thereof to purchase from us for $8.00 (the “Exercise Price”) one one-thousandth of a share of our Series A Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”).

Flip-In Event. In the event that a person becomes an Acquiring Person, each Right, other than those beneficially owned by the Acquiring Person which shall become null and void, will as of such date (the “Flip-in Date”) constitute the right to purchase from us for the Exercise Price shares of our common stock having an aggregate Market Price (as defined in the Rights Agreement) equal to twice the Exercise Price.

Terms of the Preferred Stock. The terms of the Preferred Stock issuable upon exercise of the Rights are designed so that each one one-thousandth of a share of Preferred Stock is the economic and voting equivalent of one whole share of our common stock. In addition, the Preferred Stock has certain minimum dividend and liquidation rights, which are set out in the form of Certificate of Designation of Series A Participating Preferred Stock attached as Exhibit B to the Rights Agreement.

Exchange. Our board may, at its option, at any time after a Flip-in Date and prior to the time that an Acquiring Person becomes the beneficial owner of more than 50% of the outstanding shares of our common stock, elect to exchange all (but not less than all) of the then outstanding Rights (other than Rights beneficially owned by the Acquiring Person or any affiliate thereof, which Rights shall become void) for shares of our common stock at an exchange ratio of one share of our common stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the Separation Time (the “Exchange Ratio”).  Immediately upon such action by our board (the “Exchange Time”), the right to exercise the Rights will terminate and each Right will thereafter represent only the right to receive a number of shares of our common stock equal to the Exchange Ratio.

Substitution. Whenever we shall become obligated, as described in the preceding paragraphs, to issue shares of our common stock upon exercise of or in exchange for Rights, we, at our option, may substitute therefor shares of Preferred Stock, at a ratio of one one-thousandth of a share of Preferred Stock for each share of our common stock so issuable, or, subject to certain conditions, other debt or equity securities.

Exempt Persons. Any person desiring to engage in an acquisition of our common stock that, if consummated, might cause such person to become an Acquiring Person may request that our board exempt such acquisition from the provisions of the Rights Agreement such that the person would not be deemed to be an Acquiring Person. Our board may grant any such request if it determines, in its sole discretion, that the acquisition (i) does not (x) create a significant risk of material adverse tax consequences to us or (y) constitute an event of default under our prior credit facility which is no longer in force or (ii) is otherwise in our best interest. Our board has granted several exemptions under the Agreement. Currently, the effective exemptions are (i) an exemption requested by Solas Capital Management, LLC (“Solas”) to purchase up to an additional 16.9% of our outstanding common stock (which would result in Solas owning approximately 34% of our outstanding stock if the remaining exempted amount of approximately 11.2% of our outstanding common stock was fully purchased), and (ii) an exemption requested by the Hale Funds permitting them to purchase up to an additional 14.4% of our outstanding common stock (which would result in the Hale Funds owning approximately 32% of our outstanding common stock if the remaining exempted amount of approximately 7.3% of our outstanding common stock was fully purchased).

Redemption. Our board may, at its option and at any time prior to a Flip-in Date, redeem all (but not less than all) of the then outstanding rights at a price of $0.0001 per Right (the “Redemption Price”). Immediately upon the action of our board electing to redeem the Rights, and without any further action or notice, the right to exercise the Rights will terminate and each Right will thereafter represent only the right to receive the Redemption Price in cash or securities for each Right so held.

Anti-Dilution Adjustments. The Exercise Price and the number of Rights outstanding, or in certain circumstances the securities purchasable upon exercise of the Rights, are subject to adjustment from time to time to prevent dilution in the event of a stock dividend on, or a subdivision or a combination into a smaller number of shares of, our common stock, or the issuance or distribution of any securities or assets in respect of, in lieu of or in exchange for our common stock.

Supplements and Amendments.  The Rights Agreement may be supplemented or amended without the approval of holders of the Rights at any time and in any respect prior to the Flip-in Date. Subsequent to the Flip-in Date, the Rights Agreement may only be supplemented or amended in certain limited circumstances as specified in the Rights Agreement.

Expiration. The Rights and the Rights Agreement will expire on the earliest of (i) the Exchange Time, (ii) the date on which the Rights are redeemed as described above, (iii) the close of business on the day after our 2020 Annual Meeting of Stockholders unless our stockholders approve the amendment to the Rights Agreement set forth in Amendment No. 2, (iv) the close of business on December 5, 2022, and (iv) the time at which our board determines, in its sole discretion, that the NOLs are utilized in all material respects or no longer available in any material respect under Section 382 of the Code or any applicable state law or that an ownership change under Section 382 of the Code would not adversely impact in any material respect the time period in which we could use the NOLs, or materially impair the amount of the NOLs that could be used by us in any particular time period, for applicable tax purposes (in any such case, the “Expiration Time”).

Certain Considerations Related to the Rights Agreement

Our board of directors believes that attempting to protect our NOLs as is in our company’s and our stockholders’ best interests. However, we cannot eliminate the possibility that an ownership change will occur even if the amendment to the Rights Agreement is approved. Please consider the items below when making your decision.

Future Use of the NOLs is Uncertain. Our use of the NOLs depends on our ability to generate taxable income in the future. There can be no assurance that we will have taxable income in any applicable period, or if we do, that we will have NOLs in an amount equal to our taxable income.

Potential Challenge to the NOLs. The IRS has not audited or otherwise validated the amount of our NOLs. The IRS could challenge the amount of our NOLs, which could limit our ability to use our NOLs to reduce future taxable income. In addition, the complexity of Code Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an ownership change has occurred. Therefore, we cannot assure you that the IRS will not claim that we experienced an ownership change and attempt to reduce or eliminate the benefit of our NOLS even if the Rights Agreement is in place.

Potential Effects on Liquidity. The Rights Agreement will restrict a stockholder’s ability to acquire, directly or indirectly, additional shares of our common stock in excess of the specified limitations. Further, a stockholder’s ability to dispose of our common stock may be limited by reducing the class of potential acquirers for such shares. In addition, a stockholder’s ownership of our common stock may become subject to the restrictions of the Rights Agreement upon actions taken by persons related to, or affiliated with, such stockholder.

Potential Anti-Takeover Impact. The reason our board approved the Rights Agreement and Amendment No. 2 thereto is to protect our ability to use our NOLs. The Rights Agreement is not intended to prevent a takeover of our company. Because our board can redeem the Rights, the Rights should not interfere with a merger or other business combination approved by our board. However, the Rights Agreement could be deemed to have an anti-takeover effect because, among other things, it will restrict the ability of a person, entity or group to accumulate more than a 4.9% of our common stock and the ability of persons, entities or groups now owning more than 4.9% of our common stock to acquire additional shares of our common stock without the approval of our board. Consequently, the Rights Agreement may discourage or make more difficult, a merger, tender offer, proxy contest or assumption of control by a substantial holder of our securities.