Forward-Looking Statements
Statements that do not relate strictly to historical or current facts are forward-looking and usually identified by the use of words such as “anticipate,” “estimate,” “approximate,” “expect,” “intend,” “plan,” “believe” and other factors and matterswords of similar meaning in connection with any discussion of future operating or financial matters. Without limiting the generality of the foregoing, forward-looking statements contained or incorporated in this document, we believereport include the followingmatters discussed regarding the expectation of compensation plans, strategies, objectives, and growth and anticipated financial and operational performance of the Company and its subsidiaries. A variety of factors could cause the Company's actual results to differ materially from those discussedthe anticipated results or other expectations expressed in the Company's forward-looking statements:
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| the occurrence of any event, change, or other circumstances that could give rise to the termination of the Stock Purchase Agreement; |
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| the inability to consummate the Issuancestatements. The risks and uncertainties that may affect the operations, performance and the Merger due to the failure to obtain stockholder approval of the Issuance or failure to satisfy any other conditions to the consummation of the Issuance; |
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| business uncertainty and contractual restrictions during the pendency of the Issuance; |
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| adverse outcomes of pending or threatened litigation or governmental investigations; |
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| the failure of the Issuance to be consummated for any other reason; |
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| the amount of the costs, fees, expenses and charges related to the Issuance; |
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| diversion of management’s attention from ongoing business concerns; |
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| the effect of the announcement of the Issuance on the Company’s business and customer relationships, operating results and business generally, including the ability to retain key employees; |
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| the risks that the Issuance or the Merger disrupts current plans and operations; |
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| the possible adverse effect on our business and the price of our common stock if the Issuance is not consummated in a timely fashion or at all; |
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| risks that we may be unable to successfully integrate MTE’s business and personnel with our own; |
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| Risks that the expected benefits of the Issuance may not be realized, including utilization of the NOLs; and |
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| other risks and uncertainties applicable to our business set forth in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. See section “Additional Information” below. |
Many of the factors that will determine our future results are beyond our ability to control or predict. We cannot guarantee any future results, levels of activity, performance, or achievements. In light of the significant uncertainties inherent in theCompany's business and forward-looking statements readers shouldinclude, but are not place undue reliance on forward-looking statements, which speaklimited to, those set forth herein. Any forward-looking statement speaks only as of the date on which the statements weresuch statement is made and it should not be assumed that the statements remain accurate as of any future date.
You should carefully consider the cautionary statements contained or referred to in this section in connection with any subsequent forward-looking statements that may be issued by us or persons acting on our behalf.
APPROVAL OF THE ISSUANCE PROPOSAL
(Proposal No. 1)
THE ISSUANCE
Background of the Transaction and Overview
In line with the strategic objective to increase its membership base through mergers and acquisitions (M&A), Travelzoo has an M&A desk constituted of members of Travelzoo’s management and board of directors with M&A and industry experience. This M&A desk has been consistently meeting since approximately September 2019. Since its inception, the M&A desk has evaluated hundreds of potential acquisition targets, undertaken in-depth due diligence inquiries into and entered negotiations with at least seven potential targets, and successfully closed more than four transactions, including the acquisition of a majority stake in JFC Travel Group Co. (a paid subscription membership company), the investment into and later sale of such investment in weekengo GmbH (a weekend travel company) and the acquisition of assets in the United States and a branch in Spain from a competing membership-based travel company.
In line with the strategic objective to expand its product offerings, including for times when physical travel is limited or impossible due to extraordinary events such as, for example, another global pandemic, Travelzoo management started as early as the second half of 2021 to assess opportunities for Travelzoo related to Metaverse travel. Beginning in January 2022, Travelzoo hired an executive focused on building a paid subscription membership. While the original plan was for this executive to focus on a Travelzoo-based paid subscription membership, after conducting research into the fast-growing market of Metaverse travel and experiences, it was decided that the Travelzoo paid subscription membership would be focused on the Metaverse specifically. In a presentation to the Audit Committee at the beginning of March 2022, it was noted that in 2021 the US Metaverse market was approximately $58.5 billion, which accounted for 41% of the global market share. This was discussed in further detail with the board of directors of Travelzoo during the Q1 2022 board meeting, where the board supported the plan of gathering additional data and building a strategy to move into this space.
As Travelzoo began building out its strategy for a paid subscription membership for Metaverse travel experiences, it became obvious that sourcing high-quality, unique, exclusive Metaverse experiences, and more specifically sourcing the creators who had made or could make such experiences, would be critical to the success of Travelzoo META and that Travelzoo did not have the internal resources with the necessary connections or skills to manage this aspect of the business. As discussed in further detail below, MTE had already begun building a global team to focus on sourcing Metaverse experiences specifically. As such, the Company entered into a service agreement with MTE on March 1, 2022, whereby MTE agreed to exclusively source Metaverse travel experiences and creators for the Company, in exchange for a monthly fee of $25,000 and a commission of 25% of all subscription revenues generated by Travelzoo META (the “Service Agreement”).
Based on the insights and experiences gained over the period since the entry into the Service Agreement, in particular in relation to the uncertainty of expected subscriber numbers as well as expected margins, Travelzoo’s management believes that the acquisition of MTE will likely be economically more attractive for the Company than continuing to pay the monthly fee and any future (and potentially very high) commission share under the Service Agreement.
Additionally, as the Company continues its recovery from the pandemic, mainly due to increased liabilities for vouchers that are expiring in the next few years, the Company is in a negative net working capital position. Although management of the Company believes that the Company has significant capital to meet its ongoing obligations, management also expects cash levels to be at their lowest in the next few quarters, with gradual increases over the course of next year.
Therefore, in combination with the advantages presented by the Merger, the Issuance is also attractive to the Company because it would provide some liquidity to the Company during a time when the Company has negative net working capital and lower cash levels and because a capital raise by way of the proposed private placement appears superior to alternative options. Specifically, one alternative option of obtaining a debt facility of some kind (most likely a revolving credit facility) would, as confirmed by Travelzoo’s banking partner, come with considerable restrictions in the form of covenants and pledges of security interests over Travelzoo’s most valuable assets (cash, intellectual property, subsidiaries, etc.), neither of which are present with the Issuance.
The other alternative option of raising equity from existing shareholders other than Azzurro or new investors presents the disadvantage that such shareholders or investors, when invited to acquire a considerable stake in a private placement, will likely request a non-negligible discount on the share price. A public offering, in turn, would be more costly than a private placement because of added legal and administrative requirements. Such alternative equity issuance would also not present the added advantages of the Merger relating to MTE (elimination of payment obligations under Service Agreement; direct control over Metaverse experience scouting; utilization of MTE’s NOLs), nor would it further management’s strategic goal to ensure long term stability and continuity in Travelzoo’s stockholder base on the basis of a robust corporate governance and compliance framework designed for a company with a controlling shareholder.
For all of these reasons, on November 25, 2022, the Company entered into the Stock Purchase Agreement with Azzurro providing for the Issuance, in exchange for (a) $10 million, payable, at the election of Azzurro, in cash or as a combination of no less than $2 million in cash and up to $8 million in the form of a secured promissory note; and (b) shares of common stock representing all of the outstanding equity securities of MTE.
Background of Metaverse Travel Experiences, Inc. (“MTE”), formerly known as Azzurro Brands, Inc. (“AB”)
In the first few years after incorporation, MTE had three stores located in the states of New York and Nevada. MTE licensed from an unrelated third party the trademark “Devi Kroell” in the field of fashion, accessories, fragrances, cosmetics, etc. MTE utilized this trademark for several years and then in 2014, sub-licensed it to Devi Kroell S.R.L., an affiliated entity. MTE’s Nevada location was closed in 2013 and the New York City location on Madison Avenue was closed in 2017. Until recently, MTE operated as last remaining store a seasonal store in East Hampton, New York under the name Devi Kroell.
Since 2017, MTE has considered various investment opportunities to pivot its business model. As it had historically been involved in various licensing arrangements, in March of 2021, MTE purchased an email database from a significant competitor of the Company (the “Database”), which it then licensed to Travelzoo for its exclusive use. Travelzoo preferred to license the Database initially, rather than purchase it outright, to minimize the cash needed to be expended by Travelzoo and to mitigate the risk of data privacy issues during the transition phase of moving over the email addresses.
On January 3, 2022, MTE legally changed its name from “Azzurro Brands, Inc.” to “Metaverse Travel Experiences, Inc.” and hired a team of professionals who began building worldwide relationships with creators and providers of high quality Metaverse experiences with the goal of brokering contacts between such creators/experience providers and businesses planning to market Metaverse experiences to consumers. On March 1, 2022, MTE entered into the exclusive Service Agreement with Travelzoo to scout for Metaverse experiences in support of Travelzoo’s new strategic business opportunity of building a premium subscription membership for the Metaverse. In that same month, MTE sold the membership database to Travelzoo (after Travelzoo had successfully transitioned the email addresses and realized value of more than $1M in purchases from the members in the database) to consolidate its business operations and focus on Metaverse experience scouting.
MTE is wholly owned by Azzurro, whose sole shareholder is The Ralph Bartel 2005 Trust, whose sole beneficiary is Ralph Bartel, the Chairman of the Board of the Company.
Potential Transaction with Azzurro Brands, Inc. (“AB”) (March 2020 through December 2021)
As part of its ongoing growth by acquisition strategy, Travelzoo and AB approached each other several times since early 2020 to discuss a possible acquisition of AB with the goal of expanding Travelzoo’s membership base and product offerings.
In March of 2020, Travelzoo discussed with Grant Thornton the possibility of Travelzoo acquiring AB to use it as vehicle for the U.S. expansion of Travelzoo’s then-newly acquired 60% subsidiary JFC Travel Group Co. Before a possible transaction was concluded, the COVID-19 pandemic struck and the project was de-prioritized by Travelzoo.
In November of 2020, Travelzoo re-engaged with Grant Thornton to conduct a feasibility analysis on the acquisition of AB. Grant Thornton presented the preliminary results of its analysis on December 17, 2020, discussing generally the two options available for the transaction – a taxable purchase or a tax-free reorganization. On December 23, 2020, Grant Thornton provided structure charts outlining these two options. After internal discussions at the Company, including members of the Company’s board who serve as independent directors, the Company advised Grant Thornton to look deeper into the second option of a tax-free reorganization. Grant Thornton provided the results of the work, which was an in-depth feasibility analysis of the tax-free reorganization, on February 15, 2021, advising that for a tax-free reorganization to be in compliance with tax requirements, the Azzurro Group, which is comprised of Azzurro, its sole shareholder. The Ralph Bartel 2005 Trust and Ralph Bartel, as the sole beneficiary of the Trust, would need to have greater than 50% ownership of Travelzoo at the closing of the transaction.
After communications from the Company that an acquisition of AB would be feasible, and even beneficial, to the Company from a tax perspective, Azzurro Capital then submitted a proposal to the board of directors of Travelzoo for the acquisition of AB on March 23, 2021, which offered to sell AB to the Company in exchange for 1,800,000 shares of the Company, which given the share price of around $15.25, implied total consideration of approximately $27,450,000.
On that same day, the Board via a unanimous written consent, appointed a Special Committee, comprised solely of independent and disinterested directors, to determine whether a potential transaction would be in the best interests of the Company and its stockholders, other than Azzurro and its affiliates, and review, evaluate and negotiate the terms of any definitive agreements, as well as appoint independent legal, financial, and other advisors, in their discretion.
On March 25, 2021, the Company entered into a confidentiality agreement with AB to begin conducting additional due diligence on AB specifically.
On April 9, 2021, upon the request of the Special Committee, management of the Company began to prepare internal forecasts for US taxable income for 2021, 2022 and 2023.
On April 15, 2021, the Special Committee appointed Ballard Spahr LLP to act as its independent legal advisor. On April 21, 2021, the Special Committee and its independent legal advisor held their first meeting. The independent legal advisor advised the Special Committee members of their fiduciary duties in connection with a potential transaction and discussed certain preliminary issues relating to evaluating a potential transaction. The Special Committee discussed the structure and timing for the proposed transaction. On April 23, 2021, the Special Committee held another meeting with counsel in order to receive an update regarding due diligence.During that meeting, the Special Committee and the representatives of Ballard Spahr also reviewed the independence and disinterestedness determinations for the members of the Special Committee.
On April 28, 2021, the Special Committee met via videoconference with Grant Thornton to discuss the proposed transaction and their analysis of the net operating losses of AB. In order to fully understand the value of the net operating losses to the Company, the Company’s Chief Financial Officer began working on projections for the Company’s US taxable income over the next 10 years. Once completed, the Company worked with Grant Thornton to update the NOL utilization estimates.
Following the meeting, the Company requested that Grant Thornton prepare technical documentation and a supporting memo for the potential transaction and utilization of the NOLs. On May 8, 2021, management of the Company met with Grant Thornton to discuss questions relating to Grant Thornton’s analysis and the tax treatment of the transaction as well as their evaluation of the quality of the NOLs. Following the meeting, management decided to engage Grant Thornton to conduct detailed due diligence into the quality of the NOLs.
On May 20, 2021, the Company met with its independent auditors, RSM US LLP, to discuss their questions and any accounting matters to be considered for the potential transaction.
On May 26, 2021, the Special Committee held a meeting, via video conference, with management and its independent legal advisor to discuss the potential transaction. Management proposed a potential restructure, which would incorporate the potential transaction, business justifications for the restructure, proposed valuation of AB from management’s perspective (subject to review by the Special Committee’s independent financial advisor), analysis of the consideration and accounting considerations. As part of the proposed valuation of AB, management also discussed a 10-year US taxable income forecast, with 3 scenarios, prepared by the Company’s Chief Financial Officer and Business Controlling Director.
On May 27, 2021, Grant Thornton met with Azzurro to discuss certain outstanding due diligence questions and send a follow-up list of questions and diligence requests following the call.
On June 1, 2021, Grant Thornton provided an excerpt of the technical memo for review by management in terms of factual accuracy.
On June 4, 2021, the Company’s Chief Financial Officer shared additional information with the Special Committee, specifically some explanation regarding the underlying assumptions, for the previously presented U.S. taxable income forecast.
On June 6, 2021, Azzurro and Azzurro’s tax advisor met with Grant Thornton and the Company’s General Counsel to discuss the resolution of the outstanding shareholder loans of AB, an issue that came up during due diligence.
On June 9, 2021, RSM provided some initial feedback to Grant Thornton regarding the technical memo. The feedback centered on the discussion in the memo concerning the business purpose of the transaction in the context of Code section 269, among other additional questions.
On the same day, Grant Thornton provided the initial findings of their due diligence of AB and the NOLs, which were reviewed by the Company and shared with the Special Committee. The diligence report included an NOL schedule which estimated the total NOLs of AB to be $63,518,000 and stated that Grant Thornton did not anticipate material limitations, if any, related to the future use of the NOLs. The diligence report did not contain any material red flags.
On June 25, 2021, Grant Thornton provided the full initial draft of the technical memo to the Company. Management reviewed the memo to ensure its factual accuracy and shared the memo with the Special Committee. The memo analyzed certain tax impacts to the Company from the proposed transaction, including the potential benefits to be received by the Company from the NOLs of AB.
On July 2, 2021, the Special Committee, along with its independent legal advisor, met with management, the Company’s auditors and Grant Thornton to review Grant Thornton’s technical memo draft, as well as the status of the potential transaction. The Special Committee focused particularly on the business purpose of the transaction, as they wanted to ensure that the various business justifications provided by management for acquiring AB aligned with the strategy of the Company and the requirements of the Code and would be in the best interests of the stockholders. Questions were also raised concerning some of the outstanding assets still contained within AB, including assets relating to the historic business of AB. The Special Committee also discussed with Grant Thornton the standard of review included in the technical memo (i.e., the “more likely than not” standard).The Special Committee also directed its independent legal adviser to contact a potential financial advisor to independently advise the Special Committee as to the fairness of a potential transaction.
At this point, although regular status updates had been provided to Azzurro, no formal negotiations had commenced and the Special Committee still had not determined whether they wanted to officially proceed with the potential transaction. The Special Committee had not yet engaged an independent financial advisor to limit expenses until they were certain that the transaction should continue to be considered.
Following the meeting, the Special Committee requested management to run additional analyses regarding whether any outstanding options held by Ralph Bartel, as an individual, should be included in the potential transaction. The Special Committee also requested an updated U.S. taxable income forecast and cash forecast, as some time had passed since the last analysis.
On July 12, 2021, management provided an updated copy of the technical memo to the Company’s auditors, RSM, for further review, including by their tax specialist. In furtherance of feedback from the Special Committee, management requested to understand the tax and accounting treatment of the transaction, to ensure no impact to the utilization of the NOLs by the Company, and asked RSM to check for any concerns relating to the potential insolvency of AB as part of the potential transaction. RSM responded to the Special Committee’s questions on July 22, 2021, explaining that the potential transaction, if consummated, would be considered a material transaction and therefore subject to various audit procedures and assessments on the Company’s disclosure.
On July 20, 2021, the Special Committee held a meeting with its independent legal adviser relating to the transaction.The purpose of the meeting was to discuss the status of the proposed transaction and the potential engagement of Stout Risius Ross LLC, or Stout, as an independent financial advisor to the Special Committee in connection with the transaction.The Special Committee considered Stout’s independence and the prior work performed by Stout for the independent directors of the board.Following discussion, the Special Committee directed the representatives of Ballard Spahr to move forward with engaging Stout as the Special Committee’s independent financial advisor, subject to negotiation of an acceptable engagement letter. The Special Committee also discussed the status of the proposed transaction and due diligence.
On August 2, 2021, management, the Special Committee and its independent legal advisor, the Company’s auditors and Grant Thornton receive an update on Grant Thornton’s analysis of the tax and accounting treatment for the potential transactions as well as Grant Thornton’s diligence of AB.
On August 5, 2021, the independent legal advisor to the Special Committee, management and Grant Thornton met to discuss additional questions from the Special Committee relating to the transaction and diligence of AB. Following the meeting, Grant Thornton agreed to update the technical memo to include state tax considerations for the potential transaction and consequences on the potential transaction should the store be sold and the transaction no longer qualifying for reorganization treatment. Grant Thornton also agreed to consider the effects on the transaction for a valuation where the majority of the value is the NOLs.
On August 13, 2021, the Special Committee and its independent legal and financial advisors as well as representatives of Stout met with management to receive updates from management on their diligence of AB on and the possible valuation for MTE’s assets. The Special Committee also received input from management regarding potential terms for the proposed transaction.The Special Committee then discussed such proposed terms and potential next steps with its independent legal adviser.
In mid-August 2021, the representatives of Ballard Spahr, the Special Committee’s independent legal advisor, proceeded to negotiate an engagement letter with the representatives of Stout to potentially engage them as independent financial advisors to the Special Committee for the potential transaction.
On August 19, 2021, Grant Thornton provided an updated draft of the technical memo to the Company. The updated technical memorandum detailed certain assets of AB that would not be required to be included in the transaction, since such asset was only relevant for determining whether or not the transaction would be a tax-free reorganization for Azzurro. Grant Thornton also confirmed that there may be sufficient continuity of AB’s business in order to constitute a tax-free reorganization in light of the use of the membership database before and after the contemplated transaction.
On September 10, 2021, the Special Committee engaged Stout as their independent financial advisor to conduct an analysis regarding the fairness of the transaction from a financial standpoint to the Company and its stockholders.
On September 24, 2021, Grant Thornton provided a further updated technical memo.
On September 28, 2021, the Special Committee, along with its legal and financial advisor, met with management and Grant Thornton to discuss certain due diligence questions raised by Stout as it began to conduct its analysis.
On September 29, 2021, Stout provided the Special Committee with an initial draft of its analysis. The analysis reviewed the Company’s 1-year and 5-year stock performance and trading statistics and volume-weighted average prices of the company’s shares of common stock for 5, 10, 15 and 20 trading days. The analysis also reviewed management’s U.S. taxable income forecast and Grant Thornton’s NOL utilization analysis, along with an analysis of the asset of the membership database, to provide a preliminary estimate of the implied value of AB. For clarity, Grant Thornton did not opine on the valuation of AB, but only the utilization of the NOLs, which management reviewed along with its U.S. taxable income forecast and submitted to Stout. Stout also conducted an analysis of the proposed consideration to be included in the transaction. The Special Committee discussed with Stout whether a discount should be applied to restricted shares that would be issued in connection with the proposed transaction.
On October 11, 2021, management, representatives of Azzurro and the Special Committee’s independent legal advisor met to discuss the status of the potential transaction. Based on the conversation, there appeared to be a gap in the valuation of AB when comparing Stout’s analysis and the proposal provided by Azzurro.
Management had further discussions with Stout and Grant Thornton regarding the estimated discount rate and effective tax rate utilized in Stout and Grant Thornton’s analyses. The Special Committee directed its advisors to communicate to Azzurro that its view on AB’s valuation had not changed, and that, as currently contemplated for the proposed transaction, Azzurro would need to provide additional value or assets, including cash, before the transaction could proceed further.
On October 19, 2021, Azzurro withdraw its proposal. Management continued its review of potential options for the transaction, with various questions exchanged over email with its tax advisor, Grant Thornton.
On November 12, 2021, management contacted the Special Committee and its independent legal advisor to discuss a potential alternative structure for an acquisition of AB.
On November 16, 2021, management met with its auditors to discuss again Grant Thornton’s technical memo. On November 17, 2021, RSM’s tax specialist provided feedback regarding the background information that should be included in the technical memo. An updated draft of the memo was provided back to RSM on November 19, 2021. After additional review by management and discussion with Grant Thornton, a further updated draft of the technical memo was provided to Grant Thornton on November 29, 2021. On the same day, RSM provided further follow-up questions to the Company regarding the updated memo.
On November 17, 2021, the Special Committee met with representatives of Ballard Spahr, its independent legal counsel, and members of management. At the meeting, management provided the Special Committee an update on certain developments and other strategic matters that may impact a potential transaction with AB. The Special Committee discussed potential options for changes to the AB transaction structure in light of management’s updates. In response to the discussion, the Special Committee requested additional information regarding such potential options from management
On November 24, 2021, the Company and Azzurro entered into a confidentiality agreement, with the intention of entering into further discussions regarding potential structuring of a transaction whereby the Company would acquire AB.
Also in November 2021, Travelzoo engaged with a financial advisor to begin evaluating other possible business combinations. In the context of the contemplated business combinations, the Company discussed with its independent financial advisor whether a possible acquisition of AB prior to a combination with a third party, with the aims of improving Travelzoo’s valuation and stock price and potentially consolidating Azzurro’s holdings of Travelzoo before entering into a stock transaction with the shareholders of any potential target, would ultimately be beneficial and in the best interests of the Company. The financial advisor ran various calculations and determined that a transaction with AB prior to any business combinations with an unrelated third party company would be beneficial as it would improve the Company’s financial statements and result in tangible equity value creation for shareholders of the Company.
On December 8, 2021, Azzurro submitted a new proposal to the Special Committee for the Company to purchase AB in exchange for 650,000 shares of the Company and $7,000,000 in cash. Upon receipt of the updated proposal and the request of the Special Committee, management prepared updated forecast numbers, the Company’s cash situation, and other open items from the previous review of a potential transaction with Azzurro.
On December 9, 2021, the Special Committee met with its independent legal and financial advisors. In light of the amount of cash requested as part of the proposal, the Special Committee was focused on ensuring that the Company had sufficient cash levels to support ongoing operations if it were to go ahead with the potential transaction and requested further
information regarding the same be obtained from management. The Special Committee also discussed the additional work to be completed in order to evaluate Azzurro’s latest proposal.
On December 10, 2021, Grant Thornton provided an updated draft of the technical memo. After extensive back-and-forth among the Special Committee, management and Grant Thornton, the Special Committee, along with its independent legal advisor, met first with management and then in an executive session to discuss the outstanding proposal and whether it would be feasible and in the best interests of the Company to complete before the end of the year. Management indicated that the transaction could bring immediate value for the 2021 tax year and also would allow the Company to be in a better position for other contemplated M&A activity, in terms of improved financial statements and potential equity value creation, as determined by the Company’s external financial advisor..
With the authorization of the Special Committee, the Special Committee’s independent legal advisor engaged in discussions with representatives of Azzurro regarding potential terms for a transaction. Following various discussions, the Special Committee, through its independent legal advisor, informed representatives of Azzurro that it was to prepared to accept Azzurro’s latest proposal at such time.
Accordingly, for reasons relating to timing, pricing, availability of management and the Special Committee during the holiday season and continued COVID recovery, the acquisition of AB was then paused for further consideration.
Potential Transaction with MTE (January 2022 through Present)
On January 3, 2022, MTE legally changed its name to “Metaverse Travel Experiences, Inc.” and hired a team of professionals who began building worldwide relationships with creators and providers of high quality Metaverse experiences with the goal of brokering contacts between such creators/ experience providers and businesses planning to market Metaverse experiences to consumers. On March 1, 2022, MTE entered into the Service Agreement with the Company pursuant to which MTE would scout Metaverse travel experiences and creators for the Company. In that same month, MTE sold the database to Travelzoo (after Travelzoo had successfully transitioned the email addresses and realized value of more than $1M in purchases from the database) to consolidate its business operations and focus on Metaverse experience scouting.
In April 2022, two members of the Special Committee rotated off the Board due to long tenure on the board and in support of corporate governance best practices. Also in April 2022, the Company elected two new independent directors to the Board, with one independent director continuing from before.
On May 23, 2022, Azzurro submitted a new proposal to the Company for an issuance of 3,363,000 new shares of common stock of the Company in exchange for consideration comprised of 100% of the equity interests of MTE, a cash payment of $1,000,000 and a promissory note to be paid on or before December 31, 2022.
On May 24, 2022, the board of directors of the Company re-appointed the Special Committee via a unanimous written consent, which included the two recently elected independent directors and one independent director who previously served on the Special Committee, to determine whether a potential transaction as proposed by Azzurro would be in the best interests of the Company and its stockholders, other than Azzurro and its affiliates and review, evaluate and negotiate the terms of any definitive agreements, as well as appoint independent legal, financial and other advisors, in their discretion. The new Special Committee agreed to re-appoint Ballard Spahr LLP as its independent legal advisor and Stout Risius Ross LLC as its independent financial advisor.
Management commenced updating the U.S. taxable income forecast and NOL utilization analysis for the benefit of the Special Committee. Management also coordinated with Grant Thornton on a further update of their technical memo to include more details surrounding the new transaction structure. Management also updated the presentation, previously provided to the Special Committee considering the former potential transaction, to account for the new view of management as to the updated potential transaction structure.
Management, with the approval of the Special Committee, also requested that Grant Thornton refresh its diligence report previously conducted on AB, now that the entity had become MTE. Management also refreshed its calculations regarding the shares and proposed consideration and shared with the Special Committee and its independent legal advisor.
On June 18, 2022, the Special Committee, along with its independent legal advisor, met with management of the Company to discuss the potential transaction. Following the meeting, the Special Committee requested that representatives of Ballard Spahrfurther review the tax analysis conducted by Grant Thornton.The Special Committee also authorized management of the Company to have informal discussions with various banking partners to understand potential terms for a financing transaction as an alternative to the proposed transaction.
The Special Committee also agreed that Company management in coordination with the representatives of Ballard Spahr should prepare an initial draft of a term sheet for the proposed transaction. On July 8, 2022, the Special Committee and its independent legal advisor met with members of Company management to review the proposed term sheet draft. A revised term sheet was provided to the Special Committee on July 14, 2022 in response to the Special Committee’s feedback. With the
approval of the Special Committee, the Special Committee’s independent legal advisor sent the draft term sheet to Azzurro on July 18, 2022.
On August 22, 2022, the Special Committee’s independent legal advisor and the Company’s General Counsel met with a representative of Azzurro to discuss the term sheet. Following that conversation, Azzurro returned comments to the term sheet for review by the Special Committee.
On August 29, 2022, the Special Committee and its independent legal advisor met with the Company’s General Counsel to discuss Azzurro’s feedback on the term sheet. Following the call, an updated draft of the term sheet was circulated for review. After additional edits, the Special Committee confirmed to its independent legal advisor that the revised draft was approved and the Special Committee’s independent legal advisor sent the revised term sheet to Azzurro on September 8, 2022.
On September 7, 2022, the scope of services being provided pursuant to the Service Agreement was amended by mutual agreement of Azzurro and the Company.
On October 18, 2022, Grant Thornton provided an updated draft of the technical memo, accounting for the new proposed transaction. Its conclusions did not materially change, however, the facts were significantly updated to account for the new Metaverse business and the fact that the proposed transaction was now structured as an issuance of shares, with a merger included as consideration, instead of just a merger transaction. Specifically, the memo was updated to review the transaction as a qualified stock purchase under section 338(d)(3) followed by a section 332 liquidation, instead of as a tax-free reorganization as was previously contemplated.
On October 31, 2022, Azzurro responded to the Special Committee’s independent legal advisor with comments to the term sheet. On November 4, 2022, the Special Committee and its independent legal advisor met with members of management to review such comments to the term sheet and the Special Committee’s feedback.The Special Committee’s independent legal advisor and Company management prepared an updated term sheet based on the Special Committee’s comments. An updated draft of the term sheet was returned to Azzurro on November 10, 2022.
Azzurro provided comments to the term sheet to the Special Committee’s independent legal advisor on November 15, 2022. In the meantime, management of the Company worked to update the U.S. taxable income forecast and NOL utilization analysis in order for Stout to provide an updated analysis. Stout also conducted a review of the VWAP of the Company’s stock price.
On November 15, 2022, Azzurro engaged Morrison Cohen LLP to act as its legal advisor in connection with the proposed transaction.
On November 17, 2022, management of the Company provided an updated U.S. taxable income forecast and NOL utilization analysis to the Special Committee and Stout.
On November 18, 2022, the Special Committee met with its independent legal advisor and management to discuss the latest term sheet. Management represented its view to the Special Committee that it would be beneficial to the Company if a transaction could be completed before the end of the year, so that any tax benefit from the NOLs could be applied against 2022, when the Company was estimated to have lower cash levels. During executive session, the Special Committee considered the feedback received from Azzurro on the term sheet and authorized the Company’s General Counsel and the Special Committee’s independent legal advisor to negotiate the remaining open items and finalize the term sheet as soon as possible. The Special Committee also provided its approval to begin preparation and negotiation of the draft Stock Purchase Agreement.
Following the meeting, the revised term sheet was delivered to Azzurro, which confirmed it had no further comments.The Company’s General Counsel, with authority granted by the Special Committee, and a representative of Azzurro, executed the nonbinding term sheet on November 18, 2022.
Thereafter, the Company’s General Counsel, along with the Special Committee’s independent legal advisor, prepared and negotiated the terms of the draft Stock Purchase Agreement with Azzurro and its counsel over the next week.
The Special Committee met on November 22, 2022 with its independent legal advisor and members of management to receive an update on the status of the Stock Purchase Agreement negotiations and provide input on certain open points.In light of feedback provided during such meeting, the Special Committee’s independent legal advisor continued negotiations with Azzurro.On November 23, 2022, the Special Committee held a meeting with its independent legal advisor and Stout, as well as, for a portion of the meeting, certain members of Company management, to present to the Special Committee Stout’s fairness analysis. The representatives of Stout reported that they were prepared to issue a fairness opinion if requested by the Special Committee.
From November 23 through 25, 2022, the Special Committee’s counsel, in coordination with management, continued negotiations with Azzurro in order to finalize the Stock Purchase Agreement.Also, on November 25, 2022, Stout delivered to the Special Committee its updated fairness analysis and fairness opinion, and the Special Committee approved the Stock Purchase Agreement subject to final changes agreed upon by the Special Committee.
On November 25, 2022, the Company’s General Counsel, with the unanimous approval of the special committee, and a representative of Azzurro executed the Stock Purchase Agreement.
On November 25, 2022, the Company filed a Form 8-K disclosing the execution of the Stock Purchase Agreement and then filed the preliminary proxy statement..
Description of the Stock Purchase Agreement
Consideration
On November 25, 2022, we entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Azzurro, providing for the issuance of 3,410,000 shares (the “Shares”) of common stock of the Company (the “Common Stock”), in exchange for consideration comprised of (a) $10 million, payable at the election of Azzurro, in cash or as a combination of no less than $2 milion in cash and the remaining up to $8 million in the form of a secured promissory note; and (b) shares of common stock representing all of the outstanding equity securities of MTE , such that following the consummation of the proposed issuance, Azzurro and its affiliates will own greater than 50% of the common stock of the Company. The Stock Purchase Agreement contemplates that the offer and sale of the Shares will be made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) or another available exemption from registration.
The Stock Purchase Agreement contemplates an issuance price for the Shares equal to $5.88 per share (the “Issuance Price”), which was the 15-day volume-weighted average price (“VWAP”) of the shares of common stock of the Company as of the date of execution of the Stock Purchase Agreement calculated by Stout, which results in an aggregate purchase price for the issuance of the Shares of $20,050,800.
Purchase Price Adjustment
The Stock Purchase Agreement contains a purchase price adjustment, whereby if the Nasdaq closing stock price of the Company during the period between the signing of the Stock Purchase Agreement and the closing of the transactions contemplated under the Stock Purchase Agreement (the “Closing) increases or decreases by more than 10%, with such increase sustained for 15 consecutive trading days or more, then the Issuance Price shall be increased or decreased, as applicable, to the Company’s 15-day volume-weighted average price (VWAP) of the shares of common stock of the Company as of the date of Closing.
Registration of the Shares
Following the Closing, the Company shall file a registration statement covering the resale of the Shares by Azzurro issued in exchange for the cash consideration actually paid by Azzurro at Closing and MTE.
Representations and Warranties/Indemnification
The Stock Purchase Agreement contains customary representations and warranties surrounding MTE, the business of MTE and the NOLs and a corresponding right to indemnification of the Company by Azzurro. The Stock Purchase Agreement also contains customary indemnification provisions, including for breaches of representations and warranties made by MTE and Azzurro, including tax representations relating specifically to the NOLs. In the case of a Loss (as defined in the Stock Purchase Agreement), Azzurro would be required to indemnify the Company.
Conditions That Must Be Satisfied or Waived for the Issuance to Occur
The obligations of the parties to consummate the transactions contemplated by the Stock Purchase Agreement are subject to, among other things, the approval of the stockholders of the Company, that Azzurro and its affiliates have sufficient ownership so that upon the issuance of the Shares Azzurro and its affiliates will hold more than 50.0% of the Company. Azzurro is also obligated to resolve all outstanding shareholder loans in the financial statements of MTE in a manner satisfactory to the Company. Azzurro must also have sufficient ownership prior to the Closing so that upon the issuance of the Shares, Azzurro, together with its affiliates, shall have greater than 50% ownership (in order to allow full utilization of the NOLs of MTE). The Stock Purchase Agreement also contains customary conditions to closing, such as requiring that no governmental authority shall have enacted any order which would make the transaction illegal, and that the representations,
warranties and covenants of MTE, Azzurro and the Company shall be true anddoes not intend to correct as of the Closing Date, and that the Investor, MTE and the Company shall have complied in all material respects with the SPA andor update any related agreements.
Termination
The Stock Purchase Agreement may be terminated at any time prior to the Closing upon the mutual written consent of the parties, by the Company if there is an increase in the Nasdaq closing stock price of the Company by 15% or more sustained for a period of 15 consecutive business days or more, and by Azzurro if there is a decrease in the Nasdaq closing stock price of the Company by 15% or more sustained for a period of 15 consecutive business days or more. The Stock Purchase Agreement contains an outside date of March 31, 2022, at which time, either party may terminate the Stock Purchase Agreement, with notice to the other party. There are no termination fees payable by either party in connection with a termination pursuant to the Stock Purchase Agreement or related agreements.
Standstill
The Stock Purchase Agreement provides that Azzurro may not, for the period of 12 months following the Closing Date and subject only to customary exceptions, sell, transfer or dispose any shares of the Company held by Azzurro if such sale, transfer or disposal would reduce the total number of shares of the Company held by Azzurro below 3,410,000 (with such minimum number of shares to be held by Azzurro not including any shares that are issued in the Issuance and pledged as collateral securing the Promissory Note).
The Stock Purchase Agreement is included as Annex A to this proxy statement. The description set forth herein is qualified in its entirety by the text of the Stock Purchase Agreement, which is incorporated by reference herein.
The Merger Agreement
The form of merger agreement (the “Merger Agreement”) attached to the Stock Purchase Agreement as Exhibit A provides that upon the closing of the Issuance, MTE will merge with and into Merger Sub Inc., a Delaware corporation (“Merger Sub"), with MTE as the surviving entity, and then, immediately following the merger of Merger Sub into MTE, and as part of the overall transaction, MTE will merge with and into Merger Sub LLC, a Delaware limited liability company (“Merger Sub LLC”) that will be disregarded as an entity separate from the Company, with Merger Sub LLC as the surviving entity.
As advised by Grant Thornton LLP (“Grant Thornton), the Company’s tax advisor, the Issuance and the Merger would be treated as a qualified stock purchase under section 338(d)(3) followed by a section 332 liquidation pursuant to the United States Internal Revenue Code of 1986, as amended (the “Code”). Additionally, upon the closing of the Issuance, Azzurro’s ownership of the Company would surpass 50%, meaning due to the overlap of Azzurro’s ownership, the acquisition would not result in an ownership change undersection 382(g) of the Code the NOLs of MTE would not be limitedforward-looking statements, whether as a result of the proposed restructuring.
A technical memorandum prepared by Grant Thornton for the Company analyzed whether the Issuance and the Merger will be treated as a qualified stock purchase under section 338(d)(3) followed by a section 332 liquidation, whether the potential transaction would not result in an ownership change under section 382(g) of the Code and whether the potential transaction is subject to section 269. Based on Grant Thornton’s analysis of the facts, Grant Thornton stated that it is more likely than not that the potential transaction will be treated as a qualified stock purchase under section 338(d)(3) followed by a section 332 liquidation, did not result in an ownership change and is not subject to Section 269, meaning it is more likely than not that the Company can fully utilize the approximately $63 million in NOLs of MTE, by applying them against the Company’s taxable income in the United States (US).
The Promissory Note
Should Azzurro be unable to pay the full $10 million in cash at the closing of the Issuance (the “Closing”), the Company is willing to accept a portion of the Purchase Price in the form of a secured promissory note (the “Promissory Note”). The Promissory Note shall be full recourse, secured by a pledge of 2 million of the Shares, representing the principal value of the Promissory Note, plus a safety margin. The Promissory Note shall contain an interest rate of 12% per annum. An amount equal to the principal amount of the Promissory Note plus interest accrued thereon until March 15, 2023 minus $3 million shall be due onnew information, future events or before March 15, 2023, and the remaining $3 million plus accrued interest for the time from March 15, 2023 until June 30, 2023 shall be due on or before June 30, 2023. The principal amounts and interest owing under the Promissory Note may be prepaid by Azzurro without penalty.otherwise.
In order to ensure the collateral under the Promissory Note remains at the right amount to provide sufficient security for Azzurro’s obligations while also not over-securing Azzurro’s obligations, there is an adjustment mechanism which
allows the Company to increase and Azzurro to decrease the collateral proportionately in the case of a decrease or increase, as applicable, of the Nasdaq closing stock price of the Common Stock of 10% or more with such decrease or increase, as applicable, sustained for 15 consecutive business days or more.
Upon the occurrence of an Event of Default (as defined in the Promissory Note to include a default on payment obligations or insolvency), the Company may exercise all of the rights of a secured party under the Uniform Commercial Code, without demand, notice of any kind, etc.
The form of Promissory Note is included as Exhibit B to the Stock Purchase Agreement.
Why We Need Shareholder Approval
The Company is proposing the Issuance Proposal in order to comply with Nasdaq Listing Rule 5635(a) and 5635(d). Nasdaq Listing Rule 5635(a) requires stockholder approval prior to the issuance of securities in connection with the acquisition of the stock or assets of another company if any Substantial Shareholder (as defined by Rule 5635(e)(3)) in the consideration to be paid in the transaction and the potential issuance of common stock could result in an increase in the outstanding common shares of 5% or more. The Shares being issued, even solely in exchange for MTE and not considering the Shares issued in exchange for cash or the Promissory Note, constitute greater than 5% of the outstanding Common Stock.
Nasdaq Listing Rule 5653(d) requires stockholder approval prior to a 20% Issuance (meaning, a transaction other than a public offering, involving the issuance of common Stock by a company, which equals 20% or more of the common stock outstanding before the issuance) at a price that is less than the Minimum Price (meaning the lower of the Nasdaq Official Closing Price immediately preceding the signing of the SPA or the five-day trading average). The Shares being issued constitute approximately 27.5% of the Common Stock before the Issuance and the price of $5.88, which is based on the 15-day volume-weighted average price of the shares of common stock of the Company prior to the signing of the SPA, is less than the Minimum Price of $6.10.
Effect of the Issuance Proposal on Current Stockholders
We will issue shares of common stock that represent approximately 27.5% of our outstanding shares of common stock prior to the Issuance to Azzurro in the Issuance. When the Issuance occurs, Azzurro will have ownership of more than 50% of the Company. As a result, the percentage ownership of the Company held by each of our current stockholders will be smaller than such stockholder’s percentage ownership of the Company prior to the Issuance. Our current stockholders will, therefore, have proportionately less ownership and voting interests in the Company following the Issuance than they have now. In addition, if the value of the Shares is less than the value of the Company, then our existing stockholders will experience dilution in the value of their shares of common stock.
Interests of the Company’s Executive Officers and Directors in the Acquisition
When considering the recommendation of the Special Committee, you should be aware Azzurro is the Company’s largest stockholder and is wholly owned by The Ralph Bartel 2005 Trust, whose sole beneficiary is Ralph Bartel, the Chairman of the Board of the Company. Mr. Ralph Bartel’s brother, Mr. Holger Bartel, is the Global Chief Executive Officer of the Company and is affiliated with MTE as a member of its board of directors.
The Special Committee have taken these additional interests into considerations and ensured that a fair process was followed to avoid any conflicts of interest. The members of the Special Committee are independent, dis-interested directors, with no affiliation to Mr. Ralph Bartel, Mr. Holger Bartel, Azzurro or MTE. The Special Committee appointed independent financial and legal advisors to advise on the proposed transaction and ensure its fairness to the Company and all of its stockholders, excluding Azzurro and its affiliates.
Vote Required
The approval of the Nasdaq Stock Issuance Proposal requires the affirmative vote of a majority of the votes cast by the holders of Common Stock, voting together as a single class, as of the Record Date, present in person (which would include presence at a virtual meeting) or by proxy at the special meeting and entitled to vote thereon. Abstentions, broker non-votes and the failure to vote by proxy or in person (which would include presence at a virtual meeting) at the special meeting will have no effect on the approval of the Issuance Proposal.
Recommendation of the Special Committee of the Board of Directors
While the mechanics and purpose of the proposed transaction have evolved over time, the main business reasons for pursuing the issuance and acquisition of MTE now are, in the opinion of management of the Company and the Special Committee, (1) to strengthen Travelzoo’s balance sheet and working capital with (a) a capital injection in the form of cash and a
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debt note, (b) the elimination of the monthly retainer fee ($25,000 per month) and commission (25% of paid membership sales once Travelzoo META launches) payable by Travelzoo to MTE under the terms of the existing service agreement, which commission is expected to be significant, and (c) increase in available cash due to the expected elimination of tax payments by Travelzoo in the United States upon the successful completion of the proposed transaction, and (2) the building out of Travelzoo’s Metaverse business by giving Travelzoo direct control over the Metaverse scouting services and related connections. Based on the insights and experiences gained over the period since the entry into the service agreement, in particular in relation to the uncertainty of expected subscriber numbers as well as expected margins, Travelzoo’s management believes that the acquisition of MTE will likely be economically more attractive for the Company than continuing to pay the monthly fee and any future (and potentially very high) commission share under the service agreement.
In combination with the other advantages presented by the proposed transaction, a capital raise by way of the proposed issuance appears superior to alternative options. Specifically, one alternative option of obtaining a debt facility (most likely a revolving credit facility) would, as confirmed by Travelzoo’s banking partner, come with considerable restrictions in the form of covenants and pledges of security interests over Travelzoo’s most valuable assets (cash, intellectual property, subsidiaries, etc.), neither of which are present in the proposed transaction.
The other alternative option of raising equity from existing stockholders other than Azzurro or new investors presents the disadvantage that such stockholders or investors, when invited to acquire a considerable stake in a issuance, will likely request a non-negligible discount on the VWAP of the Company’s common stock. A public offering, in turn, would be more costly than an issuance because of added legal and administrative requirements. Such alternative equity issuance would also not present the added advantages of the proposed transaction relating to MTE (elimination of payment obligations under service agreement; direct control over Metaverse experience scouting; utilization of MTE’s NOLs), nor would it further management’s strategic goal to ensure long term stability and continuity in Travelzoo’s stockholder base on the basis of a robust corporate governance and compliance framework designed for a company with a controlling stockholder.
Additionally, and contrary to the outright acquisition of the database from MTE, MTE’s Metaverse scouting business is not an asset that could easily be bought by Travelzoo without acquiring MTE as a whole, since it is constituted of goodwill in the form of name recognition and contacts established on behalf of and in the name of MTE.
Management Projections
In connection with management and the Special Committee’s review of the Issuance and the Merger, management of the Company provided the Special Committee and its financial advisor, Stout, with forecasts of the expected US taxable income and utilization of the NOLs in three scenarios (scenario 1 – baseline; scenario 2 – moderate growth; and scenario 3 – slowest growth due to delayed recovery from the pandemic). The projected US taxable income and NOL utilization for each of the scenarios that management provided are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | Total |
| Projected US Taxable Income | | | | | | | | | | |
| Scenario 1 | $8,588,000 | $15,884,700 | $22,387,255 | $24,919,705 | $27,674,127 | $ 29,450,928 | $31,336,224 | $33,336,422 | $35,003,243 | $228,580,604 |
| Scenario 2 | $8,588,000 | $11,864,120 | $16,158,356 | $19,856,289 | $21,031,202 | $ 22,465,170 | $23,989,957 | $25,611,060 | $26,891,613 | $176,455,766 |
| Scenario 3 | $7,358,000 | $9,172,100 | $12,157,215 | $15,080,518 | $15,704,871 | $ 16,530,209 | $17,390,932 | $18,288,421 | $18,837,074 | $130,519,340 |
| | | | | | | | | | |
| Estimated NOL Utilization | | | | | | | | | | |
| Scenario 1 | $8,588,000 | $15,884,700 | $22,387,255 | $16,445,785 | $ - | $ - | $ - |
$ - | $ - | $63,305,740 |
| Scenario 2 | $8,588,000 | $11,864,120 | $16,158,356 | $19,856,289 | $6,838,976 | $ - | $ - |
$ - | $ - | $63,305,740 |
| Scenario 3 | $7,358,000 | $9,172,100 | $12,157,215 | $15,080,518 | $19,537,907 | $ - |
$ - |
$ - | $ - | $63,305,740 |
| | | | | | | | | | |
| Cash Tax Savings (21.6%) | | | | | | | | | | |
| Scenario 1 | $1,855,008 | $3,431,095 | $4,835,647 | $3,552,290 | $ - | $ - | $ - |
$ - | $ - | $13,674,040 |
| Scenario 2 | $1,855,008 | $2,562,650 | $3,490,205 | $4,288,958 | $1,477,219 | $ - | $ - |
$ - | $ - | $13,674,040 |
| Scenario 3 | $1,589,328 | $1,981,174 | $2,625,958 | $3,257,392 | $4,220,188 | $ - | $ - |
$ - | $ - | $13,674,040 |
Opinion of Stout Risius Ross, LLC
On November 25, 2022, Stout delivered its opinion to the Special Committee that, as of November 25, 2022 and based upon the subject to the factors and assumptions set forth therein, the aggregate consideration consisting of (a) $10 million, payable, at the election of Azzurro, in cash or as a combination of no less than $2 million in cash and up to $8 million in the form of a secured promissory note; and (b) shares of common stock representing all of the outstanding equity securities of MTE, to be paid for 3,410,000 shares of Common Stock was fair, from a financial point of view, to the Company.
Stout’s opinion was directed to the Special Committee and only addressed the fairness, from a financial point of view, of the consideration to be paid by the Company pursuant the Issuance. The Opinion does not address any other
aspect or implication of the Issuance. The summary of Stout’s opinion in this information statement is qualified in its entirety by reference to the full text of the written opinion. The full text of the written opinion of Stout, dated November 23, 2022, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B. Stout provided advisory services and its opinion for the information and assistance of the Special Committee in connection with its consideration of the Issuance. The Stout opinion is not a recommendation as to how any holder of the Company’s Common Stock should vote with respect to the Issuance or any other matter.
In arriving at its opinion, Stout reviewed, among other facts and data that they deemed relevant in reaching their conclusions:
a.The draft of the Stock Purchase Agreement, dated November 24, 2022;
b.The draft of the Secured Promissory Note agreement, received November 22, 2022, relating to the promissory note;
c.The draft of the Memorandum Regarding Azzurro Issuance, prepared by Grant Thornton, dated October 18, 2022;
d.The draft of the Tax Due Diligence Report prepared by Grant Thornton, dated June 2021;
e.The draft of the the Company Reorg Illustrative Plan, prepared by Grant Thornton, dated February 2021;
f.Certain publicly available business and financial information relating to the Company that Stout deemed to be relevant;
g.Certain information relating to the historical, current and future operations, financial condition and prospects of the Company made available to us by the Company, including:
i.certain information from the Company’s Form 10-K filings for the years ended December 31, 2017 through 2021 and Form 10-Q filing for the period ended September 30, 2022;
ii.certain information from the Company’s internally prepared income statements for its U.S. operations for the fiscal years ended December 31, 2016 through 2021, and for the year-to-date periods ended September 30, 2021 and 2022;
iii.certain information from the Company’s U.S. federal income tax returns for the fiscal years ended December 31, 2017 through 2021; and
iv.financial projections relating to the Company’s U.S. operations as prepared by Company management for the fiscal years ending December 31, 2022 through 2030.
h.The Service Agreement between MTE and the Company (Asia) Limited, a wholly owned subsidiary of the Company, dated March 1, 2022;
i.MTE’s federal income tax returns for the fiscal years ended December 31, 2018 and 2019, and internally prepared financial statements for the fiscal years ended December 31, 2011 through 2021;
j.Publicly available financial data of certain companies with publicly traded equity securities that Stout deemed relevant;
k.Discussions with the Company’s management and certain of its representatives concerning the business, industry, history, and prospects of the Company, MTE, the Issuance and related matters; and
l.A certificate from senior management of the Company containing, among other things, representations regarding the accuracy of the information, data, and other material (financial or otherwise) provided to Stout by or on behalf of the Company.
No opinion, counsel or interpretation was intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. Stout was not requested to opine as to, and its opinion does not in any manner address the following: (i) the underlying business decision of the Company, its security holders, the Board, the Special Committee, or any other party to proceed with or effect the Issuance; (ii) the merits of the Issuance relative to any alternative business strategies that may exist for the Company or any other party or the effect of any other Issuances in which the Company or any other party might have engaged; (iii) the terms of any arrangements, understandings, agreements or documents related to, or the form or any other portion or aspect of, the Issuance or otherwise, except as expressly addressed in Stout’s opinion; (iv) the fairness of any portion or aspect of the Issuance to the holders of any class of securities, creditors or other constituencies of the Company, or to any other party, not specifically addressed in Stout’s opinion; (v) the solvency, creditworthiness or fair value of the Company or any other participant in the Issuance under any applicable laws relating to bankruptcy, insolvency or similar matters or (vi) how the Board, the Special Committee, the Company’s security holders or any other person should act with respect to the Issuance.
Stout’s opinion was intended to be utilized by the Special Committee as only one input to consider in its process of analyzing the Issuance. Further, Stout’s opinion was not intended to and does not constitute a recommendation to any security holder of the Company as to how such person should vote in regard to the Issuance. Moreover, Stout was not engaged to, and did not, (i) initiate any discussions with, or solicit any indications of interest from, third parties with respect to the Issuance, the assets, businesses or operations of MTE, the Company, or any other party, or any alternatives to the Issuance, or (ii) negotiate the terms of the Issuance.
Stout did not conduct a physical inspection of the Company’s or MTE’s facilities or assets. Stout assumed, with the consent of the Special Committee, that the final executed form of the Stock Purchase Agreement would not differ materially from the draft of the Stock Purchase Agreement that it examined, that the conditions to the Issuance as set forth in the draft of the Stock Purchase Agreement would be satisfied, and that the Issuance would be consummated on a timely basis in the manner contemplated by the draft of the Stock Purchase Agreement. Stout’s opinion was necessarily based on business, economic, market, and other conditions as they existed and could be evaluated by Stout at the date of its opinion. Although subsequent developments may affect Stout’s opinion, Stout does not have any obligation to update, revise, or reaffirm its opinion. Stout reserves the right, however, to withdraw, revise, or modify its opinion based upon additional information that may be provided
to or obtained by it after the date of its opinion that suggests, in Stout’s judgment, a material change in the assumptions upon which its opinion was based.
Stout’s opinion was furnished for the use and benefit of the Special Committee in connection with the Issuance, and is not intended to be used, and may not be used, for any other purpose, without Stout’s express, prior written consent. Stout has consented to the reproduction of its opinion in this information statement and to the inclusion of our summary of its opinion as it appears in this proxy statement.
Summary of Financial Analyses
In preparing its opinion to the Special Committee, Stout performed a variety of analyses, including those described below. The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. Stout arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole. Stout did not form a conclusion as to whether any individual analysis, when considered independently of the other analyses conducted by Stout, supported or failed to support its opinion as to the fairness, from a financial point of view, of the consideration to be paid by the Company pursuant to the Stock Purchase Agreement. Further, Stout did not specifically rely or place specific weight on any individual analysis. Rather, Stout believes that its analyses must be considered in their entirety, and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors together, could create a misleading or incomplete view of the processes underlying the analyses performed by Stout in connection with the preparation of its opinion. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques.
In rendering its opinion, Stout assumed and relied upon the accuracy and completeness of all financial and other information that was publicly available, furnished by the Company, or otherwise reviewed by or discussed with Stout without independent verification of such information. Stout’s opinion is premised on the assumption that the assets, liabilities, financial condition, and prospects of the Company and MTE, as of the date of its opinion, have not changed materially since September 30, 2022 and December 31, 2021, respectively, the dates of the most recent financial statements made available to Stout. Stout assumed, without independent verification, the accuracy of, and relied upon, the representations and warranties contained in the draft Stock Purchase Agreement that it reviewed. Stout assumed, without independent verification, that the financial forecasts and projections provided to Stout were prepared in good faith and reflect the best currently available estimate of the future financial results of the Company, and relied upon such projections in arriving at its opinion. Stout was not engaged to assess the reasonableness or achievability of these forecasts and projections or the assumptions upon which they were based. Stout expressed no view as to those forecasts, projections, or assumptions. Stout assumed that the Issuance would be consummated on the terms described in the draft Stock Purchase Agreement, without any waiver of any material terms or conditions by the parties to the draft Stock Purchase Agreement. Stout’s opinion was necessarily based on business, economic, market, and other conditions as they existed and could be evaluated by Stout at the date of its opinion.
Stout’s opinion was provided to the Special Committee in connection with its consideration of the proposed Issuance and was only one of many factors considered by the Special Committee in evaluating the proposed Issuance. Neither Stout’s opinion nor its analyses were determinative of the Issuance consideration or of the views of the Special Committee or management with respect to the Issuance or the consideration payable therein. The type and amount of consideration payable in the Issuance were determined through negotiation between the Company/the Special Committee and Azzurro. The decision to enter into the Issuance was solely that of the Special Committee.
The implied reference range values indicated by Stout’s analyses, and the estimates upon which they are based, are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which assets, businesses or securities may actually be sold, which may depend on a variety of factors, many of which are beyond our control. Much of the information used in, and accordingly the results of, Stout’s analyses are inherently subject to substantial uncertainty.
The following is a summary of the material analyses reviewed by Stout with the Special Committee in connection with Stout’s opinion rendered on November 25, 2022. The order of the analyses below does not represent relative importance or weight given to those analyses by Stout. In addition, the analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of Stout’s analyses.
Implied Value of the Consideration
For the purposes of its analysis, Stout calculated implied ranges of values for the consideration to be issued in the Issuance and compared these implied ranges of values of the consideration to the implied ranges of equity values to the
Company contributed by Azzurro in the Issuance. The consideration consists of 3,410,000 shares of common stock in the Company.
In calculating the implied range of values of the consideration (the Shares), Stout considered the historical trading activity in the Company's common stock from November 24, 2021 through November 23, 2022. During this time period, the common stock of the Company traded in a range from $4.43 per share to $10.59 per share. Stout considered the range of trading prices implied by a 20-day and a 10-day volume-weighted average price of $5.75 per share and $5.98 per share, respectively, as of November 23, 2022, as provided by Bloomberg L.P. Stout calculated a range of implied values for the Shares of $19.6 million to $20.4 million based on the 3,410,000 shares of common stock issued in the Issuance times the 20-day and 10-day volume weighted-average prices, respectively.
Discounted Cash Flow Analysis
The Company management represented that the Company was not expected to incur any incremental expenses from MTE following the Issuance. the Company management represented that the the Company Meta business was still in the startup phase, and no financial projections for the business were available. However, the Company management stated that MTE’s costs associated with the Company Meta’s business approximated the monthly payment that the Company pays to MTE under the Service Agreement. Therefore, the measurable financial impact to the Company from the Issuance was the estimated tax savings from the net operating losses (“NOLs”) from MTE and the value of the cash or the cash and promissory notes contributed to the Company.
Stout performed a discounted cash flow analysis of tax benefits of the NOLs of MTE expected to be realized by the Company based on the Company management’s financial projections. In performing its discounted cash flow analysis, Stout calculated the present values of the Company’s estimated income tax savings, based on income tax rate of 21.6%, of the Company management’s projected utilization of the NOLs for the calendar years ending December 31, 2022 through December 31, 2027 for the base case scenario, the moderate case scenario, as well as the low case scenario. These scenarios are based on Company management's long-term forecasts. The estimated income tax savings for each of these scenarios were discounted to present value based on a range of discount rates of 16.75 % to 18.75%, which were based upon the Company’s estimated required return on equity. As the Company would receive $10 million in cash or a combination of cash and promissory notes and was not expected to assume any liabilities in the Issuance, the range of present values of the estimated tax savings plus $10 million resulted in the estimated range of implied equity values to the Company in the Issuance.
The Company’s estimated required return on equity used in the analysis was based upon information from various independent sources (including the Board of Governors of the Federal Reserve, Kroll Cost of Caputal Navigator™, Bloomberg L.P. and S&P Capital IQ, Inc.) concerning market risk-free interest rates, market equity risk premiums, equity betas, small stock risk premiums, and its assumed capital structure. Further, a current market risk adjustment and a company-specific risk premium were added to the cost of equity capital in order to account for unaccounted levels of systematic risk in the market (and the low yield for risk-free securities) as well as the heightened risk of regulation in areas of geographic concentration, respectively.
Based on the assumptions above, the discounted cash flow analysis resulted in the implied equity value reference ranges for the base case, moderate, and low case scenarios, as presented below, which were compared to the implied ranges of values of the consideration in the Issuance (the Shares) of $19.6 million to $20.4 million based on the 3,410,000 shares of common stock in the Company times the 20-day and 10-day volume weighted average prices of $5.75 per share and $5.98 per share, respectively. | | | | | | | | |
| | Implied Equity Value to the Company |
| | Reference Range |
Base case scenario | | $20.6 million - $20.9 million |
Moderate case scenario | | $20.1 million - $20.4 million |
Low case scenario | | $19.4 million - $19.8 million |
After careful analysis, Stout provided an opinion to the Special Committee that the consideration to be paid by the Company in the Issuance is fair, from a financial point of view, to the Company.
Trading Range Analysis
Stout performed a trading range analysis with respect to the historical share prices of the Company’s common stock. Stout noted that the low and high closing trading prices per share of the Company’s common stock during the 52-week period ending on November 23, 2022 were $4.43 and $10.59. As of November 23, 2022, the closing price per share of was $6.29. Stout's review of the trading range was for reference only.
Other Matters
The Special Committee engaged Stout based on Stout’s experience and reputation. Stout is regularly engaged to render financial opinions in connection with mergers, acquisitions, divestitures, leveraged buyouts, recapitalizations, and for other purposes. The issuance of Stout’s opinion was approved by an internal committee of Stout authorized to approve opinions of this nature. the Company has agreed to pay Stout a fee of $150,000 payable upon the issuance of its opinion and paid Stout a fee of $50,000 in connection with its engagement with the Special Committee related to its consideration of a Issuance involving AB. No portion of Stout’s fee was contingent upon the successful completion of the Issuance. Further, none of Stout’s employees who worked on the engagement had any known financial interest in the assets or equity of the Company, MTE or Azzurro or the outcome of the engagement. Stout has provided financial advisory services to the Special Committee and the Company within the last two years. During 2021, Stout served as financial advisor to the Special Committee in connection with another Issuance that the Special Committee considered. Stout received a customary fee this engagement and disclosed and discussed such engagement with the Special Committee prior to serving in its capacity for the Issuance. the Company has also agreed to reimburse Stout for certain expenses and to indemnify Stout and certain related parties against certain liabilities and other losses associated with any third-party claim (including security holder actions) relating to or arising as a result of Stout’s services or engagement
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY RECOMMEND A VOTE “FOR” THE ISSUANCE PROPOSAL.
APPROVAL OF THE ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING
(Proposal No. 2)
We are asking our shareholders to consider and vote on a proposal to adjourn or postpone the special meeting to solicit additional proxies in the event that the Company fails to receive a sufficient number of votes to approve the Issuance Proposal (the “Adjournment Proposal”). The Company currently does not intend to propose adjournment or postponement at the special meeting if there are sufficient votes to approve the Issuance Proposal.
Vote Required
The Adjournment Proposal will be approved if the votes cast in favor of the Adjournment Proposal exceed the votes cast opposing the Adjournment Proposal.
Recommendation of the Special Committee of the Board of Directors
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY RECOMMEND A VOTE “FOR” THE ISSUANCE PROPOSAL.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the amount of our common stock beneficially owned as of November 22, 2022April 14, 2023 by (a) each director ofand nominee for election to the Board of Directors, (b) each named executive officer, (c) all executive officers and directors as a group, and (d) each person known by the Company, as of November 22, 2022,April 14, 2023, to beneficially own more than 5% of the outstanding shares of Common Stock of the Company. In general, shares "beneficially owned"“beneficially owned” include those shares a person has or shares(or shares) the power to vote, or the power to dispose of.
Beneficial Owners, Directors and Executive Officers
| | | | | | |
Ralph Bartel*(1) | | | 8,058,720 | | | 51.80% |
Holger Bartel(2) | | | 816,000 | | | 5.25% |
Christina Sindoni Ciocca(3) | | | 62,288 | | | 0.40% |
Michael Karg | | | — | | | — |
Carrie Liqun Liu | | | — | | | — |
Volodymyr Cherevko | | | — | | | — |
Beneficial owners, directors (including nominees) and executive officers as a group (7 persons) | | | 8,937,008 | | | 57.45% |
| | | | | | | | | | | | | | |
| | Beneficial Ownership |
| Beneficial Owner | | Number of Shares | | Percent of Total (5) |
| Directors and Executive Officers | | | | |
| Ralph Bartel (1) | | 4,696,603 | | | 36.34 | % |
| Holger Bartel (2) | | 816,000 | | | 6.31 | % |
| Christina Sindoni Ciocca (3) | | 37,288 | | | 0.29 | % |
| Michael Karg | | — | | | — | |
| Volodymyr Cherevko | | — | | | — | |
| Carrie Liqun Liu | | — | | | — | |
| Wayne Lee (4) | | 3,000 | | | 0.02 | % |
| Directors and executive officers as a group (7 persons) | | 5,552,891 | | | 42.96 | % |
| * Persons Owning More Than 5% of Common Stock | | | | |
(1)Ralph Bartel indirectly holds a controlling interest
*
| Persons Owning More Than 5% of Common Stock |
(1)
| Mr. Ralph Bartel indirectly holds a controlling interest in Azzurro Capital Inc., which is the holder of 7,663,858 shares, through the Ralph Bartel 2005 Trust. Mr. Ralph Bartel directly holds 194,862 shares and 200,000 options that are exercisable on April 14, 2023 or become exercisable within 60 days of April 14, 2023. |
(2)
| Mr. Holger Bartel holds 300,000 options that are exercisable on April 14, 2023 or become exercisable within 60 days of April 14, 2023. Except as otherwise indicated and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all their shares of common stock. Mr. Holger Bartel holds 516,000 shares of common stock. |
(3)
| Ms. Christina Sindoni Ciocca holds 50,000 options that are exercisable on April 14, 2023 or become exercisable within 60 days of April 14, 2023. Except as otherwise indicated and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all their shares of common stock. Ms. Ciocca holds 12,288 shares of common stock. |
(4)
| For each person and group indicated in this table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the 15,556,427 shares of common stock outstanding as of April 14, 2023, plus the number of shares of Common Stock that such person or group had the right to acquire within 60 days after April 14, 2023. |
