DEFA14A: XWELL, Inc. Adopts Tax Benefits Preservation Plan to Protect $67.3 Million in Net Operating Losses

XWELL, Inc. has implemented a Tax Benefits Preservation Plan to safeguard approximately $67.3 million in net operating losses from potential limitations due to ownership changes.

Summary

• XWELL, Inc. has adopted a Tax Benefits Preservation Plan to protect its tax attributes, specifically net operating losses (NOLs).
• The company estimates these tax attributes could reduce income taxes by up to $67.3 million for the current fiscal year.
• These tax attributes could be significantly reduced or eliminated if there is a change in ownership as defined by Section 382 of the Internal Revenue Code.
• A change of ownership generally occurs if stockholders owning 5% or more of the company's stock increase their cumulative ownership by more than 50 percentage points over a three-year period.
• The plan aims to deter any person from acquiring 4.99% or more of the company's common stock without board approval.
• The Board declared a dividend of one Series A Junior Participating Preferred Stock purchase right (the 'Rights') for each outstanding share of Common Stock, payable on August 26, 2024, to stockholders of record as of the close of business on August 26, 2024.
• The Rights will cause substantial dilution to a person or group that acquires 4.99% or more of the Common Stock on terms not approved by the Board.
• The Rights are not exercisable until the Distribution Date, which is the earlier of (i) the tenth business day following the public announcement that a person or group has become an Acquiring Person by acquiring or obtaining the right to acquire beneficial ownership of 4.99% or more of the outstanding shares of Common Stock (or the Board becoming aware of an Acquiring Person) or (ii) the tenth business day following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 4.99% or more of the outstanding shares of Common Stock, in each case with certain exceptions.
• The Rights will expire on the earliest of several dates, including August 16, 2027, redemption or exchange of the Rights, closing of a board-approved merger, repeal of Section 382 of the Code, or determination that no Tax Attributes can be carried forward.
• The Board may redeem the Rights in whole at $0.001 per Right before an Acquiring Person emerges or the Final Expiration Date.
• The company intends to file a definitive proxy statement and proxy card with the SEC in connection with the company's 2024 annual meeting of stockholders.

Sentiment

Score: 6

Explanation: The announcement is neutral to slightly positive. While it involves defensive measures, it aims to protect a valuable asset (tax attributes) and is a common practice.

Positives

• The Tax Benefits Preservation Plan aims to protect significant tax attributes, potentially saving the company up to $67.3 million.
• The plan includes a mechanism for the board to consider exemptions for certain acquisitions, providing flexibility.
• The adoption of the plan is similar to actions taken by other public companies with significant tax attributes, suggesting a standard and accepted practice.
• The issuance of the Rights will not affect the company's reported earnings or loss per share and is not taxable to the company or its stockholders.

Negatives

• The plan could deter potential investors from acquiring a significant stake in the company, potentially limiting liquidity and investment opportunities.
• The Rights will cause substantial dilution to a person or group that acquires 4.99% or more of the Common Stock on terms not approved by the Board.

Risks

• The effectiveness of the plan depends on its ability to deter unwanted acquisitions, and there is no guarantee it will be successful.
• The plan could be challenged in court by an investor seeking to acquire a larger stake in the company.
• The Board's decisions regarding exemptions could be subject to scrutiny and potential legal challenges.
• If the company's financial situation improves significantly, the tax attributes may become less valuable, rendering the plan less relevant.

Future Outlook

The company intends to file a definitive proxy statement and a proxy card with the SEC in connection with the company's 2024 annual meeting of stockholders.

Industry Context

Tax Benefits Preservation Plans, also known as 'poison pills,' are a relatively common defensive mechanism used by companies with significant net operating losses to protect those losses from being limited or eliminated due to an ownership change. Many other public companies with significant Tax Attributes have adopted similar Section 382 rights plans.

Comparison to Industry Standards

• The adoption of a Tax Benefits Preservation Plan is a common strategy employed by companies with significant net operating losses (NOLs) to protect their value under Section 382 of the Internal Revenue Code.
• Comparable companies in similar situations, such as retailers, airlines, or technology firms with substantial NOL carryforwards, have also implemented similar plans.
• These plans typically involve the issuance of rights that trigger significant dilution if an investor acquires a certain percentage (often around 4.99%) of the company's stock without board approval.
• The specific terms of these plans, such as the trigger threshold, redemption price, and expiration date, can vary depending on the company's specific circumstances and the advice of their legal and financial advisors.
• Examples of companies that have adopted similar plans include [Hypothetical Company A] in the airline industry and [Hypothetical Company B] in the retail sector, both of which had significant NOLs and sought to prevent unwanted takeovers that could jeopardize their tax benefits.

Corporate Governance

Stakeholder Impact

• Shareholders: The plan aims to protect the value of the company's tax attributes, which could benefit shareholders by reducing future tax liabilities.
• Potential Acquirers: The plan may deter potential acquirers from pursuing a takeover of the company without board approval.
• Employees: The plan could provide stability by preventing unwanted changes in control.

Next Steps

• The company will issue Rights to stockholders of record on August 26, 2024.
• The company intends to file a definitive proxy statement and a proxy card with the SEC in connection with the company's 2024 annual meeting of stockholders.

Key Dates

Keywords

Tax Benefits Preservation Plan, Net Operating Losses, Tax Attributes, Section 382, Ownership Change, Rights, Acquiring Person, Dilution, XWELL, Preferred Stock