TRAVELZOO The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations, assumptions, estimates and projections aboutTravelzoo and our industry. These forward-looking statements are subject to the many risks and uncertainties that exist in our operations and business environment that may cause actual results, performance or achievements ofTravelzoo to be different from those expected or anticipated in the forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may", "will", "should", "estimates", "predicts", "potential", "continue", "strategy", "believes", "anticipates", "plans", "expects", "intends", and similar expressions are intended to identify forward-looking statements.Travelzoo's actual results and the timing of certain events could differ significantly from those anticipated in such forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this report in the section entitled "Risk Factors" and the risks discussed in our otherSEC filings. The forward-looking statements included in this report reflect the beliefs of our management on the date of this report.Travelzoo undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other circumstances occur in the future. Overview Travelzoo® is a global Internet media company. We provide our 30 million members insider deals and one-of-a-kind experiences personally reviewed by one of our deal experts around the globe. We have our finger on the pulse of outstanding travel, entertainment, and lifestyle experiences. For over 20 years we have worked in partnership with more than 5,000 top travel suppliers-our long-standing relationships giveTravelzoo members access to irresistible deals. Our publications and products include theTravelzoo website, theTravelzoo iPhone and Android apps, the Travelzoo Top 20® email newsletter, the Newsflash email alert service, and the Travelzoo Network, a network of third-party websites that list travel deals published byTravelzoo . OurTravelzoo website includes Local Deals and Getaways listings that allow our members to purchase vouchers for deals from local businesses such as spas, hotels and restaurants. InMarch 2020 ,Travelzoo exited its loss-makingAsia Pacific business. The Company'sAsia Pacific business was classified as discontinued operations atMarch 31, 2020 . Prior periods have been reclassified to conform with the current presentation. OnJune 16, 2020 , in connection with itsAsia Pacific exit plan, the Company completed a sale of 100% of the outstanding capital stock of Travelzoo Japan to the Japan Buyer for consideration of1 Japanese Yen . The Company recorded approximately$128,000 loss upon disposal of Travelzoo Japan in the Condensed Consolidated Financial Statements during the nine months endedSeptember 30, 2020 . The parties also entered into a License Agreement, whereby the Japan Buyer obtained a license to use the intellectual property ofTravelzoo exclusively inJapan in exchange for quarterly royalty payments based on revenue over a 5 year term, with an option to renew. An interest free loan was provided to the Japan Buyer forJPY 46 million (approximately$430,000 ) to be repaid over 3 years which the Company recorded as other assets on the unaudited condensed consolidated balance sheet as ofSeptember 30, 2020 . Additionally, onAugust 24, 2020 , the Company completed a sale of 100% of the outstanding capital stock of Travelzoo Singapore, to an unaffiliated entity, AUS Buyer, which is fully owned by Mr.Julian Rembrandt , the former General Manager ofSouth East Asia andAustralia of the Company for consideration of1 Singapore Dollar . The parties also entered into a License Agreement, whereby the AUS Buyer obtained a license to use the intellectual property ofTravelzoo exclusively inAustralia ,New Zealand andSingapore and non-exclusively inChina andHong Kong for quarterly royalty payments based upon revenue over a 5 year term, with an option to renew. There was no gain or loss from the sale of Travelzoo Singapore. The Company has a minority investment in WeGo. WeGo is a technology company which provides an app and a search engine for spontaneous travelers looking for short getaways. The Company accounts for this private company investment using the equity method of accounting by recording its share of the results of WeGo in "Other income (expense)", net on a one-quarter lag basis. In accounting for the initial investment, the Company allocated$1.0 million of its purchase price to tangible assets and allocated approximately$485,000 of the purchase price to technology-related intangible assets to be amortized over a 3-year life. The remaining$1.5 million of the purchase price was allocated to goodwill. InFebruary 2020 ,Travelzoo signed the Investment Agreement with WeGo and agreed to invest an additional$1.7 million when WeGo meets certain performance targets. The Original Investment Agreement with WeGo was executed inApril 2018 . At that time,Travelzoo invested$3.0 million in WeGo for a 25% ownership interest. InApril 2019 , the Company invested an additional$673,000 in WeGo and increased the Company's ownership interest to 26.6%. 28 -------------------------------------------------------------------------------- As ofSeptember 30, 2020 , WeGo has not met these performance targets and no additional investment has been made by the Company. In connection with the Original Investment Agreement, WeGo signed an insertion order for$2.1 million in advertising services withTravelzoo inApril 2018 . The Company's advertising services provided to WeGo in the three months endedSeptember 30, 2020 and 2019 were$23,000 and$130,000 , respectively. The Company's advertising services provided to WeGo in the nine months endedSeptember 30, 2020 and 2019 were$383,000 and$924,000 , respectively. During the three and nine months endedSeptember 30, 2020 , the Company recorded$51,000 and$384,000 for its share of WeGo losses, amortization of basis differences and currency translation adjustment. During the three and nine months endedSeptember 30, 2019 , the Company recorded$323,000 and$732,000 for its share of WeGo losses, amortization of basis differences and currency translation adjustment. This equity method investment is reported as a long-term investment on the Company's condensed consolidated balance sheets. InJanuary 2020 ,Travelzoo acquiredJack's Flight Club , which operatesJack's Flight Club , a subscription service that provides members with information about exceptional airfares. As ofSeptember 30, 2020 ,Jack's Flight Club had 1.7 million subscribers.Jack's Flight Club's revenues are generated by subscription fees paid by members. InJune 2020 , the Company renegotiated certain aspects of that certain SPA with the Sellers and reached a settlement for the outstanding Promissory Notes. Historically, the Company managed its business geographically and operated in three reportable segments includingAsia Pacific ,Europe andNorth America . During the three and nine months endedSeptember 30, 2020 , the Company classified the results of itsAsia Pacific segment as discontinued operations in its condensed consolidated financial statements for current and prior periods presented. OnJanuary 13, 2020 ,Travelzoo entered into a Sales Purchase Agreement with the Sellers ofJack's Flight Club to purchase 60% of the Shares. Upon the acquisition, the Company's chief operating decision maker reviewed and evaluatedJack's Flight Club as a separate segment.Travelzoo currently has three reportable operating segments:Travelzoo North America ,Travelzoo Europe andJack's Flight Club .Travelzoo North America consists of the Company's operations inCanada and theU.S. Travelzoo Europe consists of the Company's operations inFrance ,Germany ,Spain , and theUK . When evaluating the financial condition and operating performance of the Company, management focuses on financial and non-financial indicators such as growth in the number of members to the Company's newsletters, operating margin, growth in revenues in the absolute and relative to the growth in reach of the Company's publications measured as revenue per member and revenue per employee as a measure of productivity. The Company'sAsia Pacific business was classified as discontinued operations as ofMarch 31, 2020 . Prior periods have been reclassified to conform with the current presentation for all periods presented. 29 -------------------------------------------------------------------------------- How We Generate Revenues Travelzoo Revenues from the Travelzoo brand and business are generated primarily from advertising fees from two categories of revenue: Travel and Local. The "Travel" category consists of advertising or publishing revenues, primarily (a) listing fees paid by travel companies for the publishing of their offers onTravelzoo's media properties and (b) commission from the sale of Getaways vouchers. Listing fees are based on audience reach, placement, number of listings, number of impressions, number of clicks, and actual sales. For publishing revenue, we recognize revenue upon delivery of the emails and delivery of the clicks, over the period of the placement of the advertising. Insertion orders for publishing revenue are typically for periods between one month and twelve months and are not automatically renewed. For Getaways vouchers, we recognize a percentage of the face value of the vouchers upon the sale of the vouchers. Merchant agreements for Getaways advertisers are typically for periods between twelve months and twenty-four months and are not automatically renewed. Since the second quarter of 2020, the Company expanded its vouchers refund policy in order to entice customers given the current economic climate to fully refundable until the voucher expires or is redeemed by the customer. The Company now offers fully refundable refunds for vouchers that have not been redeemed or expired. The expiration dates of vouchers range betweenOctober 2020 throughDecember 2022 . The Company estimated the refund reserve by using historical and current refund rates by product and by merchant location to calculate the estimated future refunds. As ofSeptember 30, 2020 ,$2.3 million were reserved for vouchers sold which is recorded as a reduction of revenues and is reflected as a current liability in Accrued expenses and other on the condensed consolidated balance sheet. Certain merchant contracts allow the Company to retain the proceeds from unredeemed vouchers. With these contracts, the Company estimates the value of vouchers that will ultimately not be redeemed and records the estimate as revenues in the same period. The "Local" category consists of publishing revenue for negotiated high-quality deals from local businesses, such as restaurants, spas, shows, and other activities and includes Local Deals vouchers and entertainment offers (vouchers and direct bookings). The revenues generated from these products are based upon a percentage of the face value of the vouchers, commission on actual sales or a listing fee based on audience reach. We recognize revenue upon the sale of the vouchers, upon notification of the amount of direct bookings or upon delivery of the emails. For Local Deals vouchers, we recognize a percentage of the face value of vouchers upon the sale of the vouchers. Insertion orders and merchant agreements for Local are typically for periods between one month and twelve months and are not automatically renewed. Certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon expiration, which we recognize as revenue based upon estimates at the time of sale.Jack's Flight Club Jack's Flight Club revenue is generated from paid subscriptions by members. Subscription options are quarterly, semi-annually, and annually. We recognize the revenue on a pro-rated basis based upon the subscription option. Trends in Our Business Our ability to generate revenues in the future depends on numerous factors such as our ability to sell more advertising to existing and new advertisers, our ability to increase our audience reach and advertising rates, our ability to have sufficient supply of hotels offered at competitive rates and our ability to develop and launch new products. Our ability to generate revenues is also dependent on trends impacting the travel industry more broadly. Our current revenue model primarily depends on advertising fees paid primarily by travel, entertainment and local businesses. A number of factors can influence whether current and new advertisers decide to advertise their offers with us. We have been impacted and expect to continue to be impacted by external factors such as the shift from offline to online advertising, the relative condition of the economy, competition and the introduction of new methods of advertising, and the decline in consumer demand for vouchers and travel more generally. A number of factors will have impact on our revenue, such as the reduction in spending by travel intermediaries due to their focus on improving profitability, the trend towards mobile usage by consumers, the willingness of consumers to purchase the deals we advertise, and the willingness of certain competitors to grow their business unprofitably. In addition, we have been impacted and expect to continue to be impacted by internal factors such as introduction of new technologies and advertising products, hiring and relying on key employees for the continued maintenance and growth of our business and ensuring our advertising products continue to attract the audience that advertisers desire. We also have been impacted and expect to continue to be impacted by external factors, such as the COVID-19 pandemic, which decrease consumer's discretionary income and decrease the demand for travel and entertainment. 30 -------------------------------------------------------------------------------- Additionally, existing advertisers may shift from one advertising service (e.g. Top 20) to another (e.g. Local Deals and Getaways). These shifts between advertising services by advertisers could result in no incremental revenue or less revenue than in previous periods depending on the amount purchased by the advertisers, and in particular with Local Deals and Getaways, depending on how many vouchers are purchased by members. Local revenues have been and may continue to decline over time due to market conditions driven by competition and declines in consumer demand. In the last several years, we have seen a decline in the number of vouchers sold and a decrease in the average take rate earned by us from the merchants for voucher sold. However, due to the COVID-19 pandemic and the increase in demand by consumers for fully refundable travel options, we have now begun to see a slight reversal of this trend and an increase in the sale of Getaways hotel vouchers. Demand for restaurants and spas continues to be low due to the COVID-19 pandemic. Our ability to continue to generate advertising revenue depends heavily upon our ability to maintain and grow an attractive audience for our publications. We monitor our members to assess our efforts to maintain and grow our audience reach. We obtain additional members and activity on our websites by acquiring traffic from Internet search companies. The costs to grow our audience have had, and we expect will continue to have, a significant impact on our financial results and can vary from period to period. We may have to increase our expenditures on acquiring traffic to continue to grow or maintain our reach of our publications due to competition. We continue to see a shift in the audience to accessing our services through mobile devices and social media. When funds are available for marketing spend, we are addressing this growing channel of our audience through increased marketing on social media channels. However, we will need to keep pace with technological change and this trend to further address this shift in the audience behavior in order to offset any related declines in revenue. We believe that we can increase our advertising rates only if the reach of our publications increases. We do not know if we will be able to increase the reach of our publications. If we are able to increase the reach of our publications, we still may not be able to or want to increase rates given market conditions such as intense competition in our industry. We have not had any significant rate increase in recent years due to intense competition in our industry. Even if we increase our rates, the increased price may reduce the number of advertisers willing to advertise with us and, therefore, decrease our revenue. We may need to decrease our rates based on competitive market conditions and the performance of our audience in order to maintain or grow our revenue. We do not know what our cost of revenues as a percentage of revenues will be in future periods. Our cost of revenues may increase if the face value of vouchers that we sell for Local Deals and Getaways increases or the total number of vouchers sold increases because we have credit card fees based upon face value of vouchers sold, due to customer service costs related to vouchers sold and due to refunds to members on vouchers sold. We expect fluctuations in cost of revenues as a percentage of revenues from quarter to quarter. Some of the fluctuations may be significant and may have a material impact on our results of operations. We do not know what our sales and marketing expenses as a percentage of revenue will be in future periods. Increased competition in our industry may require us to increase advertising for our brand and for our products. In order to increase the reach of our publications, we have to acquire a significant number of new members in every quarter and continue to promote our brand. One significant factor that impacts our advertising expenses is the average cost per acquisition of a new member. Increases in the average cost of acquiring new members may result in an increase of sales and marketing expenses as a percentage of revenue. We believe that the average cost per acquisition depends mainly on the advertising rates which we pay for media buys, our ability to manage our member acquisition efforts successfully, the regions we choose to acquire new members and the relative costs for that region, and the degree of competition in our industry. We may decide to accelerate our member acquisition, including through merger and acquisition activity, for various strategic and tactical reasons and, as a result, increase our marketing and other expenses. We expect the average cost per acquisition to increase with our increased expectations for the quality of the members we acquire. We may see an unique opportunity for a brand marketing campaign that will result in an increase of marketing expenses. In addition, there may be a significant number of members that cancel or we may cancel their subscription for various reasons, which may drive us to spend more on member acquisition in order to replace the lost members. We expect fluctuations in sales and marketing expenses as a percentage of revenue from year to year and from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations. We expect increased marketing expense to spur continued growth in members and revenue in future periods; however, we cannot be assured of this due to the many factors that impact our growth in members and revenue. We expect to adjust the level of such incremental spending during any given quarter based upon market conditions, as well as our performance in each quarter. We do not know what our product development expenses as a percentage of revenue will be in future periods. There may be fluctuations that have a material impact on our results of operations. Product development changes may lead to reductions of revenue based on changes in presentation of our offerings to our audience. We expect our efforts on developing our product and services will continue to be a focus in the future, which may lead to increased product development expenses. This increase in 31 -------------------------------------------------------------------------------- expense may be the result of an increase in costs related to third party technology service providers and software licenses, headcount, the compensation related to existing headcount and the increased use of professional services. We do not know what our general and administrative expenses as a percentage of revenue will be in future periods. There may be fluctuations that have a material impact on our results of operations. We do not know what our income taxes will be in future periods. There may be fluctuations that have a material impact on our results of operations. Our income taxes are dependent on numerous factors such as the geographic mix of our taxable income, foreign, federal, state and local tax law and regulations and changes thereto. Our income taxes are also dependent on the determination of whether valuation allowances for certain tax assets are required or not, audits of prior years' tax returns that result in adjustments, resolution of uncertain tax positions and different treatments for certain items for tax versus books. We expect fluctuations in our income taxes from year to year and from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations. With respect to the COVID-19 outbreak specifically, we currently expect that our 2020 and 2021 financial results will be negatively impacted compared to historical results. Additionally, we expect the COVID-19 outbreak will continue to negatively impact our business beyond 2020, but the extent and duration of such impact in the long term is largely uncertain as it is dependent on future developments that cannot be accurately predicted at this time, including but not limited to the severity and transmission rate of the virus, the extent and effectiveness of containment actions taken, including travel restrictions, and the impact of these and other factors on travel behavior. With the impact to revenues caused by COVID-19, spending in many areas within the business has been slowed or stopped, including but not limited to, marketing, technology and human resources. The key elements of our growth strategy include building a travel and lifestyle brand with a large, high-quality user base and offering our users products that keep pace with consumer preference and technology, such as the trend toward mobile usage by consumers and toward fully refundable travel deals given the uncertainty of the COVID-19 pandemic. We expect to continue our efforts to grow; however, we may not grow or we may experience slower growth. We believe that we can sell more advertising if the market for online advertising continues to grow and if we can maintain or increase our market share. We believe that the market for advertising continues to shift from offline to online. We do not know if we will be able to maintain or increase our market share. We do not know if we will be able to increase the number of our advertisers in the future. We do not know if we will have market acceptance of our new products or whether the market will continue to accept our existing products. 32 -------------------------------------------------------------------------------- Results of Operations The following table sets forth, as a percentage of total revenues, the results from our operations for the periods indicated. Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues 21.2 12.0 18.9 10.6 Gross profit 78.8 88.0 81.1 89.4 Operating expenses: Sales and marketing 50.2 50.2 59.1 48.5 Product development 4.3 6.0 6.3 6.1 General and administrative 33.0 17.6 40.6 17.1 Impairment of intangible assets and goodwill - - 7.1 Total operating expenses 87.5 73.8 113.1 71.7 Operating income (loss) (8.7) 14.2 (32.0)
17.7
Other income (expense), net (0.3) 0.2 (0.5)
0.1
Income (loss) from continuing operations before income taxes (9.0) 14.4 (32.5)
17.8
Income tax expense (benefit) (1.8) 3.6 (5.0)
4.5
Income (loss) from continuing operations (7.2) 10.8 (27.5)
13.3
Income (loss) from discontinued operations, net of
taxes (1.7) (9.5) (9.6) (7.3)
Net income (loss) (8.9) 1.3 (37.1) 6.0
Net income (loss) attributable to non-controlling
interest 0.9 - (2.7) -
Net income (loss) attributable to Travelzoo (9.8) % 1.3 % (34.4) % 6.0 %
33-------------------------------------------------------------------------------- Operating Metrics The following table sets forth selected operating metrics forEurope andNorth America : Three Months Ended September 30, 2020 2019North America Total members (1) 16,480,000 17,630,000 Average cost per acquisition of a new member N/A$ 2.20 Revenue per member (2)$ 1.16 $ 3.96 Revenue per employee (3)$ 169,000 $ 368,000 Mobile application downloads 3,771,000 3,636,000 Social media followers 3,267,000 3,232,000 Europe Total members (1) 8,865,000 9,121,000 Average cost per acquisition of a new member N/A$ 2.19 Revenue per member (2)$ 1.25 $ 4.22 Revenue per employee (3)$ 120,000 $ 249,000 Mobile application downloads 2,134,000 2,033,000 Social media followers 900,000 889,000Jack's Flight Club Total members 1,691,000 - Consolidated Total members (1) 30,518,000 30,273,000 Average cost per acquisition of a new member N/A$ 2.33 Revenue per member (2)$ 1.05 $ 3.79 Revenue per employee (3)$ 147,000 $ 272,000 Mobile application downloads 6,748,000 6,487,000 Social media followers 4,167,000 4,729,000 (1)Members represent individuals who are signed up to receive one or more of our free email publications that present our travel, entertainment and local deals. (2)Annualized revenue divided by number of members at the beginning of the year. (3)Annualized revenue divided by number of employees at the end of the quarter. 34 --------------------------------------------------------------------------------
Revenues
The following table sets forth the breakdown of revenues (in thousands) by category and segment. Travel revenue includes travel publications (Top 20,Travelzoo website, Newsflash, Travelzoo Network), Getaways vouchers, and hotel platform and vacation packages. Local revenue includes Local Deals vouchers and entertainment offers (vouchers and direct bookings). Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019Travelzoo North America Travel$ 8,706 $ 12,899 $ 23,772 $ 44,470 Local 437 2,440 2,270 7,380Total Travelzoo North America revenues 9,143 15,339 26,042 51,850 Travelzoo Europe Travel 3,449 7,727 11,442 24,804 Local 208 767 1,019 2,945 Total Travelzoo Europe revenues 3,657 8,494 12,461 27,749 Jack's Flight Club 987 - 2,615 - Consolidated Travelzoo Travel 12,155 20,626 35,214 69,274 Travelzoo Local 645 3,207 3,289 10,325 Jack's Flight Club 987 - 2,615 - Total revenues$ 13,787 $ 23,833 $ 41,118 $ 79,599 Travelzoo North America North America revenues decreased$6.2 million for the three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 . This decrease was primarily due to$4.2 million decrease in Travel revenues and$2.0 million decrease in Local revenues. Both Travel revenues and Local revenue have dropped significantly due to the global outbreak of COVID-19 during the three months endedSeptember 30, 2020 . The decrease in Travel revenue of$4.2 million was primarily due to$4.7 million decrease as a result of lower revenues from Top 20 and Newsflash and$3.0 million decrease in our website advertisements, offset partially by$5.0 million increase in Getaways vouchers due to increase in number of vouchers sold. The decrease in Local revenues of$2.0 million was primarily due to the decrease in number of Local Deals vouchers sold.North America revenues decreased$25.8 million for the nine months endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 . This decrease was primarily due to$20.7 million decrease in Travel revenues and$5.1 million decrease in Local revenues. The decrease in Travel revenue of$20.7 million was primarily due to$15.4 million decrease as a result of lower revenues from Top 20 and Newsflash and$8.1 million decrease in our website advertisements, offset partially by$6.2 million increase due to increase in number of Getaways vouchers sold. The decrease in Local revenues of$5.1 million was primarily due to the decrease in number of Local Deals vouchers sold.Travelzoo Europe Europe revenues decreased$4.8 million for the three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 . The decrease was primarily due to$4.4 million decrease in Travel revenues and$566,000 decrease in Local revenues, offset partially by$160,000 positive impact from foreign currency movements relative to theU.S. dollar. The decrease in Travel revenue of$4.4 million was primarily due to$3.6 million as a result of decrease in revenue from Top 20 and Newsflash and$1.6 million decrease in our website advertisements, offset partially by$1.5 million increase in Getaways due to increase in number of vouchers sold. The decrease in Local revenues of$566,000 was primarily due to the decrease in number of Local Deals vouchers sold.Europe revenues decreased$15.3 million for the nine months endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 . The decrease was primarily due to$13.4 million decrease in Travel revenues and$1.9 million decrease in Local revenues and$1,000 negative impact from foreign currency movements relative to theU.S. dollar. The decrease in Travel revenue of$13.4 million was primarily due to$8.9 million decrease in revenue from Top 20 and Newsflash and$4.1 million decrease in our website advertisements, offset partially by$1.7 million increase in Getaways due to increase in vouchers sold. The decrease in Local revenues of$1.9 million was primarily due to the decrease in number of Local Deals vouchers sold. 35 --------------------------------------------------------------------------------Jack's Flight Club Travelzoo acquired 60% of the Shares ofJack's Flight Club onJanuary 13, 2020 .Jack's Flight Club's premium members pay subscription fees quarterly, semi-annually or annually to receive emails or app notifications of flight deals.Jack's Flight Club's revenue was$987,000 for the three months endedSeptember 30, 2020 and$2.6 million fromJanuary 13, 2020 throughSeptember 30, 2020 . Cost of Revenues Cost of revenues consists primarily of network expenses, including fees we pay for co-location services and depreciation and maintenance of network equipment, payments made to third-party partners of the Travelzoo Network, amortization of capitalized website development costs, credit card fees, certain estimated refunds to members and customer service costs associated with vouchers we sell and hotel bookings, and salary expenses associated with network operations and customer service staff. Cost of revenues was$2.9 million for each of the three months endedSeptember 30, 2020 and 2019. Cost of revenues was$7.8 million and$8.4 million for the for the nine months endedSeptember 30, 2020 and 2019, respectively. Cost of revenue for the three months endedSeptember 30, 2020 included$76,000 fromJack's Flight Club . WithoutJack's Flight Club , cost of revenue decreased by$4,000 for the three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 . Cost of revenue for the nine months endedSeptember 30, 2020 included$274,000 fromJack's Flight Club . WithoutJack's Flight Club , cost of revenue decreased by$895,000 for the nine months endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 . The decrease was primarily due to$1.3 million decrease in expenses from third-party partners of the Travelzoo Network. Operating Expenses Sales and Marketing Sales and marketing expenses consist primarily of advertising and promotional expenses, salary expenses associated with sales, marketing and production employees, expenses related to our participation in industry conferences, public relations expenses and facilities costs. Sales and marketing expenses were$6.9 million and$12.0 million for the three months endedSeptember 30, 2020 and 2019, respectively. Sales and marketing expenses were$24.3 million and$38.6 million for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively. Advertising expenses consist primarily of online advertising referred to as traffic acquisition cost and member acquisition costs. For the three months endedSeptember 30, 2020 and 2019, advertising expenses accounted for 1% and 19% of the total sales and marketing expenses. For the nine months endedSeptember 30, 2020 and 2019, advertising expenses accounted for 10% and 20% of the total sales and marketing expense, respectively. The goal of our advertising was to acquire new members to our email products, increase the traffic to our websites, increase brand awareness and increase our audience through mobile and social media channels. Sales and marketing expenses for the three months endedSeptember 30, 2020 included$156,000 fromJack's Flight Club . WithoutJack's Flight Club , sales and marketing expenses decreased$5.2 million for the three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 primarily due to$1.9 million decrease for headcount related expenses and$1.4 million decrease in member acquisition costs. Sales and marketing expenses for the nine months endedSeptember 30, 2020 included$458,000 fromJack's Flight Club . WithoutJack's Flight Club , sales and marketing expenses decreased$14.8 million for the nine months endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 primarily due to$6.4 million decrease for headcount related expenses,$4.6 million decrease in member acquisition costs and$1.0 million decrease in travel expenses. Product Development Product development expenses consist primarily of compensation for software development staff, fees for professional services, software maintenance, amortization, and facilities costs. Product development expenses were$592,000 and$1.4 million for the three months endedSeptember 30, 2020 and 2019, respectively. Product development expenses were$2.6 million and$4.9 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Product development expenses decreased$842,000 for three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 primarily due to$361,000 decrease in headcount related expenses and$329,000 decrease in professional services fees. 36 -------------------------------------------------------------------------------- Product development expenses decreased$2.3 million for nine months endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 primarily due to$1.0 million decrease in professional services fees and$823,000 decrease in headcount related expenses. General and Administrative General and administrative expenses consist primarily of compensation for administrative and executive staff, bad debt expense, professional service expenses for audit and tax preparation, legal expenses, amortization of intangible assets, general office expense and facilities costs. General and administrative expenses were$4.5 million and$4.2 million for the three months endedSeptember 30, 2020 and 2019, respectively. General and administrative expenses were$16.7 million and$13.6 million for the nine months endedSeptember 30, 2020 and 2019, respectively. General and administrative expenses for the three months endedSeptember 30, 2020 included$505,000 fromJack's Flight Club . WithoutJack's Flight Club , general and administrative expenses decreased$148,000 for the three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 primarily due to$568,000 decrease in headcount related expenses,$205,000 decrease in travel expenses and$165,000 decrease in bad debt expense, offset partially by$845,000 increase in stock-based compensation expense as the result of the shareholders' approval inMay 2020 of newly granted options and increases and repricing of certain previously granted options. General and administrative expenses for the nine months endedSeptember 30, 2020 included$2.0 million fromJack's Flight Club . WithoutJack's Flight Club , general and administrative expenses increased$1.1 million for the nine months endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 . The increase was primarily due to$4.5 million increase in stock-based compensation expense as the result of the shareholders' approval inMay 2020 of newly granted options and increases and repricing of certain previously granted options, offset partially by$1.5 million gain relating toJack Flight Club's promissory note forgiveness and$1.4 million decrease in headcount related expenses. Income Taxes Our income is generally taxed in theU.S. ,Canada andU.K. Our income tax provision reflects federal, state and country statutory rates applicable to our worldwide income, adjusted to take into account losses that are treated as having no recognizable tax benefit. Income tax benefit was$244,000 and$2.1 million for the three and nine months endedSeptember 30, 2020 , respectively. Our effective tax rate was 20% and 15% for the three and nine months endedSeptember 30, 2020 , respectively. Income tax expense was$860,000 and$3.6 million for the three and nine months endedSeptember 30, 2019 , respectively. Our effective tax rate was 25% for each of the three and nine months endedSeptember 30, 2019 , respectively. Our effective tax rate decreased for the three and nine months endedSeptember 30, 2020 from the three and nine months endedSeptember 30, 2019 primarily due to operating losses in 2020 as a result of the COVID-19 pandemic. We expect our effective tax rate to fluctuate in future periods depending on the geographic mix of our worldwide income or losses mainly incurred by our operations, statutory tax rate changes that may occur, existing or new uncertain tax matters that may arise and require changes in tax reserves, the use of accumulated losses to offset current taxable income and the need for valuation allowances on certain tax assets, if any. See "Note 5: Income Taxes" to the accompanying unaudited condensed consolidated financial statements for further information.Travelzoo North America Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) Revenue$ 9,143 $ 15,339 $ 26,042 $ 51,850 Operating profit (loss) $ (696)$ 2,620 $ (6,374) $ 10,673 Operating profit (loss) as a % of revenue (7.6) % 17.1 % (24.5) % 20.6 %North America revenues decreased by$6.2 million for the three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 (see "Revenues" above).North America expenses decreased by$2.9 million for the three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 . The decrease was primarily due to$1.4 million decrease in expenses for headcount related expenses and$767,000 decrease in member acquisition costs.North America revenues decreased by$25.8 million for the nine months endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 (see "Revenues" above).North America expenses decreased by$8.8 million for the nine months 37 -------------------------------------------------------------------------------- endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 . The decrease was primarily due to$5.3 million decrease in headcount related expenses,$2.3 million decrease in payments made to the third-party partners of the Travelzoo Network,$1.5 million gain in relates toJack Flight Club's promissory note forgiveness and$1.3 million decrease in member acquisition costs, offset partially by$4.3 million increase in stock-based compensation expense as the result of the shareholders' approval inMay 2020 of newly granted options and increases and repricing of certain previously granted options.Travelzoo Europe Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) Revenue$ 3,657 $ 8,494 $ 12,461 $ 27,749 Operating profit (loss) $ (757)$ 815 $ (3,781) $ 3,536 Operating profit (loss) as a % of revenue (20.7) % 9.6 % (30.3) % 12.7 %Europe revenues decreased by$4.8 million for the three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 (see "Revenues" above).Europe expenses decreased by$3.3 million for the three months endedSeptember 30, 2020 from the three months endedSeptember 30, 2019 . The decrease was primarily due to$617,000 million decrease in headcount related expenses,$639,000 decrease in member acquisition costs and$480,000 decrease in travel expenses.Europe revenues decreased by$15.3 million for the nine months endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 (see "Revenues" above).Europe expenses decreased by$8.0 million for the nine months endedSeptember 30, 2020 from the nine months endedSeptember 30, 2019 . The decrease was primarily due to$3.3 million decrease in headcount related expenses and$2.3 million decrease in member acquisition costs. Foreign currency movements relative to theU.S. dollar negatively impacted our local currency income from our operations inEurope by approximately$33,000 and$0 for the three and nine months endedSeptember 30, 2020 , respectively. Foreign currency movements relative to theU.S. dollar negatively impacted our local currency income from our operations inEurope by approximately$46,000 and$218,000 for the three and nine months endedSeptember 30, 2019 , respectively. Liquidity and Capital Resources As ofSeptember 30, 2020 , we had$50.5 million in cash and cash equivalents, of which$29.1 million was held outside theU.S. in our foreign operations. If this cash is distributed to theU.S. , we may be subject to additionalU.S. taxes in certain circumstances. Cash and cash equivalents increased from$18.7 million as ofDecember 31, 2019 primarily by cash provided by operating activities, offset by cash used to purchaseJack's Flight Club . As ofSeptember 30, 2020 , we had promissory notes payable to the sellers ofJack's Flight Club aggregating$1.7 million which are due inJune 2021 , as well as PPP loans aggregating$3.6 million due inApril 2022 . As ofSeptember 30, 2020 , we had negative working capital of$13.7 million primarily due to an increase in accounts payable related to merchants from the sale of vouchers. The payable to merchants is generally due upon redemption of the voucher. The vouchers have maturities that extend into 2021 and 2022 and we believe that redemption patterns may be delayed under the current environment. Based on the current projections of redemption activity, we expect that cash on hand as ofSeptember 30, 2020 will be sufficient to provide for working capital needs for at least the next twelve months. However, if redemption activity is more accelerated, or if we are not able to reduce operating losses, we may need to obtain additional financing to meet our working capital needs in the future. We believe that we could obtain additional financing if needed, but there can be no assurance that financing will be available on terms that are acceptable to us, if at all. 38 --------------------------------------------------------------------------------
The following table provides a summary of our cash flows from operating, investing and financing activities:
Nine Months Ended September 30,
2020 2019
(In thousands)
Net cash provided by operating activities $ 37,584 $ 1,926
Net cash used in investing activities (1,361) (1,023)
Net cash used in financing activities (5,342) (7,056)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
393 (395)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
31,274
Net cash provided by operating activities is net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. Net cash provided by operating activities for the nine months endedSeptember 30, 2020 was$37.6 million , which consisted of$41.8 million increase in cash from changes in operating assets and liabilities and$11.0 million non-cash items, offset partially by net loss of$15.3 million . The increase in cash from changes in operating assets and liabilities primarily consisted of the$33.2 million increase in accounts payable and$6.2 million decrease in accounts receivable. Adjustments for non-cash items primarily was consisted of$5.2 million of stock-based compensation, 3.9 million of provision of loss on accounts receivable and other,$2.9 million impairment of goodwill and intangible assets and$1.8 million depreciation and amortization, offset partially by$1.7 million deferred income tax and$1.5 million gain relating toJack Flight Club's Promissory notes forgiveness. Net cash provided by operating activities for the nine months endedSeptember 30, 2019 was$1.9 million , which consisted of net income of$4.8 million and adjustments for non-cash items of$3.1 million , offset by a$5.9 million decrease in cash from changes in operating assets and liabilities. The decrease in cash from changes in operating assets and liabilities primarily consisted of the$4.4 million net decrease in accounts payable and accrued expenses. Cash paid for income tax, net of refunds received, during the nine months endedSeptember 30, 2020 and 2019 was$1.2 million and$3.8 million , respectively. Net cash used in investing activities for the nine months endedSeptember 30, 2020 and 2019 was$1.4 million and$1.0 million , respectively. The cash used in investing activities for the nine months endedSeptember 30, 2020 was primarily due to the$1.0 million investment inJack's Flight Club acquisition less acquired cash of$321,000 ,$430,000 other investments and$252,000 in purchases of property and equipment. The cash used in investing activities for the nine months endedSeptember 30, 2019 was primarily due to$673,000 investment in WeekenGO and$350,000 in purchases of property and equipment. Net cash used in financing activities for the nine months endedSeptember 30, 2020 and 2019 was$5.3 million and$7.1 million , respectively. The cash used in financing activities for the nine months endedSeptember 30, 2020 was primarily due to the$7.8 million promissory note payment forJack's Flight Club stock purchase and$1.2 million payment to repurchase common stock, offset partially by$3.7 million proceeds from PPP loans. Net cash used in financing activities for the nine months endedSeptember 30, 2019 was$7.1 million primarily due to a$8.8 million payment for repurchase common stock, offset partially by proceeds from the issuance of common stock, net of tax paid for the net share settlement, of$1.7 million . Although we have settled the states unclaimed property claims with all states, we may still receive inquiries from certain potential Netsurfers promotional shareholders that had not provided their state of residence to us byApril 25, 2004 . Therefore, we are continuing our voluntary program under which we make cash payments to individuals related to the promotional shares for individuals whose residence was unknown by us and who establish that they satisfied the conditions to receive shares of Netsurfers, and who failed to submit requests to convert their shares into shares ofTravelzoo within the required time period. This voluntary program is not available for individuals whose promotional shares have been escheated to a state by us. Our capital requirements depend on a number of factors, including market acceptance of our products and services, the amount of our resources we devote to the development of new products, cash payments related to former shareholders of Netsurfers, expansion of our operations, and the amount of resources we devote to promoting awareness of the Travelzoo brand. Since the inception of the voluntary program under which we make cash payments to people who establish that they were former shareholders of Netsurfers, and who failed to submit requests to convert their shares into shares ofTravelzoo within the required time period, we have incurred expenses of$2.9 million . While future payments for this program are expected to decrease, the total cost of this voluntary program is still undeterminable because it is dependent on our stock price and on the number of valid requests ultimately received. Consistent with our growth, we have experienced fluctuations in our cost of revenues, sales and marketing expenses and our general and administrative expenses, including increases in product development costs, and we anticipate that these 39 -------------------------------------------------------------------------------- increases will continue for the foreseeable future. We believe cash on hand will be sufficient to pay such costs for at least the next twelve months. In addition, we will continue to evaluate possible investments in businesses, products and technologies, the consummation of any of which would increase our capital requirements. We are subject to risks and uncertainties as a result of the COVID-19 pandemic. Since COVID-19 has spread globally, many of our advertisers have paused, canceled, and stopped advertising with us. Additionally, there have been a large amount of cancellations for our hotel and travel package partners as well as refund requests for our vouchers with the Company's restaurant and spa partners. We are taking steps to adopt new policies and reduce expenses in an effort to maintain our cash position, while we evaluate potential business options and strategic alternatives that may be available. Although we currently believe that we have sufficient capital resources to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months, unanticipated events and opportunities or a less favorable than expected development of our business with one or more of our advertising formats may require us to sell additional equity or debt securities or establish new credit facilities to raise capital in order to meet our capital requirements. If we sell additional equity or convertible debt securities, the sale could dilute the ownership of our existing shareholders. If we issue debt securities or establish a new credit facility, our fixed obligations could increase, and we may be required to agree to operating covenants that would restrict our operations. We cannot be sure that any such financing will be available in amounts or on terms acceptable to us. If the development of our business is less favorable than expected, we may decide to significantly reduce the size of our operations and marketing expenses in certain markets with the objective of reducing cash outflow. The information set forth under "Note 4: Commitments and Contingencies" and "Note 11: Leases" to the accompanying unaudited condensed consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference. Litigation and claims against the Company may result in legal defense costs, settlements or judgments that could have a material impact on our financial condition. We also have contingencies related to net unrecognized tax benefits, including interest, of approximately$381,000 as ofSeptember 30, 2020 . See "Note 5: Income Taxes" to the accompanying unaudited condensed consolidated financial statements for further information. Critical Accounting Policies and Estimates Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. Our critical accounting policies include revenue recognition, reserve for member refunds, allowance for doubtful accounts, income taxes and loss contingencies. For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 as well as updates in the current fiscal year provided in "Note 1 Summary of Significant Accounting Policies" in the notes to the condensed consolidated financial statements. Recent Accounting Pronouncements See "Note 1-The Company and Basis of Presentation" to the accompanying unaudited condensed consolidated financial statements included in this report, regarding the impact of certain recent accounting pronouncements on our unaudited condensed consolidated financial statements. 40
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