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.Travelzoo (the "Company" or "we") attracts a high-quality audience of travel enthusiasts across multiple digital platforms, including email, web, social media and mobile applications. Our insider deals and email newsletters are published byTravelzoo and its licensees worldwide. Our publications and products include theTravelzoo website (travelzoo.com), theTravelzoo iPhone and Android apps, the Travelzoo Top 20® email newsletter, the Newsflash email alert service, and the Travelzoo Network. 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. In January andJuly 2022 , the Company's German branch ofTravelzoo (Europe) Limited received the payment for approximately$1.2 million and$494,000 , respectively, from German federal government for companies suffered Corona-related slump. The Company recorded$1.2 million and$494,000 gain in Other income, net in the first quarter and third quarter of 2022. The Company also received other government fundings for the three and nine months endedSeptember 30, 2022 and 2021. Job retention related funding fromCanada was approximately$10,000 and$64,000 for the three months endedSeptember 30, 2022 and 2021, respectively, and was approximately$164,000 and$381,000 for the nine months endedSeptember 30, 2022 and 2021, respectively. Job retention related funding from European locations was$0 and$31,000 for the three and nine months endedSeptember 30, 2021 , respectively. These other government fundings were recorded against salary and related expenses. The Company did not receive any job retention related funding from European locations for the three and nine months endedSeptember 30, 2022 . InDecember 2020 , the Company sold all of its shares in WeGo to trivago for a total purchase price of approximately$2.9 million , of which$196,000 was placed in escrow for one year. The Company received the full escrow payment inJanuary 2022 and recorded the gain in Other income, net for the first quarter of 2022. Historically, the Company managed its business geographically and operated in three reportable segments includingAsia Pacific ,Europe andNorth America . In the first quarter of 2020, the Company classified the results of itsAsia Pacific segment as discontinued operations in its 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. 31
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How We Generate Revenues
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 full refunds for vouchers that have not been redeemed or expired. The expiration dates of vouchers range betweenOctober 2022 throughDecember 2025 with the majority of vouchers expiring during 2023; provided, that these expiration dates may sometimes be extended on a case-by-case basis. The revenues generated from Local Deals vouchers and entertainment offers are based upon a percentage of the face value of the vouchers, commission on actual sales or a listing fee based on audience reach. For Local Deals vouchers, we recognize a percentage of the face value of vouchers upon the sale of the vouchers. 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, 2022 , the Company had approximately$9.6 million of unredeemed vouchers that had been sold throughSeptember 30, 2022 representing the Company's commission earned from the sale. The Company had estimated a refund liability of$1.9 million for these unredeemed vouchers as ofSeptember 30, 2022 which is recorded as a reduction of revenues and is reflected as a current liability in Accrued expenses and other on the consolidated balance sheet. The Company has recorded Merchant Payables of$38.2 million as ofSeptember 30, 2022 related to unredeemed vouchers. 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.
32
--------------------------------------------------------------------------------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, our ability to
develop and launch new products and our ability to continue to service our
members without interruption. Our ability to generate revenues is also dependent
on trends impacting the travel industry and online advertising businesses 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
global pandemic, which decrease the demand for travel and entertainment and
increasing cybersecurity risks due to increased dependence on digital
technologies. We also could be indirectly impacted by climate change and related
legislation to the extent such legislation impacts the businesses of our
advertisers such as airlines and cruise ship operators, which have come under
increasing scrutiny for their carbon footprints.
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 global 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 global 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.
33-------------------------------------------------------------------------------- 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 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 the impact to revenues caused by the global pandemic, spending by the Company in many areas within the business was slowed or stopped, including but not limited to, marketing, technology and human resources. For example, in 2020, the Company ceased operations inAsia Pacific , conducted employee furloughs and restructured its employees significantly. The Company also renegotiated many of its outstanding contractual obligations with vendors and closed some ancillary office locations in order to reduce capital expenditures. We do not anticipate that any additional cost-cutting measures will be necessary at this time, but the Board and management of the Company are continually evaluating Company spending. While the Company has already implemented a policy governing employees returning to the office voluntarily (in jurisdictions where they are permitted to do so), which includes health, safety and cleaning protocols, the Board and management are continually evaluating the best timeframe for employees' official return to the offices, including implementing a phased return and ongoing flexible working arrangements. 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 global 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. 34 --------------------------------------------------------------------------------
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,
2022 2021 2022 2021
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues 14.7 19.1 14.0 17.4
Gross profit 85.3 80.9 86.0 82.6
Operating expenses:
Sales and marketing 53.7 49.1 49.2 44.5
Product development 3.0 4.4 2.7 4.2
General and administrative 26.9 29.1 26.4 28.9
Total operating expenses 83.6 82.6 78.3 77.6
Operating income (loss) 1.7 (1.7) 7.7 5.0
Other income, net 5.3 21.3 4.7 7.9
Income from continuing operations before income taxes 7.0 19.6 12.4 12.9
Income tax expense 2.0 1.5 4.3 4.3
Income from continuing operations 5.0 18.1 8.1 8.6
Income (loss) from discontinued operations, net of taxes
- (0.1) - -
Net income 5.0 18.0 8.1 8.6
Net income attributable to non-controlling interest - - 0.1 -
Net income attributable to Travelzoo 5.0 % 18.0 % 8.0 % 8.6 %
35
--------------------------------------------------------------------------------Operating Metrics
The following table sets forth, as a percentage of total revenues, the results from our operations for the periods indicated.
Three Months Ended
September 30,
2022 2021
North America
Total members (1) 16,385,000 17,241,000
Average cost per acquisition of a new member $ 3.48 $ 4.81
Revenue per member (2) $ 2.73 $ 2.74
Revenue per employee (3) $ 381,000 $ 395,000
Social media followers 3,261,000 3,251,000
Europe
Total members (1) 9,075,000 8,437,000
Average cost per acquisition of a new member $ 3.35 $ 2.36
Revenue per member (2) $ 2.35 $ 1.99
Revenue per employee (3) $ 197,000 $ 174,000
Social media followers 900,000 899,000
Jack's Flight Club
Total members 1,872,000 1,706,000
Consolidated
Total members (1) 27,332,000 27,384,000
Average cost per acquisition of a new member $ 3.43 $ 3.81
Revenue per member (2) $ 2.31 $ 2.48
Revenue per employee (3) $ 297,000 $ 292,000
Social media followers 4,161,000 4,150,000
(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.
36
--------------------------------------------------------------------------------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, 2022 2021 2022 2021Travelzoo North America Travel$ 9,668 $ 9,078 $ 32,167 $ 31,141 Local 830 585 2,410 2,326Total Travelzoo North America revenues 10,498 9,663 34,577 33,467 Travelzoo Europe Travel 4,230 4,772 13,926 11,796 Local 274 457 866 1,245 Total Travelzoo Europe revenues 4,504 5,229 14,792 13,041 Jack's Flight Club 847 796 2,622 2,543 Consolidated Travelzoo Travel 13,898 13,850 46,093 42,937 Travelzoo Local 1,104 1,042 3,276 3,571 Jack's Flight Club 847 796 2,622 2,543 Total revenues$ 15,849 $ 15,688 $ 51,991 $ 49,051 Travelzoo North America North America revenues increased$835,000 for the three months endedSeptember 30, 2022 from the three months endedSeptember 30, 2021 . This increase was primarily due to$590,000 increase in Travel revenues and$245,000 increase in Local revenues. The increase in Travel revenue of$590,000 was primarily due to$2.2 million increase as a result of higher revenues from Top 20 and Newsflash, offset partially by$1.5 million decrease in Getaways revenue due to a decrease in number of vouchers sold. The increase in Local revenues of$245,000 was primarily due to the increase in number of Local Deals vouchers sold.North America revenues increased$1.1 million for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 . This increase was primarily due to$1.0 million increase in Travel revenues and$84,000 increase in Local revenues. The increase in Travel revenue of$1.0 million was primarily due to$9.0 million increase as a result of higher revenues from Top 20 and Newsflash, offset partially by$8.1 million decrease in Getaways revenue due to a decrease in number of vouchers sold. The increase in Local revenues of$84,000 was primarily due to the increase in number of Local Deals vouchers sold.
Europe revenues decreased$725,000 for the three months endedSeptember 30, 2022 from the three months endedSeptember 30, 2021 . The decrease was primarily due to$859,000 negative impact from foreign currency movements relative to theU.S. dollar and$131,000 decrease in Local revenue, offset partially by$265,000 increase in Travel revenues. The increase in Travel revenue of$265,000 was primarily due to$1.5 million increase as a result of higher revenues from Top 20 and Newsflash, offset partially by$1.4 million decrease in Getaways revenue due to a decrease in number of vouchers sold. The decrease in Local revenues of$131,000 was primarily due to the decrease in number of Local Deals vouchers sold. 37 --------------------------------------------------------------------------------Europe revenues increased$1.8 million for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 . The increase was primarily due to$3.7 million increase in Travel revenues, offset partially by$287,000 decrease in Local revenues and$1.7 million negative impact from foreign currency movements relative to theU.S. dollar. The increase in Travel revenue of$3.7 million was primarily due to$3.9 million increase as a result of higher revenues from Top 20 and Newsflash,$1.6 million increase in hotel and entertainment commissions, revenue reserve adjustment of$1.0 million and$349,000 increase in our website advertisements, offset partially by$3.4 million decrease in Getaways revenue due to a decrease in number of vouchers sold. The decrease in Local revenues of$287,000 was primarily due to the decrease in number of Local Deals vouchers sold.
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 increased by$51,000 and$79,000 , respectively, for three and nine months endedSeptember 30, 2022 from the three and nine months endedSeptember 30, 2021 due to the increase of premium members.
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 and related expenses associated with network operations and customer service employees. Cost of revenues was$2.3 million and$3.0 million , respectively, for the three months endedSeptember 30, 2022 and 2021. Cost of revenues was$7.3 million and$8.5 million , respectively, for the nine months endedSeptember 30, 2022 and 2021. Cost of revenues decreased$668,000 for the three months endedSeptember 30, 2022 from the three months endedSeptember 30, 2021 primarily due to$324,000 decrease in credit card fees as a result of decreased voucher sales,$256,000 decrease in software license expenses and$139,000 decrease in customer service costs associated with vouchers we sell and hotel bookings. Cost of revenues decreased$1.2 million for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 primarily due to$999,000 decrease in credit card fees as a result of decreased voucher sales and$435,000 decrease in network expenses, offset partially by$299,000 increase in software license expenses. Operating Expenses Sales and Marketing Sales and marketing expenses consist primarily of advertising and promotional expenses, salary and related 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$8.5 million and$7.7 million for the three months endedSeptember 30, 2022 and 2021, respectively. Sales and marketing expenses were$25.6 million and$21.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Advertising expenses consist primarily of online advertising which we refer to as traffic acquisition cost and member acquisition costs. For the three months endedSeptember 30, 2022 and 2021, advertising expenses accounted for 25% and 17%, respectively, of the total sales and marketing expenses. For the nine months endedSeptember 30, 2022 and 2021, advertising expenses accounted for 22% and 11%, respectively, of the total sales and marketing expenses. 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 increased
Sales and marketing expenses increased$3.7 million for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 . The increase was primarily due to$2.4 million increase in member acquisition costs and$1.3 million increase in marketing expenses. 38 --------------------------------------------------------------------------------
Product Development
Product development expenses consist primarily of salary and related expenses associated with software development employees, fees for professional services, software maintenance, amortization, and facilities costs. Product development expenses were$484,000 and$684,000 for the three months endedSeptember 30, 2022 and 2021, respectively. Product development expenses were$1.4 million and$2.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively.
Product development expenses decreased
Product development expenses decreased$661,000 for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 primarily due to a$407,000 decrease in salary and headcount related expenses and a$151,000 decrease in facilities costs. General and Administrative
General and administrative expenses consist primarily of salary and related
expenses associated with administrative and executive employees, bad debt
expense, professional service expenses, legal expenses, amortization of
intangible assets, general office expense and facilities costs. General and
administrative expenses were
General and administrative expenses decreased
General and administrative expenses decreased$445,000 for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 primarily due to$1.4 million decrease in salary and headcount related expenses which mainly related to the decrease of stock-based compensation expense, offset partially by$741,000 increase in professional service expenses and$344,000 increase in bad debt expense. Other Income, net Other income, net consisted primarily of foreign exchange transactions gains and losses, our share of investment gains and losses and amortization of basis differences, sublease income, gains from PPP loan forgiveness, German federal government funding for Corona-related pandemic relief, interest income earned on cash, cash equivalents and restricted cash as well as interest expense. Other income, net was$836,000 and$3.3 million , respectively, for the three months endedSeptember 30, 2022 and 2021. The decrease of$2.5 million for the three months endedSeptember 30, 2022 from three months endedSeptember 30, 2021 was due primarily to the$3.2 million gain recorded as the result of the PPP loan forgiveness in the three months endedSeptember 30, 2021 , offset partially by the$494,000 German federal government funding for COVID pandemic relief in the three months endedSeptember 30, 2022 . Other income, net was$2.5 million and$3.9 million , respectively, for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease of$1.4 million for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 was due primarily to$3.6 million gain recorded as the result of PPP loan forgiveness in the nine months endedSeptember 30, 2021 , offset partially by the$1.7 million German federal government funding for COVID pandemic relief and the$196,000 escrow payment for WeGo sale the Company received in the nine months endedSeptember 30, 2022 . 39 --------------------------------------------------------------------------------
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. Income tax expense was$317,000 and$233,000 , respectively, for the three months endedSeptember 30, 2022 and 2021. Our effective tax rate was 29% and 8%, respectively, for the three months endedSeptember 30, 2022 and 2021. Our effective tax rate changed for the three months endedSeptember 30, 2022 from three months endedSeptember 30, 2021 primarily due to other income recorded for PPP loan forgiveness in the three months endedSeptember 30, 2021 that is exempt from tax. Income tax expense was$2.2 million and$2.1 million , respectively, for each of the nine months endedSeptember 30, 2022 and 2021. Our effective tax rate was 34% and 33%, respectively, for the nine months endedSeptember 30, 2022 and 2021. Our effective tax rate changed for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 primarily due to changes in deferred tax assets from limitations on deductible stock-based compensation, offset by PPP loan forgiveness income exempt from tax. We expect our effective tax rate to fluctuate in future periods depending on the geographic mix of our worldwide income or losses mainly incurred by our operations, statutory tax rate changes that may occur, existing or new uncertain tax matters that may arise and require changes in tax reserves, the use of accumulated losses to offset current taxable income and the need for valuation allowances on certain tax assets, if any. See "Note 5: Income Taxes" to the accompanying unaudited condensed consolidated financial statements for further information.Travelzoo North America Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) (In thousands) Revenue$ 10,498 $ 9,663 $ 34,577 $ 33,467 Operating profit (loss)$ 812 $ (918) $ 5,622$ 2,654 Operating profit (loss) as a % of revenue 7.7 % (9.5) % 16.3 % 7.9 %North America revenues increased by$835,000 for the three months endedSeptember 30, 2022 from the three months endedSeptember 30, 2021 (see "Revenues" above).North America expenses decrease by$895,000 for the three months endedSeptember 30, 2022 from the three months endedSeptember 30, 2021 . The decrease was primarily due to$344,000 decrease in salary and headcount related expenses,$307,000 decrease in facilities costs,$262,000 decrease in credit card fee as a result of decreased voucher sales,$200,000 decrease in software license expenses,$142,000 decrease in customer service costs associated with vouchers we sell and hotel bookings, offset partially by$384,000 increase in professional service expenses.North America revenues increased by$1.1 million for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 (see "Revenues" above).North America expenses decreased by$1.9 million for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 . The decrease was primarily due to$891,000 decrease in credit card fee as a result of decreased voucher sales,$872,000 decrease in facilities costs,$825,000 decrease in salary and headcount related expenses, offset partially by$398,000 increase in depreciation and amortization expenses and$272,000 increase in professional service expenses.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(In thousands) (In thousands)
Revenue $ 4,504 $ 5,229 $ 14,792 $ 13,041
Operating profit (loss) $ (551) $ 600 $ (1,845) $ (323)
Operating profit (loss) as a % of revenue (12.2) % 11.5 % (12.5) % (2.5) %
Europe revenues decreased by $725,000 for the three months ended September 30,
2022 from the three months ended September 30, 2021 (see "Revenues" above).
Europe expenses increased by $426,000 for the three months ended September 30,
2022 from the three months ended September 30, 2021 primarily due to $296,000
increase in member acquisition costs and $287,000 increase in marketing
expenses.
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Europe revenues increased by $1.8 million for the nine months ended
September 30, 2022 from the nine months ended September 30, 2021 (see "Revenues"
above). Europe expenses increased by $3.3 million for the nine months ended
September 30, 2022 from the nine months ended September 30, 2021 primarily due
to $2.1 million increase in member acquisition costs, $518,000 increase in
marketing expenses, $291,000 increase in professional service expenses and
$287,000 in bad debt expense.
Foreign currency movements relative to the U.S. dollar positively impacted our
local currency income from our operations in Europe by approximately $87,000 and
$267,000 for the three and nine months ended September 30, 2022 , respectively.
Foreign currency movements relative to the U.S. dollar positively impacted our
local currency income from our operations in Europe by approximately $64,000 and
$4,000 for the three months ended September 30, 2021 , respectively.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(In thousands) (In thousands)
Revenue $ 847 $ 796 $ 2,622 $ 2,543
Operating profit $ 12 $ 57 $ 196 $ 117
Operating profit as a % of revenue 1.4 % 7.2 % 7.5 % 4.6 %
Jack's Flight Club revenues increased by $51,000 for the three months ended
September 30, 2022 from the three months ended September 30, 2021 (see
"Revenues" above). Jack's Flight Club expenses increased by $101,000 for the
three months ended September 30, 2022 from the three months ended September 30,
2021 primarily due to an increase in advertising and marketing expenses.
Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had$19.5 million in cash and cash equivalents, of which$9.9 million was held outside theU.S. in our foreign operations. We also had$1.0 million in restricted cash, of which$334,000 was held outside theU.S. in our foreign operations as ofSeptember 30, 2022 . If this cash is distributed to theU.S. , we may be subject to additionalU.S. taxes in certain circumstances.
Cash, cash equivalents and restricted cash decreased
As ofSeptember 30, 2022 , the Company had merchant payables of$38.2 million related to unredeemed vouchers. In the Company's financial statements presented in this 10-Q report, following GAAP accounting principles, we classified all merchant payables as current. When all merchant payables are classified as current, there is negative net working capital (which is defined as current assets minus current liabilities) of$17.4 million . Payables to merchants are generally due upon redemption of vouchers. The vouchers expire betweenOctober 2022 throughDecember 2025 with the majority of vouchers expiring during 2023; provided, that these expiration dates may sometimes be extended on a case-by-case basis. Management believes that redemptions may be delayed for international vouchers in the current environment. Based on current projections of redemption activity, we expect that cash on hand as ofSeptember 30, 2022 will be sufficient to provide for working capital needs for at least the next twelve months. However, if redemption activity is more accelerated, if our business is not profitable, or if our planned targets for cash flows from operations are not met, 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. 41 --------------------------------------------------------------------------------
The following table provides a summary of our cash flows from operating, investing and financing activities:
Nine Months Ended September 30,
2022 2021
(In thousands)
Net cash provided by (used in) operating activities $ (20,849) $ 9,283
Net cash used in investing activities (1,089) (24)
Net cash provided by (used in) financing activities 761 (7,117)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(3,267) (126)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
(24,444)
Net cash provided by (used in) operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Net cash used in operating activities for the nine months endedSeptember 30, 2022 was$20.8 million , which primarily consisted of$25.4 million decrease in cash from changes in operating assets and liabilities, offset partially by net income of$4.2 million and$283,000 increase in non-cash items. The decrease in cash from changes in operating assets and liabilities was primarily due to$28.9 million decrease in merchant payables, offset partially by$2.5 million decrease in accounts receivables. Adjustments for non-cash items primarily consisted of$1.7 million for depreciation and amortization,$1.5 million for stock-based compensation and$701,000 for deferred income tax, offset partially by$3.4 million reversal of reserves from accounts receivable and other reserves. Net cash provided by operating activities for the nine months endedSeptember 30, 2021 was$9.3 million , which primarily consisted of$5.4 million increase in cash from changes in operating assets and liabilities, net income of$4.2 million and$344,000 decrease in non-cash items. The increase in cash from changes in operating assets and liabilities primarily consisted of$16.5 million increase in merchant payables and$5.0 million increase in accounts payable, offset partially by$9.5 million increase in prepaid expenses and other,$3.8 million increase in accounts receivable and$2.0 million increase in prepaid income taxes. Adjustments for non-cash items primarily consisted of$3.6 million gain on PPP loan forgiveness and$2.8 million of stock-based compensation
Cash paid for income tax, net of refunds received, during the nine months ended
Net cash used in investing activities for the nine months endedSeptember 30, 2022 and 2021 was$1.1 million and$24,000 , respectively. The cash used in investing activities for the nine months endedSeptember 30, 2022 was primarily consisted of the$1.0 million for purchases of intangible assets. The cash used in investing activities for the nine months endedSeptember 30, 2021 was due to the$24,000 for purchases of property and equipment. Net cash provided by financing activities for the nine months endedSeptember 30, 2022 was$761,000 . The cash provided by financing activities for the nine months endedSeptember 30, 2022 was primarily consisted of$1.9 million proceeds from the exercise of stock options, offset partially by$1.2 million for the repurchase of common stock. Net cash used in financing activities for the nine months endedSeptember 30, 2021 was$7.1 million which primarily consisted of$5.4 million in taxes paid for net settlement of stock options exercise and$1.6 million paid for the repurchase of common stock. 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. 42 -------------------------------------------------------------------------------- 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 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 global pandemic. Because of the global pandemic, 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 have taken 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 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$1.5 million as ofSeptember 30, 2022 . See "Note 5: Income Taxes" to the accompanying unaudited condensed consolidated financial statements for further information. 43 --------------------------------------------------------------------------------
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, 2021 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.
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