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. InApril 2018 , we entered into an agreement with WeekenGO ("WeGo"), a start-up company inGermany . WeGo uses new technology to promote vacation packages. We originally invested$3.0 million in WeGo for a 25% ownership interest inApril 2018 . InApril 2019 , the Company invested an additional$673,000 in WeGo and increased the Company's ownership interest to 26.6%. OnFebruary 11, 2020 ,Travelzoo signed an amended investment agreement with WeGo and agreed to invest an additional$1.7 million to increase the Company's ownership interest to 33.7% if WeGo meets certain performance targets. In connection with the Original Investment Agreement, WeGo agreed to spend approximately$2.1 million with the Company in marketing pursuant to an Insertion Order (the "Insertion Order") and in connection with the Investment Agreement, WeGo agreed to spend an additional$1.8 million in marketing, once the additional payment was made by the Company (the "Second Insertion Order"). 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$213,000 was placed in escrow for one year. As of the date of the transaction with trivago, WeGo had not achieved the necessary performance targets. WeGo also agreed to pay in a lump sum the remaining amount outstanding pursuant to the Insertion Order, equal to approximately$200,000 . The Company acquired the domain name and trademark "weekend.com" in 2005 and amortized this asset over five years. InDecember 2020 , the Company sold the domain name and trademark "weekend.com" to trivago in exchange for a payment of$822,000 . See "Note 1: Summary of Significant Accounting Policies" to the accompanying consolidated financial statements for further information. InJanuary 2020 ,Travelzoo acquiredJack's Flight Club , which operatesJack's Flight Club , a subscription service that provides members with information about exceptional airfares. As ofMarch 31, 2021 ,Jack's Flight Club had 1.6 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, dated as ofJanuary 13, 2020 , by and betweenTravelzoo and each Seller (the "Promissory Notes"). See "Note 3: Acquisition" to the accompanying consolidated financial statements for further information. 28 -------------------------------------------------------------------------------- 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. 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 betweenApril 2021 throughJune 2023 . 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 ofMarch 31, 2021 , the Company had approximately$18.6 million of unredeemed vouchers that had been sold during 2020 representing the Company's commission earned from the sale. The Company had estimated a refund liability of$4.0 million for these unredeemed vouchers as ofMarch 31, 2021 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$70.1 million as ofMarch 31, 2021 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.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 monthly pro rata over the subscription period. 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 29 -------------------------------------------------------------------------------- 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 global pandemic, which decrease the demand for travel and entertainment and increasing cybersecurity attacks 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, 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. We do not know that 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 30 -------------------------------------------------------------------------------- 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 has been 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. 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 remote working arrangements, and will determine when an official return will be safe for employees based on government regulations and guidance in the applicable jurisdictions. Other than the PPP Loan, which the Company expects will be mostly forgiven, the Company does not have any outstanding debt and does not anticipate needing to enter into any debt arrangements or raise any capital, publicly or privately, to support its operations and liquidity in the ordinary course of business. 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. 31 -------------------------------------------------------------------------------- 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 March 31, 2021 2020 Revenues 100.0 % 100.0 % Cost of revenues 21.1 13.3 Gross profit 78.9 86.7 Operating expenses: Sales and marketing 47.5 64.4 Product development 4.8 7.1 General and administrative 31.9 27.2 Impairment of intangible assets and goodwill - 14.3 Total operating expenses 84.2 113.0 Operating loss (5.3) (26.3) Other income (loss), net (1.2) - Loss from continuing operations before income taxes (6.5)
(26.3)
Income tax expense (benefit) 5.2
(2.5)
Loss from continuing operations (11.7)
(23.8)
Loss from discontinued operations, net of taxes (0.1)
(14.3)
Net loss (11.8)
(38.1)
Net loss attributable to non-controlling interest (0.3)
(5.6)
Net loss attributable toTravelzoo (11.5) %
(32.5) %
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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
March 31,
2021 2020
North America
Total members (1) 18,113,000 16,924,000
Average cost per acquisition of a new member $ 0.80 $ 2.28
Revenue per member (2) $ 2.41 $ 3.03
Revenue per employee (3) $ 345,000 $ 271,000
Mobile application downloads 3,771,000 3,693,000
Social media followers 3,250,000 3,273,000
Europe
Total members (1) 8,596,000 9,151,000
Average cost per acquisition of a new member $ 1.67 $ 3.12
Revenue per member (2) $ 1.64 $ 3.05
Revenue per employee (3) $ 145,000 $ 210,000
Mobile application downloads 2,163,000 2,076,000
Social media followers 895,000 903,000
Jack's Flight Club
Total members 1,643,000 1,744,000
Consolidated
Total members (1) 31,805,000 31,309,000
Average cost per acquisition of a new member $ 0.81 $ 2.64
Revenue per member (2) $ 1.77 $ 2.79
Revenue per employee (3) $ 260,000 $ 257,000
Mobile application downloads 6,831,000 6,602,000
Social media followers 4,145,000 4,176,000
(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.
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--------------------------------------------------------------------------------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 March 31, 2021 2020Travelzoo North America Travel$ 8,990 $ 11,156 Local 829 1,541
3,301 6,237
Local 277 710
Total Travelzoo Europe revenues 3,578 6,947
Jack's Flight Club 887 683
Consolidated
Travelzoo Travel 12,291 17,393
Travelzoo Local 1,106 2,251
Jack's Flight Club 887 683
Total revenues $ 14,284 $ 20,327
Travelzoo North America
North America revenues decreased $2.9 million for the three months ended
March 31, 2021 from the three months ended March 31, 2020 . This decrease was
primarily due to $2.2 million decrease in Travel revenues and $712,000 decrease
in Local revenues. Both Travel revenues and Local revenues have dropped due to
the global pandemic during the three months ended March 31, 2021 . The global
pandemic has had an unprecedented impact on the global travel and hospitality
industries. Most of the restrictions on travel, dining and activities were
issued in March 2020 . For the first two months of 2020, the Company's business
in North America and Europe was not severely affected. The decrease in Travel
revenue of $2.2 million was primarily due to $3.8 million decrease as a result
of lower revenues from Top 20 and Newsflash and $1.5 million decrease in hotel
and entertainment commission, offset partially by $3.4 million increase in
Getaways vouchers due to increase in number of vouchers sold. The decrease in
Local revenues of $712,000 was primarily due to the decrease in number of Local
Deals vouchers sold.
Travelzoo Europe
Europe revenues decreased $3.4 million for the three months ended March 31, 2021
from the three months ended March 31, 2020 . The decrease was primarily due to
$3.2 million decrease in Travel revenues and $454,000 decrease in Local
revenues, offset partially by $276,000 positive impact from foreign currency
movements relative to the U.S. dollar. The decrease in Travel revenue of $3.2
million was primarily due to $2.1 million decrease in revenue from Travel Top
20® and Newsflash, $1.7 million decrease in hotel and entertainment commission
and $925,000 decrease in our website advertisements, offset partially by $1.9
million increase in Getaways due to the increase in number of vouchers sold. The
decrease in Local revenues of $454,000 was primarily due to the decrease in
number of Local Deals vouchers sold.
Jack's Flight Club
Travelzoo acquired 60% of the Shares of Jack's Flight Club on January 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 $887,000 for the three months ended
March 31, 2021 and $683,000 for the period between January 13, 2020 through
March 31, 2020 .
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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 $3.0 million and $2.7 million for
each of the three months ended March 31, 2021 and 2020.
Cost of revenue for Travelzoo North America and Travelzoo Europe was $2.9
million and $2.6 million , respectively, for the three months ended March 31,
2021 and 2020. The increase of $322,000 was due to $537,000 increase in credit
card fee as a result of increased voucher sales and $216,000 increase in
professional services, offset partially by $465,000 decrease in expenses from
third-party partners of the Travelzoo Network. Cost of revenue for Jack's Flight
Club was $90,000 for the three months ended March 31, 2021 and $97,000 for the
period between January 13, 2020 through March 31, 2020 .
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 $6.8
million and $13.1 million for the three months ended March 31, 2021 and 2020,
respectively. Advertising expenses consist primarily of online advertising,
which we refer to as traffic acquisition cost and member acquisition costs. For
the three months ended March 31, 2021 and 2020, advertising expenses accounted
for 6% and 18% 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 for Travelzoo North America and Travelzoo Europe
was $6.7 million and $12.9 million , respectively, for the three months ended
March 31, 2021 and 2020. The decrease of $6.2 million was primarily due to $1.7
million decrease for headcount related expenses, $1.5 million decrease in member
acquisition costs and $959,000 decrease om trade and brand marketing expenses.
Sales and marketing expenses for Jack's Flight Club decreased from $240,000 for
the period between January 13, 2020 through March 31, 2020 to $112,000 for the
three months ended March 31, 2021 primarily due to decrease in advertising
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 $683,000
and $1.4 million for the three months ended March 31, 2021 and 2020,
respectively. Jack's Flight Club did not incur product development expenses for
the three months ended March 31, 2021 and 2020.Product development expenses
decreased $745,000 for the three months ended March 31, 2021 from the three
months ended March 31, 2020 primarily due to $504,000 decrease in headcount
related expenses and $226,000 decrease in professional services fees.
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 $4.6 million and $5.5 million for the three months
ended March 31, 2021 and 2020, respectively.
General and administrative expenses for Travelzoo North America and Travelzoo
Europe was $3.8 million and $5.1 million , respectively, for the three months
ended March 31, 2021 and 2020. The decrease of $1.3 million was primarily due to
the decrease of $1.3 million in bad debt expense and $559,000 decrease in
headcount related expenses, offset partially by $845,000 increase in stock-based
compensation expense as the result of the shareholders' approval in May 2020 of
newly granted options and increases and repricing of certain previously granted
options. General and administrative expenses for Jack's Flight Club was $795,000
for the three months ended March 31, 2021 and $416,000 for the period between
January 13, 2020 through March 31, 2020 . This increase is due primarily to an
estimate for indirect tax expenses the Company recorded during the three months
ended March 31, 2021 .
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Impairment of intangible assets and goodwill
We determined that the global pandemic that was declared in March 2020 was a
triggering event requiring us to assess our long-lived assets including goodwill
for impairment in the first quarter ended March 31, 2020 . The Company's
impairment test indicated that Jack's Flight Club's indefinite lived intangible
assets ("Trade name") was impaired for $810,000 and goodwill was impaired for
$2.1 million and the Company recorded these impairments in the first quarter
ended March 31, 2020 .
Other Income (Loss)
Other income (loss) consisted primarily of foreign exchange transactions gains
and losses, our share of investment gains and losses and amortization of basis
differences, sublease income, interest income earned on cash, cash equivalents
and restricted cash as well as interest expense. Other income (loss) was
($166,000 ) and ($6,000 ) for the three months ended March 31, 2021 and 2020
primarily due to foreign exchange transaction loss.
Income Taxes
Our income is generally taxed in the U.S. , Canada and U.K. Our income tax
provision reflects federal, state and country statutory rates applicable to our
worldwide income. Income tax expense (benefit) was $742,000 and ($517,000 ) for
the three months ended March 31, 2021 and 2020 respectively. Our effective tax
rate was (80%) and 10% for the three months ended March 31, 2021 and 2020
respectively.
Our effective tax rate increased for the three months ended March 31, 2021 from
the three months ended March 31, 2020 primarily due to changes in deferred tax
assets from limitations on deductible stock-based compensation. 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 March 31,
2021 2020
(In thousands)
Revenue $ 9,819 $ 12,697
Operating profit (loss) $ 39 $ (976)
Operating profit (loss) as a % of revenue 0.4 % (7.7) %
North America revenues decreased by$2.9 million for the three months endedMarch 31, 2021 from the three months endedMarch 31, 2020 (see "Revenues" above).North America expenses decreased by$3.9 million for the three months endedMarch 31, 2021 from the three months endedMarch 31, 2020 . The decrease was primarily due to$2.3 million decrease in expenses for headcount related expenses,$695,000 decrease in member acquisition costs,$530,000 decrease in travel expenses,$392,000 decrease in office expenses and$387,000 decrease in bad debt expenses, offset partially be$670,000 increase in stock-based compensation expense as the result of the shareholders' approval inMay 2020 of newly granted options and increases and repricing of certain previously granted options.Travelzoo Europe Three Months Ended March 31, 2021 2020 (In thousands) Revenue$ 3,578 $ 6,947 Operating profit (loss)$ (696) $ (1,341) Operating profit (loss) as a % of revenue (19.5) %
(19.3) %
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Europe revenues decreased by $3.4 million for the three months ended March 31,
2021 from the three months ended March 31, 2020 (see "Revenues" above). Europe
expenses decreased by $4.0 million for the three months ended March 31, 2021
from the three months ended March 31, 2020 . The decrease was primarily due to
$879,000 decrease in bad debt expenses, $798,000 decrease in member acquisition
costs, $651,000 decrease in trade and brand marketing expenses and $504,000
decrease in expenses for headcount related expenses,
Foreign currency movements relative to the U.S. dollar negatively impacted our
local currency income from our operations in Europe by approximately $61,000 for
each of the three months ended March 31, 2021 and 2020 respectively.
Jack's Flight Club
Three Months Ended March January 13 through
31, March 31
2021 2020
(In thousands)
Revenue $ 887 $ 683
Operating profit (loss) $ (110) $ (3,015)
Operating profit (loss) as a % of revenue (12.4) % (441.4) %
Jack's Flight Club revenues increased by $204,000 for the three months ended
March 31, 2021 compared to the revenues from January 13, 2020 through March 31,
2020 (see "Revenues" above). Jack's Flight Club expenses decreased by $2.7
million for the three months ended March 31, 2021 compared to the period between
January 13, 2020 through March 31, 2020 primarily due to the impairment of
intangible assets and goodwill charges the Company recorded as of March 31,
2020 .
Liquidity and Capital Resources
As of March 31, 2021 , we had $70.9 million in cash and cash equivalents, of
which $36.1 million was held outside the U.S. in our foreign operations. If this
cash is distributed to the U.S. , we may be subject to additional U.S. taxes in
certain circumstances.
Cash and cash equivalents increased $7.8 million from $63.0 million as of
December 31, 2020 primarily by cash provided by operating activities offset by
cash used to repurchase our common stocks. As of March 31, 2021 , we had PPP
loans aggregating $3.7 million due in April 2022 . As of March 31, 2021 , we had
negative working capital of $17.0 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 vouchers. The vouchers have
maturities that begin in April 2021 through June 2023 , and we believe that
redemption patterns may be delayed for international vouchers under the current
environment. Based on current projections of redemption activity, we expect that
cash on hand as of March 31, 2021 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 our 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.
The following table provides a summary of our cash flows from operating,
investing and financing activities:
Three Months Ended March 31,
2021 2020
(In thousands)
Net cash provided by (used in) operating activities $ 9,064 $ (3,056)
Net cash used in investing activities (7) (810)
Net cash used in financing activities (1,583) (2,205)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
270 (272)
Net increase (decrease) in cash, cash equivalents and restricted
cash $ 7,744 $ (6,343)
37-------------------------------------------------------------------------------- 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 three months endedMarch 31, 2021 was$9.1 million , which consisted of$9.5 million increase in cash from changes in operating assets and liabilities and$1.3 million non-cash items, offset partially by the net loss of$1.7 million . The increase in cash from changes in operating assets and liabilities primarily consisted of$13.2 million increase in merchant payables, offset partially by$2.4 million increase in prepaid expenses and other and$2.2 million increase in accounts receivable. Adjustments for non-cash items primarily consisted of$882,000 of stock-based compensation. Net cash used in operating activities for the three months endedMarch 31, 2020 was$3.1 million , which consisted of net loss of$7.7 million , offset partially by adjustments for non-cash items of$4.3 million non-cash items and$415,000 increase in cash from changes in operating assets and liabilities. Adjustments for non-cash items primarily was consisted of$2.9 million impairment of goodwill and intangible assets and a$1.4 million of provision of loss on accounts receivable and other. The increase in cash from changes in operating assets and liabilities primarily consisted of the$2.5 million decrease in accounts receivable,$1.9 million decrease in prepaid, tax and other receivables and$1.2 million increase in other liabilities, offset partially by$5.7 million net decrease in accounts payable and accrued expenses. Cash paid for income tax, net of refunds received, during the three months endedMarch 31, 2021 and 2020 was$592,000 and$542,000 , respectively. Net cash used in investing activities for the three months endedMarch 31, 2021 and 2020 was$7,000 and$810,000 , respectively. The cash used in investing activities for the three months endedMarch 31, 2020 was primarily due to the$1,000,000 investment inJack's Flight Club acquisition less acquired cash of$321,000 and$131,000 for purchases of property and equipment. Net cash used in financing activities for the three months endedMarch 31, 2021 and 2020 was$1.6 million and$2.2 million , respectively. The cash used in financing activities for the three months endedMarch 31, 2021 was primarily due to the$1.6 million payment to repurchase common stock. The cash used in financing activities for the three months endedMarch 31, 2020 was primarily due to a$1.2 million payment to repurchase common stock and a$1.0 million promissory note payment for theJack's Flight Club stock purchase. 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 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 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 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. 38 -------------------------------------------------------------------------------- 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$1.1 million as ofMarch 31, 2021 . 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, 2020 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. 39
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