NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
(a) The Company and Basis of Presentation
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 give Travelzoo members access to irresistible deals. Travelzoo's revenues are generated primarily from advertising fees.
Our publications and products include the Travelzoo website, the Travelzoo 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 by Travelzoo. Our Travelzoo 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. We receive a percentage of the face value of the voucher from the local businesses.
In January of 2020, Travelzoo (the “Company”) acquired JFC Travel Group Co. (“Jack’s Flight Club”). This company operates Jack’s Flight Club, a subscription service which provides members information about exceptional airfares. As of March 31, 2020, Jack’s Flight Club had 1.7 million members. Jack Flight Club’s revenues are generated by subscription fees paid by members.
In April 2018, Travelzoo invested $3.0 million in WeekenGo GmbH (“WeekenGO”) for a 25% ownership interest. WeekenGO uses new technology to promote vacation packages. The Company accounts for this private company investment using the equity method of accounting by recording its share of the results of WeekenGO in Other income (expense), net on a one-quarter lag basis. In accounting for the investment, the Company allocated $1.0 million of its purchase price to tangible assets and allocated approximately $485,000 of the purchase to technology-related intangible assets to be amortized over a three-year life. The remaining $1.5 million of the purchase price was allocated to goodwill.
In April 2019, the Company invested an additional $673,000 in WeekenGO and increased the Company's ownership interest to 26.6%. On February 11, 2020, Travelzoo signed an amended investment agreement with WeekenGO and agreed to invest an additional $1.7 million when WeekenGO meets certain internal targets. As of March 31, 2020, WeekenGO has not met the internal targets and no additional investments have been made by the Company. WeekenGO also signed a $2.1 million insertion order for advertising with Travelzoo in April 2018. The Company's advertising services provided to WeekenGO in the three months ended March 31, 2020 and 2019 were $357,000 and $555,000, respectively.
During the three months ended March 31, 2020, the Company recorded $227,000 for its share of WeekenGO losses, amortization of basis differences and currency translation adjustment. This equity method investment is reported as a long-term investment on the Company's condensed consolidated balance sheets.
Ralph Bartel, who founded the Company and who is a Director of the Company is the sole beneficiary of the Ralph Bartel 2005 Trust, which is the controlling shareholder of Azzurro Capital Inc. ("Azzurro"). As of March 31, 2020, Azzurro is the Company's largest stockholder, holding approximately 39.5% of the Company's outstanding shares. Azzurro currently holds a proxy given to it by Holger Bartel that provides it with a total of 39.9% of the voting power.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the year ended December 31, 2019, included in the Company’s Form 10-K filed with the SEC on March 20, 2020.
In March 2020, Travelzoo exited its loss-making Asia Pacific business. The Company’s Asia Pacific business was classified as discontinued operations at March 31, 2020. Prior periods have been reclassified to conform with the current presentation.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The financial results of Jack’s Flight Club have been included in our consolidated financial statements from the date of acquisition. Investments in entities where the Company does not have control, but does have significant influence, are accounted for as equity method investments.
The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other future period, and the Company makes no representations related thereto.
(b) Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which provides new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable. The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This update is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For Smaller Reporting Companies, the standard will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities are required to apply this update on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact on its financial position and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the Step 2 requirement to calculate the implied fair value of goodwill. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The ASU is effective for fiscal years beginning after December 15, 2022 for smaller reporting companies, including interim periods within those fiscal years, with early adoption permitted. The Company early adopted ASU 2017-04 as of January 1, 2020 and the adoption did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract." The new guidance required a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The guidance is effective for calendar-year public business entities in 2020. Early adoption is permitted. The adoption did not have a material impact on its financial position, results of operations and cash flows.
(c) Significant Accounting Policies
Below are a summary of the Company's significant accounting policies. For a comprehensive description of our accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2019.
Business Combinations
The purchase price of an acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. The Company determines the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management. The Company records the net assets and results of operations of an acquired entity from the acquisition date and adjusts the preliminary purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances existing at the acquisition date impacting asset valuations and liabilities assumed. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
Identifiable intangible assets
Upon acquisition, identifiable intangible assets are recorded at fair value and are carried at cost less accumulated amortization. Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. The carrying values of all intangible assets are reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. The Company evaluated intangible assets for the period ending March 31, 2020 due to the COVID-19 pandemic and recorded an impairment expense of $810,000.
Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill is evaluated for impairment annually, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. In testing goodwill for impairment, the Company first uses a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. If the qualitative assessment indicates that goodwill impairment is more likely than not, the Company performs an impairment test by comparing the book value of net assets to the fair value of the reporting units. The Company evaluated goodwill for the period ending March 31, 2020 due to the COVID-19 pandemic and recorded an impairment expense of $2.1 million.
Leases
The Company determines if an arrangement contains a lease at inception. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The lease payments used to determine the operating lease assets may include lease incentives and stated rent increases. The Company does not include options to extend or terminate until it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit rate. The Company elected not to recognize leases with an initial term of 12 months or less on its unaudited condensed consolidated balance sheets.
The Company’s leases are reflected in operating lease ROU assets, operating lease liabilities and long-term operating lease liabilities in our unaudited condensed consolidated balance sheets. The lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company also has a real estate lease agreement which is subleased to a third party. The Company recognizes sublease income in Other income (expense), net on a straight-line basis over the lease term in its condensed consolidated statements of income.
Certain Risks and Uncertainties
The Company’s business is subject to risks associated with its ability to attract and retain advertisers and offer products or services on compelling terms to our members. The global outbreak of coronavirus (COVID-19) is having an unprecedented impact on the global travel and hospitality industries. Governmental authorities have implemented numerous measures to try to contain the virus, including restrictions on travel, quarantines, shelter-in-place orders, business restrictions and complete shut-downs. The measures implemented to contain COVID-19 have had, and are expected to continue to have, a significant negative effect on our business, financial condition, results of operations and cash flows.
The Company’s cash, cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents are placed with financial institutions that the management believes are of high credit quality. The accounts receivables are derived from revenue earned from customers located in the U.S. and internationally. During the three months ended March 31, 2020, the Company began to experience the adverse impact of COVID-19. Many of the Company's advertising partners paused, canceled, and stopped advertising with the Company. Additionally, there has been an unprecedented level of cancellations for the Company's hotel partners and travel package partners as well as refund requests for our vouchers with the Company’s restaurant and spa partners. The Company has modified its policies and will continue to adopt new policies as the situation evolves. However, the uncertainties of the pandemic, such as its duration and severity, will negatively impact our partners and customers. As of March 31, 2020 and December 31, 2019, the Company did not have any customers that accounted for 10% or more of accounts receivable.
Cash, Cash Equivalents and Restricted Cash
Restricted cash includes cash and cash equivalents that is restricted through legal contracts, regulations or our intention to use the cash for a specific purpose. Our restricted cash primarily relates to cash held for letters of credit for real estate leases.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets to the total amounts shown in the unaudited condensed consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
12,130
|
|
|
$
|
18,743
|
|
Restricted cash
|
1,131
|
|
|
1,135
|
|
Cash, cash equivalents and restricted cash–discontinued operations
|
1,106
|
|
|
832
|
|
Total cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows
|
$
|
14,367
|
|
|
$
|
20,710
|
|
The Company’s restricted cash was included in noncurrent assets as of March 31, 2020 and December 31, 2019.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. The cumulative effect of the revenue accounting changes made to the Company's consolidated balance sheet as of January 1, 2018 primarily consists of a decrease in accounts payable related to the merchant payable of $1.6 million and a decrease of $270,000 of net deferred tax assets for a net cumulative effect increase of retained earnings of $1.3 million. These changes were due primarily to the new revenue guidance requirement to recognize revenue related to unredeemed Local Deals and Getaway vouchers for selected deals, included in our Europe segment, based upon estimates at the time of sale of the vouchers rather than the Company's past practice of waiting to recognize this revenue until expiration of the legal obligation.
Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The Company generates revenues primarily by delivering advertising on the Travelzoo website, in the Top 20 email newsletter, in Newsflash and from the Travelzoo Network. The Company also generates transaction-based revenues from the sale of vouchers through our Local Deals and Getaways products and operation of hotel booking platform and vacation packages. The Company's disaggregated revenues are included in "Note 9: Segment Reporting and Significant Customer Information".
For fixed-fee website advertising, the Company recognizes revenues ratably over the contracted placement period.
For Top 20 email newsletter and other email products, the Company recognizes revenues when the emails are delivered to its members.
The Company offers advertising on a cost-per-click basis, which means that an advertiser pays the Company only when a user clicks on an ad on Travelzoo properties or Travelzoo Network members’ properties. For these customers, the Company recognizes revenues each time a user clicks on the ad.
The Company also offers advertising on other bases, such as cost-per-impression, which means that an advertiser pays the Company based on the number of times their advertisement is displayed on Travelzoo properties, email advertisements, Travelzoo Network properties, or social media properties. For these customers, the Company recognizes revenues each time an ad is shown or email delivered.
For transaction based revenues, including products such as Local Deals, Getaways, hotel platform and vacation packages, the Company evaluates whether it is the principal (i.e., report revenue on a gross basis) versus an agent (i.e., report revenue on a net basis). The Company reports transaction revenue on a net basis because the supplier is primarily responsible for providing the underlying service, and we do not control the service provided by the supplier prior to its transfer to the customer.
For Local Deals and Getaways products, the Company earns a fee for acting as an agent for the sale of vouchers that can be redeemed for services with third-party merchants. Revenues are presented net of the amounts due to the third-party merchants for fulfilling the underlying services. 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 in the same period as the voucher sale.
Commission revenue related to hotel platform is recognized ratably over the period of guest stay, net of an allowance for cancellations based upon historical patterns. For arrangements for booking non-cancelable reservations where the Company’s performance obligation is deemed to be the successful booking of a hotel reservation, we record revenue for the commissions upon completion of the hotel booking.
The Company’s contracts with customers may include multiple performance obligations in which the Company allocates revenues to each performance obligation based upon its standalone selling price. The Company determines standalone selling price based on its overall pricing objectives, taking into consideration the type of services, geographical region of the customers, normal rate card pricing and customary discounts. Standalone selling price is generally determined based on the prices charged to customers when the product is sold separately.
The Company relies upon the following practical expedients and exemptions allowed for in the ASC 606. The Company expenses sales commissions when incurred because the amortization period would be one year or less. These costs are recorded in sales and marketing expenses. In addition, the Company does not disclose the value of unsatisfied performance obligations for (a) contracts with an original expected length of one year or less and (b) contracts for which it recognizes revenues at the amount to which it has the right to invoice for services performed.
Deferred revenue primarily consists of customer prepayments and undelivered performance obligations related to the Company’s contracts with multiple performance obligations. At December 31, 2019, $786,000 was recorded as deferred revenue, of which $296,000 was recognized as revenue during the three months ended March 31, 2020.
Note 2: Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed by adjusting the weighted-average number of common shares outstanding for the effect of dilutive potential common shares outstanding during the period. Potential common shares included in the diluted calculation consist of incremental shares issuable upon the exercise of outstanding stock options calculated using the treasury stock method.
The following table sets forth the calculation of basic and diluted net income per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
Net income (loss) attributable to Travelzoo—continuing operations
|
$
|
(3,690
|
)
|
|
$
|
4,945
|
|
Net income (loss) attributable to Travelzoo—discontinued operations
|
$
|
(2,919
|
)
|
|
$
|
(1,825
|
)
|
Denominator:
|
|
|
|
Weighted average common shares—basic
|
11,439
|
|
|
11,914
|
|
Effect of dilutive securities: stock options
|
—
|
|
|
310
|
|
Weighted average common shares—diluted
|
11,439
|
|
|
12,224
|
|
|
|
|
|
Income (loss) per share—basic
|
|
|
|
Continuing operations
|
$
|
(0.32
|
)
|
|
$
|
0.41
|
|
Discontinued operations
|
(0.26
|
)
|
|
(0.15
|
)
|
Net income (loss) per share —basic
|
$
|
(0.58
|
)
|
|
$
|
0.26
|
|
|
|
|
|
Income (loss) per share—diluted
|
|
|
|
Continuing operations
|
$
|
(0.32
|
)
|
|
$
|
0.41
|
|
Discontinued operations
|
(0.26
|
)
|
|
(0.15
|
)
|
Net income (loss) per share—diluted
|
$
|
(0.58
|
)
|
|
$
|
0.26
|
|
For the three months ended March 31, 2020, options to purchase 700,000 shares of common stock were not included in the computation of diluted net income per share. For the three months ended March 31, 2019, options to purchase 150,000 shares of common stock were not included in the computation of diluted net income per share because the effect would have been anti-dilutive.
Note 3: Acquisition
On January 13, 2020, Travelzoo entered into a Stock Purchase Agreement (the "SPA") with the shareholders of Jack’s Flight Club (the “Sellers”) for the purchase of up to 100% of the outstanding capital stock of Jack’s Flight Club (the “Shares”). Pursuant to the SPA, on January 13, 2020, the Sellers sold 60% of the Shares to the Company for an aggregate purchase price of $12.0 million, $1.0 million of which was paid in cash and $11.0 million of which was paid in the form of promissory notes. The promissory notes contain an interest rate of 1.6% per annum and a due date of January 31, 2020, with a one-time right to extend the maturity date up to April 30, 2020 with a principal payment of $1.0 million on January 31, 2020 which the Company exercised. The remaining 40% of the Shares are subject to a call/put option exercisable by the Company or the Sellers, as applicable, on or around January 1, 2021, subject to the terms and conditions set forth in the SPA.
The strategic rationale for the Jack’s Flight Club acquisition was to expand Jack’s Flight Club’s membership to Travelzoo members worldwide, so the members from Travelzoo could also sign up to receive offers from Jack’s Flight Club.
The acquisition has been accounted for using the acquisition method in accordance with Accounting Standards Codification ("ASC") 805, Business Combinations. Under the acquisition method of accounting, the total purchase consideration of the acquisition is allocated to the tangible assets and identifiable intangible assets and liabilities assumed based on their relative fair values. The excess of the purchase consideration over the net tangible and identifiable intangible assets is recorded as goodwill. The acquisition related costs were not significant and were expensed as incurred.
Purchase Price Allocation
The purchase price allocation is based on estimates, assumptions and third-party valuations and the allocation for customer related intangible assets is preliminary subject to obtaining additional information. The aggregate purchase price and allocation was as follows (in thousands):
|
|
|
|
|
Purchase Price
|
Jack’s Flight Club
|
Cash paid
|
$
|
1,000
|
|
Promissory notes issued
|
10,931
|
|
Fair Value of Put/Call Option
|
183
|
|
|
$
|
12,114
|
|
|
|
Allocation
|
|
Goodwill
|
$
|
13,054
|
|
Intangible assets
|
|
Customer relationships
|
3,500
|
|
Trade name
|
2,460
|
|
Non-compete agreements
|
660
|
|
|
|
Current assets acquired, including cash of $321
|
324
|
|
Current liabilities assumed
|
(40
|
)
|
Deferred revenue
|
(881
|
)
|
Deferred tax liabilities
|
(1,391
|
)
|
Non-controlling interest
|
(5,572
|
)
|
|
$
|
12,114
|
|
The Company determined the estimated fair value of the put/call option by using the Monte Carlo Simulation approach and the identifiable intangible assets acquired primarily by using the income approach. Non-controlling interests represent third-party shareholders and are measured at fair value on the date acquired.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the identifiable net assets of the acquired subsidiary. Goodwill is evaluated for impairment annually, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Due to the COVID-19 pandemic that started in the quarter ended March 31, 2020 and the impact it has had on the global economy, the Company determined that this was a triggering event requiring the Company to assess its long-lived assets including Goodwill for impairment. The Company performed an impairment test during the three months ended March 31, 2020 by comparing the carrying value of Jack’s Flight Club net assets to the fair value of the Jack’s Flight Club reporting unit based on an updated discounted cash flow analysis. The fair value of the Jack’s Flight Club reporting unit was determined to be less than the carrying value, and the difference between the estimated fair value of goodwill and the carrying value was recorded as goodwill impairment. The Company also performed an ASC 360 analysis for long-lived assets noting no impairment of such assets based on the undiscounted cash flows of the Jack’s Flight Club asset group. The Company first impaired indefinite lived intangible assets (Trade names) before impairing Goodwill. The following table summarizes the goodwill activity for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
Goodwill—January 1, 2020
|
$
|
—
|
|
Acquisition
|
13,054
|
|
Impairment
|
(2,110
|
)
|
Goodwill—March 31, 2020
|
$
|
10,944
|
|
Intangible Assets
The following table represents the fair value and estimated useful lives of intangible assets (in thousands):
|
|
|
|
|
|
|
|
Fair Value
|
|
Estimated Life (Years)
|
Customer relationships
|
$
|
3,500
|
|
|
5
|
Trade name
|
2,460
|
|
|
indefinite
|
Non-compete agreements
|
660
|
|
|
4
|
The fair value of intangible assets of $6.4 million has been allocated to the following three asset categories: 1) Customer relationships, 2) Trade name, and 3) Non-compete agreements. These assets are included within “Intangible assets” on our consolidated balance sheets. Customer relationships and non-compete agreements are being amortized to operating expenses over their estimated useful lives using either the straight-line basis for non-compete agreements or on an accelerated basis for Customer Relationships.
The following table represents the activities of intangible assets for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
Fair Value
|
Intangible assets—January 1, 2020
|
$
|
—
|
|
Acquisition
|
6,620
|
|
Impairment of trade name
|
(810
|
)
|
Amortization of intangible assets with definite lives
|
(215
|
)
|
Intangible assets, net—March 31, 2020
|
$
|
5,595
|
|
Amortization expense for acquired intangibles was $215,000 for the three months ended March 31, 2020. Expected future amortization expense of acquired intangible assets as of March 31, 2020 is as follows (in thousands):
|
|
|
|
|
Years ending December 31,
|
|
2020 remainder
|
$
|
949
|
|
2021
|
1,215
|
|
2022
|
865
|
|
2023
|
515
|
|
2024
|
357
|
|
Thereafter
|
44
|
|
|
$
|
3,945
|
|
As previously discussed in Goodwill, the Company's impairment test indicated that Jack’s Flight Club’s indefinite lived intangible assets (Trade name) was impaired for $810,000 for the three months ended March 31, 2020.
Pro Forma Information
The acquired company was consolidated into our financial statements starting on the acquisition date. The unaudited financial information in the table below summarizes the combined results of operations of Travelzoo and Jack’s Flight Club, on a pro forma basis, as though the companies had been combined as of the beginning of the fiscal year presented. The debt was issued to finance the acquisition of Jack’s Flight Club. The unaudited pro forma information has been calculated after applying the Company’s accounting policies and includes adjustments to reflect the amortization charges from acquired intangible assets, adjustments to deferred revenue, interest expense and related tax effects. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the fiscal year presented. The following table summarizes the pro forma financial information (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2020
|
|
2019
|
Revenues
|
$
|
20,448
|
|
|
$
|
29,665
|
|
Net income (loss)
|
$
|
(7,723
|
)
|
|
$
|
3,077
|
|
Note 4: Commitments and Contingencies
The Company was formed as a result of a combination and merger of entities founded by the Company’s principal stockholder, Ralph Bartel. In 2002, Travelzoo.com Corporation (“Netsurfers”) was merged into the Company. Under and subject to the terms of the merger agreement, holders of promotional shares of Netsurfers who established that they had satisfied certain prerequisite qualifications were allowed a period of 2 years following the effective date of the merger to receive one share of the Company in exchange for each share of common stock of Netsurfers. In 2004, two years following the effective date of the merger, certain promotional shares remained unexchanged. As the right to exchange these promotional shares expired, no additional shares were reserved for issuance. Thereafter, the Company began to offer a voluntary cash program for those who established that they had satisfied certain prerequisite qualifications for Netsurfers promotional shares as further described below.
During 2010 through 2014, the Company became subject to unclaimed property audits of various states in the United States related to the above unexchanged promotional shares and completed settlements with all states. Although the Company has settled the unclaimed property claims with all states, the Company may still receive inquiries from certain potential Netsurfers promotional stockholders that had not provided their state of residence to the Company by April 25, 2004. Therefore, the Company is continuing its voluntary program under which it makes cash payments to individuals related to the promotional shares for individuals whose residence was unknown by the Company and who establish that they satisfy the original conditions required for them to receive shares of Netsurfers, and who failed to submit requests to convert their shares into shares of Travelzoo within the required time period. This voluntary program is not available for individuals whose promotional shares have been escheated to a state by the Company, except those individuals for which their residence was unknown to the Company. The Company did not make any payments for the three months ended March 31, 2020 and 2019.
The total cost of this program cannot be reliably estimated because it is based on the ultimate number of valid requests received and future levels of the Company’s common stock price. The Company’s common stock price affects the liability because the amount of cash payments under the program is based in part on the recent level of the stock price at the date valid requests are received. The Company does not know how many of the requests for shares originally received by Netsurfers in 1998 were valid, but the Company believes that only a portion of such requests were valid. In order to receive payment under this voluntary program, a person is required to establish that such person validly held shares in Netsurfers.
The Company has operating leases. Refer to Note 11 for contractual commitments as of March 31, 2020.
Local Deals and Getaways merchant payables included in accounts payable were $6.1 million and $13.0 million, as of March 31, 2020 and December 31, 2019, respectively.
Note 5: Income Taxes
Ordinarily, in determining the quarterly provisions for income taxes, the Company uses an estimated annual effective tax rate, which is generally based on our expected annual income and statutory tax rates in the U.S., Canada, and the U.K. Due to the COVID-19 pandemic, and difficulty forecasting the calendar year 2020 of income (loss) by jurisdiction, we determined the estimated annual effective rate method would not provide a reliable estimate of the Company’s overall annual effective tax rate. As such, we have calculated the tax provision using the actual effective rate for the three months ended March 31, 2020. The Company's effective tax rate was 10% and 25%, respectively, for the three months ended March 31, 2020 and 2019. The Company's effective tax rate decreased for the three months ended March 31, 2020 from the corresponding three months ended March 31, 2019, primarily due to operating loss not benefited.
As of March 31, 2020, the Company is permanently reinvested in certain of its non-U.S. subsidiaries and does not have a deferred tax liability related to its undistributed foreign earnings. The estimated amount of the unrecognized deferred tax liability attributed to future withholding taxes on dividend distributions of undistributed earnings for certain non-U.S. subsidiaries, which the Company intends to reinvest the related earnings indefinitely in its operations outside the U.S., is approximately $452,000.
The Company maintains liabilities for uncertain tax positions. At March 31, 2020, the Company had approximately $152,000 in total unrecognized tax benefits, which if recognized, would favorably affect the Company’s effective income tax rate.
The Company’s policy is to include interest and penalties related to unrecognized tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in the overall income tax provision in the period that such determination is made. At March 31, 2020 and December 31, 2019, the Company had approximately $215,000 and $207,000 in accrued interest, respectively.
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. states and foreign jurisdictions. The Company is subject to U.S. federal and certain state tax examinations for certain years after 2016 and is subject to California tax examinations for years after 2015.
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, federal and state and foreign country tax law and regulations and changes thereto, the determination of whether valuation allowances for certain tax assets are required or not, audits of prior years' tax returns resulting in adjustments, resolution of uncertain tax positions and different treatment 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.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which, along with earlier issued IRS guidance, provides for deferral of certain taxes. The CARES Act, among other things, also contains numerous other provisions which may benefit the Company. We continue to assess the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.
Note 6: Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
(3,452
|
)
|
|
$
|
(4,214
|
)
|
Other comprehensive income (loss) due to foreign currency translation, net of tax
|
(272
|
)
|
|
(89
|
)
|
Reclass of amounts to income relating to APAC discontinued operations, net of tax
|
(599
|
)
|
|
—
|
|
Ending balance
|
$
|
(4,323
|
)
|
|
$
|
(4,303
|
)
|
There were no amounts reclassified from accumulated other comprehensive loss for the three months ended March 31, 2019.
Note 7: Stock-Based Compensation and Stock Options
The Company accounts for its employee stock options under the fair value method, which requires stock-based compensation to be estimated using the fair value on the date of grant using an option-pricing model. The value of the portion of the award that is expected to vest is recognized on a straight-line basis as expense over the related employees’ requisite service periods in the Company’s condensed consolidated statements of operations.
In January 2012, the Company granted certain executives stock options to purchase 100,000 shares of common stock with an exercise price of $28.98, of which 25,000 options became exercisable annually starting January 23, 2013. The options expire in January 2022. During 2014, 25,000 options were canceled and 25,000 options were forfeited upon the departure of an executive. During 2019, the remaining 50,000 options were canceled upon the departure of an executive. Stock-based compensation related to these options was fully expensed.
In September 2015, the Company granted an executive stock options to purchase 400,000 shares of common stock with an exercise price of $8.07, of which 50,000 options became exercisable quarterly starting March 31, 2016. The options expire in September 2025. Stock-based compensation related to these options was fully expensed. As of March 31, 2020, 400,000 options were vested and outstanding.
In March 2016, the Company granted certain executives stock options to purchase 150,000 shares of common stock with an exercise price of $8.55, of which 37,500 options vest and become exercisable annually starting on March 7, 2017. The options expire in March 2026. In 2017, 37,500 options were forfeited and 12,500 options were canceled upon the departure of an executive and the compensation expense of $19,000 was reversed. In 2018, 50,000 options were forfeited upon the departure of an executive and the compensation expense of $59,000 was reversed. In 2019, the remaining 50,000 options were net exercised for 4,000 shares of common stock.
In October 2017, the Company granted an executive stock options to purchase 400,000 shares of common stock with an exercise price of $6.95, of which 50,000 shares are exercisable quarterly starting March 31, 2018 and ending on December 31, 2019. The options expire in 2027. During 2019, 250,000 options were exercised. As of March 31, 2020, 150,000 options were vested and outstanding. Total stock-based compensation for the three months ended March 31, 2019, related to these option grants was $143,000. Stock-based compensation related to these options was fully expensed as of December 31, 2019.
In April 2018, the Company granted an employee stock options to purchase 50,000 shares of common stock with an exercise price of $10.50. The options vest in twelve equal installments. The first installment vested on April 26, 2018, and the remaining eleven installments vest from June 30, 2018 to December 31, 2020. During the three months ended March 31, 2019, the Company recognized $34,000 stock-based compensation and canceled the 50,000 options upon the departure of the employee.
In May 2018, the Company granted an employee options to purchase 50,000 shares of common stock with an exercise price of $14.70, of which 12,500 options will vest and become exercisable annually starting in May 2019. As of March 31, 2020, 50,000 options were outstanding and 12,500 of these options were vested. Total stock-based compensation for the three months ended March 31, 2020 and 2019, related to these option grants was $22,000. As of March 31, 2020, there was
approximately $190,000 of unrecognized stock-based compensation expense relating to these options. This amount is expected to be recognized over 2.1 years.
In June 2018, the Company granted an employee options to purchase 50,000 shares of common stock with an exercise price of $16.65, of which 12,500 options will vest and become exercisable annually starting on June 2019. During the three months ended March 31, 2020, 37,500 unvested options were forfeited upon and the compensation expense of $43,000 was reversed upon the employee's notification of departure.
In May 2019, the Company granted an employee options to purchase 100,000 shares of common stock with an exercise price of $19.28, of which 10,000 options vested and became exercisable in May 2019, 15,000 options vested and become exercisable in September 2019, and the remaining 75,000 will vest in three equal installments starting on May 20, 2021 and ending on May 20, 2023. As of March 31, 2020, 100,000 options were outstanding and 25,000 of these options were vested. Total stock-based compensation for the three months ended March 31, 2020, related to these option grants, was $44,000. As of March 31, 2020, there was approximately $551,000 of unrecognized stock-based compensation expense relating to these options. This amount is expected to be recognized over 3.1 years.
Note 8: Stock Repurchase Program
The Company's stock repurchase programs assist in offsetting the impact of dilution from employee equity compensation and assist with capital allocation. Management is allowed discretion in the execution of the repurchase program based upon market conditions and consideration of capital allocation.
In February 2019, the Company entered into a Stock Repurchase Agreement with Azzurro, a majority shareholder of the Company and repurchased 100,000 shares of the Company’s common stock for an aggregate purchase price of $1.6 million, which were retired and recorded as a reduction of additional paid-in capital until extinguished with the remaining amount reflected as a reduction of retained earnings.
In May 2019, the Company announced a stock repurchase program authorizing the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock. During the three months ended March 31, 2020 and 2019, respectively, the Company repurchased 169,602 shares and 100,000 shares of common stock for an aggregate purchase price of $1.2 million and $1.6 million, respectively. There were 395,029 shares remaining to be repurchased under this program as of March 31, 2020.
In November 2019, the Company entered into a Stock Repurchase Agreement with Holger Bartel to repurchase an aggregate of 200,000 shares of the Company’s common stock for an aggregate purchase price of $2.0 million, which were retired and recorded as a reduction of additional paid-in capital until extinguished with the remaining amount reflected as a reduction of retained earnings.
Note 9: Segment Reporting and Significant Customer Information
The Company determines its reportable segments based upon the Company's chief operating decision maker managing the performance of the business. Historically, the Company managed its business geographically and operated in three reportable segments including Asia Pacific, Europe and North America. During the three months ended March 31, 2020, the Company classified the results of its Asia Pacific segment as discontinued operations in its condensed consolidated financial statements for current and prior periods presented. On January 13, 2020, Travelzoo agreed to the SPA with the Seller of Jack’s Flight Club to purchase 60% of the Shares. Upon acquisition, the Company's chief operating decision maker reviewed and evaluated JFC as a separate segment. The Company currently has three reportable operating segments: North America, Europe and Jack’s Flight Club. North America consists of the Company’s operations in Canada and the U.S. Europe consists of the Company’s operations in France, Germany, Spain, and the U.K. Jack’s Flight Club consists of subscription revenue from premium members to access and receive flight deals from Jack’s Flight Club via email or via Android or Apple mobile applications.
Management relies on an internal management reporting process that provides revenue and segment operating profit (loss) for making financial decisions and allocating resources. Management believes that segment revenues and operating profit (loss) are appropriate measures of evaluating the operational performance of the Company’s segments.
The following is a summary of operating results by business segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
North
America
|
|
Europe
|
|
Jack’s Flight Club
|
|
Elimination
|
|
Consolidated
|
Revenues from unaffiliated customers
|
$
|
12,549
|
|
|
$
|
7,103
|
|
|
$
|
683
|
|
|
$
|
(8
|
)
|
|
$
|
20,327
|
|
Intersegment revenues (expenses)
|
148
|
|
|
(156
|
)
|
|
—
|
|
|
8
|
|
|
—
|
|
Total net revenues
|
12,697
|
|
|
6,947
|
|
|
683
|
|
|
—
|
|
|
20,327
|
|
Operating profit (loss)
|
$
|
(976
|
)
|
|
$
|
(1,341
|
)
|
|
$
|
(3,015
|
)
|
|
$
|
(8
|
)
|
|
$
|
(5,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
North
America
|
|
Europe
|
|
Jack’s Flight Club
|
|
Elimination
|
|
Consolidated
|
Revenues from unaffiliated customers
|
$
|
18,136
|
|
|
$
|
11,054
|
|
|
$
|
—
|
|
|
$
|
(30
|
)
|
|
$
|
29,160
|
|
Intersegment revenues (expenses)
|
451
|
|
|
(481
|
)
|
|
—
|
|
|
30
|
|
|
—
|
|
Total net revenues
|
18,587
|
|
|
10,573
|
|
|
—
|
|
|
—
|
|
|
29,160
|
|
Operating profit (loss)
|
$
|
4,463
|
|
|
$
|
2,137
|
|
|
$
|
—
|
|
|
$
|
(30
|
)
|
|
$
|
6,570
|
|
Revenue for each segment is recognized based on the customer location within a designated geographic region. Property and equipment are attributed to the geographic region in which the assets are located. Revenues from unaffiliated customers excludes intersegment revenues and represents revenue with parties unaffiliated with the Company and its wholly owned subsidiaries.
The following is a summary of assets by business segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
North
America
|
|
Europe
|
|
Jack’s Flight Club
|
|
Elimination
|
|
Consolidated
|
Long-lived assets
|
$
|
1,659
|
|
|
$
|
305
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,964
|
|
Total assets exclude discontinued operations
|
$
|
76,200
|
|
|
$
|
67,677
|
|
|
$
|
17,565
|
|
|
$
|
(102,899
|
)
|
|
$
|
58,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
North
America
|
|
Europe
|
|
Elimination
|
|
Consolidated
|
Long-lived assets
|
$
|
2,598
|
|
|
$
|
263
|
|
|
$
|
—
|
|
|
$
|
2,861
|
|
Total assets exclude discontinued operations
|
$
|
66,057
|
|
|
$
|
74,604
|
|
|
$
|
(90,084
|
)
|
|
$
|
50,577
|
|
For the three months ended March 31, 2020 and 2019, the Company did not have any customers that accounted for 10% or more of revenue. As of March 31, 2020 and December 31, 2019, the Company did not have any customers that accounted for 10% or more of accounts receivable.
The following table sets forth the breakdown of revenues (in thousands) by category and segment. Travel revenue includes travel publications (Top 20, 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,
|
|
2020
|
|
2019
|
North America
|
|
|
|
Travel
|
$
|
11,156
|
|
|
$
|
16,317
|
|
Local
|
1,541
|
|
|
2,270
|
|
Total North America revenues
|
$
|
12,697
|
|
|
$
|
18,587
|
|
Europe
|
|
|
|
Travel
|
$
|
6,237
|
|
|
$
|
9,512
|
|
Local
|
710
|
|
|
1,061
|
|
Total Europe revenues
|
$
|
6,947
|
|
|
$
|
10,573
|
|
Jack’s Flight Club
|
$
|
683
|
|
|
$
|
—
|
|
Consolidated
|
|
|
|
Travel
|
$
|
17,393
|
|
|
$
|
25,829
|
|
Local
|
2,251
|
|
|
3,331
|
|
Jack’s Flight Club
|
683
|
|
|
—
|
|
Total revenues
|
$
|
20,327
|
|
|
$
|
29,160
|
|
Revenue by geography is based on the billing address of the advertiser. Long-lived assets attributed to the U.S. and international geographies are based upon the country in which the asset is located or owned. The following table sets forth revenue for countries that exceed 10% of total revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Revenue
|
|
|
|
United States
|
$
|
11,515
|
|
|
$
|
16,895
|
|
United Kingdom
|
5,113
|
|
|
5,859
|
|
Germany
|
2,015
|
|
|
3,641
|
|
Rest of the world
|
1,684
|
|
|
2,765
|
|
Total revenues
|
$
|
20,327
|
|
|
$
|
29,160
|
|
The following table sets forth property and equipment by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
United States
|
$
|
1,454
|
|
|
$
|
2,359
|
|
Rest of the world
|
510
|
|
|
502
|
|
Total long-lived assets
|
$
|
1,964
|
|
|
$
|
2,861
|
|
Note 10: Discontinued Operation
On March 10, 2020, Travelzoo issued a press release announcing that it will exit its business in Asia Pacific. The decision supports the Company's strategy to focus on value creation for shareholders by focusing on growing the businesses in North America and Europe, where the Company sees strong interest from our members in travel deals.
The Asia Pacific business shut down and ceased operations as of March 31, 2020, except for the Company's Japan unit, which is held for sale. The Company considers this decision to be a strategic shift in its strategy which will have a major effect on its operations. The Company has classified Asia Pacific as discontinued operations at March 31, 2020. Prior periods have been reclassified to conform with the current presentation. The following table provides a summary of amounts included in discontinued operations for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Revenues
|
$
|
904
|
|
|
$
|
1,665
|
|
Cost of revenues
|
6
|
|
|
81
|
|
Gross profit
|
898
|
|
|
1,584
|
|
|
|
|
|
Operating expenses:
|
|
|
|
Sales and marketing
|
1,712
|
|
|
2,072
|
|
Product development
|
—
|
|
|
44
|
|
General and administrative
|
2,639
|
|
|
1,067
|
|
Total operating expenses
|
4,351
|
|
|
3,183
|
|
Loss from operations
|
(3,453
|
)
|
|
(1,599
|
)
|
Other income (expense), net
|
534
|
|
|
(144
|
)
|
Loss before income taxes
|
(2,919
|
)
|
|
(1,743
|
)
|
Income tax expense
|
—
|
|
|
82
|
|
Net loss
|
$
|
(2,919
|
)
|
|
$
|
(1,825
|
)
|
The Company recorded severance and disposal costs of $1.6 million during the three months ended March 31, 2020 for the shut down and such costs were classified in general and administrative in the table above. Certain reclassifications have been made for current and prior periods between the continued operations and the discontinued operations in accordance with U.S. GAAP. Those reclassifications included direct operating expenses and certain inter-company charges that will not continue including $64,000 and $34,000 of cost of revenues that were reclassified from the discontinued operations to continued operations for the three months ended March 31, 2020 and 2019, respectively. In addition, there were $7,000 and $3,000 of operating expenses that were reclassified from discontinued operations to continued operations for the three months ended March 31, 2020 and 2019, respectively.
The following table presents information related to the major classes of assets and liabilities that were classified as assets and liabilities from discontinued operations in the Condensed Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
ASSETS
|
|
|
|
Cash, cash equivalents and restricted cash
|
$
|
1,106
|
|
|
$
|
832
|
|
Accounts receivable, net
|
874
|
|
|
1,797
|
|
Deposits
|
—
|
|
|
9
|
|
Prepaid expenses and other
|
118
|
|
|
208
|
|
Deposits and other
|
121
|
|
|
248
|
|
Operating lease right-of-use assets
|
—
|
|
|
746
|
|
Property and equipment, net
|
32
|
|
|
121
|
|
Total assets from discontinued operations
|
$
|
2,251
|
|
|
$
|
3,961
|
|
LIABILITIES
|
|
|
|
Accounts payable
|
$
|
835
|
|
|
$
|
1,057
|
|
Accrued expenses and other
|
1,256
|
|
|
1,188
|
|
Deferred revenue
|
198
|
|
|
118
|
|
Operating lease right-of-use liabilities
|
—
|
|
|
772
|
|
Total liabilities from discontinued operations
|
$
|
2,289
|
|
|
$
|
3,135
|
|
The net cash used in operating activities and investing activities for the discontinued operations for the three months ended March 31, 2020 and 2019, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Net cash used in operating activities
|
$
|
(1,026
|
)
|
|
$
|
(1,576
|
)
|
Net cash used in investing activities
|
$
|
—
|
|
|
$
|
(25
|
)
|
Net cash used in operating activities for the three months ended March 31, 2020 was $1.0 million, which consisted of net loss of $3.5 million, offset partially by adjustments for non-cash items of $236,000 primarily due to a $150,000 of provision of loss on accounts receivable, and a $2.2 million increase in cash from changes in operating assets and liabilities.
Net cash used in operating activities for the three months ended March 31, 2019 was $1.6 million, which consisted of net loss of $1.8 million, offset partially by adjustments for non-cash items of $24,000 primarily due to a $29,000 of provision of loss on accounts receivable, and a $226,000 increase in cash from changes in operating assets and liabilities.
Note 11: Leases
The Company has operating leases for real estate and certain equipment. The Company leases office space in Canada, France, Germany, Spain, the U.K., and the U.S. under operating leases. Our leases have remaining lease terms ranging from less than one year to ten years. Certain leases include one or more options to renew. In addition, we sublease real estate to a third party. All of our leases qualify as operating leases.
The following table summarizes the components of lease expense for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31
|
|
|
2020
|
|
2019
|
Operating lease cost
|
|
$
|
1,157
|
|
|
$
|
1,184
|
|
Short-term lease cost
|
|
6
|
|
|
415
|
|
Variable lease cost
|
|
290
|
|
|
300
|
|
Sublease income
|
|
(84
|
)
|
|
(84
|
)
|
Total lease cost
|
|
$
|
1,369
|
|
|
$
|
1,815
|
|
For the three months ended March 31, 2020 and 2019, cash payments against the operating lease liabilities totaled $1.3 million and $1.3 million, respectively. ROU assets obtained in exchange for lease obligations was $3.2 million and $1.8 million for three months ended March 31, 2020 and 2019, respectively.
The following table summarizes the presentation in our condensed consolidated balance sheets of our operating leases (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Assets:
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
11,210
|
|
|
$
|
8,140
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Operating lease liabilities
|
|
$
|
4,801
|
|
|
$
|
4,847
|
|
|
Long-term operating lease liabilities
|
|
12,921
|
|
|
7,920
|
|
|
Total operating lease liabilities
|
|
$
|
17,722
|
|
|
$
|
12,767
|
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
7.13
|
|
|
4.50
|
|
Weighted average discount rate
|
|
3.8
|
%
|
|
3.4
|
%
|
|
|
|
|
|
|
Maturities of lease liabilities were as follows (in thousands):
|
|
|
|
|
Years ending December 31,
|
|
2020 (excluding the three months ended March 31, 2020)
|
$
|
3,823
|
|
2021
|
3,648
|
|
2022
|
2,267
|
|
2023
|
1,871
|
|
2024
|
1,419
|
|
Thereafter
|
6,975
|
|
Total lease payments
|
20,003
|
|
Less interest
|
(2,281
|
)
|
Present value of operating lease liabilities
|
$
|
17,722
|
|
Note 12: Subsequent Events
On April 24, 2020 and May 5, 2020, the Company received $3.1 million and $535,000, respectively, pursuant to loans under the Paycheck Protection Program (the “PPP”) of the CARES Act administered by the Small Business Association. The loans have a maturity of two (2) years from the disbursement of the funds. The Company intends to use the funds from these loan only for the purposes included in the PPP, including payroll, employee benefits, and rent, and to apply for forgiveness of a portion of the loans in compliance with the CARES Act.
On May 29, 2020, the stockholders of the Company approved the grant of stock options to certain employees and directors. The stockholders of the Company also approved increases and repricing of certain options previously granted to certain employees. Options granted to certain employees and directors to purchase up to 2,250,000 shares of the Company’s common stock were approved at the exercise price of $3.49. The Company also repriced 1,250,000 shares of outstanding, unexercised stock options granted previously to certain employees at various exercise prices to the exercise price of $3.49.
On June 3, 2020, the Company renegotiated the SPA with Jack’s Flight Club. Pursuant to the original terms of the outstanding Promissory Notes, the Company owed $10.0 million plus interest (the “Outstanding Amount”) to the Sellers on April 30, 2020. On June 3, 2020, the parties reached a negotiated settlement for the Outstanding Amount with the following terms: (a) $1.5 million was forgiven in settlement of certain outstanding indemnification claims disputed by the Sellers; (b) $6.8 million, plus accrued interest, was paid to the Sellers by Travelzoo, and (c) the remaining $1.7 million is to be paid in June 2021 pursuant to new promissory notes with each of the Sellers that contain a 12% interest rate and are secured by 9.7% of the Shares. Travelzoo also agreed that the additional payment set forth in the SPA (equal to 20% of 2020 net profit) would be
payable to the Sellers regardless of whether EBITDA targets are achieved and the put/call is exercised in 2021. The parties also agreed to a new put/call option exercisable in 2022 by the Sellers or Travelzoo, as applicable, only if the put/call option for 2021 as set forth in the SPA is not exercised, with a EBITDA threshold of $4.3 million and a purchase price equal to 40% of 2021 EBITDA multiplied by 3.5, and an additional payment equal to 20% of 2021 net profit. The Company will account for the impact of this settlement and amended SPA in the second quarter of 2020 as income or expense based on the fair value of the consideration. These adjustments are not considered measurement period adjustments to the purchase consideration since there is not a clear and direct link to the consideration transferred in the SPA entered into on January 13, 2020.
On June 16, 2020, in connection with its Asia Pacific exit plan, the Company completed a sale of 100% of the outstanding capital stock of Travelzoo Japan K.K to Mr. Hajime Suzuki, the General Manager of Japan ("Buyer") for consideration of JPY1. The parties also entered into a License Agreement, whereby the Buyer obtained a license to use intellectual property from Travelzoo exclusively in Japan in exchange for quarterly royalty payments based on revenue over a 5 year term, with an option to renew. An interest free loan was provided to the Buyer for JPY46.0 million (approximately $430,000) to be repaid over 3 years.