Travelzoo(TZOO) - 2023 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the period Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2023, including balance sheets, statements of operations, comprehensive income, cash flows, and stockholders' equity, with accompanying notes detailing accounting policies, acquisitions, and segment performance Condensed Consolidated Financial Statements For the second quarter of 2023, Travelzoo reported revenues of $21.1 million, an increase from $17.7 million in Q2 2022, with net income attributable to the company rising to $2.6 million from $1.0 million year-over-year, while total assets decreased to $59.1 million as of June 30, 2023, and cash from operations for the first six months of 2023 turned positive at $5.6 million Financial Performance (Q2 2023 vs Q2 2022) (in thousands) | Financial Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Revenues | $21,128 | $17,689 | | Gross Profit | $18,248 | $15,526 | | Operating Income | $3,273 | $1,781 | | Net Income Attributable to Travelzoo | $2,626 | $1,028 | | Diluted EPS | $0.17 | $0.08 | Financial Performance (H1 2023 vs H1 2022) (in thousands) | Financial Metric | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Revenues | $42,729 | $36,142 | | Gross Profit | $37,158 | $31,147 | | Operating Income | $7,984 | $3,700 | | Net Income Attributable to Travelzoo | $6,299 | $3,387 | | Diluted EPS | $0.40 | $0.27 | Balance Sheet Summary (in thousands) | Balance Sheet Item | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $31,979 | $35,591 | | Total Assets | $59,116 | $67,274 | | Total Current Liabilities | $36,232 | $47,534 | | Total Liabilities | $48,047 | $58,423 | | Total Stockholders' Equity | $11,069 | $8,851 | Cash Flow Summary (Six Months Ended June 30) (in thousands) | Cash Flow Activity (Six Months Ended June 30) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,650 | $(16,990) | | Net cash used in investing activities | $(44) | $(1,028) | | Net cash provided by (used in) financing activities | $(5,169) | $1,885 | Note 1: Summary of Significant Accounting Policies This note outlines the company's core business as a global internet media company providing exclusive travel and entertainment offers to its 30 million members, detailing revenue recognition policies for advertising, transaction-based vouchers, and subscriptions, while confirming its ability to continue as a going concern despite a $572,000 refund reserve against $6.0 million in unredeemed vouchers - Travelzoo is a global internet media company with 30 million members, offering exclusive travel, entertainment, and lifestyle deals in partnership with over 5,000 suppliers[24][25] - The company is developing Travelzoo META, a subscription service for Metaverse travel experiences, supported by the acquisition of Metaverse Travel Experiences, LLC (MTE) in December 2022[27] - As of June 30, 2023, the company had approximately $6.0 million of unredeemed vouchers and estimated a corresponding refund liability of $572,000, which is recorded as a reduction of revenues[58] - Management believes the company has the ability to meet its obligations for at least one year from the issuance of the Form 10-Q and has prepared financial statements on a going concern basis[37] Note 3: Acquisitions This note details recent acquisitions, primarily the December 2022 acquisition of Metaverse Travel Experiences (MTE) from related-party Azzurro Capital for $15.2 million, alongside the 2022 asset acquisitions of Secret Escapes' Spanish and U.S. member databases for a combined $2.2 million, and provides an update on the 2020 acquisition of Jack's Flight Club, with amortization expense for acquired intangibles totaling $790,000 for the first six months of 2023 - In December 2022, Travelzoo acquired Metaverse Travel Experiences (MTE) from its largest shareholder, Azzurro Capital Inc., as part of a transaction where Travelzoo issued 3.4 million shares valued at $15.2 million[73][74] - In March 2022, the company acquired member databases from Secret Escapes Limited's Spanish and U.S. business units, recording a total of $2.2 million in intangible assets from these transactions[78][79][80] Acquired Intangible Assets and Estimated Lives (in thousands) | Acquired Intangible Asset | Fair Value | Estimated Life (Years) | | :--- | :--- | :--- | | Customer relationships (Jack's Flight Club) | $3,500k | 5.0 | | Trade name (Jack's Flight Club) | $2,460k | Indefinite | | Non-compete agreements (Jack's Flight Club) | $660k | 4.0 | | Intangible assets (Secret Escape Spain) | $445k | 3.0 | | Intangible assets (Secret Escape U.S.) | $1,751k | 2.3 | - Amortization expense for acquired intangibles was $388,000 for Q2 2023 and $790,000 for the six months ended June 30, 2023[89] Note 9: Segment Reporting and Significant Customer Information The company operates through four reportable segments: Travelzoo North America, Travelzoo Europe, Jack's Flight Club, and New Initiatives, with North America generating $13.6 million in revenue and $3.8 million in operating profit for Q2 2023, while the United States remains the largest geographical market with $12.7 million in revenue for the quarter - The company has four reportable operating segments: Travelzoo North America, Travelzoo Europe, Jack's Flight Club, and New Initiatives (which includes licensing and Travelzoo META)[117] Segment Performance (Q2 2023) (in thousands) | Segment (Q2 2023) | Revenues from Unaffiliated Customers | Operating Profit (Loss) | | :--- | :--- | :--- | | Travelzoo North America | $13,642 | $3,753 | | Travelzoo Europe | $6,462 | $(239) | | Jack's Flight Club | $1,011 | $97 | | New Initiatives | $13 | $(338) | | Consolidated | $21,128 | $3,273 | Revenue by Geography (Q2 2023) (in thousands) | Revenue by Geography (Q2 2023) | Amount (in thousands) | | :--- | :--- | | United States | $12,749 | | United Kingdom | $4,858 | | Germany | $1,738 | | Rest of the world | $1,783 | | Total | $21,128 | Note 10: Discontinued Operations This note details the company's exit from its Asia Pacific (APAC) business in March 2020, now classified as a discontinued operation, with a pivot to a licensing model in the region for Japan, South Korea, Australia, New Zealand, and Singapore, resulting in minimal financial impact on the income statement - In March 2020, Travelzoo exited its loss-making Asia Pacific business, which has since been classified as discontinued operations[125] - The company has transitioned to a licensing model in the APAC region, with agreements in Japan, South Korea, Australia, New Zealand, and Singapore, generating royalty payments[126][127] - For the six months ended June 30, 2023, the discontinued operations had no revenue and a net income of $0, with net cash used in operating activities of only $1,000[126][128] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management provides its perspective on the company's financial performance, highlighting revenue growth across segments driven by the post-pandemic travel recovery, with a 19% YoY revenue increase in Q2 2023, improved operating margins, and a strong positive shift in operating cash flow for the first half of the year, expressing confidence in liquidity despite negative net working capital Overview and Business Trends Travelzoo, a global internet media company with 30 million members, focuses on curated travel and lifestyle deals, expanding into new areas like Travelzoo META and growing its subscription-based Jack's Flight Club, while navigating post-pandemic travel recovery, the shift to online and mobile platforms, and effective member acquisition cost management, now reinvesting in marketing, technology, and human resources - The company's revenue model depends on advertising fees from travel and local businesses, as well as subscription fees from Jack's Flight Club[155][158] - Business trends impacting performance include the post-pandemic recovery in travel, the shift to mobile usage by consumers, and intense competition in the online advertising space[160][163] - After significant cost-cutting during the pandemic, the company is now reinvesting in marketing, technology, and human resources to support growth[171] Results of Operations This section provides a detailed analysis of the company's financial performance for Q2 and H1 2023 compared to 2022, showing total revenue for Q2 2023 increased 19% YoY to $21.1 million, driven by growth in North America and Europe, with operating income rising to $3.3 million from $1.8 million in Q2 2022, attributed to higher travel-related advertising revenue despite increased operating expenses, and an effective tax rate of 29% for Q2 2023 Revenue by Segment (Q2 2023 vs Q2 2022) (in thousands) | Revenue by Segment (Q2 2023 vs Q2 2022) | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Travelzoo North America | $14,133 | $12,378 | +$1,755 | | Travelzoo Europe | $5,887 | $4,354 | +$1,533 | | Jack's Flight Club | $1,095 | $952 | +$143 | | Total Revenues | $21,128 | $17,689 | +$3,439 | - Sales and marketing expenses increased by $1.7 million in Q2 2023 compared to Q2 2022, primarily due to higher salary and headcount costs ($619,000) and increased member acquisition costs ($498,000)[188][189] - General and administrative expenses decreased by $496,000 in Q2 2023 compared to Q2 2022, mainly due to a reduction in salary, headcount, and stock-based compensation expenses[194][195] - The effective tax rate for Q2 2023 was 29%, a significant decrease from 47% in Q2 2022, primarily due to lower non-deductible stock compensation[200] Liquidity and Capital Resources As of June 30, 2023, Travelzoo held $19.5 million in cash and cash equivalents, with net cash provided by operating activities for the first six months of 2023 at $5.6 million, a significant improvement from a $17.0 million use of cash in the same period of 2022, driven by higher net income and favorable working capital changes, and despite negative net working capital of $4.3 million, management believes cash on hand is sufficient for the next twelve months - The company had $19.5 million in cash and cash equivalents as of June 30, 2023, with $13.3 million held by foreign operations[211] Cash Flow Summary (Six Months Ended June 30) (in thousands) | Cash Flow Summary (Six Months Ended June 30) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,650 | $(16,990) | | Net cash used in investing activities | $(44) | $(1,028) | | Net cash provided by (used in) financing activities | $(5,169) | $1,885 | - The company reported negative net working capital of $4.3 million as of June 30, 2023, largely due to the classification of $23.9 million in merchant payables as current liabilities[214] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2023, due to a previously disclosed material weakness in internal control over financial reporting related to insufficient internal expertise for complex, non-routine transactions, for which a remediation plan is actively being implemented - Management concluded that disclosure controls and procedures are not effective due to a material weakness in internal control over financial reporting[232] - The material weakness relates to not having sufficient internal financial staff with the specific expertise to handle complex, non-routine accounting transactions in a complete and timely manner[234] - A remediation plan is in progress, which includes realigning personnel, recruiting additional finance headcount, improving reporting processes, and implementing new controls[235] PART II—OTHER INFORMATION This section covers legal proceedings, equity security sales, and other miscellaneous information not included in the financial statements Item 1. Legal Proceedings This section refers to Note 4 of the financial statements, indicating that while the company is subject to various claims in the ordinary course of business, any potential liability is not expected to be material to its financial position or results of operations - The company is subject to a complaint filed in May 2023 regarding alleged short-swing profits under Section 16(b) against its founder Ralph Bartel and related entities[138] - The company believes that the likelihood of any pending claims resulting in a material liability is remote[91] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activities, noting that during Q2 2023, Travelzoo repurchased 658,938 shares for $4.7 million, completing its June 2022 repurchase program, and subsequently, on July 26, 2023, the board authorized a new stock repurchase program for up to 1,000,000 shares - In Q2 2023, the company repurchased 658,938 shares of its common stock for an aggregate price of $4.7 million[241][242] - The stock repurchase program authorized in June 2022 was completed as of June 30, 2023[242] - On July 26, 2023, the Board of Directors authorized a new stock repurchase program for up to 1,000,000 shares of common stock[243]