NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (“Travelzoo” or the "Company"). 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. Jack’s Flight Club product include Jack’s Flight Club newsletter.
APAC Exit
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.
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, a stock company organized under the laws of Japan (“Travelzoo Japan”), to Mr. Hajime Suzuki, the former General Manager of Travelzoo Japan (the "Japan Buyer") for consideration of 1 Japanese Yen. The Company recorded approximately $128,000 loss upon disposal of Japan in the year ended December 31, 2020. The parties also entered into a License Agreement, whereby the Travelzoo Japan obtained a license to use the intellectual property of Travelzoo exclusively in Japan in exchange for quarterly royalty payments based on net revenue over a 5 year term, with an option to renew. An interest free loan was provided to the Japan Buyer for JPY 46 million (approximately $430,000) to be repaid over 3 years which the Company recorded as other assets on the consolidated balance sheet as of December 31, 2020. Additionally, on August 24, 2020, the Company completed a sale of 100% of the outstanding capital stock of Travelzoo (Singapore) Pty Ltd, a limited company organized under the laws of Singapore (“Travelzoo Singapore”), to an unaffiliated entity, Finest Hotels Pty Ltd, a limited company organized under the laws of Australia (“AUS Buyer”), which is fully owned by Mr. Julian Rembrandt, the former General Manager of Travelzoo in South East Asia and Australia for consideration of 1 Singapore Dollar. The parties also entered into a License Agreement, whereby the AUS Buyer obtained a license to use the intellectual property of Travelzoo exclusively in Australia, New Zealand and Singapore and non-exclusively in China and Hong Kong for quarterly royalty payments based upon net revenue over a 5 year term, with an option to renew. There was no gain or loss from the sale of Travelzoo Singapore.
WeGo Investment
The Company previously held a minority share equal to 33.7% in weekengo GmbH ("WeGo"), which the Company sold to trivago N.V. (“trivago”) on December 23, 2020.
The original investment agreement with WeGo was executed in April 2018 (the “Original Investment Agreement”). At that time, Travelzoo invested $3.0 million in WeGo for a 25.0% ownership interest. In April 2019, the Company invested an additional $673,000 in WeGo, which increased the Company's ownership interest to 26.6%. In February 2020, Travelzoo signed an amended investment agreement (the “Investment Agreement”) with WeGo, whereby the Company received additional shares (resulting in ownership of 33.7%) and in exchange, agreed to invest an additional $1.7 million if and when WeGo met 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”).
The Company accounted for this private company investment using the equity method of accounting by recording its share of the results of WeGo in “Other income (expense)”, net on a one-quarter lag basis. In accounting for the initial investment, the Company allocated $1.0 million of its purchase price to tangible assets and allocated approximately $485,000 of the purchase price to technology-related intangible assets to be amortized over a 3-year life. The remaining $1.5 million of the purchase price was allocated to goodwill. For the years ended December 31, 2020 and 2019, the Company recorded $384,000 and $882,000 for its share of WeGo losses, amortization of basis differences and currency translation adjustment. This equity method investment is reported as a long-term investment on the Company's consolidated balance sheets.
As of the date of the transaction with trivago, WeGo had not achieved the necessary performance targets. As part of the Share Purchase Agreement, by and among Travelzoo (Europe) Limited, trivago, and the other shareholders of WeGo (the “trivago SPA”), the obligation of any additional payment by the Company was terminated. Per the trivago SPA, 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. The Company recorded $468,000 gain in Other income (loss), net. for the sale of WeGo shares in 2020.
The Company’s advertising revenues from WeGo for the years ended December 31, 2020 and 2019 were $384,000 and $1.2 million , respectively. WeGo agreed to pay in a lump sum the remaining amount outstanding pursuant to the Insertion Order, equal to approximately $200,000. The payment was made in the first quarter of 2021. The Second Insertion Order and any obligation for additional payments from WeGo for marketing were terminated.
The Company acquired the domain name and trademark “weekend.com” in 2005 which was amortized over five years. Concurrently with the sale of the shares, the Company also sold the domain name and trademark “weekend.com” to trivago in exchange for a payment of $822,000. The Company recorded $822,000 gain in General and administrative for the sale of the domain name and trademark “weekend.com” in 2020.
Jack’s Flight Club
In January 2020, Travelzoo acquired JFC Travel Group Co. (“Jack’s Flight Club”), which operates Jack’s Flight Club, a subscription service that provides members with information about exceptional airfares. As of December 31, 2020, Jack’s Flight Club had 1.7 million subscribers. Jack’s Flight Club’s revenues are generated by subscription fees paid by members. In June 2020, the Company renegotiated certain aspects of that certain Stock Purchase Agreement, dated as of January 13, 2020 (the “SPA”), by and among Travelzoo, Jack’s Flight Club and the sellers party thereto (the “Sellers”) with the Sellers and reached a settlement for the outstanding Promissory Notes, dated as of January 13, 2020, by and between Travelzoo and each Seller (the “Promissory Notes”). See Note 3 to the consolidated financial statements for further information.
Ownership
Ralph Bartel, who founded Travelzoo and who is the Chairman of the Board of Directors 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 December 31, 2020, Azzurro is the Company's largest shareholder, holding approximately 40% of the Company's outstanding shares.
Financial Statements
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the U.S. Significant estimates included in the consolidated financial statements and related notes include revenue recognition, refund liability, income taxes, stock-based compensation, loss contingencies, useful lives of property and equipment, purchase price allocation for the business combination and related impairment assessment, relating to the projections and assumptions used. Actual results could differ materially from those estimates.
(b) Revenue Recognition
The Company follows Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" (Topic 606).
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's revenues are primarily advertising fees generated from the publishing of travel and entertainment deals on the Travelzoo website, in the Top 20 email newsletter, in Newsflash and through 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 a hotel booking platform, limited offerings of vacation packages and subscription revenues from Jack's Flight Club. The Company's disaggregated revenues are included in “Note 12: 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 advertisement, Travelzoo Network properties, or social media properties. For these customers, the Company recognizes revenues each time an ad is displayed 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 and an estimated amount for future refunds. 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. 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.
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.
Commission revenue related to our 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, the Company records 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 on 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 Topic 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 for Travelzoo North America and Travelzoo Europe, of which $364,000 was recognized as revenue in 2020. At December 31, 2020, the deferred revenue balance was $2.7 million, of which $1.3 million was for Travelzoo North America and Travelzoo Europe and $1.4 million was for Jack's Flight Club.
(c) Reserve for Refunds to Members
The Company records an estimated reserve for refunds to members based on our historical experience at the time revenue is recorded for Local Deals and Getaway voucher sales. We consider many key factors such as the historical refunds based upon the time lag since the sale, historical reasons for refunds, time period that remains until the deal expiration date, any changes in refund procedures and estimates of redemptions and breakage.
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 between January 2021 through January 2023. The revenues generated from Local Deals vouchers and entertainment offers are based upon a percentage of the face value of the vouchers, commission on actual sales or a listing fee based on audience reach. For Local Deals vouchers, we recognize a percentage of the face value of vouchers upon the sale of the vouchers. The Company estimated the refund reserve by using historical and current refund rates by product and by merchant location to calculate the estimated future refunds. As of December 31, 2020, the Company had approximately $15.2 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 $3.9 million for these unredeemed vouchers as of December 31, 2020 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 a Merchant Payables of $57.1 million as of December 31, 2020 related to unredeemed vouchers. Insertion orders and merchant agreements for Local are typically for periods between one month and twelve months and are not automatically renewed except for merchant contracts in foreign locations. Should any of these factors change, the estimates made by management will also change, which could impact the level of our future reserve for refunds to member. Specifically, if the financial condition of our advertisers, the business that is providing the vouchered service, were to deteriorate, affecting their ability to provide the services to our members, additional reserves for refunds to members may be required.
Estimated member refunds that are determined to be recoverable from the merchant are recorded in the consolidated statements of operations as a reduction to revenue. We accrue costs associated with refunds in accrued expenses on the consolidated balance sheets. Estimated member refunds that are determined not to be recoverable from the merchant, are presented as a cost of revenue. If our judgments regarding estimated member refunds are inaccurate, reported results of operations could differ from the amount we previously accrued.
(d) 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.
(d) 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 in the first quarter of 2020 due to the coronavirus (COVID-19) pandemic and recorded an impairment expense of $810,000. The Company performed its annual test as of October 31, 2020 and no impairment charge was identified in connection with the annual impairment test.
(d) 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 impairment in the first quarter of 2020 due to the COVID-19 pandemic and recorded an impairment expense of $2.1 million. The Company performed its annual impairment test as of October 31, 2020 and no impairment charge was identified in connection with the annual impairment test.
(d) Allowance for Doubtful Accounts
The Company records a provision for doubtful accounts based on its historical experience of write-offs and a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, management considers the age of the accounts receivable, historical write-offs, the creditworthiness of the advertiser, the economic conditions of the advertiser’s industry, and general economic conditions, among other factors. Should any of these factors change, the estimates made by management will also change, which could impact the level of the future provision for doubtful accounts. Specifically, if the financial condition of our advertisers were to deteriorate, affecting their ability to make payments, additional provision for doubtful accounts may be required.
(e) Advertising Costs
Advertising costs are expensed as incurred. Online advertising is expensed as incurred over the period the advertising is displayed. Advertising costs for Travelzoo North America and Travelzoo Europe amounted to $2.6 million and $8.8 million for years ended December 31, 2020 and 2019, respectively. Advertising and marketing costs for Jack's Flight Club was $314,000 for the year ended December 31, 2020.
(f) Operating 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 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 accompanying consolidated balance sheet as of December 31, 2020. 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 consolidated statements of operations.
(g) Stock-Based Compensation
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 as expense over the related employees’ requisite service periods in the Company’s consolidated statements of operations. See Note 10 to the consolidated financial statements for a further discussion on stock-based compensation.
(h) Foreign Currency
All foreign subsidiaries use the local currency of their respective countries as their functional currency. Assets and liabilities are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Revenues, costs and expenses are translated into U.S. dollars at average exchange rates for the period. Gains and losses resulting from translation are recorded as a component of accumulated other comprehensive income (loss). Realized gains and losses from foreign currency transactions are recognized as gain or loss on foreign currency in the consolidated statements of operations. Total foreign currency transaction net losses of $416,000 for 2020, and total foreign currency transaction net gain of $5,000 for 2019, are included in Other income (loss), net in the Company’s consolidated statements of operations.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, valuation allowances must be established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Significant judgment is required in evaluating the Company's uncertain tax positions and determining the Company's provision for income taxes. Although the Company believes it has adequately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the progress or closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.
(j) Comprehensive Income
Comprehensive income consists of two components, net income and other comprehensive income (loss). Other comprehensive income (loss) refers to certain changes in equity that are excluded from net income. For the Company, other comprehensive income (loss) includes foreign currency translation adjustments. Total comprehensive income (loss) for all periods presented has been disclosed in the consolidated statements of comprehensive loss.
(k) 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 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 management believes are of high credit quality. The accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. During the year ended December 31, 2020, the Company experienced 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 a significant 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 likely negatively impact and continue to negatively impact our partners and customers. As of December 31, 2020, the Company had negative working capital of $12.8 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 January 2021 through January 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 December 31, 2020 will be sufficient to provide for working capital needs for at least the next twelve months. However, if redemption activity is more accelerated, or if we are not able to reduce 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.
(l) Cash, Cash Equivalents and Restricted Cash
Cash equivalents consist of highly liquid investments with maturities of three months or less on the date of purchase. 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 refundable deposits and funds held in escrow.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the total amounts shown in the statements of cash flows (in thousands):
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December 31,
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December 31,
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|
2020
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2019
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Cash and cash equivalents
|
$
|
63,061
|
|
|
$
|
18,743
|
|
Restricted cash
|
1,178
|
|
|
1,135
|
|
Cash, cash equivalents and restricted cash–discontinued operations
|
146
|
|
|
832
|
|
Total cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows
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$
|
64,385
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|
|
$
|
20,710
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|
(m) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Additions and improvements are capitalized. Maintenance and repairs are expensed as incurred. The Company also includes in fixed assets the capitalized cost of internal-use software and website development, including software used to upgrade and enhance its website and processes supporting the Company’s business in accordance with the framework established by the FASB accounting guidance for accounting for the cost of computer software developed or obtained for internal use and accounting for website development costs. Costs incurred in the planning stage and operating stage are expensed as incurred while costs incurred in the application development stage and infrastructure development stage are capitalized, assuming such costs are deemed to be recoverable.
Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 3 to 5 years for computer hardware and software, capitalized internal-use software and website development costs, and office equipment and office furniture. The Company depreciates leasehold improvements over the term of the lease or the estimated useful life of the asset, whichever is shorter.
(n) Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the accounting standard relating to impairment of long-lived assets, which requires an impairment loss to be recognized on assets to be held and used if the carrying amount of a long-lived asset group is not recoverable from its undiscounted cash flows. The amount of the impairment loss is measured as the difference between the carrying amount and the fair value of the asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. No impairment loss was recognized during years ended December 31, 2020 and 2019.
(o) Recent Accounting Pronouncements Not Yet Adopted
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 (as such term is defined by the SEC), such as Travelzoo, 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.
(p) Recently Adopted Accounting Pronouncements
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 requires 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 the Company’s financial position, results of operations and cash flows.
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 (loss) per share (in thousands, except per share amounts):
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Year Ended December 31,
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2020
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2019
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Numerator:
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Net income (loss) attributable to Travelzoo—continuing operations
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$
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(10,033)
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|
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$
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12,287
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Net income (loss) attributable to Travelzoo—discontinued operations
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(3,390)
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(8,132)
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Denominator:
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Weighted average common shares—basic
|
11,344
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|
|
11,809
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Effect of dilutive securities: stock options
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—
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|
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226
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|
Weighted average common shares—diluted
|
11,344
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|
12,035
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|
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Income (loss) per share—basic
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Continuing operations
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$
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(0.88)
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$
|
1.04
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Discontinued operations
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(0.30)
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|
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(0.69)
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Net income (loss) per share —basic
|
$
|
(1.18)
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|
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$
|
0.35
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Income (loss) per share—diluted
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|
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Continuing operations
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$
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(0.88)
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|
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$
|
1.02
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Discontinued operations
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(0.30)
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(0.69)
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Net income (loss) per share—diluted
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$
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(1.18)
|
|
|
$
|
0.35
|
|
For the year ended December 31, 2020, options to purchase 3.3 million shares of common stock were not included in the computation of diluted net income per share because of the net loss. For the year ended December 31, 2019, options to purchase 200,000 shares of common stock, respectively, 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 the SPA with the shareholders of Jack’s Flight Club 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 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 results of Jack's Flight Club in 2020 did not meet the thresholds required for the put/call option to be exercisable.
On June 3, 2020, the Company renegotiated the SPA with the Sellers of Jack’s Flight Club and reached a negotiated settlement. The Company recorded adjustments accordingly, however, 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.
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. 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 using the Monte Carlo Simulation approach and the identifiable intangible assets acquired primarily 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. The Company determined that the COVID-19 pandemic 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 first quarter of 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 of $2.1 million. 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 name”) for $810,000 before impairing goodwill.
The following table summarizes the goodwill activity for the year ended December 31, 2020 (in thousands):
|
|
|
|
|
|
Goodwill—January 1, 2020
|
$
|
—
|
|
Acquisition
|
13,054
|
|
Impairment—March 31, 2020
|
(2,110)
|
|
Goodwill—December 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 $6.6 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 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 year ended December 31, 2020 (in thousands):
|
|
|
|
|
|
|
Fair Value
|
Intangible assets—January 1, 2020
|
$
|
—
|
|
Acquisition
|
6,620
|
|
Impairment of trade name—March 31, 2020
|
(810)
|
|
Amortization of intangible assets with definite lives
|
(1,276)
|
|
Intangible assets- December 31, 2020
|
$
|
4,534
|
|
Amortization expense for acquired intangibles was $1.3 million for the year ended December 31, 2020. Expected future amortization expense of acquired intangible assets as of December 31, 2020 is as follows (in thousands):
|
|
|
|
|
|
Years ending December 31,
|
|
2021
|
$
|
1,108
|
|
2022
|
875
|
|
2023
|
641
|
|
2024
|
250
|
|
Thereafter
|
10
|
|
|
$
|
2,884
|
|
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 first quarter of 2020. The Company performed its annual impairment testing of Trade name during the fourth fiscal quarter and did not identify any additional impairment in 2020.
Unaudited 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Revenues
|
$
|
53,722
|
|
|
$
|
108,220
|
|
Net income (loss)
|
$
|
(14,545)
|
|
|
$
|
4,536
|
|
Jack's Flight Club Settlement
On June 3, 2020, the Company and the Seller renegotiated the SPA. 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 to be paid by June 2021 pursuant to new promissory notes with each of the Sellers that contain a 12% interest rate. The Company recorded $1.5 million gain in “General and administrative expenses” for the partial forgiveness of the outstanding loan in the second quarter of 2020. The $1.7 million new promissory notes was paid off in October 2020. Total interest expense for the Promissory Notes of $142,000 was recorded in Other income (loss), net in 2020.
Travelzoo also agreed that the additional payment set forth in the SPA (equal to 20% of 2020 net income) would be payable to the Sellers regardless of whether EBITDA targets are achieved and the put/call is exercised in 2021. The Company estimated the total payment and recorded $448,000 expense in “General and administrative expenses” in 2020.
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 income if the EBITDA threshold is achieved. The Company re-evaluated the fair value of the put/call option by using the Monte Carlo Simulation approach and determined that the extension of the one year period did not change the fair value of the put/call option materially.
Note 4: Debt
Pursuant to the SPA with Jack’s Flight Club on January 13, 2020, the Company issued a Promissory Note for $11.0 million as part of the purchase price with an interest rate of 1.6% and a due date of January 31, 2020. On June 3, 2020, the parties reached a negotiated settlement: (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 to be paid by June 2021 pursuant to new promissory notes with each of the Sellers that contain a 12% interest rate $6.8 million and the accrued interest was paid in the second quarter of 2020, the remaining $1.7 million promissory note and the accrued interest was paid in the fourth quarter of 2020. Total interest expense for the Promissory Notes of $142,000 was paid and recorded in Other income (loss), net in 2020.
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 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the Small Business Association. The loans have a maturity of two (2) years from the disbursement of the funds and an annual interest rate of 1%. The Company used the funds from these loans only for the purposes included in the PPP, including payroll, employee benefits, and rent, and also intends to apply for forgiveness of a portion of the loans in compliance with the CARES Act. Interest expense of $25,000 for the PPP notes payable in 2020 was recorded in Other income (loss), net. As of December 31, 2020, $2.8 million principal balance was due in 2021 and was recorded as notes payable-current portion. The remaining $814,000 principal balance was due in 2022 and was recorded in long-term notes payable. The Company applied for PPP loan forgiveness for a portion of the PPP notes payable but no forgiveness have been granted as of December 31, 2020. As of March 30, 2021, the Company has not learned the extent to which the PPP loans will be forgiven. Any unforgiven portion of the loan is payable over two years at an interest rate of 1%, with a deferral of payments until the date the lender receives the applicable forgiven amount from the SBA. No assurance is provided that the Company will obtain forgiveness of the loan in whole or in part.
Note 5: Balance Sheet Components
Prepaid expenses and other consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Prepaid expenses
|
$
|
1,073
|
|
|
$
|
2,221
|
|
Deposits
|
137
|
|
|
105
|
|
Other current assets
|
93
|
|
|
67
|
|
Total prepaid expenses and other
|
$
|
1,303
|
|
|
$
|
2,393
|
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Computer hardware and software
|
$
|
2,787
|
|
|
$
|
2,759
|
|
Office equipment and office furniture
|
8,071
|
|
|
7,827
|
|
Capitalized internal-use software and website development
|
4,390
|
|
|
4,390
|
|
Leasehold improvements
|
4,126
|
|
|
5,745
|
|
|
|
|
|
|
19,374
|
|
|
20,721
|
|
Less accumulated depreciation and amortization
|
(18,027)
|
|
|
(17,860)
|
|
Total
|
$
|
1,347
|
|
|
$
|
2,861
|
|
Depreciation expense was $884,000 and $1.1 million for the years ended December 31, 2020 and 2019, respectively.
Amortization of capitalized internal-use software and website development costs was $106,000 and $157,000 for the years ended December 31, 2020 and 2019, respectively.
Changes to the allowance for doubtful accounts and reserve for member refunds are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful
accounts
|
|
Reserve for
member
refunds
|
Balance at January 1, 2019
|
$
|
673
|
|
|
$
|
379
|
|
Additions — charged to costs and expenses, or contra revenue
|
608
|
|
|
1,009
|
|
Deductions — recoveries of amounts previously reserved
|
(146)
|
|
|
—
|
|
Deductions — write-offs or refunds
|
(29)
|
|
|
(1,100)
|
|
Balance at December 31, 2019
|
1,106
|
|
|
288
|
|
Additions — charged to costs and expenses, or contra revenue
|
1,983
|
|
|
4,847
|
|
Deductions — recoveries of amounts previously reserved
|
(134)
|
|
|
—
|
|
Deductions — write-offs or refunds
|
(141)
|
|
|
(1,050)
|
|
Balance at December 31, 2020
|
$
|
2,814
|
|
|
$
|
4,085
|
|
Accrued expenses and other consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Reserve for member refunds
|
$
|
4,085
|
|
|
$
|
288
|
|
Accrued advertising expense
|
469
|
|
|
1,654
|
|
Accrued compensation expense
|
2,144
|
|
|
2,477
|
|
Other accrued expenses
|
1,951
|
|
|
1,862
|
|
Total accrued expenses and other
|
$
|
8,649
|
|
|
$
|
6,281
|
|
At December 31, 2020 and 2019, accounts receivable, accounts payable and accrued expenses are not measured at fair value; however, the Company believes that the carrying amounts of these assets and liabilities are a reasonable estimate of their fair value because of their relative short maturity.
Note 6: Commitments and Contingencies
From time to time, the Company is subject to various claims and legal proceedings, either asserted or unasserted, that arise in the ordinary course of business. The Company accrues for legal contingencies if the Company can estimate the potential liability and if the Company believes it is probable that the case will be ruled against it. If a legal claim for which the Company did not accrue is resolved against it, the Company would record the expense in the period in which the ruling was made. The Company believes that the likelihood of an ultimate amount of liability, if any, for any pending claims of any type (alone or combined) that will materially affect the Company’s financial position, results of operations or cash flows is remote. The ultimate outcome of any litigation is uncertain, however, and unfavorable outcomes could have a material negative impact on the Company’s financial condition and operating results. Regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, negative publicity, diversion of management resources and other factors.
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 was merged into Travelzoo. Under and subject to the terms of the merger agreement, holders of promotional shares of Travelzoo.com Corporation (“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 Travelzoo 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 material payments for 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 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 up to ten years. The Company maintained standby letters of credit (“LOC”) serve as collateral issued to the landlords. The LOCs are collateralized with cash which is included in the line item “Restricted cash” in the Consolidated Balance Sheets.
Rent expense was $4.2 million and $4.9 million for the years ended December 31, 2020 and 2019, respectively. The Company’s rental income from sublease was approximately $345,000 and $347,000 for the years ended December 31, 2020 and 2019. See Note 14 - Leases for more information.
The Company has purchase commitments aggregating approximately $46,000 as of December 31, 2020, which represent the minimum obligations the Company has under agreements with certain suppliers. These minimum obligations are less than the Company's projected use for those periods. Payments may be more than the minimum obligations based on actual use.
Note 7: Income Taxes
The components of income (loss) before income tax expense (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
U.S.
|
$
|
(11,865)
|
|
|
$
|
11,553
|
|
Foreign
|
(1,753)
|
|
|
5,446
|
|
|
$
|
(13,618)
|
|
|
$
|
16,999
|
|
Income tax expense (benefit) consists of current and deferred components categorized by federal, state and foreign jurisdictions, as shown below. The current provision is generally that portion of income tax expense that is currently payable to the taxing authorities. The Company makes estimated payments of these amounts during the year. The deferred tax provision (benefit) results from changes in the Company’s deferred tax assets (future deductible amounts) and tax liabilities (future taxable amounts), which are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Deferred
|
|
Total
|
|
(In thousands)
|
Year Ended December 31, 2020
|
|
|
|
|
|
Federal
|
$
|
2,006
|
|
|
$
|
(3,775)
|
|
|
$
|
(1,769)
|
|
State
|
360
|
|
|
(646)
|
|
|
(286)
|
|
Foreign
|
(32)
|
|
|
(351)
|
|
|
(383)
|
|
|
$
|
2,334
|
|
|
$
|
(4,772)
|
|
|
$
|
(2,438)
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
Federal
|
$
|
2,399
|
|
|
$
|
257
|
|
|
$
|
2,656
|
|
State
|
516
|
|
|
47
|
|
|
563
|
|
Foreign
|
1,539
|
|
|
(46)
|
|
|
1,493
|
|
|
$
|
4,454
|
|
|
$
|
258
|
|
|
$
|
4,712
|
|
Income tax expense differed from the amounts computed by applying the U.S. federal statutory tax rate applicable to the Company’s level of pretax income as a result of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Federal tax at statutory rates
|
$
|
(2,860)
|
|
|
$
|
3,570
|
|
State taxes, net of federal income tax benefit
|
(248)
|
|
|
453
|
|
Change of valuation allowance
|
349
|
|
|
—
|
|
Uncertain tax positions
|
624
|
|
|
61
|
|
Foreign income taxed at different rates
|
(770)
|
|
|
41
|
|
Foreign tax credit
|
(595)
|
|
|
—
|
|
Foreign equity investment
|
12
|
|
|
172
|
|
Non-deductible expenses and other
|
1,050
|
|
|
415
|
|
Total income tax expense (benefit)
|
$
|
(2,438)
|
|
|
$
|
4,712
|
|
The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Net operating loss and credit carryforward
|
$
|
10,506
|
|
|
$
|
11,634
|
|
Operating lease liabilities
|
3,337
|
|
|
2,632
|
|
State income taxes
|
70
|
|
|
100
|
|
Accruals and allowances
|
1,374
|
|
|
327
|
|
Stock-based compensation
|
1,651
|
|
|
643
|
|
Unrealized foreign exchange losses
|
176
|
|
|
900
|
|
Deferred revenue
|
87
|
|
|
—
|
|
Capital loss carryforward
|
410
|
|
|
—
|
|
Total deferred tax assets
|
17,611
|
|
|
16,236
|
|
Valuation allowance
|
(10,145)
|
|
|
(11,634)
|
|
Total deferred tax assets net of valuation allowance
|
7,466
|
|
|
4,602
|
|
Deferred tax liabilities:
|
|
|
|
Deferred revenue
|
—
|
|
|
(72)
|
|
Operating lease right-of-use assets
|
(1,908)
|
|
|
(2,423)
|
|
Property, equipment and intangible assets
|
(848)
|
|
|
(56)
|
|
Total deferred tax liabilities
|
(2,756)
|
|
|
(2,551)
|
|
Net deferred tax assets
|
$
|
4,710
|
|
|
$
|
2,051
|
|
Changes in the deferred tax assets valuation allowance for the years ended December 31, 2019 and 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
Charged (Credited) to expenses
|
|
Charged (Credited) to other account (*)
|
|
Balance at end of year
|
Deferred tax assets valuation allowance
|
|
|
|
|
|
|
|
2019
|
$
|
9,723
|
|
|
2,032
|
|
|
(121)
|
|
|
$
|
11,634
|
|
2020
|
$
|
11,634
|
|
|
(2,123)
|
|
|
634
|
|
|
$
|
10,145
|
|
(*) Amounts not charged (credited) to expenses are charged (credited) to stockholder's equity or deferred tax assets (liabilities).
As of December 31, 2020, the Company has a valuation allowance of approximately $10.1 million related to foreign net operating loss (“NOL”) carryforwards of approximately $43.8 million primarily related to the Company's Asia Pacific entities
for which it is more likely than not that the tax benefit will not be realized. The amount of the valuation allowance represented a decrease of approximately $1.5 million over the amount recorded as of December 31, 2019, and was due to the decrease of deferred tax assets and related release of the valuation allowance for the Travelzoo Japan and Travelzoo Singapore, which were sold during the year ended December 31, 2020. If not utilized, the foreign NOL of $30.6 million may be carried forward indefinitely, and $13.2 million will expire at various times between 2021 and 2030.
As of December 31, 2020, the Company is permanently reinvested in certain 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 $524,000 at December 31, 2020.
The total amount of gross unrecognized tax benefits was $774,000 as of December 31, 2020, of which up to $748,000 would affect the Company’s effective tax rate if realized. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits in 2019 and 2020 is as follows (in thousands):
|
|
|
|
|
|
Gross unrecognized tax benefits balance at January 1, 2019
|
$
|
239
|
|
Increase related to current year tax positions
|
7
|
|
Settlements
|
(68)
|
|
Gross unrecognized tax benefits balance at December 31, 2019
|
178
|
|
Increase related to current year tax positions
|
596
|
|
Settlements
|
—
|
|
Gross unrecognized tax benefits balance at December 31, 2020
|
$
|
774
|
|
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 December 31, 2020, the Company had approximately $235,000 in accrued interest.
The Company files income tax returns in the U.S. federal jurisdiction and various 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.
Although the timing of initiation, resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of the gross unrecognized tax benefits related to the method of computing income taxes in certain jurisdictions and losses reported on certain income tax returns could significantly change in the next 12 months. These changes may occur through settlement with the taxing authorities or the expiration of the statute of limitations on the returns filed. The Company is unable to estimate the range of possible adjustments to the balance of the gross unrecognized tax benefits.
Note 8: Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated balances of other comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
(3,452)
|
|
|
$
|
(4,214)
|
|
Other comprehensive income (loss) due to foreign currency translation, net of tax
|
(8)
|
|
|
762
|
|
Amounts reclassified from other comprehensive income (loss), net of tax
|
(599)
|
|
|
—
|
|
Ending balance
|
$
|
(4,059)
|
|
|
$
|
(3,452)
|
|
The Company reclassified $599,000 from accumulated other comprehensive income (loss) for the year ended December 31, 2020 due to Asia Pacific was considered as discontinued operation in March 2020. There were no amounts reclassified from accumulated other comprehensive income (loss) for the year ended December 31, 2019. Accumulated other comprehensive income (loss) consists of foreign currency translation gain or loss.
Note 9: Employee Benefit Plan
The Company maintains a 401(k) Profit Sharing Plan & Trust (the “401(k) Plan”) for its employees in the United States. The 401(k) Plan allows employees of the Company to contribute up to 80% of their eligible compensation, subject to certain limitations. Since 2006, the Company has matched employee contributions up to $1,500 per year. Employee contributions are fully vested upon contribution, whereas the Company’s matching contributions are fully vested after the first year of service. The Company also has various defined contribution plans for its international employees. The Company’s contributions to these benefit plans were approximately $986,000 and $1.1 million for the years ended December 31, 2020 and 2019, respectively.
Note 10: 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 consolidated statements of operations.
In September 2015, pursuant to an executed Option Agreement, the Company granted its Global Chief Executive Officer, Holger Bartel, options to purchase 400,000 shares of common stock of the Company, with an exercise price of $8.07 and quarterly vesting beginning on March 31, 2016 (the “2015 Option Agreement”). The 2015 Option Agreement expires in September 2025. The options are now fully vested and the stock-based compensation related to these options was fully expensed. In October 2017, pursuant to an executed Option Agreement, the Company granted Mr. Bartel options to purchase 400,000 shares of common stock, with an exercise price of $6.95 and quarterly vesting beginning on March 31, 2018 (the “2017 Option Agreement”). The 2017 Option Agreement expires in 2027. During 2019, 250,000 options granted pursuant to the 2017 Option Agreement were exercised by Mr. Bartel. The remaining 150,000 options are fully vested and the stock-based compensation related to these options was fully expensed. In September 2019, the Company granted Mr. Bartel options to purchase 400,000 shares of common stock subject to shareholder approval, with an exercise price of $10.79 and quarterly vesting beginning on March 31, 2020 and ending on December 31, 2021 (the “2019 Option Agreement” and together with the 2015 Option Agreement and the 2017 Option Agreements, the “Bartel Option Agreements”). The 2019 Option Agreement expires in 2024.
On May 29, 2020, the shareholders of the Company approved certain amendments to the Bartel Option Agreements, which increased and repriced all outstanding, unexercised options granted to Mr. Bartel (the “Option Agreement Amendments”). Pursuant to the Option Agreement Amendments and subject to shareholder approval, the exercise price for the options was repriced to the official NASDAQ closing share price on March 30, 2020 (the date of execution of the Option Agreement Amendments, which immediately followed the date of approval of the grants from the Board of Directors of the Company), which was $3.49. Additionally, the Option Agreement Amendments made the following increases: (a) 400,000 additional options to purchase the Company’s common stock pursuant to the 2015 Option Agreement, (b) 150,000 additional options to purchase the Company’s common stock pursuant to the 2017 Option Agreement, and (c) 400,000 additional options to purchase the Company’s common stock pursuant to the 2019 Option Agreement, which resulted in a total of 1,900,000 options granted to Mr. Bartel pursuant to the Option Agreement Amendments. Mr. Bartel’s amended options pursuant to the 2015 Option Agreement and the 2017 Option Agreement were fully vested upon the execution of the applicable Option Agreement Amendment. Therefore, stock-based compensation related to these options was fully expensed in the second quarter of 2020. As of December 31, 2020, there was approximately $1.5 million of unrecognized stock-based compensation expense relating to the 2019 Option Agreement and applicable Option Agreement Amendment. This amount is expected to be recognized over the next 1 year.
In May 2018, pursuant to executed Option Agreements, the Company granted an employee options to purchase 50,000 shares of common stock with an exercise price of $14.70 and annual vesting beginning in May 2019. The options expire in May 2028. In 2020, 25,000 unvested options were forfeited and 25,000 vested option were canceled upon the departure of the employee.
In June 2018, pursuant to an executed Option Agreement, the Company granted an employee options to purchase 50,000 shares of common stock with an exercise price of $16.65 and annual vesting beginning June 2019. The options expire in June 2023. In 2020, 37,500 unvested options were forfeited and 12,500 vested option were canceled upon the departure of the employee.
In May 2019, pursuant to an executed Option Agreement, 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 became exercisable in September 2019, and the remaining 75,000 will vest in three equal installments beginning in May 2021 and ending in May 2024. The options expire in May 2024. In 2020, 75,000 unvested options were forfeited and 25,000 of vested option were canceled upon the departure of the employee.
In September 2019, pursuant to executed Option Agreements, the Company granted six employees stock options to purchase 50,000 shares of common stock each (300,000 in the aggregate) with an exercise price of $10.79, of which 75,000 options vest and become exercisable annually starting on September 5, 2020 and ending on December 31, 2023. The options expire in September 2024. On May 29, 2020, the shareholders of the Company approved the grants, as well as certain amendments to the Option Agreements, which increased and repriced all outstanding, unexercised options granted to such employees. Pursuant to the applicable amendments, the exercise price for the options was repriced to the official NASDAQ closing share price on March 30, 2020 (the date of execution of the amendments to the Option Agreements, which immediately followed the date of approval of the grants from the Board of Directors of the Company), which was $3.49, the option grants were each increased to 100,000 each, resulting in 300,000 additional options in the aggregate. In 2020, 100,000 unvested options were forfeited upon an employee's departure. As of December 31, 2020, there was approximately $1.3 million of unrecognized stock-based compensation expense relating to these options. This amount is expected to be recognized over the next 2.7 years.
On May 29, 2020, pursuant to an executed Option Agreement, the shareholders of the Company approved the grant of stock options to purchase 800,000 shares of common stock to Mr. Ralph Bartel, Chairman of the Board of Directors of the Company, with an exercise price of $3.49 and quarterly vesting beginning June 30, 2020 and ending on March 31, 2022. The options expire in March 2025. This grant was approved at the 2020 Annual Meeting of the shareholders. As of December 31, 2020, there was approximately $1.9 million of unrecognized stock-based compensation expense relating to these options. This amount is expected to be recognized over the next 1.3 years.
On May 29, 2020, pursuant to an executed Option Agreement, the shareholders of the Company approved the grant of stock options to purchase 200,000 shares of common stock to two key employees, with an exercise price of $3.49 with annual vesting starting March 30, 2021 and ending on March 31, 2024. The options expire in March 2025. As of December 31, 2020, there was approximately $648,000 of unrecognized stock-based compensation expense relating to these options. This amount is expected to be recognized over the next 3.3 years.
The Company recorded $6.2 million of stock-based compensation in general and administrative expenses for fiscal year 2020. The Company recorded $993,000 of stock-based compensation for fiscal year 2019, of which $89,000 was recorded in sales and marketing expense and the remaining was recorded in general and administrative expenses.
The Company utilized the Black-Scholes option pricing model to value the stock options. The Company used an expected life as defined under the simplified method, which is using an average of the contractual term and vesting period of the stock options. The risk-free interest rate used for the award is based on the U.S. Treasury yield curve in effect at the time of grant. The Company accounted for forfeitures as they occur. The historical volatility was calculated based upon implied volatility of the Company's historical stock prices.
The fair value of 2020 stock option and modification and 2019 stock options was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Weighted-average fair value of options granted per share
|
$
|
3.86
|
|
|
$
|
8.78
|
|
Historical volatility
|
78
|
%
|
|
60
|
%
|
Risk-free interest rate
|
0.19
|
%
|
|
2.10
|
%
|
Dividend yield
|
—
|
|
|
—
|
|
Expected life in years
|
2.9
|
|
3.6
|
As of December 31, 2020, there was approximately $5.4 million of unrecognized stock-based compensation expense related to outstanding stock options, expected to be recognized over 1.7 years.
Option activities during the years ended December 31, 2019 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
(In thousands)
|
Outstanding at January 1, 2019
|
1,050,000
|
|
|
$
|
9.50
|
|
|
7.53 years
|
|
|
Option Granted
|
100,000
|
|
|
19.28
|
|
|
|
|
|
Exercised options
|
(300,000)
|
|
|
7.22
|
|
|
|
|
|
Options forfeited and canceled
|
(100,000)
|
|
|
19.74
|
|
|
|
|
|
Outstanding at December 31, 2019
|
750,000
|
|
|
$
|
10.35
|
|
|
6.01 years
|
|
|
Option Granted
|
2,850,000
|
|
|
$
|
3.49
|
|
|
|
|
|
Exercised options
|
(75,000)
|
|
|
$
|
3.49
|
|
|
|
|
|
Options forfeited and canceled
|
(200,000)
|
|
|
$
|
17.48
|
|
|
|
|
|
Outstanding at December 31, 2020
|
3,325,000
|
|
|
$
|
3.49
|
|
|
4.39 years
|
|
$
|
19,784
|
|
Exercisable and fully vested at December 31, 2020
|
2,250,000
|
|
|
$
|
3.49
|
|
|
4.56 years
|
|
$
|
13,388
|
|
Outstanding at December 31, 2020 and expected to vest thereafter
|
1,075,000
|
|
|
$
|
3.49
|
|
|
4.05 years
|
|
$
|
6,396
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of year ended December 31, 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2020. This amount changes based on the fair value of the Company’s stock. The Company’s policy is to issue shares from the authorized shares to fulfill stock option exercises.
Outstanding options at December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Options
Outstanding
|
|
Options Outstanding
Weighted-Average
Remaining Contractual
Life
|
|
Weighted-Average
Exercise Price
|
|
Options Outstanding
and Exercisable
|
|
Options Exercisable
Weighted-Average
Remaining Contractual
Life
|
$
|
3.49
|
|
|
3,325,000
|
|
|
4.39 years
|
|
$
|
3.49
|
|
|
2,250,000
|
|
|
4.56 years
|
Note 11: 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 significant 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 year ended December 31, 2019, the Company repurchased 436,369 shares of common stock for an aggregate purchase price of $7.2 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. During the year ended December 31, 2020, the Company repurchased 168,602 shares of common stock for an aggregate purchase price of $1.2 million. There were 395,029 shares remaining to be repurchased under this program as of December 31, 2020.
In November 2019, the Company entered into a SRA 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 12: 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 year ended December 31, 2020, the Company classified the results of its Asia Pacific segment as discontinued operations in its consolidated financial statements for current and prior years presented. On January 13, 2020, Travelzoo agreed to the SPA with the Sellers of Jack’s Flight Club to purchase 60% of the Shares. Upon acquisition, the Company's chief operating decision maker reviewed and evaluated Jack's Flight Club as a separate segment. The Company currently has three reportable operating segments: Travelzoo North America, Travelzoo Europe and Jack’s Flight Club. Travelzoo North America consists of the Company’s operations in Canada and the U.S. Travelzoo 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 and assets by business segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
Travelzoo North America
|
|
Travelzoo Europe
|
|
Jack's Flight Club
|
|
Elimination
|
|
Consolidated
|
Revenues from unaffiliated customers
|
$
|
34,663
|
|
|
$
|
15,409
|
|
|
$
|
3,537
|
|
|
$
|
(8)
|
|
|
$
|
53,601
|
|
Intersegment revenues
|
249
|
|
|
(257)
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Total net revenues
|
$
|
34,912
|
|
|
$
|
15,152
|
|
|
$
|
3,537
|
|
|
$
|
—
|
|
|
$
|
53,601
|
|
Operating income (loss)
|
$
|
(5,056)
|
|
|
$
|
(6,195)
|
|
|
$
|
(2,814)
|
|
|
$
|
(8)
|
|
|
$
|
(14,073)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Travelzoo North America
|
|
Travelzoo Europe
|
|
Jack's Flight Club
|
|
Elimination
|
|
Consolidated
|
Revenues from unaffiliated customers
|
$
|
65,455
|
|
|
$
|
39,556
|
|
|
$
|
—
|
|
|
$
|
(86)
|
|
|
$
|
104,925
|
|
Intersegment revenues
|
2,572
|
|
|
(2,658)
|
|
|
—
|
|
|
86
|
|
|
—
|
|
Total net revenues
|
$
|
68,027
|
|
|
$
|
36,898
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
104,925
|
|
Operating income (loss)
|
$
|
12,666
|
|
|
$
|
4,461
|
|
|
$
|
—
|
|
|
$
|
(86)
|
|
|
$
|
17,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
Travelzoo North America
|
|
Travelzoo Europe
|
|
Jack's Flight Club
|
|
Elimination
|
|
Consolidated
|
Long-lived assets
|
$
|
1,123
|
|
|
$
|
224
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,347
|
|
Total assets
|
$
|
138,020
|
|
|
$
|
31,659
|
|
|
$
|
6
|
|
|
$
|
(67,515)
|
|
|
$
|
102,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Travelzoo North America
|
|
Travelzoo Europe
|
|
Elimination
|
|
Consolidated
|
Long-lived assets
|
$
|
2,598
|
|
|
$
|
263
|
|
|
$
|
—
|
|
|
$
|
2,861
|
|
Total assets
|
$
|
66,803
|
|
|
$
|
74,604
|
|
|
$
|
(90,830)
|
|
|
$
|
50,577
|
|
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.
For the years ended December 31, 2020 and 2019, the Company did not have any customers that accounted for 10% or more of revenue. As of December 31, 2020 and 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, Travelzoo website, Newsflash, Travelzoo Network), Getaways vouchers, hotel platform and vacation packages. Local revenue includes Local Deals vouchers and entertainment offers (vouchers and direct bookings).
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Travelzoo North America
|
|
|
|
Travel
|
$
|
32,042
|
|
|
$
|
57,866
|
|
Local
|
2,870
|
|
|
10,161
|
|
Total Travelzoo North America revenues
|
34,912
|
|
|
68,027
|
|
Travelzoo Europe
|
|
|
|
Travel
|
13,826
|
|
|
32,081
|
|
Local
|
1,326
|
|
|
4,817
|
|
Total Travelzoo Europe revenues
|
15,152
|
|
|
36,898
|
|
Jack's Flight Club
|
3,537
|
|
|
—
|
|
Travel
|
45,868
|
|
|
89,947
|
|
Local
|
4,196
|
|
|
14,978
|
|
Jack's Flight Club
|
3,537
|
|
|
—
|
|
Total revenues
|
$
|
53,601
|
|
|
$
|
104,925
|
|
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):
The following table sets forth revenue for individual countries that were 10% or more of total revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Revenue
|
|
|
|
United States
|
$
|
31,854
|
|
|
$
|
61,375
|
|
United Kingdom
|
12,832
|
|
|
19,961
|
|
Germany
|
4,853
|
|
|
12,176
|
|
Rest of the world
|
4,062
|
|
|
11,413
|
|
Total revenues
|
$
|
53,601
|
|
|
$
|
104,925
|
|
The following table sets forth long lived assets by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
United States
|
$
|
912
|
|
|
$
|
2,359
|
|
Rest of the world
|
435
|
|
|
502
|
|
Total long lived assets
|
$
|
1,347
|
|
|
$
|
2,861
|
|
Note 13: Related Party Transactions
Ralph Bartel, who founded Travelzoo 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 December 31, 2020, Azzurro is the Company's largest stockholder, holding approximately 40% of the Company's outstanding shares.
In September 2015, the Company granted Holger Bartel, options to purchase 400,000 shares of common stock of the Company, with an exercise price of $8.07 and quarterly vesting beginning on March 31, 2016 (the “2015 Option Agreement”). In October 2017, the Company granted Mr. Bartel options to purchase 400,000 shares of common stock, with an exercise price of $6.95 and quarterly vesting beginning on March 31, 2018 (the “2017 Option Agreement”). During 2019, 250,000 options granted pursuant to the 2017 Option Agreement were exercised by Mr. Bartel. The remaining 150,000 options are fully vested. In September 2019, the Company granted Mr. Bartel options to purchase 400,000 shares of common stock subject to shareholder approval, with an exercise price of $10.79 and quarterly vesting beginning on March 31, 2020 and ending on December 31, 2021 (the “2019 Option Agreement” and together with the 2015 Option Agreement and the 2017 Option Agreements, the “Bartel Option Agreements”). On May 29, 2020, the shareholders of the Company approved certain amendments to the Bartel Option Agreements, which increased and repriced all outstanding, unexercised options granted to Mr. Bartel (the “Option Agreement Amendments”). The exercise price for the options was repriced to the official NASDAQ closing share price on March 30, 2020 (the date of execution of the Option Agreement Amendments), which was $3.49. Additionally, the Option Agreement Amendments made the following increases: (a) 400,000 additional options to purchase the Company’s common stock pursuant to the 2015 Option Agreement, (b) 150,000 additional options to purchase the Company’s common stock pursuant to the 2017 Option Agreement, and (c) 400,000 additional options to purchase the Company’s common stock pursuant to the 2019 Option Agreement, which resulted in a total of 1,900,000 options granted to Mr. Bartel pursuant to the Option Agreement Amendments. Mr. Bartel’s amended options pursuant to the 2015 Option Agreement and the 2017 Option Agreement were fully vested upon the execution of the applicable Option Agreement Amendment.
WeGo signed a $2.1 million insertion order for advertising with the Company in 2018. The Company’s advertising revenues from WeGo in the years ended December 31, 2020 and 2019 were $384,000 and $1.2 million , respectively. WeGo agreed to pay in a lump sum the remaining amount outstanding pursuant to the Insertion Order, equal to approximately $200,000. The Second Insertion Order and any obligation for additional payments from WeGo for marketing were terminated. The lump sum payment was made in the first quarter of 2021.
On February 13, 2019, the Company entered into a SRA with Azzurro to repurchase an aggregate of 100,000 shares of the Company’s common stock for an aggregate purchase price of $1.6 million. The SRA provides that the purchase price is based on the five (5) day volume weighted average price calculated using the VWAP function on Bloomberg, from the dates of February 6, 2019 through and including February 12, 2019, minus a five percent (5%) discount. The Company’s board of directors established a special committee (the “Special Committee”), consisting of independent and disinterested directors who engaged independent legal counsel and an independent financial advisor, to authorize the transaction.
On November 9, 2019, the Company entered into a SRA 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. The SRA provides that the purchase price is based on the 10-day volume weighted average price calculated using the VWAP function on Bloomberg, from the dates of October 22, 2019 through and including November 4, 2019, less 4.4%.
On October 22, 2020, Azzurro, a significant shareholder of the Company, purchased 50,000 shares of the Company’s common stock from Mr. Holger Bartel at a price of $7.80 based on the closing price of October 21, 2020. 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. Mr. Holger Bartel had previously granted a proxy to Azzurro with power to vote these shares. Azzurro had reported those shares as beneficially owned by it because of the voting power, although it disclaimed beneficial ownership and had no pecuniary interest in the shares. This related party transaction was reviewed and approved in advance by the Audit Committee of the Board of Directors of the Company.
Note 14: 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 up to ten years. Certain leases include one or more options to renew. In addition, we sublease certain 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 year ended December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Operating lease cost
|
$
|
4,435
|
|
|
$
|
4,078
|
|
Short-term lease cost
|
26
|
|
|
663
|
|
Variable lease cost
|
1,060
|
|
|
1,197
|
|
Sublease income
|
(336)
|
|
|
(336)
|
|
Total lease cost
|
$
|
5,185
|
|
|
$
|
5,602
|
|
For the year ended December 31, 2020 and 2019, cash payments against the operating lease liabilities totaled $4.7 million and $5.6 million, respectively. ROU assets obtained in exchange for lease obligations was $3.2 million and $4.1 million for the year ended December 31, 2020 and 2019, respectively.
The following table summarizes the presentation in our consolidated balance sheet of our operating leases (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Assets:
|
|
|
|
|
Operating lease right-of-use assets
|
$
|
8,541
|
|
|
$
|
8,140
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Operating lease liabilities
|
$
|
3,587
|
|
|
$
|
4,847
|
|
|
Long-term operating lease liabilities
|
10,774
|
|
|
7,920
|
|
|
Total operating lease liabilities
|
$
|
14,361
|
|
|
$
|
12,767
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
7.28
|
|
3.43
|
Weighted average discount rate
|
3.6
|
%
|
|
4.5
|
%
|
|
|
|
|
|
Maturities of lease liabilities were as follows (in thousands):
|
|
|
|
|
|
Years ending December 31,
|
|
2021
|
$
|
3,622
|
|
2022
|
2,278
|
|
2023
|
1,879
|
|
2024
|
1,426
|
|
2025
|
1,350
|
|
Thereafter
|
5,625
|
|
Total lease payments
|
16,180
|
|
Less interest
|
(1,819)
|
|
Present value of operating lease liabilities
|
$
|
14,361
|
|
Note 15: Discontinued Operations
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 continues to see 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 and Singapore units, which were 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 year ended December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Revenues
|
$
|
970
|
|
|
$
|
6,482
|
|
Cost of revenues
|
6
|
|
|
453
|
|
Gross profit
|
964
|
|
|
6,029
|
|
|
|
|
|
Operating expenses:
|
|
|
|
Sales and marketing
|
1,712
|
|
|
9,008
|
|
Product development
|
—
|
|
|
175
|
|
General and administrative
|
2,836
|
|
|
4,427
|
|
Total operating expenses
|
4,548
|
|
|
13,610
|
|
Loss from operations
|
(3,584)
|
|
|
(7,581)
|
|
Other income (loss), net
|
194
|
|
|
(474)
|
|
Loss before income taxes
|
(3,390)
|
|
|
(8,055)
|
|
Income tax expense
|
—
|
|
|
82
|
|
Net loss
|
$
|
(3,390)
|
|
|
$
|
(8,137)
|
|
The Company recorded severance and disposal costs of $1.6 million during the first quarter of fiscal year 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 allocation of expenses including $64,000 and $135,000 of cost of revenues that were reclassified from the discontinued operations to continued operations for the years ended December 31, 2020 and 2019, respectively. In addition, $7,000 and $204,000 of operating expenses were reclassified from continued operations to discontinued operations for the years ended December 31, 2020 and 2019, respectively.
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 to the Japan Buyer for consideration of 1 Japanese Yen. The Company recognized a pre-tax loss of $128,000. The parties also entered into a License Agreement, whereby the Travelzoo Japan obtained a license to use the intellectual property of Travelzoo exclusively in Japan in exchange for quarterly royalty payments based on revenue over a 5-year term, with an option to renew. However, Travelzoo Japan is only obligated to pay Travelzoo if Travelzoo Japan has a positive EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted pro forma before royalty expenses, according to Travelzoo Japan’s income statement. Travelzoo was not able to estimate whether Travelzoo Japan will generate positive EBITDA based on the uncertainties, and no amount has been recorded for future royalties under this agreement. The Company did not record royalties from Travelzoo Japan for 2020 and will record royalties from Travelzoo Japan on a one-quarter lag basis for future royalties. An interest free loan was provided to the Japan Buyer for JPY 46.0 million (approximately $430,000) to be repaid over 3 years.
On August 24, 2020, the Company completed a sale of 100% of the outstanding capital stock of Travelzoo Singapore, to an unaffiliated entity, AUS Buyer, which is fully owned by Mr. Julian Rembrandt, the former General Manager of South East Asia and Australia of the Company for consideration of Singapore Dollar1. The parties also entered into a License Agreement, whereby the AUS Buyer obtained a license to use the intellectual property of Travelzoo exclusively in Australia, New Zealand and Singapore and non-exclusively in China and Hong Kong for quarterly royalty payments based upon revenue over a 5 year term, with an option to renew. Travelzoo was not able to estimate whether the AUS Buyer will generate revenues based on the
current uncertainties, and no amount has been recorded for future royalties under this agreement. The Company did not record royalties from Travelzoo Japan for 2020 and will record royalties from Travelzoo Japan on a one-quarter lag basis for future royalties.
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 Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
December 31,
2019
|
ASSETS
|
|
|
|
Cash, cash equivalents and restricted cash
|
$
|
146
|
|
|
$
|
832
|
|
Accounts receivable, net
|
69
|
|
|
1,797
|
|
Deposits
|
—
|
|
|
9
|
|
Prepaid expenses and other
|
15
|
|
|
208
|
|
Deposits and other
|
—
|
|
|
248
|
|
Operating lease right-of-use assets
|
—
|
|
|
746
|
|
Property and equipment, net
|
—
|
|
|
121
|
|
Total assets from discontinued operations
|
$
|
230
|
|
|
$
|
3,961
|
|
LIABILITIES
|
|
|
|
Accounts payable
|
$
|
611
|
|
|
$
|
1,057
|
|
Accrued expenses and other
|
48
|
|
|
1,188
|
|
Deferred revenue
|
12
|
|
|
118
|
|
Operating lease right-of-use liabilities
|
—
|
|
|
772
|
|
Total liabilities from discontinued operations
|
$
|
671
|
|
|
$
|
3,135
|
|
The net cash used in operating activities and investing activities for the discontinued operations for the for the year ended December 31, 2020 and 2019, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Net cash used in operating activities
|
$
|
(1,974)
|
|
|
$
|
(7,499)
|
|
Net cash used in investing activities
|
$
|
—
|
|
|
$
|
(65)
|
|
Note 16: Non-Controlling Interest
The Company’s consolidated financial statements include Jack's Flight Club where the Company has operating control but owns 60% of the equity interest.
The non-controlling interest for the year ending December 31, 2020 was as follow:
|
|
|
|
|
|
Non-controlling interest—January 1, 2020
|
$
|
—
|
|
Acquisition
|
5,756
|
|
Net loss attributable to non-controlling interest
|
(1,147)
|
|
Non-controlling interest—December 31, 2020
|
$
|
4,609
|
|
Note 17: Unaudited Quarterly Information
The following represents unaudited quarterly financial data for 2020 and 2019 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
Dec. 31, 2020
|
|
Sep. 30, 2020
|
|
Jun. 30, 2020
|
|
Mar. 31, 2020
|
Revenues
|
$
|
12,483
|
|
|
$
|
13,787
|
|
|
$
|
7,004
|
|
|
$
|
20,327
|
|
Cost of revenues
|
2,795
|
|
|
2,924
|
|
|
2,141
|
|
|
2,703
|
|
Gross profit
|
9,688
|
|
|
10,863
|
|
|
4,863
|
|
|
17,624
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Sales and marketing
|
6,305
|
|
|
6,929
|
|
|
4,288
|
|
|
13,094
|
|
Product development
|
495
|
|
|
592
|
|
|
566
|
|
|
1,428
|
|
General and administrative
|
3,785
|
|
|
4,545
|
|
|
6,642
|
|
|
5,522
|
|
Impairment of intangible asset and goodwill
|
—
|
|
|
—
|
|
|
—
|
|
|
2,920
|
|
Total operating expenses
|
10,585
|
|
|
12,066
|
|
|
11,496
|
|
|
22,964
|
|
Operating loss
|
(897)
|
|
|
(1,203)
|
|
|
(6,633)
|
|
|
(5,340)
|
|
Other income (loss), net
|
677
|
|
|
(37)
|
|
|
(179)
|
|
|
(6)
|
|
Loss from continuing operations before income taxes
|
(220)
|
|
|
(1,240)
|
|
|
(6,812)
|
|
|
(5,346)
|
|
Income tax benefit
|
(368)
|
|
|
(244)
|
|
|
(1,309)
|
|
|
(517)
|
|
Income (loss) from continuing operations
|
148
|
|
|
(996)
|
|
|
(5,503)
|
|
|
(4,829)
|
|
Income (loss) from discontinued operations, net of tax
|
554
|
|
|
(230)
|
|
|
(795)
|
|
|
(2,919)
|
|
Net income (loss)
|
702
|
|
|
(1,226)
|
|
|
(6,298)
|
|
|
(7,748)
|
|
Net income (loss) attributable to non-controlling interest
|
(25)
|
|
|
125
|
|
|
(108)
|
|
|
(1,139)
|
|
Net income (loss) attributable to Travelzoo
|
$
|
727
|
|
|
$
|
(1,351)
|
|
|
$
|
(6,190)
|
|
|
$
|
(6,609)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Travelzoo—continuing operations
|
$
|
173
|
|
|
$
|
(1,121)
|
|
|
$
|
(5,395)
|
|
|
$
|
(3,690)
|
|
Net income (loss) attributable to Travelzoo—discontinued operations
|
$
|
554
|
|
|
$
|
(230)
|
|
|
$
|
(795)
|
|
|
$
|
(2,919)
|
|
|
|
|
|
|
|
|
|
Income (loss) per share—basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.02
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.48)
|
|
|
$
|
(0.32)
|
|
Discontinued operations
|
$
|
0.05
|
|
|
$
|
(0.02)
|
|
|
$
|
(0.07)
|
|
|
$
|
(0.26)
|
|
Net income (loss) per share—basic
|
$
|
0.06
|
|
|
$
|
(0.12)
|
|
|
$
|
(0.55)
|
|
|
$
|
(0.58)
|
|
|
|
|
|
|
|
|
|
Income (loss) per share—diluted
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.01
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.48)
|
|
|
$
|
(0.32)
|
|
Discontinued operations
|
$
|
0.04
|
|
|
$
|
(0.02)
|
|
|
$
|
(0.07)
|
|
|
$
|
(0.26)
|
|
Net income (loss) per share —diluted
|
$
|
0.06
|
|
|
$
|
(0.12)
|
|
|
$
|
(0.55)
|
|
|
$
|
(0.58)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
Dec. 31, 2019
|
|
Sep. 30, 2019
|
|
Jun. 30, 2019
|
|
Mar. 31, 2019
|
Revenues
|
$
|
25,326
|
|
|
$
|
23,833
|
|
|
$
|
26,606
|
|
|
$
|
29,160
|
|
Cost of revenues
|
3,046
|
|
|
2,852
|
|
|
2,672
|
|
|
2,865
|
|
Gross profit
|
22,280
|
|
|
20,981
|
|
|
23,934
|
|
|
26,295
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Sales and marketing
|
12,737
|
|
|
11,967
|
|
|
13,104
|
|
|
13,534
|
|
Product development
|
1,853
|
|
|
1,434
|
|
|
1,763
|
|
|
1,659
|
|
General and administrative
|
4,764
|
|
|
4,188
|
|
|
4,914
|
|
|
4,532
|
|
Total operating expenses
|
19,354
|
|
|
17,589
|
|
|
19,781
|
|
|
19,725
|
|
Operating income
|
2,926
|
|
|
3,392
|
|
|
4,153
|
|
|
6,570
|
|
Other income (loss), net
|
(90)
|
|
|
32
|
|
|
(29)
|
|
|
45
|
|
Income from continuing operations before income taxes
|
2,836
|
|
|
3,424
|
|
|
4,124
|
|
|
6,615
|
|
Income tax expense
|
1,116
|
|
|
860
|
|
|
1,066
|
|
|
1,670
|
|
Income from continuing operations
|
1,720
|
|
|
2,564
|
|
|
3,058
|
|
|
4,945
|
|
Loss from discontinued operations, net of tax
|
(2,319)
|
|
|
(2,258)
|
|
|
(1,730)
|
|
|
(1,825)
|
|
Net income (loss)
|
$
|
(599)
|
|
|
$
|
306
|
|
|
$
|
1,328
|
|
|
$
|
3,120
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Travelzoo—continuing operations
|
$
|
1,720
|
|
|
$
|
2,564
|
|
|
$
|
3,058
|
|
|
$
|
4,945
|
|
Net income (loss) attributable to Travelzoo—discontinued operations
|
$
|
(2,319)
|
|
|
$
|
(2,258)
|
|
|
$
|
(1,730)
|
|
|
$
|
(1,825)
|
|
|
|
|
|
|
|
|
|
Income (loss) per share—basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.15
|
|
|
$
|
0.22
|
|
|
$
|
0.25
|
|
|
$
|
0.41
|
|
Discontinued operations
|
$
|
(0.20)
|
|
|
$
|
(0.19)
|
|
|
$
|
(0.14)
|
|
|
$
|
(0.15)
|
|
Net income (loss) per share—basic
|
$
|
(0.05)
|
|
|
$
|
0.03
|
|
|
$
|
0.11
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
Income (loss) per share—diluted
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.15
|
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.41
|
|
Discontinued operations
|
$
|
(0.20)
|
|
|
$
|
(0.19)
|
|
|
$
|
(0.14)
|
|
|
$
|
(0.15)
|
|
Net income per share —diluted
|
$
|
(0.05)
|
|
|
$
|
0.03
|
|
|
$
|
0.11
|
|
|
$
|
0.26
|
|
Note 18: Subsequent Events
License Agreement with Azzurro Brands Inc.
On March 12, 2021, the Company entered into a License Agreement (the “License Agreement”) with Azzurro Brands Inc., a New York corporation (“Azzurro Brands”) that is a wholly-owned subsidiary of Azzurro Capital Inc., the Company’s largest shareholder. Pursuant to the terms of the License Agreement, the Company was granted the exclusive right and license to use a database of 2.2 million subscribers that Azzurro Brands purchased from a competitor of Travelzoo. The License Agreement requires that the Company pay a license fee of $413,000 per quarter, with an initial payment of $894,000 due upon execution, which would cover the period from execution until Q4 2021. The License Agreement has a term of one (1) year with an automatic renewal, terminable by either party with sixty (60) days’ written notice before the end of the term. The License Agreement contains customary representations and warranties.
Stock Repurchase Agreement
Travelzoo from time to time, engages in share repurchases and on March 27, 2021, the Company entered into a Stock Repurchase Agreement (the “SRA”) with Holger Bartel to repurchase an aggregate of 100,000 shares of the Company’s common stock at a price of $15.83 per share. The SRA provides that the purchase price is based on the 10-day volume weighted average price calculated using the VWAP function on Bloomberg, from the dates of March 15, 2021 through and including March 26, 2021, less a 5% discount. The aggregate purchase price of $1.6 million was paid on the first business day following the execution of the SRA.
Prior to the execution of the SRA and because Mr. Bartel is an executive officer of the Company, the Company’s board of directors delegated to its compensation committee, which consists of independent and disinterested directors, the exclusive power and authority to determine whether any potential transaction to acquire shares from Mr. Bartel was advisable, fair to and in the best interests of the Company and its stockholders, other than Mr. Bartel. In connection with its determination, the compensation committee engaged independent legal counsel and an independent financial advisor and unanimously approved the SRA. The SRA contains customary terms for transactions of this type, including, but not limited to, representations and warranties made by the Company and Mr. Bartel.