What changed in this filing

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Item 1. Financial Statements

2023-08-14 compared with 2012-08-03 · 844 added, 1526 removed, 78 unchanged (97% of the section changed)

Financial Statements

TRAVELZOO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

2023 December 31,

Current assets:

Cash and cash equivalents $ 19,138 $ 18,693

Accounts receivable, less allowance for doubtful accounts of $459 and $400 as of June 30, 2012 and December 31, 2011,

Income tax receivable

Prepaid expenses and other current assets

Deferred tax assets

Accounts receivable, less allowance for doubtful accounts of $ 1,386 and $ 1,468 as of March 31, 2023 and December 31, 2022, respectively

13,672 13,820

Prepaid income taxes 1,401 1,778

Prepaid expenses and other 1,764 1,289

Assets from discontinued operations 10 11

Total current assets 35,985 35,591

Deposits, less current portion

Deferred tax assets, less current portion

Deposits and other 4,618 5,094

Deferred tax assets 3,248 3,222

Restricted cash 679 675

Operating lease right-of-use assets 6,852 7,440

Property and equipment, net 692 657

Intangible assets, net 3,249 3,651

Goodwill 10,944 10,944

Total assets $ 66,267 $ 67,274

LIABILITIES AND STOCKHOLDERS’ EQUITY

1 unchanged sentence

Accounts payable $ 3,143 $ 4,271

Accrued expenses

Merchant payables 27,976 32,574

Accrued expenses and other 4,611 5,049

Deferred revenue 3,124 2,216

Income tax payable

Deferred rent

Operating lease liabilities 2,682 2,972

Liabilities from discontinued operations 453 452

Total current liabilities 41,989 47,534

Long-term tax liabilities

Deferred rent, less current portion

Long-term operating lease liabilities 7,926 8,326

Other long-term liabilities 3,530 2,563

Total liabilities 53,445 58,423

Commitments and contingencies — —

Stockholders’ equity:

Preferred stock, $0.01 par value per share (5,000 shares authorized;

Common stock, $ 0.01 par value ( 20,000 shares authorized;

16,462 shares issued and 15,962 shares outstanding as of June 30,

2012 and December 31, 2011)

Treasury stock (at cost, 0 and 500 shares at June 30, 2012 and December 31, 2011)

16,505 shares issued and 15,669 shares outstanding and 16,505 shares issued and 15,704 outstanding as of March 31, 2023 and December 31, 2022, respectively)

Treasury stock (at cost, 836 shares at March 31, 2023 and 801 shares at December 31, 2022)

( 7,316 ) ( 7,130 )

Additional paid in capital 23,670 23,274

Tax indemnification ( 9,537 ) ( 9,537 )

Note receivable from shareholder ( 4,753 ) ( 4,753 )

Retained earnings 10,815 7,142

Accumulated other comprehensive loss ( 4,825 ) ( 4,905 )

Total Travelzoo stockholders’ equity 8,219 8,219 4,256

Non-controlling interest 4,603 4,595

Total stockholders’ equity 12,822 8,851

1 unchanged sentence

See accompanying notes to unaudited condensed consolidated financial statements.

TRAVELZOO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

Revenues $ 21,601 $ 18,453

Cost of revenues 2,691 2,832

Gross profit 18,910 15,621

Operating expenses:

Sales and marketing 9,296 8,581

Product development 490 453

General and administrative 4,413 4,668

Unexchanged merger shares

Total operating expenses 14,199 13,702

Income (loss) from operations

Other income (expense)

Income (loss) before income taxes

Net income (loss)

Basic net income (loss) per share

Diluted net income (loss) per share

Shares used in computing basic net income (loss) per share

Shares used in computing diluted net income (loss) per share

Operating income 4,711 1,919

Other income, net 350 1,423

Income from continuing operations before income taxes 5,061 3,342

Income tax expense 1,378 968

Income from continuing operations 3,683 2,374

Loss from discontinued operations, net of taxes ( 2 ) ( 11 )

Net income 3,681 2,363

Net income attributable to non-controlling interest 8 4

Net income attributable to Travelzoo $ 3,673 $ 2,359

Net income attributable to Travelzoo—continuing operations $ 3,675 $ 2,370

Net loss attributable to Travelzoo—discontinued operations $ ( 2 ) $ ( 11 )

Income (loss) per share—basic

Continuing operations $ 0.23 $ 0.20

Discontinued operations $ — $ —

Net income (loss) per share —basic $ 0.23 $ 0.20

Income (loss) per share—diluted

Continuing operations $ 0.23 $ 0.19

Discontinued operations $ — $ —

Income (loss) per share—diluted $ 0.23 $ 0.19

Shares used in per share calculation from continuing operations—basic 15,697 12,056

Shares used in per share calculation from discontinued operations—basic 15,697 12,056

Shares used in per share calculation from continuing operations—diluted 15,779 12,544

Shares used in per share calculation from discontinued operations—diluted 15,697 12,056

See accompanying notes to unaudited condensed consolidated financial statements.

TRAVELZOO INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30

Net income (loss)

Other Comprehensive Income (loss):

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

Three Months Ended

Net income $ 3,681 $ 2,363

Other comprehensive income:

Foreign currency translation adjustment 80 ( 138 )

Total comprehensive income (loss)

TRAVELZOO INC.

Total comprehensive income $ 3,761 $ 2,225

See accompanying notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Six Months Ended June 30,

Three Months Ended

Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Net income $ 3,681 $ 2,363

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization 478 574

Deferred income tax

Stock-based compensation 396 542

Provision for losses on accounts receivable

Tax benefit of stock option exercise

Deferred income tax ( 68 ) 97

Loss on long-lived assets — 38

Gain on equity investment in WeGo — ( 196 )

Net foreign currency effect 3 ( 13 )

Changes in operating assets and liabilities:

Reversal of loss on accounts receivable, refund reserve and other ( 712 ) ( 1,408 )

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable 372 ( 3,163 )

Income tax receivable

Prepaid expenses and other current assets

Prepaid income taxes 407 759

Prepaid expenses and other 160 565

Accounts payable ( 1,321 ) 103

Accrued expenses

Deferred revenue

Deferred rent

Merchant payables ( 4,591 ) ( 7,961 )

Accrued expenses and other 911 917

Income tax payable — ( 157 )

Other non-current liabilities

Other liabilities 819 176

Net cash provided by (used in) operating activities 535 ( 6,764 )

Cash flows from investing activities:

Proceeds from repayment of note receivable 39 —

Purchases of intangible assets — ( 1,049 )

Proceeds from sale of equity investment in WeGo — 196

Purchases of property and equipment ( 111 ) ( 89 )

1 unchanged sentence

Cash flows from financing activities:

Proceeds from exercise of stock options

Tax benefit of stock option exercise

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Repurchase of common stock ( 186 ) —

Net cash used in financing activities ( 186 ) —

Effect of exchange rate changes on cash, cash equivalents and restricted cash 171 ( 524 )

Net increase (decrease) in cash, cash equivalents and restricted cash 448 ( 8,230 )

Cash, cash equivalents and restricted cash at beginning of period 19,378 44,989

Cash, cash equivalents and restricted cash at end of period $ 19,826 $ 36,759

Supplemental disclosure of cash flow information:

Cash paid for income taxes, net $ 74 $ 259

Cash paid for amounts included in the measurement of lease liabilities $ 860 $ 938

Non-cash consideration for purchase of intangible asset $ — $ 1,150

See accompanying notes to unaudited condensed consolidated financial statements.

TRAVELZOO INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

Treasury Stock Additional

Capital Tax Indemnification Note Receivable from Shareholder Retained

Earnings (Accumulated Deficit) Accumulated

Comprehensive

Loss Total Travelzoo

Stockholders’

Equity Non-Controlling interest Total

Stockholders’

Shares Amount As Restated As Restated

Balances, January 1, 2023 16,505 $ 165 $ ( 7,130 ) $ 23,274 $ ( 9,537 ) $ ( 4,753 ) $ 7,142 $ ( 4,905 ) $ 4,256 $ 4,595 $ 8,851

Stock-based compensation expense — — — 396 — — — — 396 — 396

Repurchase of common stock — — ( 186 ) — — — — ( 186 ) — ( 186 )

Foreign currency translation adjustment — — — — — — — 80 80 — 80

Net income — — — — — 3,673 — 3,673 8 3,681

Balances, March 31, 2023 16,505 $ 165 $ ( 7,316 ) $ 23,670 $ ( 9,537 ) $ ( 4,753 ) $ 10,815 $ ( 4,825 ) $ 8,219 $ 4,603 $ 12,822

Common Stock Treasury Stock Additional

Capital Tax Indemnification Note Receivable from Shareholder Retained

Earnings Accumulated

Comprehensive

Loss Total Travelzoo

Stockholders’

Deficit Non-controlling interest Total

Stockholders’

Shares Amount

Balances, January 1, 2022 12,551 $ 126 $ ( 5,488 ) $ 4,415 $ — $ — $ 508 $ ( 3,793 ) $ ( 4,232 ) $ — $ ( 4,232 )

Reclassification of non-controlling interest — — — — — — — — — 4,600 4,600

Stock-based compensation expense — — — 542 — — — — 542 — 542

Foreign currency translation adjustment — — — — — — — ( 138 ) ( 138 ) — ( 138 )

Net income — — — — — — 2,359 — 2,359 4 2,363

Balances, March 31, 2022 12,551 $ 126 $ ( 5,488 ) $ 4,957 $ — $ — $ 2,867 $ ( 3,931 ) $ ( 1,469 ) $ 4,604 $ 3,135

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company and Basis of Presentation

Travelzoo Inc.

(the Company or Travelzoo) is a global Internet media company.

We inform over

25 million subscribers in North America, Europe and Asia Pacific, as well as millions of website users, about the best travel, entertainment and local deals available from thousands of companies.

Our deal experts source, research and test-book

offers, recommending only those that meet Travelzoos rigorous quality standards.

We provide travel companies, entertainment companies, and local businesses with a fast, flexible, and cost effective way to reach millions of consumers.

revenues are generated primarily from advertising fees.

In Asia Pacific, the Travelzoo business is operated by Travelzoo (Asia) Ltd.

and Travelzoo Japan K.K.

under a license agreement with Travelzoo Inc.

Our publications and products include the Travelzoo websites (www.travelzoo.com, www.travelzoo.ca, www.travelzoo.co.uk,

www.travelzoo.de, www.travelzoo.es, www.travelzoo.fr, among others), the Travelzoo Top 20 e-mail newsletter, the Newsflash e-mail alert service, the SuperSearch pay-per-click travel search tool, and the Travelzoo Network ,

a network of third-party websites that list travel deals published by Travelzoo.

We also operate Fly.com , a travel search engine that allows users to quickly and easily find the best prices on flights from hundreds of airlines and online

travel agencies.

Recently, we launched Local Deals and Getaways , new services that allow our subscribers to purchase vouchers for deals from local businesses such as spas, hotels and restaurants through the Travelzoo website.

are redeemable at the local businesses during the promotional period.

We receive a percentage of the face value of the voucher from the local businesses.

Since November 1, 2009, the Travelzoo websites in Asia Pacific (cn.travelzoo.com, www.travelzoo.co.jp, www.travelzoo.com.au, www.travelzoo.com.hk, www.travelzoo.com.tw, among others), the

Travelzoo Top 20 e-mail newsletters in Asia Pacific and the Newsflash e-mail alert service in Asia Pacific have been published by Travelzoo (Asia) Limited and Travelzoo Japan K.K., wholly owned subsidiaries of Azzurro Capital Inc.,

under a license agreement with the Company.

There is a reciprocal revenue-sharing agreement among the entities operating the Travelzoo business in Asia Pacific and the Company related to cross-selling audiences, channels and offers.

Travelzoo is controlled by Ralph Bartel, who held beneficially approximately 53.3% of the outstanding shares as of

July 27, 2012.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company

in accordance with the rules and regulations of the U.S.

Summary of Significant Accounting Policies

(a) The Company and Basis of Presentation

Travelzoo® (including its subsidiaries and affiliates, the “Company” or "we") is a global Internet media company.

Travelzoo® provides its 30 million members with exclusive offers and one-of-a-kind experiences personally reviewed by our deal experts around the globe.

We have our finger on the pulse of outstanding travel, entertainment, and lifestyle experiences.

We work in partnership with more than 5,000 top travel suppliers—our long-standing relationships give Travelzoo members access to irresistible offers.

Our most important products and services are the Travelzoo website (travelzoo.com), the Travelzoo iPhone and Android apps, the Top 20 ® email newsletter, the Travelzoo Network , and Jack’s Flight Club ®.

Our Travelzoo website and newsletters include Local Deals and Getaways listings that allow our members to purchase vouchers for offers from local businesses such as spas, hotels and restaurants.

Jack’s Flight Club is a subscription service that provides members with information about exceptional airfares.

We also license Travelzoo products and our intellectual property to licensees in various countries in Asia Pacific, including but not limited to Australia, Japan and Southeast Asia.

In March 2022, we announced the development of Travelzoo META, a subscription service that intends to provide members with exclusive access to innovative, high quality Metaverse travel experiences.

On December 30, 2022, we acquired Metaverse Travel Experiences, Inc., now Metaverse Travel Experiences, LLC (“MTE”), a Metaverse experience scouting business to support Travelzoo META.

Stock Purchase Agreement between Travelzoo and Azzurro Capital Inc.

In connection with the development of Travelzoo META, the Company acquired MTE, a wholly owned subsidiary of Azzurro Capital Inc.

("Azzurro"), and also completed a private placement of newly issued shares.

Ralph Bartel, who founded the Company, is the sole beneficiary of the Ralph Bartel 2005 Trust, which is the controlling shareholder of Azzurro.

Azzurro is the Company’s largest shareholder as of the time of this transaction and as of December 31, 2022, Azzurro and Ralph Bartel owned approximately 50.3 % the Company's outstanding shares.

On December 28, 2022, the stockholders of Travelzoo approved the issuance and sale of 3.4 million shares of common stock (the “Shares”) of Travelzoo to Azzurro, in exchange for certain consideration, and on December 30, 2022 (the “Closing Date”), the transaction was consummated.

The closing price of Travelzoo’s common stock on December 30, 2022 was $ 4.45 per share, resulting in an aggregate fair value of $ 15.2 million.

The purchase price was paid as follows:

(a) $ 1.0 million in cash paid on the Closing Date;

(b) $ 4.8 million paid in the form of a promissory note issued on the Closing Date and payable by June 30, 2023 with accrued interest of 12 %;

and (c) the transfer to the Company of all outstanding capital stock of MTE, which transfer was effected pursuant to a merger of MTE with a wholly-owned subsidiary of the Company on the Closing Date.

The Company recorded the $ 4.8 million promissory note as Note receivable from shareholder in the stockholders' equity section on the consolidated balance sheet as of December 31, 2022.

Acquisitions in the unaudit ed condensed consolidated financial statements for further information.

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 March 31, 2023, Jack’s Flight Club h ad 2.0 million subscribers.

Jack’s Flight Club’s revenues are generated by subscription fees paid by members.

See Note 3 to the unaudited condensed consolidated financial statements for further information.

APAC Exit and Pivot to Licensing Model

In March 2020, Travelzoo exited its loss-making Asia Pacific business and pivoted to a licensing model.

The Company’s Asia Pacific business was classified as discontinued operations at March 31, 2020.

Travelzoo currently has license agreements in Japan and South Korea, as well as Australia, New Zealand and Singapore.

The license agreement for Japan provides a license to the licensee 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.

The territory subject to the license was amended to also include South Korea.

An interest free loan was provided to the licensee for JPY 46 million (approximately $ 430,000 ), of which $ 133,000 was repaid in 2021, $ 39,000 was repaid during the three months

ended March 31, 2023, and the remaining expected to be paid off in 2023.

The Company recorded this loan as current prepaid expense and other on the condensed consolidated balance sheet as of March 31, 2023.

The license agreement for Australia, New Zealand and Singapore provides a license to the licensee to use the intellectual property of Travelzoo exclusively in Australia, New Zealand and Singapore for quarterly royalty payments based upon net revenue over a 5 year term, with an option to renew.

The Company records royalties for its licensing arrangements on a one-quarter lag basis.

The Company recognized royalties of $ 8,000 and $ 5,000 for its licensing arrangements from the licensee in Australia for the three months ended March 31, 2023 and 2022, respectively.

The Company did not recognize any royalty from Travelzoo Japan for the three months ended March 31, 2023 and 2022.

We expect the royalty payments to increase over time as the effects of the pandemic subside.

Government funding

In January 2022 and July 2022, the Company’s German branch of Travelzoo (Europe) Limited, a wholly-owned subsidiary of the Company (“Travelzoo Germany”), received the notification and payment of approximately $ 1.2 million and $ 494,000 from the German Federal Government Bridging Aid III plan and Bridging Aid III+, respectively.

This program was for companies that suffered a Corona-related decrease in sales of at least 30% in one month compared to the reference month in 2019.

Travelzoo Germany applied for the funding in 2021 and 2022, respectively, and was approved by the German government in January 2022 and July of 2022.

The Company has to submit a final declaration in connection to this grant by June 30, 2023.

The Company believes it was eligible to participate in the plan and is entitled to the payment and does not expect significant changes to the amount already received from the final submission.

The Company recorded $ 1.2 million and $ 494,000 gains in Other income, net in the first and third quarters of 2022, respectively.

The Company also received $ 68,000 job retention related funding from Canada in the three months ended March 31, 2022.

Such funding was recorded against salary and related expenses.

The Company did not receive job retention related funding in the three months ended March 31, 2023.

Travelzoo funds its operations primarily with revenues generated from advertising fees and the sale of vouchers.

In the Company’s financial statements presented in this 10-Q report, following GAAP accounting principles, we classified all merchant payables as current.

When all merchant payables are classified as current, there is negative net working capital (which is defined as current assets minus current liabilities) of $ 6.0 million as of March 31, 2023.

Cash provided by operating activities was $ 535,000 for the three months ended March 31, 2023.

In response to the global pandemic which severely limited travel , Travelzoo adjusted its refund policy in the second quarter of 2020 so that vouche rs were fully refundable until expiration or redemption by the customer.

This refund policy has mostly been adjusted as of April 1, 2022, back to fully refundable within fourteen days of purchase unless a surcharge is paid at the time of the vouc her purchase for the right to be fully refundable.

As of March 31, 2023, the Company has recorded merchant payables of $ 28.0 million related to unredeemed vouchers with the majority of vouchers expiring in 2023.

Management understands that these conditions could raise doubt over the Company’s ability to meet all of its obligations over the next twelve months, however, management has evaluated these conditions and concluded that management's plans alleviate these concerns.

Management’s plans include, among others, a focus on managing operating expenses while increasing revenues, as well as obtaining additional financing if required.

Revenue and net income increased for the three months ended March 31, 2023 compared to the same period of last year.

The Company is expecting revenue and net income to increase for 2023 based on improving conditions for travel.

Cash and cash equivalents were $ 19.1 million as of March 31, 2023.

Although as mentioned above, all merchant payables are classified as current, the expiration dates of these vouchers range between April 2023 through December 2025 with the majority of the vouchers expiring during 2023;

provided, that these expiration dates may sometimes be extended on a case-by-case basis.

However, if redemption and refund activities are more accelerated, or if we are not able to increase operating income, we may need to obtain additional financing to meet our working capital needs in the future.

Management believes that it could raise funds through the issuance of equity securities or through debt securities if necessary.

Management therefore concluded that these actions and plans have alleviated the doubt of the Company's ability to continue as a going concern.

However, the Company cannot predict, with certainty, the outcome of its action to generate liquidity, including the availability of additional financing on reasonable terms and conditions, or whether such actions would generate the expected liquidity as planned.

Ralph Bartel, who founded Travelzoo, is the sole beneficiary of the Ralph Bartel 2005 Trust, which is the controlling shareholder of Azzurro.

Azzurro is the Company’s largest shareholder, and as of March 31, 2023 together with Ralph Bartel, in his individual capacity (together, the “Azzurro Parties"), holds approximately 50.5 % of the Company's outstanding shares.

Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the U.S.

Securities and Exchange Commission (SEC).

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted

accounting principles in the United States of America have been condensed or omitted in accordance with such rules and regulations.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all

adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company, and its results of operations and cash flows.

These condensed consolidated financial statements should be read in

conjunction with the Companys audited consolidated financial statements and related notes as of and for the year ended December 31, 2011, included in the Companys Form 10-K filed with the SEC on February 21, 2012.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted in accordance with such rules and regulations.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the year ended December 31, 2022, included in the Company’s Form 10-K filed with the SEC on March 31, 2023.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

All significant

intercompany accounts and transactions have been eliminated in consolidation.

All foreign subsidiaries use the local currency of their respective countries as their functional currency.

Assets and liabilities are translated into U.S.

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.

The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other

future period, and the Company makes no representations related thereto.

The Company was formed as a result of a combination

and merger of entities founded by the Companys majority stockholder, Ralph Bartel.

Bartel founded Travelzoo.com Corporation, a Bahamas corporation, which issued 5,155,874 shares via the Internet to approximately 700,000

Netsurfer stockholders for no cash consideration, but subject to certain conditions as referred to below.

Bartel also founded Silicon Channels Corporation, a California corporation, to operate the Travelzoo

During 2001, Travelzoo Inc.

was formed as a subsidiary of Travelzoo.com Corporation, and Mr.

Bartel contributed all of the outstanding shares of Silicon Channels Corporation to Travelzoo Inc.

in exchange for 8,129,273 shares of

Travelzoo Inc.

and options to acquire an additional 2,158,349 shares at $1.00.

Bartel exercised these options in January 2009.

In April 2002, Travelzoo.com Corporation was merged into Travelzoo Inc.

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 two years following the

effective date of the merger to receive one share of Travelzoo Inc.

in exchange for each share of common stock of Travelzoo.com Corporation.

The records of Travelzoo.com Corporation showed that, assuming all of the shares applied for by the

Netsurfer stockholders were validly issued, there were 11,295,874 shares of Travelzoo.com Corporation outstanding.

As of April 25, 2004, two years following the effective date of the merger, 7,180,342 shares of Travelzoo.com Corporation had

been exchanged for shares of Travelzoo Inc.

Prior to that date, the remaining shares were also included in the issued and outstanding common stock of Travelzoo Inc.

and included in the calculation of basic and diluted earnings per share.

April 25, 2004, the Company ceased issuing shares to the former stockholders of Travelzoo.com Corporation, and no additional shares are reserved for issuance to any former stockholders, because their right to receive shares has now expired.

April 25, 2004, the number of shares reported as outstanding was reduced from 19,425,147 to 15,309,615 to reflect actual shares issued as of the expiration date.

Earnings per share calculations reflect this reduction of the number of shares

reported as outstanding.

As of June 30, 2012, there were 15,961,553 shares of common stock outstanding.

April 21, 2011, the Company entered into an agreement with the State of Delaware resolving all claims relating to an unclaimed property review which began in 2010.

The primary issue raised in the preliminary findings from the review, received

by the Company on April 12, 2011, concerned the shares of Travelzoo which have not been claimed by former Netsurfer stockholders of Travelzoo.com as discussed in the preceding paragraph.

In the preliminary findings under the unclaimed property

review, up to 3.0 million shares were identified as demandable under Delaware escheat laws.

While the Company continues to take the position that such shares were a promotional incentive and were issuable only to persons who

establish their eligibility as stockholders, the Company determined that it was in its best interest to promptly resolve all claims relating to the unclaimed property review.

The Company made a $20.0 million cash payment to the State of Delaware on

April 27, 2011 and received a complete release of those claims.

During March 2012, the Company became subject to

unclaimed property reviews by most of the other states in the U.S.

The auditing firm representing these States in the reviews has presented to the Company preliminary findings which relate primarily to the unexchanged merger shares that were not

covered by the settlement and release by the State of Delaware.

During the three months ended March 31, 2012, the Company recorded a $3.0 million charge related to this unexchanged merger shares contingency.

While the Company believes it has

meritorious defenses regarding the applicability of escheat rights related to this unexchanged merger shares contingency, the ultimate resolution of this matter may take longer than one year to resolve.

If the claims for all of the additional shares

referred to in the preliminary findings were upheld in full, based on the closing price of the Companys shares at the end of June 2012, the cost to the Company would be approximately $22.2 million in excess of the amount accrued, plus any

interest or penalty which might be applicable.

However, the Company is not able to predict the ultimate amount or outcome of any current or future claims which have been or might be asserted relating to the unissued shares.

The Company intends to continue to challenge the applicability of escheat rights, in that, among other reasons, the shares of the

predecessor Bahamas corporation were offered for free as part of a promotional incentive program to qualified individuals.

There were certain conditions applicable to the issuance of shares to the Netsurfer stockholders, including requirements that

(i) they be at least 18 years of age, (ii) they be residents of the U.S.

or Canada, and (iii) they not apply for shares more than once.

The Netsurfer stockholders were advised that failure to comply could result in cancellation of

their shares in Travelzoo.com Corporation.

Travelzoo.com Corporation was not able to verify that the applicants met the requirements referred to above at the time of their applications for issuance of shares, and the remaining Netsurfer stockholders

who have not qualified to receive shares in the Company, or who have not participated in the cash payments program referred to below, have not demonstrated their actual compliance with the conditions to the issuance of shares by Travelzoo.com

The Company does not know how many of the requests for shares originally received by Travelzoo.com Corporation in 1998 were valid, but the Company believes that only a portion of such requests were valid.

In response to the pending

reviews referred to above, and in response to other persons claiming to be former stockholders of Travelzoo.com Corporation, the Company intends to assert that the claimant must establish that the original Netsurfer stockholders complied with the

conditions to issuance of their shares.

The Company is continuing its program under which it makes cash payments to people

who establish that they satisfy the conditions to receive shares of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo Inc.

within the required time period.

The accompanying condensed

consolidated financial statements include a charge in general and administrative expenses of $11,000 and $22,000 for these cash payments for the three months and six months ended June 30, 2012.

The total cost of this program is not reliably

estimable because it is based on the

ultimate number of valid requests received and future levels of the Companys common stock price, and would be affected by any settlement of the pending reviews referred to above.

Companys 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.

As noted above, in order to receive

payment under the program, a person is required to establish that such person validly held shares in Travelzoo.com Corporation.

In July 2012, the Company announced a stock repurchase program authorizing the repurchase of up to 1,000,000 shares of the Companys

outstanding common stock.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding for the

Diluted net income (loss) 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.

All intercompany accounts and transactions have been eliminated in consolidation.

The financial results of Jack’s Flight Club have been included in our condensed consolidated financial statements from the date of acquisition.

Investments in entities where the Company does not have control, but does have significant influence, are accounted for as equity method investments.

We have reclassified prior period financial statements to conform to the current period presentation.

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.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any other future period, and the Company makes no representations related thereto.

(b) Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,” which provides new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable.

The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses.

This update is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

For Smaller Reporting Companies (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 adopted the ASU prospectively on January 1, 2023.

This ASU has not and is currently not expected to have a material impact on our consolidated financial statements.

Below are a summary of the Company's significant accounting policies.

For a comprehensive description of our accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.

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 standalone Travelzoo emails 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 and limited offerings of vacation packages and subscription revenues from Jack's Flight Club.

The Company's disaggregated revenues are included in “Note 9:

Segment Reporting and Significant Customer Information”.

For fixed-fee website advertising, the Company recognizes revenues ratably over the contracted placement period.

For the 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 advertisement 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 basis, such as cost-per-impression, which means that an advertiser pays the Company based on the number of times their advertisement is displayed on Travelzoo properties, email advertisements, Travelzoo Network properties, or social media properties.

For these customers, the Company recognizes revenues each time an advertisement is shown or email delivered.

For transaction based revenues, including products such as Local Deals, Getaways, hotel platform and vacation packages, the Company evaluates whether it is the principal (i.e., report revenue on a gross basis) versus an agent (i.e., report revenue on a net basis).

The Company reports transaction revenue on a net basis because the supplier is primarily responsible for providing the underlying service, and we do not control the service provided by the supplier prior to its transfer to the customer.

For Local Deals and Getaways products, the Company earns a fee for acting as an agent for the sale of vouchers that can be redeemed for services with third-party merchants.

Revenues are presented net of the amounts due to the third-party merchants for fulfilling the underlying services and an estimated amount for future refunds.

In the second quarter of 2020, the Company expanded its vouchers refund policy in response to pandemic travel restrictions 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 on a pro-rated basis based upon the subscription option.

Commission revenue related to hotel platform is recognized ratably over the period of guest stay, net of an allowance for cancellations based upon historical patterns.

For arrangements that are for the booking of non-cancelable reservations where the Company’s performance obligation is deemed to be the successful booking of a hotel reservation, we record revenue for the commissions upon completion of the hotel booking.

The Company’s contracts with customers may include multiple performance obligations in which the Company allocates revenues to each performance obligation based upon its standalone selling price.

The Company determines standalone selling price based on its overall pricing objectives, taking into consideration the type of services, geographical region of the customers, normal rate card pricing and customary discounts.

Standalone selling price is generally determined based on the prices charged to customers when the product is sold separately.

The Company relies upon the following practical expedients and exemptions allowed for in the ASC 606.

The Company expenses sales commissions when incurred because the amortization period would be one year or less.

These costs are recorded in sales and marketing expenses.

In addition, the Company does not disclose the value of unsatisfied performance obligations for (a) contracts with an original expected length of one year or less and (b) contracts for which it recognizes revenues at the amount to which it has the right to invoice for services performed.

Deferred revenue primarily consists of customer prepayments and undelivered performance obligations related to the Company’s contracts with multiple performance obligations.

As of December 31, 2022, $ 1.2 million was recorded as deferred revenue for Jack's Flight Club, of which $ 630,000 was recognized in the three months ended March 31, 2023, $ 981,000 was recorded as deferred revenue for Travelzoo North America and Travelzoo Europe, of which $ 250,000 was recognized as revenue in the three months ended March 31, 2023 .

As of March 31, 2023, the deferred revenue balance was $ 3.1 million, of which $ 1.9 million was for Jack's Flight Club and the remaining $ 1.2 million was for Travelzoo North America and Travelzoo Europe.

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 Getaways 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 voucher refund policy to fully refundable until the voucher expires or is redeemed by the customer.

This refund policy has been adjusted starting April 1, 2022, back to fully refundable within fourteen days of purchase unless a surcharge is paid at the time of the voucher purchase for the right to be fully refundable.

The expiration dates of vouchers range between April 2023 through December 2025 with the majority of vouchers expiring during 2023;

provided, that these expiration dates may sometimes be extended on a case-by-case basis.

The revenues generated from Local Deals vouchers and entertainment offers are based upon a percentage of the face value of the vouchers, commission on actual sales or a listing fee based on audience reach.

For Local Deals vouchers, we recognize a percentage of the face value of vouchers upon the sale of the vouchers.

The Company estimated the refund reserve by using historical and current refund rates by product and by merchant location to calculate the estimated future refunds.

As of March 31, 2023, the Company had approximately $ 7.0 million of unredeemed vouchers that had been sold through March 31, 2023, representing the Company’s commission earned from the sale.

The Company had estimated a refund liability of $ 785,000 for these unredeemed vouchers as of March 31, 2023, which is recorded as a reduction of revenues and is reflected as a current liability in accrued expenses and other on the condensed consolidated balance sheet.

As of December 31, 2022, the Company had approximately $ 8.1 million of unredeemed vouchers that had been sold through 2022 representing the Company’s commission earned from the sale and estimated a refund liability of $ 1.3 million for these unredeemed vouchers as of December 31, 2022, which was recorded as a reduction of revenues and was reflected as a current liability in accrued expenses and other on the condensed consolidated balance sheet.

The Company has recorded Merchant Payables of $ 28.0 million as of March 31, 2023 related to unredeemed vouchers.

Insertion orders and merchant agreements for Local Deals 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 and may adversely affect future revenue as the liability is recorded against revenue.

We record a liability associated with estimated future refunds in accrued expenses on the condensed consolidated balance sheets.

Estimated member refunds that are determined to be recoverable from the merchant are recorded in the condensed consolidated statements of operations as a reduction to revenue.

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.

Business Combinations

The purchase price of an acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.

To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill.

The Company determines the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management.

The Company records the net assets and results of operations of an acquired entity from the acquisition date and adjusts the preliminary purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances existing at the acquisition date impacting asset valuations and liabilities assumed.

Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.

Identifiable intangible assets

Upon acquisition, identifiable intangible assets are recorded at fair value and are carried at cost less accumulated amortization.

Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives.

The carrying values of all intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

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 performed its annual impairment test as of October 31, 2022 and no impairment charge was identified in connection with the annual impairment test .

The Company did no t identify any indicators of impairment during the three months ended March 31, 2023 .

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 unaudited condensed consolidated balance sheets.

The Company’s leases are reflected in operating lease ROU assets, operating lease liabilities and long-term operating lease liabilities in our unaudited condensed consolidated balance sheets.

The lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company also has a real estate lease agreement which is subleased to a third party.

The Company recognizes sublease income in “Other income, net”, on a straight-line basis over the lease term in its condensed consolidated statements of operations.

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 outbreak of coronavirus (COVID-19) in 2020 had an unprecedented impact on the global travel and hospitality industries.

Governmental authorities implemented numerous measures to try to contain the virus, including restrictions on travel, quarantines, shelter-in-place orders, business restrictions and complete shut-downs.

As the Company and many of our advertisers are part of the global travel and hospitality industries, the measures implemented to contain COVID-19 had a significant negative effect on our business, financial condition, results of operations and cash flows.

Many of the Company's advertising partners paused, canceled, and/or stopped advertising.

Additionally, there were significant levels of cancellations for the Company's hotel partners and travel package partners and refund requests for our vouchers.

Now that COVID-19 and its lingering effects have mostly subsided, we are seeing many of our advertisers and partners return to advertising with us and have altered our policies again to align with the changing environment (including reverting to a 14-day return window for vouchers and implementing a surcharge for vouchers to be fully refundable), although with the emergence of new variants, this trend could stop or even reverse which could result in a material adverse impact on our business and financial performance.

It is difficult to estimate the impact of the global pandemic on the Company’s future revenues, results of operations, cash flows, liquidity, or financial condition.

The Company’s cash, cash equivalents and a ccounts 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 receivables are derived from revenue earned from customers located in the U.S.

and internationally.

As of March 31, 2023 and December 31, 2022, the Company did not have any customers that accounted for 10% or more of accounts receivables.

As of March 31, 2023, the Company had merchant payables of $ 28.0 million related to the sale of vouchers.

In the Company’s financial statements presented in this 10-Q report, following GAAP accounting principles, we classified all merchant payables as current.

When all merchant payables are classified as current, there is negative net working capital (which is defined as current assets minus current liabilities) of $ 6.0 million.

Payables to merchants are generally due upon redemption of vouchers.

The vouchers expire between April 2023 through December 2025 with the majority of vouchers expiring during 2023;

provided, that these expiration dates may sometimes be extended on a case-by-case basis.

Management believes that redemptions may be delayed for international vouchers in the current environment.

Based on current projections of redemption activity, management expect that cash on hand as of March 31, 2023 will be sufficient to provide for working capital needs for at least the next twelve months.

However, if redemption activity is more accelerated, if the Company’s business is not profitable, or if the Company’s planned targets for cash flows from operations are not met, the Company may need to obtain additional financing to meet its working capital needs in the future.

The Company believes that it could obtain additional financing if needed, but there can be no assurance that financing will be available on terms that are acceptable to the Company, if at all.

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 for leases.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets to the total amounts shown in the unaudited condensed consolidated statements of cash flows:

March 31, December 31,

Cash and cash equivalents $ 19,138 $ 18,693

Restricted cash 679 675

Cash, cash equivalents and restricted cash–discontinued operations 9 10

Total cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows $ 19,826 $ 19,378

The Company’s restricted cash was included in noncurrent assets as of March 31, 2023 and December 31, 2022.

Net Income Per Share

Basic net income 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):

Three Months Ended

Six Months Ended

Basic net income (loss) per share:

Net income (loss)

Weighted average common shares

Basic net income (loss) per share

Diluted net income (loss) per share:

Net income (loss)

Weighted average common shares

Net income attributable to Travelzoo—continuing operations $ 3,675 $ 2,370

Net loss attributable to Travelzoo—discontinued operations $ ( 2 ) $ ( 11 )

Weighted average common shares—basic 15,697 12,056

Effect of dilutive securities:

stock options 82 488

Diluted weighted average common shares

Diluted net income (loss) per share

For the three months ended June 30, 2012, options to purchase 100,000 shares of common stock were not included in

the computation of diluted net income per share because the effect would have been anti-dilutive.

For the three months ended June 30, 2011, all outstanding options were included in the computation of diluted net income per share.

For the six months ended June 30, 2012, options to purchase 100,000 shares of common stock were not included in the computation of

diluted net income per share because the effect would have been anti-dilutive.

For the six months ended June 30, 2011, options to purchase 300,000 shares of common stock were not included in the computation of diluted net income (loss) per

share because the effect would have been anti-dilutive.

Financial Instruments

At June 30, 2012, restricted cash consisted primarily of a certificate of deposit for $875,000 serving as

collateral for a standby letter of credit for the security deposit under the lease of our corporate headquarters and a $2.2 million deposit with our bank in the U.K.

for our merchant account.

Cash equivalents consist of highly liquid investments

with remaining maturities of three months or less on the date of purchase held in money market funds.

The Company believes that the carrying amounts of these financial assets are a reasonable estimate of their fair value and are categorized as level

The fair value of these financial assets was determined using the following inputs at June 30, 2012 and December 31, 2011(in thousands):

Fair Value Measurements at Reporting Date Using

Quoted Prices in

Active Markets

for Identical

Balance at June 30, 2012

Money market funds

Balance at December 31, 2011

Money market funds

At June 30, 2012, cash, accounts receivable and accounts payable are not measured at fair value;

Company believes that the carrying amounts of these assets and liabilities are a reasonable estimate of their fair value.

Cash is categorized as Level 1 and accounts receivable and accounts payable are categorized as Level 2.

There have been no changes in Level 1, Level 2 and Level 3 and no changes in valuation techniques for these assets or liabilities for the

period ended June 30, 2012.

Weighted average common shares—diluted 15,779 12,544

Income (loss) per share—basic

Continuing operations $ 0.23 $ 0.20

Discontinued operations — —

Net income (loss) per share —basic $ 0.23 $ 0.20

Income (loss) per share—diluted

Continuing operations $ 0.23 $ 0.19

Discontinued operations — —

Net income (loss) per share—diluted $ 0.23 $ 0.19

For the three months ended March 31, 2023 and 2022, options to purchas e 950,000 shares and 50,000 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.

Stock Purchase Agreement (“SPA”) between Travelzoo and Azzurro Capital Inc., a Related-Party

In connection with the development of Travelzoo META, the Company acquired MTE, a wholly owned subsidiary of Azzurro, and also completed a private placement of newly issued shares.

Ralph Bartel, who founded the Company, is the sole beneficiary of the Ralph Bartel 2005 Trust, which is the controlling shareholder of Azzurro.

Azzurro was the Company’s largest shareholder as of the time of this transaction, and Azzurro and Ralph Bartel owned as of December 31, 2022 approximately 50.3 % the Company's outstanding shares.

On December 28, 2022, the stockholders of Travelzoo approved the issuance and sale of 3.4 million Shares of Travelzoo to Azzurro, in exchange for certain consideration, and on the Closing Date, the transaction was consummated.

The closing price of Travelzoo’s common stock on December 30, 2022 was $ 4.45 per share, resulting in an aggregate fair value $ 15.2 million.

The purchase price was paid as follows:

(a) $ 1.0 million in cash paid on the Closing Date;

(b) $ 4.8 million paid in the form of a promissory note issued on the Closing Date and payable by June 30, 2023 with accrued interest of 12 %;

and (c) the transfer to the Company of all outstanding capital stock of MTE, which transfer was effected pursuant to a merger of MTE with a wholly-owned subsidiary of the Company on the Closing Date.

The Company records the $ 4.8 million promissory note as Note receivable from shareholder in the stockholders' equity section on the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022.

Travelzoo acquired the entire business of MTE.

The acquisition was accounted for as an asset acquisition in accordance with ASC Topic 805 – Business Combinations.

The fair value of the consideration paid by Travelzoo and allocation of that amount to the underlying assets, on a relative fair value basis, was recorded by the Company as of the Closing Date.

Additionally, costs directly related to the MTE acquisition of $ 184,000 were capitalized as a component of the purchase price.

As a result of the MTE acquisition, the Company also assumed MTE’s historical net operating loss carryforwards of approximately $ 64.7 million.

While these net operating losses (NOLs) may be used to offset future taxable income, the Company determined it is appropriate to record an uncertain tax benefit liability in accordance with ASC Topic 740—Income Taxes.

Subject to the provisions of the SPA, Azzurro agreed to indemnify Travelzoo for tax related liabilities in the event of the inability of the Company to utilize any NOLs of MTE as a result of any breach of or inaccuracy in any representation or warranty made by Azzurro, which included the representation that NOLs will be available for use by the Company after the closing for federal and analogous state income tax purposes, including pursuant to section 381(a) of the U.S.

tax code, and that, as of the date of the SPA, no NOLs of MTE are subject to any limitation, restriction or impairment on its use.

Based on the terms of the agreement, the Company believes that with the uncertain tax position recognized related to the acquired NOLs, that the Company has the right to claim losses against Azzurro if NOLs are not able to be utilized.

Therefore, the Company recorded an indemnification asset of $ 9.5 million for the relative fair value of this indemnification.

Any losses indemnified by Azzurro related to the inability to utilize MTE’s net operating loss carry forwards shall be satisfied by Azzurro returning to the Company the number of shares of common stock of Travelzoo corresponding to the value of the loss.

Accordingly, the Company has classified this tax indemnification asset as contra-equity in the accompanying condensed consolidated financial statements.

The following table represents the allocation of the total cost of the MTE acquisition to the assets acquired (in thousands):

Consideration for MTE assets

Fair value of Travelzoo common stock issued $ 15,175

Direct transaction costs 184

Cash received from Azzurro Capital Inc.

Notes receivable from Azzurro Capital Inc.

Total consideration for MTE assets $ 9,606

Relative fair value of the assets acquired

Cash and cash equivalents $ 6

Prepaid expenses and other 45

Property and equipment 18

Tax indemnification asset 9,537

Total assets acquired $ 9,606

Travelzoo (Europe) Ltd, Sucursal en España Acquired Secret Escapes Limited’s Spanish Business Unit

On March 3, 2022, Travelzoo (Europe) Ltd, Sucursal en Espana, the Spanish branch of Travelzoo (Europe) Limited, a wholly-owned subsidiary of the Company (“Travelzoo Spain”), entered into a Business Unit Purchase Agreement (“BUPA”) with Secret Escapes Limited (“Secret Escapes”) for the purchase of its Spanish business unit, which included, among other things, a database of approximately 940,000 members.

The purchase price was 400,000 Euros, with an earn-out opportunity of an additional 100,000 Euros payable by the Company upon the achievement of certain metrics by the business unit in six months (September 2022).

The metrics were not achieved and thus no payments were made on the earn-out.

T ravelzoo was granted the right to use the Secret Escapes name exclusively in Spain for a continuity period of six ( 6 ) months.

The BUPA contained typical representations and warranties and indemnification protections, as well as a restrictive covenant, whereby Secret Escapes agreed to leave the Spanish market for at least three ( 3 ) years, subject to a right to purchase a waiver.

Asset Purchase Agreement between Metaverse Travel Experiences, Inc.

f/k/a Azzurro Brands Inc.

and Travelzoo

On March 17, 2022, the Company, as Buyer, entered into an Asset Purchase Agreement (the “APA”) with Metaverse Travel Experiences, Inc.

f/k/a Azzurro Brands Inc., a New York corporation (the “Seller”) and a wholly-owned subsidiary of Azzurro, the Company’s largest shareholder.

Pursuant to the APA, the Company acquired certain assets, primarily comprised of all U.S.

members of Secret Escapes Limited, which Seller acquired in March 2021 and licensed exclusively to Travelzoo pursuant to the previously disclosed License Agreement, dated as of March 12, 2021 (the “License Agreement”), in accordance with data privacy and other applicable laws.

The License Agreement allowed the Company to exclusively utilize the assets in exchange for a license fee of $ 412,500 per quarter with a one-year term that automatically renewed.

The License Agreement was reviewed and unanimously approved by the Audit Committee of the Board of Directors, which consists solely of independent directors.

The purchase price for the transaction was $ 1.75 million, with $ 600,000 paid in cash upon closing in

March 2022 and the remaining $ 1.15 million payable in the form of a credit with Seller relating to prepaid license fees, under the License Agreement.

The remaining commitment of the Company under the License Agreement for the then-current remaining term (equal to $ 825,000 ) was eliminated.

The Company recorded the transactions with both Secret Escape Limited and Metaverse Travel Experiences, Inc.

as asset acquisitions as the assets acquired and liabilities assumed do not meet the definition of a business in Accounting Standards Codification (“ASC”) 805-10.

Cost accumulation model was used to account for the cost of the acquisition and the 100,000 Euros earn-out was considered as contingent consideration based on ASC 805-50.

Travelzoo acquired the database of members and recorded $ 2.2 million intangible assets from both agreements.

Acquisition of Jack's Flight Club

Travelzoo acquired 60 % of Jack’s Flight Club for an aggregate purchase price of $ 12.0 million in January 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 Company renegotiated with Jack’s Flight Club in June 2020 and reached a negotiated settlement which resulted a gain in “General and administrative expenses” for the partial forgiveness for the promissory note issued for the acquisition.

The acquisition has been accounted for using the acquisition method in accordance with 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.

Accordingly, the Company allocated $ 3.5 million to customer relationships, $ 2.5 million to trade name and $ 660,000 to non-compete agreements and the remaining $ 13.1 million to goodwill.

The acquisition related costs were not significant and were expensed as incurred.

Jack’s Flight Club's result have been included in the accompanying financial statements from their the dates of acquisition.

The Company performed an annual impairment test in October did not identify any further indicators of impairment as of December 31, 2022.

The Company also did not identify any indicators of impairment during the three months ended March 31, 2023 .

Intangible Assets

Intangible assets consist of the following (in thousands):

Internet domain names

Less accumulated amortization

Intangible assets have a useful life of 5 years.

For the three months ended June 30, 2012 and 2011, amortization

expense was $88,000 for each period.

For the six months ended June 30, 2012 and 2011, amortization expense was $176,000 for each period.

Future expected amortization expense related to intangible assets at June 30, 2012 is as follows (in thousands):

The expected amortization expense is an estimate.

Actual amounts of amortization expense may differ from estimated

amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets and other events.

The following table represents the fair value and estimated useful lives of intangible assets from the above acquisitions (in thousands):

Fair Value Estimated Life (Years)

Customer relationships (Jack's Flight Club) $ 3,500 5.0

Trade name (Jack's Flight Club) 2,460 indefinite

Non-compete agreements (Jack's Flight Club) 660 4.0

Intangible assets (Secret Escape Spain member database) 445 3.0

Intangible assets (Secret Escape U.S.

member database) 1,751 2.3

Assets Measured at Fair Value on a Non-recurring Basis

The Company’s non-financial assets, such as goodwill, intangible assets and property and equipment, are adjusted to fair value if an impairment is recognized during the period.

The fair value measurements are based on Level 3 inputs.

Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets at fair value.

The goodwill assessment was performed by comparing the fair value of the reporting units to its carrying value.

The fair value estimates for the reporting units, were based on a blended analysis of the present value of future discounted cash flows and market value approach, using Level 3 inputs.

The indefinite-lived intangible assets assessment was valued using the relief-from-royalty method, which includes unobservable inputs, classified as Level 3, including projected revenues and approximately 5 % royalty rate.

The Company recorded a goodwill impairment of $ 2.1 million and a Trade name impairment of $ 810,000 for Jack's Flight Club due to the pandemic in the first quarter of 2020.

No impairment charge was identified and recorded for 2021.

The Company performed its annual test as of October 31, 2022 and a Trade name impairment charge of $ 200,000 was recorded as “ General and administrative expenses ” for Jack's flight club in the fourth quarter of 2022.

The revenue for Jack's Flight Club was negatively impacted by the pandemic and did not meet the forecasted growth expectation.

No impairment charge was identified and recorded for goodwill in 2022.

The following table represents the activities of intangible assets for the three months ended March 31, 2023 and 2022 (in thousands):

Jack's Flight Club Secret Escape Spain Secret Escape U.S.

Intangible assets—January 1, 2022 3,426

Acquisitions—March 2022 — 445 1,751

Amortization of intangible assets with definite lives ( 226 ) ( 12 ) ( 195 )

Intangible assets—March 31, 2022 3,200 433 1,556

Amortization of intangible assets with definite lives ( 217 ) ( 34 ) ( 194 )

Intangible assets—June 30, 2022 2,983 399 1,362

Amortization of intangible assets with definite lives ( 216 ) ( 30 ) ( 194 )

Intangible assets—September 30, 2022 2,767 369 1,168

Amortization of intangible assets with definite lives ( 216 ) ( 42 ) ( 195 )

Impairment of trade name—December 31, 2022 ( 200 ) — —

Intangible assets—December 31, 2022 2,351 327 973

Amortization of intangible assets with definite lives ( 168 ) ( 39 ) ( 195 )

Intangible assets—March 31, 2023 $ 2,183 $ 288 $ 778

Amortization expense for acquired intangibles was $ 402,000 and $ 433,000 for the three months ended March 31, 2023 and 2022, respectively.

Expected future amortization expense of acquired intangible assets as of March 31, 2023 is as follows (in thousands):

Years ending December 31,

2023 (excluding the three months ended March 31, 2023) 1,159

The Company performed its annual impairment testing of Trade name as of October 31, 2022 using a relief from royalty method.

As previously discussed, the Company's impairment test indicated that Jack’s Flight Club’s indefinite lived intangible assets (“Trade name”) was impaired for $ 200,000 in 2022.

No impairment was identified in the three months ended March 31, 2023.

As of March 31, 2023, the carrying value of the Trade name was $ 1.5 million.

Commitments and Contingencies

Beginning on August 9, 2011, two purported class action lawsuits were commenced in the United States District

Court for the Southern District of New York.

On January 6, 2012, a Consolidated and Amended Class Action Complaint was filed.

The complaint asserts claims under Section 10(b) and 20(a) pursuant to the Securities Exchange Act of 1934

(Exchange Act) alleging that between March 16, 2011 and July 21, 2011, the Company and/or the individual defendants purportedly issued materially false and misleading statements.

In particular, the complaint asserts, among

other things, allegations challenging certain statements relating to the Companys growth.

The complaint also makes allegations regarding the Companys Getaways business and asserts that certain officers and directors sold stock

while in possession of materially adverse non-public information.

The action seeks unspecified damages and we are unable to estimate the possible loss or range of losses that could potentially result from the action.

The Company believes that the

action is without merit and intends to defend the suits vigorously.

In addition, five shareholder derivative lawsuits,

Bartel, et al ., Wirth v.

Bartel, et al ., Kitt v.

Bartel, et al ., Blatt v.

Bartel, et al .

, and Turansky v.

Bartel, et al ., were filed in the Southern District of New York based on similar allegations

that seek to assert claims under state law derivatively on behalf of Travelzoo against certain officers and directors of the Company.

These derivatives actions were consolidated and on January 6, 2012, a Verified Consolidated Shareholder

Derivative Complaint was filed purportedly on behalf of nominal defendant Travelzoo.

The complaint asserts claims for breaches of fiduciary duties, unjust enrichment, abuse of control and gross mismanagement against current and former directors and

officers of the Company.

The complaint also asserts a breach of fiduciary duty claim for insider trading against certain officers and directors, as well as Azzurro Capital, Inc.

The derivative action makes allegations regarding the Companys

Getaways business and asserts that certain officers and directors sold stock while in possession of materially adverse non-public information.

On January 27, 2012, a purported shareholder of Travelzoo commenced a suit in the Supreme Court of New York that allegedly asserts claims derivatively on behalf of Travelzoo Inc.

for breaches of

fiduciary duty against Travelzoos board of directors.

The complaint also asserts claims for breaches of fiduciary duty and unjust enrichment against Ralph Bartel and Azzurro Capital Inc.

The complaint challenges Travelzoos sale of its

Asia Pacific division for $3.6 million to Azzurro and alleges that the transaction was not entirely fair to the Company.

April 21, 2011, the Company entered into an agreement with the State of Delaware resolving all claims relating to an unclaimed property review which began in 2010.

The primary issue raised in the preliminary findings from the review, received

by the Company on April 12, 2011, concerned the shares of Travelzoo, which have not been claimed by former Netsurfer stockholders of Travelzoo.com (unexchanged merger shares) as discussed further in Note 1.

In the preliminary findings under the

unclaimed property review, up to 3.0 million shares were identified as demandable under Delaware escheat laws.

While the Company continues to take the position that such shares were a promotional incentive and were issuable only to

persons who established their eligibility as stockholders, the Company determined that it was in its best interest to promptly resolve all claims relating to the unclaimed property review.

The Company made a $20.0 million cash payment to the State

of Delaware on April 27, 2011 and received a complete release of those claims.

As discussed in Note 1 above, during

March 2012, the Company has become subject to unclaimed property reviews by most of the other states in the U.S.

that relate primarily to the unexchanged merger share, which were not covered by the settlement and release by the State of Delaware.

During the three months ended March 31, 2012, the Company recorded a $3 million charge related to this unexchanged merger share contingency.

While the Company believes it has meritorious defenses regarding the applicability of escheat rights

related to this unexchanged merger share contingency, the ultimate resolution of this matter may take longer than one year to resolve.

If the claims for all of the additional shares referred to in the preliminary findings were upheld in full, based

on the closing price of the Companys shares at the end of June 2012, the cost to the Company would be approximately $22.2 million in excess of the amount accrued, plus any interest or penalties which might be applicable.

However, the Company

is not able to predict the ultimate amount or outcome of any current or future claims which have been or might be asserted relating to the unissued shares.

The Company is continuing its program under which it makes cash payments to people who establish that they satisfy the conditions to receive shares of Travelzoo.com Corporation, and who failed to submit

requests to convert their shares into shares of Travelzoo Inc.

within the required time period.

The accompanying condensed consolidated financial statements include a charge in general and administrative expenses of $11,000 and $22,000 for these

cash payments for the three months and six months ended June 30, 2012.

The total cost of this program is not reliably estimable because it is based on the ultimate number of valid requests received and future levels of the Companys common

stock price, and would be affected by any settlement of the pending unclaimed property reviews referred to above.

The Companys 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 leases office space in Canada, France, Germany, Spain, the U.K., and the U.S.

under operating leases which expire between April 30, 2012 and June 30, 2022.

The future minimum lease payments under these operating leases as of June 30, 2012 total $12.9 million.

The future lease payments consist of $2,388,000 due

in 2012, $3,773,000 due in 2013, $1,897,000 due in 2014, $1,767,000 due in 2015, $1,409,000 due in 2016, and $1,692,000 thereafter.

Local Deals and Getaway merchant payable included in accounts payable was $18.6 million and $16.0 million as of June 30, 2012 and December 31, 2011, respectively.

Stock-Based Compensation

In November 2009, the Company granted employee options to purchase 300,000 shares of common stock with an exercise

price of $14.97, of which 75,000 options vest and become exercisable annually starting July 1, 2011.

The options expire in November 2019.

As of June 30, 2012, 75,000 of these options were vested and 300,000 options were outstanding.

stock-based compensation for the three months ended June 30, 2012 and 2011 was $187,000 for each period.

Total stock-based compensation for the six months ended June 30, 2012 and 2011 was $375,000 for each period As of June 30, 2012,

there was approximately $1.5 million of unrecognized stock-based compensation expense related to outstanding stock options.

This amount is expected to be recognized over 2.0 years.

In January 2012, the Company granted employee options to purchase

100,000 shares of common stock with an exercise price of $28.98, of which 25,000 options become exercisable annually starting January 23, 2013.

The options expire in January 2022.

As of June 30, 2012, none of these options were vested and

100,000 options were outstanding.

Total stock-based compensation for the three months ended June 30, 2012 was $119,000.

Total stock-based compensation for the six months ended June 30, 2012 was $219,000.

As of June 30, 2012, there was

approximately $1.7 million of unrecognized stock-based compensation expense related to outstanding stock options.

This amount is expected to be recognized over 3.6 years.

The Company used a forfeiture rate of 0% as the Company does not have enough

historical forfeiture data to estimate the forfeiture rate.

To the extent the actual forfeiture rate is greater than what we have anticipated, stock-based compensation related to these options will be lower than our expectations.

In determining the quarterly provisions for income taxes, the Company uses an estimated annual effective tax rate which

is generally based on our expected annual income and statutory tax rates in the U.S.

For the six months ended June 30, 2012, the Companys effective tax rate was 35%, treating the $3.0 million accrued expense for unexchanged

merger shares as having no recognizable tax benefits.

For the six months ended June 30, 2011, the Companys effective tax rate was (297)%, treating the $20.0 million expense for the settlement with the State of Delaware as having no

recognizable tax benefits.

United States income and foreign withholding taxes have not been provided on undistributed

earnings for certain non-U.S.

subsidiaries.

The undistributed earnings on a book basis for the non-U.S.

subsidiaries are approximately $1.6 million.

The Company intends to reinvest these earnings indefinitely in its operations outside the U.S.

the undistributed earnings are remitted to the U.S.

these amounts would be taxable in the U.S at the current federal and state tax rates net of foreign tax credits.

Also, depending on the jurisdiction, any distribution may be subject to withholding

taxes at rates applicable for that jurisdiction.

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.

Accruals for legal contingencies were not material as of March 31, 2023 and December 31, 2022.

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 shareholder, Ralph Bartel.

In 2002, Travelzoo.com Corporation (“Netsurfers”) was merged into the Company.

Under and subject to the terms of the merger agreement, holders of promotional shares of Netsurfers who established that they had satisfied certain prerequisite qualifications were allowed a period of 2 years following the effective date of the merger to receive one share of the Company in exchange for each share of common stock of Netsurfers.

In 2004, two years following the effective date of the merger, certain promotional shares remained unexchanged.

As the right to exchange these promotional shares expired, no additional shares were reserved for issuance.

Thereafter, the Company began to offer a voluntary cash program for those who established that they had satisfied certain prerequisite qualifications for Netsurfers promotional shares as further described below.

From 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 shareholders 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 material payments for the three months ended March 31, 2023 and 2022.

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, 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 eight years .

Refer to Note 11 for leases as of March 31, 2023.

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.

The Company has purchase commitments aggregating approximately $ 1.0 million as of March 31, 2023, 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.

In determining the quarterly provisions for income taxes, the Company uses an estimated annual effective tax rate, which is generally based on our expected annual income and statutory tax rates in the U.S., Canada, and the U.K.

The Company's effective tax rate from continuing operations was 27 % and 29 %, respectively, for the three months ended March 31, 2023 and 2022.

The Company’s effective tax rate for the three months ended March 31, 2023 changed from the three months ended March 31, 2022 primarily due to a decrease in non-deductible stock compensation in the three months ended March 31, 2023.

As of March 31, 2023, the Company is permanently reinvested in certain of its non-U.S.

subsidiaries and does not have a deferred tax liability related to its undistributed foreign earnings.

The estimated amount of the unrecognized deferred tax liability attributed to future withholding taxes on dividend distributions of undistributed earnings for certain non-U.S.

subsidiaries, which the Company intends to reinvest the related earnings indefinitely in its operations outside the U.S., is approximately $ 694,000 .

The Company maintains liabilities for uncertain tax positions.

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 June 30, 2012, the Company had

approximately $1.6 million in total unrecognized tax benefits.

Unrecognized tax benefits of approximately $192,000 which, if recognized, would favorably affect the Companys effective income tax rate, and unrecognized tax benefits of

approximately $1.4 million which if recognized, would be recorded in discontinued operations.

The Companys policy is to

include interest and penalties related to unrecognized tax positions in income tax expense.

As of June 30, 2012 and December 31, 2011, the Company had approximately $412,000 and $391,000, respectively, in accrued interest and penalties

related to uncertain tax positions.

The Company is in various stages of multiple year examinations by federal and state taxing authorities.

Although the timing of resolution and/or closure on 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 jurisdiction 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.

As of March 31, 2023, the Company had approximately $ 16.9 million in total unrecognized tax benefits, of which up to $ 16.4 million would favorably affect the Company’s effective income tax rate if realized.

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.

As of March 31, 2023 and December 31, 2022, the Company had approximately $ 746,000 and $ 704,000 in accrued interest and penalties, respectively.

The Company files income tax returns in the U.S.

federal jurisdiction and various states and

foreign jurisdictions.

federal jurisdiction, various U.S.

states and foreign jurisdictions.

The Company is subject to U.S.

federal and certain state tax examinations for years after 2007 and is subject to California tax examinations for years after 2004.

The Company manages its business geographically and has two reportable operating segments:

North America and Europe.

North America consists of the Companys operations in Canada and the U.S.

Europe consists of the Companys operations in France, Germany, Spain, and the U.K.

Management relies on an internal management reporting process that provides revenue and segment operating income (loss) for making financial decisions and allocating resources.

Management believes that

segment revenues and operating income (loss) are appropriate measures of evaluating the operational performance of the Companys segments.

The following is a summary of operating results from continuing operations and assets (in thousands) by business segment:

Three months ended June 30, 2012:

Revenues from unaffiliated customers

Intersegment revenues

Total net revenues

Operating income (loss)

Three months ended June 30, 2011:

Revenues from unaffiliated customers

Intersegment revenues

Total net revenues

Operating income (loss)

Six months ended June 30, 2012:

federal and certain state tax examinations for certain years after 2018 and forward and is subject to California tax examinations for years after 2017.

We do not know what our income taxes will be in future periods.

There may be fluctuations that have a material impact on our results of operations.

Our income taxes are dependent on numerous factors such as the geographic mix of our taxable income, federal and state and foreign country tax law and regulations and changes thereto, the determination of whether valuation allowances for certain tax assets are required or not, audits of prior years' tax returns resulting in adjustments, resolution of uncertain tax positions and different treatment for certain items for tax versus books.

We expect fluctuations in our income taxes from year to year and from quarter to q uarter.

Some of the fluctuations may be significant and have a material impact on our results of operations.

On March 27, 2020, the CARES Act, which, along with earlier issued IRS guidance, provides for deferral of certain taxes.

The CARES Act, among other things, also contains numerous other provisions which may benefit the Company.

We continue to assess the effect of the CARES Act and ongoing government guidance related to the global pandemic that may be issued.

Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated other comprehensive loss (in thousands):

Three Months Ended

Beginning balance $ ( 4,905 ) $ ( 3,793 )

Other comprehensive income (loss) due to foreign currency translation, net of tax 80 ( 138 )

Ending balance $ ( 4,825 ) $ ( 3,931 )

There were no amounts reclassified from accumulated other comprehensive loss for the three months ended March 31, 2023 and 2022.

Accumulated other comprehensive income (loss) consists of foreign currency translation gain or loss.

Stock-Based Compensation and Stock Options

The Company accounts for its employee stock options under the fair value method, which requires stock-based compensation to be estimated using the fair value on the date of grant using an option-pricing model.

The value of the portion of the award that is expected to vest is recognized on a straight-line basis as expense over the related employees’ requisite service periods in the Company’s condensed consolidated stateme nts of operations.

In September 2015, pursuant to an executed Nonqualified Stock 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.

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.

All options granted pursuant to the 2015 Option Agreement and 2017 Option Agreement have been exercised.

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.

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 second quarter of 2020.

In 2021, 800,000 options granted pursuant to the 2015 Option Agreement, 300,000 options granted pursuant to the 2017 Option Agreement and 260,000 options granted pursuant to the 2019 Option Agreement were exercised by Mr.

Bartel, 681,902 shares of common stock were issued as the result of a cashless exercise or net settlement with respect to the option exercise price or taxes which were approved by Travelzoo's Board of Directors.

As of December 31, 2021, stock-based compensation related to the 2019 Option Agreement and applicable Option Agreement Amendment was fully expensed.

Bartel exercised the remaining 540,000 options granted pursuant to the 2019 Option Agreement during the three months ended June 30, 2022 .

The Company received aggregate cash proceeds of $ 1.9 million.

All options granted pursuant to the 2019 Option Agreement have been exercised.

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 in total 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 upo n an employee’s departure, 75,000 options were exercised and 54,258 shares of common stock were issued as the result of a cashless exercise approved by Travelzoo ’ s Board of Directors.

In 2021, 125,000 unvested options were forfeited upon employees’ departure, 150,000 options were exercised and 88,917 shares of common stock were issued as the result of the cashless exercises or net settlement with respect to the option exercise price which were approved by Travelzoo’s Board of Directors.

As of March 31, 2023, 150,000 options were outstanding and 75,000 of these options were vested.

Total stock-based compensation related to these option grants of $ 72,000 and $ 71,000 was recorded in general and administrative expenses for the three months ended March 31, 2023 and 2022.

As of March 31, 2023, there was approximately $ 121,000 of unrecognized stock-based compensation expense relating to these options.

This amount is expected to be recognized over the next 0.4 years.

On May 29, 2020, pursu ant 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.

In 2021, 600,000 options were exercised and 390,809 shares of common stock were issued as the result of the cashless exercises which were approved by Travelzoo’s Board of Directors.

Total stock-based compensation related to these option grants of $ 385,000 was recorded in general and administrative expenses for the three months ended March 31, 2022.

S tock-based compensation related to this grant was fully expensed by the end of the first quarter of 2022.

As of March 31, 2023, 200,000 options were outstanding and all of these options were vested.

On May 29, 2020, pursuant to an execut ed 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.

In 2021, 50,000 options were exercised, and 24,474 shares of common stock were issued as the result of the cashless exercises which were approved by Travelzoo’s Board of Directors.

In 2022, 50,000 unvested options were forfeited upon one employee's departure, 25,000 options were exercised and 4,676 shares of common stock were issued as the result of the cashless exercises or net settlement with respect to the option exercise price which were approved by Travelzoo’s Board of Directors.

As of March 31, 2023, 75,000 options were outstanding and 50,000 of these options were vested.

Total stock-based compensation related to these option grants of $ 25,000 and $ 49,000 was recorded in general and administrative expenses for the three months ended March 31, 2023 and 2022.

As of March 31, 2023, there was approximately $ 98,000 of unrecognized stock-based compensation expense relating to these options.

This amount is expected to be recognized over the next 1 year.

On June 1, 2021, pursuant to an executed Option Agreement, the shareholders of the Company approved the grant of stock options to purchase 50,000 shares of common stock to one employee, with an exercise price of $ 9.44 , with annual vesting starting January 1, 2022 and ending on January 1, 2025.

The options expire in January 2026.

As of March 31, 2023, 50,000 options were outstanding and 25,000 of these options were vested.

Total stock-based compensation related to this option grant of $ 36,000 was recorded in general and administrative expenses for each of the three months ended March 31, 2023 and 2022 .

As of March 31, 2023, there was approximately $ 251,000 of unrecognized stock-based compensation expense relating to these options.

This amount is expected to be recognized over the next 1.8 years.

In March 2022, pursuant to an executed Option Agreement, the Company granted its Global Chief Executive Officer, Holger Bartel, options to purchase 600,000 shares of common stock of the Company, with an exercise price of $ 8.14 and vesting 25 % every six months over two years beginning on June 30, 2022 and ending on December 31, 2023.

The options expire in March 2027.

This grant was approved at the 2022 Annual Meeting of the shareholders.

As of March 31, 2023, 600,000 options were outstanding and 300,000 of these options were vested.

Total stock-based compensation related to this option grant of $ 216,000 was recorded in general and administrative expenses for the three months ended March 31, 2023 .

The Company did not recognize stock-based compensation expense related to this option grant for the three months ended March 31, 2022.

As of March 31, 2023, there was approximately $ 648,000 of unrecognized stock-based compensation expense relating to these options.

This amount is expected to be recognized over 0.8 years.

In June 2022, the Company granted an employee options to purchase 100,000 shares of common stock with an exercise price of $ 6.78 and quarterly vesting beginning on September 30, 2022 and ending on June 30, 2025 with vesting based on both time-based service condition and also performance conditions.

However, if the performance targets are not met as of the first date on which the time condition is met, the time condition may be extended by one quarter up to three times.

The options expire in June 2027.

The Company did not recognize stock-based compensation expense for this grant as the performance targets were not achieved and thus no shares were vested in 2022.

Total stock-based compensation related to this option grant of $ 30,000 was recorded in sales and marketing expenses and thus 8,333 shares were vested for the three months ended March 31, 2023.

As of March 31, 2023, 100,000 options were outstanding.

As of March 31, 2023, there was approximately $ 338,000 of unrecognized stock-based compensation expense relating to these options.

This amount is expected to be recognized over 2.25 years.

In March 2023, the Company granted an employee options to purchase 200,000 shares of common stock of the Company, with an exercise price of $ 4.96 and vesting 12.5 % every six months over four years beginning on June 30, 2023 and ending on December 31, 2026.

This grant is subject to final approval at the Annual Meeting of Stockholders to be held in June 2023.

The options expire in March 2025.

As of March 31, 2023, 200,000 options were outstanding and 25,000 of these options were vested.

Total stock-based compensation related to this option grant of $ 17,000 was recorded in general and administrative expenses for the three months ended March 31, 2023.

As of March 31, 2023, there was approximately $ 539,000 of unrecognized stock-based compensation expense relating to these options.

This amount is expected to be recognized over 3.8 years.

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 June 2022, the Company announced that its Board of Directors approved a stock repurchase program authorizing the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock.

In 2022, the Company repurchased 306,375 shares of common stock for an aggregate purchase price of $ 1.6 million, which were recorded as part of treasury stock as of December 31, 2022.

In the three months ended March 31, 2023, the Company repurchased 34,687 shares of common stock for an aggregate purchase price of $ 186,000 , which were recorded as part of treasury stock as of March 31, 2023.

As of March 31, 2023, there were 658,938 shares remaining to be repurchased under this program .

Segment Reporting and Significant Customer Information

The Company determines its reportable segments based upon the Company ’ s chief operating decision maker managing the performance of the business.

Historically, the Company managed its business geographically and operated in three reportable segments including Asia Pacific, Europe and North America.

During the three months ended March 31, 2020, the Company classified the results of its Asia Pacific segment as discontinued operations in its condensed consolidated financial statements for current and prior periods presented.

On January 13, 2020, Travelzoo agreed to the SPA with the 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.

In 2020, Travelzoo entered into royalty-bearing licensing agreements with local licensees for Australia, Japan, New Zealand, and Singapore.

Travelzoo granted licensees the exclusive use of Travelzoo’s brand, but continuously own the existing members as the licensor.

In March 2022, the Company announced the development of Travelzoo META, a subscription service that intends to provide members with exclusive access to innovative, high quality Metaverse travel experiences.

On December 30, 2022, the Company acquired Metaverse Travel Experiences, Inc., now Metaverse Travel Experiences, LLC (“MTE”), a Metaverse experience scouting business to support Travelzoo META.

The Company ’ s chief operating decision maker viewed licensing and Travelzoo META business as New Initiatives and reviewed and evaluated New Initiatives as a separate segment.

The Company currently has four reportable operating segments:

Travelzoo North America, Travelzoo Europe, Jack’s Flight Club and New Initiatives.

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.

New Initiatives consists of Travelzoo licensing business and Travelzoo META subscription service and scouting business.

Prior periods have been reclassified to conform with the current presentation.

Management relies on an internal management reporting process that provides revenue and segment operating profit (loss) for making financial decisions and allocating resources.

Management believes that segment revenues and operating profit (loss) are appropriate measures of evaluating the operational performance of the Company’s segments.

The following is a summary of operating results by business segment (in thousands):

Three Months Ended March 31, 2023 Travelzoo North

America Travelzoo Europe Jack’s Flight Club New Initiatives Elimination Consolidated

Revenues from unaffiliated customers $ 14,567 $ 6,078 $ 948 $ 8 $ — $ 21,601

Intersegment revenues

Intersegment revenues (expenses) 191 ( 191 ) — — — —

Total net revenues 14,758 5,887 948 8 — 21,601

Operating income (loss)

Six months ended June 30, 2011:

Operating profit (loss) $ 4,516 $ 457 $ ( 45 ) $ ( 217 ) $ — $ 4,711

Three Months Ended March 31, 2022 Travelzoo North

America Travelzoo Europe Jack’s Flight Club New Initiatives Elimination Consolidated

Revenues from unaffiliated customers $ 11,498 $ 6,127 $ 823 $ 5 $ — $ 18,453

Intersegment revenues

Intersegment revenues (expenses) 193 ( 193 ) — — — —

Total net revenues 11,691 5,934 823 5 — 18,453

Operating income (loss)

Amount represents a charge related to unexchanged merger shares of $3.0 million and $20.0 million for the six months ended June 30, 2012 and 2011, respectively.

As of June 30, 2012:

Operating profit (loss) $ 1,820 $ 178 $ 23 $ ( 102 ) $ — $ 1,919

Property and equipment are attributed to the geographic region in which the assets are located.

Revenues from unaffiliated customers excludes intersegment revenues and represents revenue with parties unaffiliated with the Company and its wholly owned subsidiaries.

The following is a summary of assets by business segment (in thousands):

As of March 31, 2023 Travelzoo North

America Travelzoo Europe Jack’s Flight Club New Initiatives Elimination Consolidated

Long-lived assets $ 308 $ 86 $ — $ 298 $ — $ 692

As of December 31, 2011:

Total assets excluding discontinued operations $ 100,683 $ 18,357 $ 19,560 $ 369 $ ( 72,712 ) $ 66,257

As of December 31, 2022 Travelzoo North

America Travelzoo Europe Jack’s Flight Club New Initiatives Elimination Consolidated

Long-lived assets $ 375 $ 86 $ — $ 196 $ — $ 657

Revenue for each segment is recognized based on the customer location within a designated geographic region.

and equipment are attributed to the geographic region in which the assets are located.

For the three and six months ended

June 30, 2012 and 2011, the Company did not have any customers that accounted for 10% or more of revenue.

As of June 30, 2012 and December 31, 2011, the Company did not have any customers that accounted for 10% or more of accounts

The following table sets forth the breakdown of revenues by type and segment for the three and six months ended

June 30, 2012 and 2011.

Travel revenue includes travel publications ( Top 20 , Website , Newsflash , Travelzoo Network) and Getaways vouchers.

Search revenue includes SuperSearch and Fly.com .

revenue includes Local Deals vouchers and Entertainment.

Total assets excluding discontinued operations $ 97,693 $ 19,253 $ 18,737 $ 267 $ ( 68,687 ) $ 67,263

For the three months ended March 31, 2023 and 2022, the Company did not have any customers that accounted for 10% or more of revenue.

As of March 31, 2023 and December 31, 2022, 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, standalone Travelzoo emails , Travelzoo Network ), Getaways vouchers, hotel platform and vacation packages.

Local revenue includes Local Deals vouchers and entertainment offers (vouchers and direct bookings).

Three Months Ended

Six Months Ended

North America

Total North America revenues

Total Europe revenues

Travelzoo North America

Travel $ 14,140 $ 11,045

Local 618 646

Total Travelzoo North America revenues 14,758 11,691

Travelzoo Europe

Travel 5,550 5,624

Local 337 310

Total Travelzoo Europe revenues 5,887 5,934

Jack’s Flight Club

New Initiatives 8 5

Travelzoo Travel 19,690 16,669

Travelzoo Local 955 956

Jack’s Flight Club

New Initiatives 8 5

Total revenues $ 21,601 $ 18,453

Related Party Transactions

In July 2010, the Company entered into an independent contractor agreement with Holger Bartel, the Companys

former Chief Executive Officer, the Companys Chairman and brother of Ralph Bartel, who controls the Company, to provide consulting services.

Fees for these services rendered during the three and six months ended June 30, 2011 totaled

approximately $104,000 and $268,000, respectively.

No consulting services were rendered after September 30, 2011 as effective October 1, 2011, Holger Bartel became a full time employee of Travelzoo Inc.

pursuant to an employment agreement.

On October 31, 2009, the Company completed the sale of its Asia Pacific operating segment to Azzurro Capital Inc.

its wholly owned subsidiaries, Travelzoo (Asia) Limited and Travelzoo Japan K.K.

Azzurro Capital Inc.

is owned and controlled by the Ralph Bartel 2005 Trust, on behalf of itself.

Ralph Bartel, the Companys principal shareholder, is a Director

of the Company and through September 30, 2010 was the Companys Chairman.

Bartel is currently the sole beneficiary of the Ralph Bartel 2005 Trust.

The Companys receivables from Travelzoo (Asia) Limited and Travelzoo Japan

totaled $290,000 and $422,000 as of June 30, 2012 and December 31, 2011, respectively, and were related primarily to fees under a Hosting Agreement and a Referral Agreement entered into in connection with the sale transaction.

$290,000 and $422,000 are part of prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets.

Managements Discussion and Analysis of Financial Condition and Results of Operations

The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,

as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Such statements are based upon current expectations, assumptions, estimates and projections about Travelzoo and our industry.

These forward-looking statements are

subject to the many risks and uncertainties that exist in our operations and business environment that may cause actual results, performance or achievements of Travelzoo to be different from those expected or anticipated in the forward-looking

Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements.

For example, words such as may, will, should, estimates,

predicts, potential, continue, strategy, believes, anticipates, plans, expects, intends, and similar expressions are intended to identify

forward-looking statements.

Travelzoos actual results and the timing of certain events could differ significantly from those anticipated in such forward-looking statements.

Factors that might cause or contribute to such a discrepancy include,

but are not limited to, those discussed elsewhere in this report in the section entitled Risk Factors and the risks discussed in our other SEC filings.

The forward-looking statements included in this report reflect the beliefs of our

management on the date of this report.

Travelzoo undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other circumstances occur in the future.

Travelzoo Inc.

(the Company, or Travelzoo) is a global Internet media company.

We inform over 25 million subscribers in North America, Europe and Asia Pacific, as well as millions of website users, about the best travel and

entertainment deals available from thousands of companies.

Our deal experts source, research and test-book offers, recommending only those that meet Travelzoos rigorous quality standards.

We provide travel companies, entertainment companies

and local businesses with a fast, flexible, and cost-effective way to reach millions of consumers.

Our revenues are generated primarily from advertising fees.

In Asia Pacific, the Travelzoo business is operated by Travelzoo (Asia) Ltd.

Travelzoo Japan K.K.

under a License agreement with Travelzoo Inc.

Our publications and products include the Travelzoo

websites (www.travelzoo.com, www.travelzoo.ca, www.travelzoo.co.uk, www.travelzoo.de, www.travelzoo.es, www.travelzoo.fr, among others), the Travelzoo Top 20 e-mail newsletter, and the Newsflash e-mail alert service.

SuperSearch, a pay-per-click travel search tool, and the Travelzoo Network , a network of third-party websites that list deals published by Travelzoo.

We also operate Fly.com , a travel search engine that allows users to quickly

and easily find the best prices on flights from hundreds of airlines and online travel agencies.

Recently, we launched Local Deals and Getaways , new services that allow our subscribers to purchase vouchers for deals from local

businesses such as spas, hotels and restaurants through the Travelzoo website.

Vouchers are redeemable at the local businesses during the promotional period.

We receive a percentage of the face value of the voucher from the local businesses.

On October 31, 2009, we completed the sale of our Asia Pacific operating segment to Azzurro Capital Inc.

wholly-owned subsidiaries, Travelzoo (Asia) Limited and Travelzoo Japan K.K.

We have not had significant ongoing involvement with the operations of the Asia Pacific operating segment and have not had material economic interests in the Asia Pacific

operating segment since the completion of the sale.

Starting November 1, 2009, the Travelzoo websites in Asia Pacific (cn.travelzoo.com, www.travelzoo.co.jp, www.travelzoo.com.au, www.travelzoo.com.hk, www.travelzoo.com.tw, among

others), the Travelzoo Top 20 e-mail newsletters in Asia Pacific and the Newsflash e-mail alert service in Asia Pacific have been published by Travelzoo (Asia) Limited and Travelzoo Japan K.K., under a license agreement with the

There is a reciprocal revenue-sharing agreement among the entities operating the Travelzoo business in Asia Pacific and the Company related to cross-selling audiences, channels and offers.

More than 2,000 companies use our services, including American Airlines, Avis Rent A Car, British Airways, Harrahs Entertainment,

Expedia, Fairmont Hotels and Resorts, Interstate Hotels & Resorts, JetBlue Airways, Kimpton Hotels, Liberty Travel, Marriott Hotels, Royal Caribbean, Spirit Airlines, Starwood Hotels & Resorts Worldwide, United Airlines, and Virgin

We have two operating segments based on geographic regions:

North America and Europe.

North America consists of our

operations in Canada and the U.S.

Europe consists of our operations in France, Germany, Spain, and the U.K.

For the three months ended June 30, 2012, European operations were 27% of revenues.

Financial information with respect to our business

segments and certain financial information about geographic areas appears in Note 8 to the accompanying consolidated financial statements.

When evaluating the financial condition and operating performance of the Company, management

focuses on financial and non-financial indicators such as growth in the number of subscribers to the Companys newsletters and page views of the homepages of the Travelzoo websites, operating margin, growth in revenues in the absolute

and relative to the growth in reach of the Companys publications measured as revenue per subscriber and revenue per employee as a measure of productivity.

How We Generate Revenue

Our revenues are advertising revenues, consisting

primarily of listing fees paid by travel companies, entertainment companies and local businesses to advertise their offers on Travelzoos media properties.

Listing fees are based on audience reach, placement, number of listings, number of

impressions, number of clicks, number of referrals, or percentage of the face value of vouchers sold.

Insertion orders are typically for periods between one month and twelve months and are not automatically renewed.

Merchant agreements for Local

Deals and Getaway advertisers are typically for the voucher redemption period, which normally is between three months and twelve months and are not automatically renewed.

We have three separate groups of our advertising products;

Search and Local.

Our Travel category of revenue includes the publishing revenue for negotiated high-quality deals from

travel companies, such as hotels, airlines, cruises or car rentals and includes products such as Top 20 , Website, Newsflash, Travelzoo Network as well as Getaways vouchers.

The revenues generated from these products are based

upon a fee for number of e-mails delivered to our audience, a fee for clicks delivered to the advertisers, a fee for placement of the advertising on our website or a fee based on a percentage of the face value of vouchers sold.

We recognize revenue

upon delivery of the e-mails, delivery of the clicks, over the period of placement of the advertising and upon the sale of the vouchers.

Our Search category of revenue includes comparison shopping tools for consumers to quickly and easily compare airfares, hotel and car rental prices and includes SuperSearch and Fly.com

The revenues generated from these products are based upon a fee for clicks delivered to the advertisers or a fee for clicks delivered to advertisers that resulted in revenue for advertisers (i.e.

successful clicks).

We recognize revenue

upon delivery of the clicks or successful clicks.

Our Local category of revenue includes the publishing revenue for

negotiated high-quality deals from local businesses, such as restaurants, spas, shows, and other activities and includes Local Deals vouchers and entertainment offers (vouchers and direct bookings).

The revenues generated from these products

are based upon a percentage of the face value of vouchers or items sold or a fee for clicks delivered to the advertisers.

We recognize revenue upon the sale of the vouchers, when we receive notification of the direct bookings or upon delivery of the

The Company earns a fee for acting as an agent in these transactions which is recorded on a net basis and is included in revenue upon completion of the voucher sale.

Certain merchant contracts in foreign locations allow us to retain fees

related to vouchers sold that are not redeemed by purchasers upon expiration, which we recognize as revenue after the expiration of the redemption period and after there are no further obligations to provide funds to merchants, subscribers or

Trends in Our Business

Our ability to generate revenues in the future depends on numerous factors such as our ability to sell more advertising to existing and new advertisers, our ability to increase our audience reach and

advertising rates and our ability to develop and launch new products.

Our current revenue model depends on advertising fees

paid primarily by travel, entertainment and local companies.

A number of factors can influence whether current and new advertisers decide to advertise their offers with us.

We have been impacted and expect to continue to be impacted by external

factors such as the shift from offline to online advertising, the relative health of the economy, competition and the introduction of new methods of advertising.

For example, the consolidation of the airline industry reduced our revenues generated

from this sector, the introduction of a new voucher-based product offered by competitive companies impacted our ability to sell our existing advertising products, the willingness of certain competitors to grow their business unprofitably and the

economic uncertainty in Europe impacted advertisers willingness to purchase our advertising.

In addition, we have been impacted and expect to continue to be impacted by internal factors such as introduction of new advertising products, hiring

and relying on key employees for the continued maintenance and growth of our business and ensuring our advertising products continue to attract the audience that advertisers desire.

Existing advertisers may shift from one advertising service (e.g.

Top 20 ) to another (e.g.

Local Deals and

These shifts between advertising services by advertisers could result in no incremental revenue or less revenue than in previous periods depending on the amount purchased by the advertisers, and in particular with Local

Deals and Getaways , depending on how many vouchers are purchased by subscribers.

Our ability to continue to generate advertising revenue depends heavily upon our ability to

maintain and grow an attractive audience to reach with our advertising publications.

We monitor our subscribers and page views of our websites to assess our efforts to maintain and grow our audience reach.

We obtain additional subscribers and

activity on our websites by acquiring traffic from internet search companies.

The costs to grow our audience have had, and we expect will continue to have, a significant impact on our financial results and can vary from period to period.

to increase our expenditures on acquiring traffic to continue to grow or maintain our reach of our publications due to competition.

We believe that we can increase our advertising rates only if the reach of our publications increases.

We do not know if we will be able to increase the reach of our publications.

If we are able to

increase the reach of our publications, we still may not be able to or want to increase rates given market conditions such as intense competition in our industry.

We have not had any significant rate increase in recent years due to intense

competition in our industry.

Even if we increase our rates, based upon the increased price this may reduce the amount of advertisers willing to advertise for the increased rates and therefore decrease our revenue.

We do not know what our cost of revenues as a percentage of revenues will be in future periods.

Our cost of revenues will increase if the

number of searches performed on Fly.com increases because we pay a fee based on the number of searches performed on Fly.com .

Our cost of revenues will increase if the face value of vouchers that we sell for Local Deals and

Getaways increases because we have credit card fees based upon face value of vouchers sold, customer service costs related to vouchers sold and subscriber refunds on vouchers sold.

We expect fluctuations of cost of revenues as a percentage of

revenues from quarter to quarter.

Some of the fluctuations may be significant and have a material impact on our results of operations.

We do not know what our sales and marketing expenses as a percentage of revenue will be in future periods.

Increased competition in our industry may require us to increase advertising for our brand and

for our products.

In order to increase the reach of our publications, we have to acquire a significant number of new subscribers in every quarter and continue to promote our brand.

One significant factor that impacts our advertising expenses is the

average cost per acquisition of a new subscriber.

Increases in the average cost of acquiring new subscribers may result in an increase of sales and marketing expenses as a percentage of revenue.

We believe that the average cost per acquisition

depends mainly on the advertising rates which we pay for media buys, our ability to manage our subscriber acquisition efforts successfully, and the degree of competition in our industry.

We may decide to accelerate our subscriber acquisition for

various strategic and tactical reasons and, as a result, increase our marketing expenses.

We may see a unique opportunity for a brand marketing campaign that will result in an increase of marketing expenses.

Further, we expect our strategy to

replicate our business model in selected foreign markets to result in a significant increase in our sales and marketing expenses and have a material adverse impact on our results of operations.

Due to the continued desire to grow our business both

in the North America and Europe we expect relatively high level of sales and marketing expense in the foreseeable future.

We expect fluctuations of sales and marketing expenses as a percentage of revenue from year to year and from quarter to

Some of the fluctuations may be significant and have a material impact on our results of operations.

In July 2012, we announced our intention to increase our marketing expenses by an expected incremental $3 million to $4 million per quarter

for the next six quarters.

We expect this increased marketing expense to spur continued growth in subscribers and revenue;

however, we cannot be assured of this due to the many factors that impact our growth in subscribers and revenue.

We do not know what our general and administrative expenses as a percentage of revenue will be in future periods.

fluctuations that have a material impact on our results of operations.

We expect our headcount to continue to increase in the future.

The Companys headcount is one of the main drivers of general and administrative expenses.

Therefore, we

expect our absolute general and administrative expenses to continue to increase.

We expect our continued expansion into foreign markets to result in a significant additional increase in our general and administrative expenses.

Our general and

administrative expenses as a percentage of revenue may also fluctuate depending on the number of requests received related to a program under which the Company intends to make cash payments to people who establish that they were former stockholders

of Travelzoo.com Corporation, and who failed to submit requests to convert shares into Travelzoo Inc.

within the required time period.

We expect an increase in legal and professional fees due primarily to our defense of legal proceedings and claims

and compliance efforts.

We do not know what our income taxes will be in future periods.

There may be fluctuations that have a

material impact on our results of operations.

Our income taxes are dependent on numerous factors such as the geographic mix of our taxable income, federal and state and foreign country tax law and regulations and changes thereto, the amount of

accumulated net operating loss we have to offset current taxable income, the determination of whether valuation allowances for certain tax

assets are required or not, including our valuation allowance on our European loss carryforwards, audits of prior years tax returns resulting in adjustments, resolution of uncertain tax

positions and different treatment for certain items for tax versus books such as our disposition our Asia business in 2009 or our State of Delaware settlement during 2011.

We expect fluctuations in our income taxes from year to year and from quarter

Some of the fluctuations may be significant and have a material impact on our results of operations.

strategy key elements include building strong brand awareness, increasing reach, maintaining a high-quality user base, increasing the number of advertisers, providing advertisers with excellent service and replicating our business model in foreign

We expect to continue our efforts to grow;

however, we may not grow or we may experience slower growth.

Some recent examples of our efforts to expand our business internationally since our inception from the U.S.

have been expansion to the

in 2005, Canada in 2006, Germany in 2006, France in 2007 and Spain in 2008.

We also have launched new products to grow our revenue such as the introduction of Fly.com in 2009 Local Deals in 2010, Getaways in 2011 as well as

our mobile application launches in 2011.

We believe that we can sell more advertising only if the market for online

advertising continues to grow and if we can maintain or increase our market share.

We believe that the market for advertising continues to shift from offline to online.

We do not know if we will be able to maintain or increase our market share.

do not know if we will be able to increase the number of advertisers in the future.

We do not know if we will have market acceptance of our new products.

Results of Operations

The following table sets forth, as a percentage of

total revenues, the results from our operations for the periods indicated.

Revenue by geography is based on the billing address of the advertiser.

Long-lived assets attributed to the U.S.

and international geographies are based upon the country in which the asset is located or owned.

The following table sets forth revenue for countries that exceed 10% of total revenue (in thousands):

Three Months Ended

Six Months Ended

United States $ 13,473 $ 10,638

United Kingdom 4,962 3,999

Germany 1,495 2,252

Rest of the world 1,671 1,564

Total revenues $ 21,601 $ 18,453

The following table sets forth property and equipment by geographic area (in thousands):

March 31, December 31,

United States $ 201 $ 274

Rest of the world 491 383

Total long-lived assets $ 692 $ 657

Discontinued Operations

On March 10, 2020, Travelzoo issued a press release announcing that it was exiting its loss-making 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.

The Asia Pacific business ceased operations as of March 31, 2020, except for the Company’s Japan and Singapore units, which were held for sale.

The Company has classified Asia Pacific as discontinued operations at March 31, 2020.

Prior periods have been reclassified to conform with the current presentation.

The following table provides a summary of amounts included in discontinued operations for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended

Revenues $ — $ —

Cost of revenues — —

Gross profit — —

Operating expenses:

Sales and marketing — —

Product development — —

General and administrative 1 8

Unexchanged merger shares

Total operating expenses 1 8

Income (loss) from operations

Other income and expenses, net

Loss from operations ( 1 ) ( 8 )

Other income (loss), net ( 1 ) ( 3 )

Income (loss) before income taxes ( 2 ) ( 11 )

Income tax expense — —

Net income (loss) $ ( 2 ) $ ( 11 )

Operating Metrics

The following table sets forth operating metrics in North America and Europe for the three months ended June 30, 2012, and 2011:

Three Months Ended June 30,

North America

Total Subscribers

Page views of homepages of Travelzoo website(2)

Average cost per acquisition of a new subscriber

Revenue per employee (3)

Revenue per subscriber(4)

Total Subscribers

Page views of homepages of Travelzoo websites(2)

Average cost per acquisition of a new subscriber

Revenue per employee (3)

Revenue per subscriber(4)

Total Subscribers(1)

Page views of homepages of Travelzoo websites(2)

Average cost per acquisition of a new subscriber

Revenue per employee (3)

Revenue per subscriber(4)

In Asia Pacific, the Travelzoo business is operated by Travelzoo (Asia) Ltd.

and Travelzoo Japan K.K.

under a license agreement with Travelzoo Inc.

subscriber amounts exclude Asia Pacific subscribers of 3,400,000 and 3,100,000 for the three months ended June 30, 2012 and 2011, respectively.

The comparability of year-over-year changes of page views of the homepages of Travelzoo websites may be limited due to the design and navigation of the websites.

Annualized revenue divided by number of employees at the end of the quarter.

Annualized revenue divided by number of subscribers at the beginning of the year.

following table sets forth the breakdown of revenues by type and segment for the three and six months ended June 30, 2012 and 2011.

Travel revenue includes travel publications ( Top 20 , Website , Newsflash , Travelzoo

Network ) and Getaways vouchers.

Search revenue includes SuperSearch and Fly.com .

Local revenue includes Local Deals vouchers and Entertainment.

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 Mr.

Hajime Suzuki (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 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.

An interest free loan was provided to the Japan Buyer for JPY 46.0 million (approximately 46.0 million) to be repaid over 3 years.

The Japan Buyer repaid $ 133,000 , $ 39,000 was repaid during the three months ended March 31, 2023, and the remaining expected to be paid off in 2023.

The Company recorded this loan as short-term prepaid expense and other on the consolidated balance sheet as of March 31, 2023.

The Company records royalties for its licensing arrangements on a one-quarter lag basis.

The Company did not recognize royalties for the three months ended March 31, 2023 and 2022.

On August 24, 2020, the Company completed a sale of 100 % of the outstanding capital stock of Travelzoo Singapore, to an unaffiliated entity, Finest Hotels Pty Ltd d/b/a Travelzoo (“AUS Buyer”), which is fully owned by Mr.

Julian Rembrandt, the former General Manager of Southeast Asia and Australia of the Company 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 revenue over a 5 year term, with an option to renew.

The non-exclusive license in China and Hong Kong was terminated by Travelzoo.

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 records royalties for its licensing arrangements on a one-quarter lag basis.

The Company recorded $ 8,000 and $ 5,000 in licensing revenue from the licensee in Australia, New Zealand, and Singapore for the three months ended March 31, 2023 and 2022, respectively.

The following table presents information related to the major classes of assets and liabilities that were classified as assets and liabilities from discontinued operations in the Condensed Consolidated Balance Sheets (in thousands):

2023 December 31,

Cash, cash equivalents and restricted cash $ 9 $ 10

Accounts receivable, net — —

Prepaid expenses and other 1 1

Total assets from discontinued operations $ 10 $ 11

Accounts payable $ 404 $ 403

Accrued expenses and other 14 13

Income tax payable 24 24

Deferred revenue 11 12

Total liabilities from discontinued operations $ 453 $ 452

The net cash used in operating activities for the discontinued operations for the three months ended March 31, 2023 and 2022, were as follows (in thousands):

Three Months Ended

Six Months Ended

North America

Total North America revenues

Total Europe revenues

Total revenues

North America

North America revenues increased $1.1 million for the three months ended June 30, 2012 from the three months ended June 30, 2011.

This increase was primarily due to growth of Local revenues.

increase in Local revenue of $1.1 million was primarily due to the increased number of Local Deals sold.

North America

revenues increased $2.2 million for the six months ended June 30, 2012 from the six months ended June 30, 2011.

This increase was primarily due to growth of Local revenues offset by a decrease in Search revenue.

The increase in Local

revenue of $2.6 million was primarily due to the increased number of Local Deals sold.

The decrease in Search revenue of $320,000 was primarily due to the decreased number of clicks that generate revenue as a result of decreased spending on

traffic acquisition.

Europe revenues increased $671,000 for the three months ended June 30, 2012 from the three months ended June 30, 2011.

This increase was primarily due to growth of Local and Travel revenues,

offset by a decrease in Search revenue.

The increase in Travel revenue of $543,000 was primarily due to an increase in revenue from Getaways due to increased number of Getaways sold.

The increase in Local revenue of $454,000 was

primarily due to the increased number of Local Deals sold.

The decrease in Search revenue of $326,000 was primarily due to the decreased number of clicks that generate revenue as a result of decreased spending on traffic acquisition.

Europe revenues increased $2.0 million for the six months ended June 30, 2012 from the six months ended June 30,

This increase was primarily due to growth of Local and Travel revenues.

The increase in Local revenue of $1.4 million was primarily due to the increased number of Local Deals sold.

The increase in Travel revenue of $604,000 was

primarily due to an increase in revenue from Getaways due to increased number of Getaways sold.

For the three

and six months ended June 30, 2012 and June 30, 2011, none of our customers accounted for 10% or more of our revenue.

Foreign currency movements relative to the U.S.

dollar negatively impacted our revenues from our operations in Europe by approximately

$606,000 for the three months ended June 30, 2012.

Foreign currency movements relative to the U.S.

dollar positively impacted our revenues from our operations in Europe by approximately $958,000 for the three months ended June 30, 2011.

Foreign currency movements relative to the U.S.

dollar negatively impacted our revenues from our operations in Europe by

approximately $883,000 for the six months ended June 30, 2012.

Foreign currency movements relative to the U.S.

dollar positively impacted our revenues from our operations in Europe by approximately $1.1 million for the six months ended

June 30, 2011

Cost of Revenues

Cost of revenues consists primarily of network expenses, including fees we pay for co-location services and depreciation and maintenance of network equipment, payments made to third-party partners of the

Travelzoo Network , fees we pay related to user searches on Fly.com , amortization of capitalized website development costs, credit card fees, certain estimated subscriber refunds and customer service costs associated with vouchers we

sell, and salary expenses associated with network operations and customer service staff.

Cost of revenues was $3.6 million and $2.9 million for the three months ended June 30, 2012 and 2011, respectively.

Cost of revenues was $7.7 million and

$5.4 million for the six months ended June 30, 2012 and 2011, respectively.

Cost of revenue increased $690,000 for the

three months ended June 30, 2012 from the three months ended June 30, 2011.

This increase was primarily due to an increase in Local Deals and Getaways costs including $547,000 in credit card fees, offset by a $172,000

decrease in subscriber refunds.

In addition, there was an increase of $193,000 in payments made to third-party partners of the Travelzoo Network .

Cost of revenue increased $2.3 million for the six months ended June 30, 2012 from the three months ended June 30, 2011.

This increase was primarily due to an increase in Local Deals and

Getaways costs including $405,000 in subscriber refunds and $910,000 in credit card fees, a $327,000 increase in salary and employee related expenses due primarily to an increase in customer service headcount.

In addition, there was an

increase of $370,000 in payments made to third-party partners of the Travelzoo Network .

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of advertising and promotional expenses, salary expenses associated with sales, marketing

and production staff, expenses related to our participation in industry conferences, and public relations expenses.

Sales and marketing expenses was $16.1 million and $18.7 million for the three months ended June 30, 2012 and June 30,

2011, respectively.

For the three months ended June 30, 2012 and 2011, advertising expenses accounted for 42% and 55%, respectively, of total sales and marketing expenses and consisted primarily of online advertising referred to as traffic

acquisition cost and subscriber acquisition costs.

The goal of our advertising was to acquire new subscribers for our e-mail products, increase the traffic to our websites, and increased brand awareness.

Sales and marketing expenses was $32.3 million and $34.8 million for the six months ended June 30, 2012 and June 30, 2011,

respectively.

For the six months ended June 30, 2012 and 2011, advertising expenses accounted for 42% and 54%, respectively, of total sales and marketing expenses.

Sales and marketing expenses decreased $2.6 million for the three months ended June 30, 2012 from the three months ended June 30, 2011.

The decrease was primarily due to a $2.0 million dollar

decrease in television advertising expense, and a $1.4 million decrease in subscriber acquisition costs, offset by a $966,000 increase in salary and employee related expenses due primarily to an increase in headcount.

Despite reduced subscriber

acquisition spending, we believe we continued to add new subscribers due to factors such as our website requiring visitors to subscribe in order to be able to view most deals and the traffic associated with Local Deals and Getaways .

Sales and marketing expenses decreased $2.5 million for the six months ended June 30, 2012 from the six months ended

June 30, 2011.

The decrease was primarily due to a $4.0 million decrease in subscriber acquisition costs and a $2.0 million dollar decrease in television advertising expense, offset by a $2.5 million increase in salary and employee related

expenses due primarily to an increase in headcount, and a $766,000 increase in Search traffic acquisition costs.

Despite reduced subscriber acquisition spending, we believe we continued to add new subscribers due to factors such as our website

requiring visitors to subscribe in order to be able to view most deals and the traffic associated with Local Deals and Getaways .

General and Administrative

General and administrative expenses consist primarily of compensation for administrative, executive, and software development staff, fees for professional services, rent, bad debt expense, amortization of

intangible assets, and general office expense.

General and administrative expenses were $9.3 million and $8.3 million for the three months ended June 30, 2012 and June 30, 2011, respectively.

General and administrative expenses were $18.7

million and $16.7 million for the six months ended June 30, 2012 and June 30, 2011, respectively.

General and administrative expenses increased $1.0 million for the three months ended

June 30, 2012 from the three months ended June 30, 2011.

The increase was primarily due to a $492,000 increase in salary and employee related expenses due primarily to an increase in headcount, and a $348,000 increase in professional

services expense.

General and administrative expenses increased $2.1 million for the six months ended June 30, 2012 from

the six months ended June 30, 2011.

The increase was primarily due to a $1.1 million increase in salary and employee related expenses due primarily to an increase in headcount, and a $449,000 increase in professional services expense.

Unexchanged Merger Shares

On April 21, 2011, the Company entered into an agreement with the State of Delaware resolving all claims relating to a previously-announced unclaimed property review.

The primary issue raised in the

preliminary findings from the review, received by the Company on April 12, 2011, concerned the shares of Travelzoo which have not been claimed by former shareholders of Travelzoo.com Corporation following a 2002 merger, as previously disclosed

in the companys report on Form 10-K.

In the preliminary findings under the unclaimed property review, up to 3.0 million shares were identified as demandable under Delaware escheat laws.

While the Company continues to take the

position that such shares were a promotional incentive and were issuable only to persons who establish their eligibility as shareholders, the Company determined that it was in its best interest to promptly resolve all claims relating to the

unclaimed property review.

Under the terms of the agreement, the Company made a $20.0 million cash payment to the State of Delaware on April 27, 2011 and received a complete release of those claims.

The $20.0 million payment was recorded as an

expense in the three months ended March 31, 2011.

During March 2012, the Company has become subject to unclaimed

property reviews by most of the other states in the U.S.

that relate primarily to the unexchanged merger share, which were not covered by the settlement and release by the State of Delaware.

During the three months ended March 31, 2012, the

Company recorded a $3 million charge related to this unexchanged merger share contingency.

While the Company believes it has meritorious defenses regarding the applicability of escheat rights related to this unexchanged merger share contingency, the

ultimate resolution of this matter may take longer than one year to resolve.

If the claims for all of the additional shares referred to in the preliminary findings were upheld in full, based on the closing price of the Companys shares at the

end of June 2012, the cost to the Company would be approximately $22.2 million in excess of the amount accrued, plus any interest or penalties which might be applicable.

However, the Company is not able to predict the ultimate amount or outcome of

any current or future claims which have been or might be asserted relating to the unissued shares.

See Note 1 to the

consolidated financial statements for further information on the unexchanged merger share contingency.

Our income is generally taxed in the U.S., Canada and our income tax provisions reflect federal, state and country statutory rates

applicable to our levels of income, adjusted to take into account expenses that are treated as having no recognizable tax benefit.

Income tax expense was $3.1 million and $2.8 million for the three months ended June 30, 2012 and 2011,

respectively.

Our effective tax rate was 30% and 36% for the three months ended June 30, 2012 and 2011, respectively.

Income tax expense was $6.0 million and $6.8 million for the six months ended June 30, 2012 and 2011, respectively.

effective tax rate was 35% and (297)% for the six months ended June 30, 2012 and 2011, respectively.

Our effective tax

rate increased for the six months ended June 30, 2012 from the three months ended June 30, 2011 due primarily to the $20.0 million expense for the settlement with the State of Delaware that was treated as having no recognizable tax

benefits in the six months ended June 30, 2011.

For the six months ended June 30, 2012, the $3.0 million accrued expense for unexchanged merger shares was treated as having no recognizable tax benefit.

We expect that our effective tax rate in

future periods may fluctuate depending on the total amount of expenses representing payments to former stockholders, losses or gains incurred by our operations in Canada and Europe, the use of accumulated losses to offset current taxable income and

need for valuation allowances on certain tax assets, if any.

United States income and foreign withholding taxes have not been

provided on undistributed earnings for certain non-U.S.

subsidiaries.

The undistributed earnings on a book basis for the non-U.S.

subsidiaries are approximately $1.6 million.

The Company intends to reinvest these earnings indefinitely in its

operations outside the U.S.

If the undistributed earnings are remitted to the U.S.

these amounts would be taxable in the U.S at the current federal and state tax rates net of foreign tax credits.

Also, depending on the jurisdiction, any distribution

may be subject to withholding taxes at rates applicable for that jurisdiction.

We file income tax returns in the U.S.

federal jurisdiction and various states and

foreign jurisdictions.

We are subject to U.S.

federal and certain state tax examinations for years after 2007 and are subject to California tax examinations for years after 2004.

We are under examination by federal and state taxing authorities.

We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, although we cannot assure you that this will be the case given the inherent uncertainties in these examinations.

ongoing tax examinations, we believe it is impractical to determine the amount and timing of these adjustments.

North America

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

Income (loss) from operations

Income (loss) from operations as a % of revenues

North America net revenues increased $1.2 million for the three months ended June 30, 2012 from

the three months ended June 30, 2011 (see Revenues above).

North America expenses decreased $72,000 for the three months ended June 30, 2012 from the three months ended June 30, 2011.

This decrease was primarily due

to a $2.0 million dollar decrease in television advertising expense and a $509,000 decrease in subscriber acquisition cost, offset by a $1.1 million increase in salary and employee related expense due in part to a head count increase, a $484,000

increase in cost of revenue primarily related to Local Deals and Getaways credit card fees, a $340,000 increase in professional services expense, a $275,000 increase in rent, office and insurance expense and a $163,000 increase in

Search traffic acquisition costs.

North America net revenues increased $2.4 million for the six months ended

June 30, 2012 from the six months ended June 30, 2011 (see Revenues above).

North America expenses increased $1.1 million for the six months ended June 30, 2012 from the six months ended June 30, 2011.

increase was primarily due to a $2.8 million increase in salary and employee related expense due in part to a head count increase and a $1.7 million increase in cost of revenue primarily related to Local Deals and Getaways credit card

fees, customer service and certain subscriber refunds, offset by a $2.0 million dollar decrease in television advertising expense and a $1.7 million decrease in subscriber acquisition cost.

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

Income (loss) from operations

Income (loss) from operations as a % of revenues

Europe net revenues increased $635,000 for the three months ended June 30, 2012 from the three

months ended June 30, 2011 (see Revenues above).

Europe expenses decreased $814,000 for the three months ended June 30, 2012 from the three months ended June 30, 2011.

This decrease was primarily due to a $917,000 decrease

in subscriber acquisition cost.

Foreign currency movements relative to the U.S.

dollar negatively impacted our income from our operations in Europe by approximately $48,000 for the three months ended June 30, 2012.

Foreign currency movements

relative to the U.S.

dollar positively impacted our income from our operations in Europe by approximately $52,000 for the three months ended June 30, 2011.

Europe net revenues increased $2.0 million for the six months ended June 30, 2012 from the six months ended June 30, 2011 (see Revenues above).

Europe expenses decreased $2.0

million for the six months ended June 30, 2012 from the six months ended June 30, 2011.

This decrease was primarily due to a $2.3 million decrease in subscriber acquisition cost, offset by a $921,000 increase in salary and employee related

expense due in part to a head count increase.

Foreign currency movements relative to the U.S.

dollar negatively impacted our income from our operations in Europe by approximately $119,000 for the six months ended June 30, 2012.

Foreign currency

movements relative to the U.S.

dollar positively impacted our income from our operations in Europe by approximately $128,000 for the six months ended June 30, 2011.

Liquidity and Capital Resources

As of June 30, 2012, we had $54.2 million in cash and cash equivalents, of which $25.7 million was held outside the U.S.

of our foreign operations.

If these assets were distributed to the U.S., we may be subject to additional U.S.

taxes in certain circumstances.

Cash and cash equivalents increased from $38.7 million as of December 31, 2011 primarily as

a result of cash provided by operating, offset by cash used in investing activities as explained below.

We expect that cash on hand will be sufficient to provide for working capital needs for at least the next 12 months.

Six Months Ended June 30,

(In thousands)

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net cash provided by in operating activities is net income adjusted for certain non-cash items and

changes in assets and liabilities.

Net cash provided by operating activities for the six months ended June 30, 2012 increased by $17.4 million compared to the six months ended June 30, 2011.

The $17.4 million increase in cash provided by

operating activities was due primarily to a $20.0 million increase in net income, a $3.5 million increase in income tax receivable, offset by a $5.1 million decrease in accounts payable and a $1.9 million decrease in accrued expenses.

million increase in net income was primarily due to a $17.0 million decrease in expenses related to unexchanged merger shares.

Net cash used in investing activities was $1.3 million for the six months ended June 30, 2012 compared to $1.1 million for the six

months ended June 30, 2101.

The $216,000 increase in cash used in investing activities was due primarily to a $216,000 increase in purchases of property and equipment.

Net cash provided by financing activities was zero for the six months ended June 30, 2012 compared to net cash provided by financing activities of $308,000 for the six months ended June 30,

For the six months ended June 30, 2011, net cash provided by financing activities was due to proceeds from the exercise of stock options and the excess tax benefit from exercise of stock options.

On April 21, 2011, the Company entered into an agreement which required a $20.0 million cash payment to the State of Delaware

resolving all claims relating to the State of Delawares unclaimed property review, which related primarily to unexchanged merger share contingency.

During June 2012, the Company has become subject to unclaimed property reviews by most of the

other states in the U.S.

that relate primarily to the unexchanged merger share, which were not covered by the settlement and release by the State of Delaware.

During the six months ended June 30, 2012, the Company recorded a $3.0 million charge

related to this unexchanged merger share contingency.

While the Company believes it has meritorious defenses regarding the applicability of escheat rights related to this unexchanged merger share contingency, the ultimate resolution of this matter

may take longer than one year to resolve.

If the claims for all of the additional shares referred to in the preliminary findings were upheld in full, based on the closing price of the Companys shares at the end of June 2012, the cost to the

Company would be approximately $22.2 million in excess of the amount accrued, plus any interest or penalties which might be applicable.

However, the Company is not able to predict the ultimate amount or outcome of any current or future claims which

have been or might be asserted relating to the unissued shares.

The Company is not able to predict the amount or outcome of

any future claims which might be asserted related to the unissued shares.

The Company is continuing its program under which it makes cash payments to people who establish that they satisfy the condition to receive shares of Travelzoo.com

Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo Inc.

within the required time period.

See Note 1 to the accompanying financial statements for further details.

In July 2012, the Company announced a stock repurchase program authorizing the repurchase of up to 1,000,000 shares of the Companys

outstanding common stock.

Our capital requirements depend on a number of factors, including market acceptance of our

products and services, the amount of our resources we devote to the development of new products, cash payments to former stockholders of Travelzoo.com Corporation, expansion of our operations, and the amount of resources we devote to promoting

awareness of the Travelzoo and Fly.com brands.

Since the inception of the program under which we make cash payments to people who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit

requests to convert their shares into shares of Travelzoo Inc.

within the required time period, we have incurred expenses of $2.9 million.

While future payments for this program are expected to decrease, the total cost of this program is still

undeterminable because it is dependent on our stock price and on the number of valid requests ultimately received.

with our growth, we have experienced substantial increases in our cost of revenues, sales and marketing expenses and our general and administrative expenses, and we anticipate that these increases will continue for the foreseeable future.

cash on hand will be sufficient to pay such costs for at least the next twelve months.

In addition, we will continue to evaluate possible investments in businesses, products and technologies, the consummation of any of which would increase our

capital requirements.

Although we currently believe that we have sufficient capital resources to meet our anticipated working

capital and capital expenditure requirements for at least the next 12 months, unanticipated events and opportunities or a less favorable than expected development of our business in Europe may require us to sell additional equity or debt securities

or establish new credit facilities to raise capital in order to meet our capital requirements.

If we sell additional equity

or convertible debt securities, the sale could dilute the ownership of our existing stockholders.

If we issue debt securities or establish a new credit facility, our fixed obligations could increase, and we may be required to agree to operating

covenants that would restrict our operations.

We cannot be sure that any such financing will be available in amounts or on terms acceptable to us.

If the development of our business is less favorable than expected, we may decide to significantly reduce the size of our operations and marketing expenses in certain markets with the objective of

reducing cash outflow.

The information set forth under Note 5 Commitments and Contingencies to the

condensed consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference.

Litigation and claims against the Company may result in legal defense costs, settlements or judgments that could have a

material impact on our financial condition.

The following summarizes our principal contractual commitments as of

June 30, 2012 (in thousands):

Operating leases

Purchase obligations

Total commitments

We also have contingencies related to net unrecognized tax benefits of approximately $1.6 million as of

June 30, 2012.

We are unable to make reasonably reliable estimates on the timing of the cash settlements with the respective taxing authorities.

Critical Accounting Policies

We believe that there are a number of

accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving managements judgments and estimates.

significant accounting policies relate to revenue recognition, reserve for subscriber refunds, allowance for doubtful accounts, income tax and loss contingencies.

These policies, and our procedures related to these policies, are described in detail

Revenue Recognition

We recognize revenue on arrangements in accordance with the SEC Staff Accounting Bulletin for revenue recognition.

We recognize advertising revenues in the period in which the advertisement is displayed,

provided that evidence of an arrangement exists, the fees are fixed or determinable and collection of the resulting receivable is reasonably assured.

Effective January 1, 2011, we adopted ASU 2009-13.

The adoption of this new accounting

standard had no material impact on the Companys consolidated results of operations.

If fixed-fee advertising is displayed over a term greater than one month, revenues are recognized ratably over the period as described below.

The majority of

insertion orders have terms that begin

and end in a quarterly reporting period.

In the cases where at the end of a quarterly reporting period the term of an insertion order is not complete, the Company allocates the total arrangement

fee to each element based on the relative estimated selling price of each element.

The Company uses prices stated on its internal rate card, which represents stand-alone sales prices, to establish estimated selling prices.

The stand-alone price is

the price that would be charged if the advertiser purchased only the individual insertion.

Fees for variable-fee advertising arrangements are recognized based on the number of impressions displayed, number of clicks delivered, or number of referrals

generated during the period.

Under these policies, no revenue is recognized unless persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is deemed reasonably assured.

evaluates each of these criteria as follows:

Evidence of an arrangement.

We consider an insertion order signed by the advertiser or its agency to be evidence of an arrangement.

Delivery is considered to occur when the advertising has been displayed and, if applicable, the click-throughs have been

Fixed or determinable fee.

We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment

terms are standard.

Collection is deemed reasonably assured.

We conduct a credit review for all transactions at the time of the arrangement to determine the

creditworthiness of the advertiser.

Collection is deemed reasonably assured if we expect that the advertiser will be able to pay amounts under the arrangement as payments become due.

If we determine that collection is not reasonably assured, then we

defer the revenue and recognize the revenue upon cash collection.

Collection is deemed not reasonably assured when a advertiser is perceived to be in financial distress, which may be evidenced by weak industry conditions, a bankruptcy filing, or

previously billed amounts that are past due.

Revenues from advertising sold to advertisers through agencies

are reported at the net amount billed to the agency.

The Company started selling vouchers for Local Deals in third

quarter 2010 and Getaways in second quarter 2011, from local businesses such as spas, hotels and restaurants.

The Company earns a fee for acting as an agent in these transactions which is recorded on a net basis and is included in revenue

upon completion of the voucher sale.

Certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon expiration, which we recognize as revenue after the expiration of the

redemption period and after there are no further obligations to provide funds to merchants, subscribers or others.

Reserve for Subscriber

We record an estimated reserve for subscriber refunds based on our historical experience at the time revenue is

recorded for Local Deals and Getaways voucher sales.

We accrue costs associated with refunds in accrued expenses on the consolidated balance sheets.

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.

Should any of these factors change, the estimates made by management

will also change, which could impact the level of our future reserves for subscriber refunds.

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 subscribers, additional reserves for subscriber refunds may be required.

Estimated subscriber refunds that are determined to be recoverable from the merchant are recorded in the consolidated statements of

operations as a reduction to revenue.

Estimated subscriber refunds that are determined not to be recoverable from the merchant, are presented as a cost of revenue.

If our judgments regarding estimated subscriber refunds are inaccurate, reported

results of operations could differ from the amount we previously accrued.

Allowance for Doubtful Accounts

We record a provision for doubtful accounts based on our 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, our historical write-offs, the creditworthiness of the advertiser, the economic conditions of

the advertisers 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 our 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.

We are subject to income taxes in the U.S.

and numerous foreign jurisdictions.

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes.

Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different.

We adjust these reserves in light of changing facts and circumstances, such

as the 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.

Our effective tax rates have differed from the statutory rate primarily due to the tax impact of foreign operations, state taxes, certain

benefits realized related to stock option activities, research and experimentation tax credits, the extent that our earnings are indefinitely reinvested outside the U.S.

and tax asset valuation allowance determinations including on certain loss

carryforwards.

For the six months ended June 30, 2012 and 2011, our effective tax rates were 35% and (297)%, respectively.

Our future effective tax rates could be materially impacted by earnings being lower than anticipated in countries where

we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, changes in the deferred tax assets or liabilities, changes in tax asset valuation allowance determinations including our valuation allowance

on our European loss carryforwards, changes in our judgment about whether certain foreign earnings are indefinitely reinvested outside the U.S., or changes in tax laws, regulations, and accounting principles.

In addition, we are subject to the

continuous examination of our income tax returns by the IRS and other tax authorities.

We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Loss Contingencies

are involved in claims, suits, and proceedings arising from the ordinary course of our business.

We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably

Significant judgment is required to determine both probability and the estimated amount.

Such claim proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control.

Should any of

these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows.

We have several known loss contingencies such as our liability to former

stockholders of Travelzoo.com Corporation that may be realized as a result of our cash program for these claimants, State unclaimed property claims or otherwise and several lawsuits, both class actions and derivative suits.

Please refer to

Note 5 to the consolidated financial statements for further details about our loss contingencies.

Investing in our common stock involves a high degree of risk.

Any or all of the risks listed below as well as other variables affecting

our operating results could have a material adverse effect on our business, our quarterly and annual operating results or financial condition, which could cause the market price of our stock to decline or cause substantial volatility in our stock

price, in which event the value of your common stock could decline.

You should also keep these risk factors in mind when you read forward-looking statements.

Risks Related to Our Financial Condition and Business Model

We cannot assure you

that we will be profitable.

For the six months ended June 30, 2012, we generated a net income of $11.0 million.

For the six months ended June 30, 2011, we incurred a net loss of $9.0 million.

In the year ended December 31, 2010 and 2011, we generated a net income of $13.2 million and $3.3 million.

Although we were profitable in 2011 and 2010, there

is no assurance that we will continue to be profitable in the future.

We forecast our future expense levels based on our operating plans and our estimates of future revenues.

We may find it necessary to significantly accelerate expenditures relating

to our sales and marketing efforts or otherwise increase our financial commitment to creating and maintaining brand awareness among Internet users and advertisers.

If our revenues grow at a slower rate than we anticipate, or if our spending levels

exceed our expectations or cannot be adjusted to reflect slower revenue growth, we may not generate sufficient revenues to be profitable.

Any of these developments could result in a significant decrease in the trading price of our common stock.

Fluctuations in our operating results may negatively impact our stock price.

Our quarterly and annual operating results may fluctuate significantly in the future due to a variety of factors that could affect our

revenues or our expenses in any particular period.

You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance.

Factors that may affect our quarterly results include:

mismatches between resource allocation and client demand due to difficulties in predicting client demand in a new market;

changes in general economic conditions that could affect marketing efforts generally and online marketing efforts in particular;

the magnitude and timing of marketing initiatives, including our acquisition of new subscribers and our expansion efforts in other regions;

the introduction, development, timing, competitive pricing and market acceptance of our products and services and those of our competitors;

our ability to attract and retain key personnel;

our ability to manage our anticipated growth and expansion;

our ability to attract traffic to our websites;

technical difficulties or system downtime affecting the Internet generally or the operation of our products and services specifically;

payments which we may make to previous stockholders of Travelzoo.com Corporation who failed to submit requests for shares in Travelzoo Inc.

required time period, or escheat claims related to shares not issued in the Companys merger with Travelzoo.com Corporation;

volatility of our operating results in new markets.

We may significantly increase our operating expenses related to advertising campaigns for the Travelzoo and Fly.com brands for a certain period if we see a unique opportunity for a brand

marketing campaign, if we find it necessary to respond to increased brand marketing by a competitor, or if we decide to accelerate our acquisition of new subscribers.

If revenues fall below our expectations in any quarter and we are unable to quickly reduce our operating expenses in response, our operating results would be lower than expected and our stock price may

Our expansion of our product offering to include Local Deals and Getaways formats may result in additional

costs that exceed revenue and may trigger additional stock volatility.

During the third quarter of 2010, we launched

our Local Deals format of advertising and during the second quarter of 2010, we launched our Getaways format of advertising, under which we sell vouchers directly to consumers to advertise promotional deals provided by merchants.

example, a consumer could buy a voucher for $99 for a dinner for two at a merchants restaurant that would normally be valued at $199, representing a promotional value of $100 to the consumer.

This format involves several aspects that are new

to us, and will require investments to maintain and grow the business including additional sales force hiring, building a customer service organization, marketing, technology tracking systems and payment processing.

This format, introduced to the

market in recent years, has resulted in many competitors entering the marketplace, thereby creating a very competitive marketplace.

This competitive landscape along with the required investments to start, maintain and grow this format create a risk

that our costs may exceed our revenues in the short and long term, which may materially impact our results of operation and financial condition.

Operating this format may introduce additional volatility to our stock price due to the performance of

this format by the Company and/or the overall market valuations that are being determined by the market for companies operating this format of advertising.

Our business model may not be adaptable to a changing market.

current revenue model depends primarily on advertising fees paid by travel and entertainment companies.

If current clients decide not to continue advertising their offers with us and we are unable to replace them with new clients, our business may

be adversely affected.

To be successful, we must provide online marketing solutions that achieve broad market acceptance by travel and entertainment companies.

In addition, we must attract sufficient Internet users with attractive demographic

characteristics to our products.

It is possible that we will be required to further adapt our business model in response to changes in the online advertising market or if our current business model is not successful.

If we are not able to anticipate

changes in the online advertising market or if our business model is not successful, our business could be materially adversely affected.

If we fail to retain existing advertisers or add new advertisers, our revenue and business will be

We depend on our ability to attract and retain advertisers (hotels, spas, restaurants, vacation packagers,

airlines, etc.) that are prepared to offer products or services on compelling terms to our subscribers.

We do not have long-term arrangements to guarantee the availability of deals that offer attractive quality, value and variety to consumers or

favorable payment terms to us.

We must continue to attract and retain advertisers in order to increase revenue and maintain profitability.

If new advertisers do not find our marketing and promotional services effective, or if existing advertisers do

not believe that utilizing our products provides them with a long-term increase in customers, revenue or profit, they may stop making offers through our marketplace.

In addition, we may experience attrition in our advertisers in the ordinary course

of business resulting from several factors, including losses to competitors and advertiser closures or bankruptcies.

If we are unable to attract new advertisers in numbers sufficient to grow our business, or if too many advertisers are unwilling to

offer products or services with compelling terms to our subscribers or offer favorable payment terms to us, we may sell less advertising, and our operating results will be adversely affected.

Our existing advertisers may shift from one advertising service to another, which may adversely affect our revenue.

Existing advertisers may shift from one advertising service (e.g.

Top 20 ) to another (e.g.

Local Deals and Getaways ).

These shifts between advertising services by advertisers could

result in no incremental revenue or less revenue than in previous periods depending on the amount purchased by the advertisers, and in particular with Local Deals and Getaways , depending on how many vouchers are purchased by

An increase in our refund rates related to our Local Deals and Getaways could reduce our liquidity and profitability.

We provide refunds related to our Local Deals and Getaways voucher sales.

As we increase our revenue,

our refund rates may exceed our historical levels.

A downturn in general economic conditions may also increase our refund rates.

An increase in our refund rates could significantly reduce our liquidity and profitability.

As we do not have control over our merchants and the quality of products or services they deliver, we rely on a combination of our

historical experience with our merchants over time and the type of refunds provided for development of our estimate for refund claims.

Our actual level of refund claims could prove to be greater than the level of refund claims we estimate.

refund reserves are not adequate to cover future refund claims, this inadequacy could have a material adverse effect on our liquidity and profitability.

Our standard agreements with our merchants generally limit the time period during which we may seek reimbursement for subscriber refunds or claims.

Our subscribers may make claims for refunds with respect

to which we are unable to seek reimbursement from our merchants.

Our inability to seek reimbursement from our merchants for refund claims could have an adverse effect on our liquidity and profitability.

If our advertisers do not meet the needs and expectations of our subscribers, our business could suffer.

Our business depends on our reputation for providing high-quality deals, and our brand and reputation may be harmed by actions taken by

advertisers that are outside our control.

In particular, this is the case with our Local Deals and Getaways merchants, since we are selling vouchers on behalf of the merchants, directly to our subscribers as opposed to the remainder of

our business in which we are only collecting the advertising fee from the advertiser and the subscribers are booking the deal directly with the advertiser.

Any shortcomings of one or more of our merchants, particularly with respect to an issue

affecting the quality of the deal offered or the products or services sold, may be attributed by our subscribers to us, thus damaging our reputation, brand value and potentially affecting our results of operations.

In addition, negative publicity

and subscriber sentiment generated as a result of fraudulent or deceptive conduct by our merchants could damage our reputation, reduce our ability to attract new subscribers or retain our current subscribers, and diminish the value of our brand.

Our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or a

decrease in subscriber willingness to receive messages could adversely affect our revenue and business.

is highly dependent upon email and other messaging services.

Deals offered through emails and other messages sent by us, or on our behalf by our affiliates, generate a substantial portion of our revenue.

Because of the importance of email and other

messaging services to our businesses, if we are unable to successfully deliver emails or messages to our subscribers or potential subscribers, or if subscribers decline to open our emails or messages, our revenue and profitability would be adversely

Actions by third parties to block, impose restrictions on, or charge for the delivery of, emails or other messages could also materially and adversely impact our business.

From time to time, internet service providers block bulk email

transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to third parties.

In addition, our use of email and other messaging services to

send communications about our website or other matters may result in legal claims against us, which if successful might limit or prohibit our ability to send emails or other messages.

disruption or restriction on the distribution of emails or other messages or any increase in the associated costs would materially and adversely affect our revenue and profitability.

Our total number of subscribers may be higher than the number of our actual individual subscribers and may not be representative of the number of persons who are active potential customers.

Our total number of subscribers may be higher than the number of our actual individual subscribers because some

subscribers have multiple registrations, other subscribers have died or become incapacitated and others may have registered under fictitious names.

Given the challenges inherent in identifying these subscribers, we do not have a reliable system to

accurately identify the number of actual individual subscribers, and thus we rely on the number of total subscribers as our measure of the size of our subscriber base.

In addition, the number of subscribers includes the total number of individuals

that have completed registration through a specific date, less individuals who have unsubscribed.

The number of subscribers may include individuals who do not receive our emails because our emails have been blocked or are otherwise undeliverable.

a result, the number of subscribers should not be considered as representative of the number of persons who continue to actively consider our deals by reviewing our email offers.

We may not be able to obtain sufficient funds to grow our business and any additional financing may be on terms adverse to your interests.

During the six months ended June 30, 2012, our cash and cash equivalents increased by $15.4 million to $54.2 million.

continue to grow our business and fund our current operations using cash on hand.

However, this may not be sufficient to meet our needs.

We may not be able to obtain financing on commercially reasonable terms, or at all.

If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund our expansion,

successfully promote our brand name, develop or enhance our products and services, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our business.

If we choose to raise additional funds through the issuance of equity securities, you may experience significant dilution of your

ownership interest and holders of the additional equity securities may have rights senior to those of the holders of our common stock.

If we obtain additional financing by issuing debt securities or bank borrowings, the terms of these arrangements

could restrict or prevent us from paying dividends and could limit our flexibility in making business decisions.

Our business may be

sensitive to recessions.

The demand for online advertising may be linked to the level of economic activity and

employment in the U.S.

Specifically, our business is primarily dependent on the demand for online advertising from travel and entertainment companies.

The recent recession decreased consumer travel and caused travel and entertainment

companies to reduce or postpone their marketing spending generally, and their online marketing spending in particular.

Continued or future recessions could have a material adverse effect on our business and financial condition.

Our operations could be significantly hindered by the occurrence of a natural disaster or other catastrophic event.

Our operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, unexpected technical problems in

the systems that power our websites and distribute our e-mail newsletters, break-ins and similar events.

In addition, a significant portion of our network infrastructure is located in Northern California, an area susceptible to earthquakes.

not have multiple site capacity to protect us against any such occurrence.

Outages could cause significant interruptions of our service.

In addition, despite our implementation of network security measures, our servers are vulnerable to computer

viruses, physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems.

We do not carry business interruption insurance to compensate us for losses that may occur as a result of any of these events.

Technological or other assaults on our service could harm our business.

We are vulnerable to coordinated attempts to overload our systems with data, which could result in denial or reduction of service to some

or all of our users for a period of time.

We have experienced denial of service attacks in the past, and may experience such attempts in the future.

Any such event could reduce our revenue and harm our operating results and financial condition.

do not carry business interruption insurance to compensate us for losses that may occur as a result of any of these events.

We are subject to payments-related risks.

We accept payments for the sale of vouchers using a variety of methods, including credit cards and debit cards.

We pay interchange and

other fees, which may increase over time and raise our operating expenses and lower profitability.

We rely on third parties to provide payment processing services, including the processing of credit cards and debit cards, and it could disrupt our

business if these companies become unwilling or unable to provide these services to us.

We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or

be reinterpreted to make it difficult or impossible for us to comply.

Moreover, under payment card rules and our contracts with our card processors, if there is a security breach of payment card information that we store, we could be liable to the

payment card issuing banks for their cost of issuing new cards and related expenses.

If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card

payments, process electronic funds transfers, or facilitate other types of online payments, and our business and results of operations could be adversely affected.

If one or more of these contracts are terminated and we are unable to replace them on

similar terms, or at all, it could adversely affect our results of operations.

Risks Related to Our Markets and Strategy

Our international expansion may result in operating losses, and is subject to other material risks.

In May 2005, we began operations in the U.K.

In 2006, we began operations in Canada, Germany, and Spain.

In 2007, we began operations in

Although our revenues in Europe increased 10.1% in the six months ended June 30, 2012 from the same period last

year and our operations in Europe generated a profit of $5.0 million for the six months ending June 30, 2012 and a profit of $4.9 million during the 2011 fiscal year, our operations in Europe incurred a loss of $1.8 million during the 2010

fiscal year, primarily as a result of significant expenses related to subscriber acquisition and the launch of Fly.com .

We intend to continue adding a significant number of subscribers in selected countries in which we operate as we believe

this is one of the factors that will allow us to increase our advertising rates and increase our revenues in Europe.

incur losses from our operations in Europe in the future, these losses may not have any recognizable tax benefit.

We expect that this would have a material negative impact on our net income and cash flows.

Any of these developments could result in a

significant decrease in the trading price of our common stock.

In addition to uncertainty about our ability to generate net income from our foreign operations and expand our international market position, there are certain risks inherent in doing

business internationally, including:

trade barriers and changes in trade regulations;

difficulties in developing, staffing and simultaneously managing foreign operations as a result of distance, language and cultural differences;

stringent local labor laws and regulations;

currency exchange rate fluctuations;

risks related to government regulation;

potentially adverse tax consequences.

If current economic conditions in Europe do not improve or deteriorate further due to the adverse effects of the ongoing sovereign debt crisis, advertisers may delay or reduce advertising or marketing

This could result in reductions in sales of our services, longer sales cycles, and increased price competition.

We may not be

able to continue developing awareness of our brand names.

We believe that continuing to build awareness of the

Travelzoo and Fly.com brand names is critical to achieving widespread acceptance of our business.

Brand recognition is a key differentiating factor among providers of online advertising opportunities, and we believe it could become

more important as competition in our industry increases.

In order to maintain and build brand awareness, we must succeed in our marketing efforts.

If we fail to successfully promote and maintain our brands, incur significant expenses in promoting

our brands and fail to generate a corresponding increase in revenue as a result of our branding efforts, or encounter legal obstacles which prevent our continued use of our brand names, our business could be materially adversely affected.

If we fail to retain our existing subscribers or acquire new subscribers, our revenue and business

will be harmed.

We spent $2.0 million and $6.0 million on online marketing initiatives relating to subscriber

acquisition for the six months ended June 30, 2012 and 2011 and expect to continue to spend significant amounts to acquire additional subscribers.

We must continue to retain and acquire subscribers in order to maintain or increase revenue.

cannot assure you that the revenue from subscribers we acquire will ultimately exceed the cost of acquiring new subscribers.

If subscribers do not perceive our offers to be of high value and quality or if we fail to introduce new and more relevant

deals, we may not be able to acquire or retain subscribers.

If we reduce our subscriber acquisition costs we cannot assure you that this will not adversely impact our ability to acquire new subscribers.

If we are unable to acquire new subscribers

who purchase our deals directly or indirectly in numbers sufficient to grow our business, or if subscribers cease to purchase our deals directly or indirectly through our advertisers, the revenue we generate may decrease and our operating results

will be adversely affected.

If the level of usage by our subscriber base declines or does not grow as expected, we may suffer a decline in subscriber growth or revenue.

A significant decrease in the level of usage or subscriber growth would have an

adverse effect on our business, financial condition and results of operations

Our business may be sensitive to events affecting the

travel industry in general.

Events like the middle east conflicts or the terrorist attacks on the U.S.

in 2001 or the

recent global financial crisis have a negative impact on the travel industry.

We are not in a position to evaluate the net effect of these circumstances on our business.

In the longer term, our business might be negatively affected by financial

pressures on the travel industry.

However, our business may also benefit if travel companies increase their efforts to promote special offers or other marketing programs.

If such events result in a long-term negative impact on the travel industry,

such impact could have a material adverse effect on our business.

We may not be able to attract travel and entertainment companies or

Internet users if we do not continually enhance and develop the content and features of our products and services.

remain competitive, we must continually improve the responsiveness, functionality, and features of our products and services.

We may not succeed in developing features, functions, products, or services that travel and entertainment companies and

Internet users find attractive.

This could reduce the number of travel and entertainment companies and Internet users using our products and materially adversely affect our business.

We may lose business if we fail to keep pace with rapidly changing technologies and client needs.

Our success is dependent on our ability to develop new and enhanced software, services, and related products to meet rapidly evolving technological requirements for online advertising.

technology may not meet the future technical requirements of travel and entertainment companies.

Trends that could have a critical impact on our success include:

rapidly changing technology in online advertising;

evolving industry standards, including both formal and de facto standards relating to online advertising;

developments and changes relating to the Internet;

competing products and services that offer increased functionality;

changes in travel company, entertainment company, and Internet user requirements.

If we are unable to timely and successfully develop and introduce new products and enhancements to existing products in response to our

industrys changing technological requirements, our business could be materially adversely affected.

Our business and growth will

suffer if we are unable to hire and retain highly skilled personnel.

Our future success depends on our ability to

attract, train, motivate, and retain highly skilled employees.

We may be unable to retain our skilled employees, or attract, assimilate, and retain other highly skilled employees in the future.

We have from time to time in the past experienced, and

we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications.

If we are unable to hire and retain skilled personnel, our growth may be restricted, which could

adversely affect our future success.

We may not be able to effectively manage our expanding operations.

Since the commencement of our operations, we have experienced a period of rapid growth.

In order to execute our business plan, we must

continue to grow significantly.

As of June 30, 2012, we had 374 employees, up from 343 employees as of June 30, 2011.

We expect that the number of our employees will continue to increase for the foreseeable future.

growth has placed, and our anticipated future growth will continue to place, a significant strain on our management, systems, and resources.

We expect that we will need to continue to improve our

financial and managerial controls and reporting systems and procedures.

We will also need to continue to expand and maintain close coordination among our sales, production, marketing, IT, and finance departments.

We may not succeed in these efforts.

Our inability to expand our operations in an efficient manner could cause our expenses to grow disproportionately to revenues, our revenues to decline or grow more slowly than expected and could otherwise have a material adverse effect on our

Intense competition may adversely affect our ability to achieve or maintain market share and operate profitably.

We compete for advertising dollars with large Internet portal sites, such as MSN and Yahoo!

that offer listings or

other advertising opportunities to travel, entertainment and local companies.

These companies have significantly greater financial, technical, marketing and other resources and larger advertiser bases.

We compete with search engines like Google and

Bing that offer pay-per-click listings.

We compete with travel meta-search engines like Kayak and online travel and entertainment deal publishers.

We compete with large online travel agencies like Expedia and Priceline that also offer advertising

placements and capture consumer interest.

We compete with companies like Groupon and LivingSocial that sell vouchers for deals from local businesses such as spas, hotels and restaurants.

We expect to face increased competition from other internet

and technology-based businesses such as Google and Microsoft, each of which has launched initiatives which are directly competitive to our Local Deals and G etaways products.

We also have seen that some competitors will accept

lower margins, or negative margins, to attract attention and acquire new subscribers.

If competitors engage in group buying initiatives in which merchants receive a higher percentage of the face value than we currently offer, we may be forced to pay

a higher percentage of the face value than we currently offer, which may reduce our revenue.

In addition, we compete with newspapers, magazines and other traditional media companies that operate websites which provide online advertising

opportunities.

We expect to face additional competition as other established and emerging companies, including print media companies, enter the online advertising market.

Competition could result in reduced margins on our services, loss of market

share or less use of Travelzoo by advertisers and consumers.

If we are not able to compete effectively with current or future competitors as a result of these and other factors, our business could be materially adversely affected.

Loss of any of our key management personnel could negatively impact our business.

Our future success depends to a significant extent on the continued service and coordination of our management team, particularly

Christopher Loughlin, our Chief Executive Officer.

The loss or departure of any of our officers or key employees could materially adversely affect our ability to implement our business plan.

We do not maintain key person life insurance for any

member of our management team.

In addition, we expect new members to join our management team in the future.

These individuals will not previously have worked together and will be required to become integrated into our management team.

management personnel are not able to work together effectively or successfully, our business could be materially adversely affected.

may not be able to access third party technology upon which we depend.

We use technology and software products from

third parties including Microsoft and ITA Software.

Technology from our current or other vendors may not continue to be available to us on commercially reasonable terms, or at all.

Our business will suffer if we are unable to access this technology,

to gain access to additional products or to integrate new technology with our existing systems.

This could cause delays in our development and introduction of new services and related products or enhancements of existing products until equivalent or

replacement technology can be accessed, if available, or developed internally, if feasible.

If we experience these delays, our business could be materially adversely affected.

Risks Related to the Market for our Shares

Our stock price has been volatile

historically and may continue to be volatile.

The trading price of our common stock has been and may continue to be

subject to wide fluctuations.

During the twelve months ended July 25, 2012, the closing price of our common stock on the NASDAQ Global Select Market ranged from $19.55 to $60.86.

Our stock price may fluctuate in response to a number of events and

factors, such as quarterly variations in operating results;

announcements of technological innovations or new products by us or our competitors;

changes in financial estimates and recommendations by securities analysts;

the operating and stock price

performance of other companies that investors may deem comparable to us;

and news reports relating to trends in our markets or general economic conditions.

In addition, the stock market in general, and the market prices for Internet-related

companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies.

These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating

We are controlled by a principal stockholder.

Ralph Bartel, who founded Travelzoo and who is a Director of Travelzoo, is our largest stockholder, holding beneficially, as of July 26,

2012, approximately 53.3% of our outstanding shares.

Through his share ownership, he is in a position to control Travelzoo and to elect our entire board of directors.

Risks Related to Legal Uncertainty

We may become subject to shareholder lawsuits

over securities violations due to volatile stock price and this can be burdensome to management and costly to defend.

Shareholder lawsuits for securities violations are often launched against companies whose stock price is volatile.

Such lawsuits

involving the Company would require managements attention to defend, which may distract attention from operating the Company.

In addition, the Company may incur substantial costs to defend itself and/or settle such claims, which may be

considered advisable to minimize the distraction and costs of defense.

Such lawsuits would result in judgments against the Company requiring substantial payments to claimants.

Such costs may materially impact our results of operations and financial

Between August 2011 and January 2012, numerous class action and derivative lawsuits were filed against the Company.

See further disclosure in Note 5 to the Condensed Consolidated Financial Statements included in this report.

We may become subject to burdensome government regulations and legal uncertainties affecting the Internet which could adversely affect our

To date, governmental regulations have not materially restricted use of the Internet in our markets.

However, the legal and regulatory environment that pertains to the Internet is uncertain and may change.

Uncertainty and new regulations could increase our costs of doing business, prevent us from delivering our products and services over the

Internet, or slow the growth of the Internet.

In addition to new laws and regulations being adopted, existing laws may be applied to the Internet.

New and existing laws may cover issues which include:

user privacy;

anti-spam legislation;

consumer protection;

pricing controls;

characteristics and quality of products and services;

sales and other taxes;

other claims based on the nature and content of Internet materials.

We may be liable as a result of information retrieved from or transmitted over the Internet.

We may be sued for defamation, negligence, copyright or trademark infringement or other legal claims relating to information that is published or made available in our products.

These types of claims have

been brought, sometimes successfully, against online services in the past.

The fact that we distribute information via e-mail may subject us to potential risks, such as liabilities or claims resulting from unsolicited e-mail or spamming, lost or

misdirected messages, security breaches, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service.

In addition, we could incur significant costs in investigating and defending such claims, even if we ultimately are not

If any of these events occur, our business could be materially adversely affected.

The implementation of the CARD Act and

similar state and foreign laws may harm our Local Deals business.

Vouchers which are issued under our Local

Deals may be considered gift cards, gift certificates, stored value cards or prepaid cards and therefore governed by, among other laws, the CARD Act, and state laws governing gift cards, stored value cards and coupons.

Other foreign

jurisdictions have similar laws in place, in particular European jurisdictions where the European E-Money Directive regulates the business of electronic money institutions.

Many of these laws contain provisions governing the use of gift cards, gift

certificates, stored value cards or prepaid cards, including specific disclosure

requirements and prohibitions or limitations on the use of expiration dates and the imposition of certain fees.

For example, if the vouchers are subject to the CARD Act and are not included in

the exemption for promotional programs, it is possible that the purchase value, which is the amount equal to the price paid for the voucher, or the promotional value, which is the add-on value of the voucher in excess of the price paid, or both, may

not expire before the later of (i) five years after the date on which the voucher was issued;

(ii) the vouchers stated expiration date (if any);

or (iii) a later date provided by applicable state law.

Purported class actions

against other companies have been filed in federal and state court claiming that coupons similar to the vouchers are subject to the CARD Act and various state laws governing gift cards and that the defendants have violated these laws by issuing the

coupons with expiration dates and other restrictions.

In addition, investigations by certain state attorney general offices have been launched against other companies with regards to similar issues.

If similar claims are asserted against the Company

in respect of the Local Deals vouchers and are successful, we may become subject to fines and penalties and incur additional costs.

In addition, if federal or state laws require that the face value of our vouchers have a minimum expiration

period beyond the period desired by a merchant for its promotional program, or no expiration period, this may affect the willingness of merchants to issue vouchers in jurisdictions where these laws apply.

Such developments may materially and

adversely affect the profitability or viability of our Local Deals and Getaways .

If we are required to materially

increase the estimated liability recorded in our financial statements with respect to unredeemed Local Deals and Getaways vouchers due to application of certain gift card laws, our net income could be materially and adversely affected.

In certain states and foreign jurisdictions, our Local Deals and Getaways vouchers may be considered a

Some of these states and foreign jurisdictions include gift cards under their unclaimed and abandoned property laws which require companies to remit to the government the value of the unredeemed balance on the gift cards after a specified

period of time (generally between one and five years) and impose certain reporting and recordkeeping obligations.

We do not remit any amounts relating to unredeemed vouchers we sell based on our assessment of applicable laws.

The analysis of the

potential application of the unclaimed and abandoned property laws to our vouchers is complex, involving an analysis of constitutional and statutory provisions and factual issues, including our relationship with subscribers and merchants and our

role as it relates to the issuance and delivery of a voucher.

In the event that one or more states or foreign jurisdictions successfully challenges our position on the application of its unclaimed and abandoned property laws to vouchers, or if the

estimates that we use in projecting the likelihood of vouchers being redeemed prove to be inaccurate, our liabilities with respect to unredeemed vouchers may be materially higher than the amounts shown in our financial statements.

If we are required

to materially increase the estimated liability recorded in our financial statements with respect to unredeemed gift cards, our net income could be materially and adversely affected.

Moreover, a successful challenge to our position could subject us

to penalties or interest on unreported and unremitted sums, and any such penalties or interest would have a further material adverse impact on our net income.

New tax treatment of companies engaged in internet commerce may adversely affect the commercial use of our services and our financial results.

Due to the global nature of the internet, it is possible that various states or foreign countries might attempt to regulate our

transmissions or levy sales, income or other taxes relating to our activities.

Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in internet commerce.

revised international, federal, state or local tax regulations may subject us or our subscribers to additional sales, income and other taxes.

We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over

the internet.

New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the internet.

taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes.

Any of these events could have an adverse effect on our business and results of operations.

We may suffer liability as a result of information retrieved from or transmitted over the internet and claims related to our service offerings.

We may be sued for defamation, civil rights infringement, negligence, patent, copyright or trademark infringement,

invasion of privacy, personal injury, product liability, breach of contract, unfair competition, discrimination, antitrust or other legal claims relating to information that is published or made available on our websites or service offerings we make

available (including provision of an application programming interface platform for third parties to access our website, mobile device services and geolocation applications).

This risk is enhanced in certain jurisdictions outside the United States,

where our liability for such third-party actions may be less clear and we may be less protected.

In addition, we could incur significant costs in investigating and defending such claims, even if we ultimately are not found liable.

If any of these

events occurs, our net income could be materially and adversely affected.

We are subject to risks associated with information

disseminated through our websites and applications, including consumer data, content that is produced by our editorial staff and errors or omissions related to our product offerings.

Such information, whether accurate or inaccurate, may result in

our being sued by our advertisers, merchants, subscribers or third parties and as a result our revenue and goodwill could be materially and adversely affected.

Claims have been asserted against us relating to shares not issued in our 2002 merger.

The merger of Travelzoo.com Corporation into the Company became effective on April 25, 2002.

promotional shares of Travelzoo.com Corporation who established they had satisfied certain prerequisite qualifications were allowed a period of two years following the effective date to receive one share of Travelzoo Inc.

in exchange for each share

of common stock of Travelzoo.com Corporation.

After April 25, 2004, two years following the effective date, we ceased issuing shares to the former stockholders of Travelzoo.com Corporation.

Many of the Netsurfer stockholders, who

had applied to receive shares of Travelzoo.com Corporation in 1998 for no cash consideration, did not elect to receive their shares which were issuable in the merger prior to the end of the two-year period.

A total of 4,115,532 of our shares which

had been reserved for issuance in the merger were not claimed.

As discussed above under Note 1, on April 21, 2011, we

settled all claims by the State of Delaware relating to a previously-announced unclaimed property review relating to shares of Travelzoo which have not been claimed by former Netsurfers stockholders of Travelzoo.com Corporation as discussed in the

preceding paragraph.

Unclaimed shares which were properly issuable would have been subject to escheat to the State of Delaware because the Company is organized under Delaware law.

Under applicable law, unclaimed property held by a corporation is

subject to escheat to the jurisdiction of incorporation if the address of the owner is unknown.

During March 2012, the

Company has become subject to unclaimed property reviews by most of the other states in the U.S.

that relate primarily to the unexchanged merger share, which were not covered by the settlement and release by the State of Delaware.

During the three

months ended March 31, 2012, the Company recorded a $3.0 million charge related to this unexchanged merger share contingency.

While the company believes it has meritorious defenses regarding the applicability of escheat rights related to this

unexchanged merger share contingency, the ultimate resolution of this matter may take longer than one year to resolve.

If the claims for all of the additional shares referred to in the preliminary findings were upheld in full, based on the closing

price of the Companys shares at the end of June 2012, the cost to the Company would be approximately $22.2 million in excess of the amount accrued, plus any interest and penalties which might be applicable.

However, the Company is not able to

predict the ultimate amount or outcome of any current or future claims which have been or might be asserted relating to the unissued shares.

requests to convert their shares into shares of Travelzoo Inc.

within the required time period.

The accompanying condensed consolidated financial statements include a charge in general and administrative expenses of $11,000 and $22,000 for these

cash payments for the three months and six months ended June 30, 2012.

The total cost of this program is not reliably estimable because it is based on the ultimate number of valid requests received and future levels of the Companys common

stock price, and would be affected by any settlement of the pending reviews referred to above.

The Companys 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.

As noted above, in order to receive payment under the program, a person is required to establish that such person validly held shares in Travelzoo.com Corporation.

Federal laws and regulations, such as the Bank Secrecy Act and the USA PATRIOT Act and similar foreign laws, could be expanded to include Local

Deals and Getaway vouchers.

Various federal laws, such as the Bank Secrecy Act and the USA PATRIOT Act and foreign

laws and regulations, such as the European Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, impose certain anti-money laundering requirements on companies that are financial

institutions or that provide financial products and services.

For these purposes, financial institutions are broadly defined to include money services businesses such as money transmitters, check cashers and providers of prepaid access cards.

Examples of anti-money laundering requirements imposed on financial institutions include customer identification and verification programs, suspicious activity monitoring and reporting, record retention policies and procedures and transaction

We do not believe that we are a financial institution subject to these laws and regulations based, in part, upon the closed loop nature and other characteristics of vouchers and our role with respect to the distribution of vouchers to

However, the Financial Crimes Enforcement Network, a division of the U.S.

Department of the Treasury tasked with implementing the requirements of the Bank Secrecy Act, recently issued final rules regarding the scope and requirements for

non-bank parties involved in stored value or prepaid access cards, including obligations on sellers or providers of prepaid access.

Under the final rule, providers or sellers of closed loop vouchers, such as those offered through the

Local Deals program, would only be subject to registration if the voucher exceed $2,000 in total value or if they are sold in aggregate amounts exceeding $10,000

to any single person in one day.

Should the $2,000 limit be exceeded or should more than $10,000 in aggregate vouchers be sold to any individual person (sales to businesses for resale or

distribution are excluded) then we may be deemed either a seller or provider of prepaid access subject to regulation.

In the event that we become subject to the requirements of the Bank Secrecy Act or any other anti-money laundering law or

regulation imposing obligations on us as a money services business, our regulatory compliance costs to meet these obligations would likely increase which could reduce our net income.

In addition, the costs for third parties to sell vouchers would

increase, which may restrict our ability to enlist third parties to issue vouchers

Our internal controls over financial reporting may

not be effective, and our independent auditors may not be able to certify as to the effectiveness of such internal controls, which could have a significant and adverse effect on our business.

We are obligated to evaluate our internal controls over financial reporting in order to allow management to report on, and our

independent auditors to opine on, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which we collectively refer to as Section 404.

Section 404 evaluation, we have identified areas of internal controls that may need improvement and have instituted remediation efforts where necessary.

Currently, none of our identified areas that need improvement has been categorized as

material weaknesses.

We may identify conditions that may result in significant deficiencies or material weaknesses in the future.

may be unable to protect our registered trademark or other proprietary intellectual property rights.

depends to a significant degree upon the protection of the Travelzoo brand name.

We rely upon a combination of copyright, trade secret and trademark laws, as well as non-disclosure and other contractual arrangements to protect our

intellectual property rights.

The steps we have taken to protect our proprietary rights, however, may not always succeed in deterring misappropriation of proprietary information.

We have registered the Travelzoo trademark in the U.S., Australia, Canada, China, Hong Kong, Japan, South Korea, Taiwan, the EU

If we are unable to protect our rights in the mark in North America, Europe, and Asia Pacific, where we have licensed the trademark as described above under overview, a key element of our strategy of promoting Travelzoo

as a brand could be disrupted and our business could be adversely affected.

We may not always be able to detect unauthorized use of our proprietary information or take appropriate steps to enforce our intellectual property rights.

the validity, enforceability, and scope of protection of intellectual property in Internet-related industries are uncertain and still evolving.

The laws of countries in which we may market our services in the future are uncertain and may afford

little or no effective protection of our intellectual property.

The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from our technology and brand name without paying us for

If this were to occur, our business could be materially adversely affected.

We may face liability from intellectual property

litigation that could be costly to prosecute or defend and distract managements attention with no assurance of success.

We cannot be certain that our products, content and brand names do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties.

While we have a trademark

for Travelzoo, many companies in the industry have similar names including the word travel.

We expect that infringement claims in our markets will increase in number as more participants enter the markets.

We may be subject

to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business.

We may incur substantial expenses in defending against these third party infringement claims, regardless of

their merit, and such claims could result in a significant diversion of the efforts of our management personnel.

Successful infringement claims against us may result in monetary liability or a material disruption in the conduct of our business.

Net cash used in operating activities $ ( 1 ) $ ( 10 )

The Company has operating leases for real estate and certain equipment.

The Company leases office space in Canada, Germany, Spain, the U.K., and the U.S.

under operating leases.

Our leases have remaining lease terms ranging from less than one year up to seven years .

Certain leases include one or more options to renew.

In addition, we sublease real estate to a third party.

All of our leases qualify as operating leases.

The following table summarizes the components of lease expense for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended

Operating lease cost $ 674 $ 685

Short-term lease cost 20 —

Variable lease cost 150 221

Sublease income ( 90 ) ( 86 )

Total lease cost $ 754 $ 820

For the three months ended March 31, 2023 and 2022, cash payments against the operating lease liabilities total ed $ 860,000 and $ 938,000 , respectively.

There was no ROU assets obtained in exchange for lease obligations for three months ended March 31, 2023 and 2022.

The following table summarizes the presentation in our condensed consolidated balance sheets of our operating leases (in thousands):

March 31, 2023 December 31, 2022

Operating lease right-of-use assets $ 6,852 $ 7,440

Operating lease liabilities $ 2,682 $ 2,972

Long-term operating lease liabilities 7,926 8,326

Total operating lease liabilities $ 10,608 $ 11,298

Weighted average remaining lease term (years) 5.79 5.87

Weighted average discount rate 4.2 % 4.3 %

Maturities of lease liabilities were as follows (in thousands):

Years ending December 31,

2023 (excluding the three months ended March 31, 2023) $ 2,237

Thereafter 2,925

Total lease payments 11,821

Less interest ( 1,213 )

Present value of operating lease liabilities $ 10,608

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 three months ended March 31, 2023 and 2022 was as follow (in thousands):

Non-controlling interest—January 1, 2022 $ 4,600

Net loss attributable to non-controlling interest 4

Non-controlling interest—March 31, 2022 4,604

Net loss attributable to non-controlling interest 30

Non-controlling interest—June 30, 2022 4,634

Net loss attributable to non-controlling interest 2

Non-controlling interest—September 30, 2022 4,636

Net loss attributable to non-controlling interest ( 41 )

Non-controlling interest—December 31, 2022 4,595

Net loss attributable to non-controlling interest 8

Non-controlling interest—March 31, 2023 $ 4,603

Related Party Transactions

Ralph Bartel, who founded Travelzoo and who is the sole beneficiary of the Ralph Bartel 2005 Trust, which is the controlling shareholder of Azzurro.

As of March 31, 2023 , Azzurro is the Company's largest stockholder, and together with Ralph Bartel, in his individual capacity, hold approximately 50.5 % of the Company's outstanding shares.

Holger Bartel, the

Company's Global Chief Executive Officer, is Ralph Bartel's brother and holds approximately 4.2 % of the Company's outstanding shares.

Stock Purchase Agreement between Travelzoo and Azzurro Capital Inc.

In connection with the development of Travelzoo META, the Company acquired MTE, a wholly owned subsidiary of Azzurro, and also completed a private placement of newly issued shares.

Ralph Bartel, who founded the Company, is the sole beneficiary of the Ralph Bartel 2005 Trust, which is the controlling shareholder of Azzurro.

Azzurro is the Company’s largest shareholder as of the time of this transaction and as of December 31, 2022, Azzurro and Ralph Bartel owned approximately 50.3 % the Company's outstanding shares.

On December 28, 2022, the stockholders of Travelzoo approved the issuance and sale of 3.4 million Shares to Azzurro, in exchange for certain consideration, and on the Closing Date, the transaction was consummated.

The closing price of Travelzoo’s common stock on December 30, 2022 was $ 4.45 per share, resulting in an aggregate fair value $ 15.2 million.

The purchase price was paid as follows:

(a) $ 1.0 million in cash paid on the Closing Date;

(b) $ 4.8 million paid in the form of a promissory note issued on the Closing Date and payable by June 30, 2023 with accrued interest of 12 %;

and (c) the transfer to the Company of all outstanding capital stock of MTE, which transfer was effected pursuant to a merger of MTE with a wholly-owned subsidiary of the Company on the Closing Date.

The Company recorded the $ 4.8 million promissory note as Note receivable from shareholder in the stockholders' equity section on the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022.

The related interest of $ 143,000 was recorded in Prepaid expenses and other on the condensed consolidated balance sheet as of March 31, 2023 .

License Agreement with Azzurro Brands Inc.

and subsequent Asset Purchase Agreement

On March 12, 2021, the Company, with the approval of the Audit Committee of the Board of Directors, which consists solely of independent directors, entered into a License Agreement (the “License Agreement”) with Azzurro Brands Inc., a New York corporation (“Azzurro Brands”) and wholly-owned subsidiary of Azzurro, 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 non-duplicated subscribers that Azzurro Brands purchased from a competitor of Travelzoo.

The License Agreement required that the Company pay a license fee of $ 413,000 per quarter with an initial payment of $ 894,000 due upon execution, which covers the period from execution until September 30, 2021.

The License Agreement had 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 contained customary representations and warranties.

The payment of $ 894,000 was made in the first quarter of 2021 and recorded in sales and marketing expenses in 2021.

The second payment of $ 701,000 was made in the second quarter of 2021 which covers the period from October 2021 through March 2022 and recorded in sales and marketing expenses and prepaid expenses and other.

Travelzoo renewed the License Agreement in January 2022 for a license fee of $ 413,000 per quarter and made the payment of $ 800,000 to cover the period from April 2022 to September 2022 in the fourth quarter of 2021 and was recorded in Prepaid expenses-Related party, which totaled $ 1.15 million as of December 31, 2021.

On March 17, 2022, the Company, as Buyer, entered into an Asset Purchase Agreement (the “APA”) with Azzurro Brands to purchase the database previously utilized by Travelzoo in accordance with the License Agreement.

The purchase price for the transaction was $ 1.75 million, with $ 600,000 paid in cash upon closing in March 2022 and the remaining $ 1.15 million payable in the form of a credit with Seller relating to prepaid license fees, under the License Agreement.

The remaining commitment of the Company under the License Agreement for the then-current remaining term (equal to $ 825,000 ) was eliminated.

Stock Option Agreement

In March 2022, the Compensation Committee of the Board of Directors granted Holger Bartel 600,000 stock options that vest through December 31, 2023.

This grant was approved by the shareholders of the Company at the 2022 annual meeting of shareholders.

Holger Bartel is the brother of Ralph Bartel and is our Global Chief Executive Officer .

See Note 3 to the unaudited condensed consolidated financial statements for further information.

Profits from Sale and Purchase of Travelzoo Common Stock within Six Month Period

Holger Bartel completed sales and purchases of 25,000 shares of Travelzoo common stock within a six month period ended July 29, 2022.

Per Section 16(b) of Securities and Exchange Act, he agreed to immediately remit to the Company $ 46,000 in profits gained from these transactions during the three months ended September 30, 2022.

Restatement of previously issued financial statements

The Company restated its previously issued Condensed Consolidated Financial Statements as of and for the three month ended March 31, 2023.

In connection with the preparation of our second quarter 2023 condensed consolidated financial statements, Travelzoo realized that the non-controlling interest (NCI) classification during the first quarter of 2022, the second quarter of 2022, the third quarter of 2022, the year ended December 31, 2022 and the first quarter of 2023 had not been correctly updated .

When the put/call option in the Company’s stock purchase agreement with JFC Travel Group Co.

expired in January 2022, the Company did not reclassify the NCI from temporary equity to permanent equity.

The reclassification of NCI from temporary equity to permanent equity reduced temporary equity and increased permanent equity by $ 4.6 million but did not have any impact on the Company's previously reported total assets, total liabilities and stockholders’ equity, results of operations or cash flows.

The impacts from the restatement as of and for the three months ended March 31, 2023 are as follows (in thousands):

Condensed Consolidated Balance Sheet:

March 31, 2023

As Reported Adjustments As Restated

Non-controlling interest $ 4,603 $ ( 4,603 ) $ —

Stockholders’ equity:

Total Travelzoo stockholders’ equity 8,219 — 8,219

Non-controlling interest — 4,603 4,603

Total stockholders’ equity $ 8,219 $ 4,603 $ 12,822

Condensed Consolidated Statement of Stockholders’ Equity:

March 31, 2023

As Reported Adjustments As Restated

Total Travelzoo stockholders’ equity $ 8,219 $ — $ 8,219

Non-controlling interest — 4603 4,603

Total stockholders’ equity $ 8,219 $ 4,603 $ 12,822

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q/A

Item 1. Financial Statements