TRAVELZOO 10-Q

Item 2. Management’s 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 statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may”, “will”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”, “believes”, “anticipates”, “plans”, “expects”, “intends”, and similar expressions are intended to identify forward-looking statements. Travelzoo’s actual results and the timing of certain events could differ significantly from those anticipated in such forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this report in the section entitled “Risk Factors” and the risks discussed in our 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. Overview We are 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. Travelzoo attracts a high-quality audience of travel enthusiasts across multiple digital platforms, including email, websites, social media and mobile applications. The Travelzoo website is visited by 5.4 million to 6.6 million unique visitors each month. We have over 4.5 million followers on Facebook, Instagram, and Twitter, Our Apple and Android mobile applications have been downloaded 7.4 million times. 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 MTE, a Metaverse experience scouting and development 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, and also completed a private placement of newly issued 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 ; and (c) the transfer to the Company of all outstanding capital stock of MTE. The Company recorded the $4.8 million promissory note as Note receivable from shareholder in the stockholder’' equity section on the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022. As of June 30, 2023, Azzurro paid the interest of $285,000, but has not yet paid the principal amount of the note. The Company submitted a letter to Azzurro seeking payment and the parties are in the process of negotiating a payment plan. Should satisfactory terms not be agreed for a payment plan, the Company shall have the right to pursue the shares serving as collateral under the promissory note. 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 June 30, 2023, Jack’s Flight Club h ad over 2 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. 33 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, $113,000 was repaid during six months ended June 30, 2023, and the remaining is 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 June 30, 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 $9,000 and $7,000 for its licensing arrangements from the licensee in Australia for the three months ended June 30, 2023 and 2022, respectively. The Company recognized royalties of $17,000 and $12,000 for its licensing arrangements from the licensee in Australia for the six months ended June 30, 2023 and 2022 , respectively. The Company recognized royalties of $4,000 for its licensing arrangements from the licensee in Japan for the three and six months ended June 30, 2023. The Company did not recognize any royalty from Travelzoo Japan in 2022. We expect the royalty payments to increase over time as the effects of the pandemic subside. Government funding In January 2022, July 2022 and May 2023, 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, $494,000 and $205,000 from the German Federal Government Bridging Aid III plan, Bridging Aid III+ and Bridging Aid IV, 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 and May 2023. The Company has to submit a final declaration in connection with the grant and the declaration date has been extended from June 30, 2023 to December 31, 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, $494,000 and $205,000 gains in Other income, net in the first and third quarters of 2022 and second quarter of 2023, respectively. The Company also received $85,000 and $153,000 job retention related funding from Canada in the three and six months ended June 30, 2022. Such funding was recorded against salary and related expenses. The Company did not receive job retention related funding in 2023. 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 MTE, a Metaverse experience scouting and development business to support Travelzoo META. The Company ’ s chief operating decision maker viewed licensing and Travelzoo META 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 Metaverse experience scouting and development business. 34 When evaluating the financial condition and operating performance of the Company, management focuses on financial and non-financial indicators such as growth in the number of members to the Company’s newsletters, operating margin, growth in revenues in the absolute and relative to the growth in reach of the Company’s publications measured as revenue per member and revenue per employee as a measure of productivity. How We Generate Revenues Travelzoo Revenues from the Travelzoo brand and business are generated primarily from advertising fees from two categories of revenue: Travel and Local. The “Travel” category consists of advertising or publishing revenues, primarily (a) listing fees paid by travel companies for the publishing of their offers on Travelzoo’s media properties and (b) commission from the sale of Getaways vouchers. Listing fees are based on audience reach, placement, number of listings, number of impressions, number of clicks, and actual sales. For publishing revenue, we recognize revenue upon delivery of the emails and delivery of the clicks, over the period of the placement of the advertising. Insertion orders for publishing revenue are typically for periods between one month and twelve months and are not automatically renewed. For Getaways vouchers, we recognize a percentage of the face value of the vouchers upon the sale of the vouchers. Merchant agreements for Getaways advertisers are typically for periods between twelve months and twenty-four months and are not automatically renewed. Since the second quarter of 2020, the Company expanded its vouchers refund policy in order to entice customers given the current economic climate to fully refundable until the voucher expires or is redeemed by the customer. The Company now offers full refunds for vouchers that have not been redeemed or expired . The expiration dates of vouchers range between July 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 and final payment upon expiration may not be due for up to a year after expiration. 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 June 30, 2023, the Company had approximately $6.0 million of unredeemed vouchers that had been sold through June 30, 2023 representing the Company’s commission earned from the sale. The Company had estimated a refund liability of $572,000 for these unredeemed vouchers as of June 30, 2023 which is recorded as a reduction of revenues and is reflected as a current liability in Accrued expenses and other on the consolidated balance sheet. The Company has recorded Merchant Payables of $23.9 million as of June 30, 2023 related to unredeemed vouchers. Certain merchant contracts allow the Company to retain the proceeds from unredeemed vouchers. With these contracts, the Company estimates the value of vouchers that will ultimately not be redeemed and records the estimate as revenues in the same period. The "Local" category consists of publishing revenue for negotiated high-quality deals from local businesses, such as restaurants, spas, shows, and other activities and includes Local Deals vouchers and entertainment offers (vouchers and direct bookings). The revenues generated from these products are based upon a percentage of the face value of the vouchers, commission on actual sales or a listing fee based on audience reach. We recognize revenue upon the sale of the vouchers, upon notification of the amount of direct bookings or upon delivery of the emails. For Local Deals vouchers, we recognize a percentage of the face value of vouchers upon the sale of the vouchers. Insertion orders and merchant agreements for Local are typically for periods between one month and twelve months and are not automatically renewed. Certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon expiration, which we recognize as revenue based upon estimates at the time of sale. Jack’s Flight Club Jack’s Flight Club revenue is generated from paid subscriptions by members. Subscription options are quarterly, semi-annually, and annually. We recognize the revenue monthly pro rata over the subscription period. Trends in Our Business Our ability to generate revenues in the future depends on numerous factors such as our ability to sell more advertising to existing and new advertisers, our ability to increase our audience reach and advertising rates, our ability to have sufficient supply of hotels offered at competitive rates, our ability to develop and launch new products and our ability to continue to service our members without interruption. Our ability to generate revenues is also dependent on trends impacting the travel industry and online advertising businesses more broadly. 35 Our current revenue model primarily depends on advertising fees paid primarily by travel, entertainment and local businesses. A number of factors can influence whether current and new advertisers decide to advertise their offers with us. We have been impacted and expect to continue to be impacted by external factors such as the shift from offline to online advertising, the relative condition of the economy, competition and the introduction of new methods of advertising, and the decline in consumer demand for vouchers and travel more generally. A number of factors will have impact on our revenue, such as the reduction in spending by travel intermediaries due to their focus on improving profitability, the trend towards mobile usage by consumers, the willingness of consumers to purchase the deals we advertise, and the willingness of certain competitors to grow their business unprofitably. In addition, we have been impacted and expect to continue to be impacted by internal factors such as introduction of new technologies and advertising products, hiring and relying on key employees for the continued maintenance and growth of our business and ensuring our advertising products continue to attract the audience that advertisers desire. We also have been impacted and expect to continue to be impacted by external factors, such as the global pandemic, which decrease the demand for travel and entertainment and increasing cybersecurity risks due to increased dependence on digital technologies. We also could be indirectly impacted by climate change and related legislation to the extent such legislation impacts the businesses of our advertisers such as airlines and cruise ship operators, which have come under increasing scrutiny for their carbon footprints. Additionally, existing advertisers may shift from one advertising service (e.g. Top 20 ) to another (e.g. Local Deals and Getaways ). These shifts between advertising services by advertisers could result in no incremental revenue or less revenue than in previous periods depending on the amount purchased by the advertisers, and in particular with Local Deals and Getaways , depending on how many vouchers are purchased by members. Local revenues have been and may continue to decline over time due to market conditions driven by competition and declines in consumer demand. In the last several years, we have seen a decline in the number of vouchers sold and a decrease in the average take rate earned by us from the merchants for voucher sold. However, due to the global pandemic and the increase in demand by consumers for fully refundable travel options, we have now begun to see a slight reversal of this trend and an increase in the sale of Getaways hotel vouchers. Demand for restaurants and spas continues to be low due to the global pandemic. Our ability to continue to generate advertising revenue and generate subscription revenue through Jack’s Flight Club depends heavily upon our ability to maintain and grow an attractive audience for our publications. We monitor our members to assess our efforts to maintain and grow our audience reach. We obtain additional members and activity on our websites by acquiring traffic from Internet search companies. The costs to grow our audience have had, and we expect will continue to have, a significant impact on our financial results and can vary from period to period. We may have to increase our expenditures on acquiring traffic to continue to grow or maintain our reach of our publications due to competition. We continue to see a shift in the audience to accessing our services through mobile devices and social media. When funds are available for marketing spend, we are addressing this growing channel of our audience through increased marketing on social media channels. However, we will need to keep pace with technological change and this trend to further address this shift in the audience behavior in order to offset any related declines in revenue. We believe that we can increase our advertising rates only if the reach of our publications increases. We do not know if we will be able to increase the reach of our publications. If we are able to increase the reach of our publications, we still may not be able to or want to increase rates given market conditions such as intense competition in our industry. We have not had any significant rate increase in recent years due to intense competition in our industry. Even if we increase our rates, the increased price may reduce the number of advertisers willing to advertise with us and, therefore, decrease our revenue. We may need to decrease our rates based on competitive market conditions and the performance of our audience in order to maintain or grow our revenue. We do not know what our cost of revenues as a percentage of revenues will be in future periods. Our cost of revenues may increase if the face value of vouchers that we sell for Local Deals and Getaways increases or the total number of vouchers sold increases because we have credit card fees based upon face value of vouchers sold, due to customer service costs related to vouchers sold and due to refunds to members on vouchers sold. We expect fluctuations in cost of revenues as a percentage of revenues from quarter to quarter. Some of the fluctuations may be significant and may have a material impact on our results of operations. 36 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 members in every quarter and continue to promote our brand. One significant factor that impacts our advertising expenses is the average cost per acquisition of a new member. Increases in the average cost of acquiring new members may result in an increase of sales and marketing expenses as a percentage of revenue. We believe that the average cost per acquisition depends mainly on the advertising rates which we pay for media buys, our ability to manage our member acquisition efforts successfully, the regions we choose to acquire new members and the relative costs for that region, and the degree of competition in our industry. We may decide to accelerate our member acquisition, including through merger and acquisition activity, for various strategic and tactical reasons and, as a result, increase our marketing and other expenses. We expect the average cost per acquisition to increase with our increased expectations for the quality of the members we acquire. We may see an unique opportunity for a brand marketing campaign that will result in an increase of marketing expenses. In addition, there may be a significant number of members that cancel or we may cancel their subscription for various reasons, which may drive us to spend more on member acquisition in order to replace the lost members. We expect fluctuations in sales and marketing expenses as a percentage of revenue from year to year and from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations. We expect increased marketing expense to spur continued growth in members and revenue in future periods; however, we cannot be assured of this due to the many factors that impact our growth in members and revenue. We expect to adjust the level of such incremental spending during any given quarter based upon market conditions, as well as our performance in each quarter. We do not know what our product development expenses as a percentage of revenue will be in future periods. There may be fluctuations that have a material impact on our results of operations. Product development changes may lead to reductions of revenue based on changes in presentation of our offerings to our audience. We expect our efforts on developing our product and services will continue to be a focus in the future, which may lead to increased product development expenses. This increase in expense may be the result of an increase in costs related to third party technology service providers and software licenses, headcount, the compensation related to existing headcount and the increased use of professional services. We do not know what our general and administrative expenses as a percentage of revenue will be in future periods. There may be fluctuations that have a material impact on our results of operations. We do not know what our income taxes will be in future periods. There may be fluctuations that have a material impact on our results of operations. Our income taxes are dependent on numerous factors such as the geographic mix of our taxable income, foreign, federal, state and local tax law and regulations and changes thereto. Our income taxes are also dependent on the determination of whether valuation allowances for certain tax assets are required or not, audits of prior years' tax returns that result in adjustments, resolution of uncertain tax positions and different treatments for certain items for tax versus books. We expect fluctuations in our income taxes from year to year and from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations. With the impact to revenues caused by the global pandemic, spending by the Company in many areas within the business was slowed or stopped, including but not limited to, marketing, technology and human resources. For example, in 2020, the Company ceased operations in Asia Pacific, conducted employee furloughs and restructured its employees significantly. The Company also renegotiated many of its outstanding contractual obligations with vendors and closed some ancillary office locations in order to reduce capital expenditures. We do not anticipate that any additional cost-cutting measures will be necessary at this time. Instead, the Company is beginning to invest again in marketing, technology and human resources in line with the recovery of its revenue from the effects of the pandemic. The key elements of our growth strategy include building a travel and lifestyle brand with a large, high-quality user base and offering our users products that keep pace with consumer preference and technology, such as the trend toward mobile usage by consumers and toward fully refundable travel deals given the uncertainty of the global pandemic. We expect to continue our efforts to grow; however, we may not grow or we may experience slower growth. We believe that we can sell more advertising if the market for online advertising continues to grow and if we can maintain or increase our market share. We believe that the market for advertising continues to shift from offline to online. We do not know if we will be able to maintain or increase our market share. We do not know if we will be able to increase the number of our advertisers in the future. We do not know if we will have market acceptance of our new products or whether the market will continue to accept our existing products. 37 Results of Operations The following table sets forth, as a percentage of total revenues, the results from our operations for the periods indicated. Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues 13.6 12.2 13.0 13.8 Gross profit 86.4 87.8 87.0 86.2 Operating expenses: Sales and marketing 48.0 47.9 45.5 47.2 Product development 2.5 2.6 2.4 2.5 General and administrative 20.4 27.2 20.4 26.3 Total operating expenses 70.9 77.7 68.3 76.0 Operating income 15.5 10.1 18.7 10.2 Other income, net 2.3 1.1 1.9 4.5 Income from continuing operations before income taxes 17.8 11.2 20.6 14.7 Income tax expense 5.2 5.2 5.8 5.2 Income from continuing operations 12.6 6.0 14.8 9.5 Income (loss) from discontinued operations, net of taxes — — — — Net income 12.6 6.0 14.8 9.5 Net income attributable to non-controlling interest 0.2 0.2 0.1 0.1 Net income attributable to Travelzoo 12.4 % 5.8 % 14.7 % 9.4 % 38 Operating Metrics The following table sets forth, as a percentage of total revenues, the results from our operations for the periods indicated. Three Months Ended June 30, 2023 2022 North America Total members (1) 16,225,000 16,541,000 Average cost per acquisition of a new member $ 4.68 $ 2.82 Revenue per member (2) $ 3.56 $ 2.85 Revenue per employee (3) $ 448,000 $ 408,000 Mobile application downloads 4,158,000 4,014,000 Social media followers 3,260,000 3,225,000 Europe Total members (1) 9,197,000 9,083,000 Average cost per acquisition of a new member $ 4.59 $ 4.20 Revenue per member (2) $ 2.61 $ 2.45 Revenue per employee (3) $ 238,000 $ 213,000 Mobile application downloads 2,356,000 2,261,000 Social media followers 898,000 898,000 Jack's Flight Club Total members 2,187,000 1,798,000 Consolidated Total members (1) 27,609,000 27,422,000 Average cost per acquisition of a new member $ 4.64 $ 3.52 Revenue per member (2) $ 2.77 $ 2.41 Revenue per employee (3) $ 356,000 $ 320,000 Mobile application downloads 7,524,000 7,181,000 Social media followers 4,158,000 4,153,000 (1) Members represent individuals who are signed up to receive one or more of our free email publications that present our travel, entertainment and local deals. (2) Annualized revenue divided by number of members at the beginning of the year. (3) Annualized revenue divided by number of employees at the end of the quarter. 39 Revenues The following table sets forth the breakdown of revenues (in thousands) by category and segment. Travel revenue includes travel publications ( Top 20 , Travelzoo website, Standalone email newsletters, Travelzoo Network ), Getaways vouchers, and hotel platform and vacation packages. Local revenue includes Local Deals vouchers and entertainment offers (vouchers and direct bookings). Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 Travelzoo North America Travel $ 13,458 $ 11,444 $ 27,598 $ 22,489 Local 675 934 1,293 1,580 Total Travelzoo North America revenues 14,133 12,378 28,891 24,069 Travelzoo Europe Travel 5,546 4,072 11,096 9,696 Local 341 282 678 592 Total Travelzoo Europe revenues 5,887 4,354 11,774 10,288 Jack’s Flight Club 1,095 952 2,043 1,775 New Initiatives 13 5 21 10 Consolidated Travelzoo Travel 19,004 15,516 38,694 32,185 Travelzoo Local 1,016 1,216 1,971 2,172 Jack’s Flight Club 1,095 952 2,043 1,775 New Initiatives 13 5 21 10 Total revenues $ 21,128 $ 17,689 $ 42,729 $ 36,142 Travelzoo North America North America revenues increased $1.8 million for the three months ended June 30, 2023 from the three months ended June 30, 2022. This increase was primarily due to $2.0 million increase in Travel revenues, offset partially by $259,000 decrease in Local revenues. The increase in Travel revenue of $2.0 million was primarily due to the increase of revenues from Top 20 and Standalone. The decrease in Local revenues of $259,000 was primarily due to the decrease in number of Local Deals vouchers sold. North America revenues increased $4.8 million for the six months ended June 30, 2023 from the six months ended June 30, 2022. This increase was primarily due to $5.1 million increase in Travel revenues, offset partially by $287,000 decrease in Local revenues. The increase in Travel revenue of $5.1 million was primarily due to $4.4 million increase as a result of higher revenues from Top 20 and Standalone and $794,000 increase in hotel commission . The decrease in Local revenues of $287,000 was primarily due to the decrease in number of Local Deals vouchers sold. Travelzoo Europe Europe revenues increased $1.5 million for the three months ended June 30, 2023 from the three months ended June 30, 2022 . The increase was primarily due to $1.5 million increase in Travel revenues and $61,000 increase in Local revenue, offset partially by $73,000 negative impact from foreign currency movements relative to the U.S. dollar. The increase in Travel revenue of $1.5 million was primarily due to the increase of revenues from Top 20 and Standalone . The increase in Local revenues of $61,000 was primarily due to the increase in number of Local Deals vouchers sold. Europe revenues increased $1.5 million for the six months ended June 30, 2023 from the six months ended June 30, 2022 . The increase was primarily due to $1.8 million increase in Travel revenues and $113,000 increase in Local revenue, offset partially by $447,000 negative impact from foreign currency movements relative to the U.S. dollar. The increase in Travel revenue of $1.8 million was primarily due to $2.5 million increase as a result of higher revenues from Top 20 and Standalone , offset partially by $626,000 decrease in Getaways revenue due to a decrease in number of vouchers sold. The increase in Local revenues of $113,000 was primarily due to the increase in number of Local Deals vouchers sold. 40 Jack’s Flight Club Travelzoo acquired 60% of the Shares of Jack’s Flight Club on January 13, 2020. Jack’s Flight Club's premium members pay subscription fees quarterly, semi-annually or annually to receive emails or app notifications of flight deals. Jack’s Flight Club’s revenue increased by $143,000 and $268,000, respectively, for three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022 due to the increase of premium members. New Initiatives 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 MTE, a Metaverse experience scouting and development business to support Travelzoo META. Revenue from New Initiatives business segment was $13,000 and $5,000 for the three months ended June 30, 2023 and 2022, respectively. Revenue from New Initiatives business segment was $21,000 and $10,000 for the six months ended June 30, 2023 and 2022, respectively. Cost of Revenues Cost of revenues consists primarily of network expenses, including fees we pay for co-location services and depreciation and maintenance of network equipment, payments made to third-party partners of the Travelzoo Network , amortization of capitalized website development costs, credit card fees, certain estimated refunds to members and customer service costs associated with vouchers we sell and hotel bookings, and salary and related expenses associated with network operations and customer service employees . Cost of revenues was $2.9 million and $2.2 million, respectively, for the three months ended June 30, 2023 and 2022. Cost of revenues was $5.6 million and $5.0 million, respectively, for the six months ended June 30, 2023 and 2022, respectively. Cost of revenues increased $717,000 for the three months ended June 30, 2023 from the three months ended June 30, 2022 primarily due to $322,000 increase in expenses from third-party partners of the Travelzoo Network, $131,000 increase in credit card fees and $121,000 increase in software license expenses Cost of revenues increased $576,000 for the six months ended June 30, 2023 from the six months ended June 30, 2022 primarily due to $309,000 increase in expenses from third-party partners of the Travelzoo Network, $142,000 increase in credit card fees and $131,000 increase in professional services expenses. Operating Expenses Sales and Marketing Sales and marketing expenses consist primarily of advertising and promotional expenses, salary and related expenses associated with sales, marketing and production employees, expenses related to our participation in industry conferences, public relations expenses and facilities costs. Sales and marketing expenses were $10.1 million and $8.5 million for the three months ended June 30, 2023 and 2022, respectively. Sales and marketing expenses were $19.4 million and $17.1 million for the six months ended June 30, 2023 and 2022, respectively. Advertising expenses consis t primarily of online advertising which we refer to as traffic acquisition cost and member acquisition costs. For the three months ended June 30, 2023 and 2022, advertising expenses accounted for 28% and 25%, respectively, of the total sales and marketing expenses. For the six months ended June 30, 2023 and 2022, advertising expenses accounted for 27% and 21%, respectively, of the total sales and marketing expenses. The goal of our advertising was to acquire new members to our email products, increase the traffic to our websites, increase brand awareness and increase our audience through mobile and social media channels. Sales and marketing expenses increased $1.7 million for the three months ended June 30, 2023 from the three months ended June 30, 2022. The increase was primarily due to $619,000 increase in salary and headcount related expenses, $498,000 increase in member acquisition costs and $248,000 increase in marketing expenses. Sales and marketing expenses increased $2.4 million for the six months ended June 30, 2023 from the six months ended June 30, 2022 . The increase was primarily due to $1.2 million increase in member acquisition costs, $939,000 increase in salary and headcount related expenses and $151,000 increase in marketing expenses. . 41 Product Development Product development expenses consist primarily of salary and related expenses associated with software development employees, fees for professional services, software maintenance, amortization, and facilities costs. Product development expenses were $518,000 and $454,000 for the three months ended June 30, 2023 and 2022, respectively. Product development expenses were $1.0 million and $907,000 for the six months ended June 30, 2023 and 2022, respectively. Product development expenses increased $64,000 for the three months ended June 30, 2023 from the three months ended June 30, 2022 primarily due to the expenses of the New Initiative segment for developing Travelzoo META and scouting, compiling and developing Metaverse travel experiences. Product development expenses increased 101,000 for the six months ended June 30, 2023 from the six months ended June 30, 2022 primarily due to the expenses of the New Initiative segment for developing Travelzoo META and scouting, compiling and developing Metaverse travel experiences. General and Administrative General and administrative expenses consist primarily of salary and related expenses associated with administrative and executive employees, bad debt expense, professional service expenses, legal expenses, amortization of intangible assets, general office expense and facilities costs. General and administrative expenses were $4.3 million and $4.8 million for the three months ended June 30, 2023 and 2022, respectively. General and administrative expenses were $8.7 million and $9.5 million for the six months ended June 30, 2023 and 2022, respectively. General and administrative expenses decreased $496,000 for the three months ended June 30, 2023 from the three months ended June 30, 2022 primarily due to the decrease in salary and headcount related expenses which included the decrease of stock-based compensation expense. General and administrative expenses decreased $751,000 for the six months ended June 30, 2023 from the six months ended June 30, 2022 primarily due to the decrease in salary and headcount related expenses which included the decrease of stock-based compensation expense. Other Income, net Other income, net consisted primarily of foreign exchange transactions gains and losses, sublease income, German federal government funding for Corona-related pandemic relief, interest income earned on cash, cash equivalents and restricted cash as well as interest expense. Other income, net was $479,000 and $195,00, respectively, for the three months ended June 30, 2023 and 2022. Other income, net was $829,000 and $1.6 million, respectively, for the six months ended June 30, 2023 and 2022. The increase of $284,000 for the three months ended June 30, 2023 from the three months ended June 30, 2022 was due primarily to the $205,000 German federal government funding for COVID pandemic relief the Company received in the three months ended June 30, 2023. The decrease of $789,000 for the six months ended June 30, 2023 from the six months ended June 30, 2022 was due primarily to the $1.2 million German federal government funding for COVID pandemic relief the Company received in the six months ended June 30, 2022, offset partially by the $205,000 German federal government funding for COVID pandemic relief the Company received in the six months ended June 30, 2023. Income Taxes Our income is general ly taxed in the U.S., Canada and U.K. Our income tax provision reflects federal, state and country statutory rates applicable to our worldwide income. Income tax expense was $1.1 million and $928,000, respectively, for the three months ended June 30, 2023 and 2022. Our effective tax rate was 29% and 47%, respectively, for the three months ended June 30, 2023 and 2022, respectively. Our effective tax rate changed for the three months ended June 30, 2023 from three months ended June 30, 2022 primarily due to a decrease in non-deductible stock compensation in the three months ended June 30, 2023. Income tax expense was $2.5 million and $1.9 million, respectively, for the six months ended June 30, 2023 and 2022. Our effective tax rate was 28% and 36%, respectively, for the six months ended June 30, 2023 and 2022. Our effective tax rate changed for the six months ended June 30, 2023 from the six months ended June 30, 2022 primarily due to a decrease in non-deductible stock compensation in the six months ended June 30, 2023. 42 We expect our effective tax rate to fluctuate in future periods depending on the geo graphic mix of our worldwide income or losses mainly incurred by our operations, statutory tax rate changes that may occur, existing or new uncertain tax matters that may arise and require changes in tax reserves, the use of accumulated losses to offset current taxable income and the need for valuation allowances on certain tax assets, if any. See “Note 5: Income Taxes” to the accompanying unaudited condensed consolidated financial statements for further information. 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. Travelzoo North America Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) (In thousands) Revenues $ 14,133 $ 12,378 $ 28,891 $ 24,069 Operating profit $ 3,753 $ 3,272 $ 8,269 $ 5,092 Operating profit as a % of revenue 26.6 % 26.4 % 28.6 % 21.2 % North America revenues increased by $1.8 million for the three months ended June 30, 2023 from the three months ended June 30, 2022 (see “Revenues” above). North America expenses increase by $1.3 million for the three months ended June 30, 2023 from the three months ended June 30, 2022. The increase was primarily due to $581,000 increase in member acquisition costs, $197,000 increase in expenses from third-party partners of the Travelzoo Network, $161,000 increase in salary and headcount related expenses, $151,000 increase in professional service expenses and $100,000 increase in software license expenses. North America revenues increased by $4.8 million for the six months ended June 30, 2023 from the six months ended June 30, 2022 (see “Revenues” above). North America expenses increase by $1.6 million for the six months ended June 30, 2023 from the six months ended June 30, 2022 primarily due to the increase in member acquisition costs. Travelzoo Europe Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) (In thousands) Revenues $ 5,887 $ 4,354 $ 11,774 $ 10,288 Operating profit $ (239) $ (1,472) $ 218 $ (1,294) Operating profit as a % of revenue (4.1) % (33.8) % 1.9 % (12.6) % Europe revenues increased by $1.5 million for the three months ended June 30, 2023 from the three months ended June 30, 2022 (see “Revenues” above). Europe expenses increased by $300,000 for the three months ended June 30, 2023 from the three months ended June 30, 2022 primarily due to $197,000 increase in marketing expenses and $111,000 increase in professional service expenses Europe revenues increased by $1.5 million for the six months ended June 30, 2023 from the six months ended June 30, 2022 (see “Revenues” above). Europe expenses decreased by $26,000 for the six months ended June 30, 2023 from the six months ended June 30, 2022 primarily due to $347,000 decrease in salary and headcount related expenses, offset partially by $283,000 increase in marketing expenses Foreign currency movements relative to the U.S. dollar negatively impacted our local currency income from our operations in Europe by approximately $21,000 and $79,000 for the three and six months ended June 30, 2023, respectively. Foreign currency movements relative to the U.S. dollar positively impacted our local currency income from our operations in Europe by approximately $200,000 and $165,000 for the three and six months ended June 30, 2022, respectively. 43 Jack ’ s Flight Club Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) (In thousands) Revenues $ 1,095 $ 952 $ 2,043 $ 1,775 Operating profit (loss) $ 97 $ 161 $ 52 $ 184 Operating profit (loss) as a % of revenue 8.9 % 16.9 % 2.5 % 10.4 % Jack ’ s Flight Club revenues increased by $143,000 for the three months ended June 30, 2023 from the three months ended June 30, 2022 (see “Revenues” above). Jack ’ s Flight Club expenses in creased by $207,000 for the three months ended June 30, 2023 from the three months ended June 30, 2022 primarily due to an increase in advertising and marketing expenses. Jack ’ s Flight Club revenues increased by $268,000 for the six months ended June 30, 2023 from the six months ended June 30, 2022 (see “Revenues” above). Jack ’ s Flight Club expenses in creased by $400,000 for the three months ended June 30, 2023 from the three months ended June 30, 2022 primarily due to an increase in advertising and marketing expenses. New Initiatives Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) (In thousands) Revenues $ 13 $ 5 $ 21 $ 10 Operating profit (loss) $ (338) $ (180) $ (555) $ (282) New Initiatives segment consists of Travelzoo licensing business and Travelzoo META subscription service and Metaverse experience scouting and development business. Licensing revenue was $13,000 and $5,000 for the three months ended June 30, 2023 and 2022, respectively. New Initiatives segment expenses increased by $166,000 for the three months ended June 30, 2023 from the three months ended June 30, 2022 primarily due to $124,000 increase in p roduct development and product marketing expenses and $42,000 increase in in salary and related expenses. Licensing revenue was $21,000 and $10,000 for the six months ended June 30, 2023 and 2022, respectively. New Initiatives segment expenses increased by $284,000 for the six months ended June 30, 2023 from the six months ended June 30, 2022 primarily due to $184,000 increase in p roduct development and product marketing expenses and $100,000 increase in in salary and related expenses. Liquidity and Capital Resources As of June 30, 2023, we had $19.5 million in cash and cash equivalents, of which $13.3 million was held outside the U.S. in our foreign operations. If this cash is distributed to the U.S., we may be subject to additional U.S. taxes in certain circumstances. We also had $675,000 in restricted cash held in the U.S. as of June 30, 2023. Cash, cash equivalents and restricted cash increased $819,000 from $19.4 million as of December 31, 2022 to $20.2 million as of June 30, 2023 primarily due to $5.6 million cash provided by operating activities, offset partially by the $5.2 million cash used by financing activities. 44 As of June 30, 2023 , the Company had merchant payables of $23.9 million related to unredeemed 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 $4.3 million . Payables to merchants are generally due upon redemption of vouchers. The vouchers expire between July 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 and final payment upon expiration may not be due for up to a year after expiration. Management believes that redemptions may be delayed for international vouchers in the current environment. Based on current projections of redemption activity, we expect that cash on hand as of June 30, 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 our business is not profitable, or if our planned targets for cash flows from operations are not met, we may need to obtain additional financing to meet our working capital needs in the future. We believe that we could obtain additional financing if needed, but there can be no assurance that financing will be available on terms that are acceptable to us, if at all. The following table provides a summary of our cash flows from operating, investing and financing activities: Six Months Ended June 30, 2023 2022 (In thousands) Net cash provided by (used in) operating activities $ 5,650 $ (16,990) Net cash used in investing activities (44) (1,028) Net cash provided by (used in) financing activities (5,169) 1,885 Effect of exchange rate changes on cash, cash equivalents and restricted cash 382 (2,176) Net increase (decrease) in cash, cash equivalents and restricted cash $ 819 $ (18,309) Net cash provided by (used 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, 2023 was $5.6 million, which primarily consisted of net income of $6.3 million, $882,000 increase in non-cash items and $1.6 million decrease in cash from changes in operating assets and liabilities. Adjustments for non-cash items primarily consisted of $945,000 for depreciation and amortization and $827,000 for stock-based compensation, offset partially by $829,000 reversal of reserves from accounts receivable and other. The decrease in cash from changes in operating assets and liabilities was primarily due to $8.6 million decrease in merchant payables and $2.4 million decrease in accounts payable, offset partially by $3.9 million increase in accounts receivable and 2.6 million increase in accrued expenses and other. Net cash used in operating activities for the six months ended June 30, 2022 was $17.0 million, which primarily consisted of $21.0 million decrease in cash from changes in operating assets and liabilities, offset partially by net income of $3.4 million and $609,000 increase in non-cash items. The decrease in cash from changes in operating assets and liabilities was primarily due to $19.8 million decrease in merchant payables and $2.1 million decrease in accounts payables. Adjustments for non-cash items primarily consisted of $1.1 million for depreciation and amortization, $1.1 million for stock-based compensation and $550,000 for deferred income tax, offset partially by $2.2 million reversal of reserves from accounts receivable and other reserves. Cash refunds for income tax, net of payment made, during the six months ended June 30, 2023 was $494,000. Cash paid for income tax, net of refunds received, during the six months ended June 30, 2022 was $771,000 . Net cash used in investing activities for the six months ended June 30, 2023 was $44,000. The cash used in investing activities for the six months ended June 30, 2023 was primarily consisted of the $157,000 purchases of property and equipment, offset partially by $113,000 proceeds from repayment of the Japan loan. Net cash used in investing activities for the six months ended June 30, 2022 was $1.0 million. The cash used in investing activities for the six months ended June 30, 2022 was primarily consisted of the $1.0 million for purchases of intangible assets. Net cash used for financing activities for the six months ended June 30, 2023 was $5.2 million which primarily consisted of the repurchase of common stocks. Net cash provided by financing activities for the six months ended June 30, 2022 was $1.9 million which primarily consisted of the proceeds from exercise of stock options. Although we have settled the states unclaimed property claims with all states, we may still receive inquiries from certain potential Netsurfers promotional shareholders that had not provided their state of residence to us by April 25, 2004. Therefore, we are continuing our voluntary program under which we make cash payments to individuals related to the promotional shares for individuals whose residence was unknown by us and who establish that they satisfied the conditions to receive shares of 45 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 us. Our capital requirements depend on a number of factors, including market acceptance of our products and services, the amount of our resources we devote to the development of new products, cash payments related to former shareholders of Netsurfers, expansion of our operations, and the amount of resources we devote to promoting awareness of the Travelzoo brand. Since the inception of the voluntary program under which we make cash payments to people who establish that they were former shareholders of Netsurfers, and who failed to submit requests to convert their shares into shares of Travelzoo within the required time period, we have incurred expenses of $2.9 million. While future payments for this program are expected to decrease, the total cost of this voluntary program is still undeterminable because it is dependent on our stock price and on the number of valid requests ultimately received. Consistent with our growth, we have experienced fluctuations in our cost of revenues, sales and marketing expenses and our general and administrative expenses, including increases in product development costs, and we anticipate that these increases will continue for the foreseeable future. We believe cash on hand will be sufficient to pay such costs for at least the next twelve months. In addition, we will continue to evaluate possible investments in businesses, products and technologies, the consummation of any of which would increase our capital requirements. Although we currently believe that we have sufficient capital resources to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months, unanticipated events and opportunities or a less favorable than expected development of our business with one or more of advertising formats may require us to sell additional equity or debt securities or establish new credit facilities to raise capital in order to meet our capital requirements. If we sell additional equity or convertible debt securities, the sale could dilute the ownership of our existing shareholders. If we issue debt securities or establish a new credit facility, our fixed obligations could increase, and we may be required to agree to operating covenants that would restrict our operations. We cannot be sure that any such financing will be available in amounts or on terms acceptable to us. If the development of our business is less favorable than expected, we may decide to significantly reduce the size of our operations and marketing expenses in certain markets with the objective of reducing cash outflow. The information set forth under “Note 4: Commitments and Contingencies” and “Note 11: Leases” to the accompanying unaudited condensed consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference. Litigation and claims against the Company may result in legal defense costs, settlements or judgments that could have a material impact on our financial condition. We also have contingencies related to net unrecognized tax benefits, including interest and penalties, of approximately $17.5 million as of June 30, 2023. See “Note 5: Income Taxes” to the accompanying unaudited condensed consolidated financial statements for further information. Critical Accounting Policies and Estimates Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. Our critical accounting policies include revenue recognition, reserve for member refunds, allowance for doubtful accounts, income taxes and loss contingencies. For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2022 as well as updates in the current fiscal year provided in “Note 1 Summary of Significant Accounting Policies” in the notes to the condensed consolidated financial statements. Recent Accounting Pronouncements See “Note 1 — The Company and Basis of Presentation” to the accompanying unaudited condensed consolidated financial statements included in this report, regarding the impact of certain recent accounting pronouncements on our unaudited condensed consolidated financial statements. 46 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies.