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 Travelzoo (including its subsidiaries and affiliates, the “Company” or “we”) is a global Internet media company. It operates Travelzoo ®, the club for travel enthusiasts, and Jack’s Flight Club ®, a subscription service that provides information about exceptional airfares. Travelzoo has more than 30 million members. Through its websites, e-mails newsletters, iOS and Android apps, and social media channels, Travelzoo provides members information and access to exclusive discounted travel, entertainment, and local offers and experiences. Offers are researched, negotiated, and personally selected by Travelzoo’s deal experts around the globe. Offers are sourced from more than 5,000 top travel and entertainment partners. The Company generates revenues from advertising, membership fees, and other. In March 2022, the Company began the development of Travelzoo META, a subscription service that is intended to provide Metaverse travel experiences. We also license Travelzoo products, services and intellectual property to licenses in Australia, Japan, New Zealand, Singapore, and South Korea. In each case, the Company is entitled to a quarterly royalty payment based on a percentage of net revenue. The Company recognized $18,000 and $13,000 in royalties in the three months ended June 30, 2024 and 2023, respectively. The Company recognized $35,000 and $21,000 in royalties in the six months ended June 30, 2024 and 2023, respectively. Under the licensing agreements, Travelzoo's existing member list in the applicable territories continues to be owned by the Company. In May 2023 we launched Travelzoo META, to extend the range of experiences we offer consumers in the emerging metaverse. This paid membership service currently provides founding members with a limited edition “Travel Companion” non-fungible token (“NFT”) and future access to beta version metaverse travel experiences, as developed. In December 2022, we acquired Metaverse Travel Experiences, Inc., now Metaverse Travel Experiences, LLC (“MTE”), to support Travelzoo META in sourcing prospective metaverse travel experiences. MTE also continues to operate its legacy business in retail and fashion, which is included in but not material to the Company’s consolidated results. See Note 3— Acquisitions to the accompanying condensed consolidated financial statements included in this report for further information regarding the acquisition of MTE. 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 as of March 31, 2020. Travelzoo currently has license agreements covering Australia, Japan, New Zealand, Singapore, and South Korea. The license agreement for Australia, New Zealand and Singapore provides the licensee exclusive rights to use Travelzoo products, services and intellectual property in each jurisdiction in exchange for quarterly royalty payments based upon net revenue over a five-year term, with an option to renew. The Company recognized royalties o f $11,000 and $9,000 from the licensee for the three months ended June 30, 2024 and 2023, respectively. The Company recognized royalties o f $21,000 and $17,000 from the licensee for the six months ended June 30, 2024 and 2023 , respectively. 26 The license agreement for Japan and South Korea provides the licensee exclusive rights to use Travelzoo products, services, and intellectual property in exchange for quarterly royalty payments based on net revenue over a five-year term, with an option to renew. An interest free loan was provided to the licensee for JPY 46 million (approximately $430,000 ), of which $133,000 was repaid in 2021 and the remaining amount repaid in 2023. The Company recognized royalties o f $7,000 and $4,000 from the licensee for the three months ended June 30, 2024 and 2023, respectively. The Company recognized royalties o f $14,000 and $4,000 from the licensee for the six months ended June 30, 2024 and 2023 , respectively. Reportable Segments The Company determines its reportable segments based upon the Company's chief operating decision maker managing the performance of the business. 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 the U.S. and Canada. Travelzoo Europe consists of the Company’s operations in France, Germany, Spain and the U.K. Jack’s Flight Club consists of subscription revenues from premium members to access and receive flight deals from Jack’s Flight Club via email or mobile applications. New Initiatives consists of Travelzoo’s licensing business, the Travelzoo META subscription service and MTE. Financial information with respect to our business segments and certain financial information about geographic areas appears in Note 9–Segment Reporting and Significant Customer Information to the accompanying condensed consolidated financial statements included in this report. 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 three categories: Advertising, Membership Fees, and Other. The "Advertising" category consists primarily of (a) advertising fees paid by travel companies for the publishing of their offers on Travelzoo’s media properties, (b) commission generated from the sale of Getaways vouchers and bookings on our hotel platform, and (c) publishing fees from high-quality local businesses, sale of Local Deals vouchers and entertainment offers. Advertising fees may be based on audience reach, placement in email newsletters or on media properties, number of listings, number of clicks, and/or actual sales. We typically recognize advertising revenues upon delivery of emails or clicks, as tracked by our internal platform or third-party platforms, in the period of the applicable insertion orders, which 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 vouchers upon sale as commission, net of an allowance for future refunds. Merchant agreements for Getaways advertisers are typically for periods between twelve and twenty-four months and are not automatically renewed. Revenues generated from local business offers are based upon a percentage of the face value of the vouchers sold, commission on actual sales or a listing fee based on audience reach. We recognize revenue upon the sale of vouchers, upon notification of the amount of direct bookings or upon delivery of emails. For Local Deals vouchers, we recognize a percentage of the face value of vouchers upon the sale of the vouchers, net of an allowance for refunds. Insertion orders and merchant agreements for Local Deals are typically for periods between one and twelve months and are not automatically renewed. In the second quarter of 2020, due to the global pandemic and various stay-at-home protocols, the Company expanded its voucher refund policy to fully refundable until the voucher expires or is redeemed by the customer. This refund policy was reverted in April 2022 to a 14-day refund period from date of purchase, with a newly introduced option to extend refund eligibility until voucher redemption or expiration, for a surcharge. The expiration dates of vouchers range between July 2024 through December 2025; provided, that these expiration dates may sometimes be extended on a case-by-case basis and final payment to merchants upon expiration may not be due for up to a year later. As of June 30, 2024 and December 31, 2023, the Company had approximately $4.2 million and $5.2 million of unredeemed vouchers that had been sold, respectively, representing the Company’s commission. The Company estimates a refund reserve using historical and current refund rates by product and by merchant location to calculate estimated future refunds. The Company estimated and recorded a refund reserve of $177,000 and $268,000 as of June 30, 2024 and December 31, 2023, respectively, for these unredeemed vouchers which is recorded as a reduction of revenues on the consolidated statements of operations, and accrued expense and other on the consolidated balance sheet. 27 Merchant payables of $16.7 million as of June 30, 2024 related to unredeemed vouchers is recorded on the consolidated balance sheet, representing amounts payable to merchants by the Company for vouchers sold but not redeemed. Certain merchant contracts, typically in foreign locations, allow the Company to retain the proceeds from unredeemed vouchers upon expiration. 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 "Membership Fees" category consists of subscription fees paid by Travelzoo, Jack's Flight Club, and Travelzoo META members. Travelzoo ® membership has historically been free, however, on January 1, 2024, Travelzoo introduced an annual membership fee of $40 (or local equivalent) for new members in the United States, Canada, United Kingdom and Germany, with the 2024 annual fee waived for existing members as of December 31, 2023. Jack’s Flight Club subscription options are quarterly, semi-annually, and annually. We recognize subscription revenues ratably over the respective subscription periods. For Travelzoo META, a founding membership was launched in 2022 following a test-and-learn strategy. The "Other" category consists of licensing fees from license agreements, as well as the retail business originally operated by MTE and acquired and maintained by the Company following the acquisition of MTE. Trends in Our Business Our ability to generate revenues in the future depends on numerous factors, including those relating to members, advertisers, competitors, the travel industry, the online advertising business, internal factors and external factors. Factors relating to members include their willingness to purchase the deals we advertise, their demand for vouchers as a promotional format, and with the introduction of membership fees for new members in 2024 and existing members in 2025, our ability to enroll new paying members and transition existing members to paid membership, without adversely affecting our membership base and existing advertising revenue streams. Factors relating to advertisers include our ability to sell more advertising to existing and new advertisers, our ability to enhance our audience reach and advertising rates, spending controls by travel intermediaries to focus on improving profitability, and advertiser shifts from one advertising service (e.g. Top 20 ) to another (e.g. Local Deals and Getaways ). Advertiser shifts between advertising services could result in no incremental revenue or less revenue than in previous periods, depending on amounts purchased, and in particular with Local Deals and Getaways , depending on how many vouchers are purchased by members. Factors relating to competitors include the willingness of certain competitors to grow their business unprofitably. Factors relating to the travel industry include lingering effects of the global pandemic, geopolitical tensions affecting consumer travel to certain regions, and risk of future unforeseeable macro events that impact travel, while factors relating to the online advertising business include shifts in consumer use of different digital media formats such as from desktop to mobile, from mobile web to mobile app, and from email to push notifications and SMS text messaging. Internal factors include risks relating to our ability to continue to service members without interruption, our ability to develop and launch new products members will utilize and advertisers will adopt, and hiring and relying on key employees for the continued maintenance and growth of our business. External factors include the introduction of new methods of advertising, the relative condition of the economy, cybersecurity risks due to increased dependence on digital technologies, and 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. Revenues from local business 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 commission rate earned by us from the merchants for vouchers sold. However, during the global pandemic, we saw an increase in demand by consumers for fully refundable travel options, which led to a slight reversal of this trend and an increase in the sale of Getaways hotel vouchers (although demand for restaurants and spas continued to be low). With the ending of the pandemic, the importance of fully refundable travel options has decreased (and we also shifted to offering a surcharge for full refundability), and the trend is therefore returning to pre-pandemic patterns. 28 Our ability to continue generating revenues through advertising, commissions and subscriptions depends heavily upon our ability to maintain and grow an attractive audience for our publications. We monitor our membership base 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 and social media 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. With the introduction of membership fees in 2024, we have been adjusting our user acquisition strategies whose timeframes to become effective are uncertain. While we are initially reducing our expenditures on acquiring traffic as we test new strategies for efficacy, in time we plan to increase these expenditures to maintain or grow our membership, audience and the reach of our publications. We continue to see a shift in users accessing our services through mobile devices and social media and, therefore, anticipate continuing to address this growing channel through additional investments in mobile app development. We believe that an important factor for our advertising rates is the reach of our publications, however, we also believe that there are other important factors, such as the engagement of our membership base with our content. We do not know if we will be able to increase the reach of our publications, particularly with the introduction of membership fees in 2024. We do not know if by increasing the reach of our publications, we will also be able to increase engagement and other key metrics of importance to our advertisers. 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, including 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 could, 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 change in relation to volume and terms with third-party partners of the Travelzoo network, the incurrence of merchant processing fees from the sale of vouchers for Local Deals and Getaways and payment of membership fees, changes in refund request trends and provisioning of customer service. 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. We do not know what our sales and marketing expenses as a percentage of revenue will be in future periods. Changes in the average cost per acquisition of new members impacts our advertising expenses and sales and marketing expenses as a percentage of revenue, and are not readily predictable. With the introduction of membership fees in 2024, we expect the cost of acquiring new paying members to increase significantly, as compared with the cost of acquiring non-paying members prior to 2024. We are early in the development of new strategies to acquire paying members, so our test budgets have not yet fully scaled. However, as we test new strategies and gain more learnings as to acquiring paying members, our expenditures may increase significantly. We hope efficiencies we have gained through our testing will scale as well. In addition, there may be a significant number of members that cancel or we may cancel their memberships for various reasons, which may prompt us to spend more on member acquisition in order to replace lost members. In addition to the type of membership offered, we believe the average cost per acquisition depends mainly on the advertising rates we pay for media buys, the quality of the members we acquire, our ability to manage our member acquisition efforts successfully, the regions we target to acquire new members and the relative costs for that region, and the degree of competition in our industry. All else equal, increased competition may require us to increase advertising for our brand and advertisers’ deals. Beside member acquisition costs, we may see a unique opportunity for a brand marketing campaign, experience increases in the cost of retaining or sourcing new advertiser clients, or change the number of personnel or compensation structure for the Sales and marketing function, any of which would result in an increase in sales and marketing expenses. 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 expenses to spur continued growth in revenue in future periods; however, we cannot be assured of this due to the many factors that impact our growth. We expect to adjust the level of such incremental spending dynamically 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. We expect to increase investment in our products in connection with building out and refining the value proposition of the Travelzoo membership. 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 receptivity of our offerings to our member audience and advertiser clients. We expect our efforts in developing products and services will continue to be a focus in the future, which may lead to increased product development expenses. Increases in expense may result from costs related to third-party technology service providers and software licenses, headcount and the use of professional services. 29 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, any audits of prior years' tax returns that result in adjustments, resolution of uncertain tax positions and different treatments for certain items for tax versus book purposes. We expect fluctuations in our income taxes from year to year and from quarter to quarter, which may be significant and have a material impact on our results of operations. Due to the adverse effects of the global pandemic, the Company reduced expenditures in many areas, 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 operations significantly. The Company also renegotiated many of its outstanding contractual obligations with vendors and closed some ancillary office locations. We do not currently anticipate that additional cost-cutting measures will be necessary. In the foreseeable future, we anticipate relatively slow growth in fixed costs for our existing business, while investing in new initiatives where we see opportunities to expand our business, in aggregate, in-line with the trend of our revenues. The key elements of our growth strategy include building our trusted travel, entertainment and local brands, refining and building out the value proposition of our membership and consequently increasing the value and engagement of our members, sourcing more exclusive and compelling offers from travel and entertainment partners, and innovating with new experiences and revenue streams. 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 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. 30 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, 2024 2023 2024 2023 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues 11.9 13.6 12.0 13.0 Gross profit 88.1 86.4 88.0 87.0 Operating expenses: Sales and marketing 44.4 48.0 41.7 45.5 Product development 2.8 2.5 2.7 2.4 General and administrative 21.9 20.4 21.3 20.4 Total operating expenses 69.1 70.9 65.7 68.3 Operating income 19.0 15.5 22.3 18.7 Other income, net 0.8 2.3 0.7 1.9 Income from continuing operations before income taxes 19.8 17.8 23.0 20.6 Income tax expense 6.0 5.2 6.4 5.8 Income from continuing operations 13.8 12.6 16.6 14.8 Income from discontinued operations, net of taxes — — — — Net income 13.8 12.6 16.6 14.8 Net income attributable to non-controlling interest — 0.2 — 0.1 Net income attributable to Travelzoo 13.8 % 12.4 % 16.6 % 14.7 % 31 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, 2024 2023 North America Total members (1) 16,118,000 16,225,000 Average cost per acquisition of a new member $ 2.62 $ 4.68 Revenue per member (2) $ 3.49 $ 3.56 Revenue per employee (3) $ 461,000 $ 448,000 Mobile application downloads 4,220,000 4,158,000 Social media followers 3,323,000 3,260,000 Europe Total members (1) 9,230,000 9,197,000 Average cost per acquisition of a new member $ 3.47 $ 4.59 Revenue per member (2) $ 2.73 $ 2.61 Revenue per employee (3) $ 260,000 $ 238,000 Mobile application downloads 2,409,000 2,356,000 Social media followers 1,012,000 898,000 Jack's Flight Club Total members 2,244,000 2,187,000 Other locations 3,221,000 3,214,000 Consolidated Total members (1) 30,813,000 30,823,000 Average cost per acquisition of a new member $ 2.93 $ 4.64 Revenue per member (2) $ 2.80 $ 2.77 Revenue per employee (3) $ 373,000 $ 356,000 Mobile application downloads 7,736,000 7,524,000 Social media followers 4,335,000 4,158,000 (1) Members represent individuals who receive one or more of our email publications. (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. 32 Revenues The following table sets forth the breakdown of revenues (in thousands) by category Advertising, Membership Fees, and Other. Advertising includes travel publications ( Top 20 , Travelzoo website, Standalone email newsletters, Travelzoo Network ), Getaways vouchers, hotel platform, vacation packages, Local Deals vouchers and entertainment offers (vouchers and direct bookings). Membership Fees includes subscription fees paid by Travelzoo, Jack’s Flight Club and Travelzoo META members. Other includes licensing fees from license agreements and the retail business acquired with MTE. Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 Advertising $ 19,957 $ 20,020 $ 40,807 $ 40,665 Membership Fees 1,161 1,095 2,265 2,043 Other 23 13 54 21 Total revenues $ 21,141 $ 21,128 $ 43,126 $ 42,729 Advertising Advertising revenue decreased $63,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023. This decrease was primarily due to $664,000 decrease in revenues from Top 20 and Standalone, offset partially by $267,000 increase in revenues from Travelzoo Network and $243,000 increase in Hotel commission. Advertising revenue increased $142,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023. This increase was primarily due to $989,000 increase in Hotel commission and $569,000 increase in revenues from Travelzoo Network, offset partially by $1.5 million decrease in revenues from Top 20 and Standalone. Membership Fees Revenues from Membership fees increased $66,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 due to the increase of subscription fees paid by Travelzoo and Jack's Flight Club members. Revenues from Membership fees increased $222,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 due to the increase of subscription fees paid by Travelzoo and Jack's Flight Club members. Other Revenues from Other increased $10,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to $5,000 revenue increase from retail and fashion business and $5,000 increase in licensing revenue. Revenues from Other increased $33,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 primarily due to $19,000 revenue increase from retail and fashion business and $14,000 increase in licensing revenue. 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, software and license expenses, 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 $2.5 million and $2.9 million, respectively, for the three months ended June 30, 2024 and 2023. Cost of revenues was $5.2 million and $5.6 million, respectively, for the six months ended June 30, 2024 and 2023. Cost of revenues decreased $360,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to the $178,000 decrease in software and license costs and $112 ,000 decrease in estimated refunds to members for customer retention. Cost of revenues decreased $411,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 primarily due to the decrease in software and license costs. Operating Expenses 33 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, marketing professional service costs, public relations expenses and facilities costs. Sales and marketing expenses were $9.4 million and $10.1 million for the three months ended June 30, 2024 and 2023, respectively. Sales and marketing expenses were $18.0 million and $19.4 million for the six months ended June 30, 2024 and 2023, 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, 2024 and 2023, advertising expenses accounted for 19% and 28%, respectively, of the total sales and marketing expenses. For the six months ended June 30, 2024 and 2023, advertising expenses accounted for 15% and 27%, 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 decreased $756,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023. The decrease was primarily due to the decrease in member acquisition costs as a result of management's strategic plan. Sales and marketing expenses decreased $1.5 million for the six months ended June 30, 2024 from the six months ended June 30, 2023 . The decrease was primarily due to $2.3 million decrease in member acquisition costs as a result of management's strategic plan, offset partially by $461,000 increase in salary and related expenses and $306,000 increase in professional service costs. 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 $603,000 and $518,000 for the three months ended June 30, 2024 and 2023, respectively. Product development expenses were $1.2 million and $1.0 million for the six months ended June 30, 2024 and 2023, respectively. Product development expenses increased $85,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to the increase in professional service expenses . Product development expenses increased $161,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 primarily due to the increase in professional service expenses . 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 $4.6 million and $4.3 million for the three months ended June 30, 2024 and 2023, respectively. General and administrative expenses were $9.2 million and $8.7 million for the six months ended June 30, 2024 and 2023, respectively. General and administrative expenses increased $306,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to $202,000 increase in salary and related expenses and $170,000 increase in professional service expenses. General and administrative expenses increased $483,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 primarily due to the increase in professional service expenses. Other Income, net Other income, net consisted primarily of foreign exchange transactions gains and losses, sublease income, German federal government funding for COVID-19 pandemic relief, interest income earned on cash, cash equivalents and restricted cash as well as interest expense. Other income, net was $176,000 and $479,000, respectively, for the three months ended June 30, 2024 and 2023. Other income, net was $315,000 and $829,000, respectively, for the six months ended June 30, 2024 and 2023. Other income, net decreased $303,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to $205,000 German federal government funding for COVID-19 pandemic relief the Company received in the three months ended June 30, 2023 and $90,000 decrease in sublease income as the result of the sublease term expiration in 2023. 34 Other income, net decreased $514,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 primarily due to $205,000 German federal government funding for COVID-19 pandemic relief the Company received in the six months ended June 30, 2023, $180,000 decrease in sublease income as the result of the sublease term expiration in 2023 and $145,000 decrease in interest income as the result of Azzurro's repayment of $3.0 million principal of its Notes Receivable in 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 $1.3 million and $1.1 million, respectively, for the three months ended June 30, 2024 and 2023. Our effective tax rate from continuing operations was 30% and 29%, respectively, for the three months ended June 30, 2024 and 2023. The Company’s effective tax rate for the three months ended June 30, 2024 changed from the three months ended June 30, 2023 primarily due to an increase in certain non-deductible expenses in the three months ended June 30, 2024. Income tax expense was $2.8 million and $2.5 million, respectively, for the six months ended June 30, 2024 and 2023. Our effective tax rate from continuing operations was 28% for each the six months ended June 30, 2024 and 2023 . We expect our effective tax rate to fluctuate in future periods depending on the geographic 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 and the need for valuation allowances on certain tax assets, if any. See Note 7–Income Taxes to the accompanying 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, 2024 2023 2024 2023 (In thousands) (In thousands) Revenues $ 14,134 $ 14,133 $ 28,362 $ 28,891 Operating profit $ 3,717 $ 3,753 $ 8,155 $ 8,269 Operating profit as a % of revenue 26.3 % 26.6 % 28.8 % 28.6 % North America revenues increased by $1,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023. This increase was primarily due to $267,000 increase in revenues from Travelzoo Network, $243,000 increase in Hotel commission and $233,000 increase in sale of Getaway Vouchers, offset partially by $664,000 decrease in revenues from Top 20 and Standalone. North America expenses increased by $37,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023. The increase was primarily due to $555,000 increase in salary and related expenses, offset partially by $504,000 decrease in member acquisition costs. North America revenues decreased by $529,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023. This decrease was primarily due to $1.5 million decrease in revenues from Top 20 and Standalone, offset partially by $989,000 increase in hotel commission. North America expenses decreased by $415,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023. The decrease was primarily due to $1.4 million decrease in member acquisition costs, offset partially by $967,000 increase in professional service expenses. 35 Travelzoo Europe Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Revenues $ 5,951 $ 5,887 $ 12,613 $ 11,774 Operating profit $ 512 $ (239) $ 1,894 $ 218 Operating profit as a % of revenue 8.6 % (4.1) % 15.0 % 1.9 % Europe revenues increased by $64,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023. The increase was primarily due to $24,000 increase in Advertising revenues and $40,000 positive impact from foreign currency movements relative to the U.S. dollar. The increase in Advertising revenue of $24,000 was primarily due to $112,000 increase in Hotel commission and $90,000 increase in sale of Getaway Vouchers, offset partially by $150,000 decrease in revenues from Top 20 and Standalone. Eur ope expenses decreased by $687,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to $304,000 decrease in member acquisition costs, $174,000 decrease in trade and brand marketing expenses and $101,000 decrease in salary and related expenses. Europe revenues increased by $839,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023. The increase was primarily due to $572,000 increase in Advertising revenues and $267,000 positive impact from foreign currency movements relative to the U.S. dollar. The increase in Advertising revenue of $572,000 was primarily due to the increase in Hotel commission. Eur ope expenses decreased by $837,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 primarily due to the decrease in member acquisition costs. Foreign currency movements relative to the U.S. dollar positively impacted our local currency income from our operations in Europe by approximately $5,000 and $53,000 for the three and six months ended June 30, 2024, respectively. 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. Jack ’ s Flight Club Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Revenues $ 1,033 $ 1,095 $ 2,096 $ 2,043 Operating profit (loss) $ (34) $ 97 $ (133) $ 52 Operating profit (loss) as a % of revenue (3.3) % 8.9 % (6.3) % 2.5 % Jack ’ s Flight Club revenues decreased by $62,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 due to the decrease of subscription fees paid by the members. Jack’s Flight Club expenses in creased by $69,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to the increase in salary and related expenses. Jack ’ s Flight Club revenues increased by $53,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 due to the increase of premium members. Jack’s Flight Club expenses in creased by $238,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 primarily due to $146,000 increase in salary and related expenses and $109,000 increase in software expenses. New Initiatives Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Revenues $ 23 $ 13 $ 55 $ 21 Operating profit (loss) $ (184) $ (338) $ (314) $ (555) 36 New Initiatives segment primarily consists of Travelzoo licensing business, Travelzoo META subscription service, Metaverse experience scouting and development business and retail and fashion business acquired with MTE. New Initiatives revenues increased $10,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to $5,000 revenue increase from retail and fashion business and $5,000 increase in licensing revenue. New Initiatives segment expenses decreased by $144,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to decrease in salary and related expenses. New Initiatives revenues increased $34,000 for the six months ended June 30, 2024 from the six months ended June 30, 2023 primarily due to $19,000 revenue increase from retail and fashion business and $14,000 increase in licensing revenue. New Initiatives segment expenses decreased by $207,000 for the three months ended June 30, 2024 from the three months ended June 30, 2023 primarily due to decrease in salary and related expenses. Liquidity and Capital Resources As of June 30, 2024, we had $12.6 million in cash and cash equivalents, of which $8.0 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, 2024. Cash, cash equivalents and restricted cash decreased $3.1 million from $16.4 million as of December 31, 2023 to $13.2 million as of June 30, 2024 primarily due to $10.4 million cash used to repurchase common stock, offset partially by $7.7 million cash provided by operating activities. As of June 30, 2024 , we had merchant payables of $16.7 million related to unredeemed vouchers. In the Company’s financial statements presented in this 10-Q report, following U.S. generally accepted accounting principles (“GAAP”), 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 2024 through December 2025; however, 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. Based on current projections of redemption activity, we expect that cash on hand as of June 30, 2024 will be sufficient to provide for working capital needs for at least the next twelve months. The following table provides a summary of our cash flows from operating, investing and financing activities: Six Months Ended June 30, 2024 2023 (In thousands) Net cash provided by operating activities $ 7,927 $ 5,650 Net cash used in investing activities (83) (44) Net cash used in financing activities (10,679) (5,169) Effect of exchange rate changes on cash, cash equivalents and restricted cash (311) 382 Net increase (decrease) in cash, cash equivalents and restricted cash $ (3,146) $ 819 Net cash provided by operating ac tivities 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, 2024 was $7.9 million, which primarily consisted of net income of $7.1 million and $1.3 million increase in non-cash items, offset partially by $514,000 decrease in cash from changes in operating assets and liabilities. Adjustments for non-cash items primarily consisted of $783,000 for stock-based compensation and $558,000 for depreciation and amortization. The decrease in cash from changes in operating assets and liabilities was primarily due to $3.8 million decrease in merchant payables, offset partially by $1.2 million increase in deferred revenue, $1.2 million increase in accounts payable and accrued expenses and other, and $753,00 increase in other non-current 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. 37 Cash paid for income tax, net of refunds received, during the six months ended June 30, 2024 was $1.2 million. Cash refunds for income tax, net of payment made, during the six months ended June 30, 2023 was $494,000. Net cash used in investing activities for the six months ended June 30, 2024 and 2023 was $83,000 and $44,000, respectively. The cash used in investing activities for the six months ended June 30, 2024 was consisted of purchases of property and equipment. 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 for financing activities for the six months ended June 30, 2024 was $10.7 million which primarily consisted of repurchase of common stock of $10.4 million and taxes paid for net share settlement of $257,000. Net cash used for financing activities for the six months ended June 30, 2023 was $5.2 million which primarily consisted of repurchase of common stock of $4.9 million and taxes paid for net share settlement of $299,000. Consistent with our growth, we experienced fluctuations in our cost of revenues, sales and marketing expenses, product development expenses and general and administrative expenses, 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 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 advertising formats may require us to sell additional equity or debt securities or establish credit facilities to raise capital in order to meet our capital requirements. If we sell additional equity or convertible debt securities, such 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 outflows. The information set forth unde r “Note 6— Commitments and Contingencies ” and “Note 11— Leases ” to the accompanying condensed consolidated financial statements included in this report. 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 $24.8 million as of June 30, 2024. 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 income taxes. 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, 2023 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. 38 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies.