Travelzoo
TRAVELZOO (Form: 10-Q, Received: 08/03/2017 16:48:01)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________
Form 10-Q
______________________________________________________________________________  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or  
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File No.: 000-50171
_______________________________________________________________________________  
TRAVELZOOLOGORGBFORWEB.JPG
(Exact name of registrant as specified in its charter)
  ________________________________________________________________________________
DELAWARE
36-4415727
(State or other jurisdiction of
incorporation or organization)
(I.R.S. employer
identification no.)
 
 
590 Madison Avenue, 37th Floor
New York, New York
10022
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (212) 484-4900
_________________________________________________________________________________ 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x     No   ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨   (Do not check if a smaller reporting company)
Smaller reporting company
¨   
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisited financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
The number of shares of Travelzoo common stock outstanding as of July 26, 2017 was 12,712,000 shares.

1



TRAVELZOO
Table of Contents
 

PART I—FINANCIAL INFORMATION
Page
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 

2




PART I—FINANCIAL INFORMATION

Item 1.        Financial Statements

TRAVELZOO
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value)  

 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
21,331

 
$
26,838

Accounts receivable, less allowance for doubtful accounts of $288   and $295 as of June 30, 2017 and December 31, 2016, respectively
12,576

 
14,415

Income tax receivable
639

 
542

Deposits
709

 
105

Deferred tax assets

 
793

Prepaid expenses and other
1,481

 
1,773

Total current assets
36,736

 
44,466

Deposits and other
413

 
702

Deferred tax assets
1,860

 
1,052

Restricted cash
1,413

 
1,152

Property and equipment, net
5,418

 
6,158

Total assets
$
45,840

 
$
53,530

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,194

 
$
19,714

Accrued expenses and other
9,334

 
8,699

Deferred revenue
954

 
719

Income tax payable
1,056

 
691

Total current liabilities
25,538

 
29,823

Long-term tax liabilities
2,602

 
2,879

Long-term deferred rent and other
2,674

 
2,764

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value (40,000 shares authorized; 12,753 shares and 13,462 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively)
128

 
135

Additional paid in capital

 

Retained earnings
18,585

 
21,716

Accumulated other comprehensive loss
(3,687
)
 
(3,787
)
Total stockholders’ equity
15,026

 
18,064

Total liabilities and stockholders’ equity
$
45,840

 
$
53,530

 
See accompanying notes to unaudited condensed consolidated financial statements.

3



TRAVELZOO
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
26,411

 
$
29,798

 
$
54,840

 
$
60,626

Cost of revenues
3,222

 
3,471

 
6,429

 
7,322

Gross profit
23,189

 
26,327

 
48,411

 
53,304

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
14,213

 
15,455

 
29,569

 
30,985

Product development
2,344

 
2,001

 
4,701

 
4,789

General and administrative
5,246

 
5,434

 
10,693

 
11,247

Total operating expenses
21,803

 
22,890

 
44,963

 
47,021

Income from continuing operations
1,386

 
3,437

 
3,448

 
6,283

Other income (loss), net
18

 
(91
)
 
25

 
42

Income from continuing operations before income taxes
1,404

 
3,346

 
3,473

 
6,325

Income tax expense
771

 
1,548

 
1,980

 
2,702

Income from continuing operations
$
633

 
$
1,798

 
$
1,493

 
$
3,623

Income from discontinued operations, net of income taxes
54

 
222

 
1,938

 
446

Net income
$
687

 
$
2,020

 
$
3,431

 
$
4,069

 
 
 
 
 
 
 
 
Income per share—basic:
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.13

 
$
0.11

 
$
0.26

Discontinued operations

 
0.01

 
0.15

 
0.03

Net income per share—basic
$
0.05

 
$
0.14

 
$
0.26

 
$
0.29

 
 
 
 
 
 
 
 
Income per share—diluted:


 


 


 


Continuing operations
$
0.05

 
$
0.13

 
$
0.11

 
$
0.26

Discontinued operations

 
0.01

 
0.15

 
0.03

Net income per share—diluted
$
0.05

 
$
0.14

 
$
0.26

 
$
0.29

 
 
 
 
 
 
 
 
Shares used in computing basic net income per share
13,030

 
14,066

 
13,224

 
14,246

Shares used in computing diluted net income per share
13,058

 
14,066

 
13,229

 
14,246


See accompanying notes to unaudited condensed consolidated financial statements.


4



TRAVELZOO
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
687

 
$
2,020

 
$
3,431

 
$
4,069

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
133

 
91

 
100

 
283

Total comprehensive income
$
820

 
$
2,111

 
$
3,531

 
$
4,352


See accompanying notes to unaudited condensed consolidated financial statements.


5



TRAVELZOO
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended
 
June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
3,431

 
$
4,069

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
1,101

 
1,250

Discontinued operations gain on sale of Fly.com  domain name
(2,890
)
 

Provision for losses on accounts receivable
(27
)
 
44

Stock-based compensation
480

 
442

Deferred income tax
(69
)
 
(211
)
Net foreign currency effect
(224
)
 
236

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,087

 
(2,265
)
Income tax receivable
35

 
525

Prepaid expenses and other
(218
)
 
182

Accounts payable
(6,054
)
 
(2,210
)
Accrued expenses
441

 
484

Income tax payable
179

 
1,268

Other non-current liabilities
(278
)
 
91

Net cash provided by (used in) operating activities
(2,006
)
 
3,905

Cash flows from investing activities:
 
 
 
Proceeds from sale of Fly.com  domain name
2,890

 

Purchases of property and equipment
(306
)
 
(648
)
Net cash provided by (used in) investing activities
2,584

 
(648
)
Cash flows from financing activities:
 
 
 
Acquisition of the Asia Pacific business

 
58

Payment of loan to related party

 
(5,658
)
Repurchase of common stock
(6,824
)
 
(4,956
)
Net cash used in financing activities
(6,824
)
 
(10,556
)
Effect of exchange rate changes on cash and cash equivalents
739

 
(269
)
Net decrease in cash and cash equivalents
(5,507
)
 
(7,568
)
Cash and cash equivalents at beginning of period
26,838

 
35,128

Cash and cash equivalents at end of period
$
21,331

 
$
27,560

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes, net
$
3,230

 
$
1,072

Cash paid for interest on related party loan
$

 
$
110

See accompanying notes to unaudited condensed consolidated financial statements.

6



TRAVELZOO
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1: The Company and Basis of Presentation
Travelzoo (the “Company” or “Travelzoo”) is a global publisher of travel and entertainment offers. The Company informs its members in Asia Pacific, Europe and North America, as well as website users, about the best travel, entertainment and local deals available from thousands of companies. The Company's deal experts source, research and test-book offers, recommending only those that meet Travelzoo’s rigorous quality standards. The Company provides travel, entertainment, and local businesses with a fast, flexible, and cost effective way to reach consumers. The Company's revenues are generated primarily from advertising fees.
Our publications and products include the  Travelzoo  website (travelzoo.com), the Travelzoo iPhone and Android apps, the  Travelzoo Top 20  e-mail newsletter, the  Newsflash  e-mail alert service, and the  Travelzoo Network , a network of third-party websites that list travel deals published by Travelzoo. Our  Travelzoo  website includes  Local Deals and Getaway listings that allow our members to purchase vouchers for deals from local businesses such as spas, hotels and restaurants. We receive a percentage of the face value of the voucher from the local businesses.
Ralph Bartel, who founded Travelzoo and who is a Director of the Company, is the sole beneficiary of the Ralph Bartel 2005 Trust, which is the controlling shareholder of Azzurro Capital Inc. ("Azzurro"). As of June 30, 2017 , Azzurro is the Company's largest stockholder, holding approximately 56.6% of the Company's outstanding shares.
During the first quarter of 2017, the Company discontinued operations of its SuperSearch and Fly.com products to focus on its global Travelzoo® brand and reflected the revenues and expenses for these products as discontinued operations, net of taxes, for the current and prior periods presented. See "Note 9: Discontinued Operations" for further information.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the year ended December 31, 2016, included in the Company’s Form 10-K filed with the SEC on March 15, 2017.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other future period, and the Company makes no representations related thereto.
Recently Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective for us beginning on January 1, 2017 with early application permitted as of the beginning of any interim or annual reporting period. The Company adopted ASU 2015-17 in the first quarter of 2017 on a prospective basis. Accordingly, the Company reclassified current deferred taxes of $793,000 to noncurrent on its March 31, 2017 consolidated balance sheet. No prior periods were retrospectively adjusted.
In March, 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting," which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This accounting standard update was effective for the Company on January 1, 2017 with early adoption permitted. The Company adopted ASU 2016-09 in the first quarter of 2017. The Company elected to account for forfeitures as they occur and did not have unrecognized tax benefits of stock-based compensation; therefore, the adoption of this guidance did not have a material impact on our financial position or results of operations.

7



Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most of the existing revenue recognition guidance in U.S. GAAP when it becomes effective. This new accounting standard is effective for the Company for annual periods in fiscal years beginning after December 15, 2017 (as amended in August 2015 by ASU 2015-14, "Deferral of the Effective Date"). In December 27, 2016, FASB issued ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," which addresses loan guarantee fees, impairment testing of contract costs, provisions for losses on construction-type and production-type contracts, and various disclosures. ASU 2016-20 will go into effect once ASU 2014-09 takes effect. The Company is currently assessing the timing of revenue for its various advertising products including Top 20 , Newsflash , Local Deals and Getaway vouchers and Hotel Platform commissions. Although the Company is still currently evaluating the impact of the adoption on its financial position, results of operations and cash flows and has not yet determined whether the effect will be material, the adoption is expected to result in additional required disclosures related to its revenue arrangements. The Company expects to adopt this standard effective January 1, 2018 with a cumulative adjustment to retained earnings as opposed to retrospectively adjusting prior periods.
In February 2016, the FASB issued an accounting standard update ASU 2016-02, "Leases," which requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability on its balance sheet. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. This accounting standard update will be effective for the Company on January 1, 2019. For operating leases with terms longer than 12 months, the Company will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The Company is currently in the process of evaluating the impact of the adoption on its financial position, results of operations and cash flows.
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments," which addresses eight classification issues related to the statement of cash flows. In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows: Restricted Cash," which addresses classification and presentation of changes in restricted cash on the statement of cash flows. The standard requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. Both ASU 2016-15 and ASU 2016-18 are effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017 and should apply using a retrospective transition method to each period presented. These accounting standard updates will be effective for the Company on January 1, 2018. The Company is currently in the process of evaluating the impact of the adoption on its financial position, results of operations and cash flows.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory," which requires immediate recognition of the income tax consequences of intercompany asset transfers other than inventory. This update is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. This accounting standard update will be effective for the Company on January 1, 2018 with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption on its financial position, results of operations and cash flows.
In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting," which gives direction on which changes to the terms or conditions of these awards require an entity to apply modification accounting in ASC Topic 718, "Compensation-Stock Compensation." The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for all entities with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption on its financial position, results of operations and cash flows.
Note 2: Net Income Per Share
Basic net income per share is computed using the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed by adjusting the weighted-average number of common shares outstanding for the effect of dilutive potential common shares outstanding during the period. Potential common shares included in the diluted calculation consist of incremental shares issuable upon the exercise of outstanding stock options calculated using the treasury stock method.

8



The following table sets forth the calculation of basic and diluted net income per share (in thousands, except per share amounts):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Income from continuing operations

$
633

 
$
1,798

 
$
1,493

 
$
3,623

Income from discontinued operations, net of income taxes
54

 
222

 
1,938

 
446

Net income
$
687

 
$
2,020

 
$
3,431

 
$
4,069

Denominator:

 
 
 
 
 
 
 
Weighted average common shares—basic
13,030

 
14,066

 
13,224

 
14,246

Effect of dilutive securities: stock options
28

 

 
5

 

Weighted average common shares—diluted
13,058

 
14,066

 
13,229

 
14,246

Income per share—basic:
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.13

 
$
0.11

 
$
0.26

Discontinued operations

 
0.01

 
0.15

 
0.03

Net income per share—basic
$
0.05

 
$
0.14

 
$
0.26

 
$
0.29

Income per share—diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.13

 
$
0.11

 
$
0.26

Discontinued operations

 
0.01

 
0.15

 
0.03

Net income per share—diluted
$
0.05

 
$
0.14

 
$
0.26

 
$
0.29

For the three and six months ended June 30, 2017 , options to purchase 200,000 shares of common stock were not included in the computation of diluted net income per share because the effect would have been anti-dilutive. For the three and six months ended June 30, 2016 , options to purchase 600,000 shares of common stock were not included in the computation of diluted net income per share because the effect would have been anti-dilutive.
Note 3: Commitments and Contingencies
The Company was formed as a result of a combination and merger of entities founded by the Company’s principal stockholder, Ralph Bartel. In 2002, Travelzoo.com Corporation was merged into Travelzoo. Under and subject to the terms of the merger agreement, holders of promotional shares of Travelzoo.com Corporation (“Netsurfers”) who established that they had satisfied certain prerequisite qualifications were allowed a period of 2 years following the effective date of the merger to receive one share of Travelzoo in exchange for each share of common stock of Travelzoo.com Corporation. In 2004, two years following the effective date of the merger, certain promotional shares remained unexchanged. As the right to exchange these promotional shares expired, no additional shares were reserved for issuance. Thereafter, the Company began to offer a voluntary cash program for those who established that they had satisfied certain prerequisite qualifications for Netsurfer promotional shares as further described below.
During 2010 through 2014, the Company became subject to unclaimed property audits of various states in the United States related to the above unexchanged promotional shares and completed settlements with all states. Although the Company has settled the unclaimed property claims with all states, the Company may still receive inquiries from certain potential Netsurfer promotional stockholders that had not provided their state of residence to the Company by April 25, 2004. Therefore, the Company is continuing its voluntary program under which it makes cash payments to individuals related to the promotional shares for individuals whose residence was unknown by the Company and who establish that they satisfy the original conditions required for them to receive shares of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo within the required time period. This voluntary program is not available for individuals whose promotional shares have been escheated to a state by the Company, except those individuals for which their residence was unknown to the Company. The accompanying condensed consolidated financial statements include charges in general and administrative expenses of $1,000 for each of the three and six months ended June 30, 2016 . The Company did not make any payment for the three and six months ended June 30, 2017 .

9



The total cost of this program cannot be reliably estimated because it is based on the ultimate number of valid requests received and future levels of the Company’s common stock price. The Company’s common stock price affects the liability because the amount of cash payments under the program is based in part on the recent level of the stock price at the date valid requests are received. The Company does not know how many of the requests for shares originally received by Travelzoo.com Corporation in 1998 were valid, but the Company believes that only a portion of such requests were valid. In order to receive payment under this voluntary program, a person is required to establish that such person validly held shares in Travelzoo.com Corporation.
The Company leases office space in Australia, Canada, China, France, Germany, Hong Kong, Japan, Singapore, Spain, Taiwan, the U.K., and the U.S. under operating leases which expire between July 2017 and November 30, 2024. The Company has purchase commitments which represent the minimum obligations the Company has under agreements with certain suppliers. These minimum obligations are less than our projected use for those periods. Payments may be more than the minimum obligations based on actual use.
The following table summarizes principal contractual commitments as of June 30, 2017 (in thousands):  
 
2017 Remaining
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Operating leases
$
2,964

 
$
4,932

 
$
4,274

 
$
3,795

 
$
3,187

 
$
5,612

 
$
24,764

Purchase obligations
388

 
536

 


 

 

 

 
924

Total commitments
$
3,352

 
$
5,468

 
$
4,274

 
$
3,795

 
$
3,187

 
$
5,612

 
$
25,688

Local Deals and Getaways merchant payables included in accounts payable were $9.8 million and $14.8 million , as of June 30, 2017 and December 31, 2016 , respectively.
Note 4: Income Taxes
In determining the quarterly provisions for income taxes, the Company uses an estimated annual effective tax rate, which is generally based on our expected annual income and statutory tax rates in the U.S., Canada, Japan, Hong Kong, and the U.K. For the three months ended June 30, 2017 and 2016 , the Company's effective tax rate was 55% and 45% , respectively. For the six months ended June 30, 2017 and 2016 , the Company's effective tax rate was 57% and 42% , respectively. The Company's effective tax rate increased for the three and six months ended June 30, 2017 from the corresponding three and six months ended June 30, 2016 , due primarily to the change of geographic mix of income from continuing operations for the three and six months ended June 30, 2017 .
U.S. income and foreign withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries. The undistributed earnings on a book basis for the non-U.S. subsidiaries as of June 30, 2017 are approximately $13.4 million . The Company intends to reinvest these earnings indefinitely in its operations outside the U.S. If the undistributed earnings are remitted to the U.S., these amounts would be taxable in the U.S. at the current federal and state tax rates net of foreign tax credits. Also, depending on the jurisdiction any distribution may be subject to withholding taxes at rates applicable for that jurisdiction. The estimated amount of the unrecognized deferred tax liability attributed to future dividend distributions of undistributed earnings is approximately $1.1 million at June 30, 2017 .
The Company maintains liabilities for uncertain tax positions. At June 30, 2017 , the Company had approximately $1.6 million in total unrecognized tax benefits, which if recognized, would favorably affect the Company’s effective income tax rate.
The Company’s policy is to include interest and penalties related to unrecognized tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in the overall income tax provision in the period that such determination is made. As of June 30, 2017 and December 31, 2016 , the Company had approximately $953,000 and $951,000 , respectively, in accrued interest and penalties related to uncertain tax positions. The Company is in various stages of multiple year examinations by federal taxing authorities. Although the timing of initiation, resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of the gross unrecognized tax benefits related to the method of computing income taxes in certain jurisdictions and losses reported on certain income tax returns could significantly change in the next 12 months . These changes may occur through settlement with the taxing authorities or the expiration of the statute of limitations on the returns filed. The Company is unable to estimate the range of possible adjustments to the balance of the gross unrecognized tax benefits.

10



The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is subject to U.S. federal and certain state tax examinations for certain years after 2008 and is subject to California tax examinations for years after 2005. The material foreign jurisdictions where the Company is subject to potential examinations by tax authorities are the France, Germany, Spain and United Kingdom for tax years after 2009. The Company's 2009 federal income tax return is currently under examination, including a review of the impact of the sale of Asia Pacific business segment in 2009. These examinations may lead to ordinary course adjustments or proposed adjustments to the Company's taxes or its net operating income. The Company has received a Revenue Agent’s Report (RAR) generally issued at the conclusion of an IRS examination, which was consistent with the Notice of Proposed Adjustment the Company received earlier from the IRS for the 2009 calendar year related to the sale of our Asia Pacific business segment with additional penalties. The RAR proposes an increase to the Company's U.S. taxable income which would result in additional federal tax, federal penalty and state tax expense totaling approximately $31.0 million , excluding interest and state penalties, if any. The proposed adjustment is primarily driven by the IRS’s view that the Asia Pacific business segment assets sold by the Company had a significantly higher valuation than the sales proceeds the Company received upon the sale. The Company disagrees with the proposed adjustments and intends to vigorously contest them. The Company did not make any adjustments to its liabilities for uncertain tax positions related to the RAR during the three and six months ended June 30, 2017 because the Company does not believe the IRS’s valuation of the Asia Pacific business segment assets is appropriate. If the Company is not able to resolve these proposed adjustments at the IRS examination level, it plans to pursue all available administrative and, if necessary, judicial remedies.
Note 5: Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated balances of other comprehensive loss (in thousands):
 
 
Three Months Ended
 
 
June 30,
 

2017
 
2016
Beginning balance

$
(3,820
)
 
$
(3,716
)
Other comprehensive income due to foreign currency translation, net of tax
 
133

 
91

Ending balance

$
(3,687
)
 
$
(3,625
)
 
 
 
 
 
 
 
Six Months Ended
 
 
June 30,
 
 
2017
 
2016
Beginning balance
 
$
(3,787
)
 
$
(3,908
)
Other comprehensive income due to foreign currency translation, net of tax
 
100

 
283

Ending balance
 
$
(3,687
)
 
$
(3,625
)
There were no amounts reclassified from accumulated other comprehensive loss for the three and six months ended June 30, 2017 and 2016 .
Note 6: Stock-Based Compensation and Stock Options
The Company accounts for its employee stock options under the fair value method, which requires stock-based compensation to be estimated using the fair value on the date of grant using an option-pricing model. The value of the portion of the award that is expected to vest is recognized on a straight-line basis as expense over the related employees’ requisite service periods in the Company’s consolidated statements of operations.
In January 2012, the Company granted certain executives stock options to purchase 100,000 shares of common stock with an exercise price of $28.98 , of which 25,000 options became exercisable annually starting January 23, 2013. The options expire in January 2022. During 2015 , 25,000 options were canceled and 25,000 options were forfeited upon the departure of an executive. As of June 30, 2017 , 50,000 options were outstanding and vested. As of June 30, 2017 , there was no unrecognized stock-based compensation expense relating to these options.

11



In September 2015, the Company granted an executive stock options to purchase 400,000 shares of common stock with an exercise price of $8.07 , of which 50,000 options became exercisable quarterly starting March 31, 2016. The options expire in September 2025. As of June 30, 2017 , 400,000 options were outstanding and 300,000 of these options were vested. Total stock-based compensation for the three and six months ended June 30, 2017 , related to this option grant were $196,000 and $391,000 , respectively. As of June 30, 2017 , there was approximately $391,000 of unrecognized stock-based compensation expense relating to these options. This amount is expected to be recognized over 0.5 years .
In March 2016, the Company granted certain executives stock options to purchase 150,000 shares of common stock with an exercise price of $8.55 , of which 37,500 options vest and become exercisable annually starting on March 7, 2017. The options expire in March 2026. As of June 30, 2017 , 150,000 options were outstanding and 37,500 of these options were vested. Total stock-based compensation for the three and six months ended June 30, 2017 , related to these option grants were $44,000 and $88,000 , respectively. As of June 30, 2017 , there was approximately $476,000 of unrecognized stock-based compensation expense relating to these options. This amount is expected to be recognized over 2.8 years .
Note 7: Stock Repurchase Program
The Company's stock repurchase programs assist in offsetting the impact of dilution from employee equity compensation and assist with capital allocation. Management is allowed discretion in the execution of the repurchase program based upon market conditions and consideration of capital allocation.
In January 2014 , the Company announced a stock repurchase program authorizing the repurchase of up to 500,000 shares of the Company’s outstanding common stock. During the year ended December 31, 2014 , the Company repurchased 261,000 shares of common stock for an aggregate purchase price of $5.9 million , which were recorded as part of treasury stock as of December 31, 2014 . During the year ended December 31, 2015 , the Company repurchased 212,000 shares of common stock for an aggregate purchase price of $1.7 million . The shares repurchased under this program were retired as of December 31, 2015 . There were 56,000 shares remaining to be repurchased under this program as of December 31, 2015 .
In February 2016 , the Company announced a stock repurchase program authorizing the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock. During the year ended December 31, 2016 , the Company repurchased 1,056,000 shares of common stock, including the 56,000 shares from the previous stock repurchase program, for an aggregate purchase price of $9.5 million and therefore there were no shares remaining to be repurchased under the repurchase programs authorized in January 2014 and January 2016 as of December 31, 2016. The shares repurchased were retired and recorded as a reduction of additional paid-in capital until extinguished with the remaining amount reflected as a reduction of retained earnings.
In February 2017, the Company announced a stock repurchase program authorizing the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock. During the three and six months ended June 30, 2017 , the Company repurchased 493,912 and 708,992 shares of common stock, respectively, for an aggregate purchase price of $5.0 million and $7.0 million , respectively. The shares repurchased were retired and recorded as a reduction of additional paid-in capital until extinguished with the remaining amount reflected as a reduction of retained earnings. There were 291,000 shares remaining to be repurchased under this program as of June 30, 2017 .



12



Note 8: Segment Reporting and Significant Customer Information
The Company manages its business geographically and has three reportable operating segments: Asia Pacific, Europe and North America. Asia Pacific consists of the Company's operations in Australia, China, Hong Kong, Japan, Taiwan, and Southeast Asia. Europe consists of the Company’s operations in France, Germany, Spain, and the U.K. North America consists of the Company’s operations in Canada and the U.S.
Management relies on an internal management reporting process that provides revenue and segment operating profit (loss) for making financial decisions and allocating resources. Management believes that segment revenues and operating profit (loss) are appropriate measures of evaluating the operational performance of the Company’s segments. These segment disclosures have been adjusted to remove the revenue and operating profit (loss) related to discontinued operations in the current and prior periods. See "Note 9: Discontinued Operations" for further information.
The following is a summary of operating results and assets (in thousands) by business segment:
 
Three Months Ended June 30, 2017
Asia Pacific
 
Europe
 
North
America
 
Consolidated
Revenues from unaffiliated customers
$
1,963

 
$
8,005

 
$
16,443

 
$
26,411

Intersegment revenues
(13
)
 
(108
)
 
121

 

Total net revenues
1,950

 
7,897

 
16,564

 
26,411

Operating profit (loss)
$
(1,165
)
 
$
268

 
$
2,283

 
$
1,386

 
Three Months Ended June 30, 2016
Asia Pacific
 
Europe
 
North
America
 
Consolidated
Revenues from unaffiliated customers
$
2,401

 
$
9,638

 
$
17,759

 
$
29,798

Intersegment revenues
37

 
(181
)
 
144

 

Total net revenues
2,438

 
9,457

 
17,903

 
29,798

Operating profit (loss)
$
(1,233
)
 
$
1,704

 
$
2,966

 
$
3,437

 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
Asia Pacific
 
Europe
 
North
America
 
Consolidated
Revenues from unaffiliated customers
$
3,807

 
$
17,223

 
$
33,810

 
$
54,840

Intersegment revenues
(44
)
 
(255
)
 
299

 

Total net revenues
3,763

 
16,968

 
34,109

 
54,840

Operating profit (loss)
$
(2,706
)
 
$
1,217

 
$
4,937

 
$
3,448

 
Six Months Ended June 30, 2016
Asia Pacific
 
Europe
 
North
America
 
Consolidated
Revenues from unaffiliated customers
$
4,651

 
$
20,279

 
$
35,696

 
$
60,626

Intersegment revenues
42

 
(264
)
 
222

 

Total net revenues
4,693

 
20,015

 
35,918

 
60,626

Operating profit (loss)
$
(2,282
)
 
$
3,611

 
$
4,954

 
$
6,283

 

As of June 30, 2017
Asia Pacific
 
Europe
 
North
America
 
Elimination
 
Consolidated
Long-lived assets
$
181

 
$
655

 
$
4,582

 
$

 
$
5,418

Total assets
$
4,055

 
$
47,398

 
$
63,099

 
$
(68,712
)
 
$
45,840

 
As of December 31, 2016
Asia Pacific
 
Europe
 
North
America
 
Elimination
 
Consolidated
Long-lived assets
$
209

 
$
763

 
$
5,186

 
$

 
$
6,158

Total assets
$
5,295

 
$
49,125

 
$
65,961

 
$
(66,851
)
 
$
53,530


13



Revenue for each segment is recognized based on the customer location within a designated geographic region. Property and equipment are attributed to the geographic region in which the assets are located. Revenues from unaffiliated customers excludes intersegment revenues and represents revenue with parties unaffiliated with Travelzoo and its wholly owned subsidiaries.
For the three and six months ended June 30, 2017 and 2016 , the Company did not have any customers that accounted for 10% or more of revenue. As of June 30, 2017 , the Company did not have any customers that accounted for 10% or more of accounts receivable. As of December 31, 2016 , the Company had one customer that accounted for 16% of accounts receivable.
The following table sets forth the breakdown of revenues (in thousands) by category and segment. Travel revenue includes travel publications ( Top 20 , Website , Newsflash , Travelzoo Network ), Getaways vouchers and hotel platform. Local revenue includes Local Deals vouchers and entertainment offers (vouchers and direct bookings). 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Asia Pacific
 
 
 
 
 
 
 
Travel
$
1,858

 
$
2,220

 
$
3,525

 
$
4,247

Local
92

 
218

 
238

 
446

Total Asia Pacific revenues
$
1,950

 
$
2,438

 
$
3,763

 
$
4,693

Europe
 
 
 
 
 
 
 
Travel
$
6,795

 
$
8,075

 
$
14,801

 
$
17,082

Local
1,102

 
1,382

 
2,167

 
2,933

Total Europe revenues
$
7,897

 
$
9,457

 
$
16,968

 
$
20,015

North America
 
 
 
 
 
 
 
Travel
$
13,911

 
$
14,240

 
$
28,769

 
$
28,997

Local
2,653

 
3,663

 
5,340

 
6,921

Total North America revenues
$
16,564

 
$
17,903

 
$
34,109

 
$
35,918

Consolidated
 
 
 
 
 
 
 
Travel
$
22,564

 
$
24,535

 
$
47,095

 
$
50,326

Local
3,847

 
5,263

 
7,745

 
10,300

Total revenues
$
26,411

 
$
29,798

 
$
54,840

 
$
60,626

Revenue by geography is based on the billing address of the advertiser. Long-lived assets attributed to the U.S. and international geographies are based upon the country in which the asset is located or owned. The following table sets forth revenue for countries that exceed 10% of total revenue (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
 
 
 
 
 
 
 
United States
$
15,244

 
$
16,585

 
$
31,469

 
$
33,378

United Kingdom
4,703

 
5,908

 
9,623

 
12,524

Germany
2,659

 
3,005

 
6,165

 
6,394

Rest of the world
3,805

 
4,300

 
7,583

 
8,330

Total revenues
$
26,411

 
$
29,798

 
$
54,840

 
$
60,626

 

14



The following table sets forth long lived asset by geographic area (in thousands):  
 
June 30,
 
December 31,
 
2017
 
2016
United States
$
4,171

 
$
4,755

Rest of the world
1,247

 
1,403

Total long lived assets
$
5,418

 
$
6,158

Note 9: Discontinued Operations
On March 30, 2017, the Company decided to discontinue its Search products, consisting of Fly.com and SuperSearch products. This decision supports the Company’s strategy to focus on its global Travelzoo® brand. On March 30, 2017, the Company ceased operations of SuperSearch and on March 31, 2017, the Company sold the Fly.com domain name, which had no net book value, to a third party. There were no other assets or liabilities transferred as part this transaction.
A reconciliation of the line items comprising the results of operations of the Search products to the income (loss) from discontinued operations through the date of disposal presented in the condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016, in thousands, is included in the following table:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Revenues from Search
$
79

 
$
4,247

 
$
2,088

 
$
8,222

Cost of revenues
(2
)
 
(140
)
 
(101
)
 
(298
)
Gross profit
77

 
4,107

 
1,987

 
7,924

Total operating expenses
2

 
(3,768
)
 
(1,817
)
 
(7,283
)
Gain on sale of Fly.com  domain name

 

 
2,890

 

Income from discontinued operations before income taxes
79

 
339

 
3,060

 
641

Income tax expense
25

 
117

 
1,122

 
195

Income from discontinued operations, net of income taxes
$
54

 
$
222

 
$
1,938

 
$
446




15



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 (the “Company” or “Travelzoo”) is a global publisher of travel and entertainment offers. We inform over 28 million members in Asia Pacific, Europe and North America, as well as millions of website users, about the best travel, entertainment and local deals available from thousands of companies. Our deal experts source, research and test-book offers, recommending only those that meet Travelzoo's rigorous quality standards. We provide travel, entertainment, and local businesses with a fast, flexible, and cost effective way to reach millions of consumers. Our revenues are generated primarily from advertising fees.
Our publications and products include the Travelzoo website (travelzoo.com), the Travelzoo iPhone and Android apps, the Travelzoo Top 20 e-mail newsletter, and the Newsflash e-mail alert service. We operate the Travelzoo Network, a network of third-party websites that list deals published by Travelzoo. Our Travelzoo website includes Local Deals and Getaway listings that allow our members to purchase vouchers for deals from local businesses such as spas, hotels and restaurants. We receive a percentage of the face value of the voucher from the local businesses.
More than 2,000 companies use our services, including Air France, Air New Zealand, British Airways, Cathay Pacific Airways, Ctrip, Emirates, Etihad, Expedia, Fairmont Hotels and Resorts, Hawaiian Airlines, Hilton Hotels & Resorts, InterContinental Hotels Group, JPB Corporation, Lufthansa, Key Tours International, Princess Cruises, Royal Caribbean, Singapore Airlines, Starwood Hotels & Resorts Worldwide, Travelocity, United Airlines and Virgin America.
During the first quarter of 2017, the Company discontinued the operations of its SuperSearch and Fly.com products to focus on its global Travelzoo® brand and reflected the revenues and expenses for these products as discontinued operations, net of taxes, for the current and prior periods presented. See "Note 9: Discontinued Operations" to the accompanying unaudited condensed consolidated financial statement for further information.
We have three operating segments based on geographic regions: Asia Pacific, Europe and North America. Asia Pacific consists of our operations in Australia, China, Hong Kong, Japan, Taiwan, and Southeast Asia. Europe consists of our operations in France, Germany, Spain, and the U.K. North America consists of our operations in Canada and the U.S.
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
Our revenues are advertising revenues, consisting primarily of listing fees paid by travel, entertainment and local businesses to advertise their offers on Travelzoo’s media properties. Listing fees are based on audience reach, placement, number of listings, number of impressions, number of clicks, number of referrals, or percentage of the face value of vouchers sold. Insertion orders are typically for periods between one month and twelve months and are not automatically renewed. Merchant agreements for  Local Deals  and  Getaway  advertisers are typically for twelve months and are not automatically renewed. We have two separate groups of our advertising products: Travel and Local.

16



Our Travel category of revenue includes the publishing revenue for negotiated high-quality deals from travel companies, such as hotels, airlines, cruises or car rentals and includes products such as  Top 20 , Travelzoo website, Newsflash, Travelzoo Network as well as  Getaway  vouchers. The revenues generated from these products are based upon a fee for number of e-mails delivered to our audience, a fee for clicks delivered to the advertisers, a fee for placement of the advertising on our website or a fee based on a percentage of the face value of vouchers sold, hotel booking stays or other items sold. We recognize revenue upon delivery of the e-mails, delivery of the clicks, over the period of placement of the advertising, upon hotel booking stays and upon the sale of the vouchers or other items sold.
Our Local category of revenue includes the publishing revenue for negotiated high-quality deals from local businesses, such as restaurants, spas, shows, and other activities and includes  Local Deals  vouchers and entertainment offers (vouchers and direct bookings). The revenues generated from these products are based upon a percentage of the face value of vouchers or items sold or a fee for clicks delivered to the advertisers. We recognize revenue upon the sale of the vouchers, when we receive notification of the direct bookings or upon delivery of the clicks. The Company earns a fee for acting as an agent in these transactions, which is recorded on a net basis and is included in revenue upon completion of the voucher sale. Certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon expiration, which we recognize as revenue after the expiration of the redemption period and after there are no further obligations to provide funds to merchants, members or others.
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 and our ability to develop and launch new products.
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. 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 advertising products, hiring and relying on key employees for the continued maintenance and growth of our business and ensuring our advertising products continue to attract the audience that advertisers desire.

Existing advertisers may shift from one advertising service (e.g.  Top 20 ) to another (e.g.  Local Deals  and  Getaway ). 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  Getaway , depending on how many vouchers are purchased by members. In addition, we are anticipating a shift from our existing hotel revenue to commission-based hotel revenue as we expand the use of our hotel platform, which may result in lower revenue depending on volume of hotel bookings.

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.

Our ability to continue to generate advertising revenue 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 to 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. We are addressing this growing channel of our audience through development of our mobile applications and through 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.


17



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 amount 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  Getaway  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 member refunds on vouchers sold. Our cost of revenues are expected to increase due to our effort to develop our hotel booking platform as well. We expect fluctuations in cost of revenues as a percentage of revenues from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations.
We do not know what our sales and marketing expenses as a percentage of revenue will be in future periods. Increased competition in our industry may require us to increase advertising for our brand and for our products. In order to increase the reach of our publications, we have to acquire a significant number of new 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 for various strategic and tactical reasons and, as a result, increase our marketing 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. Further, we expect to continue our strategy over time to replicate our business model in selected foreign markets to result in a significant increase in our sales and marketing expenses and have a material adverse impact on our results of operations. For example, in August of 2015 we acquired our Asia Pacific business, which we intend on increasing our investment in audience in this region. Due to the continued desire to grow our business in Asia Pacific, Europe and North America, we expect relatively high level of sales and marketing expenses in the foreseeable future. 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 have increased and may continue to increase our spending on sales and marketing to increase the number of our members and address the growing audience from mobile and social media channels, as well as to increase our analytic capabilities to continuously improve the presentation of our offerings to our audience.
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 headcount, the compensation related to existing headcount and the increased use of professional services. We expect our continued expansion into foreign markets and development of new advertising formats to result in a significant additional increase in our product development expenses. We expect to incur additional costs related to the development of our hotel platform capabilities, which we are developing, in part, to address the shift to mobile devices. We also may increase our investment in product development to ensure our products are suited for different regions such as Asia Pacific. In addition, we expect to incur additional costs related to the development of our search capabilities of our website and mobile applications.

18



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 expect our headcount to continue to increase in the future. The Company’s headcount is one of the main drivers of general and administrative expenses. Therefore, we expect our absolute general and administrative expenses to continue to increase. We expect our continued expansion into foreign markets to result in an increase in our general and administrative expenses. Our general and administrative expenses as a percentage of revenue may also fluctuate depending on the number of requests received related to a program under which the Company intends to make cash payments to people who establish that they were former stockholders of Travelzoo.com Corporation, whose claims were not escheated to states and who failed to submit requests to convert shares into Travelzoo within the required time period. We expect an increase in professional fees for various initiatives.
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, such as the disposition of our Asia Pacific business in 2009 and the acquisition of our Asia Pacific business in 2015. 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.
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. We expect to continue our efforts to grow; however, we may not grow or we may experience slower growth. Some examples of our efforts to expand our business internationally since our inception in the U.S. have been expansion to the U.K. in 2005, Canada in 2006, Germany in 2006, France in 2007, and Spain in 2008. In addition, from 2007 through 2009 we began operations in Asia Pacific, including in Australia, China, Hong Kong, Japan, Taiwan, and Southeast Asia. We also have launched new products to grow our revenue, such as  Local Deals  in 2010,  Getaway  in 2011, as well as our mobile application launches in 2011 and 2012. In late 2012, we bought an online hotel platform to assist in our development of a product to better serve hotels and to facilitate the development of our hotel platform. We have also increased our spending on addressing the shift of our audience to mobile devices and social media.
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.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
Results of Operations
The following table sets forth, as a percentage of total revenues, the results from our operations for the periods indicated.
 

19



 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of revenues
12.2

 
11.6

 
11.7

 
12.1

Gross profit
87.8

 
88.4

 
88.3

 
87.9

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
53.8

 
51.9

 
53.9

 
51.1

Product development
8.9

 
6.7

 
8.6

 
7.9

General and administrative
19.9

 
18.2

 
19.5

 
18.6

Total operating expenses
82.6

 
76.8

 
82.0

 
77.6

Income from continuing operations
5.2

 
11.6

 
6.3

 
10.3

Other income (loss), net
0.1

 
(0.3
)
 
0.1

 
0.1

Income from continuing operations before income taxes
5.3

 
11.3

 
6.4

 
10.4

Income tax expense
2.9

 
5.2

 
3.6

 
4.4

Income from continuing operations
2.4

 
6.1

 
2.8

 
6.0

Income from discontinued operations, net of income taxes
0.2

 
0.7

 
3.5

 
0.7

Net income
2.6
%
 
6.8
%
 
6.3
%
 
6.7
%

20



Operating Metrics
The following table sets forth selected operating metrics for Asia Pacific, Europe and North America:
 
 
Three Months Ended
 
June 30,
 
2017
 
2016
Asia Pacific
 
 
 
Total members (1)
3,641,000

 
3,610,000

Average cost per acquisition of a new member
$
3.21

 
$
3.94

Revenue per member (2)
$
2.14

 
$
2.70

Revenue per employee (3)
$
91,000

 
$
111,000

Mobile application downloads
682,000

 
615,000

Social media followers
536,000

 
392,000

Europe
 
 
 
Total members (1)
8,425,000

 
8,146,000

Average cost per acquisition of a new member
$
3.36

 
$
3.20

Revenue per member (2)
$
3.75

 
$
4.64

Revenue per employee (3)
$
215,000

 
$
254,000

Mobile application downloads
1,630,000

 
1,526,000

Social media followers
675,000

 
654,000

North America
 
 
 
Total members (1)
17,363,000

 
17,376,000

Average cost per acquisition of a new member
$
1.74

 
$
2.44

Revenue per member (2)
$
3.82

 
$
4.12

Revenue per employee (3)
$
326,000

 
$
346,000

Mobile application downloads
3,105,000

 
2,920,000

Social media followers
2,507,000

 
2,444,000

Consolidated
 
 
 
Total members (1)
29,295,000

 
28,994,000

Average cost per acquisition of a new member
$
2.50

 
$
2.77

Revenue per member (2)
$
3.61

 
$
4.11

Revenue per employee (3)
$
242,000

 
$
274,000

Mobile application downloads
5,417,000

 
5,062,000

Social media followers
3,718,000

 
3,491,000


(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.


21



Revenues
The following table sets forth the breakdown of revenues (in thousands) by category and segment. Travel revenue includes travel publications ( Top 20 , Website , Newsflash , Travelzoo Network ), Getaways vouchers and hotel platform. Local revenue includes Local Deals vouchers and entertainment offers (vouchers and direct bookings).  
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Asia Pacific
 
 
 
 
 
 
 
Travel
$
1,858

 
$
2,220

 
$
3,525

 
$
4,247

Local
92

 
218

 
238

 
446

Total Asia Pacific revenues
$
1,950

 
$
2,438

 
$
3,763

 
$
4,693

Europe
 
 
 
 
 
 
 
Travel
$
6,795

 
$
8,075

 
$
14,801

 
$
17,082

Local
1,102

 
1,382

 
2,167

 
2,933

Total Europe revenues
$
7,897

 
$
9,457

 
$
16,968

 
$
20,015

North America
 
 
 
 
 
 
 
Travel
$
13,911

 
$
14,240

 
$
28,769

 
$
28,997

Local
2,653

 
3,663

 
5,340

 
6,921

Total North America revenues
$
16,564

 
$
17,903

 
$
34,109

 
$
35,918

Consolidated
 
 
 
 
 
 
 
Travel
$
22,564

 
$
24,535

 
$
47,095

 
$
50,326

Local
3,847

 
5,263

 
7,745

 
10,300

Total revenues
$
26,411

 
$
29,798

 
$
54,840

 
$
60,626

Asia Pacific
Asia Pacific revenues decreased $488,000 for the three months ended June 30, 2017 from the three months ended June 30, 2016 . The decrease was primarily due to a $304,000 decrease in Travel revenues, a $110,000 decrease in Local revenues and a $74,000 negative impact from foreign currency movements relative to the U.S. dollar. The decrease in Travel revenue of $304,000 was primarily due to the decreased number of emails sent and paid clicks. The decrease in Local revenues of $110,000 was primarily due to the decreased number of Local Deals vouchers sold.
Asia Pacific revenues decreased $930,000 for the six months ended June 30, 2017 from the six months ended June 30, 2016 . The decrease was primarily due to a $633,000 decrease in Travel revenues, a $189,000 decrease in Local revenues, and a $108,000 negative impact from foreign currency movements relative to the U.S. dollar. The decrease in Travel revenue of $633,000 was primarily due to the decreased number of emails sent and paid clicks. The decrease in Local revenues of $189,000 was primarily due to the decreased number of Local Deals vouchers sold.
Europe
Europe revenues decreased $1.6 million for the three months ended June 30, 2017 from the three months ended June 30, 2016 . This decrease was primarily due to a $742,000 decrease in Travel revenues, a $164,000 decrease in Local revenues and a $653,000 negative impact from foreign currency movements relative to the U.S. dollar. The decrease in Travel revenue of $742,000 was primarily due to an decreased number of emails sent. The decrease in Local revenues of $164,000 was primarily due to the decreased number of  Local Deals  vouchers sold.
Europe revenues decreased $3.0 million for the six months ended June 30, 2017 from the six months ended June 30, 2016 . This decrease was primarily due to a $942,000 decrease in Travel revenues and a $520,000 decrease in Local revenues and a $1.6 million negative impact from foreign currency movements relative to the U.S. dollar. The decrease in Travel revenue of $942,000 was primarily due to the decreased number of emails sent and the decreased number of Getaways vouchers sold. The decrease in Local revenues of $520,000 was primarily due to the decreased number of  Local Deals  vouchers sold.

22



North America
North America revenues decreased $1.3 million for the three months ended June 30, 2017 from the three months ended June 30, 2016 . This decrease was primarily due to the decrease in Travel and Local revenues. The decrease in Travel revenue of $329,000 was primarily due to the decreased number of Getaways vouchers sold and paid clicks. The decrease in Local revenues of $1.0 million was primarily due to the decreased number of Local Deals vouchers sold.
North America revenues decreased $1.8 million for the six months ended June 30, 2017 from the six months ended June 30, 2016 . This decrease was primarily due to the decrease in Travel and Local revenues. The decrease in Travel revenue of $228,000 was primarily due to the decreased number of Getaways vouchers sold and paid clicks, offset partially by the increased number of emails sent. The decrease in Local revenues of $1.6 million was primarily due to the decreased number of Local Deals vouchers sold.
For the three and six months ended June 30, 2017 and 2016 , none of our customers accounted for 10% or more of our 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, credit card fees, certain estimated member refunds and customer service costs associated with vouchers we sell and hotel bookings, and salary expenses associated with network operations and customer service staff. Cost of revenues was $3.2 million and $3.5 million for the three months ended June 30, 2017 and June 30, 2016 , respectively. Cost of revenues was $6.4 million and $7.3 million for the six months ended June 30, 2017 and June 30, 2016 , respectively.
Cost of revenue decreased $249,000 for the three months ended June 30, 2017 from the three months ended June 30, 2016 . This decrease was primarily due to a $146,000 decrease in payments made to third-party partners of the Travelzoo Network, and a $118,000 decrease in credit card fees paid related to vouchers.
Cost of revenue decreased $893,000 for the six months ended June 30, 2017 from the six months ended June 30, 2016 . This decrease was primarily due to a $538,000 decrease in payments made to third-party partners of the Travelzoo Network, and a $232,000 decrease in credit card fees paid related to vouchers.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of advertising and promotional expenses, salary expenses associated with sales, marketing and production staff, expenses related to our participation in industry conferences, public relations expenses and facilities costs. Sales and marketing expenses were $14.2 million and $15.5 million for the three months ended June 30, 2017 and 2016, respectively. Sales and marketing expenses were $29.6 million and $31.0 million for the six months ended June 30, 2017 and 2016 , respectively. Advertising expenses consist primarily of online advertising referred to as traffic acquisition cost and member acquisition costs. For the three months ended June 30, 2017 and 2016 , advertising expenses accounted for 16% of the total sales and marketing expenses. For the six months ended June 30, 2017 and 2016 , advertising expenses accounted for 18% of the total sales and marketing expenses. The goal of our advertising was to acquire new members to our e-mail 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 $1.2 million for the three months ended June 30, 2017 from the three months ended June 30, 2016 . The decrease was primarily due to a $670,000 decrease in member acquisition costs and a $422,000 decrease in salary and employee related expenses due in part to a decrease in headcount.
Sales and marketing expenses decreased $1.4 million for the six months ended June 30, 2017 from the six months ended June 30, 2016 . The decrease was primarily due to a $1.1 million decrease in member acquisition costs, a $861,000 decrease in salary and employee related expenses due in part to a decrease in headcount and a $352,000 decrease in brand marketing costs.

23



Product Development
Product development expenses consist primarily of compensation for software development staff, fees for professional services, software maintenance and amortization, and facilities costs. Product development expenses were $2.3 million and $2.0 million for the three months ended June 30, 2017 and 2016 , respectively. Product development expenses were $4.7 million and $4.8 million for the three months ended June 30, 2017 and 2016 , respectively.
Product development expenses increased $343,000 for three months ended June 30, 2017 from the three months ended June 30, 2016 . The increase was primarily due to $182,000 in additional professional service expenses and $47,000 employee related expenses.
Product development expenses decreased $88,000 for six months ended June 30, 2017 from the six months ended June 30, 2016 . The decrease was primarily due to a $232,000 decrease in salary and employee related expenses due in part to a decrease in headcount, offset partially by the increase of $182,000 in additional professional service expenses.
General and Administrative
General and administrative expenses consist primarily of compensation for administrative, executive, bad debt expense, amortization of intangible assets, general office expense and facilities costs. General and administrative expenses were $5.2 million and $5.4 million for the three months ended June 30, 2017 and 2016 , respectively. General and administrative expenses were $10.7 million and $11.2 million for the three months ended June 30, 2017 and 2016 , respectively.
General and administrative expenses decreased $188,000 for the three months ended June 30, 2017 from the three months ended June 30, 2016 . The decrease was primarily due to $108,000 decrease in professional service expenses.
General and administrative expenses decreased $554,000 for the six months ended June 30, 2017 from the six months ended June 30, 2016 . The decrease was primarily due to $297,000 decrease in professional service expenses and $140,000 decrease in employee related expenses.
Income Taxes
Our income is generally taxed in the U.S., Canada, and U.K. Our income tax provisions reflect federal, state and country statutory rates applicable to our levels of worldwide income, adjusted to take into account expenses that are treated as having no recognizable tax benefit. Income tax expense was $771,000 and $1.5 million for the three months ended June 30, 2017 and 2016 , respectively. Our effective tax rate was 55% and 45% for the three months ended June 30, 2017 and 2016 , respectively. Income tax expense was $2.0 million and $2.9 million for the six months ended June 30, 2017 and 2016 , respectively. Our effective tax rate was 57.0% and 42.0% for the six months ended June 30, 2017 and 2016 , respectively.
Our effective tax rate increased for the three and six months ended June 30, 2017 from the three and six months ended June 30, 2016 , due primarily to the change of geographic mix of income from continuing operations for the three and six months ended June 30, 2017 . We expect our effective tax rate to fluctuate in future periods depending on the geographic mix of our worldwide income or losses incurred by our operations in Asia Pacific, Canada and Europe, 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 in Asia Pacific and the need for valuation allowances on certain tax assets, if any.
U.S. income and foreign withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries. The undistributed earnings on a book basis for those non-U.S. subsidiaries are approximately $13.4 million . The Company intends to reinvest these earnings indefinitely in its operations outside the U.S. If the undistributed earnings are remitted to the U.S., these amounts would be taxable in the U.S. at the current federal and state tax rates net of foreign tax credits. Also, depending on the jurisdiction any distribution may be subject to withholding taxes at rates applicable for that jurisdiction.
We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are subject to U.S. federal and certain state tax examinations for years after 2008 and are subject to California tax examinations for years after 2005. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating income. Our 2009 federal income tax returns are currently under examination, including a review of the impact of the sale of Asia Pacific business segment in 2009. In connection with this examination, the Company received a Revenue Agent's Report (RAR) from the IRS, generally issued at the conclusion of an IRS examination. The RAR proposes an increase to our U.S. taxable income, which would result in additional federal tax, federal penalty and state tax expense totaling approximately $31.0 million , excluding interest and state penalties, if any. See Note 4 to the accompanying unaudited condensed consolidated financial statements for further information.

24



Segment Information
Asia Pacific  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
(In thousands)
Revenue
1,950

 
2,438

 
3,763

 
4,693

Operating loss
$
(1,165
)
 
$
(1,233
)
 
$
(2,706
)
 
$
(2,282
)
Operating loss as a % of revenue
(59.7
)%
 
(50.6
)%
 
(71.9
)%
 
(48.6
)%
Asia Pacific revenues decreased $488,000 for the three months ended June 30, 2017 from the three months ended June 30, 2016 (see “Revenues” above). Asia Pacific expenses decreased $556,000 for the three months ended June 30, 2017 from the three months ended June 30, 2016 . This decrease was primarily due to a $280,000 decrease in member acquisition and marketing costs.
Asia Pacific revenues decreased $930,000 for the six months ended June 30, 2017 from the six months ended June 30, 2016 (see “Revenues” above). Asia Pacific expenses decreased $506,000 for the six months ended June 30, 2017 from the six months ended June 30, 2016 . This decrease was primarily due to a $280,000 decrease in member acquisition costs.
Foreign currency movements relative to the U.S. dollar positively impacted our local currency loss from our operations in Asia Pacific by approximately $26,000 for the three months ended June 30, 2017 . Foreign currency movements relative to the U.S. dollar positively impacted our loss from our operations in Asia Pacific by approximately $31,000 for the three months ended June 30, 2016 .
Foreign currency movements relative to the U.S. dollar positively impacted our local currency loss from our operations in Asia Pacific by approximately $47,000 for the six months ended June 30, 2017 . Foreign currency movements relative to the U.S. dollar positively impacted our loss from our operations in Asia Pacific by approximately $113,000 for the six months ended June 30, 2016 .
Europe
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
(In thousands)
Revenue
7,897

 
9,457

 
16,968

 
20,015

Operating profit
$
268

 
$
1,704

 
$
1,217

 
$
3,611

Operating profit as a % of revenue
3.4
%
 
18.0
%
 
7.2
%
 
18.0
%
Europe revenues decreased $1.6 million for the three months ended June 30, 2017 from the three months ended June 30, 2016 (see “Revenues” above). Europe expenses decreased $124,000 for the three months ended June 30, 2017 from the three months ended June 30, 2016 . This decrease was primarily due to a $289,000 decrease in salary and employee related expense, offset partially by a $152,000 increase in member acquisition.
Europe revenues decreased $3.0 million for the six months ended June 30, 2017 from the six months ended June 30, 2016 (see “Revenues” above). Europe expenses decreased $653,000 for the six months ended June 30, 2017 from the six months ended June 30, 2016 . This decrease was primarily due to a $756,000 decrease in salary and employee related expense due in part to a decrease in headcount.
Foreign currency movements relative to the U.S. dollar negatively impacted our local currency income from our operations in Europe by approximately $79,000 for the three months ended June 30, 2017 . Foreign currency movements relative to the U.S. dollar negatively impacted our income from our operations in Europe by approximately $121,000 for the three months ended June 30, 2016 .
Foreign currency movements relative to the U.S. dollar negatively impacted our local currency income from our operations in Europe by approximately $185,000 for the six months ended June 30, 2017 . Foreign currency movements relative to the U.S. dollar negatively impacted our income from our operations in Europe by approximately $257,000 for the six months ended June 30, 2016 .

25



North America
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
(In thousands)
Revenue
16,564

 
17,903

 
34,109

 
35,918

Operating profit
$
2,283

 
$
2,966

 
$
4,937

 
$
4,954

Operating profit as a % of revenue
13.8
%
 
16.6
%
 
14.5
%
 
13.8
%
North America revenues decreased $1.3 million for the three months ended June 30, 2017 from the three months ended June 30, 2016 (see “Revenues” above). North America expenses decreased $656,000 for the three months ended June 30, 2017 from the three months ended June 30, 2016 . This decrease was primarily due to a $542,000 decrease in member acquisition costs and a $119,000 decrease in payments made to third-party partners of the Travelzoo Network.
North America revenues decreased $1.8 million for the six months ended June 30, 2017 from the six months ended June 30, 2016 (see “Revenues” above). North America expenses decreased $1.8 million for the six months ended June 30, 2017 from the six months ended June 30, 2016 . This decrease was primarily due to a $816,000 decrease in member acquisition costs and $759,000 decrease in salary and employee related expense due in part to a decrease in headcount.
Liquidity and Capital Resources
As of June 30, 2017 , we had $21.3 million in cash and cash equivalents, of which $10.7 million was held outside the U.S. in certain of our foreign operations. If these assets are distributed to the U.S., we may be subject to additional U.S. taxes in certain circumstances. Cash and cash equivalents decreased from $26.8 million as of December 31, 2016 primarily as a result of cash used in financing activities and operating activities, offset by cash provided by investing activities as explained below. We expect that cash on hand will be sufficient to provide for working capital needs for at least the next twelve months.  
 
Six Months Ended June 30,
 
2017
 
2016
 
(In thousands)
Net cash provided by (used in) operating activities
$
(2,006
)
 
$
3,905

Net cash provided by (used in) investing activities
2,584

 
(648
)
Net cash used in financing activities
(6,824
)
 
(10,556
)
Effect of exchange rate changes on cash and cash equivalents
739

 
(269
)
Net decrease in cash and cash equivalents
$
(5,507
)
 
$
(7,568
)

Net cash used in operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Net cash used in operating activities for the six months ended June 30, 2017 was $2.0 million, which consisted of net income of $3.4 million, adjustments for non-cash items of $1.6 million and a $3.8 million decrease in cash from changes in operating assets and liabilities. Adjustments for non-cash items primarily consisted of the $2.9 million discontinued operations gain on the sale of the  Fly.com  domain name, offset by $1.1 million of depreciation and amortization expense on property and equipment. In addition, the decrease in cash from changes in operating assets and liabilities primarily consisted of $6.1 million decrease in accounts payable, offset by $2.1 million decrease in accounts receivable.
Net cash provided by operating activities for the  six months ended June 30, 2016 was $3.9 million, which consisted of net income of $4.1 million, adjustments for non-cash items of $1.8 million and a $1.9 million decrease in cash from changes in operating assets and liabilities. Adjustments for non-cash items primarily consisted of $1.3 million of depreciation and amortization expense on property and equipment, $211,000 of deferred taxes and $442,000 of stock-based compensation expense. In addition, the decrease in cash from changes in operating assets and liabilities primarily consisted of $2.3 million in accounts receivable, $2.2 million in accounts payable, offset by $1.8 million in income tax receivable and payable and $484,000 in accrued expenses.
Cash paid for income tax net of refunds received during the six months ended June 30, 2017 and June 30, 2016 was $3.2 million and $1.1 million, respectively.

26



Net cash provided by investing activities for the six months ended June 30, 2017 was $2.6 million. Net cash used in investing activities for the six months ended June 30, 2016 was $648,000. The cash provided by investing activities for the six months ended  June 30, 2017  was primarily due to $2.9 million proceeds from sale the  Fly.com  domain name, offset partially by $306,000 in purchases of property and equipment. The cash used in investing activities for the six months ended  June 30, 2016  was primarily due to $648,000 in purchases of property and equipment. 
Net cash used in financing activities for the six months ended June 30, 2017 and June 30, 2016 was $6.8 million and $10.6 million, respectively. Net cash used in financing activities for the  six months ended June 30, 2017  was primarily due to $6.8 million cash used in repurchases of our common stock. Net cash used in financing activities for the  six months ended June 30, 2016  was primarily due to $5.7 million payment of related party loan and $5.0 million cash used in repurchases of our common stock.
Although we have settled the states unclaimed property claims with all states, we may still receive inquiries from certain potential Netsurfer promotional stockholders that had not provided their state of residence to us by April 25, 2004. Therefore, we are continuing our voluntary program under which it makes 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 Travelzoo.com Corporation, 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 stockholders of Travelzoo.com Corporation, expansion of our operations, and the amount of resources we devote to promoting awareness of the Travelzoo brand. Since the inception of the program under which we make cash payments to people who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo within the required time period, we have incurred expenses of $2.9 million. While future payments for this program are expected to decrease, the total cost of this program is still undeterminable because it is dependent on our stock price and on the number of valid requests ultimately received.
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 our 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 stockholders. If we issue debt securities or establish a new credit facility, our fixed obligations could increase, and we may be required to agree to operating covenants that would restrict our operations. We cannot be sure that any such financing will be available in amounts or on terms acceptable to us.
If the development of our business is less favorable than expected, we may decide to significantly reduce the size of our operations and marketing expenses in certain markets with the objective of reducing cash outflow.
The information set forth under “Note 3: Commitments and Contingencies” 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.
The following summarizes our principal contractual commitments as of June 30, 2017 (in thousands):
 
 
2017 Remaining
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Operating leases
$
2,964

 
$
4,932

 
$
4,274

 
$
3,795

 
$
3,187

 
$
5,612

 
$
24,764

Purchase obligations
388

 
536

 


 

 

 

 
924

Total commitments
$
3,352

 
$
5,468

 
$
4,274

 
$
3,795

 
$
3,187

 
$
5,612

 
$
25,688


27




We also have contingencies related to net unrecognized tax benefits, including interest, of approximately $2.6 million as of June 30, 2017 . In addition, the Company received a Revenue Agents' Report from the IRS for the 2009 calendar year related to the sale of our Asia Pacific business segment, which would result in additional federal and state tax expense totaling approximately $31.0 million, excluding interest and penalties, if any. We are unable to make reasonably reliable estimates on the timing of the cash settlements with the respective taxing authorities, if any. See Note 4 to the accompanying unaudited condensed consolidated financial statements for further information.
Critical Accounting Policies and Estimates
We believe that there are a number of accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, reserve for member refunds, allowance for doubtful accounts, income taxes and loss contingencies. These policies, and our procedures related to these policies, are described in detail below.
Revenue Recognition
We recognize advertising revenues in the period in which the advertisement is displayed or the voucher sale has been completed, provided that evidence of an arrangement exists, the fees are fixed or determinable and collection of the resulting receivable is reasonably assured. If fixed-fee advertising is displayed over a term greater than one month, revenues are recognized ratably over the period as described below. The majority of insertion orders have terms that begin and end in a quarterly reporting period. In the cases where at the end of a quarterly reporting period the term of an insertion order is not complete, the Company allocates the total arrangement fee to each element based on the relative estimated selling price of each element. The Company uses prices stated on its internal rate card, which represents stand-alone sales prices, to establish estimated selling prices. The stand-alone price is the price that would be charged if the advertiser purchased only the individual insertion. Fees for variable-fee advertising arrangements are recognized based on the number of impressions displayed, number of clicks delivered, or number of referrals generated during the period.
Under these policies, the Company evaluates each of these criteria as follows:
Evidence of an arrangement.  We consider an insertion order signed by the advertiser or its agency to be evidence of an arrangement.
Delivery.  Delivery is considered to occur when the advertising has been displayed, the click-throughs have been delivered, the voucher sale has been completed, cancelable hotel booking reservation stays have occurred or non-cancelable hotel booking reservations have been booked, as applicable.
Fixed or determinable fee.  Our arrangements with our customers specifies the price paid for advertising services.
Collection is deemed reasonably assured.  We conduct a credit review for all advertising transactions at the time of the arrangement to determine the creditworthiness of the advertiser. Collection is deemed reasonably assured if we expect that the advertiser will be able to pay amounts under the arrangement as payments become due. Collection is deemed not reasonably assured when an advertiser is perceived to be in financial distress, which may be evidenced by weak industry conditions, a bankruptcy filing, or previously billed amounts that are past due. If we determine that collection is not reasonably assured, then we defer the revenue and recognize the revenue upon cash collection. Collection is deemed reasonably assured for our voucher sales to consumers as these transactions require the use of credit cards subject to authorization.
Revenues from advertising sold to advertisers through agencies are reported at the amount billed to the agency.
For Local Deals and Getaway products, the Company earns a fee for acting as an agent in these transactions which is recorded on a net basis and is included in revenue upon completion of the voucher sale. Certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon expiration, which we recognize as revenue after the expiration of the redemption period and after there are no further obligations to provide funds to merchants, members or others.
Commission revenues generated through provision of hotel booking reservations to hotels are recognized upon the estimated date the stay occurs at the hotel, which includes estimates of cancellations of the hotel bookings based upon historical

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patterns. If the hotel booking cannot be canceled or the hotel advertiser has agreed to pay for booking regardless of potential future cancellations then revenue is recognized upon booking.
Reserve for Member Refunds
We record an estimated reserve for member refunds based on our historical experience at the time revenue is recorded for Local Deals and Getaway voucher sales. We accrue costs associated with refunds in accrued expenses on the consolidated balance sheets. We consider many key factors such as the historical refunds based upon the time lag since the sale, historical reasons for refunds, time period that remains until the deal expiration date, any changes in refund procedures and estimates of redemptions and breakage. Should any of these factors change, the estimates made by management will also change, which could impact the level of our future reserves for member refunds. Specifically, if the financial condition of our advertisers, the businesses that are providing the vouchered services, were to deteriorate, affecting their ability to provide the services to our members, additional reserves for member refunds may be required.
Estimated member refunds that are determined to be recoverable from the merchant and the portion of which represents our fee from the merchant are recorded in the consolidated statements of operations as a reduction to revenue. Estimated member refunds that are determined not to be recoverable from the merchant are presented as a cost of revenue. If our judgments regarding estimated member refunds are inaccurate, reported results of operations could differ from the amount we previously accrued.
Allowance for Doubtful Accounts
We record a provision for doubtful accounts based on our historical experience of write-offs and a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, management considers the age of the accounts receivable, our historical write-offs, the creditworthiness of the advertiser, the economic conditions of the advertiser’s industry, and general economic conditions, among other factors. Should any of these factors change, the estimates made by management will also change, which could impact the level of our future provision for doubtful accounts. Specifically, if the financial condition of our advertisers were to deteriorate, affecting their ability to make payments, additional provision for doubtful accounts may be required.
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the progress or closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.
Our effective tax rates have differed from the statutory rate primarily due to the tax impact of foreign operations, state taxes, certain benefits realized related to stock option activities, credits, and the extent that our earnings are indefinitely reinvested outside the U.S. and tax asset valuation allowance determinations including on certain loss carryforwards. For the six months ended June 30, 2017 and 2016 , our effective tax rates were 57% and 42%, respectively. Our future effective tax rates could be materially impacted by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, changes in the deferred tax assets or liabilities, existing or new uncertain tax matters that may arise and require changes in tax reserves, changes in tax asset valuation allowance determinations, changes in our judgment about whether certain foreign earnings are indefinitely reinvested outside the U.S., or changes in tax laws, regulations, and accounting principles. In addition, we are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. See Note 4 to the accompanying unaudited condensed consolidated financial statements for further information.

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Loss Contingencies
We are involved in claims, suits, and proceedings arising from the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. Such claim proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows. See "Note 3: Commitments and Contingencies" to the accompanying unaudited condensed consolidated financial statements for further information regarding our loss contingencies.
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 consolidated financial statements.


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RISK FACTORS
Investing in our common stock involves a high degree of risk. Any or all of the risks listed below as well as other variables affecting our operating results could have a material adverse effect on our business, our quarterly and annual operating results or financial condition, which could cause the market price of our stock to decline or cause substantial volatility in our stock price, in which event the value of your common stock could decline. You should also keep these risk factors in mind when you read forward-looking statements.

Risks Related to Our Financial Condition and Business Model
We cannot assure you that we will be profitable.
During the six months ended June 30, 2017 and June 30, 2016 , we generated a net income of $3.4 million and $4.1 million, respectively. During the year ended December 31, 2016, we generated net income of $6.6 million. Although we were profitable in 2016 and the six months ended June 30, 2017 , there is no assurance that we will be profitable in the future. We forecast our future expense levels based on our operating plans and our estimates of future revenues. We may find it necessary to significantly accelerate expenditures relating to our sales and marketing efforts or otherwise increase our financial commitment to creating and maintaining brand awareness among Internet users and advertisers. We may also make investments in our products as well as develop new products that may impact our profitability. If our revenues grow at a slower rate than we anticipate or decline, or if our spending levels exceed our expectations or cannot be adjusted to reflect slower revenue growth, we may not generate sufficient revenues to be profitable. Any of these developments could result in a significant decrease in the trading price of our common stock.
Fluctuations in our operating results may negatively impact our stock price.
Our quarterly and annual operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular period. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. Factors that may affect our quarterly results include:
mismatches between resource allocation and client demand due to difficulties in predicting client demand in a new market;
changes in general economic conditions that could affect marketing efforts generally and online marketing efforts in particular;
the magnitude and timing of marketing initiatives, including our acquisition of new members and our expansion efforts in other regions;
the introduction, development, timing, competitive pricing and market acceptance of our products and services and those of our competitors;
our ability to attract and retain key personnel;
our ability to manage our planned growth;
our ability to attract users to our websites, which may be adversely affected by the audience shift to mobile devices;
technical difficulties or system downtime affecting the Internet generally or the operation of our products and services specifically; and
volatility of our operating results in new markets.
We may significantly increase our operating expenses related to advertising campaigns for the Travelzoo brand, as well as our hotel booking platform, for a certain period if we see a unique opportunity for a brand marketing campaign, if we find it necessary to respond to increased brand marketing by a competitor, or if we decide to accelerate our acquisition of new members.
If revenues fall below our expectations in any quarter and we are unable to quickly reduce our operating expenses in response, our operating results would be lower than expected and our stock price may fall.


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Our expansion of our product offering to include the addition of a hotel booking platform may result in additional costs that exceed revenue and may trigger additional stock volatility.
We have been in the process of expanding our hotel booking platform which may result in an increase in costs to further develop the platform in the near-term and an increase in cost structure in the long-term, which may be in excess of incremental revenue. If our hotel booking platform is not embraced by our users or our advertising partners, our business and financial results could be adversely affected. To the extent that our room rates on our hotel booking platform are not competitive (i.e., versus the websites of other online travel companies or hotel company websites), we may not be able to attract members. If we cannot attract members to the hotel booking platform to make bookings, our financial results could be adversely affected. In addition, the hotel booking platform will be sensitive to fluctuations in hotel supply, occupancy and average daily rates and a fluctuation in any of these factors could negatively impact our hotel booking revenue. Furthermore, hotels may offer products and services on more favorable terms to consumers who transact directly with them. In the past year, certain hotel chains have launched advertising campaigns expressly designed to drive consumer traffic directly to their websites. We can give no assurances that the hotel booking platform will yield the benefits we expect and will not result in additional costs or have adverse impacts on our business.
Our Local Deals business may be adversely impacted by competition and decreased consumer demand for vouchers.
Our Local Deals and Getaway formats of advertising include the sale of vouchers directly to consumers to advertise promotional deals provided by merchants.
For example, a consumer could buy a voucher for $99 for a dinner for two at a merchant’s restaurant that would normally be valued at $199, representing a promotional value of $100 to the consumer. This format may require investments to maintain and grow the business including additional sales force hiring and additional spend on customer service, marketing, technology tracking systems and payment processing. The rate at which our existing customers purchase vouchers has declined, and may continue to decline, given, among other things, increased competition in the marketplace and the decrease in demand of consumers for voucher deals. Historically, our customers often purchased a voucher when they received our emails, even though they may not have intended to use the voucher in the near term. The growth in recent periods of competition and the marketplaces of deals has enabled customers to wait until they are ready to use the related vouchers before making purchases. This shift in purchasing behavior may adversely impact revenues. While we are continuing to evolve our strategy to address the changing market dynamics, we may not always be successful in doing so.

Our business could be negatively affected by changes in search engine algorithms and dynamics or other traffic-generating arrangements.
We utilize Internet search engines such as Google, principally through the purchase of travel-related keywords, to generate additional traffic to our websites. Search engines, including Google, frequently update and change the logic that determines the placement and display of results of a user’s search, such that the purchased or algorithmic placement of links to our websites can be negatively affected. In addition, a significant amount of traffic is directed to our websites through our participation in pay-per-click and display advertising campaigns on search engines, including Google, travel metasearch engines, including Kayak, and Internet media properties, including TripAdvisor. Pricing and operating dynamics for these traffic sources can experience rapid change, both technically and competitively. Moreover, a search or metasearch engine could, for competitive or other purposes, alter its search algorithms or results causing a website to place lower in search query results. If a major search engine changes its algorithms or results in a manner that negatively affects the search engine ranking, paid or unpaid, of our websites or that of our third-party distribution partners, or if competitive dynamics impact the costs or effectiveness of search engine optimization, search engine marketing or other traffic-generating arrangements in a negative manner, our business and financial performance would be adversely affected, potentially to a material extent.


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Recent trends in consumer adoption and use of mobile devices create new challenges.
Widespread adoption of mobile devices, such as the iPhone, Android-enabled smart phones, and tablets such as the iPad, coupled with the improved web browsing functionality and development of thousands of useful “apps” available on these devices, is driving substantial traffic and commerce activity to mobile platforms. We have experienced a significant shift of business to mobile platforms and our advertising partners are also seeing a rapid shift of traffic to mobile platforms. Our major competitors and certain new market entrants are offering mobile applications for travel products and other functionality, including proprietary last-minute discounts for hotel bookings. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. The gross profit earned on a mobile transaction may be less than that earned from a typical desktop transaction due to different consumer purchasing patterns. For example, hotel reservations made on a mobile device typically are for shorter lengths of stay and are not made as far in advance as hotel reservations made on a desktop. Further, given the device sizes and technical limitations of tablets and smartphones, mobile consumers may not be willing to download multiple applications from multiple travel service providers and instead prefer to use one or a limited number of applications for their mobile travel activity. As a result, the consumer experience with mobile applications, as well as brand recognition and loyalty, are likely to become increasingly important. We have made progress creating mobile offerings which have received strong reviews and have shown solid download trends. We believe that mobile bookings present an opportunity for growth. Further development of our mobile offerings is necessary to maintain and grow our business as consumers increasingly turn to mobile devices instead of a personal computer and to mobile applications instead of a web browser. Further, many consumers use a mobile device based web browser instead of an application. As a result, it is increasingly important for us to develop and maintain effective mobile websites optimized for mobile devices to provide customers with appealing easy-to-use mobile website functionality. If we are unable to continue to rapidly innovate and create new, user-friendly and differentiated mobile offerings and efficiently and effectively advertise and distribute on these platforms, or if our mobile applications are not downloaded and used by travel consumers, we could lose market share to existing competitors or new entrants and our future growth and results of operations could be adversely affected.

We may have exposure to additional tax liabilities .    
As a global company, we are subject to income taxes as well as non-income based tax, in both the U.S. and various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, there is no assurance that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals. Changes in tax laws or tax rulings may have a significantly adverse impact on our effective tax rate. We are also subject to non-income based taxes, such as value-added, payroll, sales, use, net worth, property and goods and services taxes, in both the U.S. and various foreign jurisdictions.
From time to time, the Company is under audit by tax authorities with respect to these non-income based taxes and may have exposure to additional non-income based tax liabilities. These examinations may lead to ordinary course adjustments or proposed adjustments to its taxes or its net operating income. The Company's 2009 federal income tax returns are currently under examination, including a review of the impact of the sale of Asia Pacific business segment in 2009. In connection with this examination, the Company has received a Revenue Agent’s Report (RAR) generally issued at the conclusion of an IRS examination, which was consistent with the Notice of Proposed Adjustment the Company received earlier from the IRS for the 2009 calendar year related to the sale of our Asia Pacific business segment with the addition of penalties. The RAR proposes an increase to our U.S. taxable income which would result in additional federal tax expense, federal penalty and state tax expense totaling approximately $31 million, excluding interest and state penalties, if any. The proposed adjustment is primarily driven by IRS’s view that the Asia Pacific business segment assets sold by the Company had a significantly higher valuation than the sales proceeds the Company received upon the sale. The Company disagrees with the proposed adjustments and intends to vigorously contest them. The Company did not make any adjustments to its liabilities for uncertain tax positions related to the RAR as of June 30, 2017 because the Company does not believe the IRS’s valuation of Asia Pacific business segment assets is appropriate. If the Company is not able to resolve these proposed adjustments at the IRS examination level, the Company plans to pursue all available administrative and, if necessary, judicial remedies. The Company is not able to predict the ultimate amount or outcome of this tax audit and we may incur additional costs in defending any claims that may arise, even if we ultimately are not liable for any additional taxes.



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Adverse application of state and local tax laws could have an adverse effect on our business and results of operation.
Our expansion of our product offering to include a hotel booking platform may subject us to state and local tax laws and result in additional tax liabilities. A number of jurisdictions in the U.S. have initiated lawsuits against other online travel companies, related to, among other things, the payment of hotel occupancy and other taxes (i.e., state and local sales tax). In addition, a number of municipalities have initiated audit proceedings, issued proposed tax assessments or started inquiries relating to the payment of hotel occupancy and other taxes.
Given that we intend for our hotel booking platform to consist of an agency model whereby we will facilitate reservations on behalf of a hotel, the payment of hotel occupancy taxes and other taxes should be the responsibility of the merchant. The intended business practice for our hotel booking platform will primarily be for the merchant to be responsible for remitting applicable taxes to the various tax authorities. Nevertheless, to the extent that any tax authority succeeds in asserting that we have a tax collection responsibility, or we determine that we have one, with respect to future transactions, we may collect any such additional tax obligation from our customers, which would have the effect of increasing the cost of hotel room reservations to our customers and, consequently, could make our hotel service less competitive (i.e., versus the websites of other online travel companies or hotel company websites) and reduce hotel reservation transactions. Either step could have a material adverse effect on our business and results of operations. We will continue to assess the risks of the potential financial impact of additional tax exposure.

Our business model may not be adaptable to a changing market.
Our current revenue model depends primarily on advertising fees paid by travel and entertainment companies and still relies significantly on e-mail communications with our members. If current clients decide not to continue advertising their offers with us and we are unable to replace them with new clients, our business may be adversely affected. To be successful, we must provide online marketing solutions that achieve broad market acceptance by travel and entertainment companies. In addition, we must attract sufficient Internet users with attractive demographic characteristics to our products. It is possible that we will be required to further adapt our business model and products in response to changes in the online advertising market or if our current business model is not successful. For example, the trend toward mobile online traffic will require us to adapt our product offering to facilitate consumers' use of our products. If we do not adapt to this trend fully or quickly enough, we may lose advertising revenue as consumer usage may decline from our non-mobile traffic. If we are not able to anticipate changes in the online advertising market or if our business model is not successful, our business could be materially adversely affected.

If we fail to retain existing advertisers or add new advertisers, our revenue and business will be harmed.
We depend on our ability to attract and retain advertisers (hotels, spas, restaurants, vacation packagers, airlines, etc.) that are prepared to offer products or services on compelling terms to our members. We do not have long-term arrangements to guarantee the availability of deals that offer attractive quality, value and variety to consumers or favorable payment terms to us. We must continue to attract and retain advertisers in order to increase revenue and maintain profitability. If new advertisers do not find our marketing and promotional services effective, or if existing advertisers do not believe that utilizing our products provides them with a long-term increase in customers, revenue or profit, they may stop making offers through our marketplace. In addition, we may experience attrition in our advertisers in the ordinary course of business resulting from several factors, including losses to competitors and advertiser closures or bankruptcies. If we are unable to attract new advertisers in numbers sufficient to grow our business, or if too many advertisers are unwilling to offer products or services with compelling terms to our members or offer favorable payment terms to us, we may sell less advertising, and our operating results will be adversely affected. For example, we may lose advertisers due to market conditions or performance, such as our recent loss of revenue from certain online booking engines, airlines and vacation packagers. We may not add enough additional revenue, such as hotel revenue from Getaway or the hotel booking platform, in order to replace the lost revenue. Furthermore, the new revenue may cost more to generate compared to the costs that the lost revenue required to generate, thereby adversely impacting our operating results.
Our existing advertisers may shift from one advertising service to another, which may adversely affect our revenue.
Existing advertisers may shift from one advertising service (e.g. Top 20 ) to another (e.g. Local Deals, Getaway or the hotel booking platform). 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, Getaway , and hotel booking platform, depending on how many vouchers are purchased by members and how many hotel bookings are made. In addition, we are anticipating a shift from our existing hotel revenue to commission-based revenue in connection with the continued expansion of our hotel booking platform, which may result in lower revenue depending on volume of hotel bookings.

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An increase in our refund rates related to our Local Deals and Getaway could reduce our liquidity and profitability.
We provide refunds related to our Local Deals and Getaway voucher sales. As we increase our revenue, our refund rates may exceed our historical levels. A downturn in general economic conditions may also increase our refund rates. An increase in our refund rates could significantly reduce our liquidity and profitability.
As we do not have control over our merchants and the quality of products or services they deliver, we rely on a combination of our historical experience with our merchants over time and the type of refunds provided for development of our estimate for refund claims. Our actual level of refund claims could prove to be greater than the level of refund claims we estimate. If our refund reserves are not adequate to cover future refund claims, this inadequacy could have a material adverse effect on our liquidity and profitability.
Our standard agreements with our merchants generally limit the time period during which we may seek reimbursement for member refunds or claims. Our members may make claims for refunds with respect to which we are unable to seek reimbursement from our merchants. Our members could also make false or fraudulent refund claims. Our inability to seek reimbursement from our merchants for refund claims could have an adverse effect on our liquidity and profitability.
If our advertisers do not meet the needs and expectations of our members, our business could suffer.
Our business depends on our reputation for providing high-quality deals, and our brand and reputation may be harmed by actions taken by advertisers or merchants that are outside our control. For our Local Deals and Getaway merchants, since we are selling vouchers on behalf of the merchants directly to our members, we face exposures should merchants not fully honor the deals. As for our travel business, we are only collecting an advertising fee from the advertiser and the members are booking the deal directly with the advertiser. Although the advertiser is responsible to the consumer to provide the consumer the deal it advertised, our business can be adversely affected should an advertiser fail to comply with the terms of the advertised deal. Any shortcomings of one or more of our merchants, particularly with respect to an issue affecting the quality of the deal offered or the products or services sold, may be attributed by our members to us, thus damaging our reputation and brand value and potentially affecting our results of operations. In addition, negative publicity and member sentiment generated as a result of fraudulent or deceptive conduct by our merchants could damage our reputation, reduce our ability to attract new members or retain our current members, and diminish the value of our brand.
Our business relies heavily on e-mail and other messaging services, and any restrictions on the sending of e-mails or messages or a decrease in member willingness to receive messages could adversely affect our revenue and business.
Our business is highly dependent upon e-mail and other messaging services. Deals offered through e-mails and other messages sent by us, or on our behalf by our affiliates, generate a substantial portion of our revenue. Because of the importance of e-mail and other messaging services to our businesses, if we are unable to successfully deliver e-mails or messages to our members or potential members, or if members decline to open our e-mails or messages, our revenue and profitability would be adversely affected. New laws and regulations regulating the sending of commercial e-mails, including those enacted in foreign jurisdictions (such as Canada), may affect our ability to deliver e-mails or messages to our members or potential members and may also result in increased compliance costs. Further, actions by third parties to block, impose restrictions on, or charge for the delivery of e-mails or other messages could also materially and adversely impact our business. From time to time, Internet service providers block bulk e-mail transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver e-mails or other messages to third parties. In addition, our use of e-mail and other messaging services to send communications about our website or other matters may result in legal claims against us, which if successful might limit or prohibit our ability to send e-mails or other messages. Any disruption or restriction on the distribution of e-mails or other messages or any increase in the associated costs would materially and adversely affect our revenue and profitability. In addition, the shift in our website traffic originating from mobile devices accessing our services may decrease our members' willingness to use our services if they are not satisfied with our mobile user experience and could decrease their willingness to be an e-mail member, which could adversely affect our revenue and profitability.


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Changes to our technology and user interface for our website and mobile applications used to present our deals could adversely affect our revenue and business.
Our business depends on website and mobile technology interface in order to present deals to our members and generate revenue from our advertisers. Changes to our website and mobile technology and user interface intended to enhance the user experience may have an adverse impact on our member activity and may reduce revenue from advertisers. In October 2016, we recently launched our fully responsive website that adjusts to different screen sizes and allows our members to more readily search our deals, which we believe will improve the user experience on our site; however, this may lead to unforeseen issues that could adversely affect our revenue and business. In addition, as the Company previously disclosed, the Company discontinued its SuperSearch product in order to simplify the overall search experience, and this could result in further loss of revenues. The discontinuance of SuperSearch supports the Company's strategy to focus on its global Travelzoo brand.
Our reported total number of members may be higher than the number of our actual individual members and may not be representative of the number of persons who are active potential customers.
The total number of members we report may be higher than the number of our actual individual members because some members have multiple registrations, other members have died or become incapacitated and others may have registered under fictitious names. Given the challenges inherent in identifying these members, we do not have a reliable system to accurately identify the number of actual individual members, and thus we rely on the number of total members shown on our records as our measure of the size of our member base. In addition, the number of members we report includes the total number of individuals that have completed registration through a specific date, less individuals who have unsubscribed. Those numbers of members may include individuals who do not receive our e-mails because our e-mails have been blocked or are otherwise undeliverable. As a result, the reported number of members should not be considered as representative of the number of persons who continue to actively consider our deals by reviewing our e-mail offers.
We may not be able to obtain sufficient funds to grow our business and any additional financing may be on terms adverse to your interests.
For the six months ended June 30, 2017 , our cash and cash equivalents decreased by $5.5 million to $21.3 million, of which $10.7 million was held outside the U.S. in certain of our foreign operations. We intend to continue to grow our business and fund our current operations using cash on hand. However, this may not be sufficient to meet our needs, including the payments required to settle various commitments and contingencies, as described under Notes 3 and 4 to the accompanying unaudited condensed consolidated financial statements. We may not be able to obtain financing on commercially reasonable terms, or at all.
If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund our expansion, successfully promote our brand name, develop or enhance our products and services, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our business.
If we choose to raise additional funds through the issuance of equity securities, existing stockholders may experience significant dilution of their ownership interest and holders of the additional equity securities may have rights senior to existing stockholders of our common stock. If we obtain additional financing by issuing debt securities or bank borrowings, the terms of these arrangements could restrict or prevent us from paying dividends and could limit our flexibility in making business decisions.


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Our business may be sensitive to recessions.
The demand for online advertising may be linked to the level of economic activity and employment in the U.S. and abroad. Specifically, our business is primarily dependent on the demand for online advertising from travel and entertainment companies. The most recent recession decreased consumer travel and caused travel and entertainment companies to reduce or postpone their marketing spending generally, and their online marketing spending in particular. Continued or future recessions could have a material adverse effect on our business and financial condition. Moreover, declines or disruptions in the travel industry could adversely affect the hotel booking platform and financial performance.
Our operations could be significantly hindered by the occurrence of a natural disaster or other catastrophic event.
Our operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, unexpected technical problems in the systems that power our websites and distribute our e-mail newsletters, break-ins and similar events. In addition, a significant portion of our network infrastructure is located in Northern California, an area susceptible to earthquakes. We do not have multiple site capacity to protect us against any such occurrence. Outages could cause significant interruptions of our service. In addition, despite our implementation of network security measures, our servers are vulnerable to computer viruses, physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems. We do not carry business interruption insurance to compensate us for losses that may occur as a result of any of these events.
Technological or other assaults on our service could harm our business.
We are vulnerable to coordinated attempts to overload our systems with data, which could result in denial or reduction of service to some or all of our users for a period of time. We have experienced denial of service attacks in the past, and may experience such attempts in the future. Any such event could reduce our revenue and harm our operating results and financial condition. We do not carry business interruption insurance to compensate us for losses that may occur as a result of any of these events.
We are subject to payments-related risks.
We accept payments for the sale of vouchers using a variety of methods, including credit cards and debit cards. We pay interchange and other fees, which may increase over time and raise our operating expenses and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards and debit cards, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. In addition, our results can be negatively impacted by purchases made using fraudulent credit cards. Because we act as the merchant of record for certain hotel booking and voucher transactions, we may be held liable for accepting fraudulent credit cards on our websites as well as other payment disputes with our customers. If we have an increase of charge-backs due to the use of fraudulent credit cards on our websites, our business, results of operations and financial condition could be adversely affected. Moreover, under payment card rules and our contracts with our card processors, if there is a security breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments, process electronic funds transfers, or facilitate other types of online payments, and our business and results of operations could be adversely affected. If one or more of these contracts