magazine. As a percentage of our net revenues, sales and marketing expenses decreased to 23% and 25% for the three and six months ended June 30, 2007, respectively, from 25% and 28% for the corresponding periods in 2006.
General and administrative expenses consist primarily of payroll and related expenses for our executive management, finance and administrative personnel, legal and accounting fees, facilities costs, insurance and bad debt expenses.
General and administrative expenses increased to $4.0 million and $8.1 million for the three and six months ended June 30, 2007, respectively, as compared to $3.3 million and $6.6 million for the corresponding periods in 2006. These increases include $281,000 and $765,000, respectively, of costs associated with WeddingChannel for personnel and related costs and other administrative expenses. Other personnel and related costs increased by $247,000 and $430,000 for the three and six months ended June 30, 2007 to support the growth of the Company. Computer software costs, credit card fees, recruiting costs and bad debt expense also increased in 2007 by aggregate amounts of $281,000 and $554,000, respectively, as compared to the comparable periods in 2006. For the three and six months ended June 30, 2006, we incurred higher consulting costs associated with the development of a formal disaster recovery plan for the Company and with respect to Sarbanes-Oxley compliance. These costs aggregated $241,000 and $342,000 for the respective periods. As a percentage of our net revenues, general and administrative expenses decreased to 14% and 16% for the three and six months ended June 30, 2007, respectively, from 19% and 20% for the corresponding periods in 2006.
Total stock-based compensation expense related to all of the Company’s stock awards was included in various operating expense categories for the three and six months ended June 30, 2007 and 2006, as follows:
As of June 30, 2007, total unrecognized estimated compensation expense related to nonvested stock options, restricted shares and ESPP rights was $7.1 million, which is expected to be recognized over a weighted average period of 3.0 years.
Depreciation and amortization consists of depreciation and amortization of property and equipment and capitalized software, and amortization of intangible assets related to acquisitions.
Depreciation and amortization increased to $2.2 million and $4.3 million for the three and six months ended June 30, 2007, respectively, as compared to $453,000 and $825,000 for the corresponding periods in 2006. For the three and six months ended June 30, 2007, we recorded additional depreciation and amortization of property, equipment, capitalized software and intangible assets of $1.6 million and $3.1 million, respectively, related to the assets acquired as a result of the WeddingChannel acquisition. The remaining increases in 2007 were due to increasing capital expenditures during calendar year 2006, including amounts for additional computer hardware and software to establish secondary back-up systems in connection with the development of a formal disaster recovery plan.
Interest Income
Interest income, net of interest expense, increased to $1.2 million and $2.2 million for the three and six months ended June 30, 2007, respectively, as compared to $363,000 and $663,000 for the corresponding periods in 2006. The increase was primarily the result of higher funds available for investment, including proceeds from the issuance of common stock in connection with the completion of a private placement in July 2006.
Provision for Taxes on Income
The effective tax rate for each of the three and six months ended June 30, 2007, was approximately 41% which differed from the amount computed by applying the Federal statutory income tax rate primarily due to state income taxes, net of Federal benefit, and non-deductible stock-based compensation expense.
Prior to December 31, 2006, we had maintained a valuation allowance with respect to certain deferred tax assets related to net operating loss carryforwards as a result of uncertainties associated with our future profitability. As of December 31, 2006, we concluded, based upon our assessment of positive and negative evidence, that it was more likely than not that an additional portion of our net deferred tax assets would be realized and, accordingly, we recorded a non-cash tax benefit in the fourth quarter of 2006 of $9.4 million resulting from the reversal of a portion of the valuation allowance. During 2006, we also utilized approximately $14.0 million of our net operating loss carryforwards. Accordingly, for the three and six months ended June 30, 2006, our provision for income taxes was $173,000, and $276,000 respectively, primarily due to operating income generated in certain states.
Liquidity and Capital Resources
As of June 30, 2007, our cash, cash equivalents and short-term investments amounted to $95.6 million. We currently invest primarily in short-term debt instruments that are highly liquid, of high-quality investment grade, and have maturities ranging from one to six months, with the intent to make such funds readily available for operating purposes.
Net cash provided by operating activities was $15.2 million for the six months ended June 30, 2007. This resulted primarily from the net income for the period of $6.4 million, depreciation, amortization, stock-based compensation and deferred income taxes of $9.4 million and a decrease in other current assets of $359,000. These sources of cash were offset, in part, by an increase in inventory of $753,000 in anticipation of higher seasonal sales of wedding supplies in the second and third quarters and a decrease in accounts payable and accrued expenses of $273,000. Net cash provided by operating activities was $6.4 million for the six months ended June 30, 2006. This resulted primarily from the net income for the period of $5.6 million, depreciation, amortization, non-cash services expense and stock-based compensation of $1.8 million, and a decrease in accounts receivable, net of deferred revenue, of $961,000 due to improved collection efforts and further credit card usage by local vendors. These sources of cash were offset, in part, by an increase in other assets of $1.1 million due primarily to legal and other costs associated with the acquisition of WeddingChannel, a decrease in accounts payable and accrued expenses of $456,000 and an increase in deferred production and marketing expenses of $204,000. Inventory also increased by $163,000 due to higher seasonal sales of wedding supplies in the second and third quarters.
Net cash used in investing activities was $45.0 million for the six months ended June 30, 2007, due primarily to purchases of short-term investments, net of proceeds from sales, of $43.9 million, and purchases of property and equipment of $1.3 million. Net cash provided by investing activities was $17,000 for the six months ended June 30, 2006 due primarily to the sale of short-term investments, net of purchases, of $2.0 million offset, in part, by purchases of property equipment and software of $1.9 million.
Net cash provided by financing activities was $901,000 and $526,000 for the six months ended June 30, 2007 and 2006, respectively, primarily due to proceeds from the issuance of common stock in connection with the exercise of stock options and warrants and through our Employee Stock Purchase Plan.
We currently believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for the foreseeable future. Our ability to meet our obligations in the ordinary course of business is dependent upon our ability to maintain profitable operations and/or raise additional financing through public or private equity financings, or other arrangements with corporate sources, or other sources of
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financing to fund operations. However, there is no assurance that we will maintain profitable operations or that additional funding, if required, will be available to us in amounts or on terms acceptable to us.
Contractual Obligations and Commitments
We do not have any special purposes entities or capital leases and, other than operating leases, which are described below, we do not engage in off-balance sheet financing arrangements.
In the ordinary course of business, we enter into various arrangements with vendors and other business partners principally for magazine production, inventory purchases, computer equipment, host services and bandwidth.
As of June 30, 2007, we had no material commitments for capital expenditures.
As of June 30, 2007, we had commitments under non-cancelable operating leases amounting to approximately $4.5 million.
As of June 30, 2007, other long-term liabilities of $500,000 primarily represented accruals to recognize rent expense on a straight-line basis over the respective lives of four of our operating leases under which rental payments increase over the lease periods. These accruals will be reduced as the operating lease payments, summarized in the table of contractual obligations below, are made.
Our contractual obligations as of June 30, 2007 are summarized as follows:
| | | |
| | | | | | Less than 1 | | 1-3 | | 3-5 | | More than 5 |
| Contractual Obligations | | Total | | year | | years | | years | | years |
| | | (in thousands) |
| Long term debt | | $ | 106 | | $ | 51 | | $ | 55 | | $ | — | | $ | — |
| Operating leases | | | 4,502 | | | 1,221 | | | 2,070 | | | 1,211 | | | — |
| Purchase commitments | | | 3,129 | | | 2,958 | | | 171 | | | — | | | |
| Total | | | 7,737 | | $ | 4,230 | | | | | | | | $ | |
Seasonality
We believe that the impact of the frequency of weddings from quarter to quarter results in lower registry services and merchandise revenues in the first and fourth quarters.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flows of the Company due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks.
We are exposed to some market risk through interest rates related to the investment of our current cash, cash equivalents and short-term investments of approximately $95.6 million as of June 30, 2007. These funds are generally invested in highly liquid debt instruments. As such instruments mature and the funds are re-invested, we are exposed to changes in market interest rates. This risk is not considered material, and we manage such risk by continuing to evaluate the best investment rates available for short-term, high quality investments.
We have no activities related to derivative financial instruments or derivative commodity instruments, and we are not currently subject to any significant foreign currency exchange risk.
Item 4. Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of June 30, 2007. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and
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procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and to ensure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2007 identified in connection with the evaluation thereof by the Company’s management, including the Chief Executive Officer and Chief Financial Officer, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Knot is engaged in legal actions arising in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material effect on its results of operations, financial position or cash flows.
Item 1A. Risk Factors
Risks that could have a negative impact on our business, results of operations and financial condition include without limitation, (i) The Knot’s unproven business model, (ii) The Knot’s history of significant losses, (iii) risks related to The Knot’s recent acquisition of WeddingChannel, (iv) the significant fluctuation to which The Knot’s quarterly revenues and operating results are subject, (v) the seasonality of the wedding industry and (vi) other factors detailed in documents The Knot files from time to time with the SEC. A more detailed description of each of these and other risk factors can be found under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, filed on March 13, 2007. There have been no material changes to the risk factors described in the Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 23, 2007.
The stockholders elected Sandra Stiles and Charles Baker to the class of directors whose terms expire at the 2010 Annual Meeting of Stockholders or until their successors are elected and have qualified.
The stockholders ratified the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the calendar year ending December 31, 2007.
Shares of common stock were voted as follows:
| | | | | | | | |
| Director Nominee or Proposal | | For | | Against/Withheld | | Abstentions | |
| Sandra Stiles | | 26,865,167 | | 949,244 | | 0 | |
| Charles Baker | | 27,563,711 | | 250,700 | | 0 | |
| Ratification of Auditors | | 27,728,862 | | 78,720 | | 6,829 | |
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Item 6. Exhibits
| | 31.1 | Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| | 31.2 | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| | 32.1 | Certification of Chairman and Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| | 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: August 8, 2007 | | THE KNOT, INC. |
| |
| |
| | | By: | /s/ Richard Szefc |
| | | | Richard Szefc |
| | | | Chief Financial Officer (Principal Financial Officer |
| | | | and Duly Authorized Officer) |
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EXHIBIT INDEX
NumberDescription
| 31.1 | Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.2 | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.1 | Certification of Chairman and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
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