Unassociated Document
U.S. SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

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 NUMBER: 000-28271
 
THE KNOT, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
(State of incorporation)
13-3895178
(I.R.S. Employer Identification Number)
 
462 Broadway, 6th Floor
New York, New York 10013
(Address of Principal Executive Officer and Zip Code)
 
(212) 219-8555
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨   Accelerated filer x   Non-accelerated filer ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o   Nox
 
As of November 2, 2007, there were 31,553,468 shares of the registrant’s common stock outstanding.


   
Page
Number
     
PART I
FINANCIAL INFORMATION
 
     
Item 1:
 
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2:
16
     
Item 3:
25
     
Item 4:
25
     
PART II
 
     
Item 1:
25
     
Item 1A:
25
     
Item 2:
26
     
Item 6:
26
 
2

Item 1.  Financial Statements (Unaudited)
 
THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
September 30,
 
December 31,
 
   
2007
 
2006
 
   
(Unaudited)
 
(Note 1)
 
ASSETS
 
  
      
Current assets:
           
Cash and cash equivalents
 
$
20,564,621
 
$
73,633,011
 
Short-term investments
   
80,840,681
   
7,000,000
 
Accounts receivable, net of allowances of $1,519,658 and $707,567 at September 30, 2007 and December 31, 2006, respectively
   
13,386,448
   
9,742,920
 
Inventories
   
2,240,776
   
1,345,150
 
Deferred production and marketing costs
   
551,663
   
584,210
 
Deferred tax assets, current portion
   
5,041,274
   
8,369,121
 
Other current assets
   
1,489,609
   
1,499,851
 
Total current assets
   
124,115,072
   
102,174,263
 
Property and equipment, net
   
7,910,751
   
9,375,815
 
Intangible assets, net
   
31,891,472
   
34,015,125
 
Goodwill
   
32,763,029
   
33,853,840
 
Deferred tax assets
   
20,682,979
   
24,489,992
 
Other assets
   
342,123
   
341,467
 
Total assets
 
$
217,705,426
 
$
204,250,502
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Current liabilities:
             
Accounts payable and accrued expenses
 
$
6,775,804
 
$
7,661,023
 
Deferred revenue
   
13,843,346
   
10,497,552
 
Current portion of long-term debt
   
50,733
   
50,733
 
Total current liabilities
   
20,669,883
   
18,209,308
 
Deferred tax liabilities
   
14,156,700
   
15,013,770
 
Long term debt
   
55,173
   
55,173
 
Other liabilities
   
477,217
   
547,793
 
Total liabilities
   
35,358,973
   
33,826,044
 
Commitments and contingencies
             
Stockholders’ equity:
             
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding
   
   
 
Common stock, $0.01 par value; 100,000,000 shares authorized;
31,502,968 shares and 31,129,628 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively
   
315,030
   
311,297
 
Additional paid-in capital
   
191,534,425
   
188,908,678
 
Accumulated deficit
   
(9,503,002
)
 
(18,795,517
)
Total stockholders’ equity
   
182,346,453
   
170,424,458
 
Total liabilities and stockholders’ equity
 
$
217,705,426
 
$
204,250,502
 
 
See accompanying notes.
3


THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
     Three Months Ended September 30,  
Nine Months Ended September 30,
 
   
2007
 
2006
 
2007
 
2006
 
Net revenues:
                     
Online sponsorship and advertising
 
$
12,394,070
 
$
9,379,888
 
$
35,691,614
 
$
25,533,198
 
Registry services
   
3,665,755
   
954,965
   
8,782,342
   
1,097,880
 
Merchandise
   
5,316,915
   
4,273,656
   
16,447,195
   
12,165,753
 
Publishing and other
   
3,632,668
   
3,897,744
   
13,603,111
   
12,189,710
 
Total net revenues
 
$
25,009,408
 
$
18,506,253
 
$
74,524,262
 
$
50,986,541
 
Cost of revenues:
                         
Online sponsorship and advertising
 
$
386,190
 
$
320,854
 
$
1,163,120
 
$
928,621
 
Registry services
   
   
   
   
 
Merchandise
   
2,446,873
   
2,160,277
   
7,720,728
   
6,048,440
 
Publishing and other
   
1,561,030
   
1,719,472
   
5,177,081
   
4,410,451
 
Total cost of revenues
 
$
4,394,093
 
$
4,200,603
 
$
14,060,929
 
$
11,387,512
 
Gross profit
   
20,615,315
   
14,305,650
   
60,463,333
   
39,599,029
 
Operating expenses:
                         
Product and content development
   
3,486,799
   
2,170,369
   
9,937,098
   
5,784,068
 
Sales and marketing
   
6,230,330
   
4,657,215
   
18,567,666
   
13,739,820
 
General and administrative
   
4,399,333
   
4,232,411
   
12,470,968
   
10,820,420
 
Goodwill impairment
   
495,578
   
   
495,578
   
 
Depreciation and amortization
   
2,078,598
   
975,106
   
6,384,499
   
1,799,908
 
Total operating expenses
   
16,690,638
   
12,035,101
   
47,855,809
   
32,144,216
 
Income from operations
   
3,924,677
   
2,270,549
   
12,607,524
   
7,454,813
 
Interest income, net
   
1,272,843
   
1,082,226
   
3,496,047
   
1,745,687
 
Income before income taxes
   
5,197,520
   
3,352,775
   
16,103,571
   
9,200,500
 
Provision for income taxes
   
2,299,213
   
90,199
   
6,811,056
   
366,451
 
Net income
 
$
2,898,307
 
$
3,262,576
 
$
9,292,515
 
$
8,834,049
 
Net earnings per share—basic
 
$
0.09
 
$
0.12
 
$
0.30
 
$
0.36
 
Net earnings per share—diluted
 
$
0.09
 
$
0.11
 
$
0.28
 
$
0.33
 
Weighted average number of common shares outstanding
                         
Basic
   
31,034,101
   
27,472,080
   
30,915,579
   
24,592,760
 
Diluted
   
32,767,237
   
29,766,300
   
32,786,345
   
27,059,012
 

See accompanying notes.
4

 
THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


 
 
Nine Months Ended September 30,
 
   
2007
 
2006
 
Operating activities
           
Net income
 
$
9,292,515
 
$
8,834,049
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
3,510,846
   
1,386,619
 
Amortization of intangibles
   
2,873,653
   
413,289
 
Stock-based compensation
   
1,676,226
   
1,077,270
 
Deferred income taxes
   
6,111,790
   
 
Non-cash services expense
   
   
445,833
 
Reserve for returns
   
2,503,522
   
2,400,954
 
Goodwill impairment
   
495,578
   
 
Allowance for doubtful accounts
   
421,824
   
123,646
 
Other non-cash charges
   
29,723
   
97,937
 
Changes in operating assets and liabilities:
             
Accounts receivable
   
(5,935,383
)
 
(2,710,922
)
Inventories
   
(826,416
)
 
(16,814
)
Deferred production and marketing costs
   
32,547
   
(121,342
)
Other current assets
   
(34,849
)
 
(98,806
)
Other assets
   
(656
)
 
(76,596
)
Accounts payable and accrued expenses
   
(1,430,021
)
 
(37,969
)
Deferred revenue
   
3,362,050
   
1,854,964
 
Other liabilities
   
(70,576
)
 
56,741
 
Net cash provided by operating activities.
   
22,012,373
   
13,628,853
 
Investing activities
             
Purchases of property and equipment
   
(2,338,775
)
 
(3,059,165
)
Purchases of short-term investments
   
(126,812,681
)
 
(9,300,000
)
Proceeds from sales of short-term investments
   
52,972,000
   
13,850,000
 
Acquisition of business, net of cash acquired
   
52,410
   
(53,313,362
)
Net cash used in investing activities
   
(76,127,046
)
 
(51,822,527
)
Financing activities
             
Financing costs
   
   
(5,285,741
)
Proceeds from issuance of common stock
   
423,138
   
95,403,788
 
Proceeds from exercise of stock options and warrants
   
932,907
   
1,042,362
 
Repurchase of common stock
   
(309,762
)
 
 
Net cash provided by financing activities
   
1,046,283
   
91,160,409
 
(Decrease) increase in cash and cash equivalents
   
(53,068,390
)
 
52,966,735
 
Cash and cash equivalents at beginning of period
   
73,633,011
   
17,685,067
 
Cash and cash equivalents at end of period
 
$
20,564,621
 
$
70,651,802
 
 
See accompanying notes.
5


THE KNOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  BASIS OF PRESENTATION AND NATURE OF OPERATIONS

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company’s management in accordance with U.S. generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the management, all adjustments (consisting only of normally recurring adjustments) considered necessary for a fair presentation have been included.

The accompanying condensed consolidated balance sheet and financial information as of December 31, 2006 is derived from audited financial statements but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2006.

The Company has only achieved operating income in recent periods and has an accumulated deficit of $9,503,002 as of September 30, 2007. The Company believes that its current cash and cash equivalents will be sufficient to fund its working capital and capital expenditure requirements for the foreseeable future. The Company’s ability to meet its obligations in the ordinary course of business is dependent upon its 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 financing to fund operations. However, there is no assurance that the Company will maintain profitable operations or that additional funding, if required, will be available to the Company in amounts or on terms acceptable to the Company.
 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES

Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year.

EARNINGS PER SHARE

The Company computes earnings per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts basic earnings per share for the effects of stock options, restricted common stock, warrants and other potentially dilutive financial instruments, only in the periods in which the effects are dilutive. For the three months ended September 30, 2007 and 2006, the weighted average number of shares used in calculating diluted earnings per share includes stock options, restricted common stock and warrants to purchase common stock of 1,733,136 and 2,294,220, respectively. For the nine months ended September 30, 2007 and 2006, the weighted average number of shares used in calculating diluted earnings per share includes stock options, restricted common stock and warrants to purchase common stock of 1,870,766 and 2,466,252, respectively. The calculation of earnings per share for the three and nine months ended September 30, 2007 excludes a weighted average number of stock options of 410,000 and 186,227, respectively, because to include them in the calculation would be antidilutive.

6

SEGMENT INFORMATION

The Company operates in one reportable segment because it is organized around its online and offline media and e-commerce service lines. These service lines do not have operating managers who report to the chief operating decision maker. The chief operating decision maker generally reviews financial information at a consolidated results of operations level but does review revenue and cost of revenue results of the individual service lines.
  
CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. Cash, cash equivalents and short-term investments are deposited with three major financial institutions. The Company's customers are primarily concentrated in the United States. The Company performs on-going credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information.

For the three and nine months ended September 30, 2007, one customer accounted for 12% and 10% of net revenues, respectively. No other customer accounted for more than 2% of revenue for the three and nine months ended September 30, 2007; and no customer accounted for more than 5% and 3% of net revenues, respectively, for the three and nine months ended September 30, 2006. As of September 30, 2007 and December 31, 2006, one customer accounted for approximately 10% and 7%, respectively, of accounts receivable.

STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective method. Under this method, previously reported amounts are not restated. SFAS No. 123(R) requires the measurement of compensation expense for all stock awards granted to employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service periods for awards expected to vest. Under the modified prospective method, the Company recognizes compensation expense for all stock awards granted after December 31, 2005, and for awards granted prior to January 1, 2006 that remained unvested as of that date or which may be subsequently modified. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company’s common stock, and the fair value of stock options granted is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123 and SFAS No. 148.

The Company continues to recognize stock-based compensation for service-based graded-vesting stock awards granted prior to January 1, 2006 using the accelerated method prescribed by Financial Accounting Standards Board (“FASB”) Interpretation No. 28. As permitted under SFAS No. 123(R), for stock awards granted after December 31, 2005, the Company has adopted the straight-line attribution method. In addition, effective January 1, 2006, the Company has included an estimate of stock awards to be forfeited in the future in calculating stock-based compensation expense for the period. The cumulative effect of this accounting change for forfeitures was not material due to the significant reduction in both the number of personnel receiving stock awards and the aggregate amount of stock awards granted by the Company in 2004 and 2005.
 
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 nine months ended September 30, 2007 and 2006, as follows:

   
Three Months Ended
 
Nine Months Ended
 
   
September 30
 
September 30
 
   
2007
 
2006
 
2007
 
2006
 
Product and content development
 
$
93,000
 
$
62,000
 
$
333,000
 
$
116,000
 
Sales and marketing
   
77,000
   
62,000
   
295,000
   
183,000
 
General and administrative
   
456,000
   
264,000
   
1,048,000
   
778,000
 
Total stock-based compensation expense
 
$
626,000
 
$
388,000
 
$
1,676,000
 
$
1,077,000
 

7

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes- An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS 109. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not impact the Company’s operating results or financial position.

The Company is subject to taxation in the United States and various state and local jurisdictions. The Company is currently under audit with respect to its 2005 U.S. Federal tax return. As of September 30, 2007, none of the Company’s other tax returns have been examined by any income taxing authority. As a result of the ongoing use of tax loss carryforwards, all of the Company’s prior U.S. Federal and more significant state and local returns remain subject to examination. Through September 30, 2007, the Company has not recorded any interest and penalties related to uncertain tax positions.

3.  ACQUISITIONS

WeddingChannel

On September 8, 2006, the Company completed the acquisition of WeddingChannel.com, Inc. (“WeddingChannel”), through the merger of IDO Acquisition Corporation, a wholly-owned subsidiary of the Company, with and into WeddingChannel. The Company undertook the acquisition to increase the Company’s market share and provide the Company additional opportunities to leverage its core assets including its audience and local and national sales forces. In addition, the Company undertook the acquisition to enhance the services the Company is able to provide engaged couples and their wedding guests, through WeddingChannel’s registry offerings. The purchase price for all of the capital stock and stock options of WeddingChannel was approximately $81.9 million, representing cash paid of $60.9 million, the issuance of 1,144,144 shares of common stock valued at $18.6 million and direct transaction costs of $2.4 million. The purchase price included a working capital adjustment of $2.9 million. The value of the common stock portion of the purchase price was determined based on the market price of the Company’s common stock at the time the Company made its determination to pay the primary consideration, as defined in the merger agreement, which fixed the consideration for the outstanding capital stock and stock options of WeddingChannel. The purchase price reflects a reduction of $808,000 and 5,732 shares of common stock based upon a final determination of WeddingChannel’s working capital, as defined, as of September 8, 2006. In addition, approximately $5.9 million in cash and 109,268 shares of common stock included in the purchase price are currently held in an escrow account and are subject to certain deductions in the event indemnification claims are successfully asserted by the Company pursuant to the merger agreement.

In connection with this acquisition, the Company also recorded estimated liabilities of $1.1 million, primarily for costs resulting from a plan to involuntarily terminate certain employees of WeddingChannel and for the cost of remaining lease obligations for acquired facilities to be closed or for acquired space leased which exceeds the Company’s current or projected needs due to staff reductions. As of September 30, 2007, substantially all of these estimated liabilities have been paid.

The estimated cost of the acquisition has been allocated to the assets acquired and liabilities assumed of WeddingChannel based on a determination of their fair values.

The following table summarizes the cost allocation at the date of acquisition:
       
Current assets
 
$
19,755,000
 
Property and equipment
   
5,395,000
 
Intangible assets
   
35,570,000
 
Goodwill
   
22,534,000
 
Deferred tax assets
   
20,915,000
 
Other assets
   
22,000
 
Total assets acquired
 
$
104,191,000
 
Current liabilities
 
$
6,316,000
 
Deferred tax liabilities
   
14,901,000
 
Total liabilities acquired
   
21,217,000
 
Total estimated cost
 
$
82,974,000
 

8

The acquisition of WeddingChannel was a stock transaction for tax purposes, which results in different book and tax bases. Accordingly, the purchase price allocation includes $14.9 million of deferred tax liabilities related to the tax effect of the preliminary differences in the book and tax bases of property and equipment and acquired intangibles other than goodwill. In addition, a deferred tax asset of $22.7 million, associated with a reduction in a portion of the valuation allowance previously recorded by WeddingChannel with respect to its net operating carryforwards has been recorded. To the extent further reductions in the valuation allowance are recorded, the offsetting credit would reduce goodwill.

The results of operations for WeddingChannel have been included in the Company’s condensed consolidated statements of operations since September 8, 2006. The following unaudited pro forma financial information presents a summary of the results of operations assuming the acquisition of WeddingChannel occurred on January 1, 2006:

   
Three Months Ended
 
Nine Months Ended
 
   
September 30, 2006
 
September 30, 2006
 
Net revenues
 
$
24,318,817
 
$
70,119,910
 
Net income
 
$
2,949,615
 
$
8,149,178
 
Net earnings per share - basic
 
$
0.10
 
$
0.30
 
Net earnings per share - diluted
 
$
0.09
 
$
0.27
 
 
Pro forma adjustments have been made to reflect depreciation and amortization using asset values recognized after applying purchase accounting adjustments and related tax effects as well as to eliminate legal fees incurred in connection with the litigation between the Company and WeddingChannel, which was withdrawn following the acquisition. Direct transaction and other costs related to the acquisition, a gain on the sale of an investment and losses from discontinued operations, all of which were recorded by WeddingChannel prior to September 8, 2006, have been eliminated from the pro forma financial information. The pro forma earnings per share amounts are based on the pro forma weighted average number of shares outstanding which include the shares issued by the Company as a portion of the total consideration for the acquisition and the shares sold on August 15, 2006 by the Company in connection with a follow-on offering, the net proceeds from which were used to fund a portion of the cash consideration for the acquisition.

The pro forma consolidated financial information is presented for information purposes only. The pro forma consolidated financial information does not reflect the effects of any anticipated changes to be made by the Company to the operations of the combined companies, including synergies and cost savings and does not include one time charges expected to result from the acquisition. The pro forma consolidated financial information should not be construed to be indicative of results of operations or financial position that actually would have occurred had the acquisition been consummated as of the date indicated or the Company’s future results of operations or financial position.

Lilaguides 
 
On July 25, 2006, the Company acquired the publishing business and related assets of OAM Solutions, Inc., the publisher of the Lilaguides, local information guides for parents, for $2.1 million, which includes direct transaction costs. The acquisition represented the Company’s first significant step into the business of catering to the needs of first-time parents. The cost of this acquisition was allocated to the assets acquired based upon a determination of their fair values as follows:
9

 
Current assets
 
$
8,700
 
Property and equipment
   
14,300
 
Tradename
   
83,000
 
Other intangibles
   
168,000
 
Goodwill
   
1,820,000
 
Total cost
 
$
2,094,000
 

This acquisition would not have had a material impact with respect to the condensed consolidated results of operations for the three and nine months ended September 30, 2006, had the acquisition been consummated on January 1, 2006.


4.  SHIPPING AND HANDLING CHARGES

For the three months ended September 30, 2007 and 2006, merchandise revenues included outbound shipping and handling charges of approximately $794,000 and $655,000, respectively. For the nine months ended September 30, 2007 and 2006, merchandise revenues included outbound shipping and handling charges of approximately $2,367,000 and $1,815,000, respectively.


5.  INVENTORY

Inventory consists of the following:

   
September 30,
 
December 31,
 
   
2007
 
2006
 
Raw materials
 
$
251,010
 
$
194,122
 
Finished goods
   
1,989,766
   
1,151,028
 
   
$
2,240,776
 
$
1,345,150
 


6. GOODWILL

The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 are as follows:

Balance as of December 31, 2006
 
$
33,853,840
 
Acquisition of WeddingChannel.com, Inc. (see Note 3):
       
Adjustments to purchase price and additional direct transaction costs
   
(375,387
)
Adjustments to fair value of net assets acquired other than goodwill
   
(219,846
)
Goodwill impairment
   
(495,578
)
Balance as of September 30, 2007
 
$
32,763,029
 
 
The Company completed its most recent goodwill impairment test as of October 1, 2006. No impairment of goodwill was indicated at that time. Under SFAS No. 142, the Company is required to perform goodwill impairment tests on at least an annual basis or more frequently if circumstances dictate. During its business planning process for calendar year 2008, which commenced in September 2007, the Company concluded that it would not currently commit additional marketing resources for its online personals site, GreatBoyfriends.com. Accordingly, the Company reduced its future revenue expectations and estimated future cash flows for that reporting unit. The Company also determined that the carrying value of goodwill for GreatBoyfriends.com exceeded its implied fair value at September 30, 2007 and recorded an impairment charge of approximately $496,000. There can be no assurance that future goodwill impairment tests will not result in additional charges to income.

10

7.  INTANGIBLE ASSETS
 
   
September 30, 2007
 
December 31, 2006
 
   
 Gross Cost
Carrying Amount
 
Accumulated Amortization
 
Net
Cost
 
Gross Cost
Carrying Amount
 
Accumulated Amortization
 
Net
Cost
 
Indefinite lived intangibles:
                            
Tradenames
 
$
15,220,000
 
$
--
 
$
15,220,000
 
$
15,220,000
 
$
--
 
$
15,220,000
 
                                       
Amortizable intangibles:
                                     
Customer and advertiser Relationships
   
5,610,000
   
672,378
   
4,937,622
   
4,940,000
   
175,000
   
4,765,000
 
Developed technology and patents
   
12,280,000
   
2,613,000
   
9,667,000
   
12,280,000
   
771,000
   
11,509,000
 
Trademarks and Tradenames
   
211,920
   
96,240
   
115,680
   
211,920
   
56,153
   
155,767
 
Service contracts and Other
   
3,328,000
   
1,376,830
   
1,951,170
   
3,248,000
   
882,642
   
2,365,358
 
     
21,429,920
   
4,758,448
   
16,671,472
   
20,679,920
   
1,884,795
   
18,795,125
 
                                       
Total
 
$
36,649,920
 
$
4,758,448
 
$
31,891,472
 
$
35,899,920
 
$
1,884,795
 
$
34,015,125
 

Definite lived intangible assets are amortized over their estimated useful lives as follows:

Customer and advertiser relationships
4 to 10 years
Developed technology and patents
5 years
Trademarks and tradenames
3 to 5 years
Service contracts and other
1 to 7 years

The increase in the gross cost carrying amount of intangibles for the nine months ended September 30, 2007 resulted from adjustments to the appraised fair value of assets acquired in connection with the acquisition of WeddingChannel (see Note 3).
 
Amortization expense was $941,000 and $352,000 for the three months ended September 30, 2007 and 2006, respectively, and $2,874,000 and $413,000 for the nine months ended September 30, 2007 and 2006, respectively. Estimated annual amortization expense is $3,812,000 in 2007, $3,635,000 in 2008, $3,598,000 in 2009, $3,524,000 in 2010, $2,375,000 in 2011, $555,000 in 2012 and $2,046,000, thereafter.


8.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

   
September 30,
 
December 31,
 
   
2007
 
2006
 
Accounts payable
 
$
2,039,586
 
$
2,156,070
 
Professional services
   
531,717
   
536,602
 
Compensation and related benefits
   
1,431,441
   
1,658,577
 
Other accrued expenses
   
2,773,060
   
3,309,774
 
   
$
6,775,804
 
$
7,661,023
 

11

9.  LONG-TERM DEBT

Long-term debt as of September 30, 2007 consists of the following:

Note due in annual installments of $60,000 through October 2008,
     
based on imputed interest of 8.75%
 
$
105,906
 
         
Less current portion
   
50,733
 
         
Long term-debt, excluding current portion
 
$
55,173
 
 
The long-term obligation matures in October, 2008. Interest expense was approximately $2,000 and $3,000 for the three months ended September 30, 2007 and 2006, respectively. Interest expense was approximately $7,000 and $10,000 for the nine months ended September 30, 2007 and 2006, respectively.


10. STOCK PLANS
 
The 1999 Stock Incentive Plan (the “1999 Plan”) was adopted by the Board of Directors and approved by the stockholders in November 1999, as a successor plan to the Company’s 1997 Long Term Incentive Plan (the “1997 Plan”). All options under the 1997 Plan have been incorporated into the 1999 Plan. The 1999 Plan became effective upon completion of the Company’s initial public offering of its common stock and was amended and restated as of March 27, 2001.
 
Under the terms of the 1999 Plan, 3,849,868 shares of common stock of the Company were initially reserved for incentive stock options, nonqualified stock options (incentive and nonqualified stock options are collectively referred to as “options”), stock appreciation rights, stock issuances (which may be subject to the attainment of designated performance goals or service requirements (“restricted stock”), or any combination thereof. On May 15, 2001, the Company’s stockholders approved a further increase of 1,000,000 to the number of shares reserved for issuance under the 1999 Plan. Through September 30, 2007, an additional 2,458,304 shares were added to the reserve pursuant to the automatic share increase provisions of the 1999 Plan. The shares reserved under the 1999 Plan automatically increase on the first trading day in January of each calendar year by an amount equal to two percent (2%) of the total number of shares of the Company’s common stock outstanding on the last trading day of December in the prior calendar year, but in no event will this annual increase exceed 1,000,000 shares (or such other lesser number determined by the Board of Directors). Awards may be granted to such non-employee directors, officers, employees and consultants of the Company as the Compensation Committee of Board of Directors shall in its discretion select. Only employees of the Company are eligible to receive grants of incentive stock options. Options are granted at the fair market value of the stock on the date of grant. Options vest over periods up to four years and have terms not to exceed 10 years. Restricted stock awards vest over periods ranging from one to four years.
 
The 2000 Non-Officer Stock Incentive Plan (the “2000 Plan”) was approved by the Board of Directors in June 2000. Under the terms of the 2000 Plan, 435,000 shares of common stock of the Company have been reserved for nonqualified stock options, stock issuances (which may be restricted stock) or any combination thereof. Awards may be granted to employees (other than officers or directors of the Company) and consultants and other independent advisors who provide services to the Company. Options are granted at the fair market value of the stock on the date of grant. Generally, options have vested over a four-year period and have terms not to exceed 10 years. Currently, there are no unvested options outstanding under the 2000 Plan.
 
The Employee Stock Purchase Plan (the “ESPP”) was adopted by the Board of Directors and approved by the stockholders in November 1999 and became effective upon completion of the Company’s initial public offering of its common stock. The Compensation Committee of the Board of Directors administers the ESPP. The ESPP permits a participating employee to make contributions to purchase shares of common stock by having withheld from his or her salary an amount between 1 percent and 15 percent of compensation. Under the ESPP, eligible employees of the Company may elect to participate on the start date of an offering period or subsequent semi-annual entry date, if any, within the offering period. On each purchase date during an offering period, a participating employee’s contributions will be used to purchase up to 1,000 shares of the Company’s common stock for such participating employee at a 15 percent discount from the fair market value, as defined in the ESPP, of such stock. Each offering period is determined by the plan administrator and may not exceed two years. The Company initially reserved 300,000 shares of common stock under the ESPP. The shares reserved automatically increase on the first trading day in January of each calendar year by the lesser of the (i) the number of shares of common stock issued under the ESPP in the immediately preceding calendar year, (ii) 300,000 shares or (iii) such other lesser amount approved by the Board of Directors. Through September 30, 2007, 393,239 shares were issued under the ESPP and 365,767 shares were added to the reserve pursuant to the automatic share increase provision.

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The following table represents a summary of the Company’s stock option activity under the 1999 and 2000 Plans and related information, without regard for estimated forfeitures, for the nine months ended September 30, 2007:

   
 
Shares
 
Weighted Average
Exercise Price
 
Options outstanding at December 31, 2006
   
1,853,976
 
$
2.76
 
Options granted
   
410,000
   
18.26
 
Options exercised
   
(282,916
)
 
2.33
 
Options canceled
   
(5,938
)
 
3.36
 
Options outstanding at September 30, 2007
   
1,975,122
 
$
6.04
 

The weighted average grant-date fair value of options granted during the nine months ended September 30, 2007, was $5.95. No options were granted during the three months ended September 30, 2007 and in 2006. The fair value of options which vested during the three months ended September 30, 2007 and 2006 was $1.75 and $1.99, respectively. The fair value of options which vested during the nine months ended September 30, 2007 and 2006 was $1.96 and $1.82, respectively. The total intrinsic value of options exercised during the three months ended September 30, 2007 and 2006 was $1.2 million and $5.6 million, respectively. The total intrinsic value of options exercised during the nine months ended September, 2007 and 2006 was $6.0 million and $7.9 million, respectively.

The following table summarizes information about options outstanding at September 30, 2007:
 
           
Options Outstanding
   
Options Exercisable
 
Range of exercise price
   
Number
Outstanding
as of
September 30, 2007
   
Weighted
Average
Remaining
Contractual
Life
(In Years)
   
Weighted
Average
Exercise
Price
   
Number
Exercisable
as of
September 30, 2007
   
Weighted
Average
Exercise
Price
 
                                 
$0.42 to $1.03
   
416,509
   
3.34
 
$
0.90
   
416,509
 
$
0.90
 
$1.37 to $4.10
   
1,060,113
   
5.91
   
3.36
   
1,054,174
   
3.36
 
$4.80 to $9.00
   
88,500
   
6.36
   
5.61
   
51,693
   
6.04
 
$18.26
   
410,000
   
9.66
   
18.26
   
--
   
--
 
     
1,975,122
   
6.17
 
$
6.04
   
1,522,376
 
$
2.78
 

The weighted average remaining contractual life of options exercisable as of September 30, 2007 was 5.20 years.

As of September 30, 2007, there were 2,210,752 shares available for future grants under the 1999 Plan and 270,418 shares available for future grants under the 2000 Plan.

The aggregate intrinsic value of stock options outstanding at September 30, 2007 was $30.1 million, of which $28.1 million relates to vested awards. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of the Company’s common stock as of September 30, 2007. The following table summarizes nonvested stock option activity for the nine months ended September 30, 2007:
13


   
Shares
 
Weighted Average Exercise
Price
 
Nonvested options outstanding at December 31, 2006
   
173,447
 
$
4.24
 
Granted
   
410,000
   
18.26
 
Vested
   
(125,641
)
 
4.05
 
Canceled
   
(5,060
)
 
3.71
 
Nonvested options outstanding at September 30, 2007
   
452,746
 
$
16.99
 
  
The weighted average grant-date fair value of ESPP rights arising from elections made by ESPP plan participants was $2.32 and $5.07 during the three and nine months ended September 30, 2007, respectively, and $2.07 and $6.30 during the three and nine months ended September 30, 2006. During the nine months ended September 30, 2006, ESPP rights to approximately 13,000 shares were granted to employees who elected to change their payroll percentage deductions effective February 1, 2006, as permitted semi-annually within the offering period in effect at that date under the ESPP plan. These ESPP rights were treated as modified stock awards which had a weighted average grant-date value of $10.60. The fair value of ESPP rights that vested during the three and nine months ended September 30, 2007 was $3.51 and $5.26, respectively, and was $10.14 and $7.80 during the three and nine months ended September 30, 2006, respectively. On January 31, 2007, the Company issued 12,130 shares at a weighted average price of $15.32 under the ESPP. On July 31, 2007, the Company issued 15,342 shares at a weighted average price of $15.43 under the ESPP.
 
The intrinsic value of shares purchased through the ESPP on January 31, and July 31, 2007 as of September 30, 2007 was $180,000 and $42,000, respectively. The intrinsic value of outstanding ESPP rights as of September 30, 2007 was $91,000. The intrinsic value of the ESPP rights is calculated as the discount from the quoted price of the Company’s common stock, as defined in the ESPP, which was available to employees as of the respective dates.

As of September 30, 2007, there was $2.2 million of unrecognized compensation cost related to nonvested stock options and ESPP rights, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 2.61 years.

The fair value for options and ESPP rights have been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

 
Nine Months Ended September 30,
 
2007
 
2006
 
Options
 
ESPP Rights
 
Options
 
ESPP Rights
Weighted average expected option lives
4.0 years
 
0.5 years
 
N/A
 
0.5 years
Risk-free interest rate
4.83%
 
4.96%-5.16%
 
N/A
 
4.60%-5.18%
Expected volatility
32.1%
 
20.3-29.3%%
 
N/A
 
25.8%-26.8%
Dividend yield
0%
 
0%
 
N/A
 
0%


Expected volatility is based on the historical volatility of the market price of the Company’s stock. The expected lives of options granted are based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are based on the expected option lives and the corresponding U.S. treasury yields in effect at the time of grant. The fair value for ESPP rights includes the option exercise price discount from market value provided for under the ESPP.

During the three months ended September 30, 2007 and 2006, the Company recorded $240,000 and $111,000, respectively, of compensation expense related to options and ESPP rights. During the nine months ended September 30, 2007 and 2006, the Company recorded $429,000 and $383,000, respectively, of compensation expense related to options and ESPP rights and received cash from the exercise of options and ESPP rights of $1.3 million in each period for which the Company issued new shares of common stock.
14


As of September 30, 2007 and 2006, there were 365,668 and 333,500 service-based restricted stock awards outstanding, respectively. During the three and nine months ended September 30, 2007, 30,000 shares and 86,000 shares, respectively, of restricted stock were awarded at weighted average grant-date fair values of $19.68 and $20.05, respectively. During the three and nine months ended September 30, 2006, 99,500 shares and 301,000 shares, respectively, of restricted stock were awarded at weighted average grant-date fair values of $16.95 and $13.36, respectively. During the three and nine months ended September 30, 2007, 115,832 and 123,332 shares of restricted stock vested, respectively. During the three and nine months ended September 30, 2007, 16,500 and 20,500 shares of restricted stock, respectively, were canceled. During the three and nine months ended September 30, 2006, 2,500 shares of restricted stock vested. The aggregate intrinsic value of restricted shares at September 30, 2007 was $7.8 million. The intrinsic value for restricted shares is calculated based on the par value of the underlying shares and the quoted price of the Company’s common stock as of September 30, 2007.

As of September 30, 2007, there was $4.9 million of total unrecognized compensation cost related to nonvested restricted shares, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 3.1 years. During the three months ended September 30, 2007 and 2006, the Company recorded $387,000 and $277,000, respectively, of compensation expense related to restricted shares. During the nine months ended September 30, 2007 and 2006, the Company recorded $1,247,000 and $694,000 of compensation expense related to restricted shares.

The tax benefit attributable to all recorded stock-based compensation was $250,000 and $157,000 for the three months ended September 30, 2007 and 2006, respectively, and $668,000 and $430,000 for the nine months ended September 30, 2007 and 2006, respectively. Through September 30, 2007, the Company has not recorded any tax benefits attributable to tax deductions generated from the exercise of employee stock options, vesting of restricted stock and the exercise of stock warrants in excess of related stock-based compensation, non-cash services expense and non-cash sales and marketing expense recorded for financial reporting purposes. In accordance with SFAS No. 123(R), the tax benefits for these deductions are recognized when they result in a reduction to current taxes payable and will be accounted for as additional paid-in-capital.

11.  AGREEMENT WITH COLLAGES. NET, INC. (“Collages”)

In March 2005, the Company entered into a Marketing Services Agreement (the “Agreement”) with Collages, a provider of hosting and website development services to professional photographers. Under the Agreement, which has a term of three years, the Company delivers online and print advertising services to Collages in exchange for having received Collages Series A Preferred Stock, which vests over the first two years of the Agreement. Through September 30, 2007, the fair value of the marketing services to be provided over the term of the Agreement approximated the fair value of Series A Preferred Stock received.

Since inception of the Agreement through September 30, 2007, the Company has earned approximately $1.5 million in revenue pursuant to the Agreement. The Company has deferred recognition of this revenue since the realization of the resulting asset, representing an equity investment in Collages, is not reasonably assured.
 
12.  COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company 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.

13.  WARRANT EXERCISE
 
In October 2004, the Company retained Allen & Company LLC (“Allen”) as a financial advisor for a period of two years with respect to various matters. In consideration for Allen’s services and a cash payment of $1,100, the Company issued warrants to Allen to purchase 220,000 shares of the Company’s common stock at $3.79 per share, subject to certain anti-dilution provisions. The warrants became fully exercisable in October 2005. The warrants expire in October 2010.

On February 8, 2007, the Company issued 18,050 shares of common stock upon the exercise of a portion of the warrant by Allen and received proceeds of approximately $68,000.

15

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements relating to future events and the future performance of The Knot based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
 
Overview

The Knot, Inc. is a leading lifestage media company targeting couples planning their weddings and future lives together. Our flagship brand, The Knot, is the nation's leading wedding resource, reaching well over a million engaged couples each year through the #1 wedding website TheKnot.com. Other Knot brand products include The Knot national and local magazines, The Knot books (published by Random House and Chronicle), and television programming bearing The Knot name (aired on the Style Network, Oxygen and Comcast Networks). We also own WeddingChannel.com, the most visited wedding gift registry website. Our Nest brand focuses on the newlywed-to-pregnancy lifestage with the popular lifestyle website TheNest.com, a home décor book series with Clarkson Potter, The Nest magazine, and baby offshoot The NestBaby.com. Also under The Knot, Inc. umbrella are WeddingTracker.com, GiftRegistryLocator.com, party planning site PartySpot.com, teen-oriented PromSpot.com, and local baby services and community site Lilaguide.com.

Milestones

We commenced operations in 1996. In 2000, we acquired Weddingpages, Inc., the nation’s largest local wedding magazine publisher, helping us to extend The Knot brand on the local level. In November 2004, with the launch of TheNest.com, we extended our audience relationship beyond weddings with the first online destination for newly married couples. In 2006, we acquired personal wedding website WeddingTracker.com and local baby resource Lilaguide, which have allowed us to deepen the relationship with both our core audience and advertisers.

In September 2006, we acquired WeddingChannel.com, Inc. The acquisition of WeddingChannel increases our market share and provides us additional opportunities to leverage core assets including our commerce operations and local and national sales forces. WeddingChannel’s registry offerings also enhance the services we are able to provide our audience of engaged couples and their wedding guests. We intend to maintain WeddingChannel.com as a separate website and continue to offer WeddingChannel’s services ranging from planning content and interactive tools to convenient, comprehensive shopping and community participation. The results of operations for WeddingChannel have been included in our consolidated statements of operations since the acquisition date.

In May 2007, we took our first steps into the baby space with the launch of TheNestBaby.com, a hip new web site for soon-to-be-parents. The site specifically targets first time parents from fertility through pregnancy, birth and the first year and facilitates community by enabling moms in each stage to meet each other and to share local advice. Like TheKnot.com, the baby site provides content and tools surrounding the big event, featuring checklists, personal blogs, message boards, articles and a baby shop for personalized gifts and supplies.

Strategy

Our strategy is to expand our position as a leading lifestage media company providing comprehensive information, services and products to couples from engagement through pregnancy on multiple platforms that keep in step with the changing media landscape.

Increase Our Market Share and Leverage Assets. Acquiring companies or services that are complementary to our business increases our leverage with advertisers as well as our ability to satisfy our customers. The acquisition of WeddingChannel has significantly increased our share of the online bridal audience and provides additional opportunities to leverage our local and national sales forces as well as our wedding merchandise offerings. WeddingChannel's registry search platform will also enhance the service we are able to provide all of our engaged couples and their wedding guests. The launch of PartySpot.com leverages our technologies as well as our local sales force and vendor relationships to provide local party planning information to families hosting rehearsal dinners, bar mitzvahs, sweet sixteens and graduation parties.
16


Deepen Our Relationship with Our Audience. A large and active membership base is critical to our success. Annual new membership has remained consistent in recent years. Membership enrollment in 2006 was approximately 1.2 million and 768,000 for The Knot and WeddingChannel websites, respectively. Membership enrollment is free and gives members the use of important services such as free personal wedding webpages, message boards, interactive planning tools, wedding checklists and wedding gown databases. Our priority in the wedding space is to increase the depth of member engagement with our sites through new content and product offerings, additional interactive premium services, and active community participation. We also acquire and create properties to expand our services. Our websites, WeddingTracker.com and Wed-o-rama.com, allow us to offer our engaged couples premium personal wedding webpage design and hosting for a fee.

Expand into Other Life Stages and Services. In the first years of marriage, The Knot members will spend even more than they did on their weddings as they buy and furnish homes, organize their finances and start having children. With TheNest.com, we are now extending our relationship with our core membership base - and new advertiser categories -- by providing access to services and products relevant to newlyweds and growing families. Getting pregnant is another intense event for young married couples, and we believe there is an opportunity to continue serving our audience as they enter this significant life stage. The launch of TheNestBaby.com extends our social network to provide pregnant moms and new parents with essential information such as stage-by-stage advice, expert Q&As, interactive tools, 30,000 product reviews, checklists, as well as local events listings and resource reviews in 26 local markets powered by sibling site Lilaguide.com.
 
Leverage Brands and New Media Platforms. Maintaining our strong brands is critical to attracting and expanding both our online and offline user base and securing our leading position in the bridal market and beyond. Distribution on new media platforms is a key effort in our brand building. We have been a leader in the production and distribution of high quality video content online. This branded wedding video content has been popular on TheKnot.com and has also gained us increased visibility on distribution partner portal MSN. In 2004, we partnered with Comcast, the nation's leading cable and broadband provider, to launch The Knot Weddings channel, the first-ever all-weddings Video-on-Demand service. In April 2007, we kicked off our strategic partnership with Style Network with our branded TV special, “My Celebrity Wedding by The Knot,” a new spin-off which showcased a wedding inspired by a celebrity ceremony, planned by The Knot’s Editor-In-Chief, Carley Roney.

Aggressive public relations outreach is another key tool we use to promote our brands. In the last twelve months, Carley Roney, as a leading wedding and lifestyle expert, has appeared on more than 35 national and local television programs promoting The Knot, The Nest and The Nest Baby brands. In addition, in spring 2007, our WeddingChannel brand was featured during a seven week wedding series on Fox Television’s daytime show Mike & Juliet.
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an on-going basis. We evaluate these estimates including those related to revenue recognition, allowances for doubtful accounts, inventory provisions, impairment of intangible assets, including goodwill, and deferred taxes. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition
 
We derive revenues from the sale of online sponsorship and advertising programs, from commissions earned in connection with the sale of gift registry products, from the sale of merchandise and from the publication of magazines.
 
Online sponsorship programs are designed to integrate advertising with online editorial content. Sponsors can purchase the exclusive right to promote products or services on a specific online editorial area and can purchase a special feature on our sites. These programs commonly include banner advertisements and direct e-mail marketing. Sponsors can also promote their services and products within the programming on our streaming video channel, The Knot TV.
17

 
Online advertising includes online banner advertisements and direct e-mail marketing as well as placement in our online search tools. This category also includes online listings, including preferred placement and other premium programs, in the local area of our websites for local wedding and other vendors. Local vendors may purchase online listings through fixed term contracts or open-ended subscriptions.
 
Certain elements of online sponsorship and advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a sponsor's advertisement, banner, link or other form of content on our sites. To the extent that minimum guaranteed impressions are not met, we are generally obligated to extend the period of the contract until the guaranteed impressions are achieved. If this occurs, we defer and recognize the corresponding revenues over the extended period.
 
Registry services revenue represents commissions earned in connection with the sale of products from gift registries under agreements with certain retail partners where we are not primarily obligated in a transaction, not subject to inventory risk and amounts earned are determined using a fixed percentage. This commission revenue is recognized when the products are sold by the retail partners.
 
Merchandise revenue generally includes the selling price of wedding supplies through our websites as well as related outbound shipping and handling charges since we are the primary party obligated in a transaction, are subject to inventory risk, and we establish our own pricing and selection of suppliers. Merchandise revenues are recognized when products are shipped to customers, reduced by discounts as well as an allowance for estimated sales returns.
 
Publishing revenue primarily includes print advertising revenue derived from the publication of national and regional magazines. These revenues are recognized upon the publication of the related magazines, at which time all material services related to the magazine have been performed. Additionally, publishing revenues are derived from the sale of magazines on newsstands and in bookstores, and from author royalties received related to book publishing contracts. Revenues from the sale of magazines are recognized when the magazines are shipped, reduced by an allowance for estimated sales returns. Author royalties, to date, have been derived primarily from publisher royalty advances that are recognized as revenue when all of our contractual obligations have been met which is typically upon the delivery to, and acceptance by, the publisher of the final manuscript.
 
For contracts with multiple elements, including programs which combine online and print advertising components, we allocate revenue to each element based on evidence of its fair value. Evidence of fair value is the normal pricing and discounting practices for those deliverables when sold separately. We defer revenue for any undelivered elements and recognize revenue allocated to each element in accordance with the revenue recognition policies set forth above.
 
Revenue for which realization is not reasonably assured is deferred.
 
Allowance for Doubtful Accounts
 
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. As of September 30, 2007 and December 31, 2006, our allowance for doubtful accounts amounted to $713,000 and $462,000, respectively. In determining these allowances, we evaluate a number of factors, including the credit risk of customers, historical trends and other relevant information. If the financial condition of our customers were to deteriorate, additional allowances may be required.
 
Inventory
 
In order to record our inventory at its lower of cost or market, we assess the ultimate realizability of our inventory, which requires us to make judgments as to future demand and compare that with current inventory levels. We record a provision to adjust our inventory balance based upon that assessment. If our merchandise revenues grow, the investment in inventory would likely increase. It is possible that we would need to further increase our inventory provisions in the future.
 
Goodwill and Other Intangibles
 
As of September 30, 2007, we had recorded goodwill and other intangible assets of $64.7 million, which included estimated goodwill and other intangible assets of $54.3 million arising from our acquisition of WeddingChannel in September 2006. In our most recent assessment of impairment of goodwill as of October 1, 2006, we made estimates of fair value using multiple approaches. In our ongoing assessment of impairment of goodwill and other intangible assets, we consider whether events or changes in circumstances such as significant declines in revenues, earnings or material adverse changes in the business climate, indicate that the carrying value of assets may be impaired. During our business planning process for calendar year 2008, which commenced in September 2007, we concluded that we would not currently commit additional marketing resources for our online personals site, GreatBoyfriends.com. Accordingly, we reduced our future revenue expectations and estimated future cash flows for that reporting unit. We also determined that the carrying value of goodwill for GreatBoyfriends.com exceeded its implied fair value at September 30, 2007 and recorded an impairment charge of approximately $496,000. As of September 30, 2007, no other impairment indicators were noted. Future adverse changes in market conditions or poor operating results of strategic investments could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring additional impairment charges in the future.

18

Deferred Tax Asset Valuation Allowance

As of September 30, 2006, we had maintained a valuation allowance with respect to certain deferred tax assets as a result of uncertainties associated with our future profitability. We had reduced a portion of the valuation allowance previously recorded by WeddingChannel with respect to its net operating loss carryforwards based on the recognition and timing of reversal of certain estimated deferred tax liabilities recorded as a result of the acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information.

During the three months ended December 31, 2006, we continued to evaluate the need for a valuation allowance against our remaining net deferred tax assets. We considered many factors as part of our assessment including our recent earnings experience by taxing jurisdiction, expectations of future taxable income resulting from the completion of our business planning process for 2007 and the status of the integration activities and related identified cost synergies associated with the acquisition of WeddingChannel.

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 will 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. As of December 31, 2006, we also recorded a deferred tax asset related to certain acquired tax loss carryforwards of WeddingChannel of $21.9 million which resulted in a reduction of goodwill associated with the acquisition. The acquired tax loss carryforwards of WeddingChannel are subject to a limitation on future utilization under Section 382 of the Internal Revenue Code. We currently estimate that the effect of Section 382 will generally limit the amount of the loss carryforwards of WeddingChannel which is available to offset future taxable income to approximately $3.6 million annually. The overall determination of the annual loss limitation is subject to interpretation, and therefore, the annual loss limitation could be subject to change.

As of September 30, 2007, we continued to maintain a valuation allowance for deferred tax assets associated with certain state net operating loss carryforwards of WeddingChannel. To the extent further reductions to this valuation allowance are recorded, the offsetting credit would reduce goodwill.

As of September 30, 2007, we had recorded deferred tax assets of $25.7 million. The realization of these deferred tax assets depends upon our ability to continue to generate taxable income in the future, as well as other factors including limitations which may arise from changes in our ownership. The valuation allowance may need to be adjusted in the future if facts and circumstances change causing a reassessment of the realization of the deferred tax assets.
 
Stock-Based Compensation
 
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, using the modified prospective method. Under this method, previously reported amounts are not restated. SFAS No. 123(R) requires the measurement of compensation expense for all stock awards granted to employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service periods for awards expected to vest. Under the modified prospective method, we recognize compensation expense for all stock awards granted after December 31, 2005, and for awards granted prior to January 1, 2006 that remained unvested as of that date or which may be subsequently modified.
 
The fair value of restricted stock is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model. The calculation for fair value of stock options requires considerable judgment including the estimation of stock price volatility, expected option lives and risk-free investment rates. We develop estimates based on historical data and market information which may change significantly over time and, accordingly, have a large impact on valuation.
19

 
We will continue to recognize stock-based compensation for service-based graded-vesting stock awards granted prior to January 1, 2006 using the accelerated method prescribed by FASB Interpretation No. 28. As permitted by SFAS No. 123(R), for stock awards granted after December 31, 2005, we have adopted the straight-line attribution method. In addition, effective January 1, 2006, we have included an estimate of stock awards to be forfeited in the future in calculating stock-based compensation expense for the period. The cumulative effect of this accounting change for forfeitures as of January 1, 2006 was not material due to the significant reduction in both the number of personnel receiving stock awards and the aggregate amount of stock awards granted by us in 2004 and 2005. We consider several factors when estimating future forfeitures, including types of awards, employee level and historical experience. Actual forfeitures may differ substantially from our current estimates.
 
Results of Operations
 
General
 
Net revenue and operating expenses of WeddingChannel have been included in our condensed consolidated statements of operations since September 8, 2006.
 
Net Revenues
 
Net revenues increased to $25.0 million and $74.5 million for the three and nine months ended September 30, 2007, respectively, from $18.5 million and $51.0 million for the corresponding periods in 2006.

Online sponsorship and advertising revenues increased to $12.4 million and $35.7 million for the three and nine months ended September 30, 2007, respectively, as compared to $9.4 million and $25.5 million for the corresponding periods in 2006. Revenue from local vendor online advertising programs increased by $2.1 million and $6.5 million for the three and nine months ended September 30, 2007, respectively, or by approximately 36% and 40% respectively, when compared to the corresponding periods in 2006. The increases were primarily the result of the continuing impact of price increases as well as an increase in the number of local vendor clients, including the addition of local vendors acquired through WeddingChannel. In addition, there was an increase of $948,000 and $3.7 million in national online sponsorship and advertising revenues for the three and nine months ended September 30, 2007, or approximately 26% and 40%, respectively, when compared to the corresponding periods in 2006 due, in part, to the addition of WeddingChannel national accounts. Online sponsorship and advertising revenues amounted to 50% and 51% of our net revenues for the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, online sponsorship and advertising revenues amounted to 48% and 50% of our net revenues, respectively.
 
Registry services revenue was $3.7 million and $8.8 million for the three and nine months ended September 30, 2007, respectively, as compared to $955,000 and $1.1 million for the corresponding periods in 2006. The increases are primarily the result of commissions earned from WeddingChannel’s retail partners. Registry services revenue amounted to 15% and 12% of our net revenues for the three and nine months ended September 30, 2007, respectively, and 5% and 2% of our net revenues for the corresponding periods in 2006.
 
Merchandise revenues, which consist primarily of the sale of wedding supplies, increased to $5.3 million and $16.4 million for the three and nine months ended September 30, 2007, respectively, as compared to $4.3 million and $12.2 million for the corresponding periods in 2006. The 2007 revenue amounts include $1.4 million and $4.4 million sold through the WeddingChannel store for the three and nine month periods, respectively. For the three and nine months ended September 30, 2006, the revenue amounts include $262,000 sold through the WeddingChannel store. In addition, revenues for The Knot Wedding Shop increased by $124,000 and $509,000 or 3% and 4% for the three and nine months ended September 30, 2007, respectively, as compared to the corresponding periods in the prior year, generally due to an increase in average order size. The sale of wedding supplies to wholesale customers decreased by $50,000 and $214,000 for the three and nine months ended September 30, 2007, respectively, as compared to the corresponding periods in prior year. Subsequent to August 2006, we are no longer pursuing wholesale customers. Merchandise revenues amounted to 21% and 23% of our net revenues for the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, merchandise revenue was 22% and 24% of our net revenues, respectively.
20


Publishing and other revenues decreased to $3.6 million and increased to $13.6 million for the three and nine months ended September 30, 2007, respectively, as compared to $3.9 million and $12.2 million for the corresponding periods in 2006. The decrease for the three months ended September 30, 2007 resulted from a decline in national print revenue due to a decrease in the number of advertising pages sold in The Knot Weddings magazine offset, in part, by a small increase in revenue contributed by The Nest magazine. In addition, local print revenue was relatively flat compared to the third quarter of 2006. For the nine months ended September 30, 2007, local print revenue increased by $1.2 million as compared to the corresponding period in 2006. This increase included approximately $753,000 of revenue contributed by the inaugural issue of our annual publication, The Knot Best of Weddings, which was published in April 2007. The remaining increase for local print revenue was primarily due to the residual impact of an increase in pricing in 2006 and a small increase in advertising pages. For the nine months ended September 30, 2007, we also recorded revenue of $389,000 associated with the April WeddingChannel Couture Show. Publishing and other revenue amounted to 15% and 21% of our net revenues for the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, publishing and other revenue was 18% and 24% of our net revenues, respectively.

Cost of Revenues

Cost of revenues consists of the cost of merchandise sold, including outbound shipping costs, costs related to the production of national and regional magazines and The Knot TV, payroll and related expenses for our personnel who are responsible for the production of online and offline media, and costs of Internet and hosting services.

Cost of revenues increased to $4.4 million and $14.1 million for the three and nine months ended September 30, 2007, respectively, as compared to $4.2 million and $11.4 million for the corresponding periods in 2006. The cost of revenues from the sale of merchandise increased by $287,000 and $1.7 million for the three and nine months ended September 30, 2007, primarily due to the increases in wedding supplies revenue. Publishing and other cost of revenues decreased by $158,000 and increased by $767,000 for the three and nine months ended September 30, 2007, respectively. The decrease for the recent quarter was primarily due to reduced page counts for The Knot Weddings magazine. The increase for the nine months ended September 30, 2007, was primarily due to production costs associated with additional issues of our quarterly The Nest magazine which launched in August 2006 and our annual The Knot Best of Weddings magazine which launched in April 2007. As a percentage of our net revenues, cost of revenues was 18% and 19%, respectively, for the three and nine months ended September 30, 2007, as compared to 23% and 22% for the corresponding periods in 2006. Margin improvements in 2007 resulted from a higher mix of registry services revenue and higher margins for merchandise revenue due to price increases.

Product and Content Development

Product and content development expenses consist primarily of payroll and related expenses for editorial, creative and information technology personnel and computer hardware and software costs.
 
Product and content development expenses increased to $3.5 million and $9.9 million for the three and nine months ended September 30, 2007, as compared to $2.2 million and $5.8 million for the three and nine months ended September 30, 2006. These increases include $546,000 and $2.5 million, respectively, in additional expenses associated with WeddingChannel, primarily for personnel and related expenses. The remaining increases were generally due to additional investments for other information technology and editorial staff. As a percentage of our net revenues, product and content development expenses increased to 14% and 13% for the three and nine months ended September 30, 2007, respectively, from 12% and 11% for the corresponding periods in 2006.

Sales and Marketing
 
Sales and marketing expenses consist primarily of payroll and related expenses for sales and marketing, customer service, registry and public relations personnel, as well as the costs for promotional activities and fulfillment and distribution of merchandise and magazines.

Sales and marketing expenses increased to $6.2 million and $18.6 million for the three and nine months ended September 30, 2007, respectively, as compared to $4.7 million and $13.7 million for the corresponding periods in 2006. These increases include $510,000 and $2.3 million, respectively, in additional expenses associated with WeddingChannel, primarily for personnel and related expenses. Other personnel and related costs increased by $731,000 and $1.5 million for the three and nine months ended September 30, 2007, respectively, primarily as a result of investments in national and local sales staff, in part, as additional support for sales efforts for new initiatives, including The Nest. Also, for the nine months ended September 30, 2007, we incurred increased fulfillment expenses of $636,000 due to the publication of two additional issues in 2007 of The Nest magazine and increased fulfillment and distribution costs of $619,000 at our Redding, California warehouse as a result of the increased sales volume for wedding supplies in 2007. As a percentage of our net revenues, sales and marketing expenses was 25% for each of the three and nine months ended September 30, 2007, as compared to 25% and 27% for the corresponding periods in 2006.

21

General and Administrative
 
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 $4.4 million and $12.5 million for the three and nine months ended September 30, 2007, respectively, as compared to $4.2 million and $10.8 million for the corresponding periods in 2006. These increases include $93,000 and $857,000, respectively, of additional expenses associated with WeddingChannel for personnel and related costs and other administrative expenses. Other personnel and related expenses increased by $446,000 and $960,000 for the three and nine months ended September 30, 2007 to support the growth of the Company. For the nine months ended September 30, 2007, we also incurred higher computer software expenses, credit card fees, recruiting costs and director stock-based compensation in an aggregate amount of approximately $662,000. For the three and nine months ended September 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, and we also recorded non-cash services expense associated with a warrant issued in October, 2004 to Allen & Company LLC for financial advisory services. The reduction in these expenses for 2007 aggregated $675,000 and $1.3 million for the respective periods. As a percentage of our net revenues, general and administrative expenses decreased to 18% and 17% for the three and nine months ended September 30, 2007, respectively, from 23% and 21% for the corresponding periods in 2006.

Stock-Based Compensation 
 
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 nine months ended September 30, 2007 and 2006, as follows:

   
Three Months Ended
 
Nine Months Ended
 
   
September 30
 
September 30
 
   
2007
 
2006
 
2007
 
2006
 
Product and content development
 
$
93,000
 
$
62,000
 
$
333,000
 
$
116,000
 
Sales and marketing
   
77,000
   
62,000
   
295,000
   
183,000
 
General and administrative
   
456,000
   
264,000
   
1,048,000
   
778,000
 
Total stock-based compensation expense
 
$
626,000
 
$
388,000
 
$
1,676,000
 
$
1,077,000
 

As of September 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.
 
Goodwill Impairment
 
For the three months ended September 30, 2007, we recorded an impairment charge of $496,000 after determining that the carrying value of goodwill for GreatBoyfriends.com exceeded its implied fair value at September 30, 2007.

22

Depreciation and Amortization
 
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 $2.1 million and $6.4 million for the three and nine months ended September 30, 2007, respectively, as compared to $975,000 and $1.8 million for the corresponding periods in 2006. For the three and nine months ended September 30, 2007, we recorded additional depreciation and amortization of property, equipment, capitalized software and intangible assets of $1.0 million and $4.0 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 $1.3 million and $3.5 million for the three and nine months ended September 30, 2007, respectively, as compared to $1.1 million and $1.7 million 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 nine months ended September 30, 2007, was approximately 42% 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 nine months ended September 30, 2006, our provision for income taxes was $90,000 and $366,000, respectively, primarily due to operating income generated in certain states.


Liquidity and Capital Resources
 
As of September 30, 2007, our cash, cash equivalents and short-term investments amounted to $101.4 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 $22.0 million for the nine months ended September 30, 2007. This resulted primarily from the net income for the period of $9.3 million and depreciation, amortization, stock-based compensation, deferred income taxes and goodwill impairment of $14.7 million. These sources of cash were offset, in part, by an increase in inventory of $896,000 and a decrease in accounts payable and accrued expenses of $1.4 million. Net cash provided by operating activities was $13.6 million for the nine months ended September 30, 2006. This resulted primarily from the net income for the period of $8.8 million, depreciation, amortization, non-cash services expense and stock-based compensation of $3.3 million and a decrease in accounts receivable, net of deferred revenue and net of businesses acquired of $1.7 million 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 deferred production and marketing costs of $121,000.
23


Net cash used in investing activities was $76.1 million for the nine months ended September 30, 2007, due primarily to purchases of short-term investments, net of proceeds from sales, of $73.8 million, and purchases of property and equipment of $2.3 million. Net cash used in investing activities was $51.8 million for the nine months ended September 30, 2006 due primarily to cash paid in connection with the acquisition of WeddingChannel, net of cash acquired, and the business and assets of OAM Solutions, Inc., aggregating $53.3 million, and purchases of property, equipment and software of $3.1 million, offset, in part, by the sale of short-term investments, net of purchases, of $4.6 million.
 
Net cash provided by financing activities was $1.0 million for the nine months ended September 30, 2007 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. Net cash provided by financing activities was $91.2 million for the nine months ended September 30, 2006 primarily due to proceeds from the issuance of common stock in connection with the completion of the private placement and follow-on offering in the third quarter of 2006 for which we received aggregate net proceeds of $89.9 million. We also received proceeds from the exercise of stock options and through our Employee Stock Purchase Plan of $1.3 million.
 
Through September 30, 2007, we have reserved all future tax benefits resulting from tax deductions in excess of recognized stock-based compensation expense and, accordingly, we have not reflected any such benefits in our consolidated statements of cash flows.
 
We currently believe that our 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 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 purpose 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 September 30, 2007, we had no material commitments for capital expenditures.
 
As of September 30, 2007, we had commitments under non-cancelable operating leases amounting to approximately $4.3 million.
 
As of September 30, 2007, other long-term liabilities of $477,000 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 September 30, 2007 are summarized as follows:
 
     
Payments due by Period
 
Contractual Obligations
   
Total
   
Less than 1
year
   
1-3
years
   
3-5
years
   
More than 5
years
 
     
(in thousands)
 
Long term debt
 
$
106
 
$
51
 
$
55
 
$
 
$
 
Operating leases
   
4,303
   
1,288
   
2,006
   
1,009
   
 
Purchase commitments
   
1,507
   
1,324
   
183
   
   
 
Total
 
$
5,916
 
$
2,663
 
$
2,244
 
$
1,009
 
$
 

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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 $101.4 million as of September 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 September 30, 2007. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and 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 September 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.

25

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities

Period
(a) Total Number of
Shares Purchased
(b) Average Price
Paid per Share
(c) Total Number
of Shares Purchased
as Part of Publicly
Announced Plans or
Programs
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
July 1 to July 31, 2007
4,997
$20.58
n/a
n/a
         
August 1 to August 31, 2007
9,362
$20.95
n/a
n/a
         
September 1 to September 30, 2007
507
$21.26
n/a
n/a
         
Total
14,866
$20.84
n/a
n/a
 

The terms of restricted stock awards granted under certain of the Company’s stock incentive plans allow participants to surrender or deliver shares of The Knot’s common stock to the Company to satisfy tax withholding obligations related to the vesting of those awards. All of the shares listed in the table above represent the surrender of shares to the Company in connection with such tax withholding obligations. For purposes of this table, the “price paid per share” is determined by reference to the closing sales price per share of The Knot’s common stock on The Nasdaq Global Market on the date of such surrender (or on the last date preceding such surrender for which such reported price exists).


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.

26

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: November 8, 2007 THE KNOT, INC.
 
 
 
 
 
 
  By:   /s/ Richard Szefc
 
Richard Szefc
  Chief Financial Officer (Principal Financial Officer 
  and Duly Authorized Officer)

27

EXHIBIT INDEX
 
Number Description
 
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.
 
28