Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - XO GROUP INC. | Financial_Report.xls |
| EX-32.2 - EXHIBIT - XO GROUP INC. | ex32293014.htm |
| EX-32.1 - EXHIBIT - XO GROUP INC. | ex32193014.htm |
| EX-31.1 - EXHIBIT - XO GROUP INC. | ex31193014.htm |
| EX-31.2 - EXHIBIT - XO GROUP INC. | ex31293014.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
______________________
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2014
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-35217
____________________________
XO GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 13-3895178 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
195 Broadway, 25th Floor
New York, New York 10007
(Address of Principal Executive Offices and Zip Code)
(212) 219-8555
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o | Accelerated Filer x |
Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No ý
As of November 4, 2014, there were 26,883,415 shares of the registrant's common stock outstanding.
XO GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended September 30, 2014
TABLE OF CONTENTS
Page | |
PART I FINANCIAL INFORMATION | |
Item 1. Financial Statements (Unaudited): | |
Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 | |
Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2014 and 2013 | |
Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2014 and 2013 | |
Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2014 | |
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 | |
Notes to Condensed Consolidated Financial Statements | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. Controls and Procedures | |
PART II OTHER INFORMATION | |
Item 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. Defaults Upon Senior Securities | |
Item 4. Mine Safety Disclosures | |
Item 5. Other Information | |
Item 6. Exhibits | |
SIGNATURES | |
i
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements relating to future events and the future performance of XO Group Inc. based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “intend,” “estimate,” “are positioned to,” “continue,” “project,” “guidance,” “target,” “forecast,” “anticipated” or comparable terms.
These forward-looking statements involve risks and uncertainties. Our actual results or events could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described in Item 1A (Risk Factors) in our most recent Annual Report on Form 10-K, filed with the Securities Exchange Commission on March 17, 2014, and Part II of 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.
WHERE YOU CAN FIND MORE INFORMATION
XO Group's corporate website is located at www.xogroupinc.com. XO Group makes available free of charge, on our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing to, the Securities and Exchange Commission ("SEC"). Information contained on XO Group's corporate website is not part of this report or any other report filed with the SEC.
Unless the context otherwise indicates, references in this report to the terms "XO Group," "we," "our" and "us" refer to XO Group Inc., its divisions and its subsidiaries.
ii
PART I - FINANCIAL INFORMATION
XO GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share and Per Share Data)
(Unaudited)
September 30, 2014 | December 31, 2013 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 85,683 | $ | 90,697 | ||||
Accounts receivable, net of allowances of $2,430 and $1,678 at September 30, 2014 and December 31, 2013, respectively | 15,778 | 11,838 | ||||||
Inventories | 1,620 | 2,374 | ||||||
Deferred production and marketing costs | 586 | 475 | ||||||
Deferred tax assets, current portion | 3,037 | 2,782 | ||||||
Prepaid expenses and other current assets | 6,143 | 5,993 | ||||||
Total current assets | 112,847 | 114,159 | ||||||
Long-term restricted cash and investments | 3,124 | 2,599 | ||||||
Property and equipment, net | 15,967 | 15,490 | ||||||
Intangible assets, net | 3,200 | 3,357 | ||||||
Goodwill | 42,436 | 38,500 | ||||||
Deferred tax assets | 16,638 | 21,469 | ||||||
Investments | 5,490 | 1,680 | ||||||
Other assets | 296 | 495 | ||||||
Total assets | $ | 199,998 | $ | 197,749 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 11,268 | $ | 12,420 | ||||
Deferred revenue | 16,353 | 14,864 | ||||||
Total current liabilities | 27,621 | 27,284 | ||||||
Deferred tax liabilities | 3,607 | 4,507 | ||||||
Deferred rent | 5,338 | 5,914 | ||||||
Other liabilities | 1,931 | 4,154 | ||||||
Total liabilities | 38,497 | 41,859 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized and 0 shares issued and outstanding as of September 30, 2014 and December 31, 2013 | — | — | ||||||
Common stock, $0.01 par value; 100,000,000 shares authorized and 26,900,115 and 27,049,095 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively | 269 | 270 | ||||||
Additional paid-in-capital | 171,186 | 169,756 | ||||||
Accumulated other comprehensive loss | (248 | ) | (204 | ) | ||||
Accumulated deficit | (9,706 | ) | (13,932 | ) | ||||
Total stockholders’ equity | 161,501 | 155,890 | ||||||
Total liabilities and stockholders' equity | $ | 199,998 | $ | 197,749 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
1
XO GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except for Per Share Data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net revenue: | ||||||||||||||||
Online sponsorship and advertising | $ | 22,122 | $ | 20,620 | $ | 65,522 | $ | 61,527 | ||||||||
Registry services | 3,289 | 2,790 | 7,954 | 6,373 | ||||||||||||
Merchandise | 4,539 | 5,232 | 13,159 | 15,411 | ||||||||||||
Publishing and other | 5,908 | 5,326 | 19,973 | 17,918 | ||||||||||||
Total net revenue | 35,858 | 33,968 | 106,608 | 101,229 | ||||||||||||
Cost of revenue: | ||||||||||||||||
Online sponsorship and advertising | 365 | 430 | 1,337 | 1,506 | ||||||||||||
Merchandise | 2,833 | 3,005 | 8,106 | 9,189 | ||||||||||||
Publishing and other | 1,663 | 1,825 | 5,920 | 6,267 | ||||||||||||
Total cost of revenue | 4,861 | 5,260 | 15,363 | 16,962 | ||||||||||||
Gross profit | 30,997 | 28,708 | 91,245 | 84,267 | ||||||||||||
Operating expenses: | ||||||||||||||||
Product and content development | 8,569 | 7,108 | 26,274 | 21,116 | ||||||||||||
Sales and marketing | 10,842 | 9,528 | 32,606 | 29,574 | ||||||||||||
General and administrative | 5,389 | 5,745 | 18,778 | 15,831 | ||||||||||||
Depreciation and amortization | 1,868 | 1,075 | 5,393 | 3,324 | ||||||||||||
Total operating expenses | 26,668 | 23,456 | 83,051 | 69,845 | ||||||||||||
Income from operations | 4,329 | 5,252 | 8,194 | 14,422 | ||||||||||||
Loss in equity interests | (68 | ) | (55 | ) | (243 | ) | (174 | ) | ||||||||
Interest and other income, net | 57 | 41 | 55 | 70 | ||||||||||||
Income before income taxes | 4,318 | 5,238 | 8,006 | 14,318 | ||||||||||||
Provision for income taxes | 2,234 | 2,137 | 3,551 | 5,456 | ||||||||||||
Net income | $ | 2,084 | $ | 3,101 | $ | 4,455 | $ | 8,862 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.08 | $ | 0.13 | $ | 0.18 | $ | 0.36 | ||||||||
Diluted | $ | 0.08 | $ | 0.12 | $ | 0.17 | $ | 0.35 | ||||||||
Weighted average number of shares used in calculating net earnings per share | ||||||||||||||||
Basic | 25,351 | 24,686 | 25,159 | 24,591 | ||||||||||||
Restricted stock | 319 | 1,096 | 359 | 872 | ||||||||||||
Employee Stock Purchase Plan | — | 8 | — | 9 | ||||||||||||
Options | — | 89 | 29 | 107 | ||||||||||||
Diluted | 25,670 | 25,879 | 25,547 | 25,579 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
2
XO GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income | $ | 2,084 | $ | 3,101 | $ | 4,455 | $ | 8,862 | ||||||||
Other comprehensive loss: | ||||||||||||||||
Foreign currency translation adjustments | (89 | ) | (39 | ) | (44 | ) | (59 | ) | ||||||||
Total comprehensive income | $ | 1,995 | $ | 3,062 | $ | 4,411 | $ | 8,803 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
3
XO GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Amounts in Thousands)
(Unaudited)
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance at December 31, 2013 | 27,049 | $ | 270 | $ | 169,756 | $ | (204 | ) | $ | (13,932 | ) | $ | 155,890 | ||||||||||
Issuance of common stock pursuant to the employee stock purchase plan | 37 | — | 374 | — | — | 374 | |||||||||||||||||
Issuance of restricted common stock, net of cancellations | 100 | 1 | — | — | — | 1 | |||||||||||||||||
Foreign currency translation adjustments | — | — | — | (44 | ) | — | (44 | ) | |||||||||||||||
Surrender of restricted common stock for income tax purposes | (355 | ) | (3 | ) | (4,367 | ) | — | — | (4,370 | ) | |||||||||||||
Issuance of common stock in connection with the exercise of vested stock options | 131 | 1 | 522 | — | — | 523 | |||||||||||||||||
Repurchase of common stock | (62 | ) | — | (386 | ) | — | (229 | ) | (615 | ) | |||||||||||||
Stock-based compensation | — | — | 4,024 | — | — | 4,024 | |||||||||||||||||
Excess tax benefits from stock-based awards | — | — | 1,263 | — | — | 1,263 | |||||||||||||||||
Net income | — | — | — | — | 4,455 | 4,455 | |||||||||||||||||
Balance at September 30, 2014 | 26,900 | $ | 269 | $ | 171,186 | $ | (248 | ) | $ | (9,706 | ) | $ | 161,501 | ||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
XO GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 4,455 | $ | 8,862 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 5,393 | 3,324 | ||||||
Stock-based compensation expense | 4,447 | 4,552 | ||||||
Deferred income tax expense | 587 | 194 | ||||||
Excess tax benefits from stock-based awards | (1,263 | ) | — | |||||
Allowance for doubtful accounts | 755 | 397 | ||||||
Other non-cash activity | 384 | 106 | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||
(Increase) decrease in accounts receivable | (4,695 | ) | 499 | |||||
Decrease (increase) in inventories | 714 | (562 | ) | |||||
Decrease (increase) in deferred production and marketing costs and other assets, net | 38 | (491 | ) | |||||
Decrease (increase) in prepaid expenses and other current assets | 1,119 | (1,509 | ) | |||||
Decrease in accounts payable and accrued expenses | (1,284 | ) | (468 | ) | ||||
Increase in deferred revenue | 1,440 | 973 | ||||||
Decrease in deferred rent | (576 | ) | (532 | ) | ||||
Increase in other liabilities, net | 39 | 9 | ||||||
Net cash provided by operating activities | 11,553 | 15,354 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | (652 | ) | (1,433 | ) | ||||
Additions to capitalized software | (3,321 | ) | (3,228 | ) | ||||
Maturity of U.S. Treasury Bills | 2,599 | 2,598 | ||||||
Purchases of U.S. Treasury Bills | (2,599 | ) | (2,598 | ) | ||||
Payment to acquire investment | (4,000 | ) | — | |||||
Purchase of intangible assets | (46 | ) | (3 | ) | ||||
Acquisitions, net of cash acquired | (5,724 | ) | (600 | ) | ||||
Net cash used in investing activities | (13,743 | ) | (5,264 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Repurchase of common stock | (615 | ) | — | |||||
Proceeds from issuance of common stock pursuant to employee stock-based compensation plans | 375 | 276 | ||||||
Proceeds from exercise of stock options | 523 | 197 | ||||||
Excess tax benefits from stock-based awards | 1,263 | — | ||||||
Surrender of restricted common stock for income tax purposes | (4,370 | ) | (1,753 | ) | ||||
Net cash used in financing activities | (2,824 | ) | (1,280 | ) | ||||
(Decrease) increase in cash and cash equivalents | (5,014 | ) | 8,810 | |||||
Cash and cash equivalents at beginning of period | 90,697 | 77,407 | ||||||
Cash and cash equivalents at end of period | $ | 85,683 | $ | 86,217 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
5
1. Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of XO Group Inc. (“XO Group” or the “Company”) and its wholly-owned subsidiaries. The condensed consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. Certain prior year financial statement line items have been reclassified to conform to the current year's presentation. The Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial condition, results of operations and changes in cash flows of the Company for the interim periods presented. The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the entire calendar year.
Recently Adopted Accounting Pronouncements
In July 2013, the accounting standard relating to an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists was updated to clarify the balance sheet presentation. This updated standard is effective for annual and interim periods beginning after December 15, 2013 and early adoption was permitted. The Company adopted this standard as of January 1, 2014. Upon adoption, the Company reclassified approximately $3.1 million from other long-term liabilities to be reflected as a reduction of long-term deferred tax assets.
Recently Issued Accounting Pronouncements
In April 2014, the accounting standard relating to the criteria for reporting discontinued operations was updated, which also expanded the disclosure requirements for disposals. Under the new guidance, a disposal that represents a strategic shift having a major effect on the organization’s operations and financial results should be presented as discontinued operations. The new guidance also requires expanded disclosures about discontinued operations, including more information about the assets, liabilities, revenues and expenses of a discontinued operation. This updated standard is effective for annual periods beginning on or after December 15, 2014 and interim periods within those years. Early adoption of the updated standard is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issue. This standard is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, the accounting standard relating to revenue from contracts with customers was updated to clarify the principles for recognizing revenue and develop a common standard for all industries. The new guidance is effective for reporting periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or cumulative effect approach to adopt the new standard. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements or the method of adoption.
In June 2014, the accounting standard relating to performance targets that affect vesting of a share-based payment that could be achieved after the requisite service period was updated. Under the new guidance, these performance targets that could be achieved after the requisite service period should be accounted for as a performance condition and therefore, the target is not reflected in the estimation of the award's grant date fair value. This updated standard is effective for annual periods beginning after December 15, 2014 and interim periods within those years, and early adoption is permitted. The Company is currently assessing the impact of this standard on the Company's consolidated financial statements.
In August 2014, the accounting standard relating to the evaluation of going concern was updated. Under the final guidance, management is required to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern and to provide disclosures when certain criteria are met. This updated standard is effective for annual periods beginning January 1, 2016 and for interim reporting periods starting in the first quarter of 2017, and early adoption is permitted. This standard is not expected to have a material impact on the Company's consolidated financial statements.
6
2. Fair Value Measurements
Cash and cash equivalents, restricted cash and investments consist of the following:
September 30, 2014 | December 31, 2013 | |||||||
(In Thousands) | ||||||||
Cash and cash equivalents | ||||||||
Cash | $ | 23,440 | $ | 28,436 | ||||
Money market funds | 62,243 | 62,261 | ||||||
Total cash and cash equivalents | 85,683 | 90,697 | ||||||
Long-term restricted cash and investments | ||||||||
Restricted cash | 525 | — | ||||||
U.S. Treasury Bills | 2,599 | 2,599 | ||||||
Total cash and cash equivalents, restricted cash and investments | $ | 88,807 | $ | 93,296 | ||||
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
As of September 30, 2014, the Company’s investment in cash and cash equivalents of $85.7 million, and long-term restricted cash and investments on the condensed consolidated balance sheets of $3.1 million, were measured at fair value using Level 1 inputs. During the nine months ended September 30, 2014, there were no transfers in or out of the Company’s Level 1 assets.
3. Stock-Based Compensation
The Company maintains several stock-based compensation plans, which are more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The Company included total stock-based compensation expense related to all its stock awards in various operating expense categories for the three and nine months ended September 30, 2014 and 2013, as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In Thousands) | ||||||||||||||||
Product and content development | $ | 382 | $ | 536 | $ | 1,451 | $ | 1,711 | ||||||||
Sales and marketing | 338 | 362 | 1,065 | 1,179 | ||||||||||||
General and administrative | 729 | 767 | 1,931 | 1,662 | ||||||||||||
Total stock-based compensation | $ | 1,449 | $ | 1,665 | $ | 4,447 | $ | 4,552 | ||||||||
7
4. Supplemental Balance Sheet and Cash Flow Information
The components of certain balance sheet accounts are as follows:
September 30, 2014 | December 31, 2013 | |||||||
(In Thousands) | ||||||||
Inventory | ||||||||
Raw materials | $ | 767 | $ | 859 | ||||
Finished goods | 853 | 1,515 | ||||||
Total inventories, net | $ | 1,620 | $ | 2,374 | ||||
Prepaid expenses and other current assets | ||||||||
Taxes | $ | 2,229 | $ | 2,693 | ||||
Software licenses and maintenance | 1,630 | 1,882 | ||||||
Insurance | 593 | 22 | ||||||
Compensation and employee benefits | 368 | 346 | ||||||
Rent | 283 | 288 | ||||||
Other | 1,040 | 762 | ||||||
Total prepaid expenses and other current assets | $ | 6,143 | $ | 5,993 | ||||
Inventory reserves were $0.9 million as of September 30, 2014 and December 31, 2013, respectively.
Amortization of capitalized software was $1.7 million for the nine months ended September 30, 2014, compared to $1.0 million for the nine months ended September 30, 2013.
5. Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 are as follows:
Amount | ||||
(In Thousands) | ||||
Balance at December 31, 2013 | $ | 38,500 | ||
Acquisition of mobile development company | 500 | |||
Acquisition of Two Bright Lights, Inc. | 3,436 | |||
Balance at September 30, 2014 | $ | 42,436 | ||
Note 6 to the condensed consolidated financial statements provides additional details regarding the acquisitions made by the Company during the nine months ended September 30, 2014.
8
6. Acquisitions
On March 10, 2014, the Company acquired a mobile development company for a total purchase price of $0.5 million. The Company is in the process of determining if any identifiable intangible assets should be recorded as a result of this acquisition. As of September 30, 2014, the full purchase price was preliminarily allocated to goodwill. The Company is currently in the process of finalizing the purchase price allocation for this acquisition.
On March 26, 2014, the Company acquired Two Bright Lights, Inc. ("TBL"), a platform used by professional photographers to submit wedding photos, for a total purchase price of $5.3 million. TBL is expected to expand the Company's content to users and service offerings to vendors. A portion of the purchase price for TBL was allocated to the net tangible and intangible assets based upon a preliminary estimate of their fair values as of the acquisition date, as set forth below. The excess of the purchase price over these preliminary fair values was allocated to goodwill. The Company's preliminary estimates and assumptions, which include subjective inputs such as discount and royalty rates, financial projections and estimated useful lives, are subject to change within the purchase price allocation period. The Company's preliminary purchase price allocation for TBL is as follows:
Assets and Liabilities Acquired | Amount | |||
(In Thousands) | ||||
Current assets | $ | 10 | ||
Property and equipment | 24 | |||
Software development | 157 | |||
Tradename | 33 | |||
Media content | 1,371 | |||
Customer relationships | 287 | |||
Other intangibles | 39 | |||
Goodwill | 3,436 | |||
Deferred revenue and other liabilities | (57 | ) | ||
Total purchase price | $ | 5,300 | ||
The results of operations for the acquired businesses have been included in the Company's condensed consolidated statement of operations since the respective acquisition dates. Pro forma condensed consolidated statements of operations have not been provided since the acquired businesses would not have had a material impact had the acquisitions been made as of January 1, 2013.
7. Investments
On January 16, 2014, the Company entered into an agreement to contribute $4.0 million in cash in exchange for a minority equity interest of approximately 3% in Touch Media International Holdings, an interactive in-taxi advertising and media platform with operations in China. The Company uses the cost method of accounting for this investment since the Company cannot exercise significant influence.
Effective May 31, 2014, the Company changed its method of accounting for its investment in Catchafire, Inc. from the equity method to the cost method of accounting. As of that date, the Company relinquished its representation on this investee's board of directors and, accordingly, the ability to exercise significant influence.
9
8. Commitments and Contingencies
As discussed in our Annual Report on Form 10-K, filed with the Securities Exchange Commission on March 17, 2014, the Company has guaranteed certain obligations relating principally to operating leases and a letter of credit. As of September 30, 2014, the Company also has guarantees related to purchase orders and employment contracts.
As of September 30, 2014, the Company was engaged in certain 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.
9. Income Taxes
The Company has an income tax expense of $3.6 million for the nine months ended September 30, 2014, compared to an income tax expense of $5.5 million for the nine months ended September 30, 2013. The effective tax rate for the nine months ended September 30, 2014, was 44.4%, compared to 38.1% for the nine months ended September 30, 2013. The increase in our effective tax rate was a result of finalizing the Company's prior year U.S. income tax returns and the resolution of certain prior year foreign tax matters. These incremental tax expenses increased our effective tax rate by 6.2%.
As of September 30, 2014, the Company had approximately $5.1 million in unrecognized tax benefits, of which $4.2 million has been netted against deferred tax assets related to net operating loss carryforwards and, if recognized, would be reported as a reduction of income tax expense. However, a portion of these unrecognized tax benefits could be subject to a valuation allowance if and when recognized in a future period.
The Company is subject to taxation in the United States and various state and local jurisdictions. The Company has completed its New York State tax exam for the years ended December 31, 2010 through December 31, 2012 with no change. All of the Company’s U.S. federal tax returns from 1998 through 2013, its more significant state and local returns, as well as all tax returns of WeddingChannel.com, Inc. remain subject to examination as a result of the ongoing use of tax loss carryforwards.
10. Earnings Per Share
The calculation of diluted earnings per share for the three months ended September 30, 2014 excludes a weighted average number of stock options, restricted stock and ESPP shares of 250,000, 64,051 and 659, respectively, because to include them would be antidilutive. The calculation of diluted earnings per share for the nine months ended September 30, 2014 excludes a weighted average number of stock options, restricted stock and ESPP shares of 214,835, 451,326 and 715, respectively, because to include them would be antidilutive. There were 152,203 and 50,824 antidilutive shares for the three and nine months ended September 30, 2013, respectively.
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11. Subsequent Events
On October 23, 2014, the Company committed to a plan to cease operations at its warehouse in Redding, California. The Company informed the impacted employees on this date, and the process of the warehouse closure is expected to be completed by the end of the first quarter of 2015.
Approximately 72 full-time employees and 39 part-time employees will be impacted as a result of this restructuring plan. The plan is expected to reduce operating costs by approximately $6.0 million to $7.0 million, annually. The Company estimates that gross profit from the current eCommerce operation would have been approximately $5.0 million in 2015.
The Company estimates that it will incur pre-tax costs between $2.5 million to $3.5 million during the fourth quarter of 2014 and the first quarter of 2015. The costs to be incurred relate primarily to severance, asset impairment, accelerated lease expense and disposal costs related to the warehouse closure. Approximately $1.0 million to $1.5 million of these charges are expected to be made in cash.
On November 4, 2014, the Company determined to exit the Company's Ijie operations in China by the end of the year. Cost information regarding this exit will be disclosed once determined. In connection with the Company's decision to exit its Ijie operations in China by the end of the year, David Liu, the Company's Co-Founder and executive officer in charge of Ijie, announced that he would cease to serve as an executive officer of the Company in connection with the exit of those operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report.
Executive Overview
XO Group Inc. is the premier consumer internet and media company devoted to weddings, pregnancy, and everything in between, providing couples and new parents with the trusted information, products, and advice they need to guide them through some of the most transformative events of their lives. Our family of premium brands began with the number one wedding brand, The Knot, and has grown to include The Nest, The Bump, and Ijie.com. XO Group is recognized by the industry for innovation in media — from the web to mobile, magazines, books and video. XO Group generates revenue from online sponsorship and advertising, registry services, e-commerce, and publishing.
Our mission is to provide a brand and mobile-driven marketplace that serves young couples as they navigate the most important stages of their lives. Our strategy is to maintain our position as a leading lifestage consumer internet and media company and to grow our market share of advertising, e-commerce, and registry commission dollars in national and local markets in the U.S. and from international markets.
Third Quarter 2014 Highlights
During the third quarter of 2014, our net revenue increased compared to the same period in 2013. The highlights of the third quarter of 2014 were:
• | Total net revenue increased 5.6% to $35.9 million. |
• | National online advertising revenue increased 5.7% to $7.3 million. |
• | Local online advertising revenue increased 8.1% to 14.8 million. |
• | Registry services revenue increased by 17.9% to $3.3 million. |
• | Publishing and other revenue increased 10.9% to $5.9 million. |
• | We had operating income of $4.3 million, compared to $5.3 million in the prior year. The year-over-year change was primarily due to an increase in product and content expenses due to initiatives in product and technology development. Also contributing to the change were increased operating expenses related to compensation and promotion costs related to our ecommerce business. Partially offsetting these increased operating expenses was an increase in gross profit of 8.0% due to higher revenue and improved gross margins. |
• | Net income for the three months ended September 30, 2014 was $2.1 million, or $0.08 per diluted share, compared to net income of $3.1 million, or $0.12 per diluted share for the three months ended September 30, 2013. |
• | At September 30, 2014, our total cash and cash equivalents were $85.7 million, which decreased $5.0 million from December 31, 2013. The overall decrease in cash and cash equivalents was primarily driven by cash used in investing activities totaling $13.7 million, primarily related to acquisitions, investments and capital expenditures, as well as cash used in financing activities of $2.8 million, which primarily related to cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards. |
• | At September 30, 2014, we had no debt. |
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Key Metrics
We evaluate our operating and financial performance using various performance indicators. Our management relies on the key performance indicators set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue and gross margin under “Results of Operations”, and cash flow results under “Liquidity and Capital Resources”. Other measures of our performance, including adjusted EBITDA, adjusted net income, adjusted net income per diluted share and free cash flow are defined and discussed under “Non-GAAP Financial Measures” below.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(Dollar Amounts in Thousands) | ||||||||||||||||
Total net revenue | $ | 35,858 | $ | 33,968 | $ | 106,608 | $ | 101,229 | ||||||||
Total gross margin | 86.4 | % | 84.5 | % | 85.6 | % | 83.2 | % | ||||||||
Adjusted EBITDA | $ | 7,054 | $ | 7,992 | $ | 18,796 | $ | 22,298 | ||||||||
Adjusted net income | $ | 2,303 | $ | 3,101 | $ | 5,419 | $ | 8,862 | ||||||||
Free cash flow | $ | 6,346 | $ | 3,926 | $ | 7,580 | $ | 10,693 | ||||||||
Cash and cash equivalents at September 30 | $ | 85,683 | $ | 86,217 | $ | 85,683 | $ | 86,217 | ||||||||
Total employees at September 30 | 721 | 694 | 721 | 694 | ||||||||||||
Non-GAAP Financial Measures
This Form 10-Q includes information about certain financial measures that are not prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), including adjusted EBITDA, adjusted net income, adjusted net income per diluted share and free cash flow. These non-GAAP measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Our use of these terms may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation.
Management defines its non-GAAP financial measures as follows:
• | Adjusted EBITDA represents U.S. GAAP net income (loss) adjusted to exclude, if applicable: (1) provision (benefit) for income taxes, (2) depreciation and amortization, (3) stock-based compensation expense, (4) impairment charges and asset write-offs, (5) loss in equity interests, (6) interest and other income, net, (7) net loss attributable to non-controlling interest and (8) other items impacting comparability incurred in the period. |
• | Adjusted net income represents U.S. GAAP net income (loss), adjusted for incremental or unusual costs incurred in the current period, which may include: (1) impairment charges and asset write-offs, (2) executive severance and other restructuring charges and (3) the impact of certain foreign taxes, interest and penalties. |
• | Adjusted net income per diluted share represents adjusted net income (as defined above), divided by the diluted weighted-average number of shares outstanding for the period. |
• | Free cash flow represents U.S. GAAP net cash provided by operations, less capital expenditures. |
Management believes that these non-GAAP financial measures, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about our period-over-period growth and provide additional information that is useful for evaluating our operating performance. In addition, free cash flow provides management with useful information for managing the cash needs of our business. However, adjusted EBITDA, adjusted net income, adjusted net income per diluted share and free cash flow are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered substitutes for or superior to net income (loss) and net income (loss) per diluted share and net cash provided by operating activities as indicators of operating performance.
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The table below provides reconciliations between the non-GAAP financial measures discussed above to the comparable U.S. GAAP measures:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In Thousands, Except for Per Share Data) | ||||||||||||||||
Net income | $ | 2,084 | $ | 3,101 | $ | 4,455 | $ | 8,862 | ||||||||
Provision for income taxes | 2,234 | 2,137 | 3,551 | 5,456 | ||||||||||||
Depreciation and amortization | 1,868 | 1,075 | 5,393 | 3,324 | ||||||||||||
Stock-based compensation expense | 1,449 | 1,665 | 4,447 | 4,552 | ||||||||||||
Loss in equity interests | 68 | 55 | 243 | 174 | ||||||||||||
Interest and other income, net | (57 | ) | (41 | ) | (55 | ) | (70 | ) | ||||||||
Severance charges(a) | — | — | 1,354 | — | ||||||||||||
Foreign VAT, interest and penalties(b) | (592 | ) | — | (592 | ) | — | ||||||||||
Adjusted EBITDA | $ | 7,054 | $ | 7,992 | $ | 18,796 | $ | 22,298 | ||||||||
Depreciation and amortization | (1,868 | ) | (1,075 | ) | (5,393 | ) | (3,324 | ) | ||||||||
Stock-based compensation expense | (1,449 | ) | (1,665 | ) | (4,447 | ) | (4,552 | ) | ||||||||
Loss in equity interests | (68 | ) | (55 | ) | (243 | ) | (174 | ) | ||||||||
Interest and other income, net | 57 | 41 | 55 | 70 | ||||||||||||
Adjusted income before income taxes | 3,726 | 5,238 | 8,768 | 14,318 | ||||||||||||
Adjusted provision for income taxes(c) | 1,423 | 2,137 | 3,349 | 5,456 | ||||||||||||
Adjusted net income | $ | 2,303 | $ | 3,101 | $ | 5,419 | $ | 8,862 | ||||||||
Adjusted net income per diluted share | $ | 0.09 | $ | 0.12 | $ | 0.21 | $ | 0.35 | ||||||||
Diluted weighted average number of shares outstanding | 25,670 | 25,879 | 25,547 | 25,579 | ||||||||||||
Net cash provided by operating activities | $ | 7,675 | $ | 5,788 | $ | 11,553 | $ | 15,354 | ||||||||
Less: Capital expenditures | (1,329 | ) | (1,862 | ) | (3,973 | ) | (4,661 | ) | ||||||||
Free cash flow | $ | 6,346 | $ | 3,926 | $ | 7,580 | $ | 10,693 | ||||||||
(a) | Costs impacting comparability included in Operating expenses on the condensed consolidated statements of operations for the nine months ended September 30, 2014 include severance of approximately $1.4 million, representing (i) severance charges for certain executive officers and (ii) severance charges for the employees in our Los Angeles office. Of the total severance charges, $70,000 was recorded in Product and content development, $506,000 in Sales and marketing and $778,000 in General and administrative. |
(b) | Included in "General and administrative" expenses on the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 include a favorable adjustment for foreign value-added tax ("VAT"), interest and penalties of $592,000. |
(c) | Adjusted provision for income taxes was calculated using the annual effective tax rate for each respective period, excluding discrete items. |
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Results of Operations
Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
The following table summarizes results of operations for the three months ended September 30, 2014 compared to the three months ended September 30, 2013:
Three Months Ended September 30, | |||||||||||||||||||||
2014 | 2013 | Increase/(Decrease) | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | Amount | % | ||||||||||||||||
(In Thousands, Except for Per Share Data) | |||||||||||||||||||||
Net revenue | $ | 35,858 | 100.0 | % | $ | 33,968 | 100.0 | % | $ | 1,890 | 5.6 | % | |||||||||
Cost of revenue | 4,861 | 13.6 | 5,260 | 15.5 | (399 | ) | (7.6 | ) | |||||||||||||
Gross profit | 30,997 | 86.4 | 28,708 | 84.5 | 2,289 | 8.0 | |||||||||||||||
Operating expenses | 26,668 | 74.3 | 23,456 | 69.0 | 3,212 | 13.7 | |||||||||||||||
Income from operations | 4,329 | 12.1 | 5,252 | 15.5 | (923 | ) | (17.6 | ) | |||||||||||||
Loss in equity interest | (68 | ) | (0.2 | ) | (55 | ) | (0.2 | ) | (13 | ) | (23.6 | ) | |||||||||
Interest and other income, net | 57 | 0.1 | 41 | 0.1 | 16 | 39.0 | |||||||||||||||
Income before income taxes | 4,318 | 12.0 | 5,238 | 15.4 | (920 | ) | (17.6 | ) | |||||||||||||
Provision for income taxes | 2,234 | 6.2 | 2,137 | 6.3 | 97 | 4.5 | |||||||||||||||
Net income | $ | 2,084 | 5.8 | % | $ | 3,101 | 9.1 | % | $ | (1,017 | ) | (32.8 | )% | ||||||||
Net income per share: | |||||||||||||||||||||
Basic | $ | 0.08 | $ | 0.13 | $ | (0.05 | ) | (38.5 | )% | ||||||||||||
Diluted | $ | 0.08 | $ | 0.12 | $ | (0.04 | ) | (33.3 | )% | ||||||||||||
Net Revenue
Net revenue increased to $35.9 million for the three months ended September 30, 2014, from $34.0 million for the three months ended September 30, 2013. The following table sets forth revenue by category for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:
Three Months Ended September 30, | |||||||||||||||||
Net Revenue | Percentage Increase/ (Decrease) | Percentage of Total Net Revenue | |||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||
(In Thousands) | |||||||||||||||||
National online sponsorship and advertising | $ | 7,326 | $ | 6,932 | 5.7 | % | 20.4 | % | 20.4 | % | |||||||
Local online sponsorship and advertising | 14,796 | 13,688 | 8.1 | 41.3 | 40.3 | ||||||||||||
Total online sponsorship and advertising | 22,122 | 20,620 | 7.3 | 61.7 | 60.7 | ||||||||||||
Registry services | 3,289 | 2,790 | 17.9 | 9.2 | 8.2 | ||||||||||||
Merchandise | 4,539 | 5,232 | (13.2 | ) | 12.6 | 15.4 | |||||||||||
Publishing and other | 5,908 | 5,326 | 10.9 | 16.5 | 15.7 | ||||||||||||
Total net revenue | $ | 35,858 | $ | 33,968 | 5.6 | % | 100.0 | % | 100.0 | % | |||||||
Online sponsorship and advertising — The 7.3% increase in total online sponsorship and advertising revenue was primarily driven by an increase in revenue from local advertising programs. Local online sponsorship and advertising revenue increased by 8.1%, primarily attributable to an increase in the number of local vendors advertising with us on our network of websites. As of September 30, 2014, we had 24,304 local vendors displaying 32,602 profiles, compared to 22,562 vendors displaying 30,186 profiles as of September 30, 2013. The increase in national online sponsorship and advertising revenue was primarily attributable to an increase in revenue related to TheBump.com.
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Registry services — The increase of 17.9% was primarily driven by an increase in total gross sales from our registry retail partners, as well as the favorable impact of several product enhancements completed in the prior year, which significantly improved user experience with our registry services and resulted in a higher conversion rate to purchase.
Merchandise — The decrease of 13.2% was primarily driven by a decrease in shipping revenue due to free shipping and other promotions, lower revenue generated from our ancillary sites due to reduced site traffic, as well as an overall lower average order value.
Publishing and other — The increase of 10.9% was driven by an increase in advertising revenue related to The Knot national and regional magazines, specifically higher revenue per advertising page sold for the national magazines, as well as an increase in the number of ad pages for the regional magazines.
Gross Profit/Gross Margin
Cost of revenues consists of the cost of merchandise sold, which includes outbound shipping and personalization costs, costs related to the production of national and regional magazines, 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. Gross margin improved 1.9% to 86.4% for the three months ended September 30, 2014, compared to 84.5% for the three months ended September 30, 2013. The following table presents the components of gross profit and gross margin for the three months ended September 30, 2014 compared to the three months ended September 30, 2013:
Three Months Ended September 30, | |||||||||||||||||||||
2014 | 2013 | Increase/(Decrease) | |||||||||||||||||||
Gross Profit | Gross Margin % | Gross Profit | Gross Margin % | Gross Profit | Gross Margin % | ||||||||||||||||
(In Thousands) | |||||||||||||||||||||
Online sponsorship and advertising (national and local) | $ | 21,757 | 98.4 | % | $ | 20,190 | 97.9 | % | $ | 1,567 | 0.5 | % | |||||||||
Registry | 3,289 | 100.0 | 2,790 | 100.0 | 499 | — | |||||||||||||||
Merchandise | 1,706 | 37.6 | 2,227 | 42.6 | (521 | ) | (5.0 | ) | |||||||||||||
Publishing and other | 4,245 | 71.9 | 3,501 | 65.7 | 744 | 6.2 | |||||||||||||||
Total gross profit | $ | 30,997 | 86.4 | % | $ | 28,708 | 84.5 | % | $ | 2,289 | 1.9 | % | |||||||||
The increase in the total gross margin percentage for the three months ended September 30, 2014 compared to the prior year was driven primarily by higher revenue growth for our registry services business and improved margins within our publishing business. The improved margin for publishing resulted from cost savings under a contract with a new printer commencing in early 2014.
Operating Expenses
Operating expenses increased 13.7% to $26.7 million for the three months ended September 30, 2014, compared to $23.5 million for the three months ended September 30, 2013.
The following table presents the components of operating expenses and the percentage of revenue that each component represented for the three months ended September 30, 2014 compared to the three months ended September 30, 2013:
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Three Months Ended September 30, | |||||||||||||||||
Operating Expenses | Percentage Increase/ (Decrease) | Percentage of Total Net Revenue | |||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||
(In Thousands) | |||||||||||||||||
Product and content development | $ | 8,569 | $ | 7,108 | 20.6 | % | 23.9 | % | 20.9 | % | |||||||
Sales and marketing | 10,842 | 9,528 | 13.8 | 30.2 | 28.0 | ||||||||||||
General and administrative | 5,389 | 5,745 | (6.2 | ) | 15.1 | 16.9 | |||||||||||
Depreciation and amortization | 1,868 | 1,075 | 73.8 | 5.2 | 3.2 | ||||||||||||
Total operating expenses | $ | 26,668 | $ | 23,456 | 13.7 | % | 74.4 | % | 69.0 | % | |||||||
Product and Content Development — The increase of 20.6% was primarily attributable to an increase in employee headcount, as well as a net increase in non-capitalizable expenditures to support our initiatives in product and technology development.
Sales and Marketing — The increase of 13.8% was primarily attributable to an increase in compensation costs, as well as increased promotions to generate revenue for our ecommerce business.
General and Administrative — The decrease of 6.2% was primarily attributable to a favorable adjustment recorded for value-added taxes of $0.6 million, which was partially offset by an increase in compensation costs.
Depreciation and Amortization — The increase of 73.8% was primarily attributable to the increase in additions of capitalizable software projects being placed into service and additional purchases of various computer equipment and third-party software in order to support our product and technology development. During the three months ended September 30, 2014, we recorded additional amortization expense of $0.3 million related to the Weddingchannel.com tradename, which is now being amortized through December 31, 2014, a shorter estimated useful life as compared to the prior year quarter.
Loss in Equity Interests
Loss in equity interests for the three months ended September 30, 2014 and 2013 was $68,000 and $55,000, respectively. During the three months ended September 30, 2014, we recognized a loss on our equity investment in GigMasters.com, Inc. of $67,000, representing our share of this entity's losses for the three months ended September 30, 2014.
Interest and Other Income, net
Interest and other income, net was $57,000 for the three months ended September 30, 2014, compared to $41,000 for the three months ended September 30, 2013. The variance was primarily attributable to fluctuations in foreign currency, resulting in foreign exchange gains and losses incurred during each period.
Provision for Income Taxes
We had an income tax expense of $2.2 million for the three months ended September 30, 2014, compared to $2.1 million for the three months ended September 30, 2013. The effective tax rate for the three months ended September 30, 2014 was 51.7%, compared to 40.8% for the three months ended September 30, 2013. The increase in our effective tax rate was a result of finalizing our prior year U.S. income tax returns and the resolution of certain prior year foreign tax matters. These incremental tax expenses increased our effective tax rate by 10.9%.
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Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
The following table summarizes results of operations for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013:
Nine Months Ended September 30, | |||||||||||||||||||||
2014 | 2013 | Increase/(Decrease) | |||||||||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | Amount | % | ||||||||||||||||
(In Thousands, Except for Per Share Data) | |||||||||||||||||||||
Net revenue | $ | 106,608 | 100.0 | % | $ | 101,229 | 100.0 | % | $ | 5,379 | 5.3 | % | |||||||||
Cost of revenue | 15,363 | 14.4 | 16,962 | 16.8 | (1,599 | ) | (9.4 | ) | |||||||||||||
Gross profit | 91,245 | 85.6 | 84,267 | 83.2 | 6,978 | 8.3 | |||||||||||||||
Operating expenses | 83,051 | 77.9 | 69,845 | 69.0 | 13,206 | 18.9 | |||||||||||||||
Income from operations | 8,194 | 7.7 | 14,422 | 14.2 | (6,228 | ) | (43.2 | ) | |||||||||||||
Loss in equity interest | (243 | ) | (0.2 | ) | (174 | ) | (0.2 | ) | (69 | ) | (39.7 | ) | |||||||||
Interest and other income (expense), net | 55 | — | 70 | 0.1 | (15 | ) | (21.4 | ) | |||||||||||||
Income before income taxes | 8,006 | 7.5 | 14,318 | 14.1 | (6,312 | ) | (44.1 | ) | |||||||||||||
Provision for income taxes | 3,551 | 3.3 | 5,456 | 5.3 | (1,905 | ) | (34.9 | ) | |||||||||||||
Net income attributable to XO Group Inc. | $ | 4,455 | 4.2 | % | $ | 8,862 | 8.8 | % | $ | (4,407 | ) | (49.7 | )% | ||||||||
Net income per share attributable to XO Group Inc. common stockholders: | |||||||||||||||||||||
Basic | $ | 0.18 | $ | 0.36 | $ | (0.18 | ) | (50.0 | )% | ||||||||||||
Diluted | $ | 0.17 | $ | 0.35 | $ | (0.18 | ) | (51.4 | )% | ||||||||||||
Net Revenue
Net revenue increased to $106.6 million for the nine months ended September 30, 2014, from $101.2 million for the nine months ended September 30, 2013. The following table sets forth revenue by category for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:
Nine Months Ended September 30, | |||||||||||||||||
Net Revenue | Percentage Increase/ (Decrease) | Percentage of Total Net Revenue | |||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||
(In Thousands) | |||||||||||||||||
National online sponsorship and advertising | $ | 21,777 | $ | 20,875 | 4.3 | % | 20.4 | % | 20.6 | % | |||||||
Local online sponsorship and advertising | 43,745 | 40,652 | 7.6 | 41.1 | 40.2 | ||||||||||||
Total online sponsorship and advertising | 65,522 | 61,527 | 6.5 | 61.5 | 60.8 | ||||||||||||
Registry services | 7,954 | 6,373 | 24.8 | 7.5 | 6.3 | ||||||||||||
Merchandise | 13,159 | 15,411 | (14.6 | ) | 12.3 | 15.2 | |||||||||||
Publishing and other | 19,973 | 17,918 | 11.5 | 18.7 | 17.7 | ||||||||||||
Total net revenue | $ | 106,608 | $ | 101,229 | 5.3 | % | 100.0 | % | 100.0 | % | |||||||
Online sponsorship and advertising — The 6.5% increase in total online sponsorship and advertising revenue was primarily driven by an increase in revenue from local advertising programs. Local online sponsorship and advertising revenue increased by 7.6%, primarily attributable to an increase in the number of local vendors advertising with us on our network of websites. As of September 30, 2014, we had 24,304 local vendors displaying 32,602 profiles, compared to 22,562 vendors displaying 30,186 profiles as of September 30, 2013. The increase in national online sponsorship and advertising revenue was primarily attributable to an increase in revenue related to TheBump.com.
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Registry services — The increase of 24.8% was primarily driven by an increase in total gross sales from our registry retail partners, as well as the favorable impact of several product enhancements completed in the prior year, which significantly improved user experience with our registry services and resulted in a higher conversion rate to purchase.
Merchandise — The decrease of 14.6% was primarily driven by a decrease in shipping revenue due to free shipping and other promotions, lower revenue generated from our ancillary sites due to reduced site traffic, as well as an overall lower average order value.
Publishing and other — The increase of 11.5% was driven by an increase in advertising revenue related to The Knot national and regional magazines, specifically higher revenue per advertising page sold for the national magazines, as well as an increase in the number of ad pages for the regional magazines.
Gross Profit/Gross Margin
Cost of revenues consists of the cost of merchandise sold, which includes outbound shipping and personalization costs, costs related to the production of national and regional magazines, 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. Gross margin improved 2.4% to 85.6% for the nine months ended September 30, 2014, compared to 83.2% for the nine months ended September 30, 2013. The following table presents the components of gross profit and gross margin for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013:
Nine Months Ended September 30, | |||||||||||||||||||||
2014 | 2013 | Increase/(Decrease) | |||||||||||||||||||
Gross Profit | Gross Margin % | Gross Profit | Gross Margin % | Gross Profit | Gross Margin % | ||||||||||||||||
(In Thousands) | |||||||||||||||||||||
Online sponsorship and advertising (national and local) | $ | 64,185 | 98.0 | % | $ | 60,021 | 97.6 | % | $ | 4,164 | 0.4 | % | |||||||||
Registry | 7,954 | 100.0 | 6,373 | 100.0 | 1,581 | — | |||||||||||||||
Merchandise | 5,053 | 38.4 | 6,222 | 40.4 | (1,169 | ) | (2.0 | ) | |||||||||||||
Publishing and other | 14,053 | 70.4 | 11,651 | 65.0 | 2,402 | 5.4 | |||||||||||||||
Total gross profit | $ | 91,245 | 85.6 | % | $ | 84,267 | 83.2 | % | $ | 6,978 | 2.4 | % | |||||||||
The increase in the total gross margin percentage for the nine months ended September 30, 2014 compared to the prior year was driven primarily by higher revenue growth for our registry services business and improved margins within our publishing business. The improved margin for publishing resulted from cost savings under a contract with a new printer commencing in early 2014.
Operating Expenses
Operating expenses increased 18.9% to $83.1 million for the nine months ended September 30, 2014, compared to $69.8 million for the nine months ended September 30, 2013.
The following table presents the components of operating expenses and the percentage of revenue that each component represented for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013:
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Nine Months Ended September 30, | |||||||||||||||||
Operating Expenses | Percentage Increase/ (Decrease) | Percentage of Total Net Revenue | |||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||
(In Thousands) | |||||||||||||||||
Product and content development | $ | 26,274 | $ | 21,116 | 24.4 | % | 24.6 | % | 20.9 | % | |||||||
Sales and marketing | 32,606 | 29,574 | 10.3 | 30.6 | 29.2 | ||||||||||||
General and administrative | 18,778 | 15,831 | 18.6 | 17.6 | 15.6 | ||||||||||||
Depreciation and amortization | 5,393 | 3,324 | 62.2 | 5.1 | 3.3 | ||||||||||||
Total operating expenses | $ | 83,051 | $ | 69,845 | 18.9 | % | 77.9 | % | 69.0 | % | |||||||
Product and Content Development — The increase of 24.4% was primarily attributable to an increase in employee headcount, as well as an increase in non-capitalizable expenditures to support our initiatives in product and technology development.
Sales and Marketing — The increase of 10.3% was primarily attributable to an increase in compensation costs, primarily severance related to changes on the executive team, as well as the closure of our Los Angeles office. Increased costs related to custom publishing initiatives, as well as investments in technology to support our growing advertising business, also contributed to the increase in sales and marketing expense compared to the prior year.
General and Administrative — The increase of 18.6% was primarily attributable to an increase in compensation costs resulting from changes to the executive team, including executive severance charges, as well as increases in consulting and legal fees, which was partially offset by a favorable adjustment related to value-added taxes of $0.6 million.
Depreciation and Amortization — The increase of 62.2% was primarily attributable to the increase in additions of capitalizable software projects being placed into service and additional purchases of various computer equipment and third-party software in order to support our product and technology development. During the nine months ended September 30, 2014, we recorded additional amortization expense of $0.9 million related to the Weddingchannel.com tradename, which is now being amortized through December 31, 2014, a shorter estimated useful life as compared to the prior year period.
Loss in Equity Interests
Loss in equity interests for the nine months ended September 30, 2014 and 2013 was $243,000 and $174,000, respectively. During the nine months ended September 30, 2014, we recognized a loss on our equity investment in GigMasters.com, Inc. of $223,000, representing our share of this entity's losses for the nine months ended September 30, 2014.
Interest and Other Income, net
Interest and other income, net was $55,000 for the nine months ended September 30, 2014, compared to income of $70,000 for the nine months ended September 30, 2013. The variance was primarily attributable to fluctuations in foreign currency, resulting in foreign exchange gains and losses incurred during each period.
Provision for Income Taxes
We had an income tax expense of $3.6 million for the nine months ended September 30, 2014, compared to $5.5 million for the nine months ended September 30, 2013. The effective tax rate for the nine months ended September 30, 2014 was 44.4%, compared to 38.1% for the nine months ended September 30, 2013. The increase in our effective tax rate was a result of finalizing our prior year U.S. income tax returns and the resolution of certain prior year foreign tax matters. These incremental tax expenses increased our effective tax rate by 6.2%.
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Liquidity and Capital Resources
Cash Flow
Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of acquisition. At September 30, 2014, we had $85.7 million in cash and cash equivalents, compared to $90.7 million at December 31, 2013. At September 30, 2013, we had $86.2 million in cash and cash equivalents, compared to $77.4 million at December 31, 2012.
The following table sets forth our cash flows from operating activities, investing activities and financing activities for the periods indicated:
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
(In Thousands) | ||||||||
Net cash provided by operating activities | $ | 11,553 | $ | 15,354 | ||||
Net cash used in investing activities | (13,743 | ) | (5,264 | ) | ||||
Net cash used in financing activities | (2,824 | ) | (1,280 | ) | ||||
(Decrease) increase in cash and cash equivalents | $ | (5,014 | ) | $ | 8,810 | |||
Operating Activities
Net cash provided by operating activities was $11.6 million for the nine months ended September 30, 2014. This was driven by our net income of $4.5 million, plus adjustments of $10.3 million for non-cash items including depreciation, amortization and stock-based compensation, partially offset by a net increase in operating assets and liabilities of $3.2 million. The net increase in operating assets and liabilities of $3.2 million was mainly driven by a $3.3 million increase in trade accounts receivable net of deferred revenue, primarily due to increased receivables related to national online advertising campaigns and registry services, as well as a decrease in accounts payable and accrued expenses of $1.3 million. Partially offsetting the net increase in operating assets and liabilities was a decrease of $1.1 million in prepaid expenses and other current assets.
Net cash provided by operating activities was $15.4 million for the nine months ended September 30, 2013. This was driven by our net income of $8.9 million, plus adjustments of $8.6 million for non-cash items including depreciation, amortization and stock-based compensation, partially offset by a net increase in operating assets and liabilities of $2.1 million. The net increase in operating assets and liabilities was mainly driven by a $1.5 million increase in prepaid expenses and other current assets, primarily due to the renewal of licenses for computer software and prepaid business insurance for the remainder of the 2013 policy year, a $0.6 million increase in inventory in anticipation of the 2014 peak season for e-commerce sales and a $0.5 million increase in deferred production and marketing costs and other assets. Also contributing to the net increase in operating assets and liabilities were decreases in accounts payable and accrued expenses of $0.5 million, mainly due to a decrease in the number of publications related to The Knot regional magazines in the third quarter, and a decrease in deferred rent associated with our New York and Austin leased locations of $0.5 million, which were partially offset by an increase in deferred revenue of $1.0 million.
Investing Activities
Net cash used in investing activities was $13.7 million for the nine months ended September 30, 2014, which primarily related to acquisitions totaling $5.7 million, as well as an investment in a company with an interactive in-taxi advertising and media platform with operations in China of $4.0 million for a minority equity interest of approximately 3%. Also contributing to the net cash used in investing activities were capitalized expenditures of $4.0 million, which primarily related to capitalized software.
Net cash used in investing activities was $5.3 million for the nine months ended September 30, 2013, primarily consisting of capitalized expenditures of $4.7 million, of which $3.2 million related to capitalized software. Also included in the net cash used in investing activities for the nine months ended September 30, 2013 was $0.6 million related to the acquisition of a mobile development company.
Financing Activities
Net cash used in financing activities was $2.8 million for the nine months ended September 30, 2014, primarily driven by cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards of $4.4 million,
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partially offset by excess tax benefits related to these stock awards of $1.3 million. We also repurchased shares totaling $0.6 million, which was offset by the proceeds from the issuances of common stock in connection with our employee stock purchase plan and the exercise of stock options of $0.9 million.
Net cash used in financing activities was $1.3 million for the nine months ended September 30, 2013, primarily driven by cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards of $1.8 million, partially offset by the proceeds from the issuances of common stock in connection with our employee stock purchase plan and the exercise of stock options of $0.5 million.
Off-Balance Sheet Arrangements
As of September 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Seasonality
We believe that the impact of the frequency of weddings varying from quarter to quarter generally results in lower registry services and merchandise revenues in the first and fourth quarters. Our publishing business typically experiences a quarter to quarter revenue decline in the first and third quarters due to the cyclical pattern of our regional publishing schedule.
Critical Accounting Policies and Estimates
Our discussion of our results of operations and financial condition relies on our consolidated financial statements, which are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are based on sound measurement criteria, actual future events can result in outcomes that may be materially different from these estimates or forecasts.
The accounting policies and related risks described in our Annual Report on Form 10-K for the year ended December 31, 2013 are those that depend most heavily on these judgments and estimates. During the nine months ended September 30, 2014, there were no material changes to the critical accounting policies contained therein.
The total reserve balances that require management's judgment and estimates were $3.4 million and $2.6 million as of September 30, 2014 and December 31, 2013, respectively.
Recently Issued Accounting Pronouncements
Reference is made to Note 1 of Notes to Condensed Consolidated Financial Statements for information concerning recent accounting pronouncements since the filing of the Company's Annual Report on Form 10-K, filed with the Securities Exchange Commission on March 17, 2014.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position, results of operations, or cash flows 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 market risk through interest rates related to the investment of our current cash and cash equivalents of $85.7 million as of September 30, 2014. 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.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our 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, 2014. 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 us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2014 identified in connection with the evaluation thereof by our management, including the Chief Executive Officer and Chief Financial Officer, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
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. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective at that reasonable assurance level.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are engaged in certain legal actions arising in the ordinary course of business and believe that the ultimate outcome of these actions will not have a material effect on our 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) our online wedding-related and other websites may fail to generate sufficient revenue to survive over the long term, (ii) we incurred losses for many years following our inception and may incur losses in the future, (iii) we may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall, (iv) sales to sponsors or advertisers may be delayed or canceled, (v) efforts to launch new technology and features may not generate significant new revenue or may reduce revenue from existing services, (vi) we may be unable to develop solutions that generate revenue from advertising delivered to mobile phones and wireless devices, (vii) the significant fluctuation to which our quarterly revenue and operating results are subject, (viii) the seasonality of the wedding industry, (ix) the dependence of our e-commerce operations on internet search engine rankings, and our limited ability to influence those rankings, (x) the dependence of our registry business on third parties, and (xi) other factors detailed in documents we file 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 with the SEC on March 17, 2014. There have been no material changes to the risk factors described in our most recent Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased(a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(b) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(c) | ||||||||||
July 1 to July 31, 2014 | 15,863 | $ | 12.50 | — | $ | 19,386,169 | ||||||||
August 1 to August 31, 2014 | 465 | $ | 12.03 | — | $ | 19,386,169 | ||||||||
September 1 to September 30, 2014 | 1,592 | $ | 11.82 | — | $ | 19,386,169 | ||||||||
Total | 17,920 | $ | 12.43 | — | $ | 19,386,169 | ||||||||
_____________
(a) | The terms of some awards granted under certain of our stock incentive plans allow participants to surrender or deliver shares of XO Group's common stock to us to pay for the exercise price of those awards or to satisfy tax withholding obligations related to the exercise or vesting of those awards. The shares listed in the table above represent the surrender or delivery of shares to us in connection with such exercise price payments or 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 XO Group's common stock on the New York Stock Exchange on the date of such surrender or delivery (or on the last date preceding such surrender or delivery for which such reported price exists). |
(b), (c) | On April 10, 2013, we announced that our Board of Directors had authorized the repurchase of up to $20.0 million of our common stock from time to time in the open market or in privately negotiated transactions. The repurchase program may be suspended or discontinued at any time, but it does not have an expiration date. As of September 30, 2014, we have repurchased a total of 61,848 shares of our common stock under this program. |
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
Incorporated by reference to the Exhibit Index immediately preceding the exhibits attached to this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 7, 2014 | XO GROUP INC. |
By: /s/ Gillian Munson Gillian Munson Chief Financial Officer (principal financial officer and duly authorized officer) | |
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EXHIBIT INDEX
Number | Description | |
10.48 | 2009 Stock Incentive Plan (Incorporated by reference to Exhibit 99.1 of the Company’s Registration Statement on Form S-8, filed with the Securities and Exchange Commission on August 15, 2014). | |
31.1 | Certification of Chief Executive Officer and President 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 Chief Executive Officer and President 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 | |
101.INS** | XBRL Instance Document | |
101.SCH** | XBRL Taxonomy Extension Schema Document | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB** | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document | |
* These certifications are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.
** In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.
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