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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 1, 2007
 o
    
    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: 0-50387
 RedEnvelope, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    33-0844285(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)
 149 New Montgomery Street,
San Francisco, California 94105  (Address of Principal Executive Offices and Zip Code)
 (415) 371-9100  (Registrants Telephone Number, Including Area Code)
 þ o
  o o þ
 o þ




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RedEnvelope, Inc.
REPORT ON FORM 10-Q
For the Quarter Ended July 1, 2007
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)
    
    
    3Condensed Balance Sheets as of July 1, 2007, April 1, 2007 and July 2, 2006
    
    
    3Condensed Statements of Operations for the thirteen weeks ended July 1, 2007 and July 2, 2006
    
    
    4Condensed Statements of Cash Flows for the thirteen weeks ended July 1, 2007 and July 2, 2006
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    12Item 4.
    
    Controls and Procedures
    
    
    13PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    13Item 1A.
    
    Risk Factors
    
    
    13Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits
    
    
    22EXHIBIT 10.73EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 RedEnvelope, Inc.
 
 CONDENSED BALANCE SHEETS
(Unaudited)
 July 1,
    
    
    April 1,
    
    
    July 2,2007
    
    
    2007
    
    
    2006(In thousands, except for share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,727
    
    
    $
    13,245
    
    
    $
    2,311Short-term investments
    
    
    
    
    
    
    
    
    
    
    5,058Accounts receivable, net
    
    
    2,089
    
    
    
    1,050
    
    
    
    1,611Inventory
    
    
    12,929
    
    
    
    14,288
    
    
    
    19,209Prepaid catalog costs and other current assets
    
    
    2,056
    
    
    
    2,423
    
    
    
    2,430Total current assets
    
    
    26,801
    
    
    
    31,006
    
    
    
    30,619Property and equipment, net
    
    
    9,255
    
    
    
    8,221
    
    
    
    7,576Other assets
    
    
    374
    
    
    
    184
    
    
    
    258Total assets
    
    $
    36,430
    
    
    $
    39,411
    
    
    $
    38,453LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,133
    
    
    $
    7,092
    
    
    $
    6,285Accrued expenses and other current liabilities
    
    
    4,120
    
    
    
    3,084
    
    
    
    2,904Accrued compensation
    
    
    2,310
    
    
    
    2,287
    
    
    
    1,737Capital lease obligations, current
    
    
    184
    
    
    
    207
    
    
    
    284Total current liabilities
    
    
    12,747
    
    
    
    12,670
    
    
    
    11,210Capital lease obligations, long-term
    
    
    323
    
    
    
    350
    
    
    
    507Deferred rent
    
    
    454
    
    
    
    502
    
    
    
    644Total liabilities
    
    
    13,524
    
    
    
    13,522
    
    
    
    12,361Stockholders equity:Common stock, $0.01 par value; 100 million
shares authorized; 9.5 million, 9.5 million,
and 9.4 million issued and outstanding as of
July 1, 2007, April 1, 2007, and July 2, 2006,
respectively
    
    
    96
    
    
    
    96
    
    
    
    96Additional paid-in capital
    
    
    119,371
    
    
    
    118,800
    
    
    
    116,367Deferred compensation
    
    
    
    
    
    
    (1
    )
    
    
    Notes receivable from stockholders
    
    
    (44
    )
    
    
    (44
    )
    
    
    (44
    )Accumulated deficit
    
    
    (96,517
    )
    
    
    (92,962
    )
    
    
    (90,327
    )Total stockholders equity
    
    
    22,906
    
    
    
    25,889
    
    
    
    26,092Total liabilities and stockholders equity
    
    $
    36,430
    
    
    $
    39,411
    
    
    $
    38,453
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RedEnvelope, Inc.
 
 CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 Thirteen Weeks EndedJuly 1,
    
    
    July 2,2007
    
    
    2006(In thousands, except for per share data)Net revenues
    
    $
    24,529
    
    
    $
    26,858Cost of sales
    
    
    12,222
    
    
    
    12,608Gross profit
    
    
    12,307
    
    
    
    14,250Operating expenses:Fulfillment
    
    
    3,366
    
    
    
    3,419Marketing
    
    
    6,198
    
    
    
    6,285General and administrative
    
    
    6,443
    
    
    
    5,489Total operating expenses
    
    
    16,007
    
    
    
    15,193Loss from operations
    
    
    (3,700
    )
    
    
    (943
    )Interest income, net
    
    
    145
    
    
    
    43Net loss
    
    $
    (3,555
    )
    
    $
    (900
    )Net loss per share  basic and diluted
    
    $
    (0.37
    )
    
    $
    (0.10
    )Weighted average shares outstanding  basic and diluted
    
    
    9,519
    
    
    
    9,377
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RedEnvelope, Inc.
 
 CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 Thirteen Weeks EndedJuly 1,
    
    
    July 2,2007
    
    
    2006(In thousands)Cash Flows From Operating Activities:Net loss
    
    $
    (3,555
    )
    
    $
    (900
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    673
    
    
    
    837Stock-based compensation
    
    
    528
    
    
    
    593Other non-cash charges
    
    
    (39
    )
    
    
    (34
    )Changes in current assets and liabilities:Accounts receivable, net
    
    
    (1,039
    )
    
    
    (557
    )Inventory
    
    
    1,359
    
    
    
    481Prepaid catalog costs and other current assets
    
    
    167
    
    
    
    363Accounts payable
    
    
    (340
    )
    
    
    (3,192
    )Accrued expenses and other current liabilities
    
    
    1,059
    
    
    
    571Net cash used in operating activities
    
    
    (1,187
    )
    
    
    (1,838
    )Cash Flows From Investing Activities:Maturities of short-term investments
    
    
    
    
    
    
    6,561Purchases of short-term investments
    
    
    
    
    
    
    (4,857
    )Purchases of property and equipment
    
    
    (2,325
    )
    
    
    (945
    )Net cash (used in) provided by investing activities
    
    
    (2,325
    )
    
    
    759Cash Flows From Financing Activities:Proceeds from issuance of common stock
    
    
    44
    
    
    
    409Principal payments on capital lease obligations
    
    
    (50
    )
    
    
    (155
    )Payment of debt issuance costs
    
    
    
    
    
    
    (141
    )Net cash (used in) provided by financing activities
    
    
    (6
    )
    
    
    113Net decrease in cash and cash equivalents
    
    
    (3,518
    )
    
    
    (966
    )Cash and cash equivalents at beginning of period
    
    
    13,245
    
    
    
    3,277Cash and cash equivalents at end of period
    
    $
    9,727
    
    
    $
    2,311Supplemental Cash Flow Information:Cash paid for interest
    
    $
    19
    
    
    $
    28Supplemental Non-Cash Investing and Financing Activities:Property and equipment acquired through capital lease transactions
    
    $
    
    
    
    $
    498Property and equipment acquired but not paid for during the period
    
    $
    100
    
    
    $
    114
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RedEnvelope, Inc.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1. Financial Statements  Basis of Presentation
     2. Certain Significant Accounting Policies
  Loss Per Share 
 Comprehensive Loss
 Investments 
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3. Results of Operations and Discussion of Liquidity
   4. Stock-Based Compensation
   Thirteen Weeks EndedJuly 1,
    
    July 2,2007
    
    2006Stock Option Valuation Assumptions:Expected volatility
    
    
    51.1
    %
    
    
    56.8
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Expected term
    
    3.3  5.5 years
    
    3.8  5.7 yearsRisk-free interest rate
    
    
    4.6%  5.0
    %
    
    
    4.8%  5.2
    %
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WeightedAverageExerciseOptions
    
    PriceOutstanding
    
    per Share(inthousands)Balance, April 1, 2007
    
    
    1,335
    
    
    $
    9.50Granted
    
    
    152
    
    
    $
    6.92Cancelled
    
    
    (115
    )
    
    $
    8.85Exercised
    
    
    (1
    )
    
    $
    5.86Balance, July 1, 2007
    
    
    1,371
    
    
    $
    9.27Exercisable, July 1, 2007
    
    
    624
    
    
    $
    9.89
  5. Income Taxes
 Accounting for Income Tax Uncertainties
  6. Borrowing Arrangements
   7. Legal Proceedings
  8.  Contingencies
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-Looking Statements
 This report, together with the documents incorporated herein by reference, contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Such statements
are based upon current expectations and involve risks and uncertainties. Any statements contained
in this report that are not purely statements of historical fact may be deemed to be
forward-looking statements. Such forward-looking statements may include but are not limited to
statements regarding our future operations and enhancements, product or service offerings,
business, financial condition, results of operations and prospects. Additionally, statements
concerning possible changes in applicable rules or legislation are forward-looking statements.
Words such as expects, anticipates, intends, plans, believes, seeks, estimate, may,
should, would, could and similar expressions or variations of such words are intended to
identify forward-looking statements, but are not the exclusive means of identifying forward-looking
statements in this report. All forward-looking statements in this report are based upon information
available to us as of the date hereof, and we assume no obligation to revise or update any such
forward-looking statements in order to reflect any event or circumstance that may arise after the
date of this report. Actual results and the timing of certain events could differ materially from
our current expectations. Factors that could cause or contribute to such differences include, but
are not limited to, those set forth in this report under Risk Factors, and elsewhere in this
report, and those contained from time to time in our other filings with the SEC. We caution
investors that our business and financial performance are subject to substantial risks and
uncertainties.
 Overview
 www.redenvelope.com
    Critical Accounting Policies
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Results of Operations
  Thirteen Weeks EndedJuly 1,
    
    July 2,2007
    
    2006Statements of Operations Data:Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    49.8
    
    
    
    46.9Gross profit
    
    
    50.2
    
    
    
    53.1Operating expenses:Fulfillment
    
    
    13.7
    
    
    
    12.7Marketing
    
    
    25.3
    
    
    
    23.4General and administrative
    
    
    26.3
    
    
    
    20.4Total operating expenses
    
    
    65.3
    
    
    
    56.6Loss from operations
    
    
    (15.1
    )
    
    
    (3.5
    )Interest income, net
    
    
    0.6
    
    
    
    0.1Net loss
    
    
    (14.5
    )%
    
    
    (3.4
    )%
 Quarter Ended July 1, 2007 Compared to Quarter Ended July 2, 2006
 Net Revenues
    Cost of Sales
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Operating Expenses
 Fulfillment.
  Marketing.
  General and Administrative.
  Liquidity and Capital Resources
  Cash Flows From Operating Activities
 Cash Flows From Investing Activities
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Cash Flows From Financing Activities
 Revolving Credit Facility
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
   (In thousands)Cash and cash equivalents
    
    $
    9,727Short-term investments
    
    
    Total
    
    $
    9,727
  Foreign Currency Risk
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Item 4. Controls and Procedures
 Disclosure Controls and Procedures
 
 PART II.
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  You should consider carefully the risks and uncertainties relating to our business including
those described below, together with all of the other information included or incorporated by
reference in this Quarterly Report on Form 10-Q . Additional risks and uncertainties not currently
known to us or that we currently do not deem material could also become important factors that may
harm our business. The trading price of our common stock could decline due to any of these risks
and uncertainties, and you could lose all or part of your investment.
 If we fail to meet the borrowing requirements under our loan and security agreement, we may be
unable to obtain necessary short-term financing and if we default on a secured loan, material
assets of ours could be subject to forfeiture.
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We may need additional financing and may not be able to raise additional financing on favorable
terms or at all, which could increase our costs, limit our ability to grow and dilute the
ownership interests of existing stockholders.
  We are dependent on the success of our advertising and marketing efforts which are costly and may
not achieve desired results.
   We have a history of significant losses. If we do not achieve or sustain profitability, our
financial condition and stock price could suffer.
  Because we experience seasonal fluctuations in our net sales, our quarterly results will fluctuate
and our annual performance will depend largely on results from one quarter.
  Our operating results are volatile and difficult to predict and may adversely affect our stock
price.
  14




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Our computer and communications hardware and software systems are vulnerable to damage and
interruption, which could harm our business.
  If we fail to offer a broad selection of innovative merchandise that consumers find attractive,
our revenues could decline or fail to reach anticipated levels.
  Failure to successfully manage or expand our fulfillment and distribution operation would have a
material adverse effect on us.
  If we do not manage our inventory levels successfully, our operating results may be adversely
affected.
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We may have difficulty in product sourcing.
    Our facilities and systems are vulnerable to natural disasters or other catastrophic events.
  If we fail to manage our growth and successfully integrate our management team, our business will
suffer.
  16




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We experience intense competition in the rapidly changing retail gift market.
  
    
    other online retailers, such as Amazon.com and eBay
    
    major department stores, such as Macys, Bloomingdales, Neiman Marcus and their online storefronts
    
    physical and online stores and catalog retailers that sell popular gift items such as
Pottery Barn, Brookstone, The Sharper Image, Tiffanys, Harry & David, J Crew, 1-800-Flowers
and Williams-Sonoma
    
    Internet portals and online service providers and other comparison shopping sites, such
as AOL, Yahoo! and Google.
   If we do not successfully expand our website and order processing systems or respond to rapid
technological changes, we could lose customers and our net revenues could decline.
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Delivery of our merchandise could be delayed or disrupted by factors beyond our control, and we
could lose customers as a result.
  The loss of our senior management or other key personnel could harm our current and future
operations and prospects.
  We rely on seasonal and temporary employees during periods of peak activity and any failure by
such employees to adequately perform their jobs could adversely affect our operations.
  If we are unable to successfully manage the costs of our catalog operations or our catalogs fail
to produce sales at satisfactory levels it could adversely affect our business.
  
    
    effective management of costs associated with the production and distribution of our catalog
    
    achievement of adequate response rates to our mailings
    
    displaying a mix of merchandise in our catalog that is attractive to our customers
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
    
    production of aesthetically appealing catalogs
    
    timely delivery of catalog mailings to our customers
  If we are unable to provide satisfactory customer service, we could lose customers.
   If the protection of our trademarks and proprietary rights is inadequate, our brand and reputation
could be impaired and we could lose customers.
   Intellectual property and other claims against us could be costly and could impair our business.
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Poor economic conditions may constrain discretionary consumer spending on retail products such as
ours.
  We may incur significant costs or experience delays in product availability due to regulations
applicable to the sale of food products and live plants, which may hurt our business.
  Our charter documents, Delaware law and third-party contractual restrictions may make an
acquisition of us more difficult, even if an acquisition would be beneficial to our stockholders.
   Our directors, executive officers and significant stockholders hold a substantial portion of our
stock, which may lead to conflicts with other stockholders over corporate transactions and other
corporate matters.
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The security risks of online commerce, including credit card fraud, may discourage customers from
purchasing goods from us.
   Existing or future government regulation could harm our business.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 None.
 
 Item 3. Defaults Upon Senior Securities.
 None.
 
 Item 4. Submission of Matters to a Vote of Security Holders.
 None.
 
 Item 5. Other Information.
   
 Item 6. Exhibits
 10.73
    
    Second Amendment to Lease Agreement between Creekside III LLC and RedEnvelope, Inc. dated as of
July 23, 2007.31.1
    
    Certification of Chief Executive Officer required by Exchange Act Rules 13a-14(a) (Section 302)31.2
    
    Certification of Interim Chief Financial Officer required by Exchange Act Rules 13a-14(a) (Section 302)32.1
    
    Certification required by 18 U.S.C.§1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification required by 18 U.S.C.§1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
  REDENVELOPE, INC.By:
    /s/ William T. GochnauerInterim Chief Financial Officer  23




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EXHIBIT INDEX
 10.73
    
    Second Amendment to Lease Agreement between Creekside III LLC and RedEnvelope, Inc. dated as of
July 23, 2007.31.1
    
    Certification of Chief Executive Officer required by Exchange Act Rules 13a-14(a) (Section 302)31.2
    
    Certification of Interim Chief Financial Officer required by Exchange Act Rules 13a-14(a)
(Section 302)32.1
    
    Certification required by 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification required by 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002