##### Table of Contents



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 September 30, 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 
Incorporation or Organization)
    
    (IRS Employer
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 September 30, 2007
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)
    
    
    3Condensed Balance Sheets as of September 30, 2007, April 1, 2007 and October 1, 2006
    
    
    3Condensed Statements of Operations for the thirteen and twenty-six weeks ended
September 30, 2007 and October 1, 2006
    
    
    4Condensed Statements of Cash Flows for the twenty-six weeks ended September 30, 2007
and October 1, 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
    
    
    14Item 4.
    
    Controls and Procedures
    
    
    14PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    14Item 1A.
    
    Risk Factors
    
    
    15Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.
    
    Defaults Upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24Item 5.
    
    Other Information
    
    
    24Item 6.
    
    Exhibits
    
    
    24EXHIBIT 10.74EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 RedEnvelope, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
 September 30,
    
    
    April 1,
    
    
    October 1,2007
    
    
    2007
    
    
    2006(In thousands, except for share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,498
    
    
    $
    13,245
    
    
    $
    3,143Accounts receivable, net
    
    
    1,059
    
    
    
    1,050
    
    
    
    969Inventory
    
    
    12,662
    
    
    
    14,288
    
    
    
    22,928Prepaid catalog costs and other current assets
    
    
    2,561
    
    
    
    2,423
    
    
    
    3,883Total current assets
    
    
    20,780
    
    
    
    31,006
    
    
    
    30,923Property and equipment, net
    
    
    6,458
    
    
    
    8,221
    
    
    
    7,607Other assets
    
    
    388
    
    
    
    184
    
    
    
    200Total assets
    
    $
    27,626
    
    
    $
    39,411
    
    
    $
    38,730LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,065
    
    
    $
    7,092
    
    
    $
    10,499Accrued expenses and other current liabilities
    
    
    3,645
    
    
    
    3,084
    
    
    
    2,443Accrued compensation
    
    
    1,855
    
    
    
    2,287
    
    
    
    1,305Capital lease obligations, current
    
    
    170
    
    
    
    207
    
    
    
    207Total current liabilities
    
    
    13,735
    
    
    
    12,670
    
    
    
    14,454Capital lease obligations, long-term
    
    
    330
    
    
    
    350
    
    
    
    456Deferred rent
    
    
    410
    
    
    
    502
    
    
    
    594Total liabilities
    
    
    14,475
    
    
    
    13,522
    
    
    
    15,504Stockholders equity:Common stock, $0.01 par value; 100 million
shares authorized; 9.5 million, 9.5 million,
and 9.6 million issued and outstanding as of
September 30, 2007, April 1, 2007, and
October 1, 2006, respectively
    
    
    96
    
    
    
    96
    
    
    
    97Additional paid-in capital
    
    
    119,903
    
    
    
    118,800
    
    
    
    117,188Deferred compensation
    
    
    
    
    
    
    (1
    )
    
    
    Notes receivable from stockholders
    
    
    
    
    
    
    (44
    )
    
    
    (44
    )Accumulated deficit
    
    
    (106,848
    )
    
    
    (92,962
    )
    
    
    (94,015
    )Total stockholders equity
    
    
    13,151
    
    
    
    25,889
    
    
    
    23,226Total liabilities and stockholders equity
    
    $
    27,626
    
    
    $
    39,411
    
    
    $
    38,730
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RedEnvelope, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 Thirteen Weeks Ended
    
    
    Twenty-six Weeks EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except for per share data)Net revenues
    
    $
    15,872
    
    
    $
    15,531
    
    
    $
    40,401
    
    
    $
    42,389Cost of sales
    
    
    9,630
    
    
    
    7,804
    
    
    
    21,852
    
    
    
    20,412Gross profit
    
    
    6,242
    
    
    
    7,727
    
    
    
    18,549
    
    
    
    21,977Operating expenses:Fulfillment
    
    
    2,917
    
    
    
    2,787
    
    
    
    6,283
    
    
    
    6,206Marketing
    
    
    3,762
    
    
    
    3,165
    
    
    
    9,960
    
    
    
    9,450General and administrative
    
    
    9,972
    
    
    
    5,507
    
    
    
    16,415
    
    
    
    10,996Total operating expenses
    
    
    16,651
    
    
    
    11,459
    
    
    
    32,658
    
    
    
    26,652Loss from operations
    
    
    (10,409
    )
    
    
    (3,732
    )
    
    
    (14,109
    )
    
    
    (4,675
    )Interest income, net
    
    
    78
    
    
    
    44
    
    
    
    223
    
    
    
    87Net loss
    
    $
    (10,331
    )
    
    $
    (3,688
    )
    
    $
    (13,886
    )
    
    $
    (4,588
    )Net loss per share, basic and diluted
    
    $
    (1.08
    )
    
    $
    (0.39
    )
    
    $
    (1.46
    )
    
    $
    (0.49
    )Weighted average shares outstanding, basic and diluted
    
    
    9,523
    
    
    
    9,424
    
    
    
    9,521
    
    
    
    9,325
  4




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RedEnvelope, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 Twenty-six Weeks EndedSeptember 30,
    
    
    October 1,2007
    
    
    2006(In thousands)Cash Flows From Operating Activities:Net loss
    
    $
    (13,886
    )
    
    $
    (4,588
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,265
    
    
    
    1,600Stock-based compensation
    
    
    1,059
    
    
    
    1,234Asset impairment
    
    
    3,520
    
    
    
    Other non-cash charges
    
    
    (74
    )
    
    
    (75
    )Changes in current assets and liabilities:Accounts receivable, net
    
    
    (9
    )
    
    
    85Inventory
    
    
    1,626
    
    
    
    (3,238
    )Prepaid catalog costs and other current assets
    
    
    (360
    )
    
    
    (1,039
    )Accounts payable
    
    
    1,198
    
    
    
    877Accrued expenses and other current liabilities
    
    
    129
    
    
    
    (321
    )Net cash used in operating activities
    
    
    (5,532
    )
    
    
    (5,465
    )Cash Flows From Investing Activities:Maturities of short-term investments
    
    
    
    
    
    
    11,619Purchases of short-term investments
    
    
    
    
    
    
    (4,857
    )Repayment of note receivable
    
    
    44
    
    
    
    Purchases of property and equipment
    
    
    (3,202
    )
    
    
    (1,594
    )Net cash (used in) provided by investing activities
    
    
    (3,158
    )
    
    
    5,168Cash Flows From Financing Activities:Proceeds from issuance of common stock
    
    
    45
    
    
    
    590Principal payments on capital lease obligations
    
    
    (102
    )
    
    
    (283
    )Payment of debt issuance costs
    
    
    
    
    
    
    (144
    )Net cash (used in) provided by financing activities
    
    
    (57
    )
    
    
    163Net decrease in cash and cash equivalents
    
    
    (8,747
    )
    
    
    (134
    )Cash and cash equivalents at beginning of period
    
    
    13,245
    
    
    
    3,277Cash and cash equivalents at end of period
    
    $
    4,498
    
    
    $
    3,143Supplemental Cash Flow Information:Cash paid for interest
    
    $
    37
    
    
    $
    49Supplemental Non-Cash Investing and Financing Activities:Property and equipment acquired through capital lease transactions
    
    $
    45
    
    
    $
    498Property and equipment acquired but not paid for during the period
    
    $
    493
    
    
    $
    258
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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
 6




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3. Results of Operations and Liquidity Matters
   4. Asset Impairment
  5. Stock-Based Compensation
   7




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Thirteen Weeks Ended
    
    Twenty-six Weeks EndedStock Option Valuation Assumptions:
    
    September 30, 2007
    
    October 1, 2006
    
    September 30, 2007
    
    October 1, 2006Expected volatility
    
    
    52.1
    %
    
    
    55.7
    %
    
    
    51.1% 52.1
    %
    
    
    55.7% 56.8
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected term
    
    
    3.3 years
    

    
    
    3.8  5.7 years
    
    
    
    3.3  5.5 years
    
    
    
    3.8  5.7 yearsRisk-free interest rate
    
    
    4.1%  4.6
    %
    
    
    4.5%  5.1
    %
    
    
    4.1%  5.0
    %
    
    
    4.5%  5.2
    %
  WeightedAverageOptions
    
    Exercise PriceOutstanding
    
    per Share(in thousands)Balance, April 1, 2007
    
    
    1,335
    
    
    $
    9.50Granted
    
    
    180
    
    
    $
    6.63Cancelled
    
    
    (201
    )
    
    $
    9.16Exercised
    
    
    (2
    )
    
    $
    4.64Balance, September 30, 2007
    
    
    1,312
    
    
    $
    9.17Exercisable, September 30, 2007
    
    
    720
    
    
    $
    9.69
  6. Income Taxes
 Accounting for Income Tax Uncertainties
  7. Borrowing Arrangements
  8




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8. Legal Proceedings
  9. Contingencies
   
 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 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.
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Overview
 www.redenvelope.com
    Results
of Operations and Liquidity Matters
   10




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Critical Accounting Policies
  Results of Operations
  Thirteen Weeks Ended
    
    Twenty-six Weeks EndedSeptember 30,
    
    October 1,
    
    September 30,
    
    October 1,2007
    
    2006
    
    2007
    
    2006Statements of Operations Data:Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    60.7
    
    
    
    50.2
    
    
    
    54.1
    
    
    
    48.2Gross profit
    
    
    39.3
    
    
    
    49.8
    
    
    
    45.9
    
    
    
    51.8Operating expenses:Fulfillment
    
    
    18.4
    
    
    
    17.9
    
    
    
    15.6
    
    
    
    14.6Marketing
    
    
    23.7
    
    
    
    20.4
    
    
    
    24.7
    
    
    
    22.3General and administrative
    
    
    62.8
    
    
    
    35.5
    
    
    
    40.6
    
    
    
    25.9Total operating expenses
    
    
    104.9
    
    
    
    73.8
    
    
    
    80.9
    
    
    
    62.9Loss from operations
    
    
    (65.6
    )
    
    
    (24.0
    )
    
    
    (35.0
    )
    
    
    (11.0
    )Interest income, net
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.2Net loss
    
    
    (65.1
    )%
    
    
    (23.7
    )%
    
    
    (34.4
    )%
    
    
    (10.8
    )%
 Quarter Ended September 30, 2007 Compared to Quarter Ended October 1, 2006
 Net Revenues
    11




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Cost of Sales
   Operating Expenses
 Fulfillment.
  Marketing.
  General and Administrative.
  Twenty-six Weeks Ended September 30, 2007 Compared to Twenty-six Weeks Ended October 1, 2006
 Net Revenues
  12




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Cost of Sales
  Operating Expenses
 Fulfillment.
 Marketing.
 General and Administrative.
 Liquidity and Capital Resources
  Cash Flows From Operating Activities
 13




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Cash Flows From Investing Activities
 Cash Flows From Financing Activities
 Revolving Credit Facility
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Risk
 
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
 
 PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  14




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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.
 We
may need additional financing and may not be able to raise additional financing on favorable
terms or at all, which could have a material adverse effect on our business.
  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.
   We are dependent on the success of our advertising and marketing efforts which are costly and may
not achieve desired results.
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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.
  Our computer and communications hardware and software systems are vulnerable to damage and
interruption, which could harm our business.
  16




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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.
  We may have difficulty in product sourcing.
   17




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Our facilities and systems are vulnerable to natural disasters or other catastrophic events.
  If
we fail to manage our growth or successfully integrate our management team, our business will
suffer.
  18




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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.
  Delivery of our merchandise could be delayed or disrupted by factors beyond our control, and we
could lose customers as a result.
  19




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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
    
    production of aesthetically appealing catalogs
    
    timely delivery of catalog mailings to our customers
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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.
  We rely on third-party technologies, which may not continue to be available to us on commercially
reasonable terms or at all.
  Intellectual property and other claims against us could be costly and could impair our business.
   21




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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.
  The security risks of online commerce, including credit card fraud, may discourage customers from
purchasing goods from us.
  22




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Existing or future government regulation could harm our business.
     23




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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
 10.74
    
    Attachment D-4 dated September 28, 2007 to the Software
 License and Services Agreement dated March 31, 2000 between BroadVision, Inc. and RedEnvelope, Inc.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
 24




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SIGNATURES
  REDENVELOPE, INC.By:
    /s/ William T. GochnauerInterim Chief Financial Officer  25




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EXHIBIT INDEX
 10.74
    
    Attachment D-4 dated September 28, 2007 to the Software
 License and Services Agreement dated March 31, 2000 between BroadVision, Inc. and RedEnvelope, Inc.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