##### 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 December 30, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto
 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 Large accelerated filer
    
    o Accelerated filer
    
    þ Non-accelerated filer
    
    o Smaller reporting company(Do not check if a smaller reporting company)
 o þ




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##### 



RedEnvelope, Inc.
REPORT ON FORM 10-Q
For the Quarter Ended December 30, 2007
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements (Unaudited)
    
    
    3Condensed Balance Sheets as of December 30, 2007, April 1, 2007 and December 31, 2006
    
    
    3Condensed Statements of Operations for the thirteen and thirty-nine weeks endedDecember 30, 2007 and December 31, 2006
    
    
    4Condensed Statements of Cash Flows for the thirty-nine weeks ended December 30, 2007and December 31, 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 INFORMATION
    
    
    15Item 1.
    
    Legal Proceedings
    
    
    15Item 1A.
    
    Risk Factors
    
    
    15Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3.
    
    Defaults Upon Senior Securities
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits
    
    
    25EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 RedEnvelope, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
 December 30,
    
    
    April 1,
    
    
    December 31,2007
    
    
    2007
    
    
    2006(In thousands, except for share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,345
    
    
    $
    13,245
    
    
    $
    23,471Accounts receivable, net
    
    
    2,679
    
    
    
    1,050
    
    
    
    3,300Inventory
    
    
    9,177
    
    
    
    14,288
    
    
    
    14,466Prepaid catalog costs and other current assets
    
    
    2,288
    
    
    
    2,423
    
    
    
    3,081Total current assets
    
    
    26,489
    
    
    
    31,006
    
    
    
    44,318Property and equipment, net
    
    
    6,240
    
    
    
    8,221
    
    
    
    7,682Other assets
    
    
    379
    
    
    
    184
    
    
    
    193Total assets
    
    $
    33,108
    
    
    $
    39,411
    
    
    $
    52,193LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    15,012
    
    
    $
    7,092
    
    
    $
    14,728Accrued expenses and other current liabilities
    
    
    6,040
    
    
    
    3,084
    
    
    
    5,062Accrued compensation
    
    
    1,935
    
    
    
    2,287
    
    
    
    1,922Capital lease obligations, current
    
    
    148
    
    
    
    207
    
    
    
    207Total current liabilities
    
    
    23,135
    
    
    
    12,670
    
    
    
    21,919Capital lease obligations, long-term
    
    
    288
    
    
    
    350
    
    
    
    403Deferred rent
    
    
    368
    
    
    
    502
    
    
    
    548Total liabilities
    
    
    23,791
    
    
    
    13,522
    
    
    
    22,870Stockholders 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
December 30, 2007, April 1, 2007, and
December 31, 2006, respectively
    
    
    96
    
    
    
    96
    
    
    
    97Additional paid-in capital
    
    
    120,403
    
    
    
    118,800
    
    
    
    117,978Deferred compensation
    
    
    
    
    
    
    (1
    )
    
    
    Notes receivable from stockholders
    
    
    
    
    
    
    (44
    )
    
    
    (44
    )Accumulated deficit
    
    
    (111,182
    )
    
    
    (92,962
    )
    
    
    (88,708
    )Total stockholders equity
    
    
    9,317
    
    
    
    25,889
    
    
    
    29,323Total liabilities and stockholders equity
    
    $
    33,108
    
    
    $
    39,411
    
    
    $
    52,193
  3




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##### Table of Contents



RedEnvelope, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 Thirteen Weeks Ended
    
    
    Thirty-nine Weeks EndedDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except for per share data)Net revenues
    
    $
    45,195
    
    
    $
    56,987
    
    
    $
    85,596
    
    
    $
    99,376Cost of sales
    
    
    23,196
    
    
    
    26,157
    
    
    
    45,048
    
    
    
    46,569Gross profit
    
    
    21,999
    
    
    
    30,830
    
    
    
    40,548
    
    
    
    52,807Operating expenses:Fulfillment
    
    
    7,382
    
    
    
    7,449
    
    
    
    13,665
    
    
    
    13,655Marketing
    
    
    13,478
    
    
    
    12,569
    
    
    
    23,438
    
    
    
    22,019General and administrative
    
    
    5,466
    
    
    
    5,519
    
    
    
    21,881
    
    
    
    16,515Total operating expenses
    
    
    26,326
    
    
    
    25,537
    
    
    
    58,984
    
    
    
    52,189(Loss) income from operations
    
    
    (4,327
    )
    
    
    5,293
    
    
    
    (18,436
    )
    
    
    618Interest (expense) income, net
    
    
    (7
    )
    
    
    14
    
    
    
    216
    
    
    
    101Net (loss) income
    
    $
    (4,334
    )
    
    $
    5,307
    
    
    $
    (18,220
    )
    
    $
    719Net (loss) income per share, basic
    
    $
    (0.45
    )
    
    $
    0.56
    
    
    $
    (1.91
    )
    
    $
    0.08Net (loss) income per share, diluted
    
    $
    (0.45
    )
    
    $
    0.56
    
    
    $
    (1.91
    )
    
    $
    0.08Weighted average shares outstanding, basic
    
    
    9,526
    
    
    
    9,458
    
    
    
    9,523
    
    
    
    9,369Weighted average shares outstanding, diluted
    
    
    9,526
    
    
    
    9,488
    
    
    
    9,523
    
    
    
    9,477
  4




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RedEnvelope, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 Thirty-nine Weeks EndedDecember 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Cash Flows From Operating Activities:Net (loss) income
    
    $
    (18,220
    )
    
    $
    719Adjustments to reconcile net (loss) income to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,830
    
    
    
    2,357Stock-based compensation
    
    
    1,538
    
    
    
    1,921Write-off of capitalized software
    
    
    3,520
    
    
    
    Other non-cash charges
    
    
    (106
    )
    
    
    (114
    )Changes in current assets and liabilities:Accounts receivable, net
    
    
    (1,629
    )
    
    
    (2,246
    )Inventory
    
    
    5,111
    
    
    
    5,224Prepaid catalog costs and other current assets
    
    
    (88
    )
    
    
    (237
    )Accounts payable
    
    
    8,463
    
    
    
    5,302Accrued expenses and other current liabilities
    
    
    2,604
    
    
    
    2,914Net cash provided by operating activities
    
    
    3,023
    
    
    
    15,840Cash 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
    
    
    (3,866
    )
    
    
    (2,620
    )Net cash (used in) provided by investing activities
    
    
    (3,822
    )
    
    
    4,142Cash Flows From Financing Activities:Proceeds from issuance of common stock
    
    
    66
    
    
    
    692Principal payments on capital lease obligations
    
    
    (167
    )
    
    
    (336
    )Proceeds from line of credit
    
    
    5,800
    
    
    
    6,700Repayment of line of credit
    
    
    (5,800
    )
    
    
    (6,700
    )Payment of debt issuance costs
    
    
    
    
    
    
    (144
    )Net cash (used in) provided by financing activities
    
    
    (101
    )
    
    
    212Net (decrease) increase in cash and cash equivalents
    
    
    (900
    )
    
    
    20,194Cash and cash equivalents at beginning of period
    
    
    13,245
    
    
    
    3,277Cash and cash equivalents at end of period
    
    $
    12,345
    
    
    $
    23,471Supplemental Cash Flow Information:Cash paid for interest
    
    $
    79
    
    
    $
    101Supplemental 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
    
    $
    176
    
    
    $
    62
  5




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RedEnvelope, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1. Financial Statements  Basis of Presentation
     2. Certain Significant Accounting Policies
  Net (Loss) Income Per Share 
 6




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Weighted
    
    Per ShareDollars and amounts in thousands, except per share amounts
    
    Net Income
    
    Average Shares
    
    AmountThirteen weeks ended December 31, 2006Basic
    
    $
    5,307
    
    
    
    9,458
    
    
    $
    0.56Effect of dilutive stock-based awards
    
    
    
    
    
    
    30Diluted
    
    $
    5,307
    
    
    
    9,488
    
    
    $
    0.56Thirty-Nine weeks ended December 31, 2006Basic
    
    $
    719
    
    
    
    9,369
    
    
    $
    0.08Effect of dilutive stock-based awards
    
    
    
    
    
    
    108Diluted
    
    $
    719
    
    
    
    9,477
    
    
    $
    0.08
 Comprehensive Income (Loss)
 3. Results of Operations and Liquidity Matters
     4. Capitalized Software Write-off
  7




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5. Stock-Based Compensation
   Thirteen Weeks Ended
    
    Thirty-nine Weeks EndedStock Option Valuation Assumptions:
    
    December 30, 2007
    
    December 31, 2006
    
    December 30, 2007
    
    December 31, 2006Expected volatility
    
    
    52.6
    %
    
    
    54.0
    %
    
    
    51.1% 52.6
    %
    
    
    54.0% 56.8
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected term
    
    3.3  5.5 years
    
    3.8  5.7 years
    
    3.3  5.5 years
    
    3.8  5.7 yearsRisk-free interest rate
    
    
    3.2%  4.3
    %
    
    
    4.6%  4.8
    %
    
    
    3.2%  5.0
    %
    
    
    4.5%  5.2
    %
  WeightedAverageOptions
    
    Exercise PriceOutstanding
    
    per Share(in thousands)Balance, April 1, 2007
    
    
    1,335
    
    
    $
    9.50Granted
    
    
    686
    
    
    $
    5.24Cancelled
    
    
    (327
    )
    
    $
    9.04Exercised
    
    
    (2
    )
    
    $
    4.64Balance, December 30, 2007
    
    
    1,692
    
    
    $
    7.87Exercisable, December 30, 2007
    
    
    775
    
    
    $
    9.60
  6. Income Taxes
 Accounting for Income Tax Uncertainties
  8




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7. Borrowing Arrangements
   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. The forward-looking statements contained in this report include, among others, statements
regarding our ability to secure additional financing, our ability to continue as a going concern,
our ability to re-energize the RedEnvelope brand, the impact of upgrades at our fulfillment center
and our ability to achieve profitability. 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
 9




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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, our inability to secure additional financing, failure
of our advertising efforts, our failure to achieve profitability, the seasonality of our business,
fulfillment or distribution problems, failure to adequately predict consumer tastes and
preferences, those risks 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
      Results of Operations and Liquidity Matters
   10




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Critical Accounting Policies
  Results of Operations
  Thirteen Weeks Ended
    
    Thirty-nine Weeks EndedDecember 30,
    
    December 31,
    
    December 30,
    
    December 31,2007
    
    2006
    
    2007
    
    2006Statements of Operations Data:Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    51.3
    
    
    
    45.9
    
    
    
    52.6
    
    
    
    46.9Gross profit
    
    
    48.7
    
    
    
    54.1
    
    
    
    47.4
    
    
    
    53.1Operating expenses:Fulfillment
    
    
    16.3
    
    
    
    13.1
    
    
    
    16.0
    
    
    
    13.7Marketing
    
    
    29.8
    
    
    
    22.1
    
    
    
    27.4
    
    
    
    22.2General and administrative
    
    
    12.2
    
    
    
    9.7
    
    
    
    25.5
    
    
    
    16.6Total operating expenses
    
    
    58.3
    
    
    
    44.8
    
    
    
    68.9
    
    
    
    52.5(Loss) income from operations
    
    
    (9.6
    )
    
    
    9.3
    
    
    
    (21.5
    )
    
    
    0.6Interest income, net
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    0.1Net (loss) income
    
    
    (9.6
    )%
    
    
    9.3
    %
    
    
    (21.3
    )%
    
    
    0.7
    %
 Quarter Ended December 30, 2007 Compared to Quarter Ended December 31, 2006
 Net Revenues
  11




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Cost of Sales
   Operating Expenses
 Fulfillment.
  Marketing.
  General and Administrative.
  12




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Thirty-nine Weeks Ended December 30, 2007 Compared to Thirty-nine Weeks Ended December 31, 2006
 Net Revenues
   Cost of Sales
  Operating Expenses
 Fulfillment.
 Marketing.
 General and Administrative.
 Liquidity and Capital Resources
  13




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Cash Flows From Operating Activities
 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
 14




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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.
 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 Revolving Credit Facility, 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.
   15




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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.
  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 board or 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
  20




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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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We incur significant expenses as a result of being a public company.
  Our stock price may be volatile, and you may not be able to resell our shares at a profit or at
all.
  In the event we are unable to remedy any deficiency we identify in our system of internal controls
over financial reporting, or if our internal controls are not effective, our business and our stock
price could suffer.
   24




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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.
 None.
 
 Item 6. Exhibits
 3.2
    
    Amended and Restated Certificate of Incorporation(1)3.4
    
    Amended and Restated Bylaws(1)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
 
 (1)
    
    Incorporated by reference to the identically numbered exhibits to RedEnvelopes Registration
Statement on Form S-1, which became effective on September 24, 2003. 25




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SIGNATURES
  REDENVELOPE, INC.By:
    /s/ William T. GochnauerInterim Chief Financial Officer  26




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EXHIBIT INDEX
 3.2
    
    Amended and Restated Certificate of Incorporation(1)3.4
    
    Amended and Restated Bylaws(1)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 of2002
 
 (1)
    
    Incorporated by reference to the identically numbered exhibits to RedEnvelopes Registration
Statement on Form S-1, which became effective on September 24, 2003.