UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 3, 2004
OR
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-50763
BLUE NILE, INC.
| Delaware (State or other jurisdiction of incorporation or organization) |
91-1963165 (I.R.S. Employer Identification No.) |
|
| 705 Fifth Avenue South, Suite 900 Seattle, Washington (Address of principal executive offices) |
98104 (Zip Code) |
(206) 336-6700
(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 x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 21, 2004, the registrant had 17,692,481 shares of common stock outstanding.
1
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that involve many risks and uncertainties. These statements relate to future events and our future performance that are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. In some cases, you can identify forward-looking statements by terms such as “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “targets,” “seek,” or “continue,” the negative of these terms or other variations of such terms. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances, are forward-looking statements. These statements are only predictions based upon assumptions made that are believed t o be reasonable at the time, and are subject to risk and uncertainties. Therefore, actual events or results may differ materially and adversely from those expressed in any forward-looking statement. In evaluating these statements, you should specifically consider the risks described under the caption “Factors that May Affect Future Operating Results” and elsewhere in this Form 10-Q. These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
2
BLUE NILE, INC.
INDEX
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| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32.2 | ||||||||
3
PART I. FINANCIAL INFORMATION
BLUE NILE, INC.
| October 3, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
| (in thousands, except par value) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 22,777 | $ | 30,383 | ||||
Restricted cash |
50 | 400 | ||||||
Marketable securities |
48,816 | — | ||||||
Accounts receivable |
602 | 843 | ||||||
Inventories |
6,363 | 10,204 | ||||||
Deferred income taxes |
8,176 | 5,300 | ||||||
Prepaids and other current assets |
941 | 465 | ||||||
Total current assets |
87,725 | 47,595 | ||||||
Property and equipment, net |
3,628 | 3,979 | ||||||
Intangible assets, net |
373 | — | ||||||
Deferred income taxes |
4,908 | 10,654 | ||||||
Other assets |
77 | 77 | ||||||
Total assets |
$ | 96,711 | $ | 62,305 | ||||
Liabilities and Stockholders’ Equity (Deficit) |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 13,997 | $ | 26,288 | ||||
Accrued liabilities |
2,035 | 3,155 | ||||||
Accrued marketing |
865 | 1,312 | ||||||
Current portion of deferred rent |
177 | 173 | ||||||
Total current liabilities |
17,074 | 30,928 | ||||||
Deferred rent, less current portion |
1,002 | 1,130 | ||||||
Commitments and contingencies |
||||||||
Mandatorily redeemable convertible preferred stock, $0.001 par value;
25,856 shares authorized; no shares and 10,000 shares outstanding at October 3,
2004 and December 31, 2003, respectively; aggregate liquidation preference of
$0 and $78,664 at October 3, 2004 and December 31, 2003, respectively |
— | 57,485 | ||||||
Stockholders’ equity (deficit): |
||||||||
Preferred stock, $0.001 par value; 5,000 shares authorized, none issued and outstanding
as of October 3, 2004; no shares authorized, issued and outstanding as of
December 31, 2003 |
— | — | ||||||
Common stock, $0.001 par value; 300,000 shares and 48,000 shares authorized
as of October 3, 2004 and December 31, 2003, respectively;
18,416 shares and 5,128 shares issued as of October 3, 2004 and December 31, 2003,
respectively; 17,666 shares and 4,378 shares outstanding as of October 3, 2004
and December 31, 2003, respectively |
18 | 5 | ||||||
Additional paid-in capital |
104,391 | 4,247 | ||||||
Deferred compensation |
(1,041 | ) | (1,352 | ) | ||||
Accumulated other comprehensive loss |
(19 | ) | — | |||||
Accumulated deficit |
(24,078 | ) | (29,502 | ) | ||||
Treasury stock, at cost; 750 shares outstanding at October 3, 2004
and December 31, 2003 |
(636 | ) | (636 | ) | ||||
Total stockholders’ equity (deficit) |
78,635 | (27,238 | ) | |||||
Total liabilities and stockholders’ equity (deficit) |
$ | 96,711 | $ | 62,305 | ||||
The accompanying notes are an integral part of these consolidated financial statements
4
BLUE NILE, INC.
| Quarter Ended |
Year to Date Ended |
|||||||||||||||
| October 3, | September 30, | October 3, | September 30, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
Net sales |
$ | 33,888 | $ | 27,457 | $ | 104,694 | $ | 79,339 | ||||||||
Cost of sales |
26,519 | 21,386 | 81,186 | 61,008 | ||||||||||||
Gross profit |
7,369 | 6,071 | 23,508 | 18,331 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
5,033 | 3,922 | 15,452 | 12,129 | ||||||||||||
| 5,033 | 3,922 | 15,452 | 12,129 | |||||||||||||
Operating income |
2,336 | 2,149 | 8,056 | 6,202 | ||||||||||||
Other income (expense) net: |
||||||||||||||||
Interest income |
241 | 19 | 380 | 74 | ||||||||||||
Interest expense |
— | — | — | (209 | ) | |||||||||||
Other income |
15 | 20 | 53 | 55 | ||||||||||||
| 256 | 39 | 433 | (80 | ) | ||||||||||||
Income before income taxes |
2,592 | 2,188 | 8,489 | 6,122 | ||||||||||||
Income tax expense |
936 | — | 3,065 | — | ||||||||||||
Net income |
$ | 1,656 | $ | 2,188 | $ | 5,424 | $ | 6,122 | ||||||||
Basic net income per share |
$ | 0.09 | $ | 0.51 | $ | 0.51 | $ | 1.65 | ||||||||
Diluted net income per share |
$ | 0.09 | $ | 0.13 | $ | 0.31 | $ | 0.38 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements
5
BLUE NILE, INC.
Consolidated Statements of Changes in Mandatorily Redeemable Convertible Preferred Stock
and Stockholders’ Equity (Deficit)
(Unaudited)
| Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||
| Mandatorily Redeemable | ||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock | Common Stock | Additional | Accumulated | |||||||||||||||||||||||||||||||||||||
| Paid-in | Deferred | Accumulated | Other Comprehensive | Treasury | ||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Capital |
Compensation |
Deficit |
Loss |
Stock |
Total |
|||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2003 |
10,000 | $ | 57,485 | 5,128 | $ | 5 | $ | 4,247 | $ | (1,352 | ) | $ | (29,502 | ) | $ | — | $ | (636 | ) | $ | (27,238 | ) | ||||||||||||||||||
Net income |
— | — | — | — | — | — | 5,424 | — | — | 5,424 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||
Unrealized loss on marketable securities, net of tax |
— | — | — | — | — | — | — | (19 | ) | — | (19 | ) | ||||||||||||||||||||||||||||
Total comprehensive income |
5,405 | |||||||||||||||||||||||||||||||||||||||
Sale of common stock, net of offering expenses |
— | — | 2,301 | 2 | 42,514 | — | — | — | — | 42,516 | ||||||||||||||||||||||||||||||
Conversion of mandatorily redeemable convertible preferred stock to common stock |
(10,000 | ) | (57,485 | ) | 10,920 | 11 | 57,474 | — | — | — | — | 57,485 | ||||||||||||||||||||||||||||
Deferred stock compensation on issuance of stock options |
— | — | — | — | 228 | (228 | ) | — | — | — | — | |||||||||||||||||||||||||||||
Tax effect of stock option exercises |
— | — | — | — | 116 | — | — | — | — | 116 | ||||||||||||||||||||||||||||||
Amortization of deferred stock compensation |
— | — | — | — | — | 269 | — | — | — | 269 | ||||||||||||||||||||||||||||||
Reversal of deferred compensation relating to cancelled options |
— | — | — | — | (270 | ) | 270 | — | — | — | — | |||||||||||||||||||||||||||||
Exercise of common stock options and warrants |
— | — | 66 | — | 70 | — | — | — | — | 70 | ||||||||||||||||||||||||||||||
Issuance of common stock to directors |
— | — | 1 | — | 12 | — | — | — | — | 12 | ||||||||||||||||||||||||||||||
Balance, October 3, 2004 |
— | $ | — | 18,416 | $ | 18 | $ | 104,391 | $ | (1,041 | ) | $ | (24,078 | ) | $ | (19 | ) | $ | (636 | ) | $ | 78,635 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
6
BLUE NILE, INC.
| Year to Date Ended |
||||||||
| October 3, | September 30, | |||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
| (in thousands) | ||||||||
Operating activities: |
||||||||
Net income |
$ | 5,424 | $ | 6,122 | ||||
Adjustments to reconcile net income to net cash
(used in) provided by operating activities: |
||||||||
Depreciation and amortization |
1,108 | 940 | ||||||
(Gain) loss on disposal of assets |
(5 | ) | 45 | |||||
Stock-based compensation |
279 | — | ||||||
Warrant-based interest expense |
— | 87 | ||||||
Deferred income taxes |
2,870 | — | ||||||
Changes in assets and liabilities: |
||||||||
Receivables, net |
242 | 163 | ||||||
Inventories |
3,841 | (559 | ) | |||||
Prepaid expenses and other assets |
(477 | ) | (91 | ) | ||||
Accounts payable |
(12,290 | ) | (3,007 | ) | ||||
Accrued liabilities |
(1,851 | ) | (926 | ) | ||||
Deferred rent |
(124 | ) | 1,317 | |||||
Net cash (used in) provided by operating activities |
(983 | ) | 4,091 | |||||
Investing activities: |
||||||||
Purchases of property and equipment |
(731 | ) | (2,558 | ) | ||||
Proceeds from the sale of property and equipment |
7 | 3 | ||||||
Purchases of marketable securities |
(59,855 | ) | — | |||||
Proceeds from the sale of marketable securities |
11,020 | — | ||||||
Transfers of restricted cash |
350 | 50 | ||||||
Net cash used in investing activities |
(49,209 | ) | (2,505 | ) | ||||
Financing activities: |
||||||||
Proceeds from sale of common stock, net of issuance costs |
42,516 | — | ||||||
Repurchase of restricted and common stock |
— | (8 | ) | |||||
Payments on subordinated notes payable |
— | (6,638 | ) | |||||
Payments on capital lease obligations |
— | (995 | ) | |||||
Payments on note payable to related party |
— | (1,140 | ) | |||||
Proceeds from warrant and stock option exercises |
70 | 234 | ||||||
Net cash provided by (used in) financing activities |
42,586 | (8,547 | ) | |||||
Net decrease in cash and cash equivalents |
(7,606 | ) | (6,961 | ) | ||||
Cash and cash equivalents, beginning of period |
30,383 | 22,597 | ||||||
Cash and cash equivalents, end of period |
$ | 22,777 | $ | 15,636 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Non-cash investing activities: |
||||||||
Intangible assets acquired under purchase obligation |
$ | 400 | $ | — | ||||
The accompanying notes are an integral part of these consolidated financial statements
7
BLUE NILE, INC.
Note 1. Description of the Company and Summary of Significant Accounting Policies
The Company
Blue Nile, Inc. (the “Company”) is a leading online retailer of high quality diamonds and fine jewelry. In addition to sales of diamonds, fine jewelry and watches, the Company provides guidance and support to enable customers to more effectively learn about and purchase diamonds as well as classically styled fine jewelry. The Company, a Delaware corporation, based in Seattle, Washington, was formed in March 1999. The Company maintains its primary web site at www.bluenile.com.
Change in Fiscal Year
On January 1, 2004, the Company’s fiscal year-end changed from December 31 to the Sunday closest to December 31. Each fiscal year consists of four 13-week quarters, with an extra week added onto the fourth quarter every five to six years. Because of the transition, the year to date 2004 results include two additional days of operations.
Reclassifications
Certain reclassifications of prior period balances have been made for consistent presentation with the current period. These reclassifications had no impact on net income or stockholders’ equity (deficit) as previously reported.
Basis of Presentation
The accompanying unaudited consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in Amendment No. 4 of the Company’s registration statement on Form S-1, declared effective by the Securities and Exchange Commission on May 19, 2004. The same accounting policies are followed for preparing quarterly and annual financial statements. In the opinion of management, all adjustments necessary for the fair presentation of the financial position, results of operations and cash flows have been included and are of a normal, recurring nature.
Due to a number of factors, including the seasonal nature of the retail industry and other factors described in this report, quarterly results are not necessarily indicative of the results for the full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates include the allowance for sales returns, the reserve for estimated fraud losses and the deferred tax valuation reserve. Actual results could differ materially from those estimates.
Intangible Assets
Intangible assets represent the consideration paid for licenses and other similar agreements with finite lives. Amortization is calculated on a straight-line basis over the estimated useful life of the related assets, which range from 10 years to 17 years. Amortization expense for the quarter and year to date ended October 3, 2004 was approximately $27,000.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25.” The Company has elected to apply the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation.” Had compensation cost for the Company’s stock options been determined based on the fair value of the options at the date of grant, the Company’s pro forma net income would have been as shown below (in thousands, except per share data):
8
BLUE NILE, INC.
Notes to Consolidated Financial Statements
| Quarter Ended |
Year to Date Ended |
|||||||||||||||
| October 3, | September 30, | October 3, | September 30, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income, as reported |
$ | 1,656 | $ | 2,188 | $ | 5,424 | $ | 6,122 | ||||||||
Add: Stock-based compensation expense, as
reported |
80 | — | 269 | — | ||||||||||||
Deduct: Stock-based employee compensation
expense determined under fair-value-based
method, net of tax |
(343 | ) | (59 | ) | (605 | ) | (194 | ) | ||||||||
Pro forma net income |
$ | 1,393 | $ | 2,129 | $ | 5,088 | $ | 5,928 | ||||||||
Income per share: |
||||||||||||||||
Basic - as reported |
$ | 0.09 | $ | 0.51 | $ | 0.51 | $ | 1.65 | ||||||||
Basic - pro forma |
$ | 0.08 | $ | 0.50 | $ | 0.47 | $ | 1.60 | ||||||||
Diluted - as reported |
$ | 0.09 | $ | 0.13 | $ | 0.31 | $ | 0.38 | ||||||||
Diluted - pro forma |
$ | 0.07 | $ | 0.13 | $ | 0.29 | $ | 0.36 | ||||||||
Note 2. Inventories
Inventories are stated at cost and consist of the following (in thousands):
| October 3, | December 31, | |||||||
| 2004 |
2003 |
|||||||
Loose diamonds |
$ | 120 | $ | 124 | ||||
Fine jewelry, watches and other |
6,243 | 10,080 | ||||||
| $ | 6,363 | $ | 10,204 | |||||
Note 3. Marketable Securities
The Company’s marketable securities are classified as available-for-sale as defined by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” At October 3, 2004, marketable securities consist of U.S. government and agencies’ securities maturing within one year. The securities are carried at fair value, with the unrealized gains and losses included in accumulated other comprehensive income (loss). Any realized gains or losses on the sale of marketable securities are reflected as a component of interest income or expense. There were no realized gains or losses in the quarter or year to date ended October 3, 2004.
Note 4. Net Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding, excluding unvested common shares issued to employees upon early exercise of options, which are subject to repurchase by the Company. Diluted net income per share is based on the weighted average number of common shares and equivalents outstanding. Common share equivalents included in the computation represent common shares issued upon early exercise of options that are subject to repurchase rights, shares issuable upon assumed exercise of outstanding stock options, warrants and mandatorily redeemable convertible preferred stock except when the effect of their inclusion would be antidilutive.
9
BLUE NILE, INC.
Notes to Consolidated Financial Statements
The following tables set forth the computation of basic and diluted net income per share (in thousands, except per share data):
| Quarter Ended |
Year to Date Ended |
|||||||||||||||
| October 3, 2004 |
September 30, 2003 |
October 3, 2004 |
September 30, 2003 |
|||||||||||||
Net income |
$ | 1,656 | $ | 2,188 | $ | 5,424 | $ | 6,122 | ||||||||
Weighted average common shares outstanding |
17,661 | 4,268 | 10,723 | 3,705 | ||||||||||||
Basic net income per share |
$ | 0.09 | $ | 0.51 | $ | 0.51 | $ | 1.65 | ||||||||
Dilutive effect of stock options and warrants |
1,230 | 1,231 | 1,200 | 1,778 | ||||||||||||
Dilutive effect of mandatorily redeemable
convertible preferred stock |
— | 10,920 | 5,716 | 10,826 | ||||||||||||
Common stock and common stock equivalents |
18,891 | 16,419 | 17,639 | 16,309 | ||||||||||||
Diluted net income per share |
$ | 0.09 | $ | 0.13 | $ | 0.31 | $ | 0.38 | ||||||||
For the quarter ended October 3, 2004, there were 376,369 stock option shares excluded from the computation of net income per diluted share due to their antidilutive effect. For the year to date ended October 3, 2004, there were 126,289 stock option shares excluded from the computation of net income per diluted share due to their antidilutive effect.
For the quarter ended September 30, 2003, there were 2,994 preferred stock warrants and 8,252 stock option shares excluded from the computation of net income per diluted share due to their antidilutive effect. For the year to date ended September 30, 2003, there were 2,994 preferred stock warrants and 2,781 stock option shares excluded from the computation of net income per diluted share due to their antidilutive effect.
Note 5. Initial Public Offering
On May 19, 2004, the Company’s registration statement on Form S-1 was declared effective for its initial public offering, pursuant to which the Company sold 2,300,910 shares of common stock at $20.50 per share. The Company’s common stock commenced trading on May 20, 2004. The offering closed on May 25, 2004, and, as a result, the Company received net proceeds of approximately $43.9 million (after underwriters’ discounts of $3.3 million). The Company incurred additional related expenses of approximately $1.4 million.
On April 30, 2004, the Company effected a 1 for 2.5 reverse split of its common stock and mandatorily redeemable convertible preferred stock. All shares and per share amounts and any other references to shares included in the accompanying unaudited consolidated financial statements have been adjusted to reflect this split on a retroactive basis.
Simultaneous with the closing of this offering, the Company’s 10.0 million outstanding shares of mandatorily redeemable convertible preferred stock were automatically converted into approximately 10.9 million shares of common stock.
10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with Blue Nile, Inc.’s (“Blue Nile,” the “Company,” “we,” “our,” “us,”) Consolidated Financial Statements and the related Notes contained elsewhere in this quarterly report on Form 10-Q. All statements in the following discussion that are not reports of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the factors that may affect operating results set forth herein.
Overview
Net income in the third quarter of 2004 was $1.7 million, or $0.09 per diluted share. In the third quarter of 2003, net income and net income per diluted share were $2.2 million and $0.13, respectively. There was no income tax expense in the third quarter of 2003 as a valuation allowance was recorded against deferred tax assets. Income before income taxes in the third quarter of 2004 was $2.6 million, compared to $2.2 million in the third quarter of 2003. The significant growth in net sales drove the 18.5% increase in income before income taxes for the quarter.
For the year to date period ended October 3, 2004, net income and net income per diluted share were $5.4 million and $0.31 respectively, compared to net income and net income per diluted share of $6.1 million and $0.38 for the year to date ended September 30, 2003. Income before income taxes was $8.5 million for the year to date period ended October 3, 2004, compared to $6.1 million for the year to date ended September 30, 2003.
In August 2004, the Company launched a website in the United Kingdom, www.bluenile.co.uk through which the Company offers a limited number of products. In the third quarter of 2004, sales through the new website were immaterial.
Results of Operations
Comparison of Quarter Ended October 3, 2004 to Quarter Ended September 30, 2003
Net Sales
Net sales increased 23.4% to $33.9 million for the third quarter of 2004 compared to $27.5 million for the third quarter of 2003. The increase in net sales was primarily due to an increase in net sales of engagement rings and loose diamonds.
The change in 2004 of our fiscal year-end from December 31 to the Sunday closest to December 31 had a slightly negative impact on net sales in the quarter ended October 3, 2004 due to one less day of sales in the quarter compared to the quarter ended September 30, 2003.
Gross Profit
Gross profit increased 21.4% to $7.4 million in the third quarter of 2004 from $6.1 million in the comparable period in 2003. The increase in gross profit was due to the increase in sales volume. Gross profit as a percentage of net sales was 21.7% and 22.1% in the quarters ended October 3, 2004 and September 30, 2003, respectively. The decrease in gross profit as a percentage of net sales resulted primarily from changes in product mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 28.3% to $5.0 million in the third quarter of 2004 from $3.9 million in the third quarter of 2003. As a percentage of net sales, selling, general and administrative expenses were 14.9% in the third quarter of 2004 compared to 14.3% in the third quarter of 2003. The increase in selling, general and administrative expenses in the third quarter of 2004 was due to several factors. Marketing expenses increased by approximately $471,000 due primarily to increased advertising costs from higher