If you are truely losing fat, then this is a positive sign.
Fat cells are never really lost except through liposuction or surgery. However, if you are in a fat-burning mode, those cells are releasing their stores of fat and your body is burning it for energy. This causes the cells to "deflate". Just like you could release air from a balloon, so your cells release stored fat. This is what causes a "flabby" feeling..the cells are still there, but they aren't solid anymore. As you continue to work out and build lean muscle, that flabby look can improve as your skin tightens up and is filled out a bit with firm muscle.
HTH, Julie