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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 001-14498
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BLUEFLY, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 944-8000
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Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 9, 2006, the issuer had outstanding 21,426,154 shares of Common Stock,
$.01 par value.
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BLUEFLY, INC.
TABLE OF CONTENTS
PAGE
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Part I . Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 2006
and December 31, 2005 (unaudited) 3
Condensed Statements of Operations for the three months ended
March 31, 2006 and 2005 (unaudited) 4
Condensed Statements of Cash Flows for the three months ended
March 31, 2006 and 2005 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
Part II. Other Information 18
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 6. Exhibits 18
Signature 19
Part I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
BLUEFLY, INC.
CONDENSED BALANCE SHEETS (Unaudited)
MARCH 31, DECEMBER 31,
2006 2005
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 4,429,000 $ 9,408,000
Inventories, net 21,348,000 16,893,000
Accounts receivable, net of allowance for doubtful accounts 2,948,000 1,717,000
Prepaid inventory 159,000 485,000
Prepaid expenses 281,000 915,000
Other current assets 385,000 419,000
------------- -------------
Total current assets 29,550,000 29,837,000
Property and equipment, net 2,667,000 2,895,000
Other assets 298,000 313,000
------------- -------------
Total assets $ 32,515,000 $ 33,045,000
============= =============
Current liabilities
Accounts payable $ 7,725,000 $ 5,662,000
Allowance for sales returns 2,777,000 3,407,000
Accrued expenses and other current liabilities 898,000 1,083,000
Deferred revenue 2,456,000 1,784,000
------------- -------------
Total current liabilities 13,856,000 11,936,000
Notes payable to related party shareholders 4,000,000 4,000,000
Long-term interest payable to related party shareholders 1,366,000 1,217,000
Long-term obligations under capital lease 13,000 27,000
------------- -------------
Total liabilities 19,235,000 17,180,000
------------- -------------
Commitments and contingencies
Shareholders' equity
Series A Preferred stock - $.01 par value; 500,000 shares authorized, 460,000 issued and
outstanding as of March 31, 2006 and December 31, 2005, respectively (liquidation preference: 5,000 5,000
$9.2 million plus accrued dividends of $6.2 million and $5.9 million as of March 31, 2006
and December 31, 2005, respectively)
Series B Preferred stock - $.01 par value; 9,000,000 shares authorized, 8,889,414 shares issued
and outstanding as of March 31, 2006 and December 31, 2005, respectively (liquidation 89,000 89,000
preference: $30 million plus accrued dividends of $10.1 million and $9.5 million as of March
31, 2006 and December 31, 2005, respectively)
Series C Preferred stock - $.01 par value; 3,500 shares authorized and 1,000 shares issued and
outstanding as of March 31, 2006 and December 31, 2005, respectively (liquidation preference: -- --
$1 million plus accrued dividends of $311,000 and $286,000 as of March 31, 2006 and December
31, 2005, respectively)
Series D Preferred stock - $.01 par value; 7,150 shares authorized 5,386.745 and 6,313.43 issued
and outstanding as of March 31, 2006 and December 31, 2005 (liquidation preference: $5.4 -- --
million plus accrued dividends of $2.2 million and $6.3 million plus $2.4 million as of
March 31, 2006 and December 31, 2005, respectively)
Series E Preferred stock - $.01 par value; 1,000 shares authorized, issued and outstanding as of
March 31, 2006 and December 31, 2005, respectively (liquidation preference: $1.0 million plus -- --
accrued dividends of $384,000 and $347,000 as of March 31, 2006 and December 31, 2005,
respectively)
Series F Preferred stock - $.01 par value; 7,000 shares authorized, 3,857.143 and 5,279.714
issued and outstanding as of March 31, 2006 and December 31, 2005, respectively (liquidation -- --
preference: $3.9 million plus accrued dividends of $207,000 and $5.3 million plus $192,000 as
of March 31, 2006 and December 31, 2005, respectively)
Common stock - $.01 par value; 92,000,000 shares authorized and 21,426,154 and 19,059,166 shares
issued and outstanding as of March 31, 2006 and December 31, 2005, respectively 214,000 191,000
Additional paid-in capital 116,183,000 115,527,000
Accumulated deficit (103,211,000) (99,947,000)
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Total shareholders' equity 13,280,000 15,865,000
------------- -------------
Total liabilities and shareholders' equity $ 32,515,000 $ 33,045,000
============= =============
The accompanying notes are an integral part of these
condensed financial statements.
3
BLUEFLY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2006 2005
------------- -------------
Net sales $ 16,876,000 $ 13,502,000
Cost of sales 10,037,000 8,617,000
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Gross profit 6,839,000 4,885,000
Selling, marketing and fulfillment expenses 7,464,000 4,035,000
General and administrative expenses 2,427,000 1,586,000
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Total operating expenses 9,891,000 5,621,000
Operating loss (3,052,000) (736,000)
Interest and other income 45,000 40,000
Interest and other expense (257,000) (197,000)
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Net loss $ (3,264,000) $ (893,000)
Preferred stock dividends (1,231,000) (1,115,000)
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Net loss available to common shareholders $ (4,495,000) $ (2,008,000)
============= =============
Basic and diluted loss per common share $ (0.22) $ (0.13)
============= =============
Weighted average common shares outstanding
(basic and diluted) 20,367,508 15,299,040
============= =============
The accompanying notes are an integral part of these
condensed financial statements.
4
BLUEFLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2006 2005
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Cash flows from operating activities
Net loss $ (3,264,000) $ (893,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 353,000 290,000
Stock options expense 612,000 16,000
Warrant issued to consultant 67,000 --
Provisions for returns (629,000) 27,000
Allowance for doubtful accounts 43,000 64,000
Reserve for inventory obsolescence 240,000 158,000
Non-cash expense related to warrant issued to supplier 92,000 67,000
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories (4,787,000) (858,000)
Accounts receivable (1,274,000) (754,000)
Prepaid inventory 326,000 (1,652,000)
Prepaid expenses 634,000 79,000
Other current assets 34,000 333,000
Increase (decrease) in
Accounts payable 2,063,000 1,427,000
Accrued expenses and other current liabilities (186,000) (273,000)
Interest payable to related party shareholders 149,000 133,000
Deferred revenue 672,000 203,000
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Net cash used in operating activities (4,855,000) (1,633,000)
============= =============
Cash flows from investing activities
Purchase of property and equipment (110,000) (877,000)
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Net cash used in investing activities (110,000) (877,000)
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Cash flows from financing activities
Net proceeds from exercise of stock options -- 89,000
Payments of capital lease obligation (14,000) (114,000)
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Net cash used in financing activities (14,000) (25,000)
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Net decrease in cash and cash equivalents (4,979,000) (2,535,000)
Cash and cash equivalents - beginning of period 9,408,000 6,685,000
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Cash and cash equivalents - end of period $ 4,429,000 $ 4,150,000
============= =============
Supplemental schedule of non-cash investing and financing activities:
Cash paid for interest $ 49,000 $ 40,000
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Warrant issued to consultant $ 67,000 $ --
============= =============
The accompanying notes are an integral part of these
condensed financial statements.
5
BLUEFLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
MARCH 31, 2006
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Bluefly, Inc. (the
"Company"). The financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnote disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting mainly of
normal recurring accruals) considered necessary for a fair statement have been
included. The results of operations of any interim period are not necessarily
indicative of the results of operations to be expected for the fiscal year due
to seasonal and other factors. For further information, refer to the
consolidated financial statements and accompanying footnotes included in the
Company's Form 10-K for the year ended December 31, 2005. On January 1, 2006 we
adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R) "Share
Based Payment".
The Company has sustained net losses and negative cash flows from operations
since the formation of Bluefly.com. The Company's ability to meet its
obligations in the ordinary course of business is dependent on its ability to
establish profitable operations and/or raise additional financing through public
or private debt or equity financing, or other sources to fund operations. The
Company believes that its current funds, together with working capital, and its
availability under its existing Credit Facility, will be sufficient to enable it
to meet its planned expenditures through December 31, 2006. The Company is
exploring possible additional equity financing opportunities to maximize the
growth of its business or for use if anticipated operating results are not
achieved. If such financings are not available on terms acceptable to the
Company, and/or the Company does not achieve its sales plan, future operations
will need to be modified, scaled back or discontinued.
During 2005, the Company dissolved its wholly owned subsidiary. This subsidiary
had no operations.
NOTE 2 - THE COMPANY
The Company is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home products at discounts of up to 75% off of
retail value. The Company's e-commerce Web site ("Bluefly.com" or "Web Site")
was launched in September 1998.
NOTE 3 - NOTES PAYABLE TO RELATED PARTY SHAREHOLDERS
In February 2006, the Company extended the maturity dates on the Convertible
Promissory Notes issued in July and October 2003 (the "Notes") to affiliates of
Soros Private Equity Partners, LLC (collectively, "Soros") that collectively own
a majority of the Company's capital stock. The maturity dates of the Notes were
each extended for one year, from May 1, 2006 to May 1, 2007.
NOTE 4 - FINANCING AGREEMENT
The Company has a three year revolving credit facility (the "Credit Facility")
with Wells Fargo Retail Finance, LLC ("Wells Fargo"). Under the terms of the
Credit Facility, Wells Fargo provides the Company with a revolving credit
facility and issues letters of credit in favor of suppliers or factors. The
Credit Facility is secured by a lien on substantially all of the Company's
assets, as well as a $2,000,000 letter of credit issued by Soros in favor of
Wells Fargo (the "Soros LC"). Availability under the Credit Facility is
determined by a formula that takes into account the amount of the Company's
inventory and accounts receivable, as well as the Soros LC. The maximum
availability is currently $7,500,000 ($6,650,000 after giving effect to a
required $850,000 availability reserve), but can be increased to $12,500,000 at
the Company's request, subject to certain conditions. As of March 31, 2006,
total availability under the Credit Facility, after giving effect to the
required $850,000 availability reserve, was approximately $6,650,000, of which
$2,821,000 was committed, leaving approximately $3,829,000 available for further
borrowings.
Interest accrues monthly on the average daily amount outstanding under the
Credit Facility during the preceding month at a per annum rate equal to the
prime rate plus 0.75% or LIBOR plus 2.75%. The Company also pays a monthly
commitment fee on the unused portion of the facility (i.e., $7,500,000 less the
amount of loans outstanding) equal to 0.35%. The Company also
6
BLUEFLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
MARCH 31, 2006
pays Wells Fargo certain fees to open letters of credit and guarantees in an
amount equal to a certain percentage of the face amount of the letter of credit
for each thirty (30) days such letter of credit, or a portion thereof, remains
open. For the three months ended March 31, 2006, the Company incurred
approximately $48,000 in connection with these fees.
Subject to certain conditions, if the Company defaults on any of its obligations
under the Credit Facility, Wells Fargo has the right to draw upon the Soros LC
to satisfy any such obligations. If Wells Fargo draws on the Soros LC, pursuant
to the terms of a reimbursement agreement between the Company and Soros, the
Company would have the obligation to, among other things, reimburse Soros for
any amounts drawn under the Soros LC, plus interest accrued thereon. In
addition, the Company is required to pay Soros Fund Management LLC an annual fee
in connection with the issuance and maintenance of the Soros LC in an amount
equal to the fee that the Company would be required to pay in order to have a
similar letter of credit issued under the Credit Facility. For the year
beginning on the date of the closing of the Credit Facility, this formula
requires an annual fee of $55,000. The Company is also required to reimburse
Soros for any costs and expenses associated with the issuance and maintenance of
the Soros LC.
Under the terms of the Credit Facility, Soros has the right to purchase all of
the Company's obligations from Wells Fargo at any time if the Company is then in
default under the Credit Facility.
NOTE 5 - LOSS PER SHARE
The Company has determined Loss Per Share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
loss per share excludes dilution and is computed by dividing loss available to
common shareholders by the weighted average number of common shares outstanding
for the period.
Diluted loss per share is computed by dividing loss available to common
shareholders by the weighted average number of common shares outstanding for the
period, adjusted to reflect potentially dilutive securities. Due to the loss
from continuing operations, the following options and warrants to purchase
shares of Common Stock and Preferred Stock convertible into shares of Common
Stock were not included in the computation of diluted loss per share because the
result of the exercise of such inclusion would be antidilutive:
Security March 31, 2006 Exercise Prices March 31, 2005 Exercise Prices
--------------------- -------------- --------------- -------------- ---------------
Options 8,117,316 $0.69 - $16.47 9,211,885 $0.69 - $16.47
Warrants 1,945,893 $0.78 - $3.96 1,704,945 $0.78 - $9.08
Preferred Stock 42,683,619(1) 43,323,430(1)
Convertible Notes(2) -- --
(1) Excludes dividends on preferred stock, which are payable in cash or
common stock, at the Company's option, upon conversion, redemption or
liquidation.
(2) Excludes debt issue in connection with the July 2003 financing and the
October 2003 financing, which is convertible into equity securities of
the Company sold in any subsequent round of financing, at the holders
option, at a price that is equal to the lowest price per share
accepted by any investor in such subsequent round of financing. Until
such financing occurs, such debt is not convertible into Common Stock.
NOTE 6 - STOCK BASED COMPENSATION
The Company's Board of Directors has adopted three stock option plans, one in
April 2005, one in July 2000 and the other in May 1997 (collectively the
"Plans"). The Plans were adopted for the purpose of encouraging key employees,
consultants and directors who are not employees to acquire a proprietary
interest in the growth and performance of the Company, and are similar in
nature. Options are granted in terms not to exceed ten years and become
exercisable as specified when the option is granted. Vesting terms of the
options range from immediately to a ratable vesting period of four years. The
Plans have an
7
BLUEFLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
MARCH 31, 2006
aggregate of 15,700,000 shares authorized for issuance. As of March 31, 2006,
the Company has reserved an aggregate of 52,746,828 shares of Common Stock for
the conversion of Preferred Stock and the exercise of Stock Options and
Warrants.
Before January 1, 2006, the Company accounted for stock-based compensation under
the recognition and measurement principles of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
and related interpretations. The Company did not recognize compensation expense
related to stock options granted to employees and directors where the exercise
price was at or above fair value at the date of grant. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As permitted
by SFAS No. 123, the Company elected to continue to apply the
intrinsic-value-based method of APB No. 25 described above, and adopted only the
disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, "Accounting
For Stock-Based Compensation - Transition and Disclosure."
On January 1, 2006, the start of the first quarter of fiscal 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123(R)") which requires that
the costs resulting from all share-based payment transactions be recognized in
the financial statements at their fair values. The Company adopted SFAS No.
123(R) using the modified prospective application method under which the
provisions of SFAS No. 123(R) apply to new awards and to awards modified,
repurchased, or cancelled after the adoption date. Additionally, compensation
cost for the portion of the awards for which the requisite service has not been
rendered that are outstanding as of the adoption date is recognized in the
Statement of Operations over the remaining service period after the adoption
date based on the award's original estimate of fair value. Results for prior
periods have not been restated. Total share-based compensation expense recorded
in the Statement of Operations for the three months ended March 31, 2006 is
$612,000.
On March 29, 2005, the SEC published Staff Accounting Bulletin ("SAB") No. 107,
which provides the Staff's views on a variety of matters relating to stock-based
payments. SAB No. 107 requires stock-based compensation be classified in the
same expense line items as cash compensation. The application of SFAS No. 123(R)
had the following effect on Q1 2006 reported amounts relative to amounts that
would have been reported using the intrinsic value method under previous
accounting:
As a result of adopting SFAS No. 123(R), the Company's operating loss and net
loss for the three months ended March 31, 2006 was $612,000 higher, than if it
had continued to account for share-based compensation under APB No. 25. Basic
and diluted loss per share for the three months ended March 31, 2006 would have
been $0.03 per share lower if the Company had not adopted SFAS No.123(R). There
was no effect on the Company's cash flows.
The following table illustrates the effect on net income and net income per
common share applicable to common stockholders for the three months ended March
31, 2005, as if the Company had applied the fair value recognition provisions
for stock-based employee compensation of SFAS No. 123, as amended. For purposes
of the pro forma presentation, option forfeitures are accounted for as they
occurred and no amounts of compensation expense have been capitalized into
inventory or other assets, but instead were considered as period expenses (in
thousands, except per share data):
THREE MONTHS ENDED
MARCH 31, 2005
------------------
Net loss, as reported $ (893,000)
Deduct: total stock based compensation
expense determined under fair value
based methods for all awards (712,000)
Add: Stock-based employee compensation
Expense included in net loss 16,000
Pro forma net loss applicable to common shareholders (1,589,000)
Net Loss per share applicable to common shareholders
Basic and diluted, as reported $ (0.13)
Basic and diluted, pro forma $ (0.18)
8
BLUEFLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
MARCH 31, 2006
The fair value of options granted is estimated on the date of grant using a
Black-Scholes option pricing model. Expected volatilities are calculated based
on the historical volatility of the Company's stock. Management monitors share
option exercise and employee termination patterns to estimate forfeiture rates
within the valuation model. The expected holding period of options represents
the period of time that options granted are expected to be outstanding. The
risk-free interest rate for periods within the expected life of the option is
based on the interest rate of U.S. Treasury note in effect on the date of the
grant. The Company had previously recorded expense in accordance with APB No. 25
for certain options issued to its CEO and President that were issued below
market. Prior to the adoption of FAS 123(R), the Company recognized actual
forfeitures when they occurred but has not recorded a cumulative effect
adjustment to record estimated forfeitures related to these below market options
as the balance was immaterial.
The table below presents the assumptions used to calculate the fair value of
options granted during the three months ended March 31, 2006 and 2005,
respectively.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2006 MARCH 31, 2005
------------------ ------------------
Expected holding period (years) 6.0 6.0
Risk-free interest rate 4.79% 4.42%
Dividend yield 0.00% 0.00%
Volatility 109% 136%
The following table summarizes the Company's stock option activity:
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
------------ --------------
Balance at December 31, 2005 8,038,528 $ 1.97
------------
Options granted 120,000 $ 1.12
Options canceled (41,212) $ 1.67
Options exercised - $ 0.00
------------
Balance at March 31, 2006 8,117,316 $ 1.96
Eligible for exercise at December 31, 2005 4,969,929 $ 2.15
Eligible for exercise at March 31, 2006 5,479,669 $ 2.10
9
BLUEFLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
MARCH 31, 2006
The stock options are exercisable in different periods through 2014. Additional
information with respect to the outstanding options as of March 31, 2006, is as
follows:
-------------------------------------------------------- -------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE OPTIONS EXERCISE
PRICES VESTED UNVESTED CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
--------------- --------- ---------- ------------------ -------- ----------- --------
$0.00 - $1.66 3,506,899 1,568,860 7.6 Years $ 1.23 3,506,899 $ 1.19
$1.66 - $3.32 1,655,490 1,020,667 7.3 Years $ 2.32 1,655,490 $ 2.48
$3.32 - $4.98 52,880 48,120 7.9 Years $ 3.92 52,880 $ 3.92
$4.98 - $6.64 22,250 - 2.7 Years $ 5.11 22,250 $ 5.11
$6.64 - $9.96 52,750 - 3.4 Years $ 9.17 52,750 $ 9.17
$9.96 - $11.62 104,250 - 3.7 Years $ 11.20 104,250 $ 11.20
$11.62 - $14.94 6,250 - 3.7 Years $ 14.04 6,250 $ 14.04
$14.94 - $16.60 78,900 - 2.8 Years $ 15.13 78,900 $ 15.13
$0.69 - $16.60 5,479,669 2,637,647 7.4 Years $ 1.96 5,479,669 $ 2.10
The total fair value of the 509,896 shares that vested during the quarter was
$785,000. The weighted average fair value of the options granted during the
quarter was $0.98. At March 31, 2006, the aggregate intrinsic value of the fully
vested options was $378,000 and the weighted average remaining contractual life
of the options was 6.6 years. The Company has not capitalized any compensation
cost, or modified any of its stock option grants during the first quarter of
2006. No options were exercised during the quarter and no cash was used to
settle equity instruments granted under the Plans during the first quarter of
2006.
As of March 31, 2006, the total compensation cost related to non-vested awards
not yet recognized was $3.8 million. Total compensation cost is expected to be
recognized over 2 years on a weighted average basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Bluefly, Inc. is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home furnishings at discounts of up to 75% off
of retail value. We launched our Web site in September 1998. Over the past four
years, our sales have grown at a compounded annual growth rate of more than
21.9%, while our gross margin percentage has increased from 22.5% in the first
quarter of 2003 to 40.5% in the first quarter of 2006.
The recent increase in our margin and sales is the direct result of the
merchandise strategy that we began to implement in spring 2004. As part of that
strategy we are bringing current season merchandise and the latest fashion
trends to our customer for great value. While there will be some fluctuation in
our gross margin percentage from quarter to quarter as we further develop our
merchandising and marketing strategy, we believe that we will be able to
maintain margins well above our levels from 2003 and earlier.
Based on our improved merchandise strategy and recent customer research, we
believe that there is an opportunity to accelerate the growth of our business
while continuing to provide our customers with the great values that they have
become accustomed to. In an effort to take advantage of this opportunity, we
raised $7 million of equity financing in June 2005 and used approximately $3.2
million of the proceeds to launch a national advertising campaign. We are
continuing to use the proceeds to fund the advertising campaign for the first
half of 2006. This campaign launched in September 2005, and during the first
quarter for 2006 we spent approximately $2.9 million in connection with this
campaign.
10
BLUEFLY, INC.
MARCH 31, 2006
In addition, we secured a new $7.5 million credit facility with Wells Fargo
Retail Finance, LLC ("Wells Fargo") in July 2005. This facility is primarily
being used to help us obtain the proper merchandising mix to support the
anticipated growth in demand from our national advertising campaign.
Our net sales increased by 25% to $16,876,000 for the three months ended March
31, 2006 from $13,502,000 for the three months ended March 31, 2005. Our gross
margin increased to 40.5% in 2006 from 36.2% in 2005, 34.0% in 2004 and 22.5% in
2003. Our gross profit increased by 40% to $6,839,000 for the three months ended
March 31, 2006 from $4,885,000 for the three months ended March 31, 2005. This
growth in gross profit was driven by the increase in net sales, and by the
increase in gross margins. Our operating loss increased by almost 315%, to
$3,052,000 in 2006, from $736,000 in 2005. This was primarily a result of the
increased marketing spend in the first quarter 2006 (approximately $2.9 million
higher in first quarter 2006 than first quarter 2005) and the inclusion of
approximately $612,000 of stock option expenses as a result of the adoption of
SFAS No. 123(R).
We increased our spending in marketing (excluding staff related costs) by 405%
to $3,648,000 for the first quarter of 2006, from $723,000 for the first quarter
2005. A large portion of the increased marketing expense was a result of the
costs associated with our national advertising campaign, which was launched in
September 2005. In general, we intend to market our business more aggressively
than we have in previous years. This more aggressive growth strategy will cause
our marketing expense as a percentage of revenue to increase in the short-term;
however, we believe that it is a prudent investment in our business given that
our margin structure and average order size have historically resulted in a
relatively high positive contribution to overhead and marketing on a customer's
first order.
On January 1, 2006, we adopted SFAS No. 123(R), which requires expensing of
stock options. As a result, we recorded total share-based compensation expenses
of $612,000 for the three months ended March 31, 2006. Results for prior periods
have not been restated due to the adoption based on the modified prospective
approach. Had they been restated, additional share-based compensation expenses
of $696,000 would have been recorded for the three months ended March 31, 2005.
Our reserve for returns and credit card chargebacks increased to 38.1% of gross
sales for the first quarter 2006 compared to 36.3% in 2005. The increase was
primarily caused by an increase in average order size as well as a shift in our
merchandise mix towards certain product categories that historically have
generated higher return rates. However, we believe that this increase in return
rates has been more than offset by the higher gross margins and average order
sizes that have been generated by this shift in merchandise mix.
A portion of our inventory includes merchandise that we either purchased with
the intention of holding for the appropriate season or were unable to sell thru
in its entirety in a prior season and have determined to hold for the next
selling season, subject (in some cases) to appropriate mark-downs. In recent
years we have increased the amount of inventory purchased on a pack and hold
basis in order to take advantage of opportunities in the market.
At March 31, 2006, we had an accumulated deficit of $103,211,000. The net losses
and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site and building our infrastructure, as well
as non cash beneficial conversion charges resulting from decreases in the
conversion price of our Preferred Stock. In order to expand our business, we
intend to invest in sales, marketing, merchandising, operations, information
systems, site development and additional personnel to support these activities.
Therefore, we may continue to incur substantial operating losses. Although we
have experienced revenue growth in recent years, this growth may not be
sustainable and therefore should not be considered indicative of future
performance.
CRITICAL ACCOUNTING POLICIES
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the adequacy of the
allowances for sales returns, recoverability of inventories, useful lives of
property and equipment, calculation of stock based compensation and the
realization of deferred tax assets. Actual amounts could differ significantly
from these estimates.
11
BLUEFLY, INC.
MARCH 31, 2006
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No.
104 "Revenue Recognition". Gross sales consists primarily of revenue from
product sales and shipping and handling charges and is net of promotional
discounts. Net sales represent gross sales, less provisions for returns, credit
card chargebacks, and adjustments for uncollected sales taxes. Revenue is
recognized when all the following criteria are met:
. A customer executes an order.
. The product price and the shipping and handling fee have been
determined.
. Credit card authorization has occurred and collection is reasonably
assured.
. The product has been shipped and received by the customer.
Shipping and handling billed to customers are classified as revenue in
accordance with Financial Accounting Standards Board ("FASB") Task Force's
Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and
Handling Fees and Costs" ("EITF No. 00-10").
Provision for Returns and Doubtful Accounts
We generally permit returns for any reason within 90 days of the sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical data. We perform credit card
authorizations and check the verification of our customers prior to shipment of
merchandise. However, our future return and bad debt rates could differ from
historical patterns, and, to the extent that these rates increase significantly,
it could have a material adverse effect on our business, prospects, cash flows,
financial condition and results of operations.
Stock-Based Compensation
As of January 1, 2006, we adopted SFAS No. 123(R), which requires us to measure
compensation cost for all outstanding unvested share-based awards at fair value
and recognize compensation over the service period for awards expected to vest.
The estimation of stock awards that will ultimately vest requires judgment, and
to the extent actual results differ from our estimates, such amounts will be
recorded as a cumulative adjustment in the period estimates are revised. We
consider historical experience when estimating expected forfeitures. Actual
results may differ substantially from these estimates.
Inventory Valuation
Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and
establish a reserve for such merchandise.
Deferred Tax Valuation Allowance
We recognize deferred income tax assets and liabilities on the differences
between the financial statement and tax bases of assets and liabilities using
enacted statutory rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
realized in income or loss in the period that included the enactment date. We
have assessed the future taxable income and determined that a 100% deferred tax
valuation allowance is deemed necessary. In the event that we were to determine
that we would be able to realize our deferred tax assets, an adjustment to the
deferred tax valuation allowance would increase income in the period such
determination is made.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2005
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BLUEFLY, INC.
MARCH 31, 2006
The following table sets forth our statement of operations data, for the three
months ended March 31st. All data is in thousands, except as indicated below:
2006 2005 2004
--------------------- --------------------- ---------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
--------- --------- ---------
Net sales $ 16,876 100.0% $ 13,502 100.0% $ 11,114 100.0%
Cost of sales 10,037 59.5% 8,617 63.8% 7,332 66.0%
--------- --------- ---------
Gross profit 6,839 40.5% 4,885 36.2% 3,782 34.0%
Selling, marketing and fulfillment expenses 7,464 44.2% 4,035 29.9% 3,449 31.0%
General and administrative expenses 2,427 14.4% 1,586 11.7% 1,752 15.8%
--------- --------- ---------
Total operating expenses 9,891 58.6% 5,621 41.6% 5,201 46.8%
Operating loss (3,052) (18.1)% (736) (5.4)% (1,419) (12.8)%
Interest (expense) and other income, net (212) (1.3)% (157) (1.2)% 289 2.6%
--------- --------- ---------
Net loss (3,264) (19.4)% (893) (6.6)% (1,130) (10.2)%
We also measure and evaluate ourselves against certain other key operational
metrics. The following table sets forth our actual results based on these other
metrics for the three months ended March 31st, as indicated below:
2006 2005 2004
--------- --------- ---------
Average Order Size (including shipping & handling) $ 243.92 $ 200.06 $ 189.56
New Customers Added during the Period 38,688 36,765 33,335
Net sales: Gross sales for the three months ended March 31, 2006 increased by
over 28% to $27,245,000, from $21,211,000 for the three months ended March 31,
2005. For the three months ended March 31, 2006, we recorded a provision for
returns and credit card chargebacks and other discounts of $10,369,000, or
approximately 38.1% of gross sales. For the three months ended March 31, 2005,
the provision for returns and credit card chargebacks and other discounts was
$7,709,000, or approximately 36.3% of gross sales. The increase in this
provision as a percentage of gross sales resulted from an increase in the return
rate. The increase was primarily caused by an increase in average order size as
well as a shift in our merchandise mix towards certain product categories that
historically have generated higher return rates. However, we believe that this
increase in return rates has been more than offset by the higher gross margins
and average order sizes that have been generated by this shift in merchandise
mix.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the three months
ended March 31, 2006 were $16,876,000. This represents an increase of
approximately 25% compared to the three months ended March 31, 2005, in which
net sales totaled $13,502,000. The growth in net sales resulted from both an
increase in the number of new customers acquired (approximately 5% higher
compared to first quarter 2005) and an increase in average order size
(approximately 22% higher compared to the first quarter 2005). For the three
months ended March 31, 2006 revenue from shipping and handling (which is
included in net sales) remained relatively unchanged. Beginning in the fourth
quarter of 2005 we outsourced our international shipments to a third-party
provider and therefore both our average cost and average revenue per
international shipment is down, which on a blended rate has decreased our
shipping and handling revenue per order.
Cost of sales: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the three months ended March 31, 2006
totaled $10,037,000 resulting in gross margin of approximately 40.5%. Cost of
sales for the three months ended March 31, 2005 totaled $8,617,000, resulting in
gross margin of 36.2%. Gross profit increased by 40%, to $6,839,000 for the
three months ended March 31, 2006
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BLUEFLY, INC.
MARCH 31, 2006
compared to $4,885,000 for the three months ended March 31, 2005. The growth in
gross margin was primarily the result of increased product margins, which was
driven by a merchandising strategy that focused on negotiating better prices
with vendors as well as selling more in-season product. In season merchandise
has more value to our customers and therefore demands higher margins.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 85% in the first three months of 2006
compared to the first three months of 2005. Selling, marketing and fulfillment
expenses were comprised of the following:
Three Months Ended Three Months Ended Percentage Difference
March 31, 2006 March 31, 2005 increase (decrease)
------------------ ------------------ ---------------------
Marketing $ 4,031,000 $ 894,000 350.9%
Operating 1,750,000 1,704,000 2.7%
Technology 971,000 895,000 8.5%
E-Commerce 712,000 542,000 31.4%
------------------ ------------------ ---------------------
$ 7,464,000 $ 4,035,000 85.0%
As a percentage of net sales, our selling, marketing and fulfillment expenses
increased to 44.2% for the three months ended March 31, 2006 from 29.9% in the
three months ended March 31, 2005. This increase was primarily related to the
increase in advertising spending from our advertising campaign and the recording
of stock option expenses as a result of our adoption of SFAS No. 123(R).
Marketing expenses include expenses related to paid search, online and print
advertising, fees to marketing affiliates, direct mail campaigns as well as
staff related costs. Marketing expenses increased by a higher percentage than
our percentage increase in revenue because we focused more of our marketing
initiatives on our national advertising campaign. Of the $3.1 million
incremental marketing costs in the first quarter 2006 compared to 2005,
approximately $2.9 million related to the national advertising campaign.
While this more aggressive growth strategy will cause our marketing expense as a
percentage of revenue to increase in the short-term, we believe that it is a
prudent investment in our business given that our improved margin structure and
average order size have historically resulted in a relatively high positive
contribution to overhead on a customer's first order.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in the first three months of 2006 by approximately 3% compared to the
first three months of 2005 as a result of variable costs associated with the
increased sales volume (e.g., picking and packing orders, processing returns and
credit card fees). These increases were partially offset by a decrease in credit
card fees attributed to a refund from one of our credit card processors. Costs
associated with our temporary clearance store decreased compared to the prior
year, as this store is operated and staffed more efficiently than in the
previous year and we pay less rent for our New Jersey location.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web site hosting. For the three months ended March 31,
2006, technology expenses increased by approximately 9% compared to the three
months ended March 31, 2005. This increase resulted from an increase in salary
related expenses, including the expensing of employee stock options in the
current year, as well as an increase in software support. This increase was
offset slightly by a decrease in depreciation and web hosting expense.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web site design. For the three months ended March 31, 2006,
e-commerce expenses increased by approximately 31% as compared to the three
months ended March 31, 2005, primarily due to an increase in salary related
expenses as well as an increase in expenses associated with photo shoots and the
result of recording employee stock option expenses in the current period.
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BLUEFLY, INC.
MARCH 31, 2006
General and administrative expenses: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the three months ended
March 31, 2006 increased by approximately 53% to $2,427,000 as compared to
$1,586,000 for the three months ended March 31, 2005. The increase in general
and administrative expenses was primarily the result of the recording of
$481,000 of expense related to employee stock options in the current period,
increased consulting and professional fees of $81,000, increased public company
expenses of $90,000 and increased depreciation expense of $101,000. In addition,
the Company incurred approximately $90,000 in real estate taxes in the first
quarter 2006.
As a percentage of net sales, general and administrative expenses for the first
quarter of 2006 increased to approximately 14.4% from 11.7%.
Loss from operations: Operating loss increased by over 315% in the first three
months of 2006 to $3,052,000 from $736,000 in the first three months of 2005 as
the increase in net sales and gross margin were more than offset by the
incremental marketing expenses and the recording of stock option expenses as a
result of the adoption of SFAS No. 123(R).
Interest and other income: Other income for the three months ended March 31,
2006 increased to $45,000 from $40,000 for the three months ended March 31,
2005. These amounts relate primarily to interest income earned on our cash
balances.
Interest and other expense: Interest expense for the three months ended March
31, 2006 totaled $257,000, compared to $197,000 for the three months ended March
31, 2005. Interest expense relates to fees paid in connection with our Loan
Facility, as well as interest expense on the Convertible Notes.
LIQUIDITY AND CAPITAL RESOURCES
General
At March 31, 2006, we had approximately $4.4 million in the form of cash and
cash equivalents. Working capital at March 31, 2006 and 2005 was $15.7 million
and $11.5 million, respectively and at December 31, 2005 was $17.9 million (the
March 2005 amount excludes the approximately $1.26 million of restricted cash
that we regained access to upon refinancing our previous credit facility). In
addition, as of March 31, 2006, we had approximately $2.8 million committed
under the Credit Facility, leaving approximately $3.8 million of availability,
compared to availability of $900,000 under our previous credit facility at March
31, 2005.
In February 2006, Soros agreed to extend the maturity dates on the Convertible
Promissory Notes issued to Soros in July and October 2003. The maturity dates of
the Notes, which were originally January and April 2004, respectively, subject
to interim extensions, were each further extended for one year, from May 1, 2006
to May 1, 2007.
We fund our operations through cash on hand, operating cash flow, as well as the
proceeds of any equity or debt financing. Operating cash flow is affected by
revenue and gross margin levels, as well as return rates, and any deterioration
in our performance on these financial measures would have a negative impact on
our liquidity. Total availability under the Credit Facility is based primarily
upon our inventory levels. In addition, both availability under the Credit
Facility and our operating cash flows are affected by the payment terms that we
receive from suppliers and service providers, and the extent to which suppliers
require us to request Wells Fargo to provide credit support under the Credit
Facility. We believe that our suppliers' decision-making with respect to payment
terms and/or the type of credit support requested is largely driven by their
perception of our credit rating, which is affected by information reported in
the industry and financial press and elsewhere as to our financial strength.
Accordingly, negative perceptions as to our financial strength could have a
negative impact on our liquidity. In addition, newer vendors generally do not
provide us with payment terms that are as favorable as those we get from
existing relationships and, in some instances, new vendors may require
prepayments. We have increased our prepayments in order to open up new
relationships and gain access to inventory that was not previously available to
us, as well as in connection with our advertising campaign, as in some
circumstances we need to pay in advance of production. As of March 31, 2006, we
had approximately $159,000 of prepaid inventory on our balance sheet.
In addition, our inventory levels as of March 31, 2006 were approximately $7.8
million higher than at March 31, 2005. The increase in inventory generally
reflects a ramp up in connection with our sales growth as well as opportunistic
buying of fresh
15
BLUEFLY, INC.
MARCH 31, 2006
inventory that has not previously been available to us. However, the increased
inventory level could adversely affect our flexibility in taking advantage of
other buying opportunities that may become available in the near term.
We believe that our current funds, together with operating cash flow, and
availability under our existing Credit Facility will be sufficient to enable us
to meet our planned expenditures through at least December 31, 2006. The Company
is exploring possible equity financing opportunities to maximize the growth of
our business or for use if anticipated operating results are not achieved. If
such financings are not available on terms acceptable to us, and/or we do not
achieve our sales plan, future operations may need to be modified, scaled back
or discontinued.
Credit Facility
In July 2005, we entered into a new three year revolving credit facility with
Wells Fargo Retail Finance, LLC. Pursuant to the Credit Facility, Wells Fargo
provides the Company with a revolving loan and issues letters of credit in favor
of suppliers or factors. The Credit Facility is secured by a lien on all of the
Company's assets, as well as a $2,000,000 letter of credit issued by Soros in
favor of Wells Fargo (the "Soros LC"). Availability under the Credit Facility is
determined by a formula that takes into account the amount of the Company's
inventory and accounts receivable, as well as the Soros LC. The maximum
availability is currently $7,500,000, but can be increased to $12,500,000 at the
Company's request, subject to certain conditions. As of March 31, 2006, total
availability under the Credit Facility, after giving effect to the required
$850,000 availability reserve, was approximately $6,650,000 of which $2,821,000
was committed, leaving approximately $3,829,000 available for further
borrowings.
Interest accrues monthly on the average daily amount outstanding under the
Credit Facility during the preceding month at a per annum rate equal to the
prime rate plus 0.75% or LIBOR plus 2.75%. We also pay a monthly commitment fee
on the unused portion of the facility (i.e., $7,500,000 less the amount of loans
outstanding) equal to 0.35%. We also pay Wells Fargo certain fees to open
letters of credit and guarantees in an amount equal to a certain specified
percentage of the face amount of the letter of credit for each thirty (30) days
such letter of credit, or a portion thereof, remains open.
Subject to certain conditions, if we default on any of our obligations under the
Credit Facility, Wells Fargo has the right to draw upon the Soros LC to satisfy
any such obligations. If Wells Fargo draws on the Soros LC, pursuant to the
terms of a reimbursement agreement between us and Soros, we would have the
obligation to, among other things, reimburse Soros for any amounts drawn under
the Soros LC plus interest accrued thereon. In addition, we are required to pay
Soros Fund Management LLC an annual fee in connection with the issuance and
maintenance of the Soros LC in an amount equal to the fee that we would be
required to pay in order to have a similar letter of credit issued under the
Credit Facility. For the year beginning on the date of the closing of the Credit
Facility this formula requires an annual fee of $55,000. We are also required to
reimburse Soros for any costs and expenses associated with the issuance and
maintenance of the Soros LC. In connection with the Soros LC we granted the
Soros Fund a subordinated lien on substantially all of our assets, including our
cash balances, in order to secure our reimbursement obligations. If we default
under the loan facility, our lender and/or the Soros Fund would be entitled,
among other things, to foreclose on our assets in order to satisfy our
obligations under the loan facility.
Under the terms of the Credit Facility, Soros has the right to purchase all of
our obligations from Wells Fargo at any time if we are then in default under the
Credit Facility.
Commitments and Long Term Obligations
As of March 31, 2006, we had the following commitments and long term
obligations:
More
Less than 1-3 3-5 than 5
Total 1 year years years years
------------ --------- --------- -------- ------
Marketing and Advertising $ 277,000 277,000 -- -- --
Purchase Orders $ 5,799,000 5,799,000 -- -- --
Operating Leases $ 1,845,000 564,000 1,210,000 71,000 --
Capital Leases $ 53,000 40,000 13,000 -- --
Employment Contracts $ 2,822,000 1,395,000 1,427,000 -- --
Notes payable to shareholders, including interest payable $ 5,366,000 -- 5,366,000 -- --
------------ --------- --------- -------- ------
Grand total $ 16,162,000 8,075,000 8,016,000 71,000 --
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BLUEFLY, INC.
MARCH 31, 2006
We believe that in order to grow the business, we will need to make additional
marketing and advertising commitments in the future. In addition, we expect to
hire and train additional employees for the operations and development of
Bluefly.com. However, our marketing budget and our ability to hire such
employees is subject to a number of factors, including our results of operations
as well as the amount of additional capital that we raise.
Off Balance Sheet Arrangements
Certain warrants issued in conjunction with our preferred stock financing are
equity linked derivatives and accordingly represent an off balance sheet
arrangement. Each of these warrants meet the scope exception in paragraph 11(a)
of FAS 133 and are accordingly not accounted for as derivatives for purposes of
FAS 133, but instead included as a component of equity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents and our notes payable. Due to the short-term nature of these
investments we have determined that the risks associated with interest rate
fluctuations related to these financial instruments do not pose a material risk
to us.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Form 10-Q, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, our Chief Executive Officer along with our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
There have been no changes in our internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe", "project", "expect", or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by us with the
Securities and Exchange Commission, including Forms 8-A, 8-K, 10-Q, and 10-K.
These risks and uncertainties include, but are not limited to, the following:
our history of losses and anticipated future losses; need for additional capital
and potential inability to raise such capital; the risk of default by us under
the Credit Facility and the consequences that might arise from us having granted
a lien on substantially all of our assets under that agreement; potential
dilution arising from future equity financings, including potential dilution as
a result of the anti-dilution provisions contained in our Preferred Stock and
Convertible Notes; risks associated with Soros owning a majority of our stock;
the potential failure to forecast revenues and/or to make adjustments to our
operating plans necessary as a result of any failure to forecast accurately;
unexpected changes in fashion trends; the success of our advertising campaign;
cyclical variations in the apparel and e-commerce markets; risks of litigation
for sale of unauthentic or damaged goods and litigation risks related to sales
in foreign countries; the dependence on third parties and certain relationships
for certain services, including our dependence on U.P.S. (and the risks of a
mail slowdown due to terrorist activity) and our dependence on our third-party
web hosting, fulfillment and customer service centers; online commerce security
risks; risks related to brand owners' efforts to limit our ability to purchase
products indirectly; management of potential growth; the competitive nature of
our business and the potential for competitors with greater resources to enter
the business; the availability of merchandise; the need to further establish
brand name recognition; risks associated with our ability to handle increased
traffic and/or continued improvements to our Web site; rising return rates;
dependence upon executive personnel; the successful hiring and retaining of new
personnel; risks associated with expanding our operations; risks associated with
potential infringement of other's intellectual property; the potential inability
to protect our intellectual property; government regulation and legal
17
BLUEFLY, INC.
MARCH 31, 2006
uncertainties; uncertainties relating to the imposition of sales tax on Internet
sales; and risks associated with the agreements with Soros with respect to a
change of control and the liquidation preference of the Preferred Stock owned by
Soros.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We currently and from time to time, are involved in litigation incidental to the
conduct of our business. However we are not party to any lawsuit or proceeding
which in the opinion of management is likely to have a material adverse effect
on us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 6. EXHIBITS
The following is a list of exhibits filed as part of this Report:
EXHIBIT NUMBER DESCRIPTION
-------------- -------------------------------------------------------
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
18
BLUEFLY, INC.
MARCH 31, 2006
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BLUEFLY, INC.
By: /s/ Melissa Payner-Gregor
-------------------------
Melissa Payner-Gregor
Chief Executive Officer
By: /s/ Patrick C. Barry
-------------------------
Patrick C. Barry
Chief Financial Officer
May 11, 2006
19