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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 June 30, 2007
[ ] 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
----------
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" and "large 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 August 6, 2007, the issuer had outstanding 130,917,544 shares of Common
Stock, $.01 par value.
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BLUEFLY, INC.
TABLE OF CONTENTS
PAGE
----
Part I . Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2007
and December 31, 2006 (unaudited) 3
Condensed Statements of Operations for the six months ended
June 30, 2007 and 2006 (unaudited) 4
Condensed Statements of Operations for the three months ended
June 30, 2007 and 2006 (unaudited) 5
Condensed Statements of Changes in Shareholders' Equity for the
six months ended June 30, 2007 (unaudited) 6
Condensed Statements of Cash Flows for the six months ended
June 30, 2007 and 2006 (unaudited) 7
Condensed Notes to Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 19
Part II. Other Information 19
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 21
Signatures 22
2
Part I - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
BLUEFLY, INC.
CONDENSED BALANCE SHEETS (Unaudited)
JUNE 30, DECEMBER 31,
2007 2006
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 14,626,000 $ 20,188,000
Inventories, net 23,081,000 24,189,000
Accounts receivable, net of allowance for doubtful accounts 2,350,000 2,719,000
Prepaid inventory 569,000 616,000
Prepaid expenses 846,000 341,000
Other current assets 586,000 553,000
--------------- ---------------
Total current assets 42,058,000 48,606,000
Property and equipment, net 4,939,000 3,573,000
Other assets 220,000 251,000
--------------- ---------------
Total assets $ 47,217,000 $ 52,430,000
=============== ===============
Current liabilities
Accounts payable $ 4,308,000 $ 4,822,000
Allowance for sales returns 3,251,000 5,043,000
Accrued expenses and other current liabilities 1,324,000 1,908,000
Deferred revenue 2,532,000 2,830,000
--------------- ---------------
Total current liabilities 11,415,000 14,603,000
Other long-term liabilities 131,000 --
Total liabilities $ 11,546,000 $ 14,603,000
--------------- ---------------
Commitments and contingencies
Shareholders' equity
Series F Preferred stock - $.01 par value; 7,000 shares authorized, 571.43
issued and outstanding as of June 30, 2007 and December 31, 2006
(liquidation preference: $571,000 plus accrued dividends of $84,000, and
$62,000 as of June 30, 2007 and December 31, 2006, respectively) -- --
Common stock - $.01 par value; 200,000,000 and 152,000,000 shares authorized
as of June 30, 2007 and December 31, 2006, respectively, 131,041,942 and
130,484,854, issued as of June 30, 2007 and December 31, 2006, respectively,
130,915,039 and 130,484,854 shares outstanding as of June 30, 2007 and
December 31, 2006, respectively 1,309,000 1,305,000
Treasury Stock (160,000) --
Additional paid-in capital 155,764,000 152,519,000
Accumulated deficit (121,242,000) (115,997,000)
--------------- ---------------
Total shareholders' equity 35,671,000 37,827,000
--------------- ---------------
Total liabilities and shareholders' equity $ 47,217,000 $ 52,430,000
=============== ===============
The accompanying notes are an integral part of these condensed financial
statements.
3
BLUEFLY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2007 2006
--------------- ---------------
Net sales $ 43,716,000 $ 33,669,000
Cost of sales 26,879,000 19,784,000
--------------- ---------------
Gross profit 16,837,000 13,885,000
Selling and fulfillment expenses 8,945,000 7,281,000
Marketing expenses 6,323,000 5,760,000
General and administrative expenses 7,040,000 5,650,000
--------------- ---------------
Total operating expenses 22,308,000 18,691,000
Operating loss (5,471,000) (4,806,000)
Interest income 364,000 112,000
Interest and other expense (138,000) (471,000)
--------------- ---------------
Net loss $ (5,245,000) $ (5,165,000)
Preferred stock dividends (22,000) (2,221,000)
Deemed dividends related to beneficial conversion feature on
Series F Preferred Stock -- (3,857,000)
Net loss available to common shareholders $ (5,267,000) $ (11,243,000)
=============== ===============
Basic and diluted loss per common share $ (0.04) $ (0.37)
=============== ===============
Weighted average common shares outstanding
(basic and diluted) 130,499,858 30,372,393
=============== ===============
The accompanying notes are an integral part of these condensed financial
statements.
4
BLUEFLY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
JUNE 30,
----------------------------------
2007 2006
--------------- ---------------
Net sales $ 21,608,000 $ 16,793,000
Cost of sales 13,145,000 9,747,000
--------------- ---------------
Gross profit 8,463,000 7,046,000
Selling and fulfillment expenses 4,546,000 3,848,000
Marketing expenses 2,712,000 1,729,000
General and administrative expenses 3,454,000 3,223,000
--------------- ---------------
Total operating expenses 10,712,000 8,800,000
Operating loss (2,249,000) (1,754,000)
Interest income 169,000 67,000
Interest and other expense (62,000) (214,000)
--------------- ---------------
Net loss $ (2,142,000) $ (1,901,000)
Preferred stock dividends (11,000) (990,000)
Deemed dividends related to beneficial conversion feature on
Series F Preferred Stock -- (3,857,000)
--------------- ---------------
Net loss available to common shareholders $ (2,153,000) $ (6,748,000)
=============== ===============
Basic and diluted loss per common share $ (0.02) $ (0.17)
=============== ===============
Weighted average common shares outstanding
(basic and diluted) 130,508,897 40,267,334
=============== ===============
The accompanying notes are an integral part of these condensed financial
statements.
5
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2005, 2006 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2007 (Unaudited)
PREFERRED STOCK COMMON STOCK
$.01 PAR VALUE $.01 PAR VALUE TREASURY STOCK
---------------------- -------------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ----------- ----------- --------- ----------
Balance at January 1, 2005 9,358,550 $ 94,000 15,241,756 $ 152,000 -- $ --
---------- -------- ----------- ----------- --------- ----------
Sale of Series F Preferred Stock ($1,000 per
share net of expenses of $249,000) 7,000 -- -- -- -- --
Shares Of Series D Preferred Stock
Converted into Common Stock (823) $ -- 1,454,645 15,000 -- --
Shares Of Series F Preferred Stock
Converted into Common Stock (1,720) $ -- 765,481 8,000 -- --
Expense recognized in connection with
Issuance of Options -- -- -- -- -- --
Exercise of Employee Options -- -- 1,597,284 16,000 -- --
Net Loss -- -- -- -- -- --
---------- -------- ----------- ----------- --------- ----------
Balance at December 31, 2005 9,363,007 94,000 19,059,166 $ 191,000 -- --
---------- -------- ----------- ----------- --------- ----------
Conversion of Preferred Stock (9,362,436) (94,000) 48,545,527 485,000 -- --
Stock based compensation -- -- -- -- -- --
Sale of Common Stock, net of issuance expenses
of approximately $2.0 million -- -- 60,975,610 610,000 -- --
Issuance of Common Stock to Placement Agent -- -- 1,000,000 10,000 -- --
Warrants Issued to Third-Party -- -- -- -- -- --
Dividends Paid to Related Party Shareholders -- -- -- -- -- --
Deemed Dividends related to beneficial conversion
on Series F Preferred Stock -- -- -- -- -- --
Exercise of Employee Options -- -- 43,330 -- -- --
Issuance of Restricted Stock -- -- 861,221 9,000 -- --
Net Loss -- -- -- -- -- --
---------- -------- ----------- ----------- --------- ----------
Balance at December 31, 2006 571 $ -- 130,484,854 $ 1,305,000 -- $ --
---------- -------- ----------- ----------- --------- ----------
Stock based compensation -- -- (12,173) -- -- --
Issuance of Restricted Stock -- -- 414,942 4,000 -- --
Purchase of Treasury Stock -- -- -- -- 126,903 (160,000)
Exercise of Employee Options -- -- 25,556 -- -- --
Exercise of Related Party Warrant -- -- 1,860 -- -- --
Net Loss -- -- -- -- -- --
---------- -------- ----------- ----------- --------- ----------
Balance at June 30, 2007 571 $ -- 130,915,039 $ 1,309,000 126,903 $ (160,000)
---------- -------- ----------- ----------- --------- ----------
ADDITIONAL TOTAL
PAID-IN ACCUMULATED SHAREHOLDERS'
CAPITAL DEFICIT EQUITY
------------- -------------- -------------
Balance at January 1, 2005 $ 107,270,000 $ (96,127,000) $ 11,389,000
------------- -------------- -------------
Sale of Series F Preferred Stock ($1,000 per
share net of expenses of $249,000) 6,751,000 -- 6,751,000
Shares Of Series D Preferred Stock
Converted into Common Stock (15,000) -- --
Shares Of Series F Preferred Stock
Converted into Common Stock (8,000) -- --
Expense recognized in connection with
Issuance of Options 41,000 -- 41,000
Exercise of Employee Options 1,488,000 -- 1,504,000
Net Loss -- (3,820,000) (3,820,000)
------------- -------------- -------------
Balance at December 31, 2005 $ 115,527,000 $ (99,947,000) $ 15,865,000
------------- -------------- -------------
Conversion of Preferred Stock (391,000) -- --
Stock based compensation 4,454,000 -- 4,454,000
Sale of Common Stock, net of issuance expenses
of approximately $2.0 million 47,420,000 -- 48,030,000
Issuance of Common Stock to Placement Agent 1,070,000 -- 1,080,000
Warrants Issued to Third-Party 67,000 -- 67,000
Dividends Paid to Related Party Shareholders (19,512,000) -- (19,512,000)
Deemed Dividends related to beneficial conversion
on Series F Preferred Stock 3,857,000 (3,857,000) --
Exercise of Employee Options 36,000 -- 36,000
Issuance of Restricted Stock (9,000) -- --
Net Loss -- (12,193,000) (12,193,000)
------------- -------------- -------------
Balance at December 31, 2006 $ 152,519,000 $ (115,997,000) $ 37,827,000
------------- -------------- -------------
Stock based compensation 3,227,000 -- 3,227,000
Issuance of Restricted Stock (4,000) -- --
Purchase of Treasury Stock -- -- (160,000)
Exercise of Employee Options 22,000 -- 22,000
Exercise of Related Party Warrant -- -- --
Net Loss -- (5,245,000) (5,245,000)
------------- -------------- -------------
Balance at June 30, 2007 $ 155,764,000 $ (121,242,000) $ 35,671,000
------------- -------------- -------------
The accompanying notes are an integral part of these condensed financial
statements
6
BLUEFLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
------------------------------
2007 2006
------------- -------------
Cash flows from operating activities
Net loss $ (5,245,000) $ (5,165,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 836,000 729,000
Stock based compensation 3,227,000 1,223,000
Warrant issued to consultant -- 67,000
Provisions for returns (1,791,000) (482,000)
Bad debt expense 298,000 448,000
Reserve for inventory obsolescence 402,000 615,000
Warrant issued to supplier -- 133,000
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories 706,000 (4,985,000)
Accounts receivable 71,000 (850,000)
Prepaid expenses (458,000) 321,000
Other current assets (193,000) (109,000)
Increase (decrease) in
Accounts payable (383,000) (2,131,000)
Accrued expenses (411,000) 1,641,000
Interest payable to related party shareholders -- 271,000
Deferred revenue (298,000) 480,000
------------- -------------
Net cash (used in) provided by operating activities (3,239,000) (7,794,000)
------------- -------------
Cash flows from investing activities
Purchase of property and equipment (2,171,000) (592,000)
------------- -------------
Net cash (used in) provided by investing activities (2,171,000) (592,000)
------------- -------------
Cash flows from financing activities
Payments of capital lease obligation (14,000) (27,000)
Net proceeds from exercise of stock options 22,000 --
Purchase of Treasury Stock (160,000) --
Net proceeds from June 2006 Financing -- 48,002,000
Repayment of related party Notes Payable and interest -- (5,488,000)
Dividends paid to related party shareholders -- (19,512,000)
------------- -------------
Net cash (used in) provided by financing activities (152,000) 22,975,000
------------- -------------
Net (decrease) increase in cash and cash equivalents (5,562,000) 14,589,000
Cash and cash equivalents - beginning of period 20,188,000 9,408,000
------------- -------------
Cash and cash equivalents - end of period $ 14,626,000 $ 23,997,000
============= =============
Supplemental schedule of non-cash investing and
financing activities:
Cash paid for interest $ 61,000 $ 92,000
============= =============
Cash paid for interest - to related shareholder -- $ 1,488,000
============= =============
Warrant issued to consultant -- $ 67,000
============= =============
Deemed dividend related to beneficial conversion
feature on Series F Preferred Stock -- $ 3,857,000
============= =============
The accompanying notes are an integral part of these condensed financial
statements.
7
BLUEFLY, INC.
JUNE 30, 2007
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 accounting principles generally accepted in the United States of
America 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 financial statements and accompanying
footnotes included in the Company's Form 10-K for the year ended December 31,
2006.
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, or find 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 at least the next 12 months.
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 - OFFER TO EXCHANGE
In January 2007, the Company commenced an exchange offer (the "Exchange Offer")
pursuant to which it offered eligible employees and non-employee directors the
opportunity to exchange, on a grant-by-grant basis: (a) their outstanding
eligible stock options that were vested as of August 31, 2006 for restricted
stock awards consisting of the right to receive restricted common stock of the
Company (the "Restricted Stock Awards"); and (b) their outstanding eligible
stock options that were not vested as of August 31, 2006 for deferred restricted
stock unit awards consisting of rights to receive common stock of the Company on
specified dates subsequent to vesting (the "Deferred Stock Unit Awards," and,
together with the Restricted Stock Awards, the "Replacement Awards").
In order to be eligible to participate in the Exchange Offer, an option holder
was required to (a) have been an employee or non-employee director of the
Company on the date of the Exchange Offer, (b) have neither ceased to be an
employee or non-employee director, nor have submitted or received a notice of
termination of employment or resignation, prior to the expiration of the
Exchange Offer and (c) owned eligible options. Options eligible for exchange in
the Exchange Offer were outstanding options granted under the Company's three
stock based employee compensation plans (collectively the "Plans") that, in each
case, had an exercise price per share that was greater than $1.50.
The number of Replacement Awards an eligible participant was eligible to receive
in exchange for an eligible option was determined by a specific exchange ratio
applicable to that option, as set forth in the Offer to Exchange included as an
exhibit to the Schedule TO filed by the Company with the Securities and Exchange
Commission in connection with the Exchange Offer (the "Offer to Exchange").
Restricted Stock Awards granted pursuant to the Exchange Offer vest and become
free from restriction one year from the date of the exchange, except if the
grantee made an election under Section 83(b) of the Internal Revenue Code of
1986, as amended, in which case the restrictions on such Restricted Stock Award
lapsed only with respect to the number of shares needed to satisfy any
applicable tax withholding as of the date that the Company received such
election, as more fully described in the Offer to Exchange. The minimum period
for full vesting of Deferred Stock Unit Awards is two years from the date of
exchange. The length of the vesting schedule applicable to each Deferred Stock
Unit Award was based on the final vesting date of the eligible stock option as
follows:
8
DEFERRED STOCK UNIT AWARDS VESTING SCHEDULE
FINAL VESTING DATE OF ELIGIBLE
STOCK OPTION AS OF TOTAL VESTING PERIOD OF DEFERRED PERCENTAGE OF DEFERRED STOCK
DATE OF CANCELLATION STOCK UNIT AWARDS UNIT AWARDS VESTED QUARTERLY*
------------------------------ -------------------------------- -----------------------------
Prior to August 31, 2007 2 years 12 1/2%
On or after August 31, 2007 3 years 8 1/3%
*Deferred Stock Unit Awards vest in substantially equal quarterly installments
over the applicable vesting period, subject to the participant's continued
employment with (or service on the Board of Directors of) the Company.
The shares of common stock underlying the Deferred Stock Unit Award will be
delivered on the Delivery Date. The Delivery Date is the date on which the
earliest of the following occurs:
DELIVERY DATE
----------------------------------------------------------------------
o 2 years from the date of grant (with respect to Deferred Stock
Units Awards exchanged for eligible stock options with a vesting
date prior to August 31, 2007)
OR
3 years from the date of grant (with respect to Deferred Stock
Units Awards exchanged for eligible stock options with a vesting
date on or after August 31, 2007)
o Death
o The date on which the employee becomes disabled
Melissa Payner-Gregor, the Company's chief executive officer, and Patrick C.
Barry, the Company's chief financial officer, were not eligible to participate
in the Exchange Offer, but previously participated in an exchange in November
2006 through each of their employment agreements, which is described in the
Offer to Exchange.
Pursuant to the Exchange Offer, options to purchase an aggregate of 1,562,000
shares of Common Stock were exchanged in return for an aggregate of 472,471
Restricted Stock Awards and an aggregate of 394,405 Deferred Stock Unit Awards.
In connection with the Exchange Offer, the Company will recognize $916,000 of
expense over the next three years. For the six months ended June 30, 2007
approximately $301,000 of this amount has been expensed.
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. Historically, the Credit Facility had also been secured by a $2,000,000
letter of credit issued by an affiliate of Soros Fund Management LLC ("Soros")
in favor of Wells Fargo (the "Soros LC"). In August 2006, Wells Fargo agreed to
release the Soros LC, and that it would no longer require an availability
reserve (although it has the right under the Credit Facility to establish
reserves in the future, as it deems appropriate). In return, the Company agreed
to maintain a minimum cash balance of $5,000,000. Availability under the Credit
Facility is determined by a formula that takes into account the amount of the
Company's inventory and accounts receivable. 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 June 30, 2007, total availability
under the Credit Facility was approximately $6,800,000, of which $3,200,000 was
committed, leaving approximately $3,600,000 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 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 six
months ended June 30, 2007 and 2006, the Company incurred approximately $61,000
and $ 92,000, respectively, in connection with these fees.
9
BLUEFLY, INC.
JUNE 30, 2007
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 (i) options and warrants to purchase
shares of Common Stock, (ii) Preferred Stock convertible into shares of Common
Stock, (iii) Restricted Stock Awards that have not yet vested and (iv) Deferred
Stock Unit Awards ("DSUs") for shares that have not yet been delivered were not
included in the computation of diluted loss per share because the result of the
exercise of such inclusion would be antidilutive:
Security June 30, 2007 Exercise Prices June 30, 2006 Exercise Prices
---------------------------- ------------- --------------- ------------- ---------------
Options 3,541,908 $0.80 - $14.38 8,103,028 $0.69 - $16.47
Restricted Stock Awards/DSUs 10,800,688 (2) -- -- --
Warrants 1,214,249 $0.78 - $3.96 1,945,893 $0.78 - $ 3.96
Preferred Stock 696,341 (1) -- -- --
(1) At June 30, 2007, there were 571 shares of Series F Convertible Preferred
Stock outstanding that are convertible into approximately 696,341 shares of
Common Stock (excluding dividends).
(2) Includes both Restricted Stock Awards and DSUs.
NOTE 6 - STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with 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. Effective January 1, 2006 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 six months ended June 30, 2007
was $3,227,000, compared to $1,223,000 for the six months ended June 30, 2006.
STOCK OPTIONS
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 Common 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 notes in effect on the
date of the grant.
10
The following table summarizes the Company's stock option activity:
BLUEFLY, INC.
JUNE 30, 2007
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
-------------- --------------
Balance at December 31, 2006 5,417,116 $ 1.68
--------------
Options granted 30,000 $ 1.05
Options canceled (1,879,652) $ 2.87
Options exercised (25,556) $ 0.89
--------------
Balance at June 30, 2007 3,541,908 $ 1.06
Vested at December 31, 2006 3,682,877 $ 1.83
Vested at June 30, 2007 2,672,684 $ 1.03
During the second quarter of 2007, 311,063 options vested. Of these options
220,900 were canceled or expired. The total fair value of the options vested
(including those canceled) during the quarter ended June 30, 2007 was
approximately $292,000. During the quarter, 30,000 options were granted. At June
30, 2007, the aggregate intrinsic value of the fully vested options was $131,000
and the weighted average remaining contractual life of the options was 6.2
years. The Company has not capitalized any compensation cost, or modified any of
its stock option grants during the first half of 2007, except for those
described in connection with the Offer to Exchange. Approximately 18,056 options
with an intrinsic value of approximately $3,600 were exercised during the second
quarter of 2007. No cash was used to settle equity instruments granted under the
Plans during the second quarter of 2007.
As of June 30, 2007, the total compensation cost related to non-vested awards
not yet recognized was $699,000. Total compensation cost is expected to be
recognized over 2 years on a weighted average basis.
RESTRICTED STOCK AWARDS AND DEFERRED STOCK UNIT AWARDS
The following table is a summary of activity related to Restricted Stock Awards
and Deferred Stock Unit Awards for employees at June 30, 2007:
RESTRICTED DEFERRED STOCK
STOCK AWARDS UNIT AWARDS
---------------- ---------------
Balance at January 1, 2007 861,221 9,862,267
Shares/Units Granted 414,942 544,405
Shares/Units Forfeited (12,173) (8,753)
Shares/Units Restriction Lapses 861,221 --
Balance at June 30, 2007 402,769 10,397,919
Weighted Average Grant Date Fair Value Per share $ 1.27 $ 0.95
Aggregate Grant Date Fair Value $ 511,517 $ 9,878,023
Vesting Service Period of Shares Granted 12 months 12-36 months
Number of shares/units vested at June 30, 2007 -- --
Number of shares/units unvested at June 30, 2007 402,769 10,397,919
For the quarter ended June 30, 2007, the Company recognized an expense of
approximately $1.4 million in connection with these awards.
As of June 30, 2007, the total compensation cost related to non-vested
restricted stock and deferred stock units not yet recognized was $8.9 million.
Total compensation cost is expected to be recognized over a two year period.
11
BLUEFLY, INC.
JUNE 30, 2007
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires an
entity to recognize the impact of a tax position in its financial statements if
that position is more likely than not to be sustained on audit based on the
technical merits of the position. The provisions of FIN 48 are effective as of
the beginning of fiscal year 2007, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained earnings.
The implementation of FIN 48 had no impact on the Company's financial statement
as the Company has no uncertain tax positions. The Company is primarily subject
to US federal and New York State income tax. Tax years subsequent to 2004 remain
open to review by US federal and state tax authorities.
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 five
years, our sales have grown at a compounded annual growth rate of approximately
30%. During that same time, our gross margin levels have increased from a range
between 21.3% and 38.6% during 2003 to a range between 37.4% and 42.0% during
2006 and 2007.
The increase in our margin and sales over the past few years is the direct
result of the merchandise strategy that we began to implement in spring 2004. As
part of that strategy, we are bringing the latest fashion trends to our customer
for great value and more current season merchandise. While there will be some
fluctuation in our gross margin percentage from quarter to quarter as we further
develop our merchandising and marketing strategy (for example, our gross margin
percentage decreased for the second quarter of 2007 as compared to the second
quarter of 2006), we believe that we will be able to maintain margins in the 38%
to 40% range.
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
have invested much more aggressively in marketing during the past 21 months.
Our net sales increased by approximately 29% to $21,608,000 for the three months
ended June 30, 2007 from $16,793,000 for the three months ended June 30, 2006.
Our gross margin decreased to 39.2% for the three months ended June 30, 2007
from 42.0% for the three months ended June 30, 2006. Our gross profit increased
by approximately 20% to $8,463,000 for the three months ended June 30, 2007 from
$7,046,000 for the three months ended June 30, 2006. Our operating loss
increased to $2,249,000 for the three months ended June 30, 2007 from $1,754,000
for the three months ended June 30, 2006. This increase was primarily a result
of an increase in stock-based compensation as a result of equity awards granted
in the fourth quarter of 2006 as well as incremental expense recorded in
accordance with SFAS No. 123(R) in connection with the Offer to Exchange.
Increased marketing expenses (excluding staff related costs) of $2,389,000 for
the second quarter of 2007 from $1,309,000 for the second quarter 2006 also
contributed to the increase in the operating loss.
Our reserve for returns and credit card chargebacks increased to 42.1% of gross
sales for the second quarter of 2007 compared to 41.8% for the second quarter of
2006. The increase was primarily caused by a shift in our merchandise mix
towards higher end products. However, we believe that this increase in return
rates has been more than offset by the higher gross margin dollars and average
order sizes that have been generated by this shift in our merchandise mix. In
addition, gross margin dollars per order continues to increase.
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
through in its entirety in a prior season and have determined to hold for the
next selling season, subject 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 June 30, 2007, we had an accumulated deficit of $121,242,000. 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 and the payment of dividends to holders
of Preferred Stock. In order to expand our business, we intend to invest in
sales, marketing,
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BLUEFLY, INC.
JUNE 30, 2007
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.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2006
The following table sets forth our statement of operations data for the six
months ended June 30. All data is in thousands except as indicated below:
2007 2006 2005
------------------------ ------------------------ ------------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
---------- ---------- ----------
Net sales $ 43,716 100.0% $ 33,669 100.0% $ 25,531 100.0%
Cost of sales 26,879 61.5% 19,784 58.8% 15,995 62.6%
---------- ---------- ----------
Gross profit 16,837 38.5% 13,885 41.2% 9,536 37.4%
Selling and fulfillment expenses 8,945 20.4% 7,281 21.6% 6,168 24.1%
Marketing expenses 6,323 14.5% 5,760 17.1% 1,935 7.6%
General and administrative expenses 7,040 16.1% 5,650 16.8% 3,188 12.5%
---------- ---------- ----------
Total operating expenses 22,308 51.0% 18,691 55.5% 11,291 44.2%
Operating loss (5,471) (12.5)% (4,806) (14.3)% (1,755) (6.8)%
Interest (expense) and other income 226 0.5% (359) (1.1)% (307) (1.2)%
---------- ---------- ----------
Net loss (5,245) (12.0)% (5,165) (15.4)% (2,062) (8.0)%
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 six months ended June 30, as indicated below:
2007 2006 2005
---------- ---------- ----------
Average Order Size (including shipping & handling) $ 276.49 $ 246.13 $ 207.54
New Customers Added during the Period 94,487 76,487 66,326
NET SALES: Gross sales for the six months ended June 30, 2007 increased by
approximately 31% to $73,694,000 from $56,117,000 for the six months ended June
30, 2006. For the six months ended June 30, 2007, we recorded a provision for
returns and credit card chargebacks and other discounts of $29,978,000, or
approximately 41% of gross sales. For the six months ended June 30, 2006, the
provision for returns and credit card chargebacks and other discounts was
$22,448,000, or approximately 40% of gross sales. The increase in this provision
as a percentage of gross sales resulted from an increase in the return rate. The
increase in return rate was primarily caused by an increase in average order
size as well as a shift in our merchandise mix towards higher end products.
However, we believe that this increase in return rates has been more than offset
by the higher gross profit and average order sizes that have been generated by
this shift in merchandise mix. Gross margin dollars per order continue to
increase, growing to $64.68 for the six months ended June 30, 2007 from $61.92
for the six months ended June 30, 2006.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the six months ended
June 30, 2007 were $43,716,000. This represents an increase of approximately
29.8% compared to the six months ended June 30, 2006, in which net sales totaled
$33,669,000. The growth in net sales resulted from both an increase in the
number of new customers acquired (approximately 24% higher compared to the first
half 2006) and an increase in average order size (over 12% higher compared to
the first half 2006). For the six months ended June 30, 2007 revenue from
shipping and handling (which is included in net sales) increased approximately
21% in 2007 to $2,391,000 from $1,970,000 in 2006.
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BLUEFLY, INC.
JUNE 30, 2007
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 six months ended June 30, 2007 totaled
$26,879,000, resulting in gross margin of approximately 38.5%. Cost of sales for
the six months ended June 30, 2006 totaled $19,784,000, resulting in gross
margin of 41.2%. Gross profit increased by 21%, to $16,837,000 for the six
months ended June 30, 2007 compared to $13,885,000 for the six months ended June
30, 2006. The growth in gross profit was the result of increased sales. The
growth in the high-end designer business has a significant impact on the overall
mix of the business which continues to negatively impact the gross margin
percentage. The combination of the high demand for this merchandise and the
decline of the dollar versus the Euro had a negative impact on the designer
accessory and shoe gross margins, however the gross margin dollars per order
continue to grow.
MARKETING EXPENSES: Marketing expenses increased by approximately 10% to
$6,323,000 for the six months ended June 30, 2007 compared to $5,760,000 for the
six months ended June 30, 2006. While net sales for the six months increased by
almost 30%, our marketing expenses as a percentage of net sales decreased to
14.5% for the six months ended June 30, 2007 from 17.1% for the six months ended
June 30, 2006.
Marketing expenses include expenses related to paid search, online and print
advertising, television, fees to marketing affiliates, direct mail campaigns as
well as staff related costs. Total expenses related to the national print and
television advertising campaign for the six months ended June 30, 2007 totaled
$2.8 million compared to $3.1 million for the six months ended June 30, 2006.
The increase in marketing expenses was attributable to an increase in online
marketing expenses including affiliates, email and sweepstakes. These increases
were partially offset by a decrease of $332,000 in connection with costs
associated with our national advertising campaign.
SELLING AND FULFILLMENT EXPENSES: Selling and fulfillment expenses increased by
approximately 23% in the first six months of 2007 compared to the first six
months of 2006. Selling and fulfillment expenses were comprised of the
following:
Six Months Ended As a % of Six Months Ended As a % of Percentage Difference
June 30, 2007 Net Sales June 30, 2006 Net Sales increase (decrease)
---------------- --------- ---------------- --------- ---------------------
Operating 4,732,000 10.8% 3,699,000 11.0% 28%
Technology 2,399,000 5.5% 1,989,000 5.9% 21%
E-Commerce 1,814,000 4.2% 1,593,000 4.7% 14%
---------------- --------- ---------------- ---------
$ 8,945,000 20.5% $ 7,281,000 21.6% 23%
As a percentage of net sales, our selling and fulfillment expenses decreased to
20.5% for the six months ended June 30, 2007 from 21.6% for the six months ended
June 30, 2006.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in the first six months of 2007 by approximately 28% compared to the
first six months of 2006 as a result of variable costs associated with the
increased sales volume (e.g., picking and packing orders, processing returns and
credit card fees) and an increase in salary related expenses, as well as
incremental one time costs of approximately $170,000 incurred in connection with
our move to a new third party fulfillment center. Included in operating expenses
for 2006, was a refund from one of our credit card processors due to the fact
that it had charged us at incorrect rates during previous periods.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web site hosting. For the six months ended June 30, 2007,
technology expenses increased by approximately 21% compared to the six months
ended June 30, 2006. This increase resulted from an increase in salary related
expenses, as well as an increase in software support, web hosting and training.
This increase was partially offset by a decrease in consulting expenses as most
of the consulting expenses incurred in the first half of 2007 were related to
the development of our new Web site and capitalized accordingly. For the first
six months of 2007 approximately $1,219,000 was capitalized in connection with
the development of our new Web site.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web site design. For the six months ended June 30, 2007,
e-commerce expenses increased by approximately 14% as compared to the six months
ended June 30, 2006, primarily due to an increase in salary related expenses as
well as an increase in expenses associated with photo shoots. In
14
BLUEFLY, INC.
JUNE 30, 2007
addition, for the six months ended June 30, 2007, equity based compensation
increased compared to the six months ended June 30, 2006, as a result of the
Exchange Offer and new equity awards.
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 six months ended
June 30, 2007 increased by approximately 25% to $7,040,000 as compared to
$5,650,000 for the six months ended June 30, 2006. The increase in general and
administrative expenses was primarily the result of the recording of $2,844,000
of expense related to employee stock options in the six month period and
increased consulting and professional fees of $141,000. These increases were
partially offset by a decrease in salary and salary related expenses of $291,000
and a decrease in public company expenses of $142,000.
As a percentage of net sales, general and administrative expenses for the first
half of 2007 decreased slightly to 16.1% from 16.8% for the first half of 2006.
LOSS FROM OPERATIONS: Operating loss increased by approximately 14% in the first
six months of 2007 to $5,471,000 from $4,806,000 in the first six months of
2006, as the increase in net sales and gross margin were more than offset by the
incremental marketing expenses and an increase in expenses related to employee
stock options.
INTEREST INCOME: Other income for the six months ended June 30, 2007 increased
to $364,000 from $112,000 for the six months ended June 30, 2006. These amounts
relate primarily to interest income earned on our cash balances.
INTEREST AND OTHER EXPENSE: Interest expense for the six months ended June 30,
2007 totaled $138,000, compared to $471,000 for the six months ended June 30,
2006. Interest expense relates to fees paid in connection with our Credit
Facility, as well as interest expense on the Notes that were repaid in June
2006.
FOR THE THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 2006.
The following table sets forth our statement of operations data, for the three
months ended June 30. All data is in thousands except as indicated below:
2007 2006 2005
------------------------ ------------------------ ------------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
---------- ---------- ----------
Net sales $ 21,608 100.0% $ 16,793 100.0% $ 12,029 100.0%
Cost of sales 13,145 60.8% 9,747 58.0% 7,378 61.3%
---------- ---------- ----------
Gross profit 8,463 39.2% 7,046 42.0% 4,651 38.7%
Selling and fulfillment expenses 4,546 21.0% 3,848 22.9% 3,027 25.1%
Marketing expenses 2,712 12.6% 1,729 10.3% 1,041 8.7%
General and administrative expenses 3,454 16.0% 3,223 19.2% 1,602 13.3%
---------- ---------- ----------
Total operating expenses 10,712 49.6% 8,800 52.4% 5,670 47.1%
Operating loss (2,249) (10.4)% (1,754) (10.4)% (1,019) (8.4)%
Interest (expense) and other income 107 0.5% (147) (0.9)% (150) (1.2)%
---------- ---------- ----------
Net loss (2,142) (9.9)% (1,901) (11.3)% (1,169) (9.6)%
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 June 30, as indicated below:
2007 2006 2005
---------- ---------- ----------
Average Order Size (including shipping & handling) $ 284.01 $ 248.32 $ 216.09
New Customers Added during the Period 45,102 37,779 29,561
15
BLUEFLY, INC.
JUNE 30, 2007
NET SALES: Gross sales for the three months ended June 30, 2007 increased by 29%
to $37,327,000 from $28,872,000 for the three months ended June 30, 2006. For
the three months ended June 30, 2007, we recorded a provision for returns and
credit card chargebacks and other discounts of $15,719,000, or approximately
42.1% of gross sales. For the three months ended June 30, 2006, the provision
for returns and credit card chargebacks and other discounts was $12,079,000, or
approximately 41.8% of gross sales. The increase in the return rate in this
provision as a percentage of gross sales resulted from an increase in the return
rate. The increase was primarily caused by a shift in our merchandise mix
towards higher end products. 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. Gross margin
dollars per order continue to increase, growing to $66.53 for the three months
ended June 30, 2007 from $61.85 for the three months ended June 30, 2006
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the three months
ended June 30, 2007 were $21,608,000. This represents an increase of
approximately 29% compared to the three months ended June 30, 2006, in which net
sales totaled $16,793,000. The growth in net sales resulted from both an
increase in the number of new customers acquired (over 19% higher compared to
the three months ended June 30, 2006) and an increase in average order size
(over 14% higher compared to the three months ended June 30, 2006). For the
three months ended June 30, 2007, revenue from shipping and handling (which is
included in net sales) increased approximately 18% to $1,190,000 from $1,005,000
for the three months ended June 30, 2006.
COST OF SALES: Cost of sales for the three months ended June 30, 2007 totaled
$13,145,000, resulting in gross margin of approximately 39.2%. Cost of sales for
the three months ended June 30, 2006 totaled $9,747,000, resulting in gross
margin of 42.0%. Gross profit increased by approximately 20%, to $8,463,000 for
the three months ended June 30, 2007 compared to $7,046,000 for the three months
ended June 30, 2006. The growth in gross profit was the result of increased
average order size and growth in sales. The growth in the high-end designer
business has a significant impact on the overall mix of the business which
continues to negatively impact the gross margin percentage. The combination of
the high demand for this merchandise and the decline of the dollar versus the
Euro had a negative impact on the designer accessory and shoe gross margins.
however the gross margin dollars per order continue to grow.
MARKETING EXPENSES: Marketing expenses increased by 57% to $2,712,000 for the
three months ended June 30, 2007 from $1,729,000 for the three months ended June
30, 2006. As a percentage of net sales, our marketing expenses increased to
12.6% for the three months ended June 30, 2007 from 10.3% for the three months
ended June 30, 2006. Some of the increase in the period is due to the timing of
the launch of national campaign between the first and second quarter of 2007.
Total expenses related to the national print and television advertising campaign
for the three months ended June 30, 2007 totaled $929,000 compared to $279,000
for the three months ended June 30, 2006. The increase in marketing was
attributable to an increase of $650,000 in connection with costs associated with
our national ad campaign, as well as increases related to paid search,
affiliates, sweepstakes and email.
SELLING AND FULFILLMENT EXPENSES: Selling and fulfillment expenses increased by
18% for the three months ended June 30, 2007 compared to the three months
offended June 30, 2006. Selling and fulfillment expenses were comprised of the
following:
Three Months Three Months
Ended As a % of Ended As a % of Percentage Difference
June 30, 2007 Net Sales June 30, 2006 Net Sales increase (decrease)
---------------- --------- ---------------- --------- ---------------------
Operating 2,467,000 11.4% 1,949,000 11.6% 27%
Technology 1,231,000 5.7% 1,017,000 6.0% 21%
E-Commerce 848,000 3.9% 882,000 5.3% (4)%
---------------- --------- ---------------- --------- ---------------------
$ 4,546,000 21.0% $ 3,848,000 22.9% 18%
As a percentage of net sales, our selling and fulfillment expenses decreased to
21% for the three months ended June 30, 2007 from approximately 23% for the
three months ended June 30, 2006.
Operating expenses increased in the three months ended June 30, 2007 by
approximately 27% compared to the three months ended June 30, 2006 as a result
of variable costs associated with the increased sales volume (e.g., picking and
packing orders
16
BLUEFLY, INC.
JUNE 30, 2007
and processing returns) and an increase in customer service and salary related
expenses. In addition, during the quarter we started to move to a new third
party fulfillment center and incurred an incremental one time expense of
approximately $170,000. Start-up issues associated with the transition to the
new fulfillment center resulted in certain cancelled orders and associated
expenses during July 2007. We expect to incur an additional $350,000 in costs
directly related to the move (trucking, labor, insurance, etc.) during the third
quarter. In the long term, the move to the new fulfillment center is expected,
however, to improve customer service and to result in efficiencies and cost
savings.
For the three months ended June 30, 2007, technology expenses increased by
approximately 21% compared to the three months ended June 30, 2006. This
increase resulted from an increase in salary related expenses, as well as an
increase in software support, depreciation, training and web hosting expenses.
The increase was partially offset by a decrease in consulting expenses as most
of the consulting expenses incurred in the second quarter 2007 were related to
the development of our new Web site and capitalized accordingly. For the three
months ended June 30, 2007, approximately $685,000 of expenses was capitalized
in connection with the development of our new Web site.
For the three months ended June 30, 2007, e-commerce expenses decreased by
approximately 4% as compared to the three months ended June 30, 2006, primarily
due to a decrease in salary related expenses. This decrease was partially offset
by increases associated with photo shoots, supplies and research tools. In
addition, for the three months ended June 30, 2007, equity based compensation
increased compared to the three months ended June 30, 2006, as a result of the
Exchange Offer and new equity awards.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for the
three months ended June 30, 2007 increased by approximately 7% to $3,454,000 as
compared to $3,223,000 for the three months ended June 30, 2006. The increase in
general and administrative expenses was primarily the result of the recording of
an additional $888,000 of equity based compensation related to equity awards
granted during the fourth quarter of 2006 (stock based compensation expense was
approximately $1.3 million in the second quarter 2007 compared to $475,000 in
the second quarter 2006) as well as increased consulting and professional fees
of $65,000, increased recruiting fees of $30,000 and increased depreciation
expense of $9,000. These increases were partially offset by a decrease in public
company expenses of $97,000 and decreased salary and salary related expenses of
$419,000.
As a percentage of net sales, general and administrative expenses for the three
months ended June 30, 2007 decreased to approximately 16.0% from 19.2% for the
three months ended June 30, 2006.
LOSS FROM OPERATIONS: Operating loss increased in the three months ended June
30, 2007 to $2,249,000 from $1,754,000 in the three months ended June 30, 2006.
INTEREST INCOME: Other income for the three months ended June 30, 2007 increased
to $169,000 from $67,000 for the three months ended June 30, 2006. These amounts
related primarily to interest income earned on our cash balances.
INTEREST AND OTHER EXPENSE: Interest expense for the three months ended June 30,
2007 totaled $62,000, compared to $214,000 for the three months ended June 30,
2006. Interest expense for the three months ended June 30, 2006 included fees
paid in connection with our Credit Facility, as well as interest expense on our
then outstanding promissory notes.
LIQUIDITY AND CAPITAL RESOURCES
General
At June 30, 2007, we had approximately $14.6 million in cash and cash
equivalents. Working capital at June 30, 2007 and 2006 was $30.6 million and
$37.4 million, respectively. Working capital at December 31, 2006 was $34.0
million. In addition, as of June 30, 2007, we had approximately $3.2 million
committed under the Credit Facility, leaving approximately $3.6 million of
availability.
We fund our operations through cash on hand, operating cash flow and 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 with respect to 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
17
BLUEFLY, INC.
JUNE 30, 2007
require us to request Wells Fargo to provide credit support under the Credit
Facility. In some instances, new vendors may require prepayments. We may make
prepayments in order to open up these new relationships, or to gain access to
inventory that would not otherwise be available to us. In addition, we sometimes
make prepayments in connection with our advertising campaign, as in some
circumstances we need to pay in advance of production. As of June 30, 2007, we
had approximately $569,000 of prepaid inventory on our balance sheet.
Our inventory levels as of June 30, 2007 were approximately $2.0 million higher
than at June 30, 2006. The increase in inventory generally reflects a ramp up in
connection with our sales growth. 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 the next 12 months.
Credit Facility
In July 2005, we entered into a new three year revolving credit facility with
Wells Fargo. Pursuant to the Credit Facility, Wells Fargo provides us 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 our assets. Historically, the
Credit Facility had also been secured by the Soros LC. In August 2006, Wells
Fargo agreed to release the Soros LC, and that it would no longer require an
availability reserve (although it has the right under the Credit Facility to
establish reserves in the future, as it deems appropriate). In return, we agreed
to maintain a minimum cash balance of $5,000,000. Availability under the Credit
Facility is determined by a formula that takes into account the amount of our
inventory and accounts receivable. The maximum availability is currently
$7,500,000, but can be increased to $12,500,000 at our request, subject to
certain conditions. As of June 30, 2007, total availability under the Credit
Facility was approximately $6,800,000 of which $3,200,000 was committed, leaving
approximately $3,600,000 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.
Commitments and Long Term Obligations
As of June 30, 2007, we had the following commitments and long term obligations:
Less than 1-3 3-5 More than 5
Total 1 year years years years
------------ --------- --------- ------ -----------
Marketing and Advertising $ 3,413,000 1,673,000 1,740,000 -- --
Purchase Orders $ 19,953,000 19,953,000 -- -- --
Operating Leases $ 1,185,000 490,000 695,000 -- --
Employment Contracts $ 3,062,000 1,126,000 1,936,000 -- --
------------ --------- --------- ------ -----------
Grand total $ 27,613,000 23,242,000 4,371,000 -- --
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.
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. Due to the short-term nature of these instruments we have
determined that the risks associated with interest rate fluctuations related to
these financial instruments do not pose a material risk to us.
18
BLUEFLY, INC.
JUNE 30, 2007
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Form 10-Q (the "Evaluation Date"),
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, as of the Evaluation Date, our
disclosure controls and procedures were effective in ensuring that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act were recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms and are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
to allow timely decisions regarding required disclosure. There have been no
changes in our internal control over financial reporting that occurred during
the Company's most recent fiscal quarter that have materially affected, or are
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; the success of our
advertising campaign; risks associated with Soros, private funds associated with
Maverick Capital Ltd. and private funds associated with and Prentice Capital
Management, LP each owning a significant portion 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; cyclical variations in the apparel and e-commerce markets;
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; 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 DHL. (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; the Company's dependence on one supplier for
a material portion of its inventory; risks associated with the acquisition of
inventory from foreign markets, including currency fluctuations; government
regulation and legal uncertainties; and uncertainties relating to the imposition
of sales tax on Internet sales.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2007, we received a Civil Investigative Demand (the "Discovery Request")
from the Federal Trade Commission (the "FTC") that requested the production of
certain documents and other information regarding the labeling and advertising
of apparel containing products that contain fur or faux fur components. The
Discovery Request was issued in connection with a petition filed by the Humane
Society of the United States with the FTC regarding the labeling and advertising
of fur products by a number of national retailers and apparel manufacturers. The
Company is cooperating fully with the Discovery Request.
In addition, 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 such
litigation that in the opinion of management is likely to have a material
adverse effect on us.
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BLUEFLY, INC.
JUNE 30, 2007
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 17, 2007, we held our annual meeting of stockholders. At the meeting, our
stockholders voted for nine directors, electing David Wassong, Melissa
Payner-Gregor, Barry Erdos, Michael Gross, Ann Jackson, Christopher G. McCann,
Martin Miller, Neal Moszkowski and Alex Rafal as members of our board of
directors. In addition, our stockholders voted in favor of the following
proposals: (1) a proposal to approve amendments to our 2005 Stock Incentive Plan
(the "Incentive Plan") to (A) increase the aggregate number of shares of common
stock that may be the subject of stock-based awards granted pursuant to the
Incentive Plan; (B) increase the aggregate number of shares of common stock that
may be the subject of stock-based awards granted pursuant to the Incentive Plan
to a participant in a fiscal year, and (C) replace the formula grant of stock
options to non-employee directors currently provided for under the Incentive
Plan with a formula of restricted stock; (2) a proposal to approve an amendment
to our certificate of incorporation to increase the number of authorized shares
of common stock and; (3) a proposal to amend our amended and restated
certificate of incorporation to effect a reverse stock split of our outstanding
common stock at any ratio from 2:1 to 15:1 at anytime prior to the date of our
2008 annual meeting of stockholders, with the board of directors having the sole
discretion to determine whether or not to effect such reverse stock split and,
if so, at what ratio within the approved range. The results of the voting were
as follows:
PROPOSAL VOTES FOR VOTES WITHHELD
---------------------------------------- ------------ --------------
Election of David Wassong 114,729,044 1,023,323
Election of Melissa Payner-Gregor 114,719,377 1,032,990
Election of Barry Erdos 114,603,059 1,149,308
Election of Christopher G. McCann 114,740,957 1,011,260
Election of Michael Gross 114,348,228 1,404,139
Election of Ann Jackson 114,741,107 1,011,260
Election of Martin Miller 114,242,432 1,509,935
Election of Neal Moszkowski 114,223,761 1,528,606
Election of Alex Rafal 114,343,298 1,409,069
ABSTENTIONS AND
VOTES FOR VOTES AGAINST BROKER NON-VOTES
----------- ------------- ----------------
Approval of Amendments to 2005
Stock Incentive Plan 103,125,017 1,157,743 11,469,607
Approval of Amendment to
Company's amended and restated
certificate of incorporation
("Certificate of Incorporation") 113,934,701 1,783,718 33,947
Approval of an Amendment to the
Certificate of Incorporation to effect
a Reverse Stock Split 102,539,953 1,727,433 11,484,981
20
BLUEFLY, INC.
JUNE 30, 2007
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
21
BLUEFLY, INC.
JUNE 30, 2007
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
August 8, 2007
22