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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 September 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 November 9, 2007, the issuer had outstanding 132,442,231 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 September 30, 2007 (unaudited)
and December 31, 2006 3
Condensed Statements of Operations for the nine months ended
September 30, 2007 and 2006 (unaudited) 4
Condensed Statements of Operations for the three months ended
September 30, 2007 and 2006 (unaudited) 5
Condensed Statements of Changes in Shareholders' Equity for the
nine months ended September 30, 2007 (unaudited) 6
Condensed Statements of Cash Flows for the nine months ended
September 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 19
Item 4. Controls and Procedures 20
Part II. Other Information 20
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 6. Exhibits 21
Signatures 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
BLUEFLY, INC.
CONDENSED BALANCE SHEETS (Unaudited)
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 7,172,000 $ 20,188,000
Inventories, net 30,345,000 24,189,000
Accounts receivable, net of allowance for doubtful accounts 2,763,000 2,719,000
Prepaid inventory 422,000 616,000
Prepaid expenses 3,779,000 341,000
Other current assets 474,000 553,000
------------- -------------
Total current assets 44,955,000 48,606,000
Property and equipment, net 5,383,000 3,573,000
Other assets 204,000 251,000
------------- -------------
Total assets $ 50,542,000 $ 52,430,000
============= =============
LIABILITIES AND SHAREHOLDERS'EQUITY
Current liabilities
Accounts payable $ 8,189,000 $ 4,822,000
Allowance for sales returns 4,636,000 5,043,000
Accrued expenses and other current liabilities 1,991,000 1,908,000
Deferred revenue 3,474,000 2,830,000
------------- -------------
Total current liabilities 18,290,000 14,603,000
Other long-term obligations 98,000 --
------------- -------------
Total liabilities $ 18,388,000 $ 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 September 30, 2007 and December 31, 2006, respectively
(liquidation preference: $571,000 plus accrued dividends of $94,000 and $62,000
as of September 30, 2007 and December 31, 2006, respectively) -- --
Common stock - $.01 par value; 200,000,000 and 152,000,000 shares authorized as of
September 30, 2007 and December 31, 2006, respectively, and 131,048,197 and 130,484,854
shares issued as of September 30, 2007 and December 31, 2006, respectively and
130,921,294 and 130,484,854 outstanding as of September 30, 2007 and December 31, 2006,
respectively 1,309,000 1,305,000
Treasury Stock (160,000) --
Additional paid-in capital 157,275,000 152,519,000
Accumulated deficit (126,270,000) (115,997,000)
------------- -------------
Total shareholders' equity 32,154,000 37,827,000
------------- -------------
Total liabilities and shareholders' equity $ 50,542,000 $ 52,430,000
============= =============
The accompanying notes are an integral part of these
condensed financial statements.
3
BLUEFLY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2007 2006
------------- -------------
Net sales $ 61,795,000 $ 49,991,000
Cost of sales 39,230,000 29,995,000
------------- -------------
Gross profit 22,565,000 19,996,000
Selling and fulfillment expenses 13,528,000 11,152,000
Marketing expenses 9,130,000 9,256,000
General and administrative expenses 10,450,000 8,019,000
------------- -------------
Total operating expenses 33,108,000 28,427,000
Operating loss (10,543,000) (8,431,000)
Interest and other income 463,000 311,000
Interest and other expense (193,000) (530,000)
------------- -------------
Net loss $ (10,273,000) $ (8,650,000)
Preferred stock dividends (33,000) (2,237,000)
Deemed dividends related to beneficial conversion feature
on Series F Preferred Stock -- (3,857,000)
------------- -------------
Net loss available to common shareholders $ (10,306,000) $ (14,744,000)
============= =============
Basic and diluted loss per common share $ (0.08) $ (0.23)
============= =============
Weighted average common shares outstanding 130,504,601 63,612,059
============= =============
(basic and diluted)
The accompanying notes are an integral part of these
condensed financial statements.
4
BLUEFLY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2007 2006
------------- -------------
Net sales $ 18,079,000 $ 16,322,000
Cost of sales 12,351,000 10,211,000
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Gross profit 5,728,000 6,111,000
Selling and fulfillment expenses 4,583,000 3,871,000
Marketing expenses 2,807,000 3,496,000
General and administrative expenses 3,410,000 2,369,000
------------- -------------
Total operating expenses 10,800,000 9,736,000
Operating loss (5,072,000) (3,625,000)
Interest and other income 99,000 199,000
Interest and other expense (55,000) (59,000)
------------- -------------
Net loss $ (5,028,000) $ (3,485,000)
Preferred stock dividends (11,000) (16,000)
Net loss available to common shareholders $ (5,039,000) $ (3,501,000)
============= =============
Basic and diluted loss per common share $ (0.04) $ (0.03)
============= =============
Weighted average common shares outstanding 130,513,931 129,007,488
============= =============
(basic and diluted)
The accompanying notes are an integral part of these
condensed financial statements.
5
BLUEFLY, INC.
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2006 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 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 - - (19,673) - - -
Issuance of Restricted Stock - - 426,192 4,000 - -
Purchase of Treasury Stock - - - - 126,903 (160,000)
Exercise of Employee Options - - 28,061 - - -
Exercise of Related Party Warrant - - 1,860 - - -
Net Loss - - - - - -
========== ========== ============= ============= ============ ============
Balance at September 30, 2007 571 $ - 130,921,294 $ 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 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 4,735,000 - 4,735,000
Issuance of Restricted Stock (4,000) - -
Purchase of Treasury Stock - - (160,000)
Exercise of Employee Options 25,000 - 25,000
Exercise of Related Party Warrant - - -
Net Loss - (10,273,000) (10,273,000)
============= ============== =============
Balance at September 30, 2007 $ 157,275,000 $ (126,270,000) $ 32,154,000
============= ============== =============
The accompanying notes are an integral part of these
condensed financial statements
6
BLUEFLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2007 2006
-------------- --------------
Cash flows from operating activities
Net loss $ (10,273,000) $ (8,650,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,292,000 1,125,000
Stock options expense 4,735,000 1,820,000
Warrant issued to consultant -- 67,000
Provisions for returns (406,000) 156,000
Bad debt expense 493,000 533,000
Reserve for inventory obsolescence 1,252,000 890,000
Warrant issued to supplier -- 147,000
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories (7,408,000) (10,921,000)
Accounts receivable (537,000) (1,705,000)
Prepaid inventory 194,000 (626,000)
Prepaid expenses (3,438,000) (1,378,000)
Other current assets (81,000) 67,000
Increase (decrease) in
Accounts payable 3,465,000 963,000
Accrued expenses and other liabilities 256,000 2,027,000
Interest payable to related party shareholders -- 271,000
Deferred revenue 644,000 710,000
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Net cash used in operating activities (9,812,000) (14,504,000)
-------------- --------------
Cash flows from investing activities
Purchase of property and equipment (3,055,000) (847,000)
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Net cash used in investing activities (3,055,000) (847,000)
-------------- --------------
Cash flows from financing activities
Payments of capital lease obligation (14,000) (40,000)
Net proceeds from exercise of stock options 25,000 36,000
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 (149,000) 22,998,000
-------------- --------------
Net (decrease) increase in cash and cash equivalents (13,016,000) 7,647,000
Cash and cash equivalents - beginning of period 20,188,000 9,408,000
-------------- --------------
Cash and cash equivalents - end of period $ 7,172,000 $ 17,055,000
============== ==============
Supplemental schedule of non-cash investing and financing activities:
Cash paid for interest $ 86,000 $ 116,000
============== ==============
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
============== ==============
Issuance of Common Stock to placement agent -- $ 1,080,000
============== ==============
Conversion of Preferred Stock to Common Stock -- $ (387,000)
============== ==============
The accompanying notes are an integral part of these
condensed financial statements.
7
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 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 online retailer of designer brands, fashion trends and
superior 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) have 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
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2007
DEFERRED STOCK UNIT AWARDS VESTING SCHEDULE
FINAL VESTING DATE OF ELIGIBLE STOCK TOTAL VESTING PERIOD OF DEFERRED PERCENTAGE OF DEFERRED STOCK UNIT
OPTION AS OF DATE OF CANCELLATION STOCK UNIT AWARDS 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 pursuant to 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 nine months ended September 30, 2007,
approximately $353,000 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 September 30, 2007, total
availability under the Credit Facility was approximately $7,500,000, of which
$3,650,000 was committed, leaving approximately $3,850,000 available for further
borrowings.
9
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2007
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
nine months ended September 30, 2007 and 2006, the Company incurred
approximately $86,000 and $116,000, respectively, in connection with these fees.
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.
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 September 30, 2007 Exercise Prices September 30, 2006 Exercise Prices
---------------------------- -------------------- ----------------- -------------------- -----------------
Options 3,501,257 $0.80 - $2.73 8,007,910 $0.80 - $16.47
Restricted Stock Awards/DSUs 10,804,436 (2) -- -- --
Warrants 1,214,249 $0.78 - $3.96 1,945,893 $0.78 - $ 3.96
Preferred Stock 696,341 (1) -- -- --
(1) At September 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 nine months ended September 30,
2007 was $4,735,000, compared to $1,820,000 for the nine months ended September
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
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2007
The following table summarizes the Company's stock option activity:
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
Balance at December 31, 2006 5,417,116 $ 1.68
----------
Options granted 60,000 $ 0.97
Options canceled (1,947,798) $ 2.82
Options exercised (28,061) $ 0.89
----------
Balance at September 30, 2007 3,501,257 $ 1.05
Vested at December 31, 2006 3,682,877 $ 1.83
Vested at September 30, 2007 2,776,345 $ 1.03
During the third quarter of 2007, 103,661 options vested. Of these options,
17,264 were canceled or expired. The total fair value of the options vested
(including those canceled) during the quarter ended September 30, 2007 was
approximately $107,000. During the third quarter of 2007, 30,000 options were
granted. At September 30, 2007, the aggregate intrinsic value of the fully
vested options was $4,000 and the weighted average remaining contractual life of
the options was 6.1 years. The Company has not capitalized any compensation
cost, or modified any of its stock option grants during the nine months ended
September 30, 2007, except for those described in connection with the Offer to
Exchange. Approximately 2,505 options with an intrinsic value of approximately
$150 were exercised during the third quarter of 2007. No cash was used to settle
equity instruments granted under the Plans during the third quarter of 2007.
As of September 30, 2007, the total compensation cost related to non-vested
options not yet recognized was $588,000. 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 September 30, 2007:
RESTRICTED DEFERRED STOCK
STOCK AWARDS UNIT AWARDS
--------------- ---------------
Balance at January 1, 2007 861,221 9,862,267
Shares/Units Granted 426,192 544,405
Shares/Units Forfeited (19,673) (8,753)
Shares/Units Restriction Lapses (861,221) --
--------------- ---------------
Balance at September 30, 2007 406,519 10,397,919
Weighted Average Grant Date Fair Value Per share $ 1.26 $ 0.95
Aggregate Grant Date Fair Value $ 512,214 $ 9,878,023
Vesting Service Period of Shares Granted 12 months 12-36 months
Number of shares/units vested at September 30, 2007 -- --
Number of shares/units unvested at September 30, 2007 406,519 10,397,919
For the quarter ended September 30, 2007, the Company recognized an expense of
approximately $1.4 million in connection with these awards.
11
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2007
As of September 30, 2007, the total compensation cost related to non-vested
restricted stock and deferred stock units not yet recognized was $8.0 million.
Total compensation cost is expected to be recognized over a two year period.
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.
NOTE 8 - NASDAQ COMPLIANCE
On August 16, 2007, the Company was notified by the Nasdaq Stock Market that it
was not in compliance with the continued listing requirements for the Nasdaq
Capital Market because shares of its Common Stock had closed at a per share bid
price of less than $1.00 for at least 30 trading days. Under Nasdaq rules, the
Company has a 180-day grace period to regain compliance, which extends to
February 11, 2008. If the Company is unable to regain compliance by such date,
the Nasdaq Staff will determine whether it meets the initial listing criteria of
the Nasdaq Capital Market other than the bid price requirement. In the event
that the Company meets such initial listing criteria, it will be granted an
additional 180-day grace period to regain compliance. In order to regain
compliance, shares of its Common Stock would need to close at a price of $1.00
or more for at least ten consecutive trading days. In the event that it does not
regain compliance within the requisite time period, the Company intends to
appeal any delisting. However, no assurance can be provided that any such appeal
will be successful. The failure to maintain listing on the Nasdaq Capital Market
may have an adverse effect on the price and/or liquidity of the Company's Common
Stock.
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
22%.
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 24 months.
During the third quarter of 2007 we completed our transition to a new third
party fulfillment center. In connection with this transition we incurred
incremental expenses of approximately $632,000 ($462,000 for the third quarter)
in costs directly related to the move (including trucking, labor, insurance,
etc.). We took additional charges of approximately $550,000 against our
inventory based on the reconciliation of inventory that we normally perform in
connection with each quarter's close. We believe, at this time, that the charges
that were taken will be sufficient to cover any loss of inventory resulting from
the transition, and that we will be able to work with the fulfillment center to
implement necessary changes to their inventory reporting systems. However, there
can be no assurance that this will be the case. We intend to perform the full
physical inventory in January, following the end of the Holiday sales and
returns cycle. Start-up issues associated with the transition to the new
fulfillment center also resulted in certain cancelled orders and other
incremental costs such as expedited shipping costs. During the period from June
2007 through mid September of 2007 a portion of the Company's inventory was not
available for sale. This had a significant impact on the offering to the
consumer and hence the ultimate sales recognized in this time frame. In
addition, during this transition period the Company experienced some processing
issues with a small percentage of orders
12
BLUEFLY, INC.
SEPTEMBER 30, 2007
and returns. We believe that these issues had a negative impact on those
customers affected. We believe we have taken the appropriate action related to
the customers affected. In the long term, we expect the transition to the new
fulfillment center to improve customer service and increase efficiencies.
Our net sales increased by approximately 11% to $18,079,000 for the three months
ended September 30, 2007 from $16,322,000 for the three months ended September
30, 2006. Our gross margin decreased to 31.7% for the three months ended
September 30, 2007 from 37.4% for the three months ended September 30, 2006. Our
gross profit decreased by 6% to $5,728,000 for the three months ended September
30, 2007 from $6,111,000 for the three months ended September 30, 2006. The
decrease in gross margin was primarily related to (i) the additional reserves
against inventory taken as a result of the transition to the new fulfillment
center, as described above, (ii) a change in the merchandise mix and (iii)
expedited shipping cost incurred in connection with our transition to the new
third-party fulfillment center. Our operating loss increased to $5,072,000 for
the three months ended September 30, 2007 from $3,625,000 for the three months
ended September 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 (stock based compensation was $1.5 million in the third quarter
of 2007 versus $ 597,000 for the same period last year) as well as costs
incurred in connection with our transition to the new fulfillment center. The
increase in operating loss was partially offset by a decrease in marketing
expenses (including staff related costs) of $689,000 for the third quarter of
2007 as compared to the third quarter of 2006.
Our reserve for returns and credit card chargebacks decreased slightly to 39.8%
of gross sales for the third quarter of 2007 compared to 40.4% for the third
quarter of 2006. In general, our merchandise mix has been shifting towards
higher end products which tend to drive return rates higher. We continually try
to refine the mix to reduce the return rate. However, we believe that the higher
return rates will be more than offset by the higher gross margin dollars and
average order sizes. As such, we continually evaluate our merchandise mix in an
effort to reduce return rates.
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. We evaluate our
inventory on a quarterly basis to determine the lower of cost or the fair market
value of that inventory based upon age of the inventory, market factors, and
historical trends among other factors, and take the appropriate reserves against
inventory. 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 September 30, 2007, we had an accumulated deficit of $126,270,000. 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, 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 NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2006.
The following table sets forth our statement of operations data for the nine
months ended September 30th. 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 61,795 100.0% $ 49,991 100.0% 37,576 100.0%
Cost of sales 39,230 63.5% 29,995 60.0% 23,465 62.4%
---------- ---------- ----------
Gross profit 22,565 36.5% 19,996 40.0% 14,111 37.6%
Selling and fulfillment expenses 13,528 21.9% 11,152 22.3% 9,133 24.3%
Marketing expenses 9,130 14.7% 9,256 18.5% 3,538 9.4%
General and administrative expenses 10,450 16.9% 8,019 16.1% 4,716 12.6%
---------- ---------- ----------
Total operating expenses 33,108 53.5% 28,427 56.9% 17,387 46.3%
Operating loss (10,543) (17.0)% (8,431) (16.9)% (3,276) (8.7)%
Interest (expense) and other income 270 0.4% (219) (0.4)% (489) (1.3)%
---------- ---------- ----------
Net loss (10,273) (16.6)% (8,650) (17.3)% (3,765) (10.0)%
13
BLUEFLY, INC.
SEPTEMBER 30, 2007
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 nine months ended September 30th, as indicated below:
2007 2006 2005
------------ ------------ ------------
Average Order Size (including shipping & handling) $ 277.60 $ 250.65 $ 214.07
New Customers Added during the Period 131,895 112,457 95,088
In addition, to the financial statement items and metrics listed above, we also
report gross sales, which is a non-GAAP financial measure. We define gross sales
as the total dollar amount of orders received by customers (including shipping
and handling) net of customer credits, but before any reserves are taken for
returns or bad debt. We believe that the presentation of gross sales is useful
to investors because (a) it provides an alternative measure of the total demand
for the products sold by the Company and (b) it provides a basis upon with which
to measure the percentage of total demand that is reserved for both returns and
bad debt. Management uses the gross sales measure for these same reasons.
Net sales: Gross sales for the nine months ended September 30, 2007 increased by
24% to $103,703,000 from $83,483,000 for the nine months ended September 30,
2006. For the nine months ended September 30, 2007, we recorded a provision for
returns and credit card chargebacks and other discounts of $41,908,000, or
approximately 40.4% of gross sales. For the nine months ended September 30,
2006, the provision for returns and credit card chargebacks and other discounts
was $33,492,000, or approximately 40.1% of gross sales. The slight increase in
this provision as a percentage of gross sales resulted from a slight increase in
the return rate. The overall 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 $62.60 for the nine months ended
September 30, 2007 from $60.62 for the nine months ended September 30, 2006.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the nine months ended
September 30, 2007 were $61,795,000. This represents an increase of
approximately 24% compared to the nine months ended September 30, 2006, in which
net sales totaled $49,991,000. The growth in net sales resulted from both an
increase in the number of new customers acquired (over 17% higher compared to
the first nine months of 2006) and an increase in average order size (over 10%
higher compared to the first nine months of 2006). For the nine months ended
September 30, 2007, revenue from shipping and handling (which is included in net
sales) increased approximately 14% to $3,315,000 from $2,909,000 for the nine
months ended 2006.
Cost of sales: Cost of sales consists of the cost of products sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the nine months ended September 30, 2007
totaled $39,230,000, resulting in gross margin of approximately 36.5%. Cost of
sales for the nine months ended September 30, 2006 totaled $29,995,000,
resulting in gross margin of 40.0%. Gross profit increased by approximately 13%
to $22,565,000 for the nine months ended September 30, 2007 compared to
$19,996,000 for the nine months ended September 30, 2006. The growth in the
high-end designer items has a significant impact on the Company's overall
merchandise mix, which continues to negatively impact the gross margin
percentage. The combination of the high demand for high-end merchandise and the
decline in value of the US Dollar relative to the Euro had a negative impact on
our gross margins related to designer accessory items. In addition, the gross
margin was negatively affected by additional inventory reserves, and expedited
shipping expenses that were incurred in connection with our transition to a new
fulfillment center.
14
BLUEFLY, INC.
SEPTEMBER 30, 2007
Marketing expenses: Marketing expenses remained relatively unchanged decreasing
by 1% to $9,130,000 for the nine months ended September 30, 2007 compared to
$9,256,000 for the nine months ended September 30, 2006. While net sales for the
nine months increased by almost 24%, our marketing expenses as a percentage of
net sales decreased to 14.7% of net sales for the nine months ended September
30, 2007 from 18.5% for the nine months ended September 30, 2006.
Marketing expenses include expenses related to paid search, online and print
advertising, television, fees to marketing affiliates, direct mail campaigns and
staff related costs. Total expenses related to the national print and television
advertising campaign for the nine months ended September 30, 2007 totaled
$3,500,000 compared to $4,600,000 for the nine months ended September 30, 2006.
The $1.1 million decrease in costs associated with our national advertising
campaign was partially offset by an increase of $745,000 in connection with
costs associated with online marketing initiatives.
Selling and fulfillment expenses: Selling and fulfillment expenses increased by
21% for the nine months ended September 30, 2007 compared to the nine months
ended September 30, 2006. Selling and fulfillment expenses were comprised of the
following:
Nine Months Ended As a % of Nine Months Ended As a % of Percentage Difference
September 30, 2007 Net Sales September 30, 2006 Net Sales increase (decrease)
------------------ --------- ------------------ --------- ---------------------
Operating 7,219,000 11.7% 5,638,000 11.3% 28%
Technology 3,543,000 5.7% 3,067,000 6.1% 15%
E-Commerce 2,766,000 4.5% 2,447,000 4.9% 13%
------------------ --------- ------------------ --------- ---------------------
13,528,000 21.9% 11,152,000 22.3% 21%
As a percentage of net sales, our selling and fulfillment expenses decreased
slightly to 21.9% for the nine months ended September 30, 2007 from 22.3% for
the nine months ended September 30, 2006.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased for the nine months ended September 30, 2007 by approximately 28%
compared to the nine months ended September 30, 2006 as a result of variable
costs associated with the increased sales volume (e.g., picking and packing
orders and processing returns) and an increase in customer service and salary
related expenses as well as incremental costs of approximately $632,000 incurred
in connection with our transition to the new third party fulfillment center.
Included in operating expenses for 2006 was a refund of $274,000 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 nine months ended September 30,
2007, technology expenses increased by approximately 15% compared to the nine
months ended September 30, 2006. This increase was attributed to an increase in
staff and related costs, software support, depreciation and training and was
partially offset by a decrease in consulting expenses. A majority of the
consulting expenses incurred for the nine months ended September 30, 2007 were
related to the development of our new Web site and capitalized accordingly. As
of September 30, 2007 approximately $1,865,000 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 nine months ended September 30, 2007,
e-commerce expenses increased by approximately 13% as compared to the nine
months ended September 30, 2006. This increase was primarily due to an increase
in salary related expenses as well as an increase in expenses associated with
software used to support the web site.
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 nine months ended
September 30, 2007 increased by approximately 30% to $10,450,000 as compared to
$8,019,000 for the nine months ended September 30, 2006. The increase in general
and administrative expenses was primarily the result of the recording of
$4,209,000 of expense related to employee stock options in the nine month period
and increased consulting and professional fees of $152,000. These increases were
partially offset by a decrease in public company expenses of $214,000 and a
decrease in salary and salary related expenses of $133,000.
15
BLUEFLY, INC.
SEPTEMBER 30, 2007
As a percentage of net sales, general and administrative expenses for the nine
months ended September 30, 2007 increased to approximately 16.9% from 16.1% for
the nine months ended September 30, 2006.
Loss from operations: Operating loss increased by approximately 25% for the nine
months ended September 30, 2007 to $10,543,000 from $8,431,000 for the nine
months ended September 30, 2006. While net sales and gross margin increased over
this period, the increase in net sales and gross margin was more than offset by
the recording of stock option expenses in connection with SFAS No. 123(R).
Interest and other income: Other income for the nine months ended September 30,
2007 increased to $463,000 from $311,000 for the nine months ended September 30,
2006. These amounts relate primarily to interest income earned on our cash
balances.
Interest and other expense: Interest expense for the nine months ended September
30, 2007 totaled $193,000, compared to $530,000 for the nine months ended
September 30, 2006. Interest expense relates to fees paid in connection with our
Credit Facility, as well as interest expense on the Notes.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2006
The following table sets forth our statement of operations data for the three
months ended September 30th. 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 $ 18,079 100.0% $ 16,322 100.0% $ 12,045 100.0%
Cost of sales 12,351 68.3% 10,211 62.6% 7,470 62.0%
----------- ----------- -----------
Gross profit 5,728 31.7% 6,111 37.4% 4,575 38.0%
Selling and fulfillment expenses 4,583 25.3% 3,871 23.7% 2,965 24.6%
Marketing expenses 2,807 15.5% 3,496 21.4% 1,603 13.3%
General and administrative expenses 3,410 18.9% 2,369 14.5% 1,528 12.7%
----------- ----------- -----------
Total operating expenses 10,800 59.7% 9,736 59.6% 6,096 50.6%
Operating loss (5,072) (28.0)% (3,625) (22.2)% (1,521) (12.6)%
Interest (expense) and other income, net 44 0.2% 140 0.9% (182) (1.5)%
----------- ----------- -----------
Net loss (5,028) (27.8)% (3,485) (21.3)% (1,703) (14.1)%
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 September 30th, as indicated below:
2007 2006 2005
---------- ---------- ----------
Average Order Size (including shipping & handling) $ 280.22 $ 260.58 $ 228.72
New Customers Added during the Period 37,408 35,970 28,762
In addition to the financial statement items and metrics listed above, we also
report gross sales, which is a non-GAAP financial measure. We define gross sales
as the total dollar amount of orders received by customers (including shipping
and handling) net of customer credits, but before any reserves are taken for
returns or bad debt. We believe that the presentation of gross sales is useful
to investors because (a) it provides a measure of the total demand for the
products sold by the Company and (b) it provides a base with which to measure
the percentage of total demand that is reserved for both returns and bad debt.
Management uses the gross sales measure for these same reasons.
16
BLUEFLY, INC.
SEPTEMBER 30, 2007
Net sales: Gross sales for the three months ended September 30, 2007 increased
by approximately 10% to $30,009,000 from $27,366,000 for the three months ended
September 30, 2006. For the three months ended September 30, 2007, we recorded a
provision for returns and credit card chargebacks and other discounts of
$11,930,000, or approximately 39.8% of gross sales. For the three months ended
September 30, 2006, the provision for returns and credit card chargebacks and
other discounts was $11,044,000, or approximately 40.4% of gross sales. The
decrease in the return rate in this provision as a percentage of gross sales
resulted from a slight decrease in the return rate. However, there can be no
assurance that a decrease in return rates will continue. Historically, as our
merchandise mix has moved more towards higher end products, our return rate has
increased.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the three months
ended September 30, 2007 were $18,079,000. This represents an increase of
approximately 11% compared to the three months ended September 30, 2006, in
which net sales totaled $16,322,000. The growth in net sales resulted from both
an increase in the number of new customers acquired (approximately 4% higher
compared to third quarter 2006) and an increase in average order size
(approximately 7% higher compared to the third quarter 2006). For the three
months ended September 30, 2007, revenue from shipping and handling decreased
approximately 1% to $924,000 from $939,000 for the three months ended September
30, 2006.
Cost of sales: Cost of sales for the three months ended September 30, 2007
totaled $12,351,000, resulting in gross margin of approximately 31.7%. Cost of
sales for the three months ended September 30, 2006 totaled $10,211,000,
resulting in gross margin of 37.4%. Gross profit decreased by 6 %, to $5,728,000
for the three months ended September 30, 2007 compared to $6,111,000 for the
three months ended September 30, 2006. Included in the cost of sales was a
charge for $550,000 against our inventory based on a inventory reconciliation
(as described above in more detail). The growth in the high-end designer items
has a significant impact on the Company's overall merchandise mix, which
continues to negatively impact the gross margin percentage. The combination of
the high demand for this merchandise and the decline in the value of the US
Dollar relative to the Euro had a negative impact on our gross margins related
to designer accessory items. In addition, the gross margin was negatively
affected by additional inventory reserves, and expedited shipping expenses that
were incurred in connection with our transition to a new fulfillment center.
Marketing expenses: Marketing expenses decreased by 20% to $2,807,000 for the
three months ended September 30, 2007 from $3,496,000 for the three months ended
September 30, 2006. While net sales for the three months increased by
approximately 11%, our marketing expenses as a percentage of net sales decreased
to 15.5% for the three months ended September 30, 2007 from 21.4% for the three
months ended September 30, 2006.
Total expenses related to the national print and television advertising campaign
for the three months ended September 30, 2007 totaled $693,000 compared to
$1,486,000 for the three months ended September 30, 2006. A majority of this
variance is the result of the timing of expensing production costs related to TV
advertisements.
Selling and fulfillment expenses: Selling and fulfillment expenses increased by
approximately 18% in the third quarter of 2007 compared to the third quarter of
2006. Selling and fulfillment expenses were comprised of the following:
Three Months Ended As a % of Three Months Ended As a % of Percentage Difference
September 30, 2007 Net Sales September 30, 2006 Net Sales increase (decrease)
------------------ --------- ------------------ --------- ---------------------
Operating 2,486,000 13.7% 1,939,000 11.9% 28%
Technology 1,144,000 6.3% 1,079,000 6.6% 6%
E-Commerce 953,000 5.3% 853,000 5.2% 12%
------------------ --------- ------------------ --------- ---------------------
4,583,000 25.3% 3,871,000 23.7% 18%
As a percentage of net sales, our selling and fulfillment expenses increased to
25.3% for the three months ended September 30, 2007 from 23.7% for the three
months ended September 30, 2006.
Operating expenses increased in the third quarter of 2007 by approximately 28%
compared to the third quarter 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) as well as an increase in customer service costs.
In addition, during the third quarter we completed our transition to a new third
party fulfillment center and incurred incremental expenses during the quarter of
approximately
17
BLUEFLY, INC.
SEPTEMBER 30, 2007
$462,000 in costs directly related to the move (including trucking, labor,
insurance, etc.). Start-up issues associated with the transition to the new
fulfillment center resulted in certain cancelled orders and associated expenses
during the third quarter of 2007. In the long term, we expect the transition to
the new fulfillment to improve customer service and to result in efficiencies
and cost savings.
For the three months ended September 30, 2007, technology expenses increased by
approximately 6% compared to the three months ended September 30, 2006. This
increase resulted from an increase in software support, depreciation, training
and web hosting expenses. The increase was partially offset by a decrease in
consulting expenses. Most of the consulting expenses incurred in the third
quarter of 2007 were related to the development of our new Web site and
capitalized accordingly. For the three months ended September 30, 2007,
approximately $646,000 of expenses were capitalized in connection with the
development of our new Web site.
For the three months ended September 30, 2007, e-commerce expenses increased by
approximately 12% as compared to the three months ended September 30, 2006. This
increase was primarily due to an increase in salary related expenses, including
the recording of non-cash employee stock option expenses as well as an increase
in expenses associated with photo shoots.
General and administrative expenses: General and administrative expenses for the
three months ended September 30, 2007 increased by approximately 44% to
$3,410,000 as compared to $2,369,000 for the three months ended September 30,
2006. The increase in general and administrative expenses was primarily the
result of the recording of $1,365,000 of expense related to non-cash employee
stock options in the current period verses $463,000 last year.
As a percentage of net sales, general and administrative expenses for the third
quarter of 2007 increased to approximately 18.9% from 14.5% for the third
quarter of 2006.
Loss from operations: Operating loss increased by approximately 40% in the third
quarter of 2007 to $5,072,000 from $3,625,000 in the third quarter of 2006.
While net sales increased over this period, the increase in net sales was more
than offset by the $550,000 inventory charge, the incremental operational
expenses and the recording of stock option expenses in accordance with SFAS No.
123(R).
Interest and other income: Other income for the third quarter ended September
30, 2007 decreased to $99,000 from $199,000 for the third quarter ended
September 30, 2006. These amounts relate primarily to interest income earned on
our cash balances.
Interest and other expense: Interest expense for the three months ended
September 30, 2007 totaled $55,000, compared to $59,000 for the three months
ended September 30, 2006. Interest expense relates to fees paid in connection
with our Credit Facility.
LIQUIDITY AND CAPITAL RESOURCES
General
At September 30, 2007, we had approximately $7.2 million in cash and cash
equivalents, as compared to $17.1 million at September 30, 2006 and $5.1 million
at September 30, 2005. Cash and cash equivalents at December 31, 2006 was $20.2
million. Working capital at September 30, 2007, 2006 and 2005 was $26.7 million,
$35.8 million and $11.6 million, respectively. Working capital at December 31,
2006 was $34.0 million. In addition, as of September 30, 2007, we had
approximately $3.7 million committed under the Credit Facility, leaving
approximately $3.8 million of availability, as compared to $3.2 million
committed and $4.3 million available as of September 30, 2006, and $2.7 million
committed and $3.7 million available as of September 30, 2005.
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 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,
18
BLUEFLY, INC.
SEPTEMBER 30, 2007
as in some circumstances we need to pay in advance of production. As of
September 30, 2007, we had approximately $422,000 of prepaid inventory and
$3,395,000 of prepaid advertising on our balance sheet, as compared to
$1,111,000 and $2,096,000 as of September 30, 2006, and $436,000 and $1,082,000
as of September 30, 2005. The increase in the prepaid advertising related to ads
that will run in the fourth quarter of 2007 and the first quarter of 2008.
Our inventory levels as of September 30, 2007 were approximately $3.6 million
higher than at September 30, 2006. The increase in inventory generally reflects
a ramp up in connection with our sales growth but also is a result of some of
our inventory not being available for sale during our move to our new third
party fulfillment center. As a result we expect to carry some of this inventory
into next season. 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 September 30, 2007, total availability under the
Credit Facility was approximately $7,500,000 of which $3,650,000 was committed,
leaving approximately $3,850,000 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 September 30, 2007, we had the following commitments and long term
obligations:
Less than 1-3 3-5 More than
Total 1 year years years 5 years
------------ ----------- ----------- ----------- -----------
Marketing and Advertising $ 5,225,000 5,225,000 -- -- --
Purchase Orders 16,803,000 16,803,000 -- -- --
Operating Leases 1,061,000 470,000 591,000 -- --
Employment Contracts 2,543,000 579,000 1,964,000 -- --
------------ ----------- ----------- ----------- -----------
Grand total $ 25,632,000 23,077,000 2,555,000 -- --
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.
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BLUEFLY, INC.
SEPTEMBER 30, 2007
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 is 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; risks related to our
transition to a new order fulfillment center; the success of our advertising
campaign; risks associated with Soros, Maverick and Prentice each owning a
significant portion of our stock; the need for additional capital and potential
inability to raise such capital; 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 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 uncertainties; and uncertainties relating to the
imposition of sales tax on Internet sales.
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 such litigation that
in the opinion of management is likely to have a material adverse effect on us.
ITEM 1A. RISK FACTORS
The Risk Factors included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 have not materially changed other than as set forth
below.
During the third quarter of 2007 we completed our transition to a new third
party fulfillment center. In connection with this transition we incurred
incremental expenses of approximately $632,000 ($462,000 for the third quarter)
in costs directly related to the move (including trucking, labor, insurance,
etc.). We took additional charges of approximately $550,000 against our
inventory based on the reconciliation of inventory that we normally perform in
connection with each quarter's close. We believe, at this time, that the charges
that were taken will be sufficient to cover any loss of inventory resulting from
the
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BLUEFLY, INC.
SEPTEMBER 30, 2007
transition, and that we will be able to work with the fulfillment center to
implement necessary changes to their inventory reporting systems. However, there
can be no assurance that this will be the case. We intend to perform the full
physical inventory in January, following the end of the Holiday sales and
returns cycle. Start-up issues associated with the transition to the new
fulfillment center also resulted in certain cancelled orders and other
incremental costs such as expedited shipping costs. During the period from June
2007 through mid September of 2007 a portion of the Company's inventory was not
available for sale. This had a significant impact on the offering to the
consumer and hence the ultimate sales recognized in this time frame. In
addition, during this transition period the Company experienced some processing
issues with a small percentage of orders and returns. We believe that these
issues had a negative impact on those customers affected. We believe we have
taken the appropriate action related to the customers affected. In the long
term, we expect the transition to the new fulfillment center to improve customer
service and increase efficiencies, however, there can be no assurance that the
transition will not continue to have a negative impact upon our business,
financial condition and results of operations.
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.
SEPTEMBER 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
November 14, 2007
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