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, 2008
[ ] 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
---------------------------------------------
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, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Accelerated Non-accelerated Smaller reporting
filer [ ] filer [ ] filer [ ] company [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 12, 2008, the issuer had outstanding 13,287,437 shares of Common
Stock, $.01 par value.
BLUEFLY, INC.
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2008 (unaudited)
and December 31, 2007 3
Condensed Statements of Operations for the six months ended
June 30, 2008 and 2007 (unaudited) 4
Condensed Statements of Operations for the three months ended
June 30, 2008 and 2007 (unaudited) 5
Condensed Statements of Cash Flows for the six months ended
June 30, 2008 and 2007 (unaudited) 6
Condensed Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4T. Controls and Procedures 17
Part II. Other Information 18
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits 19
Signatures 20
2
Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
BLUEFLY, INC.
CONDENSED BALANCE SHEETS (Unaudited)
June 30, December 31,
2008 2007
---- ----
ASSETS
Current assets
Cash and cash equivalents $2,591,000 $6,730,000
Inventories, net 25,255,000 28,492,000
Accounts receivable, net of allowance for doubtful accounts 2,492,000 2,102,000
Prepaid inventory 106,000 294,000
Prepaid expenses 832,000 777,000
Other current assets 652,000 416,000
------------ ------------
Total current assets 31,928,000 38,811,000
Property and equipment, net 6,784,000 6,019,000
Other assets 190,000 189,000
------------ ------------
Total assets $38,902,000 $45,019,000
============ ============
Current liabilities
Accounts payable $7,615,000 $8,460,000
Allowance for sales returns 3,342,000 4,204,000
Accrued expenses and other current liabilities 1,352,000 2,052,000
Deferred revenue 2,732,000 3,206,000
------------ ------------
Total current liabilities 15,041,000 17,922,000
Other long-term obligations -- 60,000
------------ ------------
Total liabilities $15,041,000 $17,982,000
------------ ------------
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, 2008 and December 31, 2007
(liquidation preference: $571,000 plus accrued dividends of $127,000, and
$105,000 as of June 30, 2008 and December 31, 2007, respectively) -- --
Common stock - $.01 par value; 200,000,000 shares authorized as of
June 30, 2008 and December 31, 2007, respectively, 13,434,653 and
13,426,803 shares issued as of June 30, 2008 and December 31, 2007,
respectively, 13,278,103 and 13,275,730 shares outstanding as of June 30,
2008 and December 31, 2007, respectively 1,328,000 1,328,000
Treasury Stock (1,452,000) (1,430,000)
Additional paid-in capital 160,785,000 158,965,000
Accumulated deficit (136,800,000) (131,826,000)
------------ ------------
Total shareholders' equity 23,861,000 27,037,000
------------ ------------
Total liabilities and shareholders' equity $ 38,902,000 $ 45,019,000
============ ============
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,
----------------------------
2008 2007
---- ----
Net sales $48,579,000 $43,716,000
Cost of sales 30,545,000 26,879,000
----------- -----------
Gross profit 18,034,000 16,837,000
Selling and fulfillment expenses 9,592,000 8,945,000
Marketing expenses 6,448,000 6,323,000
General and administrative expenses 6,837,000 7,040,000
----------- -----------
Total operating expenses 22,877,000 22,308,000
Operating loss (4,843,000) (5,471,000)
Interest income 49,000 364,000
Interest expense (180,000) (138,000)
----------- -----------
Net loss $(4,974,000) $(5,245,000)
Preferred stock dividends (22,000) (22,000)
Net loss available to common shareholders $(4,996,000) $(5,267,000)
=========== ===========
Basic and diluted loss per common share $(0.38) $(0.40)
=========== ===========
Weighted average common shares outstanding
(basic and diluted) 13,259,059 13,049,986
=========== ===========
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,
----------------------------
2008 2007
---- ----
Net sales $23,334,000 $21,608,000
Cost of sales 14,236,000 13,145,000
----------- -----------
Gross profit 9,098,000 8,463,000
Selling and fulfillment expenses 4,523,000 4,546,000
Marketing expenses 2,926,000 2,712,000
General and administrative expenses 3,590,000 3,454,000
----------- -----------
Total operating expenses 11,039,000 10,712,000
Operating loss (1,941,000) (2,249,000)
Interest income 13,000 169,000
Interest expense (108,000) (62,000)
----------- -----------
Net loss $(2,036,000) $(2,142,000)
Preferred stock dividend (11,000) (11,000)
Net loss available to common shareholders $(2,047,000) $(2,153,000)
=========== ===========
Basic and diluted loss per common share $(0.15) $(0.16)
=========== ===========
Weighted average common shares outstanding
(basic and diluted) 13,269,123 13,050,889
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
5
BLUEFLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------
2008 2007
---- ----
Cash flows from operating activities
Net loss $(4,974,000) $(5,245,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 903,000 836,000
Stock based compensation 1,647,000 3,227,000
Provisions for returns (862,000) (1,791,000)
Bad debt expense 308,000 298,000
Reserve for inventory obsolescence 200,000 402,000
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories 3,037,000 706,000
Accounts receivable (698,000) 71,000
Prepaid expenses 133,000 (458,000)
Other current assets (307,000) (193,000)
Other assets (35,000) --
Increase (decrease) in
Accounts payable and other long-term liabilities (905,000) (383,000)
Accrued expenses and other current liabilities (678,000) (411,000)
Deferred revenue (474,000) (298,000)
---------- -----------
Net cash used in operating activities (2,705,000) (3,239,000)
---------- -----------
Cash flows from investing activities
Purchase of property and equipment (1,585,000) (2,171,000)
---------- -----------
Net cash used in investing activities (1,585,000) (2,171,000)
---------- -----------
Cash flows from financing activities
Warrant issued to related party shareholders 173,000 --
Payments of capital lease obligation -- (14,000)
Net proceeds from exercise of stock options -- 22,000
Purchase of Treasury Stock (22,000) (160,000)
---------- -----------
Net cash used in financing activities 151,000 (152,000)
---------- -----------
Net decrease in cash and cash equivalents (4,139,000) (5,562,000)
Cash and cash equivalents - beginning of period 6,730,000 20,188,000
---------- -----------
Cash and cash equivalents - end of period $2,591,000 $14,626,000
========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $129,000 $61,000
========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
6
BLUEFLY, INC.
JUNE 30, 2008
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,
2007.
During the second quarter of 2008, the Company revised its cash flow
presentation of a warrant issued in the first quarter of 2008. The amount of
$173,000 was initially reported as an operating activity. For the six months
ended June 30, 2008, the Condensed Statements of Cash Flows has been revised to
reflect this transaction as a financing activity.
The Company has sustained net losses and negative cash flows from operations
since the launch 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 and the Commitment (as such
terms are hereinafter defined), 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 - REVERSE STOCK SPLIT
On March 13, 2008, the Company's Board of Directors approved a 1-for-10 reverse
stock split of the Company's Common Stock. The record date for the reverse stock
split was April 3, 2008, and the reverse stock split was effective as of 11:59
P.M. EST on the same date. Retroactive restatement has been given to all share
numbers in this report, and accordingly, all amounts including per share amounts
are shown on a post-split basis.
NOTE 4 - NASDAQ COMPLIANCE
From August 2007 to April 2008, the Company was not in compliance with the $1.00
minimum per share requirement for continued listing as set forth in Nasdaq
Marketplace Rule 4310(c)(4). Following the implementation of the reverse stock
split described in Note 3, the Company's Common Stock closed at a price of $1.00
or more for ten consecutive trading days, and regained compliance with such rule
on April 17, 2008. In addition, on April 16, 2008, the Company received a letter
from the Nasdaq Listing Qualifications Staff (the "Staff") stating that it had
determined that the Company had failed to comply with the shareholder approval
rules set forth in Nasdaq Marketplace Rule 4350(i)(1)(A) because certain
warrants issued to affiliates of Soros Fund Management LLC ("Soros") and private
funds associated with Maverick Capital, Ltd. ("Maverick"), each of whom has
representation on the Company's Board of Directors, in connection with their
debt financing commitment had originally been issued with an exercise price
based on the twenty-day trailing average trading price of the Company's Common
Stock, which was lower than the market value of the Company's Common Stock on
the day immediately preceding the issuance of the warrants The Staff advised the
Company that the issuance of the warrants to Soros and Maverick at a price less
than the market value would be treated as equity compensation and would require
shareholder approval pursuant to Nasdaq Marketplace Rule 4350(i)(1)(A), unless
the exercise price of the warrants was increased to market value. Thereafter,
the Company, Soros and Maverick agreed to amend the terms of the warrants to
increase the exercise price of the warrants to a price equal to the market value
of the Company's Common Stock on the day immediately preceding the issuance of
the warrants. As a result, the Staff determined that the Company had regained
compliance with such rule by amending the warrants to increase the exercise
price. Accordingly, the Company believes that it has now resolved all
outstanding issues regarding Nasdaq listing requirements.
NOTE 5 - 2008 COMMITMENT FROM RELATED PARTY
In March 2008, the Company entered into an agreement (the "Commitment") with
affiliates of Soros Fund Management LLC ("Soros") and private funds associated
with Maverick Capital, Ltd. ("Maverick") pursuant to which they agreed to
provide up to $3 million of debt financing to the Company, on a standby basis,
available until March 2009, provided that the commitment
7
BLUEFLY, INC.
JUNE 30, 2008
amount would be reduced by the gross proceeds of any equity financing
consummated during the year. The Company drew down the entire $3 million of debt
in July 2008. The draw down is evidenced by subordinated convertible notes (the
"Subordinated Notes") that have a term expiring three years from the date of
issuance and bear interest at the rate of 8% per annum, compounded annually.
Interest is payable upon maturity or conversion. The Subordinated Notes are
convertible, at the holder's option into (a) equity securities that the Company
might issue in any subsequent round of financing at a price equal to the lowest
price per share paid by any investor in such subsequent round of financing or
(b) Common Stock at a price per share equal to $3.65, which represented the 20
-day trailing average stock price on the date of issuance of the Subordinated
Note.
As a result of the issuance of the Notes, the conversion price of the Company's
Series F Convertible Preferred Stock, automatically decreased from $8.20 to
$3.65. In accordance with FASB Emerging Issue Task Force Issue No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments," this
reduction in the conversion price of the Company's Series F Preferred Stock will
result in the Company recording a beneficial conversion feature in the
approximate amount of approximately $700,000 as part of its third quarter
financial results. This non-cash charge, which is analogous to a dividend, will
result in an adjustment to the Company's computation of Loss Per Share.
In connection with the Commitment, the Company issued warrants to Soros and
Maverick to purchase an aggregate of 52,497 shares of Common Stock at an
exercise price equal to the trailing 20-day average stock price, or $4.40. On
April 8, 2008, the warrants were amended to increase the exercise price from
$4.40 per share to $5.10 per share. The exercise price of $5.10 per share equals
the closing price of the Company's Common Stock on the day immediately preceding
the issuance of the warrants. There was no accounting impact as a result of the
modification.
The Company used the Black-Scholes option pricing method (assumption: volatility
79.6%, risk free rate 2.96%, one and a five year expected life and zero dividend
yield) to calculate the value of the 52,497 warrants issued in connection with
the Commitment. Using those assumptions, a value of approximately $173,000 was
assigned to the warrants. This amount was credited to additional paid in capital
and is being accounted for as interest expense over the life of the commitment
which is one year.
NOTE 6 - FINANCING AGREEMENT
In March 2008, the Company amended its credit facility (the credit facility as
amended is hereafter referred to as the "Credit Facility") with Wells Fargo
Retail Finance, LLC ("Wells Fargo") to (i) extend the term until July 26, 2011
from July 26, 2008; (ii) change the rate at which interest accrues on the
average daily amount under the Credit Facility during the preceding month to a
per annum rate equal to the prime rate plus 0.75% or LIBOR plus 3.25% on average
excess availability less than $3.0 million and prime rate plus 0.50% or LIBOR
plus 3% on average excess availability greater than $3.0 million; (iii) increase
the monthly commitment fee on the unused portion of the Credit Facility to 0.50%
from 0.35%; (iv) include a servicing fee of $3,333 per month; (v) increase the
early termination fee to 1% of the revolving credit ceiling, from 0.50% through
maturity; and (vi) amend the standby and documentary letter of credit fees to
3.25% and 2.75%, respectively, on average excess availability less than $3.0
million, and 3.00% and 2.50%, respectively, on average excess availability
greater than $3.0 million.
In addition, the amendment provides that no revolving credit loans shall be made
unless the full amount available pursuant to the Commitment has been advanced to
the Company and is outstanding. In connection with this amendment, the Company
paid Wells Fargo a $35,000 amendment fee. Under the terms of a Subordination and
Intercreditor Agreement, dated as of March 26, 2008 (the "Subordination
Agreement"), Soros and Maverick have the right to purchase all of the Company's
obligations from Wells Fargo at any time if the Company is in default under the
Credit Facility.
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. Availability under the Credit Facility is determined by a
formula that takes into account a certain percentage of the amount of the
Company's inventory and a certain percentage of the Company's 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, 2008, total availability under the Credit Facility
was approximately $6,327,000, of which $3,800,000 was committed, leaving
approximately $2,527,000 available for further borrowings.
For the three months and six months ended June 30, 2008, the Company incurred
approximately $81,000 and $129,000 of fees, respectively, under the Credit
Facility.
NOTE 7 - LOSS PER SHARE
8
BLUEFLY, INC.
JUNE 30, 2008
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, (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 for shares that have not yet been delivered were not included
in the computation of diluted loss per share:
Security June 30, 2008 Exercise Prices June 30, 2007 Exercise Prices
-------- ------------- --------------- ------------- ---------------
Options 368,353 $4.10 - $27.30 354,191 $8.00 - $143.80
Restricted Stock Awards/DSUs 856,536 (2) -- 1,080,068 (2) --
Warrants 113,574 $5.10 - $39.60 121,425 $7.80 - $39.60
Preferred Stock 69,634 (1) -- 69,634 (1) --
(1) At June 30, 2008 and 2007, there were 571 shares of Series F Convertible
Preferred Stock outstanding that are convertible into approximately 69,634
shares of Common Stock (excluding dividends).
(2) Includes Restricted Stock Awards and DSUs.
NOTE 8 - 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. 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. Total share-based compensation
expense recorded in the Statement of Operations for the three months ended June
30, 2008 and 2007 was $848,000 and $1,506,000, and for the six months ended June
30, 2008 and 2007 was $1,647,000 and $3,227,000, respectively.
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.
The following table summarizes the Company's stock option activity:
Number of shares Weighted Average Exercise
Price
Balance at January 1, 2008 342,879 $10.51
Options granted 35,000 $4.58
Options canceled (9,526) $10.28
Options exercised --
Balance at June 30, 2008 368,353 $9.95
Vested at December 31, 2007 287,112 $10.37
Vested at June 30, 2008 305,969 $10.46
9
BLUEFLY, INC.
JUNE 30, 2008
During the second quarter of 2008, 15,387 options vested. The total fair value
of the options that vested during the quarter ended June 30, 2008 was
approximately $161,000. There were no stock options granted during the second
quarter of 2008. At June 30, 2008, the aggregate intrinsic value of the fully
vested options was $0 and the weighted average remaining contractual life of the
options was approximately 4 years. The Company has not capitalized any
compensation cost, or modified any of its stock option grants during the first
half of 2008. During the second quarter of 2008, no options were exercised and
no cash was used to settle equity instruments granted under the Plans.
As of June 30, 2008, the total compensation cost related to non-vested stock
option awards not yet recognized was $225,000. Total compensation cost is
expected to be recognized over one year 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 swards
and deferred stock unit awards for employees at June 30, 2008:
Restricted Deferred Stock
Stock Awards Unit Awards
Balance at January 1, 2008 39,653 714,750
Shares/Units Granted 8,625 250,000
Shares/Units Forfeited (750) (117,214)
Shares/Units Restriction Lapses (38,528) --
Balance at June 30, 2008 9,000 847,536
Weighted Average Grant Date Fair Value Per share $3.39 $3.78
Aggregate Grant Date Fair Value $30,510 $3,203,686
Vesting Service Period of Shares Granted 12 months 12-36 months
Number of shares/units vested at June 30, 2008 -- 243,753
Number of shares/units unvested at June 30, 2008 9,000 603,783
For the quarter ended June 30, 2008 the Company recognized an expense of
approximately $689,000 in connection with these awards.
As of June 30, 2008 the total compensation cost related to non-vested restricted
stock and deferred stock units not yet recognized was $2,597,000 million. Total
compensation cost is expected to be recognized over a one year period.
NOTE 9 - FAIR VALUE
Effective January 1, 2008, the Company implemented Statement of Financial
Accounting Standard No. 157, Fair Value Measurement, ("SFAS 157"), which defines
fair value, establishes a framework for measuring fair value and expands
disclosure about fair value measurements. The fair value hierarchy for
disclosure of fair value measurements under SFAS 157 is as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Quoted prices for similar assets and liabilities in active markets or
inputs that are observable
Level 3 - Inputs that are unobservable (for example cash flow modeling inputs
based on assumptions)
The adoption of FAS 157 did not have an impact on our financial position or
results of operations.
In February 2008, the FASB issued FASB Staff Position 157-2 ("FSP 175-2"), which
delayed the implementation of FAS 157 until January 1, 2009, for non-financial
assets and liabilities that are not required to be measured at fair value on a
recurring basis. Pursuant to FSP 157-2, the Company did not adopt FAS 157 for
non-financial assets and liabilities. We are currently assessing the impact of
FAS 157 on our non-financial assets and liabilities.
10
BLUEFLY, INC.
JUNE 30, 2008
The Company did not have any other significant financial assets or liabilities
not currently valued at fair value.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities," ("SFAS No. 161"). SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements. This statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
The adoption of SFAS No. 161 will not affect our financial condition and results
of operations, but may require additional disclosures if we enter into
derivative and hedging activities.
In April 2008, the FASB issued EITF 07-05, "Determining whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock", ("EITF 07-05"). EITF
07-05 provides guidance on determining what types of instruments or embedded
features in an instrument held by a reporting entity can be considered indexed
to its own stock for the purpose of evaluating the first criteria of the scope
exception in paragraph 11(a) of FAS 133. EITF 07-05 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and early
application is not permitted. Management is evaluating what effect EITF 07-05
will have on the Company's financial position and operating results.
In May 2008, the FASB issued Staff Position No. APB 14-1 "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1") that requires the
liability and equity components of convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) to be
separately accounted for in a manner that reflects the issuer's nonconvertible
debt borrowing rate. FSP APB 14-1 requires that the value assigned to the debt
component would be the estimated fair value of a similar nonconvertible debt.
The resulting debt discount would be amortized over the period during which the
debt is expected to be outstanding (i.e., through the first optional redemption
date) as additional non-cash interest expense. FSP APB 14-1 will become
effective beginning in our first quarter of 2009 and is required to be applied
retrospectively to all presented periods, as applicable. The Company is
evaluating the effects of adopting FSP APB 14-1.
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.
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
began a national advertising campaign that featured both print and television.
Over the past two and a half years, we have increased awareness by targeting
general advertising efforts to a more fashion focused consumer. In 2007, we
further refined our marketing strategy by aligning ourselves with entertainment
properties, such as BravoTV.com and Project Runway.
Our net sales increased by approximately 8.0% to $23,334,000 for the three
months ended June 30, 2008 from $21,608,000 for the three months ended June 30,
2007. Our gross margin remained relatively unchanged at 39.0% for the three
months ended June 30, 2008 from 39.2% for the three months ended June 30, 2007.
Our gross profit increased by 7.5% to $9,098,000 for the three months ended June
30, 2008 from $8,463,000 for the three months ended June 30, 2007. Our operating
loss decreased to $1,941,000 for the three months ended June 30, 2008 from
$2,249,000 for the three months ended June 30, 2007. This decrease was primarily
a result of an increase in net sales compared to the prior year as well as
decreases in selling and fulfillment expenses and was partially offset by an
increase in total marketing and general and administrative expenses. Marketing
expenses (excluding staff related costs) increased to $2,664,000 for the second
quarter of 2008 from $2,506,000 for the second quarter 2007, primarily as a
result of growth of online marketing programs. Sales attributable to online
marketing programs in the period increased by 6.6%. Expenditures for offline
programs decreased 3.4% for the period and spending for online programs
increased 8.2%. The company believes that online marketing programs are more
efficient and intends to shift more of its spend toward online marketing
programs from offine programs.
11
BLUEFLY, INC.
JUNE 30, 2008
Our reserve for returns and credit card chargebacks decreased to 40.0% of gross
sales for the second quarter of 2008 compared to 42.1% for the second quarter of
2007. The decrease was primarily caused by a decrease in our return rate which
was, in turn, caused in part, by a shift in our merchandise mix.
A portion of our inventory includes merchandise that we either purchased with
the intention of holding for the appropriate season or were unable to sell
through in its entirety in a prior season and have determined to hold for the
next selling season, subject (in some cases) to appropriate mark-downs. In
recent years, we have increased the amount of inventory purchased on a pack and
hold basis in order to take advantage of opportunities in the market.
At June 30, 2008, we had an accumulated deficit of $136,800,000. 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 non-cash 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 Six Months Ended June 30, 2008 Compared To The Six Months Ended June 30,
2007.
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:
2008 2007 2006
---- ---- ----
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
Net sales $48,579 100.0% $43,716 100.0% $33,669 100.0%
Cost of sales 30,545 62.9% 26,879 61.5% 19,784 58.8%
------- ------- -------
Gross profit 18,034 37.1% 16,837 38.5% 13,885 41.2%
Selling and fulfillment expenses 9,592 19.7% 8,945 20.4% 7,281 21.6%
Marketing expenses 6,448 13.3% 6,323 14.5% 5,760 17.1%
General and administrative expenses 6,837 14.1% 7,040 16.1% 5,650 16.8%
------- ------- -------
Total operating expenses 22,877 47.1% 22,308 51.0% 18,691 55.5%
Operating loss (4,843) (10.0)% (5,471) (12.5)% (4,806) (14.3)%
Interest (expense) and income (131) (0.2)% 226 0.5% (359) (1.1)%
------- ------- -------
Net loss (4,974) (10.2)% (5,245) (12.0)% (5,165) (15.4)%
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:
2008 2007 2006
---- ---- ----
Average Order Size (including shipping & handling) $279.04 $276.49 $246.13
New Customers Added during the Period* 102,529 94,487 76,487
* Based on unique email addresses
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
12
BLUEFLY, INC.
JUNE 30, 2008
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 six months ended June 30, 2008 increased by
approximately 10.0% to $81,079,000 from $73,694,000 for the six months ended
June 30, 2007. For the six months ended June 30, 2008, we recorded a provision
for returns and credit card chargebacks and other discounts of $32,500,000, or
approximately 40.1% of gross sales. For the six months ended June 30, 2007, the
provision for returns and credit card chargebacks and other discounts was
$29,978,000, or approximately 41.0% of gross sales. The decrease in this
provision as a percentage of gross sales resulted from a slight decrease in the
return rate. The decrease was primarily caused by a shift in our merchandise
mix.
After the necessary provisions for returns, credit card chargebacks and
adjustments for sales taxes, our net sales for the six months ended June 30,
2008 were $48,579,000. This represents an increase of approximately 11% compared
to the six months ended June 30, 2007, in which net sales totaled $43,716,000.
The growth in net sales resulted primarily from an increase in the number of new
customers acquired (over 8% higher compared to the first six months of 2007).
For the six months ended June 30, 2008, revenue from shipping and handling
(which is included in net sales) increased approximately 16.8% to $2,794,000
from $2,391,000 for the six months ended June 30, 2007. Shipping and handling
revenue increased at a greater percentage than revenue as a whole as a result of
an increased number of customers selecting express and international shipping.
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, 2008 totaled
$30,545,000, resulting in gross margin of approximately 37.1%. Cost of sales for
the six months ended June 30, 2007 totaled $26,879,000, resulting in gross
margin of 38.5%. The gross margin was negatively effected, during the first
quarter, by a decrease in the overall product margin, as we were more
promotional during the first two months of the quarter compared to 2007, in
order to liquidate some older inventory. Gross profit increased by approximately
7.1%, to $18,034,000 for the six months ended June 30, 2008 compared to
$16,837,000 for the six months ended June 30, 2007. The growth in gross profit
was primarily the result of growth in sales and was offset slightly by lower
product margin percent.
Marketing expenses: Marketing expenses increased by 2% to $6,448,000 for the six
months ended June 30, 2008 from $6,323,000 for the six months ended June 30,
2007.
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. As a percentage of net sales, our marketing
expenses decreased to 13.3% for the six months ended June 30, 2008 from 14.5%
for the six months ended June 30, 2007. Total expenses related to the national
print and television advertising campaign for the six months ended June 30, 2008
totaled $2.3 million compared to $2.8 million for the six months ended June 30,
2007. In addition, expenses associated with direct mail campaigns and billboards
decreased by $61,000 and $73,000, respectively. These decreases were offset by
planned increases to online marketing programs with high return on investment,
which resulted in the following increases: $375,000 related to paid search,
$182,000 related to comparison engines, $132,000 related to banner ads and other
online advertisements, $57,000 paid to consultants and $71,000 in affiliate
expenses.
Selling and fulfillment expenses: Selling and fulfillment expenses increased by
7.2% in the first six months of 2008 compared to the first six months of 2007.
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, 2008 Net Sales June 30, 2007 Net Sales increase (decrease)
---------------- --------- ---------------- --------- ---------------------
Operating $5,401,000 11.1% 4,732,000 10.8% 14.1%
Technology 2,494,000 5.1% 2,399,000 5.5% 4.0%
E-Commerce 1,697,000 3.5% 1,814,000 4.2% (6.4%)
---------- ----- ---------- -----
$9,592,000 19.7% $8,945,000 20.5% 7.2%
As a percentage of net sales, our selling and fulfillment expenses decreased to
19.7% for the six months ended June 30, 2008 from 20.5% for the six months ended
June 30, 2007.
13
BLUEFLY, INC.
JUNE 30, 2008
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 2008 by approximately 14.1% compared to the
first six months of 2007 as a result of variable costs associated with the
increased sales volume (e.g., picking and packing orders and processing returns)
and price per order as well as an increase in customer service and salary
related expenses.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web site hosting. For the six months ended June 30, 2008,
technology expenses increased by approximately 4.0% compared to the six months
ended June 30, 2007. This increase resulted from an increase in software
support, depreciation and web hosting expenses, and was slightly offset by a
decrease in salary related expenses. Consulting expenses incurred in the second
quarter 2008 were related to the development of our new Web site and capitalized
accordingly. For the six months ended June 30, 2008, approximately $1,141,000 of
expenses was capitalized in connection with the development of our new Web site.
As of June 30, 2008, approximately $4,774,000 has been capitalized in connection
with the project.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web site design. For the six months ended June 30, 2008,
e-commerce expenses decreased by approximately 6.4% as compared to the six
months ended June 30, 2007, primarily due to a decrease in expenses associated
with photo shoots, supplies and research tools, and partially offset by an
increase in salary related expenses.
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, 2008 decreased by approximately 2.9% to $6,837,000 as compared to
$7,040,000 for the six months ended June 30, 2007. The decrease in general and
administrative expenses was primarily the result of a decrease in equity based
compensation related to equity awards of $1,363,000 . These amounts were offset
by increased salary related expenses of $899,000, which includes $280,000 of
severance payable to our former Chief Financial Officer, as well as increased
consulting and professional fees of $163,000.
As a percentage of net sales, general and administrative expenses for the first
half of 2008 decreased to approximately 14.1% from 16.1% for the first half of
2007.
Loss from operations: Operating loss decreased in the first six months of 2008
to $4,843,000 from $5,471,000 in the first six months of 2007.
Interest income: Other income for the six months ended June 30, 2008 decreased
to $49,000 from $364,000 for the six months ended June 30, 2007. These amounts
related primarily to interest income earned on our cash balances.
Interest expense: Interest expense for the six months ended June 30, 2008
totaled $180,000, compared to $138,000 for the six months ended June 30, 2007.
Interest expense consists of fees paid in connection with our Credit Facility as
well as amortization of warrants issued to a related party.
For The Three Months Ended June 30, 2008 Compared To The Three Months Ended June
30, 2007.
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:
2008 2007 2006
---- ---- ----
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
Net sales $23,334 100.0% $21,608 100.0% $16,793 100.0%
Cost of sales 14,236 61.0% 13,145 60.8% 9,747 58.0%
------- ------- -------
Gross profit 9,098 39.0% 8,463 39.2% 7,046 42.0%
Selling and fulfillment expenses 4,523 19.4% 4,546 21.0% 3,848 22.9%
Marketing expenses 2,926 12.5% 2,712 12.6% 1,729 10.3%
General and administrative expenses 3,590 15.4% 3,454 16.0% 3,223 19.2%
------- ------- -------
14
BLUEFLY, INC.
JUNE 30, 2008
Total operating expenses 11,039 47.3% 10,712 49.6% 8,800 52.4%
Operating loss (1,941) (8.3)% (2,249) (10.4)% (1,754) (10.4)%
Interest (expense) and other income (95) (0.4)% 107 0.5% (147) (0.9)%
------ ------ ------
Net loss (2,036) (8.7)% (2,142) (9.9)% (1,901) (11.3)%
The following table sets forth our actual results based on the other key
operational metrics discussed above for the three months ended June 30, as
indicated below:
2008 2007 2006
---- ---- ----
Average Order Size (including shipping & handling) $285.14 $284.01 $248.32
New Customers Added during the Period* 45,674 45,102 37,779
* Based on unique email addresses
Net sales: Gross sales for the three months ended June 30, 2008 increased by
approximately 4.2% to $38,892,000 from $37,327,000 for the three months ended
June 30, 2007. For the three months ended June 30, 2008, we recorded a provision
for returns and credit card chargebacks and other discounts of $15,558,000, or
approximately 40% of gross sales. For the three months ended June 30, 2007, the
provision for returns and credit card chargebacks and other discounts was
$15,719,000, or approximately 42.1% of gross sales. The decrease in this
provision as a percentage of gross sales resulted from a decrease in the return
rate. The decrease was primarily caused by a shift in our merchandise mix.
After the necessary provisions for returns, credit card chargebacks and
adjustments for sales taxes, our net sales for the three months ended June 30,
2008 were $23,334,000. This represents an increase of approximately 8.0%
compared to the three months ended June 30, 2007, in which net sales totaled
$21,608,000. The growth in net sales resulted primarily from an increase in the
number of new customers acquired (over 1% higher compared to the first three
months of 2007) as well as a decrease in the return rate. For the three months
ended June 30, 2008, revenue from shipping and handling (which is included in
net sales) increased approximately 12.9% to $1,344,000 from $1,190,000 for the
three months ended June 30, 2007. Shipping and handling revenue increased at a
greater percentage than revenue as a whole as a result of an increased number of
customers selecting express and international shipping.
Cost of sales: Cost of sales for the three months ended June 30, 2008 totaled
$14,236,000, resulting in gross margin of approximately 39.0%. Cost of sales for
the three months ended June 30, 2007 totaled $13,145,000, resulting in gross
margin of 39.2%. Gross profit increased by approximately 7.5%, to $9,098,000 for
the three months ended June 30, 2008 compared to $8,463,000 for the three months
ended June 30, 2007.
Marketing expenses: Marketing expenses increased by 7.9% to $2,926,000 for the
three months ended June 30, 2008 from $2,712,000 for the three months ended June
30, 2007.
As a percentage of net sales, our marketing expenses remained relatively
unchanged at 12.5% for the three months ended June 30, 2008 compared to 12.6%
for the three months ended June 30, 2007. Total expenses related to the national
print and television advertising campaign for the three months ended June 30,
2008 were $935,000 compared to $929,000 for the three months ended June 30,
2007. In addition, expenses related to online marketing programs increased as
the Company believes that these are efficient. Paid search, comparison engines
and banner ads increased by $154,000, $85,000 and $57,000, respectively. These
increases were partially offset by the following decreases, $44,000 of direct
mail campaigns, $36,000 related to billboard advertising and $14,000 paid to
consultants.
Selling and fulfillment expenses: Selling and fulfillment expenses decreased by
0.5% in the first three months of 2008 compared to the first three months of
2007. Selling and fulfillment expenses were comprised of the following:
15
BLUEFLY, INC.
JUNE 30, 2008
Three Months Three Months
Ended As a % of Ended As a % of Percentage Difference
June 30, 2008 Net Sales June 30, 2007 Net Sales increase (decrease)
------------- --------- ------------- --------- ---------------------
Operating $2,457,000 10.5% 2,467,000 11.4% (0.4%)
Technology 1,212,000 5.2% 1,231,000 5.7% (1.5%)
E-Commerce 854,000 3.7% 848,000 3.9% 0.7%
---------- ----- ----------- -----
$4,523,000 19.4% $ 4,546,000 21.0% (0.5%)
As a percentage of net sales, our selling and fulfillment expenses decreased to
19.4% for the three months ended June 30, 2008 from 21% for the three months
ended June 30, 2007.
Operating expenses remained relatively unchanged for the three months ended June
30, 2008 compared to June 30, 2007. Increased variable costs associated with
the increased sales volume (e.g., picking and packing orders and processing
returns) and price per order was offset by a decrease in customer service and
salary related expenses.
For the three months ended June 30, 2008, technology expenses decreased by
approximately 1.5% compared to the three months ended June 30, 2007. This
decrease resulted from a decrease in consulting and salary related expense
offset by an increase in software support, depreciation and web hosting
expenses. Consulting expenses incurred in the second quarter of 2008 were
related to the development of our new Web site and capitalized accordingly. For
the three months ended June 30, 2008, approximately $730,000 of expenses was
capitalized in connection with the development of our new Web site.
For the three months ended June 30, 2008, e-commerce expenses remained
relatively unchanged as compared to the three months ended June 30, 2007,
primarily due to an increase in salary related expenses offset by a decrease in
expenses associated with consulting, photo shoots, supplies and research tools.
General and administrative expenses: General and administrative expenses for the
three months ended June 30, 2008 increased by approximately 3.9% to $3,590,000
as compared to $3,454,000 for the three months ended June 30, 2007. The increase
in general and administrative expenses was primarily the result of an increase
in salaries and related expenses of $605,000 which includes $280,000 of
severance payable to our former Chief Financial Officer. In addition, consulting
and professional fees increased by $109,000. These amounts were offset by a
decrease in equity based compensation of $588,000.
As a percentage of net sales, general and administrative expenses for the three
months ended June 30, 2008 decreased to approximately 15% from 16.0% for the
three months ended June 30, 2007.
Loss from operations: Operating loss decreased in the first three months of 2008
to $1,941,000 from $2,249,000 in the first three months of 2007.
Interest income: Other income for the three months ended June 30, 2008 decreased
to $13,000 from $169,000 for the three months ended June 30, 2007. These amounts
related primarily to interest income earned on our cash balances.
Interest expense: Interest expense for the three months ended June 30, 2008
totaled $108,000, compared to $62,000 for the three months ended June 30, 2007.
Interest expense consists of fees paid in connection with our Credit Facility as
well as amortization of warrants issued to a related party.
Liquidity And Capital Resources
General
At June 30, 2008, we had approximately $2.6 million in cash and cash
equivalents. Working capital at June 30, 2008 and 2007 was $16.9 million and
$30.6 million, respectively. Working capital at December 31, 2007 was $21.0
million. In addition, as of June 30, 2008, we had approximately $3.8 million
committed under the Credit Facility, leaving approximately $2.5 million of
availability and $3.0 million available under the Commitment.
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
16
BLUEFLY, INC.
JUNE 30, 2008
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, as in some circumstances we need to pay in advance of
production. As of June 30, 2008, we had approximately $106,000 of prepaid
inventory and approximately $610,000 of prepaid marketing on our balance sheet
compared to $569,000 and $696,000 in the second quarter of 2007.
Standby Financing Commitment
In March 2008, Soros and Maverick agreed to provide up to $3 million of debt
financing to us, on a standby basis, available until March 2009, provided that
the commitment amount would be reduced by the gross proceeds of any equity
financing consummated during the year. Subsequent to quarter end, the Company
drew down on the full amount of the Commitment. The draw down is evidenced by
the Subordinated Notes. The Subordinated Notes have a term expiring three years
from the date of issuance and bear interest at the rate of 8% per annum,
compounded annually. Interest is payable upon maturity or conversion. The
Subordinated Notes are convertible, at the holder's option into (a) equity
securities that the Company might issue in any subsequent round of financing at
a price equal to the lowest price per share paid by any investor in such
subsequent round of financing or (b) Common Stock at a price per share equal to
$3.65, which represents the 20-day trailing average stock price on the date of
issuance of the Subordinated Note.
Credit Facility
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. Availability under the
Credit Facility is determined by a formula that takes into account a certain
percentage of our inventory and a certain percentage of our 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, 2008,
total availability under the Credit Facility was approximately $6,327,000 of
which $3,800,000 was committed, leaving approximately $2,527,000 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 3.25% on average excess availability less
than $3.0 million and prime rate plus 0.50% or LIBOR plus 3% on average excess
availability greater than $3.0 million. 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 0.50% and a servicing fee of $3,333 per month. 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 of such letter of credit, or a portion thereof,
remains open. No revolving credit loans may be made under the Credit Facility
unless the full amount available pursuant to the Commitment has been advanced to
the Company and is outstanding.
Under the terms of the Subordination Agreement, Soros and Maverick have the
right to purchase all of our obligations from Wells Fargo at any time if we are
then in default under the Credit Facility.
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 the next 12 months. However, in order
to accelerate the growth of our business, we intend to seek to raise additional
equity capital. However there can be no assurance that we will be able to
identify a source for such financing, or that such financing will be on terms
acceptable to the Company.
Commitments and Long Term Obligations
As of June 30, 2008, we had the following commitments and long term obligations:
Total Less than 1-3 3-5 More
1 year years years than 5
years
Marketing and Advertising $2,986,000 2,986,000 -- -- --
Purchase Orders 17,494,000 17,446,000 48,000 -- --
17
BLUEFLY, INC.
JUNE 30, 2008
Operating Leases 1,962,000 712,000 1,250,000 -- --
Employment Contracts 5,054,000 1,605,000 3,406,000 43,000 --
----------- ---------- --------- ------ -----
Grand total $27,496,000 22,749,000 4,704,000 43,000 --
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.
Item 4 T. 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; our ability to raise
additional capital to support the growth of our business; the risk associated
with the Company's transition to a new technology platform; the success of our
advertising campaign; risks associated with Soros, Maverick 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; our ability to raise additional capital; issues related to
our transition to a new third party fulfillment facility; 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 UPS, DHL and USPS (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
18
BLUEFLY, INC.
JUNE 30, 2008
Item 1. Legal Proceedings
We currently and from time to time are involved in litigation incidental to the
conduct of our business. However, we are not party to any lawsuit or proceeding
which in the opinion of management is likely to have a material adverse effect
on us.
Item 4. Submission of Matters to a Vote of Security Holders
On May 29, 2008, we held our annual meeting of stockholders. At the meeting, our
stockholders voted for ten directors, electing David Wassong, Melissa Payner
-Gregor, Barry Erdos, Riad Abrahams, Ann Jackson, Christopher G. McCann, Martin
Miller, Neal Moszkowski, Anthony Plesner and Lawrence Zigerelli as members of
our board of directors. In addition, our stockholders voted in favor of a
proposals to approve the conversion features of certain promissory notes (the
"Note Conversion Provisions"). The results of the voting were as follows:
Proposal Votes For Votes Withheld
-------- --------- --------------
Election of David Wassong 12,306,521 293,914
Election of Melissa Payner-Gregor 12,303,976 296,459
Election of Barry Erdos 12,308,683 291,752
Election of Riad Abrahams 12,308,223 292,212
Election of Christopher G. McCann 12,308,918 291,517
Election of Ann Jackson 10,903,116 1,697,319
Election of Martin Miller 12,308,804 291,631
Election of Neal Moszkowski 12308,226 292,209
Election of Anthony Plesner 12,306,477 293,958
Election of Lawrence Zigerelli* 12,308,769 291,666
Abstentions and
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
Approval of conversion provisions
of certain convertible promissory notes 11,353,473 179,657 1,067,305
*subsequent to quarter end Mr. Zigerelli resigned from the Board
Item 6. Exhibits
The following is a list of exhibits filed as part of this Report:
Exhibit Number Description
----------------------------------------------------------------------
10.1 Fifth Amendment, dated as of June 30, 2008, to Loan and Security Agreement, dated as of
July 25, 2006, by and between Bluefly, Inc. and Wells Fargo Retail Finance, LLC
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a)
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BLUEFLY, INC.
JUNE 30, 2008
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
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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/ Kara B. Jenny
-----------------
Kara B. Jenny
Chief Financial Officer
August 12, 2008
21