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, 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 filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting 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 November 10, 2008, the issuer had outstanding 13,472,625 shares of Common
Stock, $.01 par value.
BLUEFLY, INC.
TABLE OF CONTENTS
SEPTEMBER 30, 2008
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 2008 (unaudited)
and December 31, 2007 3
Condensed Statements of Operations for the nine months ended
September 30, 2008 and 2007 (unaudited) 4
Condensed Statements of Operations for the three months ended
September 30, 2008 and 2007 (unaudited) 5
Condensed Statements of Cash Flows for the nine months ended
September 30, 2008 and 2007 (unaudited) 6
Condensed Notes to Financial Statements (unaudited) 7 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4T. Controls and Procedures 20
PART II - OTHER INFORMATION 21
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,
2008 2007
------------------- ----------------------
Assets
Current Assets:
Cash and cash equivalents $ 1,920,000 $ 6,730,000
Accounts receivable - net of allowance for doubtful accounts 3,157,000 2,102,000
Inventories, net 28,341,000 28,492,000
Prepaid inventory 982,000 294,000
Prepaid expenses 1,572,000 777,000
Other current assets 584,000 416,000
------------------- ----------------------
Total current assets 36,556,000 38,811,000
Property and equipment, net 6,831,000 6,019,000
Other assets 187,000 189,000
------------------- ----------------------
Total assets $ 43,574,000 $ 45,019,000
=================== ======================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 10,459,000 $ 8,460,000
Allowance for sales returns 4,416,000 4,204,000
Accrued expenses and other current liabilities 2,559,000 2,052,000
Deferred revenue 3,628,000 3,206,000
------------------- ----------------------
Total current liabilities 21,062,000 17,922,000
Notes payable to related party shareholders 3,050,000 --
Other long-term obligations -- 60,000
------------------- ----------------------
Total liabilities 24,112,000 17,982,000
------------------- ----------------------
Commitments and contingencies
Stockholders' equity:
Series F Preferred stock - $.01 par value; 7,000 shares authorized as of
September 30, 2008 and December 31, 2007; 571.43 shares issued as of
September 30, 2008 and December 31, 2007; 262.06 and 571.43 shares
outstanding as of September 30, 2008 and December 31, 2007, respectively
(liquidation preference: $262,000 plus accrued dividends of $65,000 and
$571,000 plus accrued dividends of $105,000 as of September 30, 2008 and
December 31, 2007, respectively) -- --
Common stock - $.01 par value; 200,000,000 shares authorized as of
September 30, 2008 and December 31, 2007; 13,545,534 and 13,426,803
shares issued as of September 30, 2008 and December 31, 2007,
respectively, 13,388,979 and 13,275,730 shares outstanding as of
September 30, 2008 and December 31, 2007, respectively 1,339,000 1,328,000
Treasury stock (1,452,000) (1,430,000)
Additional paid-in capital 162,081,000 158,965,000
Accumulated deficit (142,506,000) (131,826,000)
------------------- ----------------------
Total stockholders' equity 19,462,000 27,037,000
------------------- ----------------------
Total liabilities and stockholders' equity $ 43,574,000 $ 45,019,000
=================== ======================
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,
----------------------------------------
2008 2007
----------------- ------------------
Net sales $ 68,381,000 $ 61,795,000
Cost of sales 43,040,000 39,230,000
----------------- ------------------
Gross profit 25,341,000 22,565,000
Selling and fulfillment expenses 14,525,000 13,528,000
Marketing expenses 10,620,000 9,130,000
General and administrative expenses 9,858,000 10,450,000
----------------- ------------------
Total operating expenses 35,003,000 33,108,000
Operating loss (9,662,000) (10,543,000)
Interest income 57,000 463,000
Interest expense (362,000) (193,000)
----------------- ------------------
Net loss $ (9,967,000) $ (10,273,000)
Preferred stock dividends (34,000) (33,000)
Deemed dividend related to beneficial conversion feature on
Series F Preferred Stock (712,000) --
----------------- ------------------
Net loss available to common shareholders $ (10,713,000) $ (10,306,000)
================= ==================
Basic and diluted net loss per common share $ (0.81) $ (0.79)
================= ==================
Weighted average common shares outstanding
(basic and diluted) 13,275,955 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
September 30,
----------------------------------------
2008 2007
----------------- ------------------
Net sales $ 19,802,000 $ 18,079,000
Cost of sales 12,495,000 12,351,000
----------------- ------------------
Gross profit 7,307,000 5,728,000
Selling and fulfillment expenses 4,933,000 4,583,000
Marketing expenses 4,172,000 2,807,000
General and administrative expenses 3,021,000 3,410,000
----------------- ------------------
Total operating expenses 12,126,000 10,800,000
Operating loss (4,819,000) (5,072,000)
Interest income 8,000 99,000
Interest expense (182,000) (55,000)
----------------- ------------------
Net loss $ (4,993,000) $ (5,028,000)
Preferred stock dividends (12,000) (11,000)
Deemed dividend related to beneficial conversion feature on
Series F Preferred Stock (712,000) --
----------------- ------------------
Net loss available to common shareholders $ (5,717,000) $ (5,039,000)
================= ==================
Basic and diluted net loss per common share $ (0.43) $ (0.39)
================= ==================
Weighted average common shares outstanding
(basic and diluted) 13,309,383 13,050,460
================= ==================
The accompanying notes are an integral part of these condensed financial statements.
5
BLUEFLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------------------
2008 2007
----------------- -----------------
Cash flows from operating activities:
Net loss $ (9,967,000) $ (10,273,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,622,000 1,292,000
Stock based compensation 2,241,000 4,735,000
Provisions for returns 211,000 (406,000)
Bad debt expense 398,000 493,000
Reserve for inventory obsolescence 300,000 1,252,000
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,453,000) (537,000)
Inventories (149,000) (7,408,000)
Prepaid inventory (688,000) 194,000
Prepaid expenses (795,000) (3,438,000)
Other current assets (288,000) (81,000)
Other assets 138,000 --
Increase in:
Accounts payable and other long-term liabilities 1,989,000 3,465,000
Accrued expenses and other current liabilities 530,000 256,000
Deferred revenue 422,000 644,000
----------------- -----------------
Net cash used in operating activities (5,489,000) (9,812,000)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (2,299,000) (3,055,000)
----------------- -----------------
Net cash used in investing activities (2,299,000) (3,055,000)
----------------- -----------------
Cash flows from financing activities:
Proceeds from notes issued to related party shareholders 3,000,000 --
Payments of capital lease obligation -- (14,000)
Net proceeds from exercise of stock options -- 25,000
Purchase of treasury stock (22,000) (160,000)
----------------- -----------------
Net cash provided by (used in) financing activities 2,978,000 (149,000)
----------------- -----------------
Net decrease in cash and cash equivalents (4,810,000) (13,016,000)
Cash and cash equivalents - beginning of period 6,730,000 20,188,000
----------------- -----------------
Cash and cash equivalents - end of period $ 1,920,000 $ 7,172,000
================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 193,000 $ 86,000
================= =================
Deemed dividend related to beneficial conversion feature on
Series F Preferred Stock $ 712,000 $ --
================= =================
Warrants issued to related party shareholders $ 173,000 $ --
================= =================
The accompanying notes are an integral part of these condensed financial statements.
6
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of Bluefly,
Inc. (the "Company"). The condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America 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.
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 it has sufficient liquidty despite the disruption of the capital
markets and the continued decline in economic conditions. The Company believes
that its existing cash balance, combined with working capital, and its
availability under its existing Credit Facility (as hereinafter defined), will
be sufficient to enable it to meet its planned expenditures under a streamlined
business plan through at least the next 12 months. The streamlined business plan
calls for, among other cost measures, reductions in marketing and capital
expenditures, delaying new hires and making selective inventory purchases. The
Company may seek to raise additional equity capital should opportunities arise.
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.
7
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
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 $3,000,000 of debt financing to the Company, 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. The
Company drew down the entire $3,000,000 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 Notes.
As a result of the issuance of the Subordinated 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 EITF Issue No. 98-5, 'Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios', to Certain Convertible Instruments," this reduction in the
conversion price of the Company's Series F Preferred Stock resulted in a
beneficial conversion feature of approximately $712,000 as part of its third
quarter financial results. This non-cash charge, which is analogous to a
dividend, resulted in a reduction in net loss available to common shareholders
and, consequently 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. As
described in Note 4, 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 (assumptions:
volatility 79.6%, risk free rate 2.96%, 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 $3,000,000 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
$3,000,000, and 3.00% and 2.50%, respectively, on average excess availability
greater than $3,000,000.
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 September 30, 2008, total availability under the Credit
Facility was approximately $7,500,000, of which $3,675,000 was committed,
leaving approximately $3,825,000 available for further borrowings.
8
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
For the nine months and three months ended September 30, 2008, the Company
incurred approximately $193,000 and $64,000 of fees, respectively, under the
Credit Facility.
NOTE 7 - 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 Company's net loss, (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 as the effects would be anti-dilutive and
accordingly, basic and diluted weighted average shares outstanding are equal for
the periods presented:
As of As of
Security September 30, 2008 Exercise Prices September 30, 2007 Exercise Prices
-------- ------------------ --------------- ------------------ ---------------
Options 358,851 $2.34 - $27.30 350,126 $8.00 - $27.30
Restricted Stock Awards/DSUs 852,977(2) -- 1,080,444(2) --
Warrants 113,574 $5.10 - $39.60 121,425 $7.80 - $39.60
Preferred Stock 71,681(1),(3) -- 69,634(1) --
Subordinated Notes 821,918(4) -- -- --
(1) At September 30, 2008 and 2007, there were 262 and 571 shares of Series F
Convertible Preferred Stock outstanding, respectively, that are convertible
into approximately 71,681 and 69,634 shares of Common Stock (excluding
dividends).
(2) Includes Restricted Stock Awards and DSUs.
(3) During the quarter ended September 30, 2008, approximately 309 shares of
Series F Convertible Preferred Stock were converted, in accordance with the
terms thereof, into approximately 112,000 shares (on a post-split basis,
see Note 3) of Common Stock at the conversion price of $3.65 per share.
(4) At September 30, 2008, there were $3,000,000 of Subordinated Notes
outstanding that are convertible into Common Stock at the conversion price
of $3.65 per share.
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 Condensed
Statements 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 Condensed Statements of Operations for the
nine months ended September 30, 2008 and 2007 was $2,241,000 and $4,735,000, and
for the three months ended September 30, 2008 and 2007 was $594,000 and
$1,508,000, 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.
9
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
The following table summarizes the Company's stock option activity:
Number of Weighted Average
Shares Price
--------------- ----------------
Balance at December 31, 2007 342,879 $ 10.51
Options granted 37,000 4.46
Options cancelled (21,028) 10.44
Options exercised -- --
--------------- ----------------
Balance at September 30, 2008 358,851 $ 9.89
=============== ================
Vested at December 31, 2007 287,112 $ 10.37
=============== ================
Vested at September 30, 2008 312,501 $ 10.38
=============== ================
During the third quarter of 2008, 19,842 options vested. The total fair value of
the options that vested during the third quarter of 2008 was approximately
$205,960. There were 2,000 stock options granted during the third quarter of
2008. At September 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 5 years. The Company has not capitalized any
compensation cost, or modified any of its stock option grants during the nine
months ended September 30, 2008. During the third quarter of 2008, no options
were exercised and no cash was used to settle equity instruments granted under
the Company's equity incentive plans.
As of September 30, 2008, the total compensation cost related to non-vested
stock option awards not yet recognized was $130,000. 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 September 30, 2008:
Restricted Deferred Stock
Stock Awards Unit Awards
Balance at December 31, 2007 39,653 714,750
Shares/Units granted 8,625 250,000
Shares/Units forfeited (1,875) (118,523)
Shares/Units restriction lapses (39,653) --
-------------------- ---------------------
Balance at September 30, 2008 6,750 846,227
==================== =====================
Weighted average grant date fair value per share $ 3.71 $ 8.17
==================== =====================
Aggregate grant date fair value $ 25,043 $ 6,913,675
==================== =====================
Weighted average vesting service period of shares granted 12 Months 12-36 Months
Number of shares/units vested at September 30, 2008 -- 269,224
==================== =====================
Number of shares/units unvested at September 30, 2008 6,750 577,003
==================== =====================
For the third quarter of 2008, the Company recognized an expense of
approximately $518,000 in connection with these awards.
As of September 30, 2008, the total compensation cost related to non-vested
restricted stock and deferred stock units not yet recognized was $2,088,000.
Total compensation cost is expected to be recognized over a one year period on a
weighted average basis.
10
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
NOTE 9 - FAIR VALUE
Effective January 1, 2008, the Company implemented Statement of Financial
Accounting Standards 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 the Company's financial
position or results of operations.
In February 2008, the FASB issued FASB Staff Position 157-2 ("FSP 157-2"), 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 and is currently assessing the impact of
FAS 157 on its non-financial assets and liabilities.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, ("SFAS 161"). SFAS 161 amends and expands
the disclosure requirements of SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 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 161 will
not affect the Company's financial condition and results of operations, but may
require additional disclosures if the Company 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 relating to
its convertible debt.
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. 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. The equity
component is determined by deducting the fair value of the liability component.
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.
Management is evaluating what effect FSP APB 14-1 will have on the Company's
financial position and operating results relating to its convertible debt.
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.
Our net sales increased by approximately 10% to $19,802,000 for the three months
ended September 30, 2008 from
11
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
$18,079,000 for the three months ended September 30, 2007. Our gross margin
increased to 36.9% for the three months ended September 30, 2008 from 31.7% for
the three months ended September 30, 2007. Our gross profit increased by 27.6%
to $7,307,000 for the three months ended September 30, 2008 from $5,728,000 for
the three months ended September 30, 2007. Our operating loss decreased to
$4,819,000 for the three months ended September 30, 2008 from $5,072,000 for the
three months ended September 30, 2007. This decrease was primarily a result of
an increase in net sales and gross profit compared to the prior year as well as
a decrease in general and administrative expenses and was more than offset by an
increase in total marketing and selling and fulfillment expenses. Marketing
expenses (excluding staff related costs) increased to $4,172,000 for the third
quarter of 2008 from $2,807,000 for the third quarter 2007, primarily as a
result of our growth of marketing programs as well as the timing of our
integration of Project Runway Season 5. In 2008, Project Runway Season 5 aired
in the third quarter while last year Project Runway Season 4 aired in the fourth
quarter with the finale being aired in the first quarter of 2008. Expenditures
for online programs increased 15% for the period and spending for offline
programs increased 119% (largely due to timing). The mix of marketing spend for
the quarter and the year will continue to shift toward online as the Company
believes that online marketing programs are more efficient.
Our reserve for returns and credit card chargebacks remain relatively unchanged
at approximately 39.4% of gross sales for the third quarter of 2008 compared to
39.8% for the third quarter of 2007. The decrease was primarily caused by a
slight 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. While we
have historically increased the amount of inventory purchased on a pack and hold
basis, we have made increased selective purchases of inventory in order to take
advantage of opportunities in the current economic environment.
We have developed a new version of our Web site, which was placed into service
in August 2008. We have capitalized a total of $5,282,000 in connection with the
development of the new Web site, resulting in increased capitalized expenses and
increased depreciation during the nine and three months ended September 30,
2008.
At September 30, 2008, we had an accumulated deficit of $142,506,000. 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 would need to
invest in sales, marketing, merchandising, operations, information systems, site
development and additional personnel to support these activities. 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 and we may continue to incur substantial operating losses.
Results Of Operations
For The Nine Months Ended September 30, 2008 Compared To The Nine Months Ended
September 30, 2007.
The following table sets forth our statement of operations data for the nine
months ended September 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 $ 68,381 100.0% $ 61,795 100.0% $ 49,991 100.0%
Cost of sales 43,040 62.9 39,230 63.5 29,995 60.0
-------- --------- -------- --------- -------- ---------
Gross profit 25,341 37.1 22,565 36.5 19,996 40.0
Selling and fulfillment expenses 14,525 21.2 13,528 21.9 11,152 22.3
--------------------------------
12
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
Marketing expenses 10,620 15.5 9,130 14.7 9,256 18.5
General and administrative 9,858 14.4 10,450 16.9 8,019 16.1
-------- --------- ---------- --------- -------- ---------
Total operating expenses 35,003 51.2 33,108 53.5 28,427 56.9
Operating loss (9,662) (14.1) (10,543) (17.0) (8,431) (16.9)
Interest income (expense) and
other income (305) (0.5) 270 0.4 (219) (0.4)
-------- --------- ---------- --------- --------- ---------
Net loss $ (9,967) (14.6)% $ (10,273) (16.6)% $ (8,650) (17.3)%
======== ========= ========== ========= ========= =========
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 30:
2008 2007 2006
Average Order Size (including shipping & handling) $ 282.73 $ 277.60 $ 250.65
New Customers Added during the Period* 141,584 131,895 112,457
*Based on unique email addresses
In addition to the condensed 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, 2008 increased by
approximately 10% to $113,728,000 from $103,703,000 for the nine months ended
September 30, 2007. For the nine months ended September 30, 2008, we recorded a
provision for returns and credit card chargebacks and other discounts of
$45,347,000 or approximately 39.9% of gross sales. For the nine months ended
September 30, 2007, the provision for returns and credit card chargebacks and
other discounts was $41,908,000, or approximately 40.4% of gross sales. The
decrease in this provision as a percentage of gross sales resulted from a slight
decrease in the return rate, which 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 nine months ended September
30, 2008 was $68,381,000. This represents an increase of approximately 11%
compared to the nine months ended September 30, 2007, in which net sales totaled
$61,795,000. The growth in net sales resulted primarily from a 7.3% increase in
the number of new customers acquired as well as a 1.8% increase in average order
size. For the nine months ended September 30, 2008, revenue from shipping and
handling (which is included in net sales) increased approximately 18% to
$3,898,000 from $3,315,000 for the nine months ended September 30, 2007.
Shipping and handling revenue increased at a greater percentage than revenue as
a whole as a result of an increased number of customer orders shipped express
compared to the prior year.
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 nine months ended September 30, 2008
totaled $43,040,000 resulting in a gross margin of approximately 37.1%. Cost of
sales for the nine months ended September 30, 2007 totaled $39,230,000,
resulting in a gross margin of 36.5%. The increase in gross margin was
attributable to increased merchandise and product margins and a decrease in
inventory reserves (as the prior period included approximately $550,000 of
additional inventory reserves relating to our transition to a new fulfillment
center). Gross profit increased by approximately 12.3%, to $25,341,000 for the
nine months ended September 30, 2008 compared to $22,565,000 for the nine months
ended September 30, 2007. The growth in gross profit was primarily the result of
growth in sales and was offset slightly by higher product margins.
13
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
Selling and fulfillment expenses: Selling and fulfillment expenses increased by
7.4% for the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007. Selling and fulfillment expenses were comprised of the
following:
Nine Months Ended September 30,
--------------------------------------------------
(All data in thousands) 2008 2007 Percentage
--------------------- --------------------- Difference
As a % of As a % of Increase
Net Sales Net Sales (Decrease)
Operating $ 7,506 11.0% $ 7,219 11.7% 4.0%
Technology 4,263 6.2 3,543 5.7 20.3
E-Commerce 2,756 4.0 2,766 4.5 (0.4)
-------- --------- -------- --------- ----------
Total selling and fulfillment expenses $ 14,525 21.2% $ 13,528 21.9% 7.4%
======== ========= ======== ========= ==========
As a percentage of net sales, our selling and fulfillment expenses decreased to
21.2% for the nine months ended September 30, 2008 from 21.9% for the nine
months ended September 30, 2007.
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, 2008 by approximately 4.0%
compared to the nine months ended September 30, 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. These increases were partially
offset by approximately $632,000 of incremental expenses incurred in 2007
relating to our transition of the fulfillment center.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web site hosting. For the nine months ended September 30,
2008, technology expenses increased by approximately 20.3% compared to the nine
months ended September 30, 2007. This increase resulted from an increase in
software support, depreciation and web hosting expenses and salary related
expenses. Consulting expenses incurred in the third quarter 2008 were related to
the development of our new Web site and capitalized accordingly. For the nine
months ended September 30, 2008, approximately $1,650,000 of expenses was
capitalized in connection with the development of our new Web site. Depreciation
expenses relating to the new Web site were approximately $293,000, and are
included in technology expenses.
E-Commerce expenses include expenses related to our photo design studio, image
processing, and Web site design. For the nine months ended September 30, 2008,
e-commerce expenses remained relatively unchanged as compared to the nine months
ended September 30, 2007, as increases in expenses associated with photo shoots
were offset by a decrease in salary related expenses.
Marketing expenses: Marketing expenses increased by 16.3% to $10,620,000 for the
nine months ended September 30, 2008 from $9,130,000 for the nine months ended
September 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 increased to 15.5% for the nine months ended September 30, 2008 from
14.7% for the nine months ended September 30, 2007. Total expenses related to
the national print and television advertising campaign for the nine months ended
September 30, 2008 totaled $4,400,000 compared to $3,500,000 for the nine months
ended September 30, 2007. This increase was related to a shift in the timing of
the airing of Project Runway Season 5 from the fourth quarter of 2007 to the
third quarter of 2008. In addition, expenses related to direct mail campaigns
and billboards decreased by $205,000 and $104,000, respectively. These decreases
were offset by expenses related to online marketing, which resulted in the
following increases: $255,000 related to paid search, $266,000 related to
comparison engines, $365,000 related to other online advertisements, $103,000
paid for consulting and public relations and $92,000 in affiliate 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
14
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
and administrative expenses for the nine months ended September 30, 2008
decreased by approximately 5.7% to $9,858,000 as compared to $10,450,000 for the
nine months ended September 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 $2,214,000. These amounts were offset by an increase
in salary related expenses of $965,000, which includes $280,000 of severance
payable to our former Chief Financial Officer, as well as an increase in
consulting and professional fees of $185,000.
As a percentage of net sales, general and administrative expenses for the nine
months ended September 30, 2008 decreased to approximately 14.4% from 16.9% for
the nine months ended September 30 2007.
Loss from operations: Operating loss decreased in the nine months ended
September 30, 2008 to $9,662,000 from $10,543,000 in the nine months ended
September 30, 2007.
Interest income: Other income for the nine months ended September 30, 2008
decreased to $57,000 from $463,000 for the nine months ended September 30, 2007.
These amounts related primarily to interest income earned on our cash balances.
Interest expense: Interest expense for the nine months ended September 30, 2008
totaled $362,000, compared to $193,000 for the nine months ended September 30,
2007. Interest expense consists of fees paid in connection with our Credit
Facility, interest expense relating to the Subordinated Notes issued and
amortization of warrants issued to certain related parties.
For The Three Months Ended September 30, 2008 Compared To The Three Months
September 30, 2007.
The following table sets forth our statement of operations data for the three
months ended September 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 $ 19,802 100.0% $ 18,079 100.0% $ 16,322 100.0%
Cost of sales 12,495 63.1 12,351 68.3 10,211 62.6
-------- --------- -------- --------- -------- ---------
Gross profit 7,307 36.9 5,728 31.7 6,111 37.4
Selling and fulfillment expenses 4,933 24.9 4,583 25.3 3,871 23.7
Marketing expenses 4,172 21.1 2,807 15.5 3,496 21.4
General and administrative expenses 3,021 15.2 3,410 18.9 2,369 14.5
-------- --------- -------- --------- -------- ---------
Total operating expenses 12,126 61.2 10,800 59.7 9,736 59.6
Operating loss (4,819) (24.3) (5,072) (28.0) (3,625) (22.2)
Interest and other income (174) (0.9) 44 0.2 140 0.9
-------- --------- -------- --------- -------- ---------
Net loss $ (4,993) (25.2)% $ (5,028) (27.8)% $ (3,485) (21.3)%
======== ========= ======== ========= ======== =========
The following table sets forth our actual results based on the other key
operational metrics discussed above for the three months ended September 30, as
indicated below:
2008 2007 2006
Average Order Size (including shipping & handling) $292.03 $280.22 $260.58
New Customers Added during the Period* 39,055 37,408 35,970
*Based on unique email addresses
15
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
Net sales: Gross sales for the three months ended September 30, 2008 increased
by approximately 9% to $32,649,000 from $30,009,000 for the three months ended
September 30, 2007. For the three months ended September 30, 2008, we recorded a
provision for returns and credit card chargebacks and other discounts of
$12,847,000, or approximately 39.4% of gross sales. For the three months ended
September 30, 2007, the provision for returns and credit card chargebacks and
other discounts was $11,930,000, or approximately 39.8% of gross sales. The
decrease in this provision as a percentage of gross sales resulted from a slight
decrease in the return rate, which 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 September
30, 2008 was $19,802,000. This represents an increase of approximately 10%
compared to the three months ended September 30, 2007, in which net sales
totaled $18,079,000. The growth in net sales resulted primarily from a 4.4%
increase in the number of new customers acquired as well as a 4.2% increase in
average order size and a decrease in the return rate. For the three months ended
September 30, 2008, revenue from shipping and handling (which is included in net
sales) increased approximately 19.5% to $1,104,000 from $924,000 for the three
months ended September 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 September 30, 2008
totaled $12,495,000, resulting in a gross margin of approximately 36.9%. Cost of
sales for the three months ended September 30, 2007 totaled $12,351,000,
resulting in a gross margin of 31.7%. Gross profit increased by approximately
27.6%, to $7,307,000 for the three months ended September 30, 2008 compared to
$5,728,000 for the three months ended September 30, 2007. The increase in gross
profit and gross margin is a result of increased merchandise and product margins
as well as a decrease in inventory reserves (as the prior period included
approximately $550,000 of additional inventory reserves relating to our
transition to the fulfillment center).
Selling and fulfillment expenses: Selling and fulfillment expenses increased by
7.6% for the three months ended September 30, 2008 compared to the three months
ended September 30, 2007. Selling and fulfillment expenses were comprised of the
following:
Three Months Ended September 30,
--------------------------------------------------
(All data in thousands) 2008 2007 Percentage
--------------------- --------------------- Difference
As a % of As a % of Increase
Net Sales Net Sales (Decrease)
Operating $ 2,105 10.6% $ 2,486 13.7% (15.3)%
Technology 1,768 8.9 1,144 6.3 54.5
E-Commerce 1,060 5.4 953 5.3 11.2
-------- --------- -------- --------- ----------
Total selling and fulfillment expenses $ 4,933 24.9% $ 4,583 25.3% 7.6 %
======== ========= ======== ========= ==========
As a percentage of net sales, our selling and fulfillment expenses decreased to
24.9% for the three months ended September 30, 2008 from 25.3% for the three
months ended September 30, 2007.
Operating expenses decreased $381,000 or 15.3% to $2,105,000 for the three
months ended September 30, 2008 compared to $2,486,000 for the three months
ended September 30, 2007. This decrease is primarily related to decreased
incremental expenses of approximately $462,000 relating to the transition of the
fulfillment center that were incurred in the third quarter of 2007, which was
partially offset by increases in fulfillment expenses for the third quarter of
2008 as a result of both increased volume and increased fees per order.
For the three months ended September 30, 2008, technology expenses increased by
approximately 54.5% compared to the three months ended September 30, 2007. This
increase resulted from an increase in consulting, depreciation, web hosting,
software
16
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
support and salary related expenses. Consulting expenses incurred in the third
quarter of 2008 were related to the development of our new Web site and
capitalized accordingly. For the three months ended September 30, 2008,
approximately $509,000 of expenses was capitalized in connection with the
development of our new Web site. Our new Web site was placed into service in
August 2008, depreciation expenses relating to the new Web site was
approximately $293,000, which is included in technology expenses.
For the three months ended September 30, 2008, e-commerce expenses increased
11.2% to $1,060,000 as compared to the three months ended September 30, 2007,
primarily due to an increase in salary related expenses and expenses associated
with consulting and photo shoots, which was partially offset by decreases in
expenses relating to supplies and research tools.
Marketing expenses: Marketing expenses increased by 48.6% to $4,172,000 for the
three months ended September 30, 2008 from $2,807,000 for the three months ended
September 30, 2007.
As a percentage of net sales, our marketing expenses increased to 21.1% for the
three months ended September 30, 2008 compared to 15.5% for the three months
ended September 30, 2007. Total expenses related to the national print and
television advertising campaign for the three months ended September 30, 2008
were $2,100,000 compared to $693,000 for the three months ended September 30,
2007. This increase was related to a shift in the timing of the airing of
Project Runway Season 5 from the fourth quarter of 2007 to the third quarter of
2008. In addition, expenses related to online marketing increased as we believe
that these programs are the most efficient way to grow our business. Online
integration, online marketing consultants and comparison engines increased by
$305,000, $46,000 and $84,000, respectively. These increases were partially
offset by the following decreases: $143,000 of direct mail campaigns, $31,000
related to billboard advertising and $119,000 for paid search.
General and administrative expenses: General and administrative expenses for the
three months ended September 30, 2008 decreased by approximately 11.4% to
$3,021,000 as compared to $3,410,000 for the three months ended September 30,
2007. The decrease in general and administrative expenses was primarily the
result of a decrease in equity-based compensation expense of approximately
$850,000, which was partially offset by an increase in salaries and related
expenses of $347,000. In addition, there were increases in consulting and
professional fees, recruiting and rent by $22,000, $23,000 and $53,000,
respectively.
As a percentage of net sales, general and administrative expenses for the three
months ended September 30, 2008 decreased to approximately 15.2% from 18.9% for
the three months ended September 30, 2007.
Loss from operations: Operating loss decreased in the third quarter of 2008 to
$4,819,000 from $5,072,000 in the third quarter of 2007.
Interest income: Other income for the three months ended September 30, 2008
decreased to $8,000 from $99,000 for the three months ended September 30, 2007.
These amounts related primarily to interest income earned on our cash balances.
Interest expense: Interest expense for the three months ended September 30, 2008
totaled $182,000, compared to $55,000 for the three months ended September 30,
2007. Interest expense consists of fees paid in connection with our Credit
Facility, interest expense relating to the Subordinated Notes issued and
amortization of warrants issued to certain related parties.
Liquidity And Capital Resources
General
At September 30, 2008, we had approximately $1,920,000 in cash and cash
equivalents. Working capital at September 30, 2008 and 2007 was $15,494,000 and
$7,200,000, respectively. Working capital at December 31, 2007 was $20,889,000.
In addition, as of September 30, 2008, we had approximately $3,675,000 committed
under the Credit Facility, leaving approximately $3,825,000 available for
further borrowings.
We fund our operations through cash on hand, operating cash flow and the
proceeds of any equity or debt financing. Operating cash flow is affected by
revenue and gross margin levels, as well as return rates, and any deterioration
in our performance with respect to these financial measures would have a
negative impact on our liquidity. Total availability under the Credit Facility
is based primarily upon our inventory levels. In addition, both availability
under the Credit Facility and our operating cash flows are affected by the
payment terms that we receive from suppliers and service providers, and the
extent to which suppliers
17
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
require us 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, from time to time we sometimes
make prepayments in connection with our advertising campaign, as in some
circumstances we need to pay in advance of production. As of September 30, 2008,
we had approximately $982,000 of prepaid inventory and approximately $1,152,000
of prepaid marketing on our Condensed Balance Sheet compared to $422,000 and
$3,395,000 in the third quarter of 2007.
Standby Financing Commitment
In March 2008, Soros and Maverick agreed to provide up to $3,000,000 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. In July 2008, 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 Notes.
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 September 30,
2008, total availability under the Credit Facility was approximately $7,500,000
of which $3,675,000 was committed, leaving approximately $3,825,000 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 $3,000,000 and prime rate plus 0.50% or LIBOR plus 3% on average excess
availability greater than $3,000,000. 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, without any
new equity infusion, to enable us to meet our planned expenditures under a
streamlined business plan through the next 12 months. The streamlined business
plan calls for, among other things, reductions in marketing and capital
expenditures, delaying new hires and making selective inventory purchases.
However, in order to optimize the growth of our business, we will need 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 available on terms acceptable to the Company.
18
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
Commitments and Long Term Obligations
As of September 30, 2008, we had the following commitments and long term
obligations:
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Marketing and Advertising $ 1,772,000 $ 1,772,000 $ -- $ -- $ --
Purchase Orders 11,138,000 11,138,000 -- -- --
Operating Leases 1,782,000 684,000 1,098,000 -- --
Employment Contracts 4,453,000 1,004,000 3,406,000 43,000 --
------------ ----------- ----------- -------- ---------
Total commitments and long-term obligations $ 19,145,000 $14,598,000 $ 4,504,000 $ 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.
19
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
Item 4T. 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; risks associated with
the economic downturn; risks associated with the integration of the Company's
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;
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.
20
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2008
Part II - OTHER INFORMATION
Item 6. Exhibits
The following is a list of exhibits filed as part of this Report:
Exhibit Number Description
---------------------------------------------------------------
10.1 Note Purchase Agreement, dated as of July 23, 2008,
by and among Bluefly, Inc., Quantum Industrial
Partners LDC, SFM Domestic Investments LLC,
Maverick Fund USA, Ltd., Maverick Fund, L.D.C. and
Maverick Fund II, Ltd. (incorporated by reference
to Exhibit 10.1 of Form 8-K filed on July 24, 2008)
10.2 Convertible Promissory Note, dated as of July 23,
2008, issued by Bluefly, Inc. in favor of Quantum
Industrial Partners LDC (incorporated by reference
to Exhibit 10.2 of Form 8-K filed on July 24, 2008)
10.3 Convertible Promissory Note, dated as of July 23,
2008, issued by Bluefly, Inc. in favor of SFM
Domestic Investments LLC (incorporated by reference
to Exhibit 10.3 of Form 8-K filed on July 24, 2008)
10.4 Convertible Promissory Note, dated as of July 23,
2008, issued by Bluefly, Inc. in favor of Maverick
Fund USA, Ltd. (incorporated by reference to
Exhibit 10.4 of Form 8-K filed on July 24, 2008)
10.5 Convertible Promissory Note, dated as of July 23,
2008, issued by Bluefly, Inc. in favor of Maverick
Fund, L.D.C. (incorporated by reference to Exhibit
10.5 of Form 8-K filed on July 24, 2008)
10.6 Convertible Promissory Note, dated as of July 23,
2008, issued by Bluefly, Inc. in favor of Maverick
Fund II, Ltd. (incorporated by reference to Exhibit
10.6 of Form 8-K filed on July 24, 2008)
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
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
November 12, 2008
22