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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to ______
Commission File Number: 001-14498
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BLUEFLY, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3612110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 944-8000
-----------------------
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 10, 2006, the issuer had outstanding 129,248,990 shares of Common
Stock, $.01 par value.
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BLUEFLY, INC.
TABLE OF CONTENTS
PAGE
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Part I . Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 2006 (unaudited)
and December 31, 2005 3
Condensed Statements of Operations for the nine months ended
September 30, 2006 and 2005 (unaudited) 4
Condensed Statements of Operations for the three months ended
September 30, 2006 and 2005 (unaudited) 5
Condensed Statements of Changes in Shareholders' Equity for the
nine months ended September 30, 2006 (unaudited) 6
Condensed Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005 (unaudited) 7
Condensed Notes to Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information 24
Item 1. Legal Proceedings 24
Item 5. Other Information 24
Item 6. Exhibits 26
Signatures 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
BLUEFLY, INC.
CONDENSED BALANCE SHEETS (Unaudited)
SEPTEMBER 30, DECEMBER 31,
2006 2005
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 17,055,000 $ 9,408,000
Inventories, net 26,777,000 16,893,000
Accounts receivable, net of allowance for doubtful accounts 2,889,000 1,717,000
Prepaid inventory 1,111,000 485,000
Prepaid expenses 2,293,000 915,000
Other current assets 352,000 419,000
-------------- --------------
Total current assets 50,477,000 29,837,000
Property and equipment, net 2,664,000 2,895,000
Other assets 266,000 313,000
-------------- --------------
Total assets $ 53,407,000 $ 33,045,000
============== ==============
Current liabilities
Accounts payable $ 6,625,000 $ 5,662,000
Allowance for sales returns 3,563,000 3,407,000
Accrued expenses and other current liabilities 2,017,000 1,083,000
Deferred revenue 2,494,000 1,784,000
-------------- --------------
Total current liabilities 14,699,000 11,936,000
Notes payable to related party shareholders -- 4,000,000
Long-term interest payable to related party shareholders -- 1,217,000
Long-term obligations under capital lease -- 27,000
-------------- --------------
Total liabilities $ 14,699,000 $ 17,180,000
-------------- --------------
Commitments and contingencies
Shareholders' equity
Series A Preferred stock - $.01 par value; 500,000 shares authorized, 0 and
460,000 shares issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively (liquidation preference: $0 as of
September 30, 2006, and $9.2 million plus accrued dividends
of $5.9 million as of December 31, 2005) -- 5,000
Series B Preferred stock - $.01 par value; 9,000,000 shares authorized,0 and
8,889,414 shares issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively (liquidation preference: $0 as of
September 30, 2006, and $30 million plus accrued dividends of $9.5 million
as of December 31, 2005) -- 89,000
Series C Preferred stock - $.01 par value; 3,500 shares authorized, 0 and
1,000 shares issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively (liquidation preference: $0 as of
September 30, 2006, and $1 million plus accrued dividends of $286,000 as
of December 31, 2005) -- --
Series D Preferred stock - $.01 par value; 7,150 shares authorized, 0 and
6,313.43 issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively (liquidation preference: $0 as of
September 30, 2006, and $6.3 million plus accrued dividends of
$2.4 million as of December 31, 2005) -- --
Series E Preferred stock - $.01 par value; 1,000 shares authorized, 0 and
1,000 issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively (liquidation preference: $0 as of
September 30, 2006, and $1.0 million plus accrued dividends of $347,000
as of December 31, 2005) -- --
Series F Preferred stock - $.01 par value; 7,000 shares authorized, 857.143
and 5,279.714 issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively (liquidation preference: $857,000 plus
accrued dividends of $77,000 as of September 30, 2006, and $5.3
million plus accrued dividends of $192,000 as of December 31, 2005) -- --
Common stock - $.01 par value; 152,000,000 and 92,000,000 shares authorized
as of September 30, 2006 and December 31, 2005, respectively, and
129,248,990 and 19,059,166 shares issued and outstanding as of
September 30, 2006 and December 31, 2005, respectively 1,292,000 191,000
Additional paid-in capital 149,870,000 115,527,000
Accumulated deficit (112,454,000) (99,947,000)
-------------- --------------
Total shareholders' equity 38,708,000 15,865,000
-------------- --------------
Total liabilities and shareholders' equity $ 53,407,000 $ 33,045,000
============== ==============
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,
----------------------------
2006 2005
------------- -------------
Net sales $ 49,991,000 $ 37,576,000
Cost of sales 29,995,000 23,465,000
------------- -------------
Gross profit 19,996,000 14,111,000
Selling, marketing and fulfillment expenses 20,408,000 12,671,000
General and administrative expenses 8,019,000 4,716,000
------------- -------------
Total operating expenses 28,427,000 17,387,000
Operating loss (8,431,000) (3,276,000)
Interest and other income 311,000 134,000
Interest and other expense (530,000) (623,000)
------------- -------------
Net loss $ (8,650,000) $ (3,765,000)
Preferred stock dividends (2,237,000) (3,671,000)
Deemed dividends related to beneficial
conversion feature on Series F Preferred Stock (3,857,000) --
------------- -------------
Net loss available to common shareholders $ (14,744,000) $ (7,436,000)
============= =============
Basic and diluted loss per common share $ (0.23) $ (0.48)
============= =============
Weighted average common shares outstanding
(basic and diluted) 63,612,059 15,516,454
============= =============
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,
----------------------------
2006 2005
------------- -------------
Net sales $ 16,322,000 $ 12,045,000
Cost of sales 10,211,000 7,470,000
------------- -------------
Gross profit 6,111,000 4,575,000
Selling, marketing and fulfillment expenses 7,367,000 4,568,000
General and administrative expenses 2,369,000 1,528,000
------------- -------------
Total operating expenses 9,736,000 6,096,000
Operating loss (3,625,000) (1,521,000)
Interest and other income 199,000 65,000
Interest and other expense (59,000) (247,000)
------------- -------------
Net loss $ (3,485,000) $ (1,703,000)
Preferred stock dividends (16,000) (1,387,000)
Net loss available to common shareholders $ (3,501,000) $ (3,090,000)
============= =============
Basic and diluted loss per common share $ (0.03) $ (0.20)
============= =============
Weighted average common shares outstanding
(basic and diluted) 129,007,488 15,823,602
============= =============
The accompanying notes are an integral part of these condensed financial
statements.
5
BLUEFLY, INC.
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2005, 2004 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 (Unaudited)
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
$.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE
---------------------------- ---------------------------- ----------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 2004 460,000 5,000 8,889,414 89,000 1,000 --
------------ ------------ ------------ ------------ ------------ ------------
Sale of Common Stock and Warrants in
connection with the January 2004
financing (net of issuance costs
of $423,000) -- -- -- -- -- --
Change in Value of Warrants -- -- -- -- -- --
Exercise of Employee Stock Options -- -- -- -- -- --
Expense recognized in connection
with Issuance of Options -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 460,000 $ 5,000 8,889,414 $ 89,000 1,000 $ --
------------ ------------ ------------ ------------ ------------ ------------
Sale of Series F Preferred Stock
($1,000 per share net of expenses
of $249,000) -- -- -- -- -- --
Shares Of Series D Preferred Stock
Converted into Common Stock -- -- -- -- --
Shares Of Series F Preferred Stock
Converted into Common Stock -- -- -- -- --
Expense recognized in connection
with Issuance of Options -- -- -- -- -- --
Exercise of Employee Options -- -- -- -- -- --
Net Loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 460,000 $ 5,000 8,889,414 $ 89,000 1,000 $ --
------------ ------------ ------------ ------------ ------------ ------------
Conversion Of Preferred Stock (460,000) (5,000) (8,889,414) (89,000) (1,000) --
Options Expense -- -- -- -- -- --
Sale of Common Stock -- -- -- -- -- --
(net of expenses of approximately
$2.0 million) -- -- -- -- -- --
Issuance of Common Stock -- -- -- -- --
Warrants Issued to Third-Party -- -- -- -- -- --
Dividends Paid -- -- -- -- -- --
Deemed Dividend related to
beneficial conversion feature on -- -- -- -- -- --
Series F Preferred Stock -- -- -- -- -- --
Exercise of Employee Options -- -- -- -- -- --
Net Loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 2006 -- $ -- -- $ -- -- $ --
------------ ------------ ------------ ------------ ------------ ------------
SERIES D SERIES E SERIES F
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
$.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE
---------------------------- ---------------------------- ----------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 2004 7,136 -- 1,000 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Sale of Common Stock and Warrants in
connection with the January 2004
financing (net of issuance costs
of $423,000) -- -- -- -- -- --
Change in Value of Warrants -- -- -- -- -- --
Exercise of Employee Stock Options -- -- -- -- -- --
Expense recognized in connection
with Issuance of Options -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 7,136 $ -- 1,000 $ -- -- $ --
------------ ------------ ------------ ------------ ------------ ------------
Sale of Series F Preferred Stock
($1,000 per share net of expenses
of $249,000) -- -- -- -- 7,000 --
Shares Of Series D Preferred Stock
Converted into Common Stock (823) $ -- -- -- -- --
Shares Of Series F Preferred Stock
Converted into Common Stock -- -- -- -- (1,720) $ --
Expense recognized in connection
with Issuance of Options -- -- -- -- -- --
Exercise of Employee Options -- -- -- -- -- --
Net Loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 6,313 $ -- $ 1,000 $ -- 5,280 $ --
------------ ------------ ------------ ------------ ------------ ------------
Conversion Of Preferred Stock (6,313) -- (1,000) -- (4,423) --
Options Expense -- -- -- -- -- --
Sale of Common Stock -- -- -- -- -- --
(net of expenses of approximately
$2.0 million) -- -- -- -- -- --
Issuance of Common Stock -- -- -- -- -- --
Warrants Issued to Third-Party -- -- -- -- -- --
Dividends Paid -- -- -- -- -- --
Deemed Dividend related to
beneficial conversion feature on -- -- -- -- -- --
Series F Preferred Stock -- -- -- -- -- --
Exercise of Employee Options -- -- -- --
Net Loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 2006 -- $ -- -- $ -- 857 $ --
------------ ------------ ------------ ------------ ------------ ------------
COMMON STOCK
$.01 PAR VALUE
--------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------
Balance at January 1, 2004 12,894,166 129,000 102,392,000 (92,336,000) 10,279,000
------------ ------------ ------------ ------------ ------------
Sale of Common Stock and Warrants in
connection with the January 2004
financing (net of issuance costs
of $423,000) 1,543,209 15,000 4,562,000 -- 4,577,000
Change in Value of Warrants -- -- (564,000) -- (564,000)
Exercise of Employee Stock Options 804,381 8,000 733,000 -- 741,000
Expense recognized in connection
with Issuance of Options -- -- 147,000 -- 147,000
Net loss -- -- -- (3,791,000) (3,791,000)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 15,241,756 $ 152,000 $107,270,000 $(96,127,000) $ 11,389,000
------------ ------------ ------------ ------------ ------------
Sale of Series F Preferred Stock
($1,000 per share net of expenses
of $249,000) -- -- 6,751,000 -- 6,751,000
Shares Of Series D Preferred Stock
Converted into Common Stock 1,454,645 15,000 (15,000) -- --
Shares Of Series F Preferred Stock
Converted into Common Stock 765,481 8,000 (8,000) -- --
Expense recognized in connection
with Issuance of Options -- -- 41,000 -- 41,000
Exercise of Employee Options 1,597,284 16,000 1,488,000 -- 1,504,000
Net Loss -- -- -- (3,820,000) (3,820,000)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 19,059,166 $ 191,000 $115,527,000 $(99,947,000) $ 15,865,000
------------ ------------ ------------ ------------ ------------
Conversion Of Preferred Stock 48,170,884 481,000 (387,000) -- --
Options Expense -- -- 1,820,000 -- 1,820,000
Sale of Common Stock -- -- -- -- --
(net of expenses of approximately
$2.0 million) 60,975,610 610,000 47,392,000 -- 48,002,000
Issuance of Common Stock 1,000,000 10,000 1,070,000 -- 1,080,000
Warrants Issued to Third-Party -- -- 67,000 -- 67,000
Dividends Paid -- -- (19,512,000) -- (19,512,000)
Deemed Dividend related to
beneficial conversion feature on -- -- 3,857,000 (3,857,000) --
Series F Preferred Stock -- -- -- -- --
Exercise of Employee Options 43,330 -- 36,000 -- 36,000
Net Loss -- -- -- (8,650,000) (8,650,000)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2006 129,248,990 $ 1,292,000 $149,870,000 $(112,454,000) $ 38,708,000
------------ ------------ ------------ ------------ ------------
6
BLUEFLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2006 2005
-------------- --------------
Cash flows from operating activities
Net loss $ (8,650,000) $ (3,765,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,125,000 930,000
Stock options expense 1,820,000 35,000
Warrant issued to consultant 67,000 --
Provisions for returns 156,000 309,000
Bad debt expense 533,000 199,000
Reserve for inventory obsolescence 890,000 623,000
Warrant issued to supplier 147,000 215,000
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories (10,921,000) (5,096,000)
Accounts receivable (1,705,000) (933,000)
Prepaid inventory (626,000) (352,000)
Prepaid expenses (1,378,000) (996,000)
Other current assets 67,000 434,000
Other assets -- (187,000)
Increase (decrease) in
Accounts payable 963,000 274,000
Accrued expenses and other current liabilities 2,027,000 (284,000)
Interest payable to related party shareholders 271,000 409,000
Deferred revenue 710,000 266,000
-------------- --------------
Net cash used in operating activities (14,504,000) (7,919,000)
-------------- --------------
Cash flows from investing activities
Cash collateral in connection with Rosenthal
Pledge Agreement -- 1,250,000
Purchase of property and equipment (847,000) (2,011,000)
-------------- --------------
Net cash used in investing activities (847,000) (761,000)
-------------- --------------
Cash flows from financing activities
Net proceeds from June 2006 Financing 48,002,000 --
Net proceeds from June 2005 Financing -- 6,752,000
Net proceeds from exercise of stock options 36,000 502,000
Payments of capital lease obligation (40,000) (139,000)
Repayment of related party Notes Payable and interest (5,488,000) --
Dividends paid to related party shareholders (19,512,000) --
-------------- --------------
Net cash provided by financing activities 22,998,000 7,115,000
-------------- --------------
Net increase in cash and cash equivalents 7,647,000 (1,565,000)
Cash and cash equivalents - beginning of period 9,408,000 6,685,000
-------------- --------------
Cash and cash equivalents - end of period $ 17,055,000 $ 5,120,000
============== ==============
Supplemental schedule of non-cash investing and
financing activities:
Cash paid for interest $ 116,000 $ 120,000
============== ==============
Cash paid for interest - to related shareholder $ 1,488,000 --
============== ==============
Warrant issued to consultant $ 67,000 --
============== ==============
Deemed dividend related to beneficial conversion
feature on Series F Preferred Stock $ 3,857,000 --
============== ==============
Issuance of Common Stock to placement agent $ 1,080,000 --
============== ==============
Conversion of Preferred Stock to Common Stock $ (387,000) --
============== ==============
The accompanying notes are an integral part of these condensed
financial statements.
7
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
SEPTEMBER 30, 2006
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Bluefly, Inc. (the
"Company"). The financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnote disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting mainly of
normal recurring accruals) considered necessary for a fair statement have been
included. The results of operations of any interim period are not necessarily
indicative of the results of operations to be expected for the fiscal year due
to seasonal and other factors. For further information, refer to the financial
statements and accompanying footnotes included in the Company's Form 10-K for
the year ended December 31, 2005. On January 1, 2006 the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 123(R) "Share-Based
Payment."
The Company has sustained net losses and negative cash flows from operations
since the formation of Bluefly.com. The Company's ability to meet its
obligations in the ordinary course of business is dependent on its ability to
establish profitable operations, or find other sources to fund operations. The
Company believes that its current funds, together with working capital, and its
availability under its existing Credit Facility, will be sufficient to enable it
to meet its planned expenditures through at least the next 12 months.
NOTE 2 - THE COMPANY
The Company is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home products at discounts of up to 75% off of
retail value. The Company's e-commerce Web site ("Bluefly.com" or "Web Site")
was launched in September 1998.
During 2005, the Company dissolved its wholly owned subsidiary. This subsidiary
had no operations.
NOTE 3 - JUNE 2006 FINANCING
On June 15, 2006 (the "Closing Date"), the Company completed a private placement
(the "Private Placement") through the sale of 60,975,610 shares of its common
stock, par value $0.01 per share (the "Common Stock"), at a price of $0.82 per
share. The Private Placement was made to affiliates of Maverick Capital, Ltd.
("Maverick") and Prentice Capital Management, LP ("Prentice"). The aggregate
proceeds from the Private Placement were $50 million, almost half of which was
purchased by each of Maverick and Prentice. The purchase price of $0.82 per
share represented an 11% premium to the closing bid price of the Common Stock on
June 5, 2006, the date of signing of the definitive stock purchase agreement.
The shares purchased in the Private Placement included 203,016 shares of Common
Stock that were purchased by a holder of Series D Convertible Preferred Stock in
connection with the exercise of such holder's preemptive rights. The amount
purchased by Maverick and Prentice in the Private Placement was reduced on a pro
rata basis as a result of the exercise of such holder's preemptive rights.
Concurrent with the closing of the Private Placement, affiliates of Soros Fund
Management LLC ("Soros") converted all of their outstanding Series A, Series B,
Series C, Series D, Series E and Series F Convertible Preferred Stock
(collectively, the "Preferred Stock") into 44,729,960 shares of the Company's
Common Stock. The remaining shares of Series D Convertible Preferred Stock,
which were held by investors other than Soros, automatically converted into an
aggregate of 1,073,936 shares of Common Stock. The only Preferred Stock that
remains outstanding is approximately 857 shares of Series F Convertible
Preferred Stock. The Company has the right to redeem such shares of Series F
Convertible Preferred Stock, at the face value thereof of $857,143, plus accrued
dividends, to the extent the Board of Directors of the Company determines to do
so. Allen & Company LLC acted as placement agent for the Private Placement and
was paid a commission of 5% of the gross proceeds, half of which was paid by the
Company and the other half by Soros. Of the commission paid by the Company, $1
million was paid through the issuance of Common Stock and the remainder was paid
in cash.
On the Closing Date, the Company paid Soros $25 million in cash, which
represented $4,000,000 of the principal and $1,488,376 of accrued but unpaid
interest on the outstanding convertible notes (the "Notes") held by Soros and
the majority of the accrued but unpaid dividends on the shares of Preferred
Stock that were converted by Soros in connection with the Private Placement,
with the remaining accrued but unpaid dividends on such shares of Preferred
Stock paid in shares of Common Stock. The remaining
8
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
SEPTEMBER 30, 2006
proceeds will be used by the Company for general corporate purposes. As a result
of the Private Placement and the conversion of the Preferred Stock, Soros
collectively owns approximately 39% of the Company's Common Stock, and each of
Maverick and Prentice own approximately 24% of the Company's Common Stock.
As a result of the Private Placement, the conversion price of the Company's
Series F Convertible Preferred Stock, the majority of which was held by Soros,
automatically decreased from $2.32 to $0.82. 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 resulted in the Company recording a
beneficial conversion feature in the approximate amount of approximately $3.9
million as part of its second quarter financial results. This non-cash charge,
which is analogous to a dividend, resulted in an adjustment to the Company's
computation of Loss Per Share.
The Company agreed to use its commercially reasonable efforts to (i) prepare and
file with the Securities and Exchange Commission (the "Commission") a
registration statement (the "Registration Statement") to register the shares of
Common Stock sold in the Private Placement within 120 days of the Closing Date
and (ii) cause the Registration Statement to be declared effective by the
Commission within 180 days of the Closing Date. The Registration Statement has
since been filed and declared effective.
NOTE 4 - FINANCING AGREEMENT
The Company has a three year revolving credit facility (the "Credit Facility")
with Wells Fargo Retail Finance, LLC ("Wells Fargo"). Under the terms of the
Credit Facility, Wells Fargo provides the Company with a revolving credit
facility and issues letters of credit in favor of suppliers or factors. The
Credit Facility is secured by a lien on substantially all of the Company's
assets. Historically, the Credit Facility had also been secured by a $2,000,000
letter of credit issued by Soros in favor of Wells Fargo (the "Soros LC"). In
August 2006, Wells Fargo agreed to release the Soros LC, and that it would no
longer require an availability reserve (although it has the right under the
Credit Facility to establish reserves in the future, as it deems appropriate).
In return, the Company agreed to maintain a minimum cash balance of $5,000,000.
Availability under the Credit Facility is determined by a formula that takes
into account the amount of the Company's inventory and accounts receivable. The
maximum availability is currently $7,500,000, but can be increased to
$12,500,000 at the Company's request, subject to certain conditions. As of
September 30, 2006, total availability under the Credit Facility was
approximately $7,500,000, of which $3,200,000 was committed, leaving
approximately $4,300,000 available for further borrowings.
Interest accrues monthly on the average daily amount outstanding under the
Credit Facility during the preceding month at a per annum rate equal to the
prime rate plus 0.75% or LIBOR plus 2.75%. The Company also pays a monthly
commitment fee on the unused portion of the facility (i.e., $7,500,000 less the
amount of loans outstanding) equal to 0.35%. The Company also pays Wells Fargo
certain fees to open letters of credit and guarantees in an amount equal to a
certain percentage of the face amount of the letter of credit for each thirty
(30) days such letter of credit, or a portion thereof, remains open. For the
three months ended September 30, 2006, the Company incurred approximately
$25,000 in connection with these fees.
Under the terms of the Credit Facility, Soros has the right to purchase all of
the Company's obligations from Wells Fargo at any time if the Company is then in
default under the Credit Facility.
NOTE 5 - LOSS PER SHARE
The Company has determined Loss Per Share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
loss per share excludes dilution and is computed by dividing loss available to
common shareholders by the weighted average number of common shares outstanding
for the period.
Diluted loss per share is computed by dividing loss available to common
shareholders by the weighted average number of common shares outstanding for the
period, adjusted to reflect potentially dilutive securities. Due to the loss
from continuing operations, the following options and warrants to purchase
shares of Common Stock and Preferred Stock convertible into shares of Common
Stock were not included in the computation of diluted loss per share because the
result of the exercise of such inclusion would be antidilutive:
9
Security September 30, 2006 Exercise Prices September 30, 2005 Exercise Prices
------------------- ------------------ ------------------ ------------------ ------------------
Options 8,007,910 $ 0.80 - $16.47 9,054,230 $ 0.69 - $16.47
Warrants 1,945,893 $0.78 - $ 3.96 1,933,393 $ 0.78 - $3.96
Preferred Stock --(1) 45,678,675(1)
Convertible Notes -- --(2)
(1) Excludes dividends on Preferred Stock, which are payable in cash or
Common Stock, at the Company's option, upon conversion, redemption or
liquidation. In June 2006, substantially all of the Company's
Preferred Stock was converted into shares of Common Stock. At
September 30, 2006, there were 857 shares of Series F Convertible
Preferred Stock outstanding that are convertible into approximately
1,045,296 shares of Common Stock (excluding dividends).
(2) Excludes debt issued in connection with the July 2003 financing and
the October 2003 financing, which would have been convertible into
equity securities of the Company sold in any subsequent round of
financing, at the holders option, at a price that is equal to the
lowest price per share accepted by any investor in such subsequent
round of financing. At September 30, 2005, such debt was not
convertible into Common Stock. In June 2006, all of the convertible
notes were repaid.
NOTE 6 - STOCK BASED COMPENSATION
The Company's Board of Directors has adopted three stock option plans, one in
April 2005, one in July 2000 and the other in May 1997 (collectively the
"Plans"). The Plans were adopted for the purpose of encouraging key employees,
consultants and directors who are not employees to acquire a proprietary
interest in the growth and performance of the Company, and are similar in
nature. Options are granted in terms not to exceed ten years and become
exercisable as specified when the option is granted. Vesting terms of the
options range from immediately to a ratable vesting period of four years. The
Plans have an aggregate of 15,700,000 shares authorized for issuance.
Before January 1, 2006, the Company accounted for stock-based compensation under
the recognition and measurement principles of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
and related interpretations. The Company did not recognize compensation expense
related to stock options granted to employees and directors where the exercise
price was at or above fair value at the date of grant. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As permitted
by SFAS No. 123, the Company elected to continue to apply the
intrinsic-value-based method of APB No. 25 described above, and adopted only the
disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, "Accounting
For Stock-Based Compensation - Transition and Disclosure."
On January 1, 2006, the start of the first quarter of fiscal 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"), which requires that
the costs resulting from all share-based payment transactions be recognized in
the financial statements at their fair values. The Company adopted SFAS No.
123(R) using the modified prospective application method under which the
provisions of SFAS No. 123(R) apply to new awards and to awards modified,
repurchased, or cancelled after the adoption date. Additionally, compensation
cost for the portion of the awards for which the requisite service has not been
rendered that are outstanding as of the adoption date is recognized in the
Statement of Operations over the remaining service period after the adoption
date based on the award's original estimate of fair value. Results for prior
periods have not been restated. Total share-based compensation expense recorded
in the Statement of Operations for the three and nine months ended September 30,
2006 is $597,000 and $1,820,000, respectively.
On March 29, 2005, the SEC published Staff Accounting Bulletin ("SAB") No. 107,
which provides the Staff's views on a variety of matters relating to stock-based
payments. SAB No. 107 requires stock-based compensation be classified in the
same expense line items as cash compensation. The application of SFAS No. 123(R)
had the following effect on Q3 2006 reported amounts relative to amounts that
would have been reported using the intrinsic value method under previous
accounting. As a
10
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2006
result of adopting SFAS No. 123(R), the Company's operating loss and net loss
for the three and nine months ended September 30, 2006 was $597,000 and
$1,820,000 higher, respectively, than if it had continued to account for
share-based compensation under APB No. 25. Basic and diluted loss per share for
the three and nine months ended September 30, 2006 would have been $0.01 and
$0.03 per share, lower, respectively, if the Company had not adopted SFAS
No.123(R). There was no effect on the Company's operating cash flows.
The following table illustrates the effect on net loss and net loss per common
share applicable to common stockholders for the three and nine months ended
September 30, 2005 as if the Company had applied the fair value recognition
provisions for stock-based employee compensation of SFAS No. 123, as amended.
For purposes of the pro forma presentation, option forfeitures are accounted for
as they occurred and no amounts of compensation expense have been capitalized
into inventory or other assets, but instead were considered as period expenses
(in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------ ------------------
Net loss, as reported $ (1,703,000) $ (3,765,000)
Deduct: total stock based compensation
expense determined under fair value based
methods for all awards (734,000) (2,148,000)
Add: Stock-based employee compensation
expense included in net loss 8,000 35,000
Adjusted for Preferred Stock Dividends (1,387,000) (3,671,000)
Pro forma net loss applicable to common
shareholders (3,816,000) (9,549,000)
Net Loss per share applicable to common
shareholders:
Basic and diluted, as reported $ (0.20) $ (0.48)
Basic and diluted, pro forma $ (0.24) $ (0.62)
The fair value of options granted is estimated on the date of grant using a
Black-Scholes option pricing model. Expected volatilities are calculated based
on the historical volatility of the Company's stock. Management monitors share
option exercise and employee termination patterns to estimate forfeiture rates
within the valuation model. The expected holding period of options represents
the period of time that options granted are expected to be outstanding. The
risk-free interest rate for periods within the expected life of the option is
based on the interest rate of U.S. Treasury note in effect on the date of the
grant. The Company had previously recorded expense in accordance with APB No. 25
for certain options issued to its CEO and President that were issued below
market. Prior to the adoption of FAS 123(R), the Company recognized actual
forfeitures when they occurred but has not recorded a cumulative effect
adjustment to record estimated forfeitures related to these below market options
as the balance was immaterial.
The table below presents the assumptions used to calculate the fair value of
options granted during the three and nine months ended September 30, 2006 and
2005, respectively.
11
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2006
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2006 2005 2005
------------------ ------------------ ------------------ ------------------
Expected holding period (years) 6.0 6.0 6.0 6.0
Risk-free interest rate 4.95% 4.79% 4.11% 4.26%
Dividend yield 0.00% 0.00% 0.00% 0.00%
Volatility 107% 108% 128% 132%
The following table summarizes the Company's stock option activity:
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
-------------- --------------
Balance at December 31, 2005 8,038,528 $ 1.97
--------------
Options granted 161,000 $ 1.11
Options canceled (148,288) $ 1.92
Options exercised (43,330) $ 0.82
--------------
Balance at September 30, 2006 8,007,910 $ 1.96
Eligible for exercise at December 31, 2005 4,969,929 $ 2.15
Eligible for exercise at September 30, 2006 6,152,047 $ 2.07
The stock options are exercisable in different periods through 2016. Additional
information with respect to the outstanding options as of September 30, 2006, is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ ---------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE OPTIONS EXERCISE
PRICES VESTED UNVESTED CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
------------------ ------------ ------------ ---------------- ------------ ------------ ------------
$0.00 - $1.66 3,881,647 1,138,103 7.0 Years $ 1.23 3,881,647 $ 1.22
$1.66 - $3.32 1,951,035 691,477 6.8 Years $ 2.33 1,951,035 $ 2.43
$3.32 - $4.98 54,965 26,283 6.8 Years $ 3.92 54,965 $ 3.92
$4.98 - $6.64 22,250 - 2.2 Years $ 5.11 22,250 $ 5.11
$6.64 - $9.96 52,750 - 2.9 Years $ 9.17 52,750 $ 9.17
$9.96 - $11.62 104,250 - 3.2 Years $ 11.20 104,250 $ 11.20
$11.62 - $14.94 6,250 - 3.2 Years $ 14.04 6,250 $ 14.04
$14.94 - $16.60 78,900 - 2.3 Years $ 15.13 78,900 $ 15.13
$0.69 - $16.60 6,152,047 1,855,863 6.8 Years $ 1.96 6,152,047 $ 2.07
12
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2006
The total fair value of the 311,424 options that vested during the quarter and
the 1,182,118 options that vested during the nine months ended September 30,
2006 was approximately $467,000 and $1,820,000, respectively. The weighted
average fair value of the options granted during the quarter was $0.86 and was
$0.95 for the nine months ended September 30, 2006. At September 30, 2006, the
aggregate intrinsic value of the fully vested options was $148,000 and the
weighted average remaining contractual life of the options was 6.3 years. The
Company has not capitalized any compensation cost, or modified any of its stock
option grants during the first three quarters of 2006. Approximately 43,330
options with an intrinsic value of approximately $7,000, were exercised during
the quarter. No cash was used to settle equity instruments granted under the
Plans during the third quarter of 2006
As of September 30, 2006, the total compensation cost related to non-vested
awards not yet recognized was $2.5 million. Total compensation cost is expected
to be recognized over 2 years on a weighted average basis.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMNTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 157, Fair Value Measurements ("SFAS 157"), which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial statements for that fiscal year, including financial
statements for an interim period within that fiscal year. The Company is
evaluating the effects of adopting SFAS No. 157, and does not expect the
adoption to have a material impact on its results of operations.
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN 48"), which
clarifies the accounting for uncertainty in tax positions. This Interpretation
requires an entity to recognize the impact of a tax position in its financial
statements if that position is more likely than not to be sustained on audit
based on the technical merits of the position. The provisions of FIN 48 are
effective as of the beginning of fiscal year 2007, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. Early application of FIN 48 is encouraged. The Company is evaluating
the potential effects of implementing this Interpretation on its financial
condition and results of operations.
NOTE 8 - SUBSEQUENT EVENTS
The Payner Agreement
On November 14, 2006, the Company entered into a thirty-six (36) month
employment agreement (the "Payner Agreement") with Melissa Payner-Gregor
providing for her continued service as our Chief Executive Officer and a member
of our Board of Directors. The Payner Agreement is effective as of July 1, 2006
and replaces Ms. Payner-Gregor's prior employment agreement, which would have
expired on March 1, 2007. Under the Payner Agreement, Ms. Payner-Gregor is
entitled to an annual base salary of $500,000, subject to increases in the sole
discretion of the Compensation Committee of the Board of Directors (the
"Compensation Committee"). She is also eligible to receive an annual performance
bonus based upon the achievement of certain targets to be set for each fiscal
year by the Compensation Committee in its sole discretion. The Payner Agreement
provides for the grant to Ms. Payner-Gregor of: (i) a restricted stock award
under our 2005 Stock Incentive Plan (the "Plan") for 591,256 shares of its
common stock, par value $.01 per share ("Common Stock"), plus a cash bonus of
approximately $394,686 intended to compensate her for the income taxes payable
on such restricted stock award, in exchange for Ms. Payner-Gregor forfeiting her
right to certain fully vested and out-of-the-money stock options that would have
been exercisable to purchase an aggregate of 1,665,220 shares of Common Stock,
(ii) a deferred stock unit award under the Plan for and representing 126,904
underlying shares of Common Stock, in exchange for Ms. Payner-Gregor forfeiting
her right to certain unvested and out-of-the-money stock options that would have
been exercisable to purchase an aggregate of 234,780 shares of Common Stock, and
(iii) subject to the approval of the Company's stockholders of certain
amendments to the Plan, a deferred stock unit award under the Plan for and
representing 4,201,832 shares of Common Stock. The foregoing equity awards,
together with stock options previously granted to Ms. Payner-Gregor, represent
approximately 4% of the Company's equity, inclusive of management equity awards
and stock options. The restricted stock award referred to in the foregoing
clause (i) shall vest in full on January 1, 2007. A portion of the deferred
stock unit awards referred to in the foregoing clauses (ii) and
13
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2006
(iii) vest over a one-year period, with the remainder vesting over either a two
or three year period. If Ms. Payner-Gregor's employment is terminated without
cause (as defined in the Payner Agreement) or through a constructive termination
(as defined in the Payner Agreement), all equity benefits previously granted,
including stock options, restricted stock awards and deferred stock unit awards
shall be deemed fully vested as of the date of termination, and she would be
entitled to receive her base salary through the date of termination, plus
unreimbursed business expenses and bonuses that have been earned and awarded but
not yet paid, as well as her then-current base salary for a period of twelve
(12) months from the date of termination and the reimbursement of the cost of
maintaining (or the Company shall maintain) in effect the medical and dental
insurance, disability and hospitalization plans, and life insurance policies in
which Ms. Payner-Gregor participates for a period of one-year from the date of
termination. In the event of a change of control (as defined in the Payner
Agreement), any unvested stock options, restricted stock awards and one-half of
any deferred stock unit awards granted to Ms. Payner-Gregor which are
outstanding as of the date of the change of control and have not yet vested (the
"Payner COC Unvested DSUs") shall be deemed fully vested as of the date of the
change of control. The remaining one-half of the Payner COC Unvested DSUs shall
vest on the earliest to occur of: (a) the scheduled vesting date and (b) twelve
(12) months from the date of the change of control. In the event that Ms.
Payner-Gregor would be subject to tax under Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"), the payments to her under the Payner
Agreement will be reduced to the maximum amount that she could receive without
being subject to such tax. The Payner Agreement provides Ms. Payner-Gregor with
a monthly housing allowance of $4,000 and an annual allowance of approximately
$27,500 for life insurance and supplemental disability insurance. Ms.
Payner-Gregor is subject to certain covenants under the Payner Agreement,
including a non-competition covenant covering the term of her employment and an
additional period of eighteen (18) months thereafter.
The Barry Agreement
On November 14, 2006, the Company entered into a thirty-six (36) month
employment agreement (the "Barry Agreement") with Patrick C. Barry providing for
Mr. Barry's continued service as our Chief Operating Officer and Chief Financial
Officer. The Barry Agreement is effective as of July 1, 2006 and replaces his
prior one-year evergreen employment agreement. Under the Barry Agreement, Mr.
Barry is entitled to an annual base salary of $350,000, subject to increases in
the sole discretion of the Compensation Committee. Mr. Barry is also eligible to
receive an annual performance bonus based upon the achievement of certain
targets to be set for each fiscal year by the Compensation Committee in its sole
discretion. The Barry Agreement provides for the grant to Mr. Barry of: (i) a
restricted stock award under the Plan for 269,965 shares of Common Stock, plus a
cash bonus of approximately $123,204 intended to compensate him for the income
taxes payable on such restricted stock award, in exchange for Mr. Barry
forfeiting his right to certain fully vested and out-of-the-money stock options
that would have been exercisable to purchase an aggregate of 853,238 shares of
Common Stock, (ii) a deferred stock unit award under the Plan for and
representing 45,837 underlying shares of Common Stock, in exchange for Mr. Barry
forfeiting his right to certain unvested and out-of-the-money stock options that
would have been exercisable to purchase an aggregate of 91,674 shares of Common
Stock, and (iii) subject to the approval of the Company's stockholders of
certain amendments to the Plan, a deferred stock unit award under the Plan for
and representing 4,062,692 shares of Common Stock. The foregoing equity awards,
together with stock options previously granted to Mr. Barry, represent
approximately 4% of the Company's equity, inclusive of management equity awards
and stock options. The restricted stock award referred to in the foregoing
clause (i) shall vest in full on January 1, 2007. A portion of the deferred
stock unit awards referred to in the foregoing clauses (ii) and (iii) vest over
a one-year period, with the remainder vesting over either a two or three year
period. If Mr. Barry's employment is terminated without cause (as defined in the
Barry Agreement) or through a constructive termination (as defined in the Barry
Agreement), all equity benefits previously granted, including stock options,
restricted stock awards and deferred stock unit awards shall be deemed fully
vested as of the date of termination, and he would be entitled to receive his
base salary through the date of termination, plus unreimbursed business expenses
and bonuses that have been earned and awarded but not yet paid, as well as his
then-current base salary for a period of nine (9) months from the date of
termination and the reimbursement of the cost of maintaining (or the Company
shall maintain) in effect the medical and dental insurance, disability and
hospitalization plans, and life insurance policies in which Mr. Barry
participates for a period of one-year from the date of termination. In the event
of a change of control (as defined in the Barry Agreement), any unvested stock
options, restricted stock awards and one-half of any deferred stock unit awards
granted to Mr. Barry which are outstanding as of the date of the change of
control and have not yet vested (the "Barry COC Unvested DSUs") shall be deemed
fully vested as of the date of the change of control. The remaining one-half of
the Barry COC Unvested DSUs shall vest on the earliest to occur of: (a) the
scheduled vesting date and (b) twelve (12) months from the date of the change of
control. In the event that Mr. Barry would be subject to tax under Section 4999
of the Code, the payments to him under the Barry Agreement will be reduced to
the maximum amount that he could receive
14
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2006
without being subject to such tax. The Barry Agreement contains an annual
allowance of approximately $17,500 for life insurance and supplemental
disability insurance. Mr. Barry is subject to certain covenants under the Barry
Agreement, including a non-competition covenant covering the term of his
employment and an additional period of eighteen (18) months thereafter.
Compensation Expense under SFAS No. 123(R)
The equity awards under the Payner Agreement and the Barry Agreement will be
accounted for in accordance with the Company's stock based compensation policy
in accordance with SFAS No. 123(R) over the three year vesting period of the
awards.
NASDAQ COMPLIANCE
On November 9, 2006, the Company was notified by Nasdaq Staff that it was not in
compliance with the continued listing requirements for the Nasdaq Capital Market
because shares of its Common Stock had closed at a per share bid price of less
than $1.00 for at least 30 trading days. Under Nasdaq rules, the Company has a
180-day grace period to regain compliance, which extends to May 8, 2007. If the
Company is unable to regain compliance by such date, the Nasdaq Staff will
determine whether it meets the initial listing criteria of the Nasdaq Capital
Market. In the event that the Company meets such initial listing criteria, it
will be granted an additional 180-day grace period to regain compliance. In
order to regain compliance, shares of its Common Stock would need to close at a
price of $1.00 or more for at least ten consecutive trading days. In the event
that it does not regain compliance within the requisite time period, the Company
intends to appeal any delisting. However, no assurance can be provided that any
such appeal will be successful. The failure to maintain listing on the Nasdaq
Capital Market may have an adverse effect on the price and/or liquidity of the
Company's Common Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Bluefly, Inc. is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home furnishings at discounts of up to 75% off
of retail value. We launched our Web site in September 1998. Over the past four
years, our sales have grown at a compounded annual growth rate of almost 21%,
while our gross margin percentage has increased from 21.3% in the third quarter
of 2003 to 37.4% in the third quarter of 2006.
The increase in our margin and sales over the past few years is the direct
result of the merchandise strategy that we began to implement in spring 2004. As
part of that strategy, we are bringing current season merchandise and the latest
fashion trends to our customer for great value. While there will be some
fluctuation in our gross margin percentage from quarter to quarter as we further
develop our merchandising and marketing strategy, we believe that we will be
able to maintain margins at the current levels.
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
launched a national advertising campaign in 2005. We continued the campaign into
the first half of 2006, and plan to continue it for the rest of the year. We
intend to continuously review the results of the campaign and use the learnings
to refine and improve upon our marketing strategy.
Our net sales increased by approximately 36% to $16,322,000 for the three months
ended September 30, 2006 from $12,045,000 for the three months ended September
30, 2005. Our gross margin decreased slightly to 37.4% for the three months
ended September 30, 2006 from 38.0% for the three months ended September 30,
2005, but was still above our levels of 34.2% for the three months ended
September 30, 2004 and 21.3% for the three months ended September 30, 2003. Our
gross profit increased by 34% to $6,111,000 for the three months ended September
30, 2006 from $4,575,000 for the three months ended September 30, 2005. This
growth in gross profit was driven by the increase in net sales. Our operating
loss increased by
15
BLUEFLY, INC.
SEPTEMBER 30, 2006
138% to $3,625,000 for the three months ended September 30, 2006, from
$1,521,000 for the three months ended September 30, 2005. This increase was
primarily a result of the increased marketing expenditures in the third quarter
of 2006and the inclusion of stock option expenses as a result of the adoption of
SFAS No. 123(R).
We increased our spending in marketing (excluding staff related costs) by 115%
to $3,104,000 for the third quarter of 2006, from $1,442,000 for the third
quarter 2005. The primary goal of our marketing campaign is to create awareness,
both with new customers as well as with our existing customers. In general, we
intend to market our business more aggressively than we have in previous years.
This more aggressive growth strategy will cause our marketing expense as a
percentage of revenue to increase in the short-term; however, we believe that it
is a prudent investment in our business given that our margin structure and
average order size have historically resulted in a relatively high positive
contribution to overhead and marketing on a customer's first order.
On January 1, 2006, we adopted SFAS No. 123(R), which requires expensing of
stock options. As a result, we recorded total share-based compensation expenses
of $597,000 for the three months ended September 30, 2006. Results for prior
periods have not been restated due to the adoption based on the modified
prospective approach. Had they been restated, additional share-based
compensation expenses of approximately $726,000 would have been recorded for the
three months ended September 30, 2005, in accordance with SFAS No.123.
Our reserve for returns and credit card chargebacks increased to 40.4% of gross
sales for the third quarter 2006 compared to 39.4% for the third quarter of
2005. The increase was primarily caused by an increase in average order size as
well as a shift in our merchandise mix. However, we believe that this increase
in return rates has been more than offset by the higher gross margin dollars and
average order sizes that have been generated by this shift in 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 September 30, 2006, we had an accumulated deficit of $112,454,000. The net
losses and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site and building our infrastructure, as well
as non-cash beneficial conversion charges resulting from decreases in the
conversion price of our Preferred Stock and the payment of dividends to holders
of Preferred Stock. In order to expand our business, we intend to invest in
sales, marketing, merchandising, operations, information systems, site
development and additional personnel to support these activities. Therefore, we
may continue to incur substantial operating losses. Although we have experienced
revenue growth in recent years, this growth may not be sustainable and therefore
should not be considered indicative of future performance.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No.
104 "Revenue Recognition." Gross sales consists primarily of revenue from
product sales and shipping and handling charges and is net of promotional
discounts. Net sales represent gross sales, less provisions for returns, credit
card chargebacks, and adjustments for uncollected sales taxes. Revenue is
recognized when all the following criteria are met:
o A customer executes an order.
o The product price and the shipping and handling fee have been
determined.
o Credit card authorization has occurred and collection is reasonably
assured.
o The product has been shipped and received by the customer.
Shipping and handling billed to customers are classified as revenue in
accordance with Financial Accounting Standards Board ("FASB") Task Force's
Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and
Handling Fees and Costs".
16
BLUEFLY, INC.
SEPTEMBER 30, 2006
Provision for Returns and Doubtful Accounts
We generally permit returns for any reason within 90 days of the sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical data. We perform credit card
authorizations and check the verification of our customers prior to shipment of
merchandise. However, our future return and bad debt rates could differ from
historical patterns, and, to the extent that these rates increase significantly,
it could have a material adverse effect on our business, prospects, cash flows,
financial condition and results of operations.
Stock-Based Compensation
As of January 1, 2006, we adopted SFAS No. 123(R), which requires us to measure
compensation cost for all outstanding unvested share-based awards at fair value
and recognize compensation over the service period for awards expected to vest.
The estimation of stock awards that will ultimately vest requires judgment, and
to the extent actual results differ from our estimates, such amounts will be
recorded as a cumulative adjustment in the period estimates are revised. We
consider historical experience when estimating expected forfeitures. Actual
results may differ substantially from these estimates.
Inventory Valuation
Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and
establish a reserve for such merchandise.
Deferred Tax Valuation Allowance
We recognize deferred income tax assets and liabilities on the differences
between the financial statement and tax bases of assets and liabilities using
enacted statutory rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
realized in income or loss in the period that included the enactment date. We
have assessed the future taxable income and determined that a 100% deferred tax
valuation allowance is deemed necessary. In the event that we were to determine
that we would be able to realize our deferred tax assets, an adjustment to the
deferred tax valuation allowance would increase income in the period such
determination is made.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2005
The following table sets forth our statement of operations data, for the nine
months ended September 30th. All data is in thousands except as indicated below:
2006 2005 2004
--------------------- --------------------- ---------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
--------- --------- ---------
Net sales $ 49,991 100.0% 37,576 100.0% $ 29,284 100.0%
Cost of sales 29,995 60.0% 23,465 62.4% 18,729 64.0%
--------- --------- ---------
Gross profit 19,996 40.0% 14,111 37.6% 10,555 36.0%
Selling, marketing and fulfillment expenses 20,408 40.8% 12,671 33.7% 9,718 33.2%
General and administrative expenses 8,019 16.1% 4,716 12.6% 4,882 16.7%
--------- --------- ---------
Total operating expenses 28,427 56.9% 17,387 46.3% 14,600 49.9%
Operating loss (8,431) (16.9)% (3,276) (8.7)% (4,045) (13.9)%
Interest (expense) and other income (219) (0.4)% (489) (1.3)% 247 0.9%
--------- --------- ---------
Net loss (8,650) (17.3)% (3,765) (10.0)% (3,798) (13.0)%
17
BLUEFLY, INC.
SEPTEMBER 30, 2006
We also measure and evaluate ourselves against certain other key operational
metrics. The following table sets forth our actual results based on these other
metrics for the nine months ended September 30th, as indicated below:
2006 2005 2004
---------- ---------- ----------
Average Order Size (including shipping & handling) $ 250.65 $ 214.07 $ 185.83
New Customers Added during the Period 112,457 95,088 84,605
Net sales: Gross sales for the nine months ended September 30, 2006 increased by
approximately 37% to $83,483,000 from $61,092,000 for the nine months ended
September 30, 2005. For the nine months ended September 30, 2006, we recorded a
provision for returns and credit card chargebacks and other discounts of
$33,492,000, or approximately 40.1% of gross sales. For the nine months ended
September 30, 2005, the provision for returns and credit card chargebacks and
other discounts was $23,516,000, or approximately 38.5% of gross sales. The
increase in this provision as a percentage of gross sales resulted from an
increase in the return rate. The increase was primarily caused by an increase in
average order size as well as a shift in our merchandise mix. However, we
believe that this increase in return rates has been more than offset by the
higher gross margins and average order sizes that have been generated by this
shift in merchandise mix.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the nine months ended
September 30, 2006 were $49,991,000. This represents an increase of
approximately 33.0% compared to the nine months ended September 30, 2005, in
which net sales totaled $37,576,000. The growth in net sales resulted from both
an increase in the number of new customers acquired (over 18% higher compared to
the first nine months of 2005) and an increase in average order size (over 17%
higher compared to the first nine months of 2005). For the nine months ended
September 30, 2006, revenue from shipping and handling (which is included in net
sales) increased approximately 10% in 2006 to $2,909,000 from $2,645,000 for the
nine months ended 2005.
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, 2006
totaled $29,995,000, resulting in gross margin of approximately 40.0%. Cost of
sales for the nine months ended September 30, 2005 totaled $23,465,000,
resulting in gross margin of 37.6%. Gross profit increased by approximately 42%,
to $19,996,000 for the nine months ended September 30, 2006 compared to
$14,111,000 for the nine months ended September 30, 2005. The growth in gross
margin was primarily the result of increased product margins, which was driven
by the continuing success of our merchandising strategy, which focuses on
negotiating better prices with vendors as well as selling more in-season
product. In-season merchandise has more value to our customers and therefore
commands higher margins.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by 61% in the first nine months of 2006 compared to the first
nine months of 2005. Selling, marketing and fulfillment expenses were comprised
of the following:
Nine Months Ended As a % of Nine Months Ended As a % of Percentage Difference
September 30, 2006 Net Sales September 30, 2005 Net Sales increase (decrease)
------------------ --------- ------------------ --------- ---------------------
Marketing $ 9,255,000 18.5% $ 3,538,000 9.4% 162%
Operating 5,638,000 11.3% 4,683,000 12.5% 20%
Technology 3,068,000 6.1% 2,680,000 7.1% 14%
E-Commerce 2,447,000 4.9% 1,770,000 4.7% 38%
------------------ --------- ------------------ --------- ---------------------
20,408,000 40.8% $ 12,671,000 33.7% 61%
As a percentage of net sales, our selling, marketing and fulfillment expenses
increased to 40.8% for the nine months ended September 30, 2006 from 33.7% for
the nine months ended September 30, 2005. This increase was primarily related to
the increase in advertising spending from our advertising campaign and the
recording of stock option expenses as a result of our adoption of SFAS No.
123(R).
Marketing expenses include expenses related to paid search, online and print
advertising, television, fees to marketing affiliates, direct mail campaigns as
well as staff related costs. Marketing expenses increased by a higher percentage
than our percentage
18
BLUEFLY, INC.
SEPTEMBER 30, 2006
increase in revenue because we focused more of our marketing initiatives on our
national advertising campaign. Total expenses related to the national
advertising campaign for the nine months ended September 30, 2006 totaled $4.7
million compared to $1.0 million for the nine months ended September 30, 2005.
Of the $5.1 million total incremental marketing costs in the first nine months
of 2006 compared to the first nine months of 2005, approximately $3.6 million
related to the national advertising campaign and $791,000 was related to paid
search. While this more aggressive growth strategy will cause our marketing
expense as a percentage of revenue to increase in the short-term, we believe
that it is a prudent investment in our business given that our improved margin
structure and average order size have historically resulted in a relatively high
positive contribution to overhead on a customer's first order.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in the first nine months of 2006 by approximately 20% compared to the
first nine months of 2005 as a result of variable costs associated with the
increased sales volume (e.g., picking and packing orders, processing returns)
and an increase in customer service and salary related expenses. These increases
were partially offset by a decrease in credit card fees attributed to a refund
from one of our credit card processors.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web site hosting. For the nine months ended September 30,
2006, technology expenses increased by approximately 14% compared to the nine
months ended September 30, 2005. This increase resulted from an increase in
salary related expenses, including the expensing of non cash employee stock
options in the current year, as well as an increase in software support. This
increase was partially offset by a decrease in depreciation and web hosting
expense.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web site design. For the nine months ended September 30, 2006,
e-commerce expenses increased by approximately 38% as compared to the nine
months ended September 30, 2005, primarily due to an increase in salary related
expenses including the recording of non cash employee stock option expenses, as
well as an increase in expenses associated with photo shoots in the current
period.
General and administrative expenses: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the nine months ended
September 30, 2006 increased by approximately 70% to $8,019,000 as compared to
$4,716,000 for the nine months ended September 30, 2005. The increase in general
and administrative expenses was primarily the result of the recording of
$1,419,000 of expense related to employee stock options, an increase of $379,000
in bad debt expense related to a receivable due from a third party service
provider that purchased inventory from us to be distributed internationally,
increased consulting and professional fees of $218,000, increased public company
expenses of $260,000 and increased depreciation expense of $238,000. In
addition, in June 2006, we paid approximately $650,000 of executive bonuses in
connection with the financing that closed during the second quarter 2006. Most
of these bonuses are included in general and administrative expenses.
As a percentage of net sales, general and administrative expenses for the first
nine months of 2006 increased to approximately 16.1% from 12.6% for the first
nine months of 2005.
Loss from operations: Operating loss increased by approximately 157% in the
first nine months of 2006 to $8,431,000 from $3,276,000 in the first nine months
of 2005, as the increase in net sales and gross margin were more than offset by
the incremental marketing expenses and the recording of stock option expenses as
a result of the adoption of SFAS No. 123(R).
Interest and other income: Other income for the nine months ended September 30,
2006 increased to $311,000 from $134,000 for the nine months ended September 30,
2005. These amounts relate primarily to interest income earned on our cash
balances.
Interest and other expense: Interest expense for the nine months ended September
30, 2006 totaled $530,000, compared to $623,000 for the nine months ended
September 30, 2005. Interest expense relates to fees paid in connection with our
Credit Facility, as well as interest expense on the Notes.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005
The following table sets forth our statement of operations data, for the three
months ended September 30th. All data is in thousands, except as indicated
below:
19
BLUEFLY, INC.
SEPTEMBER 30, 2006
2006 2005 2004
---------------------- ---------------------- ----------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
--------- --------- ---------
Net sales $ 16,322 100.0% $ 12,045 100.0% $ 8,675 100.0%
Cost of sales 10,211 62.6% 7,470 62.0% 5,709 65.8%
--------- --------- ---------
Gross profit 6,111 37.4% 4,575 38.0% 2,966 34.2%
Selling, marketing and fulfillment expenses 7,367 45.1% 4,568 37.9% 3,059 35.2%
General and administrative expenses 2,369 14.5% 1,528 12.7% 1,736 20.1%
--------- --------- ---------
Total operating expenses 9,736 59.6% 6,096 50.6% 4,795 55.3%
Operating loss (3,625) (22.2)% (1,521) (12.6)% (1,829) (21.1%)
Interest (expense) and other income, net 140 0.9% (182) (1.5)% (131) (1.4)%
--------- --------- ---------
Net loss (3,485) (21.3)% (1,703) (14.1)% (1,960) (22.5)%
We also measure and evaluate ourselves against certain other key operational
metrics. The following table sets forth our actual results based on these other
metrics for the three months ended September 30th, as indicated below:
2006 2005 2004
---------- ---------- ----------
Average Order Size (including shipping & handling) $ 260.58 $ 228.72 $ 179.48
New Customers Added during the Period 35,970 28,762 25,792
Net sales: Gross sales for the three months ended September 30, 2006 increased
by approximately 38% to $27,366,000 from $19,878,000 for the three months ended
September 30, 2005. For the three months ended September 30, 2006, we recorded a
provision for returns and credit card chargebacks and other discounts of
$11,044,000, or approximately 40.4% of gross sales. For the three months ended
September 30, 2005, the provision for returns and credit card chargebacks and
other discounts was $7,832,000, or approximately 39.4% of gross sales. The
increase in this provision as a percentage of gross sales resulted from an
increase in the return rate. The increase was primarily caused by an increase in
average order size as well as a shift in our merchandise mix. However, we
believe that this increase in return rates has been more than offset by the
higher gross margins and average order sizes that have been generated by this
shift in merchandise mix.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the three months
ended September 30, 2006 were $16,322,000. This represents an increase of 35.5%
compared to the three months ended September 30, 2005, in which net sales
totaled $12,045,000. The growth in net sales resulted from both an increase in
the number of new customers acquired (approximately 25% higher compared to third
quarter 2005) and an increase in average order size (approximately 14% higher
compared to the third quarter 2005). For the three months ended September 30,
2006, revenue from shipping and handling increased approximately 14% to $939,000
in 2006 from $821,000 for the three months ended 2005.
Cost of sales: Cost of sales for the three months ended September 30, 2006
totaled $10,211,000, resulting in gross margin of approximately 37.4%. Cost of
sales for the three months ended September 30, 2005 totaled $7,470,000,
resulting in gross margin of 38.0%. Gross profit increased by 33.6%, to
$6,111,000 for the three months ended September 30, 2006 compared to $4,575,000
for the three months ended September 30, 2005. While there was a slight decrease
in growth in gross margin percentage, due to some promotions and a shift in the
merchandise sold, gross margin dollars increased as a result of the increase in
sales.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 61.3% in the third quarter of 2006 compared
to the third quarter of 2005. Selling, marketing and fulfillment expenses were
comprised of the following:
20
BLUEFLY, INC.
SEPTEMBER 30, 2006
Three Months Ended As a % of Three Months Ended As a % of Percentage Difference
September 30, 2006 Net Sales September 30, 2005 Net Sales increase (decrease)
------------------ --------- ------------------ --------- ---------------------
Marketing $ 3,496,000 21.4% $ 1,603,000 13.3% 118%
Operating 1,939,000 11.9% 1,475,000 12.2% 31%
Technology 1,079,000 6.6% 840,000 7.0% 28%
E-Commerce 853,000 5.2% 650,000 5.4% 31%
------------------ --------- ------------------ --------- ---------------------
7,367,000 45.1% $ 4,568,000 37.9% 61%
As a percentage of net sales, our selling, marketing and fulfillment expenses
increased to 45.1% for the three months ended September 30, 2006 from 37.9% for
the three months ended September 30, 2005. This increase was primarily related
to increases in advertising spending from our advertising campaign, costs
related paid search, and the recording of stock option expenses as a result of
our adoption of SFAS No. 123(R).
Total expenses related to the national advertising campaign for the three months
ended September 30, 2006 totaled $1.5 million compared to $900,000 for the nine
months ended September 30, 2005. Of the $1.7 million incremental marketing costs
in the third quarter 2006 compared to 2005, approximately $585,000 related to
the national advertising campaign and $480,000 related to paid search. While
this more aggressive growth strategy will cause our marketing expense as a
percentage of revenue to increase in the short-term, we believe that it is a
prudent investment in our business given that our improved margin structure and
average order size have historically resulted in a relatively high positive
contribution to overhead on a customer's first order.
Operating expenses increased in the third quarter of 2006 by approximately 31%
compared to the third quarter of 2005 as a result of variable costs associated
with the increased sales volume (e.g., picking and packing orders, processing
returns and credit card fees) as well as an increase in customer service costs.
For the three months ended September 30, 2006, technology expenses increased by
approximately 28% compared to the three months ended September 30, 2005. This
increase resulted from an increase in salary related expenses, including the
expensing of non cash employee stock options in the current year, as well as an
increase in depreciation and web hosting expense. This increase was offset
partially by a decrease in consulting expense.
For the three months ended September 30, 2006, e-commerce expenses increased by
approximately 31% as compared to the three months ended September 30, 2005,
primarily due to an increase in salary related expenses, including the of
recording of non cash employee stock option expenses as well as an increase in
expenses associated with photo shoots in the current period.
General and administrative expenses: General and administrative expenses for the
three months ended September 30, 2006 increased by approximately 55% to
$2,369,000 as compared to $1,528,000 for the three months ended September 30,
2005. The increase in general and administrative expenses was primarily the
result of the recording of $463,000 of expense related to non cash employee
stock options in the current period, increased consulting and professional fees
of $99,000, increased public company expenses of $89,000 and increased
depreciation expense of $66,000.
As a percentage of net sales, general and administrative expenses for the third
quarter of 2006 increased to approximately 14.5% from 12.7% for the third
quarter of 2005.
Loss from operations: Operating loss increased by 138% in the third quarter of
2006 to $3,625,000 from $1,521,000 in the third quarter of 2005 as the increase
in net sales and gross margin were more than offset by the incremental marketing
expenses and the recording of stock option expenses as a result of the adoption
of SFAS No. 123(R).
Interest and other income: Other income for the third quarter ended September
30, 2006 increased to $199,000 from $65,000 for the third quarter ended
September 30, 2005. These amounts relate primarily to interest income earned on
our cash balances.
Interest and other expense: Interest expense for the three months ended
September 30, 2006 totaled $59,000, compared to $247,000 for the three months
ended September 30, 2005. Interest expense relates to fees paid in connection
with our Credit Facility, as well as interest expense on the Notes during 2005.
21
BLUEFLY, INC.
SEPTEMBER 30, 2006
LIQUIDITY AND CAPITAL RESOURCES
General
At September 30, 2006, we had approximately $17.1 million in the form of cash
and cash equivalents. Working capital at September 30, 2006 and 2005 was $35.8
million and $11.6 million, respectively. Working capital at December 31, 2005
was $17.9 million. In addition, as of September 30, 2006, we had approximately
$3.2 million committed under the Credit Facility, leaving approximately $4.3
million of availability.
We fund our operations through cash on hand, operating cash flow, as well as the
proceeds of any equity or debt financing. Operating cash flow is affected by
revenue and gross margin levels, as well as return rates, and any deterioration
in our performance on these financial measures would have a negative impact on
our liquidity. Total availability under the Credit Facility is based primarily
upon our inventory levels. In addition, both availability under the Credit
Facility and our operating cash flows are affected by the payment terms that we
receive from suppliers and service providers, and the extent to which suppliers
require us to request Wells Fargo to provide credit support under the Credit
Facility. 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 September 30, 2006,
we had approximately $1,111,000 of prepaid inventory on our balance sheet.
Our inventory levels as of September 30, 2006 were approximately $9.6 million
higher than at September 30, 2005. The increase in inventory generally reflects
a ramp up in connection with our sales growth. However, the increased inventory
level could adversely affect our flexibility in taking advantage of other buying
opportunities that may become available in the near term.
On June 15, 2006, we raised $50 million of additional capital through the sale
of 60,975,610 shares of our Common Stock. We used $25 million of the proceeds
from such sale to pay all accrued but unpaid dividends on the Preferred Stock
converted by Soros in connection with such sale and to payoff the convertible
promissory notes held by Soros. The remaining proceeds from the sale will be
used for general corporate purposes.
We believe that our current funds, together with operating cash flow, and
availability under our existing Credit Facility will be sufficient to enable us
to meet our planned expenditures through at least the next 12 months.
Credit Facility
In July 2005, we entered into a new three year revolving credit facility with
Wells Fargo Retail Finance, LLC. Pursuant to the Credit Facility, Wells Fargo
provides us with a revolving loan and issues letters of credit in favor of
suppliers or factors. The Credit Facility is secured by a lien on all of our
assets. Historically, the Credit Facility had also been secured by the Soros LC.
In August 2006, Wells Fargo agreed to release the Soros LC, and that it would no
longer require an availability reserve (although it has the right under the
Credit Facility to establish reserves in the future, as it deems appropriate).
In return, we agreed to maintain a minimum cash balance of $5,000,000.
Availability under the Credit Facility is determined by a formula that takes
into account the amount of our inventory and accounts receivable. The maximum
availability is currently $7,500,000, but can be increased to $12,500,000 at our
request, subject to certain conditions. As of September 30, 2006, total
availability under the Credit Facility, was approximately $7,500,000 of which
$3,200,000 was committed, leaving approximately $4,300,000 available for further
borrowings.
Interest accrues monthly on the average daily amount outstanding under the
Credit Facility during the preceding month at a per annum rate equal to the
prime rate plus 0.75% or LIBOR plus 2.75%. We also pay a monthly commitment fee
on the unused portion of the facility (i.e., $7,500,000 less the amount of loans
outstanding) equal to 0.35%. We also pay Wells Fargo certain fees to open
letters of credit and guarantees in an amount equal to a certain specified
percentage of the face amount of the letter of credit for each thirty (30) days
such letter of credit, or a portion thereof, remains open.
Under the terms of the Credit Facility, Soros has the right to purchase all of
our obligations from Wells Fargo at any time if we are then in default under the
Credit Facility.
Commitments and Long Term Obligations
As of September 30, 2006, we had the following commitments and long term
obligations:
22
BLUEFLY, INC.
SEPTEMBER 30, 2006
Less than 1-3 3-5 More than 5
Total 1 year years years years
------------- ------------- ------------- ------------- -------------
Marketing and Advertising $ 296,000 296,000 -- -- --
Purchase Orders $ 7,143,000 7,143,000 -- -- --
Operating Leases $ 1,561,000 521,000 1,040,000 -- --
Capital Leases $ 27,000 27,000 -- -- --
Technology Commitments $ 1,241,000 991,000 250,000 -- --
Employment Contracts $ 3,571,000 514,000 3,057,000 -- --
------------- ------------- ------------- ------------- -------------
Grand total $ 13,839,000 9,492,000 4,347,000 -- --
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.
Off Balance Sheet Arrangements
Certain warrants issued in conjunction with our preferred stock financing are
equity linked derivatives and accordingly represent an off balance sheet
arrangement. Each of these warrants meet the scope exception in paragraph 11(a)
of FAS 133 and are accordingly not accounted for as derivatives for purposes of
FAS 133, but instead included as a component of equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 157, Fair Value Measurements ("SFAS 157"), which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial statements for that fiscal year, including financial
statements for an interim period within that fiscal year. The Company is
evaluating the potential effects of adopting SFAS No. 157, and does not expect
the adoption to have a material impact on its financial condition and results of
operations.
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN 48"), which
clarifies the accounting for uncertainty in tax positions. This Interpretation
requires an entity to recognize the impact of a tax position in its financial
statements if that position is more likely than not to be sustained on audit
based on the technical merits of the position. The provisions of FIN 48 are
effective as of the beginning of fiscal year 2007, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. Early application of FIN 48 is encouraged. The Company is evaluating
the potential effects of implementing this Interpretation on its financial
condition and 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. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Form 10-Q, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, our Chief Executive Officer along with our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms
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
23
BLUEFLY, INC.
SEPTEMBER 30, 2006
principal executive and principal financial officers, to allow timely decisions
regarding required disclosure. There have been no changes in our internal
control over financial reporting that occurred during the Company's most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe", "project", "expect", or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by us with the
Securities and Exchange Commission, including Forms 8-A, 8-K, 10-Q, and 10-K.
These risks and uncertainties include, but are not limited to, the following:
our history of losses and anticipated future losses; the success of our
advertising campaign; risks associated with Soros, Maverick and Prentice 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 U.P.S.
(and the risks of a mail slowdown due to terrorist activity) and our dependence
on our third-party web hosting, fulfillment and customer service centers; online
commerce security risks; risks related to brand owners' efforts to limit our
ability to purchase products indirectly; management of potential growth; the
competitive nature of our business and the potential for competitors with
greater resources to enter the business; the availability of merchandise; the
need to further establish brand name recognition; risks associated with our
ability to handle increased traffic and/or continued improvements to our Web
site; rising return rates; dependence upon executive personnel; the successful
hiring and retaining of new personnel; risks associated with expanding our
operations; risks associated with potential infringement of other's intellectual
property; the potential inability to protect our intellectual property;
government regulation and legal uncertainties; and uncertainties relating to the
imposition of sales tax on Internet sales.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We currently and from time to time are involved in litigation incidental to the
conduct of our business. However, we are not party to any lawsuit or proceeding
which in the opinion of management is likely to have a material adverse effect
on us.
ITEM 5. OTHER INFORMATION
EMPLOYMENT AGREEMENTS
The Payner Agreement
On November 14, 2006, we entered into a thirty-six (36) month employment
agreement (the "Payner Agreement") with Melissa Payner-Gregor providing for her
continued service as our Chief Executive Officer and a member of our Board of
Directors. The Payner Agreement is effective as of July 1, 2006 and replaces Ms.
Payner-Gregor's prior employment agreement, which would have expired on March 1,
2007. Under the Payner Agreement, Ms. Payner-Gregor is entitled to an annual
base salary of $500,000, subject to increases in the sole discretion of the
Compensation Committee of the Board of Directors (the "Compensation Committee").
She is also eligible to receive an annual performance bonus based upon the
achievement of certain targets to be set for each fiscal year by the
Compensation Committee in its sole discretion. The Payner Agreement provides for
the grant to Ms. Payner-Gregor of: (i) a restricted stock award under our 2005
Stock Incentive Plan (the "Plan") for 591,256 shares of our common stock, par
value $.01 per share ("Common Stock"), plus a cash bonus of approximately
$394,686 intended to compensate her for the income taxes payable on such
restricted stock award, in exchange for Ms. Payner-Gregor forfeiting her right
to certain fully vested and out-of-the-money stock options that would have been
exercisable to purchase an aggregate of 1,665,220 shares of Common Stock, (ii) a
deferred stock unit award under the Plan for and representing 126,904 underlying
shares of Common Stock, in exchange for Ms. Payner-Gregor forfeiting her right
to certain unvested and out-of-the-money stock options that would have been
exercisable to purchase an aggregate of 234,780 shares of Common Stock, and
(iii) subject to the approval of our stockholders of certain amendments to the
Plan, a deferred stock unit
24
BLUEFLY, INC.
SEPTEMBER 30, 2006
award under the Plan for and representing 4,201,832 shares of Common Stock. The
foregoing equity awards, together with stock options previously granted to Ms.
Payner-Gregor, represent approximately 4% of the Company's equity, inclusive of
management equity awards and stock options. The restricted stock award referred
to in the foregoing clause (i) shall vest in full on January 1, 2007. A portion
of the deferred stock unit awards referred to in the foregoing clauses (ii) and
(iii) vest over a one-year period, with the remainder vesting over either a two
or three year period. If Ms. Payner-Gregor's employment is terminated without
cause (as defined in the Payner Agreement) or through a constructive termination
(as defined in the Payner Agreement), all equity benefits previously granted,
including stock options, restricted stock awards and deferred stock unit awards
shall be deemed fully vested as of the date of termination, and she would be
entitled to receive her base salary through the date of termination, plus
unreimbursed business expenses and bonuses that have been earned and awarded but
not yet paid, as well as her then-current base salary for a period of twelve
(12) months from the date of termination and the reimbursement of the cost of
maintaining (or the Company shall maintain) in effect the medical and dental
insurance, disability and hospitalization plans, and life insurance policies in
which Ms. Payner-Gregor participates for a period of one-year from the date of
termination. In the event of a change of control (as defined in the Payner
Agreement), any unvested stock options, restricted stock awards and one-half of
any deferred stock unit awards granted to Ms. Payner-Gregor which are
outstanding as of the date of the change of control and have not yet vested (the
"Payner COC Unvested DSUs") shall be deemed fully vested as of the date of the
change of control. The remaining one-half of the Payner COC Unvested DSUs shall
vest on the earliest to occur of: (a) the scheduled vesting date and (b) twelve
(12) months from the date of the change of control. In the event that Ms.
Payner-Gregor would be subject to tax under Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"), the payments to her under the Payner
Agreement will be reduced to the maximum amount that she could receive without
being subject to such tax. The Payner Agreement provides Ms. Payner-Gregor with
a monthly housing allowance of $4,000 and an annual allowance of approximately
$27,500 for life insurance and supplemental disability insurance. Ms.
Payner-Gregor is subject to certain covenants under the Payner Agreement,
including a non-competition covenant covering the term of her employment and an
additional period of eighteen (18) months thereafter.
The Barry Agreement
On November 14, 2006, we entered into a thirty-six (36) month employment
agreement (the "Barry Agreement") with Patrick C. Barry providing for Mr.
Barry's continued service as our Chief Operating Officer and Chief Financial
Officer. The Barry Agreement is effective as of July 1, 2006 and replaces his
prior one-year evergreen employment agreement. Under the Barry Agreement, Mr.
Barry is entitled to an annual base salary of $350,000, subject to increases in
the sole discretion of the Compensation Committee. Mr. Barry is also eligible to
receive an annual performance bonus based upon the achievement of certain
targets to be set for each fiscal year by the Compensation Committee in its sole
discretion. The Barry Agreement provides for the grant to Mr. Barry of: (i) a
restricted stock award under the Plan for 269,965 shares of Common Stock, plus a
cash bonus of approximately $123,204 intended to compensate him for the income
taxes payable on such restricted stock award, in exchange for Mr. Barry
forfeiting his right to certain fully vested and out-of-the-money stock options
that would have been exercisable to purchase an aggregate of 853,238 shares of
Common Stock, (ii) a deferred stock unit award under the Plan for and
representing 45,837 underlying shares of Common Stock, in exchange for Mr. Barry
forfeiting his right to certain unvested and out-of-the-money stock options that
would have been exercisable to purchase an aggregate of 91,674 shares of Common
Stock, and (iii) subject to the approval of our stockholders of certain
amendments to the Plan, a deferred stock unit award under the Plan for and
representing 4,062,692 shares of Common Stock. The foregoing equity awards,
together with stock options previously granted to Mr. Barry, represent
approximately 4% of the Company's equity, inclusive of management equity awards
and stock options. The restricted stock award referred to in the foregoing
clause (i) shall vest in full on January 1, 2007. A portion of the deferred
stock unit awards referred to in the foregoing clauses (ii) and (iii) vest over
a one-year period, with the remainder vesting over either a two or three year
period. If Mr. Barry's employment is terminated without cause (as defined in the
Barry Agreement) or through a constructive termination (as defined in the Barry
Agreement), all equity benefits previously granted, including stock options,
restricted stock awards and deferred stock unit awards shall be deemed fully
vested as of the date of termination, and he would be entitled to receive his
base salary through the date of termination, plus unreimbursed business expenses
and bonuses that have been earned and awarded but not yet paid, as well as his
then-current base salary for a period of nine (9) months from the date of
termination and the reimbursement of the cost of maintaining (or the Company
shall maintain) in effect the medical and dental insurance, disability and
hospitalization plans, and life insurance policies in which Mr. Barry
participates for a period of one-year from the date of termination. In the event
of a change of control (as defined in the Barry Agreement), any unvested stock
options, restricted stock awards and one-half of any deferred stock unit awards
granted to Mr. Barry which are outstanding as of the date of the change of
control and have not yet vested (the "Barry COC Unvested DSUs") shall be deemed
fully vested as of the date of the change of control. The remaining one-half of
the Barry COC Unvested DSUs shall vest on the earliest to occur of: (a) the
scheduled vesting date and (b) twelve (12) months from the date of the change of
control. In the event that Mr. Barry would be subject to tax under Section 4999
of the Code, the payments
25
BLUEFLY, INC.
SEPTEMBER 30, 2006
to him under the Barry Agreement will be reduced to the maximum amount that he
could receive without being subject to such tax. The Barry Agreement contains an
annual allowance of approximately $17,500 for life insurance and supplemental
disability insurance. Mr. Barry is subject to certain covenants under the Barry
Agreement, including a non-competition covenant covering the term of his
employment and an additional period of eighteen (18) months thereafter.
Compensation Expense under SFAS No. 123(R)
The equity awards under the Payner Agreement and the Barry Agreement will be
accounted for in accordance with the Company's stock based compensation policy
in accordance with SFAS No. 123(R) over the three year vesting period of the
awards.
NASDAQ COMPLIANCE
On November 9, 2006, we were notified by Nasdaq Staff that we are not in
compliance with the continued listing requirements for the Nasdaq Capital Market
because shares of our Common Stock had closed at a per share bid price of less
than $1.00 for at least 30 trading days. Under Nasdaq rules, we have a 180-day
grace period to regain compliance, which extends to May 8, 2007. If we are
unable to regain compliance by such date, the Nasdaq Staff will determine
whether we meet the initial listing criteria of the Nasdaq Capital Market. In
the event that we meet such initial listing criteria, we will be granted an
additional 180-day grace period to regain compliance. In order to regain
compliance, shares of our Common Stock would need to close at a price of $1.00
or more for at least ten consecutive trading days. In the event that we do not
regain compliance within the requisite time period, we intend to appeal any
delisting. However, no assurance can be provided that any such appeal will be
successful. The failure to maintain listing on the Nasdaq Capital Market may
have an adverse effect on the price and/or liquidity of our Common Stock.
ITEM 6. EXHIBITS
The following is a list of exhibits filed as part of this Report:
EXHIBIT NUMBER DESCRIPTION
-------------- --------------------------------------------------------
10.1 First Amendment to Loan and Security Agreement, dated as
of August 14, 2006, by and between the Company and Wells
Fargo Retail Finance, Inc. (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed on August 14, 2006)*
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
* Previously filed; incorporated herein by reference.
26
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BLUEFLY, INC.
By: /s/ Melissa Payner-Gregor
-------------------------
Melissa Payner-Gregor
Chief Executive Officer
By: /s/ Patrick C. Barry
-------------------------
Patrick C. Barry
Chief Financial Officer
November 14, 2006
27