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 March 31, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 001-14498
-----------------------------------------------
BLUEFLY, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 944-8000
-----------------------------------------------
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 1, 2008, the issuer had outstanding 13,276,998 shares of Common Stock,
$.01 par value.
1
BLUEFLY, INC.
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 2008 (unaudited)
and December 31, 2007 3
Condensed Statements of Operations for the three months ended
March 31, 2008 and 2007 (unaudited) 4
Condensed Statements of Cash Flows for the three months ended
March 31, 2008 and 2007 (unaudited) 5
Condensed Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4T. Controls and Procedures 14
Part II. Other Information 15
Item 1. Legal Proceedings 15
Item 6. Exhibits 15
Signatures 16
2
Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
BLUEFLY, INC.
CONDENSED BALANCE SHEETS (Unaudited)
March 31, December 31,
2008 2007
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $5,514,000 $6,730,000
Inventories, net 26,680,000 28,492,000
Accounts receivable, net of allowance for doubtful accounts 3,252,000 2,102,000
Prepaid inventory 140,000 294,000
Prepaid expenses 801,000 777,000
Other current assets 640,000 416,000
------------ ------------
Total current assets 37,027,000 38,811,000
Property and equipment, net 6,236,000 6,019,000
Other assets 208,000 189,000
------------ ------------
Total assets $43,471,000 $45,019,000
------------ ------------
Current liabilities
Accounts payable $8,206,000 $8,460,000
Allowance for sales returns 4,965,000 4,204,000
Accrued expenses and other current liabilities 2,268,000 2,052,000
Deferred revenue 2,950,000 3,206,000
------------ ------------
Total current liabilities 18,389,000 17,922,000
Other long-term obligations 33,000 60,000
------------ ------------
Total liabilities $18,422,000 $17,982,000
------------ ------------
Commitments and contingencies
Shareholders' equity
Series F Preferred stock - $.01 par value; 7,000 shares authorized, 571.43
issued and outstanding as of March 31, 2008 and December 31, 2007
(liquidation preference: $571,000 plus accrued dividends of $116,000, and -- --
$105,000 as of March 31, 2008 and December 31, 2007, respectively)
Common stock - $.01 par value; 200,000,000 shares authorized as of
March 31, 2008 and December 31, 2007, respectively, 13,433,553 and
13,426,803 shares issued as of March 31, 2008 and December 31, 2007,
respectively, 13,276,998 and 13,275,730 shares outstanding as of
March 31, 2008 and December 31, 2007, respectively 1,328,000 1,328,000
Treasury Stock (1,452,000) (1,430,000)
Additional paid-in capital 159,937,000 158,965,000
Accumulated deficit (134,764,000) (131,826,000)
------------ ------------
Total shareholders' equity 25,049,000 27,037,000
------------ ------------
Total liabilities and shareholders' equity $ 43,471,000 $ 45,019,000
------------ ------------
The accompanying notes are an integral part of these condensed financial
statements.
3
BLUEFLY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
----------------------------
2008 2007
----------- -----------
Net sales $25,245,000 $22,108,000
Cost of sales 16,309,000 13,734,000
----------- -----------
Gross profit 8,936,000 8,374,000
Selling and fulfillment expenses 5,069,000 4,399,000
Marketing expenses 3,522,000 3,611,000
General and administrative expenses 3,247,000 3,586,000
----------- -----------
Total operating expenses 11,838,000 11,596,000
Operating loss (2,902,000) (3,222,000)
Interest and other income 36,000 195,000
Interest and other expense (72,000) (76,000)
----------- -----------
Net loss $(2,938,000) $(3,103,000)
Preferred stock dividends (11,000) (11,000)
----------- -----------
Net loss available to common shareholders $(2,949,000) $(3,114,000)
----------- -----------
Basic and diluted loss per common share $(0.22) $(0.24)
----------- -----------
Weighted average common shares outstanding
(basic and diluted) 13,251,101 12,962,949
----------- -----------
The accompanying notes are an integral part of these condensed financial
statements.
4
BLUEFLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------------------
2008 2007
----------- -----------
Cash flows from operating activities
Net loss $(2,938,000) $(3,103,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 409,000 423,000
Stock based compensation 799,000 1,721,000
Warrant issued to related party shareholders 173,000 --
Provisions for returns 761,000 (663,000)
Bad debt expense 166,000 155,000
Reserve for inventory obsolescence -- 302,000
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories 1,812,000 (2,246,000)
Accounts receivable (1,316,000) (1,060,000)
Prepaid expenses 130,000 (387,000)
Other current assets (224,000) (93,000)
Other assets (35,000) --
Increase (decrease) in
Accounts payable (281,000) 509,000
Accrued expenses and other current liabilities 216,000 (224,000)
Deferred revenue (256,000) (250,000)
----------- -----------
Net cash used in operating activities (584,000) (4,916,000)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (610,000) (850,000)
----------- -----------
Net cash used in investing activities (610,000) (850,000)
----------- -----------
Cash flows from financing activities
Payments of capital lease obligation -- (14,000)
Net proceeds from exercise of stock options -- 6,000
Purchase of Treasury Stock (22,000) (160,000)
----------- -----------
Net cash used in financing activities (22,000) (168,000)
----------- -----------
Net decrease in cash and cash equivalents (1,216,000) (5,934,000)
Cash and cash equivalents - beginning of period 6,730,000 20,188,000
----------- -----------
Cash and cash equivalents - end of period $5,514,000 $14,254,000
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest $48,000 $23,000
----------- -----------
Warrant issued to related party shareholders $173,000 --
----------- -----------
The accompanying notes are an integral part of these condensed financial
statements.
5
BLUEFLY, INC.
MARCH 31, 2008
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Bluefly, Inc. (the
"Company"). The financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnote disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting mainly of normal recurring accruals) considered
necessary for a fair statement have been included. The results of operations of
any interim period are not necessarily indicative of the results of operations
to be expected for the fiscal year due to seasonal and other factors. For
further information, refer to the financial statements and accompanying
footnotes included in the Company's Form 10-K for the year ended December 31,
2007.
The Company has sustained net losses and negative cash flows from operations
since the launch of Bluefly.com. The Company's ability to meet its obligations
in the ordinary course of business is dependent on its ability to establish
profitable operations, or find other sources to fund operations. The Company
believes that its current funds, together with working capital, and its
availability under its existing Credit Facility and the Commitment (as such
terms are hereinafter defined), will be sufficient to enable it to meet its
planned expenditures through at least the next 12 months.
NOTE 2 - THE COMPANY
The Company is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home products at discounts of up to 75% off of
retail value. The Company's e-commerce Web site ("Bluefly.com" or "Web Site")
was launched in September 1998.
NOTE 3 - REVERSE STOCK SPLIT
On March 13, 2008, the Company's Board of Directors approved a 1-for-10 reverse
stock split of the Company's Common Stock. The record date for the reverse stock
split was April 3, 2008, and the reverse stock split was effective as of 11:59,
P.M., EST, on the same date. Retroactive restatement has been given to all share
numbers in this report, and accordingly, all amounts including per share amounts
are shown on a post-split basis.
NOTE 4 - NASDAQ COMPLIANCE
The Company had previously announced that it was not in compliance with the
$1.00 minimum per share requirement for continued listing as set forth in Nasdaq
Marketplace Rule 4310(c)(4), and had been granted an extension by the Nasdaq
Listing Qualifications Panel to regain compliance. Because the Company's Common
Stock closed at a price of $1.00 or more for ten consecutive trading days, it
regained compliance with such rule on April 17, 2008. In addition, on April 16,
2008, the Company received a letter from the Nasdaq Listing Qualifications Staff
(the "Staff") stating that it had determined that the Company had failed to
comply with the shareholder approval rules set forth in Nasdaq Marketplace Rule
4350(i)(1)(A) because certain warrants issued to affiliates of Soros Fund
Management LLC ("Soros") and private funds associated with Maverick Capital,
Ltd. ("Maverick"), each of whom has representation on the Company's Board of
Directors, in connection with their debt financing commitment had originally
been issued with an exercise price based on the twenty-day trailing average
trading price of the Company's Common Stock, which was lower than the market
value of the Company's Common Stock on the day immediately preceding the
issuance of the warrants The Staff advised the Company that the issuance of the
warrants to Soros and Maverick at a price less than the market value would be
treated as equity compensation and would require shareholder approval pursuant
to Nasdaq Marketplace Rule 4350(i)(1)(A), unless the exercise price of the
warrants was increased to market value. Thereafter, the Company, Soros and
Maverick agreed to amend the terms of the warrants to increase the exercise
price of the warrants to a price equal to the market value of the Company's
Common Stock on the day immediately preceding the issuance of the warrants. As a
result, the Staff determined that the Company had regained compliance with such
rule by amending the warrants to increase the exercise price. Accordingly, the
Company believes that it has now resolved all outstanding issues regarding
Nasdaq listing requirements.
NOTE 5- 2008 COMMITMENT FROM RELATED PARTY
In March 2008, the Company entered into an agreement (the "Commitment") with
affiliates of Soros Fund Management LLC ("Soros") and private funds associated
with Maverick Capital, Ltd. ("Maverick") pursuant to which they agreed to
provide up to
6
BLUEFLY, INC.
MARCH 31, 2008
$3 million of debt financing to the Company, on a standby basis, available until
March 2009, provided that the commitment amount will be reduced by the gross
proceeds of any equity financing consummated during the year. The Company can
draw down debt in one or more tranches, provided that its cash balances are less
than $1 million at the time of any draw down. The draw downs will be evidenced
by subordinated convertible notes (the "Subordinated Notes") that have a term
expiring on the later of June 26, 2011 and three years from the date of issuance
of the Subordinated Notes and bear interest at the rate of 8% per annum,
compounded annually. Interest is payable upon maturity or conversion. The
Subordinated Notes are convertible (subject to stockholder approval), at the
holder's option into (a) equity securities that the Company might issue in any
subsequent round of financing at a price equal to the lowest price per share
paid by any investor in such subsequent round of financing or (b) Common Stock
at a price per share equal to the market price (as defined in the Subordinated
Notes) on the date of issuance of the Subordinated Note. The Company has not
drawn on the Commitment as of the Balance Sheet date.
In connection with the Commitment, the Company issued warrants to Soros and
Maverick to purchase an aggregate of 52,497 shares of Common Stock at an
exercise price equal to the trailing 20-day average stock price, or $4.40.
Subsequent to quarter end, on April 8, 2008, the warrants were amended to
increase the exercise price from $4.40 per share to $5.10 per share. The
exercise price of $5.10 per share equals the closing price of the Company's
Common Stock on the day immediately preceding the issuance of the warrants.
The Company used the Black-Scholes option pricing method (assumption: volatility
79.6%, risk free rate 2.96% one and a five year expected life and zero dividend
yield) to calculate the value of the 52,497 warrants issued in connection with
the Commitment. Using those assumptions, a value of approximately $173,000 was
assigned to the warrants. This amount was credited to additional paid in capital
and is being expensed to interest expense over the life of the commitment which
is one year. There was no accounting impact as a result of the modification.
NOTE 6 - FINANCING AGREEMENT
In March 2008, the Company amended its credit facility with Wells Fargo Retail
Finance, LLC ("Wells Fargo") (the credit facility as amended is hereafter
referred to as the "Credit Facility") to (i) extend the term until July 26, 2011
from July 26, 2008; (ii) change the rate at which interest accrues on the
average daily amount under the Credit Facility during the preceding month to a
per annum rate equal to the prime rate plus 0.75% or LIBOR plus 3.25% on average
excess availability less than $3.0 million and prime rate plus 0.50% or LIBOR
plus 3% on average excess availability greater than $3.0 million; (iii) increase
the monthly commitment fee on the unused portion of the Credit Facility to 0.50%
from 0.35%; (iv) include a servicing fee of $3,333 per month; (v) increase the
early termination fee to 1% of the revolving credit ceiling, from 0.50% through
maturity; and (vi) amend the standby and documentary letter of credit fees to
3.25% and 2.75%, respectively, on average excess availability less than $3.0
million, and 3.00% and 2.50%, respectively, on average excess availability
greater than $3.0 million.
In addition, the amendment provides for no revolving credit loans to be made
unless the full amount available pursuant to the Commitment has been advanced to
the Company and is outstanding. In connection with this amendment, the Company
paid Wells Fargo a $35,000 amendment fee. Under the terms of a Subordination and
Intercreditor Agreement, dated as of March 26, 2008 (the "Subordination
Agreement"), Soros and Maverick have the right to purchase all of the Company's
obligations from Wells Fargo at any time if the Company is in default under the
Credit Facility.
Under the terms of the Credit Facility, Wells Fargo provides the Company with a
revolving credit facility and issues letters of credit in favor of suppliers or
factors. The Credit Facility is secured by a lien on substantially all of the
Company's assets. Availability under the Credit Facility is determined by a
formula that takes into account a certain percentage of the amount of the
Company's inventory and a certain percentage of the Company's accounts
receivable. The maximum availability is currently $7,500,000, but can be
increased to $12,500,000 at the Company's request, subject to certain
conditions. As of March 31, 2008, total availability under the Credit Facility
was approximately $6,539,000, of which $3,250,000 was committed, leaving
approximately $3,289,000 available for further borrowings.
For the three months ended March 31, 2008, the Company incurred approximately
$48,000 of fees under the Credit Facility.
NOTE 7 - LOSS PER SHARE
The Company has determined Loss Per Share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
loss per share excludes dilution and is computed by dividing loss available to
common shareholders by the weighted average number of common shares outstanding
for the period.
7
BLUEFLY, INC.
MARCH 31, 2008
Due to the loss from continuing operations, (i) options and warrants to purchase
shares of Common Stock, (ii) Preferred Stock convertible into shares of Common
Stock, (iii) restricted stock awards that have not yet vested and (iv) deferred
stock unit awards for shares that have not yet been delivered were not included
in the computation of diluted loss per share because the result of such
inclusion would be antidilutive:
Security March 31, 2008 Exercise Prices March 31, 2007 Exercise Prices
-------- -------------- --------------- -------------- ---------------
Options 372,257 $4.10 - $27.30 378,453 $8.00 - $143.80
Restricted Stock 957,625 (2) -- 1,067,161 (2) --
Awards/DSUs
Warrants 173,915 $5.10 - $39.60 151,089 $7.80 - $39.60
Preferred Stock 69,634 (1) -- 69,634 (1) --
(1) At March 31, 2008 and 2007, there were 571 shares of Series F Convertible
Preferred Stock outstanding that are convertible into approximately 69,634
shares of Common Stock (excluding dividends).
(2) Includes Restricted Stock Awards and DSUs.
NOTE 8 - STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with the
provisions of Statement of Financial Accounting Standards No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123(R)"), which requires that the costs
resulting from all share-based payment transactions be recognized in the
financial statements at their fair values. The Company adopted SFAS No. 123(R)
using the modified prospective application method under which the provisions of
SFAS No. 123(R) apply to new awards and to awards modified, repurchased, or
cancelled after the adoption date. Additionally, compensation cost for the
portion of the awards for which the requisite service has not been rendered that
are outstanding as of the adoption date is recognized in the Statement of
Operations over the remaining service period after the adoption date based on
the award's original estimate of fair value. Total share-based compensation
expense recorded in the Statement of Operations for the three months ended March
31, 2008 and 2007 was $799,000 and $1,721,000, respectively.
Stock Options
The fair value of options granted is estimated on the date of grant using a
Black-Scholes option pricing model. Expected volatilities are calculated based
on the historical volatility of the Company's Common Stock. Management monitors
share option exercise and employee termination patterns to estimate forfeiture
rates within the valuation model. The expected holding period of options
represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate for periods within the expected life of
the option is based on the interest rate of U.S. Treasury notes in effect on the
date of the grant.
The following table summarizes the Company's stock option activity:
Number of shares Weighted Average Exercise
Price
Balance at January 1, 2008 342,879 $10.51
Options granted 35,000 $4.57
Options canceled (5,622) $10.58
Options exercised --
Balance at March 31, 2008 372,257 $9.95
Vested at December 31, 2007 287,112 $10.37
Vested at March 31, 2008 292,982 $10.39
During the first quarter of 2008, 10,527 options vested. The total fair value of
the options that vested (including those canceled) during the quarter ended
March 31, 2008 was approximately $100,000. There were 35,000 stock options
8
BLUEFLY, INC.
MARCH 31, 2008
granted during the quarter. At March 31, 2008, the aggregate intrinsic value of
the fully vested options was $0 and the weighted average remaining contractual
life of the options was 5.7 years. The Company has not capitalized any
compensation cost, or modified any of its stock option grants during the first
quarter of 2008. During the first quarter of 2008, no options were exercised and
no cash was used to settle equity instruments granted under the Plans.
As of March 31, 2008, the total compensation cost related to non-vested stock
option awards not yet recognized was $384,000. Total compensation cost is
expected to be recognized over one year on a weighted average basis.
Restricted Stock Awards and Deferred Stock Unit Awards
The following table is a summary of activity related to restricted stock swards
and deferred stock unit awards for employees at March 31, 2008:
Restricted Deferred Stock
Stock Awards Unit Awards
Balance at January 1, 2008 39,653 714,750
Shares/Units Granted 7,500 250,000
Shares/Units Forfeited (750) (15,000)
Shares/Units Restriction Lapses (38,528) --
Balance at March 31, 2008 7,875 949,750
Weighted Average Grant Date Fair Value Per share $3.24 $8.32
Aggregate Grant Date Fair Value $34,515 $7,901,920
Vesting Service Period of Shares Granted 12 months 12-36 months
Number of shares/units vested at March 31, 2008 38,528 --
Number of shares/units unvested at March 31, 2008 7,875 949,750
For the quarter ended March 31, 2008 the Company recognized an expense of
approximately $668,000 in connection with these awards.
As of March 31, 2008 the total compensation cost related to non-vested
restricted stock and deferred stock units not yet recognized was $3.1 million.
Total compensation cost is expected to be recognized over a one year period.
NOTE 9 - FAIR VALUE
Effective January 1, 2008, the Company implemented Statement of Financial
Accounting Standard No. 157, Fair Value Measurement, ("SFAS 157"), which defines
fair value, establishes a framework for measuring fair value and expands
disclosure about fair value measurements. The fair value hierarchy for
disclosure of fair value measurements under SFAS 157 is as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Quoted prices for similar assets and liabilities in active markets or
inputs that are observable
Level 3 - Inputs that are unobservable (for example cash flow modeling inputs
based on assumptions)
The adoption of FAS 157 did not have an impact on our financial position or
results of operations.
In February 2008, the FASB issued FASB Staff Position 157-2 ('FSP 175-2'), which
delayed the implementation of FAS 157 until January 1, 2009, for non-financial
assets and liabilities that are not required to be measured at fair value on a
recurring basis. Pursuant to FSP 157-2, the Company did not adopt FAS 157 for
non-financial assets and liabilities. We are currently assessing the impact of
FAS 157 on our non-financial assets and liabilities.
The Company did not have any other significant financial assets or liabilities
not currently valued at fair value.
9
BLUEFLY, INC.
MARCH 31, 2008
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities," ("SFAS No. 161"). SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2008. The adoption of SFAS
No. 161 will not affect our financial condition and results of operations, but
may require additional disclosures if we enter into derivative and hedging
activities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Bluefly, Inc. is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home furnishings at discounts of up to 75% off
of retail value. We launched our Web site in September 1998.
We believe that there is an opportunity to accelerate the growth of our business
while continuing to provide our customers with the great values that they have
become accustomed to. In an effort to take advantage of this opportunity, we
began a national advertising campaign that featured both print and television.
Over the past two and a half years, we have increased awareness by targeting
general advertising efforts to a more fashion focused consumer. In 2007, we
further refined our marketing strategy by aligning ourselves with entertainment
properties, such as BravoTV.com and Project Runway.
Our net sales increased by 14% to $25,245,000 for the three months ended March
31, 2008 from $22,108,000 for the three months ended March 31, 2007. Our gross
margin decreased to 35.4% for the three months ended March 31, 2008 from 37.9%
for the three months ended March 31, 2007. The decrease in gross margin was
primarily the result of increased promotional activity during the first two
months of the first quarter of 2008, as we liquidated some of our older
inventory. Our gross profit increased by 6.7% to $8,936,000 for the three months
ended March 31, 2008 from $8,374,000 for the three months ended March 31, 2007.
Our operating loss decreased to $2,902,000 for the three months ended March 31,
2008 from $3,222,000 for the three months ended March 31, 2007. This decrease
was primarily a result of an increase in net sales, gross margin dollars
compared to the prior year as well as decreases in total marketing and general
and administrative expenses and was partially offset by an increase in selling
and fulfillment expenses. Marketing expenses (excluding staff related costs)
increased to $3,228,000 for the first quarter of 2008 from $3,182,000 for the
first quarter 2007, primarily as a result of a shift in our marketing strategy
to more online programs compared to the first quarter of 2007.
Our reserve for returns and credit card chargebacks increased to 40.2% of gross
sales for the first quarter of 2008 compared to 39.2% for the first quarter of
2007. The increase was primarily caused by an increase in our return rate which
was, in turn, caused in part, by a shift in our merchandise mix towards higher
end products. However, we believe that this increase in return rates has been
more than offset by the higher gross margin dollars and average order sizes that
have been generated by this shift in 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 March 31, 2008, we had an accumulated deficit of $134,764,000. The net losses
and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site and building our infrastructure, as well
as non-cash beneficial conversion charges resulting from decreases in the
conversion price of our Preferred Stock and the payment of dividends to holders
of Preferred Stock. In order to expand our business, we intend to invest in
sales, marketing, merchandising, operations, information systems, site
development and additional personnel to support these activities. Therefore, we
may continue to incur substantial operating losses. Although we have experienced
revenue growth in recent years, this growth may not be sustainable and therefore
should not be considered indicative of future performance.
Results Of Operations
10
BLUEFLY, INC.
MARCH 31, 2008
For The Three Months Ended March 31, 2008 Compared To The Three Months Ended
March 31, 2007.
The following table sets forth our statement of operations data for the three
months ended March 31st. All data is in thousands except as indicated below:
2008 2007 2006
---- ---- ----
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
Net sales $25,245 100.0% $22,108 100.0% $16,876 100.0%
Cost of sales 16,309 64.6% 13,734 62.1% 10,037 59.5%
------- ------- -------
Gross profit 8,936 35.4% 8,374 37.9% 6,839 40.5%
Selling and fulfillment expenses 5,069 20.1% 4,399 19.9% 3,433 20.3%
Marketing expenses 3,522 14.0% 3,611 16.3% 4,031 23.9%
General and administrative expenses 3,247 12.9% 3,586 16.2% 2,427 14.4%
------- ------- -------
Total operating expenses 11,838 46.9% 11,596 52.4% 9,891 58.6%
Operating loss (2,902) (11.5)% (3,222) (14.5)% (3,052) (18.1)%
Interest (expense) and other income (36) (.1)% 119 0.5% (212) (1.3)%
------- ------- -------
Net loss (2,938) (11.6)% (3,103) (14.0)% (3,264) (19.4)%
We also measure and evaluate ourselves against certain other key operational
metrics. The following table sets forth our actual results based on these other
metrics for the three months ended March 31st, as indicated below:
2008 2007 2006
---- ---- ----
Average Order Size (including shipping & handling) $273.65 $269.21 $243.92
New Customers Added during the Period* 56,855 49,385 38,688
* Based on unique email addresses
In addition, to the financial statement items and metrics listed above, we also
report gross sales, which is a non-GAAP financial measure. We define gross sales
as the total dollar amount of orders received by customers (including shipping
and handling) net of customer credits, but before any reserves are taken for
returns or bad debt. We believe that the presentation of gross sales is useful
to investors because (a) it provides an alternative measure of the total demand
for the products sold by the Company and (b) it provides a basis upon with which
to measure the percentage of total demand that is reserved for both returns and
bad debt. Management uses the gross sales measure for these same reasons.
Net sales: Gross sales for the three months ended March 31, 2008 increased by
approximately 16% to $42,187,000 from $36,367,000 for the three months ended
March 31, 2007. For the three months ended March 31, 2008, we recorded a
provision for returns and credit card chargebacks and other discounts of
$16,942,000, or approximately 40.2% of gross sales. For the three months ended
March 31, 2007, the provision for returns and credit card chargebacks and other
discounts was $14,259,000, or approximately 39.2% 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 a shift in our merchandise
mix towards higher end products. However, we believe that this increase in
return rates has been more than offset by the higher gross margin dollars and
average order sizes that have been generated by this shift in merchandise mix.
After the necessary provisions for returns, credit card chargebacks and
adjustments for sales taxes, our net sales for the three months ended March 31,
2008 were $25,245,000. This represents an increase of approximately 14% compared
to the three months ended March 31, 2007, in which net sales totaled
$22,108,000. The growth in net sales resulted from both an increase in the
number of new customers acquired (over 15% higher compared to the first three
months of 2007) and an increase in average order size (approximately 2% higher
compared to the first three months of 2007). For the three months ended March
31, 2008, revenue from shipping and handling (which is included in net sales)
increased approximately 20.7% to $1,451,000
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BLUEFLY, INC.
MARCH 31, 2008
from $1,202,000 for the three months ended March 31, 2007. Shipping and handling
revenue increased at greater percentage than revenue as a whole as a result of
an increased number of customers selecting express and international shipping.
Cost of sales: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the three months ended March 31, 2008
totaled $16,309,000, resulting in gross margin of approximately 35.4%. Cost of
sales for the three months ended March 31, 2007 totaled $13,734,000, resulting
in gross margin of 37.9%.The gross margin was negatively effected by a decrease
in the overall product margin, as we were promotional during the first two
months of the quarter compared to 2007, as we were trying to liquidate some
older inventory. Gross profit increased by approximately 6.7%, to $8,936,000 for
the three months ended March 31, 2008 compared to $8,374,000 for the three
months ended March 31, 2007. The growth in gross profit was primarily the result
of increased average order size and growth in sales.
Marketing expenses: Marketing expenses decreased by 2.5% to $3,522,000 for the
three months ended March 31, 2008 from $3,611,000 for the three months ended
March 31, 2007.
Marketing expenses include expenses related to paid search, online and print
advertising, television, fees to marketing affiliates, direct mail campaigns as
well as staff related costs. As a percentage of net sales, our marketing
expenses decreased to 14.0% for the three months ended March 31, 2008 from 16.3%
for the three months ended March 31, 2007. Total expenses related to the
national print and television advertising campaign for the three months ended
March 31, 2008 totaled $1.4 million compared to $1.9 million for the three
months ended March 31, 2007. This decrease was partially offset by the following
increases: $221,000 related to paid search, $97,000 related to comparison
engines, $75,000 related to banners, $70,000 paid to consultants and $64,000 in
affiliate expenses.
Selling and fulfillment expenses: Selling and fulfillment expenses increased by
15.2% in the first three months of 2008 compared to the first three months of
2007. Selling and fulfillment expenses were comprised of the following:
Three Months As a % of Three Months As a % of Percentage Difference
-------------- --------- ------------- --------- ---------------------
Ended Net Sales Ended Net Sales increase (decrease)
-------------- --------- ------------- --------- ---------------------
March 31, 2008 March 31, 2007
-------------- -------------
Operating $2,944,000 11.7% $ 2,266,000 10.2% 29.9%
Technology 1,282,000 5.1% 1,167,000 5.3% 9.8%
E-Commerce 843,000 3.3% 966,000 4.4% (12.7%)
---------- ----- -----------
$5,069,000 20.1% $ 4,399,000 19.9% 15.2%
As a percentage of net sales, our selling and fulfillment expenses increased to
20.1% for the three months ended March 31, 2008 from 19.9% for the three months
ended March 31, 2007.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in the first three months of 2008 by approximately 29.9% compared to
the first three months of 2007 as a result of variable costs associated with the
increased sales volume (e.g., picking and packing orders and processing returns)
and price per order as well as an increase in customer service and salary
related expenses.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web site hosting. For the three months ended March 31,
2008, technology expenses increased by approximately 9.8% compared to the three
months ended March 31, 2007. This increase resulted from an increase in software
support, depreciation and web hosting expenses, and was slightly offset by a
decrease in salary related expenses. Consulting expenses incurred in the first
quarter 2008 were related to the development of our new Web site and capitalized
accordingly. For the three months ended March 31, 2008, approximately $411,000
of expenses was capitalized in connection with the development of our new Web
site. As of March 31, 2008, approximately $4,044,000 has been capitalized in
connection with the project.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web site design. For the three months ended March 31, 2008,
e-commerce expenses decreased by approximately 12.7% as compared to the three
months ended March 31, 2007, primarily due to a decrease in salary related
expenses as well as a decrease in expenses associated with photo shoots,
supplies and research tools.
12
BLUEFLY, INC.
MARCH 31, 2008
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 three months ended
March 31, 2008 decreased by approximately 9.5% to $3,247,000 as compared to
$3,586,000 for the three months ended March 31, 2007. The decrease in general
and administrative expenses was primarily the result of a decrease in equity
based compensation related to equity awards of $775,000 and depreciation of
$42,000. These amounts were offset by increased legal fees of $25,000,
increased salary related expenses of $92,000 and increased recruiting fees of
$36,000.
As a percentage of net sales, general and administrative expenses for the first
three months of 2008 decreased to approximately 12.9% from 16.2% for the first
three months of 2007.
Loss from operations: Operating loss decreased in the first three months of 2008
to $2,902,000 from $3,222,000 in the first three months of 2007.
Interest income: Other income for the three months ended March 31, 2008
decreased to $36,000 from $195,000 for the three months ended March 31, 2007.
These amounts related primarily to interest income earned on our cash balances.
Interest and other expense: Interest expense for the three months ended March
31, 2008 totaled $72,000, compared to $76,000 for the three months ended March
31, 2007. Interest expense includes fees paid in connection with our Credit
Facility.
Liquidity And Capital Resources
General
At March 31, 2008, we had approximately $5.5 million in cash and cash
equivalents. Working capital at March 31, 2008 and 2007 was $18.6 million and
$32.0 million, respectively. Working capital at December 31, 2007 was $21.0
million. In addition, as of March 31, 2008, we had approximately $3.2 million
committed under the Credit Facility, leaving approximately $3.3 million of
availability.
Standby Financing Commitment
In March 2008, Soros and Maverick agreed to provide up to $3 million of debt
financing to us, on a standby basis, available until March 2009, during the next
year, provided that the commitment amount will be reduced by the gross proceeds
of any equity financing consummated during the year. We can draw down debt in
one or more tranches, provided that our cash balances are less than $1 million
at the time of any draw down. The draw downs will be evidenced by the
Subordinated Notes. The Subordinated Notes have a term expiring on the later of
June 26, 2011 and three years from the date of issuance and bear interest at the
rate of 8% per annum, compounded annually. Interest is payable upon maturity or
conversion. The Subordinated Notes are convertible (subject to stockholder
approval), at the holder's option into (a) equity securities that the Company
might issue in any subsequent round of financing at a price equal to the lowest
price per share paid by any investor in such subsequent round of financing or
(b) Common Stock at a price per share equal to the market price (as defined in
the Subordinated Notes) on the date of issuance of the Subordinated Note.
We fund our operations through cash on hand, operating cash flow and the
proceeds of any equity or debt financing. Operating cash flow is affected by
revenue and gross margin levels, as well as return rates, and any deterioration
in our performance with respect to these financial measures would have a
negative impact on our liquidity. Total availability under the Credit Facility
is based primarily upon our inventory levels. In addition, both availability
under the Credit Facility and our operating cash flows are affected by the
payment terms that we receive from suppliers and service providers, and the
extent to which suppliers require us to request Wells Fargo to provide credit
support under the Credit Facility. In some instances, new vendors may require
prepayments. We may make prepayments in order to open up these new
relationships, or to gain access to inventory that would not otherwise be
available to us. In addition, we sometimes make prepayments in connection with
our advertising campaign, as in some circumstances we need to pay in advance of
production. As of March 31, 2008, we had approximately $140,000 of prepaid
inventory and approximately $662,000 of prepaid marketing on our balance sheet
compared to $378,000 and $773,000 in the first quarter of 2007.
Credit Facility
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BLUEFLY, INC.
MARCH 31, 2008
Pursuant to the Credit Facility, Wells Fargo provides us with a revolving loan
and issues letters of credit in favor of suppliers or factors. The Credit
Facility is secured by a lien on all of our assets. Availability under the
Credit Facility is determined by a formula that takes into account a certain
percentage of our inventory and a certain percentage of our accounts receivable.
The maximum availability is currently $7,500,000, but can be increased to
$12,500,000 at our request, subject to certain conditions. As of March 31,
2008, total availability under the Credit Facility was approximately $6,539,000
of which $3,250,000 was committed, leaving approximately $3,289,000 available
for further borrowings.
Interest accrues monthly on the average daily amount outstanding under the
Credit Facility during the preceding month at a per annum rate equal to the
prime rate plus 0.75% or LIBOR plus 3.25% on average excess availability less
than $3.0 million and prime rate plus 0.50% or LIBOR plus 3% on average excess
availability greater than $3.0 million. We also pay a monthly commitment fee on
the unused portion of the facility (i.e., $7,500,000 less the amount of loans
outstanding) equal to 0.50% and a servicing fee of $3,333 per month. We also pay
Wells Fargo certain fees to open letters of credit and guarantees in an amount
equal to a certain specified percentage of the face amount of the letter of
credit for each thirty (30) days such letter of credit, or a portion thereof,
remains open. No revolving credit loans may be made under the Credit Facility
unless the full amount available pursuant to the Commitment has been advanced to
the Company and is outstanding.
Under the terms of the Subordination Agreement, Soros and Maverick have the
right to purchase all of our obligations from Wells Fargo at any time if we are
then in default under the Credit Facility.
We believe that our current funds, together with operating cash flow,
availability under our existing Credit Facility and the Commitment from Soros
and Maverick will be sufficient to enable us to meet our planned expenditures
through the next 12 months. However, in order to accelerate the growth of our
business, we may seek to raise additional equity capital.
Commitments and Long Term Obligations
As of March 31, 2008, we had the following commitments and long term
obligations:
Total Less than 1-3 3-5 More
1 year years years than 5
years
Marketing and Advertising $ 1,900,000 1,900,000 -- --
Purchase Orders 17,321,000 17,321,000 -- -- --
Operating Leases 2,105,000 684,000 1,364,000 57,000 --
Employment Contracts 5,786,000 2,266,000 3,477,000 43,000 --
------------ ---------- --------- ------- -----
Grand total $ 27,112,000 22,171,000 4,841,000 100,000 --
We believe that in order to grow the business, we will need to make additional
marketing and advertising commitments in the future. In addition, we expect to
hire and train additional employees for the operations and development of
Bluefly.com. However, our marketing budget and our ability to hire such
employees is subject to a number of factors, including our results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents. Due to the short-term nature of these instruments we have
determined that the risks associated with interest rate fluctuations related to
these financial instruments do not pose a material risk to us.
Item 4T. Controls and Procedures.
As of the end of the period covered by this Form 10-Q (the "Evaluation Date"),
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer along with our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer along
with our Chief Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective in ensuring that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act were recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms and are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and
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BLUEFLY, INC.
MARCH 31, 2008
communicated to our management, including our principal executive and principal
financial officers, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Special Note Regarding Forward Looking Statements
This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe", "project", "expect", or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by us with the
Securities and Exchange Commission, including Forms 8-A, 8-K, 10-Q, and 10-K.
These risks and uncertainties include, but are not limited to, the following:
our history of losses and anticipated future losses; our ability to raise
additional capital to support the growth of our business; the success of our
advertising campaign; risks associated with Soros, Maverick and private funds
associated with and Prentice Capital Management, LP each owning a significant
portion of our stock; the potential failure to forecast revenues and/or to make
adjustments to our operating plans necessary as a result of any failure to
forecast accurately; our ability to raise additional capital; issues related to
our transition to a new third party fulfillment facility; unexpected changes in
fashion trends; cyclical variations in the apparel and e-commerce markets; the
risk of default by us under the Credit Facility and the consequences that might
arise from us having granted a lien on substantially all of our assets under
that agreement; risks of litigation for sale of unauthentic or damaged goods and
litigation risks related to sales in foreign countries; the dependence on third
parties and certain relationships for certain services, including our dependence
on UPS, DHL and USPS (and the risks of a mail slowdown due to terrorist
activity) and our dependence on our third-party web hosting, fulfillment and
customer service centers; online commerce security risks; risks related to brand
owners' efforts to limit our ability to purchase products indirectly; management
of potential growth; the competitive nature of our business and the potential
for competitors with greater resources to enter the business; the availability
of merchandise; the need to further establish brand name recognition; risks
associated with our ability to handle increased traffic and/or continued
improvements to our Web site; rising return rates; dependence upon executive
personnel; the successful hiring and retaining of new personnel; risks
associated with expanding our operations; risks associated with potential
infringement of other's intellectual property; the potential inability to
protect our intellectual property; government regulation and legal
uncertainties; and uncertainties relating to the imposition of sales tax on
Internet sales.
Part II - OTHER INFORMATION
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 6. Exhibits
The following is a list of exhibits filed as part of this Report:
Exhibit Number Description
------------------------------------------------------------------------------------------------------------------
3.1 Certificate of Amendment to the Company's Certificate of Incorporation, dated April 3, 2008
(incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by the
Company with the Securities and Exchange Commission on April 4, 2008)
10.1 Amended and Restated Employment Agreement, by and between the Company and Kara B. Jenny,
dated March 19, 2008 (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed by the Company and the Securities and Exchange Commission on March 19, 2008)
10.2 Amended and Restated Employment Agreement, by and between the Company and Bradford Matson,
dated April 10, 2008 (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed by the Company with the Securities and Exchange Commission on April 11,
2008)
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BLUEFLY, INC.
MARCH 31, 2008
10.3 Amended and Restated Warrant No. 1, dated April 8, 2008 and effective as of March 26,
2008, issued to Quantum Industrial Partners LDC
10.4 Amended and Restated Warrant No. 2, dated April 8, 2008 and effective as of March 26,
2008, issued to SFM Domestic Investments LLC
10.5 Amended and Restated Warrant No. 3, dated April 8, 2008 and effective as of March 26,
2008, issued to Maverick Fund USA, Ltd.
10.6 Amended and Restated Warrant No. 4, dated April 8, 2008 and effective as of March 26,
2008, issued to Maverick Fund LDC
10.7 Amended and Restated Warrant No. 5, dated April 8, 2008 and effective as of March 26,
2008, issued to Maverick Fund II, Ltd.
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
16
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BLUEFLY, INC.
By: /s/ Melissa Payner-Gregor
--------------------------
Melissa Payner-Gregor
Chief Executive Officer
By: /s/ Kara B. Jenny
------------------
Kara B. Jenny
Chief Financial Officer
May 7, 2008
17