UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to ______
Commission File Number: 001-14498
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BLUEFLY, INC.
(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)
Registrant's telephone number: (212) 944-8000
----------------------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share The Nasdaq Stock Market LLC
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting company.
See the definitions of "larger 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 ]
(Do not check if a smaller reporting company)
Indicate by check mark if the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 24, 2008, there were 132,899,844 shares of Common Stock, $.01 par
value, of the registrant outstanding. The aggregate market value of the voting
and non-voting common equity held by non-affiliates as of June 29, 2007, based
upon the last sale price of such equity reported on the Nasdaq Capital Market,
was approximately $18.7 million.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by
reference to the Registrant's proxy statement for the 2008 Annual Stockholders
Meeting, which will be filed with the Securities and Exchange Commission.
BLUEFLY, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
PAGE
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Part I.
Special Note Regarding Forward-Looking Statements 3
Item 1 Business 3
Item 1A Risk Factors 7
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Part II.
Item 5 Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 14
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 27
Item 9A(T). Controls and Procedures 27
Item 9B. Other Information 27
Part III.
Item 10. Directors, Executive Officers and Corporate Governance 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 28
Item 13. Certain Relationships and Related Transactions, and Director
Independence 28
Item 14. Principal Accounting Fees and Services 28
Part IV.
Item 15. Exhibits and Financial Statement Schedules 28
Signatures 32
Financial Statements F-1
2
PART I
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Special Note Regarding Forward-Looking Statements and Associated Risks
This Annual Report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include, without limitation,
any statement that may predict, forecast, indicate, or imply future results,
performance, or achievements, and may contain the words "believe," "anticipate,"
"expect," "estimate," "project," "will be," "will continue," "will likely
result," or words or phrases of similar meaning. Forward-looking statements
involve risks and uncertainties that may cause actual results to differ
materially from the forward-looking statements ("Cautionary Statements"). The
risks and uncertainties include, but are not limited to those matters addressed
herein under "Risk Factors." All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the Cautionary Statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 1. Description of Business
General
Bluefly, Inc. is a leading online retailer of designer brands, fashion trends
and superior value. During 2007, we offered over 50,000 different styles for
sale in categories such as men's, women's and accessories as well as house and
home accessories from over 350 brands at discounts up to 75% off retail value.
We launched the Bluefly.com Web site (the "Web site") in September 1998. Since
its inception, www.bluefly.com has served over one million customers and shipped
to over 13 countries.
Our common stock is listed on the Nasdaq Capital Market under the symbol "BFLY"
and we are incorporated in Delaware. Our executive offices are located at 42
West 39th Street, New York, New York 10018, and our telephone number is (212)
944-8000. Our Internet address is www.bluefly.com. We make available, free of
charge, through our Web site, our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
In this report, the terms "we," "us," "Bluefly" and the "Company" refer to
Bluefly, Inc. and its predecessors and subsidiaries, unless the context
indicates otherwise.
Recent Developments
In March 2008, we entered into an agreement (the "Commitment") with affiliates
of Soros Fund Management LLC ("Soros") and private funds associated with
Maverick Capital, Ltd. ("Maverick") pursuant to which they agreed to provide up
to $3 million of debt financing to us, on a standby basis, 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 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 the 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 to the extent required by
the NASDAQ Capital Market), at the holder's option (a) into equity securities
that the Company might issue in any subsequent round of financing at a price
that was equal to the lowest price per share paid by any investor in such
subsequent round of financing or (b) into 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 note. In connection with the Commitment, we issued warrants to
Soros and Maverick to purchase an aggregate of 525,002 shares of Common Stock at
an exercise price equal to the trailing 20-day average stock price on the date
of grant.
In March 2008, we amended our credit facility ("Credit Facility") with Wells
Fargo Retail Finance, LLC. ("Wells Fargo") to (i) extend the term until July 26,
2011; (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 $3,333.33 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%,
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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 calls for no revolving credit loans to be made unless
the full amount available pursuant to the Subordinated Notes (described above)
has been advanced to the Company and is outstanding. In connection with this
amendment, we paid Wells Fargo a $35,000 amendment fee. Under the terms of a
Subordination and Intercreditor Agreement, dated as of March 26, 2008, 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.
On March 13, 2008, our Board of Directors approved a 1-for-10 reverse stock
split of our Common Stock. The record date for the reverse stock split is April
3, 2008, and the reverse stock split will be effective as of the close of
trading on the same date. On a pre-split basis, we currently have approximately
132 million shares of Common Stock outstanding (excluding treasury shares),
which will be reduced to approximately 13.2 million shares as a result of the
split. All share numbers in this report are shown on a pre-split basis.
Business Strategy
Our goal is to offer our customers the best designer brands and latest fashion
trends at superior values. We offer the same types of on-trend and in-season
designer merchandise as are sold in luxury department stores at discounts.
Similarly, we are able to offer an upscale shopping experience not available at
off-price stores or outlet malls because of our merchandise selection and the
presentation and product search capabilities offered by our Web site. The
frequent addition of new on-trend products to our site is also key to our
marketing strategy, as it gives our shoppers reason to visit the site and
encourages them to be loyal and active.
Our business is also designed to provide a compelling value proposition for our
suppliers and, in particular, the more than 350 top designer brands that we
offer on our Web site. Because we work with our suppliers both at the beginning
and throughout the season, we are able to help them manage inventory and cash
flow. We also create an environment that is respectful of the brands we sell.
Our buyers all have backgrounds in a full price branded retail environment. Our
Web site creates a high-end retail environment that offers only the best
designer brands and the most current trends. In doing so, we support our
vendors' brands, rather than diluting them as traditional off-price channels do.
We do not believe that we can accomplish these goals without using the Internet
as a platform. The direct marketing of products that are available in limited
quantities and sizes, and that are not replenishable, requires a cost-effective
medium that can display a large number of products. We believe print catalogs
are not well suited to this task. The paper, printing, mailing and other
production costs of a print catalog can be significant and the lead times
required to print a catalog make them significantly inflexible in addressing
inventory sell outs, price changes and new styles. To work around these
limitations, a traditional cataloger typically requires products that are
replenishable, available in a full range of sizes and in substantial quantities.
Similarly, retailing on television is costly and requires substantial quantities
of products that are available in all sizes in order for it to be an economical
medium. In addition, the number of items that can be displayed on television is
limited, and television does not allow viewers to search for products that
interest them.
The Internet, however, can be a far less expensive and far more effective
medium. By using the Internet as our platform, the number of items that we offer
is not limited by the high costs of printing and mailing catalogs. With the
Internet, we can automatically update product images as new products arrive and
other items sell out. By using a real-time inventory database, we can create a
personalized shopping environment and allow our customers to search for the
products that specifically interest them and are available in their size. In
addition, we believe that we are able to more economically and consistently
maintain an upscale environment through the design of a single online
storefront.
We believe that we have created a customer experience that is fundamentally
better than that offered by traditional off-price retailers. Similarly, we
believe that our upscale atmosphere, professional photography and premium
merchandise offering create a superior distribution channel for designers who
wish to liquidate their end-of-season and excess merchandise without suffering
the brand dilution inherent in traditional off-price channels. Our customer
research suggests that this strategy has been successful. For example,
respondents to a recent third party study that we commissioned rated us at the
level of, or higher than, luxury department stores for assortment, quality and
service and rated us much higher for value.
E-Commerce And The Online Apparel Market
The dramatic growth of e-commerce has been widely reported and is expected to
continue. According to "US eCommerce Forecast: 2008 to 2012", published by
Forrester Research, Inc., in January 2008, online retail in the United States
reached $175
4
billion in 2007 and is projected to grow to $335 billion by 2012. The apparel,
accessories and footwear category for 2007 totaled $22.7 billion and is expected
to grow to $41.8 billion by the year 2012.
According to the ComScore Inc., e-commerce non travel retail holiday spending
(excluding auctions and large corporate purchases) surpassed $29 billion in 2007
compared to $24.6 billion in 2006, an increase of 19 percent.
Marketing
Our marketing efforts are focused both on acquiring new customers and retaining
existing customers. Active Bluefly customers visit the site frequently and
purchase from one season to the next at high levels with great predictability. A
significant portion of our sales to existing customers are driven by our
customer emails, which highlight new promotions and products, and provide
special previews to customers who have asked to be included in our email list.
In addition, we believe that our sales to existing customers are driven by all
aspects of our customer experience, including our Web site design, packaging,
delivery and customer service.
Prior to 2005, we acquired new customers primarily through online advertising,
word-of-mouth, sweepstakes and our affiliate program. In September 2005, faced
with low awareness numbers, 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 customer. In 2007 we further refined our marketing strategy by aligning
ourselves with entertainment properties, such as BravoTV.com and Project Runway.
Merchandising
We buy merchandise directly from designers as well as from other third party
indirect resources. Currently, we offer products from more than 350 name brand
designers. We believe that we have been successful in developing vendor
relationships, in part because we have devoted substantial resources to
establishing Bluefly.com as a high-end retail environment. We are committed to
displaying all of our merchandise in an attractive manner, offering superior
customer service and gearing all aspects of our business towards creating a
better channel for top designers.
Warehousing And Fulfillment
When we receive an order, the information is transmitted to our third party
warehouse and fulfillment center, where the items included in the order are
picked, packed and shipped directly to the customer. Our inventory database is
updated on a real-time basis, allowing us to display on our Web site only those
styles, sizes and colors of product available for sale. During the third quarter
of 2007, we completed our transition to a new third party distribution center
located in Ohio. Over the long term, we expect the transition to the new
Distribution center to improve customer service and increase efficiencies,
however, there can be no assurance that this will happen. See, "Risk Factor -
Our Business Has Been Impacted by Issues Related to Our Transition to a New
Third Party Distribution Center."
Customer Service
We believe that a high level of customer service and support is critical to
differentiating ourselves from traditional off-price retailers and maximizing
customer acquisition and retention efforts. Our customer service effort starts
with our Web site, which is designed to provide an intuitive shopping
experience. An easy-to-use help center is available on the Web site and is
designed to answer many of our customers' most frequently asked questions. For
customers who prefer e-mail, chat or telephone assistance, customer service
representatives are available seven days a week to provide assistance. We
utilize customer representatives from a third party call center that has a team
dedicated to our business. We also maintain a team of premiere representatives
in our New York office, who provide special services and assist in the training
and management of the other representatives. To ensure that customers are
satisfied with their shopping experience, we generally allow returns for any
reason within 90 days of the sale for a full refund.
In January 2007, we were awarded the "E-tailing Excellence Award" from the
e-tailing group for the second consecutive year. This award recognizes online
merchants who excel in customer service.
Technology
We have implemented a broad array of state-of-the-art technologies that
facilitate Web site management, complex database search functionality, customer
interaction and personalization, transaction processing, fulfillment and
customer service functionality. Such technologies include a combination of
proprietary technology and commercially available, licensed
5
technology. To address the critical issues of privacy and security on the
Internet, we incorporate, for transmission of confidential personal information
between customers and our Web server, Secure Socket Layer Technology ("SSL")
such that all data is transmitted via a 128-bit encrypted session. The computer
and communications equipment on which our Web site is hosted are currently
located at a third party co-location facility in New York.
In September 2006, we entered into agreements with Art Technology Group, Inc.
("ATG"), pursuant to which we will license certain technology from ATG to be
used as a platform for future versions of our Web site. We are in the process of
developing an improved version of our Web site based on ATG software. The new
version of our Web site is expected to launch in the second half of 2008/early
2009 and will replace the older version. The launch of the new Web site will
involve the use of significant internal and external resources. Certain costs
related to the development of the new Web site will be capitalized and amortized
over a 36-month period.
We expect that the more robust tools provided by the upgraded Web site will
allow us to better create and manage, and measure the performance of, on-site
marketing promotions. In addition, we believe that the new Web site will provide
a more efficient platform from which to scale our technology infrastructure
should any future growth in our business dictate such a need. There can be no
assurance that the new Web site will have a positive effect on our business.
See, "Risk Factor - The Implementation Of A New Web site May Place A Significant
Strain On Our Resources and Could Result in Start-Up Performance Issues."
Competition
E-commerce generally, and, in particular, the online retail apparel and fashion
accessories market, is a relatively dynamic, high-growth market. Our
competition for online customers comes from a variety of sources, including
existing land-based retailers that are using the Internet to expand their
channels of distribution, established Internet companies and less established
companies. In addition, our competition for customers comes from traditional
direct marketers, designer brands that may attempt to sell their products
directly to consumers through the Internet and land-based off-price retail
stores, which may or may not use the Internet in the future to grow their
customer base. Many of these competitors have longer operating histories,
significantly greater resources, greater brand recognition and more firmly
established supply relationships. Moreover, we expect additional competitors to
emerge in the future.
We believe that the principal competitive factors in our market include: brand
recognition, merchandise selection, price, convenience, customer service, order
delivery performance and site features.
Intellectual Property
We rely on various intellectual property laws and contractual restrictions to
protect our proprietary rights in services and technology, including
confidentiality, invention assignment and nondisclosure agreements with
employees and contractors. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our intellectual property
without our authorization. In addition, we pursue the registration of our
trademarks and service marks in the U.S. and internationally and the
registration of our domain name and variations thereon. However, effective
intellectual property protection may not be available in every country in which
the services are made available online.
We rely on technologies that we license from third parties. These licenses may
not continue to be available to us on commercially reasonable terms in the
future. As a result, we may be required to obtain substitute technology of lower
quality or at greater cost, which could materially adversely affect our
business, financial condition, results of operations and cash flows.
We do not believe that our business, sales policies or technologies infringe the
proprietary rights of third parties. However, third parties have in the past and
may in the future claim that our business, sales policies or technologies
infringe their rights. We expect that participants in the e-commerce market
will be increasingly subject to infringement claims as the number of services
and competitors in the industry grows. Any such claim, with or without merit,
could be time consuming, result in costly litigation or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements might not
be available on terms acceptable to us, or at all. As a result, any such claim
of infringement against us could have a material adverse effect upon our
business, financial condition, results of operations and cash flows.
Governmental Approvals And Regulations
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to online commerce. We are not aware
of any permits or licenses that are required in order for us, generally, to sell
apparel and fashion accessories on the Internet, although licenses are sometimes
required to sell products made from specific materials. In addition, permits or
licenses may be required
6
from international, federal, state or local governmental authorities to operate
or to sell certain other products on the Internet in the future. No assurances
can be given that we will be able to obtain such permits or licenses. We may be
required to comply with future national and/or international legislation and
statutes regarding conducting commerce on the Internet in all or specific
countries throughout the world. No assurance can be made that we will be able to
comply with such legislation or statutes. Our Internet operations are not
currently impacted by federal, state, local and foreign environmental protection
laws and regulations.
Employees
As of March 17, 2008, we had 104 full-time employees and 1 part-time employee,
as compared to 95 full-time and 1 part-time employees as of March 17, 2007. None
of our employees are represented by a labor union, and we consider our relations
with our employees to be good.
Item 1A. Risk Factors
We Have A History Of Losses And Expect That Losses Will Continue In The Future.
As of December 31, 2007, we had an accumulated deficit of $131,826,000. We
incurred net losses of $15,829,000, $12,193,000 and $3,820,000 for the years
ended December 31, 2007, 2006 and 2005, respectively. We have incurred
substantial costs to develop our Web site and infrastructure, and build our
customer file and brand awareness. 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. We therefore
may continue to incur substantial operating losses for at least the next year.
Our ability to become profitable depends on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels, both
of which are uncertain. If we do achieve profitability, we cannot be certain
that we would be able to sustain or increase profitability on a quarterly or
annual basis in the future.
Soros, Maverick And Prentice Each Own A Large Amount Of Our Stock And Therefore
Can Exert Significant Influence Over Our Management And Policies. As of March
21, 2008, Soros owned, in the aggregate, approximately 38% of our Common Stock.
Maverick and investment entities and accounts managed and advised by Prentice
Capital Management, LP ("Prentice") each owned approximately 23% of our Common
Stock. We entered into a voting agreement with Soros, Maverick and Prentice (the
"Voting Agreement"), pursuant to which Soros has the right to designate three
designees to our Board of Directors, and Maverick and Prentice each have the
right to designate one designee. The Voting Agreement also provides that one
designee of Soros and the designee of each of Maverick and Prentice have the
right to serve on the Compensation Committee and the Governance and Nominating
Committee of the Board of Directors. If we establish an Executive Committee, the
designees of Soros, Maverick and Prentice will be entitled to serve on such
committee. In March 2008, we entered into the Commitment pursuant to which Soros
and Maverick agreed to provide up to $3 million of debt financing to us during
the next year. Draw downs on the Commitment will be evidenced by the
Subordinated Notes, which are convertible (subject to stockholder approval to
the extent required by the NASDAQ Capital Market), at the holder's option, into
shares of our Common Stock. To the extent we issue Subordinated Notes to Soros
and Maverick that are subsequently converted, the ownership interests of Soros
and Maverick will be increased. See "Description of Business - Recent
Developments."
In view of their large percentage of ownership, Soros, Maverick and Prentice
each have the ability to exert significant influence over our management and
policies, such as the election of our directors, the appointment of new
management and the approval of any other action requiring the approval of our
stockholders, including any amendments to our certificate of incorporation, a
sale of all or substantially all of our assets or a merger.
We Are Making A Substantial Investment In Our Business And May Need To Raise
Additional Funds. We may need additional financing to effect our business plan
and accelerate our customer acquisition. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private debt or equity financing, or other sources of financing to fund
operations. In March 2008, we entered into the Commitment pursuant to which
Soros and Maverick agreed to provide up to $3 million in debt financing
to us during the next year. The Company believes that its existing resources,
together with working capital should be sufficient to satisfy its cash
requirements through at least December 31, 2008. The Company may seek
additional equity or debt capital to maximize the growth of its business
or if anticipated operating results are not achieved. The environment for
raising investment capital has been difficult and there can be no assurance
that additional financing or other capital will be available upon terms
acceptable to us, or at all. In the event that we are unable to obtain
additional financing, if needed, we could be forced to decrease expenses that
we believe are necessary for us to realize on our long-term prospects for growth
and profitability and/or liquidate inventory in order to generate cash.
Moreover, any additional equity financing that we may raise could result in
significant dilution of the existing holders of common stock. See "Description
of Business- Recent Developments."
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Our Lender Has Liens On Substantially All Of Our Assets And Could Foreclose In
The Event That We Default Under Our Loan Facility. Under the terms of our loan
facility, our lender has a first priority lien on substantially all of our
assets, including our cash balances. If we default under the loan facility, our
lender would be entitled, among other things, to foreclose on our assets in
order to satisfy our obligations under the loan facility.
Our Business Has Been Impacted by Issues Related to Our Transition to a New
Third Party Distribution Center. During the third quarter of 2007, we completed
our transition to a new third party distribution center. In connection with this
transition, we incurred incremental expenses of approximately $721,000 in costs
directly related to the move (including trucking, labor, insurance, etc.). We
took additional charges of approximately $550,000 against our inventory during
the third quarter of 2007, based on the reconciliation of inventory that we
normally perform in connection with each quarter's close. We believe that the
charges that were taken were sufficient to cover any loss of inventory resulting
from the transition. We have worked with the distribution center to implement
necessary changes to their inventory reporting systems as a result of the full
physical inventory that was performed in January 2008, following the end of the
Holiday sales and returns cycle. We believe that significant operational issues
related to the move have been resolved. Start-up issues associated with the
transition to the new distribution center also resulted in certain cancelled
orders and other incremental costs such as expedited shipping costs. During the
period from June 2007 through mid September of 2007 a portion of the Company's
inventory was not available for sale. This had a significant impact on the
offering to the consumer and hence the ultimate sales recognized in this time
frame. As a result of this the Company made the decision to liquidate certain
inventory in order to improve the efficiency of the new fulfillment center as
well as to enhance the customer experience. The net effect to the statement of
operations of removing this inventory from our site was approximately $1.5
million. In addition, during this transition period the Company experienced some
processing issues with a small percentage of orders and returns resulting in a
decrease in revenue from repeat business. We believe that these issues had a
negative impact on those customers affected at least in the short term. In the
long term, we expect the transition to the new Distribution center to improve
customer service and increase efficiencies, however, there can be no assurance
that the transition will not continue to have a negative impact upon our
business, financial condition and results of operations.
Our Ability To Maintain And Pay Our Indebtedness Under Our Loan Facility Is
Dependent Upon Meeting Our Business Plan. We are required to pay interest under
our loan facility on a monthly basis. Assuming we meet our business plan, we
will be able to pay our interest as required. To a certain extent, however, our
ability to meet our business plan, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control, and therefore we cannot assure you that based on our business plan we
will generate sufficient cash flow from operations to enable us to pay our
indebtedness under the loan facility and maintain our minimum availability
requirement throughout the term of the agreement. If we fall short of our
business plan and are unable to raise additional capital, we could default under
our loan facility. In the event of a default under the loan facility, our lender
would be entitled, among other things, to foreclose on our assets (whether
inside or outside a bankruptcy proceeding) in order to satisfy our obligations
under the loan facility. See "Risk Factors - Our Lenders Have Liens On
Substantially All Of Our Assets And Could Foreclose In The Event That We Default
Under Our Loan Facility."
If We Are Not Accurate In Forecasting Our Revenues, We May Be Unable To Adjust
Our Operating Plans In A Timely Manner. Because our business has not yet reached
a mature stage, it is difficult for us to forecast our revenues accurately. We
base our current and future expense levels and operating plans on expected
revenues, but in the short-term a significant portion of our expenses are fixed.
Accordingly, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could cause our
operating results in some future quarter to fall below the expectations of
securities analysts and investors. In that event, the trading price of our
Common Stock could decline significantly. In addition, any such unexpected
revenue shortfall could significantly affect our short-term cash flow and our
net worth, which could require us to seek additional financing and/or cause a
default under our loan facility. See "Risk Factors - Our Ability To Comply With
Our Financial Covenants And Pay Our Indebtedness Under Our Loan Facility Is
Dependent Upon Meeting Our Business Plan."
Our National Advertising Campaign and Other Marketing Initiatives May Not Be
Successful. Our success depends on our ability to attract customers on cost-
effective terms. We have relationships with online services, search engines,
and other Web sites and e-commerce businesses to provide other links that direct
customers to our Web site. In addition, during 2005 we launched our first
national television and advertising campaign, and we have continued and expanded
on that campaign since that time. Such campaigns are expensive and may not
result in the cost effective acquisition of customers. We are relying on the
campaign as a significant source of traffic to our Web site and new customers.
If these campaigns and initiatives are not successful, our results of operations
will be adversely affected.
We Purchase a Substantial Portion of Our Inventory from One Supplier. In 2007
and 2006, we purchased approximately 38% and 28%, respectively, of our inventory
from one supplier. Should our relationship with this supplier deteriorate or
terminate, or should this supplier lose some or all of its access to the
products that we purchase from it, our performance could
8
be adversely affected. Under such circumstances, we would be required to seek
alternative sources of supply for these products, and there can be no assurance
that we would be able to obtain such products from alternative sources on the
same terms, or at all. A failure to obtain such products on as favorable terms
could have an adverse effect on our revenue and/or gross margin.
We Do Not Have Long Term Contracts With Our Vendors And Therefore The
Availability Of Merchandise Is At Risk. We do not have any agreements
controlling the long-term availability of merchandise or the continuation of
particular pricing practices. Our contracts with suppliers typically do not
restrict such suppliers from selling products to other buyers. There can be no
assurance that our current suppliers will continue to sell products to us on
current terms or that we will be able to establish new or otherwise extend
current supply relationships to ensure product acquisitions in a timely and
efficient manner and on acceptable commercial terms. In addition, in order to
entice new vendors to open up relationships with us, we sometimes are required
to either make prepayments or agree to shortened payment terms. Our ability to
develop and maintain relationships with reputable suppliers and obtain high
quality merchandise is critical to our success. If we are unable to develop and
maintain relationships with suppliers that would allow us to obtain a sufficient
amount and variety of quality merchandise on acceptable commercial terms, our
ability to satisfy our customers' needs, and therefore our long-term growth
prospects, would be materially adversely affected. See "Risk Factors - Brand
Owners Could Establish Procedures to Limit Our Ability to Purchase Products
Indirectly" and "Risk Factors - We Purchase a Substantial Portion of Our
Inventory from One Supplier."
The Implementation Of The New Web Site May Place A Significant Strain On Our
Resources and Could Result in Start-Up Performance Issues. During 2006, we
entered into a Master License Agreement with ATG, pursuant to which we will
license certain technology from ATG to be used as a platform for future versions
of our Web site, and ATG will provide certain support and consulting services in
connection therewith. The new version of our Web site is expected to launch in
the second half of 2008/early 2009 and will replace the older version. The
launch of the new Web site will involve the use of significant internal and
external resources. We will need to develop new internal procedures to operate
the new Web site and to make the most effective use of the improvements
available on the new Web site. As with any new technology, we may experience
instability and performance issues upon launch, and such issues could have a
material adverse effect on our revenue and, therefore, our results of
operations. While we believe that this project is a prudent investment for our
future growth prospects, the return on this investment is not certain and the
time and attention required to build out and learn how to best use the new Web
site could result in our inability to undertake certain initiatives that could
have a more immediate, positive impact on our business and/or distract us from
other areas of our business that require the time and attention of those
involved in the continued development of the new Web site.
We Are Not In Compliance with Certain Nasdaq Listing Requirements. On August 16,
2007, we were notified by The Nasdaq Stock Market, Inc. ("Nasdaq") that we were
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 were given
a 180-day grace period to regain compliance, which extended to February 11,
2008. On February 13, 2008, we received a Nasdaq Staff Determination Letter
indicating that the Company's common stock had not regained compliance with the
$1 minimum bid price continued listing requirement set forth in Marketplace Rule
4310(c)(4) during the 180-day extension period provided the Company in August
2007. The Company would have been entitled to an additional 180-day extension
period had it met the initial listing criteria of the Nasdaq Capital Market
(other than the minimum bid price requirement) as of the expiration of the
initial 180-day period. For a majority of the initial 180-day period, the
Company met these criteria and therefore expected that it would be granted the
additional extension. However, due to the decrease in the price of the Company's
common stock over the first few weeks of 2008, it did not meet the public float
requirement of Nasdaq's initial listing criteria as of the determination date,
and therefore was not granted the additional extension. Accordingly, the Nasdaq
Staff determined that the Company's common stock was subject to delisting from
the Nasdaq Capital Market. The Company requested a hearing before a Nasdaq
Listing Qualifications Panel to review the Staff Determination, and the
delisting action was stayed pending the issuance of a final decision by the
Panel.
In advance of the hearing, on March 13, 2008, the Board of Directors approved a
1 for 10 reverse stock split, which will be effective as of April 3, 2008. While
the trading price of our common stock cannot be predicted with certainty, as our
common stock begins trading following the reverse stock split, it is expected
that the price per share will increase to reflect the reverse stock split. For
example, as of March 20, 2008, the last closing sale price reported on NASDAQ
was $0.49. Assuming that this was the price per share as of the effective time
of the reverse stock split, it is expected that the price per share immediately
following the effective time would be $4.90, well above the $1 minimum bid price
requirement. Although we have not received a formal decision from the Nasdaq
Listing Qualifications Panel, we expect that we will be provided with a short
grace period to regain compliance with the minimum bid price requirement
following the effectiveness of the reverse stock split. In order to regain
compliance with the minimum bid price requirement, our common stock would need
to close at or above $1 for 10 consecutive business days following the reverse
stock split. There can be no assurance that such reverse stock split will cause
the Company to regain compliance for the minimum bid price requirement for the
required period of time. The failure to maintain listing on the Nasdaq Capital
Market could have a material adverse effect on the price and/or liquidity of our
Common Stock.
9
Unexpected Changes In Fashion Trends Could Cause Us To Have Either Excess or
Insufficient Inventory. Fashion trends can change rapidly, and our business is
sensitive to such changes. There can be no assurance that we will accurately
anticipate shifts in fashion trends and adjust our merchandise mix to appeal to
changing consumer tastes in a timely manner. If we misjudge the market for our
products or are unsuccessful in responding to changes in fashion trends or in
market demand, we could experience insufficient or excess inventory levels or
higher markdowns, either of which would have a material adverse effect on our
business, financial condition and results of operations. See Risk Factor "Our
Business Has Been Impacted by Issues Related to Our Transition to a New Third
Party Distribution Center" for a discussion of a write off of inventory taken in
the fourth quarter of 2007.
We Will Be Subject To Cyclical Variations In The Apparel And E-Commerce Markets.
The apparel industry historically has been subject to substantial cyclical
variations. Furthermore, Internet usage slows down in the summer months. We and
other apparel vendors rely on the expenditure of discretionary income for most,
if not all, sales. Economic downturns, whether real or perceived, in economic
conditions or prospects could adversely affect consumer spending habits and,
therefore, have a material adverse effect on our revenue, cash flow and results
of operations. Alternatively, any improvement, whether real or perceived, in
economic conditions or prospects could adversely impact our ability to acquire
merchandise and, therefore, have a material adverse effect on our business,
prospects, financial condition and results of operations, as our supply of
merchandise is dependent on the inability of designers and retailers to sell
their merchandise in full-price venues. See "Risk Factors - We Do Not Have Long
Term Contracts With The Majority Of Our Vendors And Therefore The Availability
of Merchandise Is At Risk."
We Purchase Product From Some Indirect Supply Sources, Which Increases Our Risk
of Litigation Involving The Sale Of Non-Authentic Or Damaged Goods. We purchase
merchandise both directly from brand owners and indirectly from retailers and
third party distributors. The purchase of merchandise from parties other than
the brand owners increases the risk that we will mistakenly purchase and sell
non-authentic or damaged goods, which could result in potential liability under
applicable laws, regulations, agreements and orders. Moreover, any claims by a
brand owner, with or without merit, could be time consuming, result in costly
litigation, generate bad publicity for us, and have a material adverse impact on
our business, prospects, financial condition and results of operations.
Security Breaches To Our Systems And Database Could Cause Interruptions to Our
Business And Impact Our Reputation With Customers, And We May Incur Significant
Expenses to Protect Against Such Breaches. A fundamental requirement for online
commerce and communications is the secure transmission of confidential
information over public networks. There can be no assurance that advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments will not result in a compromise or breach of the
algorithms we use to protect customer transaction and personal data contained in
our customer database. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. If any such compromise of our security were to occur, it could have
a material adverse effect on our reputation with customers, thereby affecting
our long-term growth prospects. In addition, we may be required to expend
significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches.
Brand Owners Could Establish Procedures To Limit Our Ability To Purchase
Products Indirectly. Brand owners have implemented, and are likely to continue
to implement, procedures to limit or control off-price retailers' ability to
purchase products indirectly. In addition, several brand owners in the U.S. have
distinctive legal rights rendering them the only legal importer of their
respective brands into the U.S. If we acquire such product indirectly from
distributors and other third parties who may not have complied with applicable
customs laws and regulations, such goods could be subject to seizure from our
inventory by U.S. Customs Service, and the importer may have a civil action for
damages against us. See "Risk Factors - We Do Not Have Long Term Contracts With
The Majority of Our Vendors And Therefore The Availability Of Merchandise Is At
Risk."
Our Growth May Place A Significant Strain On Our Management And Administrative
Resources And Cause Disruptions In Our Business. Historically, our growth has
placed, and any further growth is likely to continue to place, a significant
strain on our management and administrative resources. To be successful, we must
continue to implement information management systems and improve our operating,
administrative, financial and accounting systems and controls. We will also
need to train new employees and maintain close coordination among our executive,
accounting, finance, marketing, merchandising, operations and technology
functions. Any failure to implement such systems and training, and to maintain
such coordination, could affect our ability to plan for, and react quickly to,
changes in our business and, accordingly, could cause an adverse impact on our
cash flow and results of operations in the periods during which such changes
occur. In addition, as our workforce grows, our exposure to potential employment
liability issues increases, and we will need to continue to improve our human
resources functions in order to protect against such increased exposure.
Moreover, our business is
10
dependent upon our ability to expand our third-party fulfillment operations,
customer service operations, technology infrastructure, and inventory levels to
accommodate increases in demand, particularly during the peak holiday selling
season. Our planned expansion efforts in these areas could cause disruptions in
our business. Any failure to expand our third-party fulfillment operations,
customer service operations, technology infrastructure or inventory levels at
the pace needed to support customer demand could have a material adverse effect
on our cash flow and results of operations during the period in which such
failures occur and could have a long-term effect on our reputation with our
customers.
We Are Heavily Dependent On Third-Party Relationships, And Failures By A Third
Party Could Cause Interruptions To Our Business. We are heavily dependent upon
our relationships with our fulfillment operations provider, third party call
center and Web hosting provider, delivery companies like DHL, UPS and the United
States Postal Service, and credit card processing companies such as Paymentech
and Cybersource to service our customers' needs. To the extent that there is a
slowdown in mail service or package delivery services, whether as a result of
labor difficulties, terrorist activity or otherwise, our cash flow and results
of operations would be negatively impacted during such slowdown, and the results
of such slowdown could have a long-term negative effect on our reputation with
our customers. The failure of our fulfillment operations provider, third party
call center, credit card processors or Web hosting provider to properly perform
their services for us could cause similar effects. Our business is also
generally dependent upon our ability to obtain the services of other persons and
entities necessary for the development and maintenance of our business. If we
fail to obtain the services of any such person or entities upon which we are
dependent on satisfactory terms, or we are unable to replace such relationship,
we would have to expend additional resources to develop such capabilities
ourselves, which could have a material adverse impact on our short-term cash
flow and results of operations and our long-term prospects. See, "Risk Factor -
Our Business Has Been Impacted by Issues Related to Our Transition to a New
Third Party Distribution Center."
We Are In Competition With Companies Much Larger Than Ourselves. E-commerce
generally and, in particular, the online retail apparel and fashion accessories
market, is a new, dynamic, high-growth market and is rapidly changing and
intensely competitive. Our competition for customers comes from a variety of
sources including:
o existing land-based, full price retailers, that are using the Internet to
expand their channels of distribution;
o less established online companies;
o internet sites;
o traditional direct marketers; and
o traditional off-price retail stores, which may or may not use the
Internet to grow their customer base.
Competition in our industry has intensified, and we expect this trend to
continue as the list of our competitors grows. Many of our competitors and
potential competitors have longer operating histories, significantly greater
resources, greater brand name recognition and more firmly established supply
relationships. We believe that the principal competitive factors in our market
include:
o brand recognition;
o merchandise selection;
o price;
o convenience;
o customer service;
o order delivery performance; and
o site features.
There can be no assurance that we will be able to compete successfully against
competitors and future competitors, and competitive pressures faced by us could
force us to increase expenses and/or decrease our prices at some point in the
future.
We Need To Further Establish Brand Name Recognition. We believe that further
establishing, maintaining and enhancing our brand is a critical aspect of our
efforts to attract and expand our online traffic. The number of Internet sites
that offer competing services, many of which already have well established
brands in online services or the retail apparel industry generally, increases
the importance of establishing and maintaining brand name recognition. Promotion
of Bluefly.com will depend largely on our success in providing a high quality
online experience supported by a high level of customer service,
11
which cannot be assured. In addition, to attract and retain online users, and to
promote and maintain Bluefly.com in response to competitive pressures, we may
find it necessary to increase substantially our advertising and marketing
expenditures. If we are unable to provide high quality online services or
customer support, or otherwise fail to promote and maintain Bluefly.com, or if
we incur excessive expenses in an attempt to promote and maintain Bluefly.com,
our long-term growth prospects would be materially adversely affected.
There Can Be No Assurance That Our Technology Systems Will Be Able To Handle
Increased Traffic; Implementation Of Changes To Web Site. A key element of our
strategy is to generate a high volume of traffic on, and use of, Bluefly.com.
Accordingly, the satisfactory performance, reliability and availability of
Bluefly.com, transaction processing systems and network infrastructure are
critical to our reputation and our ability to attract and retain customers, as
well as maintain adequate customer service levels. Our revenues will depend on
the number of visitors who shop on Bluefly.com and the volume of orders we can
handle. Unavailability of our Web site or reduced order fulfillment performance
would reduce the volume of goods sold and could also adversely affect consumer
perception of our brand name. We may experience periodic system interruptions
from time to time. If there is a substantial increase in the volume of traffic
on Bluefly.com or the number of orders placed by customers, we will be required
to expand and upgrade further our technology, transaction processing systems and
network infrastructure. There can be no assurance that we will be able to
accurately project the rate or timing of increases, if any, in the use of
Bluefly.com or expand and upgrade our systems and infrastructure to accommodate
such increases on a timely basis. In order to remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of Bluefly.com, which is particularly challenging given the rapid rate at which
new technologies, customer preferences and expectations and industry standards
and practices are evolving in the online commerce industry. Accordingly, we
redesign and enhance various functions on our Web site on a regular basis, and
we may experience instability and performance issues as a result of these
changes. See "Risk Factors - The Implementation Of The New Web Site May Place A
Significant Strain On Our Key Personnel."
We May Be Subject To Higher Return Rates. We recognize that purchases of apparel
and fashion accessories over the Internet may be subject to higher return rates
than traditional store bought merchandise. We have established a liberal return
policy in order to accommodate our customers and overcome any hesitancy they may
have with shopping via the Internet. As a result, our reserve for returns and
credit card chargebacks for fiscal 2007, 2006 and 2005 has been 39.6%, 39.6% and
37.8%, respectively. If return rates are higher than expected, our business,
prospects, financial condition, cash flows and results of operations could be
materially adversely affected.
Our Success Is Largely Dependent Upon Our Executive Personnel. We believe our
success will depend to a significant extent on the efforts and abilities of our
executive personnel. In particular, we rely upon their strategic guidance, their
relationships and credibility in the vendor and financial communities and their
ability to recruit key operating personnel. Our current employment agreements
with our Chief Executive Officer, President and Chief Operating Officer and
Chief Marketing Officer run through July 2009, January 2011 and September 2008,
respectively, however there can be no assurance that any of them will not
terminate their employment earlier. The loss of the services of any of our
executive officers could have a material adverse effect on our credibility in
the vendor communities and our ability to recruit new key operating personnel.
Our Success Is Dependent Upon Our Ability To Attract New Key Personnel. Our
operations will also depend to a great extent on our ability to attract new key
personnel with relevant experience and retain existing key personnel in the
future. The market for qualified personnel is extremely competitive. Our failure
to attract additional qualified employees could have a material adverse effect
on our prospects for long-term growth.
There Are Inherent Risks Involved In Expanding Our Operations. We may choose to
expand our operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered, expanding our market presence through
relationships with third parties, adopting non-Internet based channels for
distributing our products, or consummating acquisitions or investments.
Expansion of our operations in this manner would require significant additional
expenses and development, operations and editorial resources and would strain
our management, financial and operational resources. For example, we have
historically expended significant internal resources in connection with the
redesign of our Web site and the implementation of our online strategic
alliances. Moreover, in the event that we expand upon our efforts to open brick-
and-mortar outlet stores, we will be required to devote significant internal
resources and capital to such efforts. There can be no assurance that we would
be able to expand our efforts and operations in a cost-effective or timely
manner or that any such efforts would increase overall market acceptance.
Furthermore, any new business or Web site that is not favorably received by
consumer or trade customers could damage our reputation.
We May Be Liable For Infringing The Intellectual Property Rights Of Others.
Third parties may assert infringement claims against us. From time to time in
the ordinary course of business we have been, and we expect to continue to be,
subject to claims alleging infringement of the trademarks and other intellectual
property rights of third parties. These claims and any
12
resulting litigation, if it occurs, could subject us to significant liability
for damages. In addition, even if we prevail, litigation could be time-consuming
and expensive and could result in the diversion of our time and attention. Any
claims from third parties may also result in limitations on our ability to use
the intellectual property subject to these claims unless we are able to enter
into agreements with the third parties making these claims.
We May Be Liable For Product Liability Claims. We sell products manufactured by
third parties, some of which may be defective. If any product that we sell were
to cause physical injury or injury to property, the injured party or parties
could bring claims against us as the retailer of the product. Our insurance
coverage may not be adequate to cover every claim that could be asserted. If a
successful claim were brought against us in excess of our insurance coverage, it
could have a material adverse effect on our cash flow and on our reputation with
customers. Unsuccessful claims could result in the expenditure of funds and
management time and could have a negative impact on our business.
We Cannot Guarantee The Protection Of Our Intellectual Property. Our
intellectual property is critical to our success, and we rely on trademark,
copyright, domain names and trade secret protection to protect our proprietary
rights. Third parties may infringe or misappropriate our trademarks or other
proprietary rights, which could have a material adverse effect on our business,
prospects, results of operations or financial condition. While we enter into
confidentiality agreements with our employees, consultants and strategic
partners and generally control access to and distribution of our proprietary
information, the steps we have taken to protect our proprietary rights may not
prevent misappropriation. We are pursuing registration of various trademarks,
service marks and domain names in the United States and abroad. Effective
trademark, copyright and trade secret protection may not be available in every
country, and there can be no assurance that the United States or foreign
jurisdictions will afford us any protection for our intellectual property. There
also can be no assurance that any of our intellectual property rights will not
be challenged, invalidated or circumvented. In addition, we do not know whether
we will be able to defend our proprietary rights since the validity,
enforceability and scope of protection of proprietary rights in Internet-related
industries is uncertain and still evolving. Moreover, even to the extent that we
are successful in defending our rights, we could incur substantial costs in
doing so.
Our Business Could Be Harmed By Consumers' Concerns About The Security Of
Transactions Over The Internet. Concerns over the security of transactions
conducted on the Internet and commercial online services, the increase in
identity theft and the privacy of users may also inhibit the growth of the
Internet and commercial online services, especially as a means of conducting
commercial transactions. Moreover, although we have developed systems and
processes that are designed to protect consumer information and prevent
fraudulent credit card transactions and other security breaches, failure to
mitigate such fraud or breaches could have a material adverse effect on our
business, prospects, financial condition and results of operations.
We Face Legal Uncertainties Relating To The Internet In General And To Our
Industry In Particular And May Become Subject To Costly Government Regulation.
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to online commerce. However, it is
possible that laws and regulations may be adopted that would apply to the
Internet and other online services. Furthermore, the growth and development of
the market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies conducting
business online. The adoption of any additional laws or regulations may increase
our cost of doing business and/or decrease the demand for our products and
services and increase our cost of doing business.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and online commerce
could also increase our cost of doing business. In addition, if we were alleged
to have violated federal, state or foreign, civil or criminal law, we could face
material liability and damage to our reputation and, even if we successfully
defend any such claim, we would incur significant costs in connection with such
defense.
We Face Uncertainties Relating To Sales And Other Taxes. We are not currently
required to pay sales or other similar taxes in respect of shipments of goods
into states other than Ohio and New York. However, state taxation laws and
regulations may change in the future, and one or more states may seek to impose
sales tax collection obligations on out-of-state companies, such as our company,
that engage in online commerce. In addition, any new operation in states outside
Ohio and New York could subject shipments into such states to state sales taxes
under current or future laws. A successful assertion by one or more states or
any foreign country that the sale of merchandise by us is subject to sales or
other taxes, could subject us to material liabilities and, to the extent that we
pass such costs on to our customers, could decrease our sales.
13
The Holders Of Our Common Stock May Be Adversely Affected By The Rights Of
Holders Of Preferred Stock That May Be Issued In The Future. Our certificate of
incorporation and by-laws, as amended, contain certain provisions that may
delay, defer or prevent a takeover. Our Board of Directors has the authority to
issue up to 15,479,250 additional shares of preferred stock, and to determine
the price, rights, preferences and restrictions, including voting rights, of
those shares, without any further vote or action by the stockholders.
Accordingly, our Board of Directors is empowered, without approval of the
holders of Common Stock, to issue preferred stock, for any reason and at any
time, with such rates of dividends, redemption provisions, liquidation
preferences, voting rights, conversion privileges and other characteristics as
it may deem necessary or appropriate. The rights of holders of Common Stock will
be subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future.
We Rely On The Effectiveness Of Our Internal Controls. Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate
internal control structure and procedures for financial reporting and assess on
an on-going basis the design and operating effectiveness of our internal control
structure and procedures for financial reporting. Our independent registered
public accounting firm will be required to audit the design and operating
effectiveness of our internal controls and attest to management's assessment of
the design and the effectiveness of our internal controls. The first such audit
will be required for our fiscal year ending December 31, 2008. It is possible
that, as we prepare for this audit, we could discover certain deficiencies in
the design and/or operation of our internal controls that could adversely affect
our ability to record, process, summarize and report financial data. We have
invested and will continue to invest significant resources in this process.
Because an audit of our internal controls has not been required to be reported
in the past, we are uncertain as to what impact a conclusion that deficiencies
exist in our internal controls over financial reporting would have on the
trading price of our Common Stock.
Item 2. Properties
We lease approximately 26,000 square feet of office space in New York City. The
property is in good operating condition. The leases expire in 2010 through 2012.
Our total lease expense for the current office space during 2007 was
approximately $477,000.
Item 3. Legal Proceedings
In June 2007, we received a Civil Investigative Demand (the "Discovery Request")
from the Federal Trade Commission (the "FTC") that requested the production of
certain documents and other information regarding the labeling and advertising
of apparel containing products that contain fur or faux fur components. The
Discovery Request was issued in connection with a petition filed by the Humane
Society of the United States with the FTC regarding the labeling and advertising
of fur products by a number of national retailers and apparel manufacturers. The
Company is cooperating fully with the Discovery Request.
We currently, and from time to time, are involved in litigation incidental to
the conduct of our business. However, we are not party to any lawsuit or
proceeding which in the opinion of management is likely to have a material
adverse effect on us.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of stockholders of the Company during the
fourth quarter of 2007.
PART II
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Item 5. Market For Registrant'S Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information
The Company's common stock, par value $.01 per share ("Common Stock"), is quoted
on The Nasdaq Capital Market. The following table sets forth the high and low
sales prices for the Common Stock for the periods indicated, as reported by the
Nasdaq Capital Market:
14
Fiscal 2007 High Low
----------- ---- ---
First Quarter $1.38 $0.98
Second Quarter $1.20 $0.98
Third Quarter $1.03 $0.85
Fourth Quarter $0.97 $0.66
Fiscal 2006 High Low
----------- ---- ---
First Quarter $1.49 $0.96
Second Quarter $1.23 $0.68
Third Quarter $1.20 $0.93
Fourth Quarter $1.59 $0.79
On March 13, 2008, the Board of Directors approved a one for 10 reverse stock
split, which will be effective as of April 3, 2008. While the trading price of
our common stock cannot be predicted with certainty, as our common stock begins
trading following the reverse stock split, it is expected that the price per
share will increase to reflect the reverse stock split. For example, as of March
20, 2008, the last closing sale price reported on NASDAQ was $0.49. Assuming
that this was the price per share as of the effective time of the reverse stock
split, it is expected that the price per share immediately following the
effective time would be $4.90.
Holders
As of March 20, 2008, there were approximately 115 holders of record of the
Common Stock. We believe that there were more than 4,800 beneficial holders of
the Common Stock as of such date.
Dividends
We have never declared or paid cash dividends on our Common Stock. In addition,
the terms of our credit facility prohibit us from paying cash dividends without
the consent of our lender. See Note 11 to the Financial Statements. We currently
intend to retain any future earnings to finance future growth and, therefore, do
not anticipate paying any cash dividends in the foreseeable future.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2007 with respect
to the Company's equity compensation plans which have been approved by its
stockholders. The Company has one equity compensation plan that was not approved
by its stockholders.
Number of Securities
remaining available for
Number of Securities to future issuance under
be issued upon exercise Weighted-average equity compensation
of exercise price of plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders 10,726,680(1) $1.05(2) 5,609,862
Equity compensation plans not approved by
security holders 246,060 1.02 --
----------------------------------------------------------------------------------------------------------------------------------
Total 10,972,740 $1.05 5,609,862
----------------------------------------------------------------------------------------------------------------------------------
(1) Includes 3,428,777 options to purchase shares of Common Stock, 396,514
shares of Restricted Stock and 7,147,447 Deferred Stock Units.
(2) Calculated based on the exercise price of the 3,428,777 options referred to
in Note 1 above.
The following is a summary of the material provisions of the Bluefly, Inc. 2000
Plan Stock Option Plan (the "2000 Plan"), our only equity compensation plan that
has not been approved by our stockholders.
Eligibility. Key employees of the Company who are not officers or directors of
the Company and its affiliates and consultants to the Company are eligible to be
granted options.
15
Administration of the 2000 Plan. The Option Plan/Compensation Committee
administers the 2000 Plan. The Option Plan/Compensation Committee has the full
power and authority, subject to the provisions of the 2000 Plan, to designate
participants, grant options and determine the terms of all options. The 2000
Plan provides that no participant may be granted options to purchase more than
1,000,000 shares of Common Stock in a fiscal year. The Option Plan/Compensation
Committee is required to make adjustments with respect to options granted under
the 2000 Plan in order to prevent dilution or expansion of the rights of any
holder. The 2000 Plan requires that the Option Plan/Compensation Committee be
composed of at least two directors.
Amendment. The 2000 Plan may be wholly or partially amended or otherwise
modified, suspended or terminated at any time or from time to time by the Board
of Directors, but no amendment without the approval of our stockholders shall be
made if stockholder approval would be required under any law or rule of any
governmental authority, stock exchange or other self-regulatory organization to
which we are subject. Neither the amendment, suspension or termination of the
2000 Plan shall, without the consent of the holder of an option under the 2000
Plan, alter or impair any rights or obligations under any option theretofore
granted.
Options Issued Under 2000 Plan. The Option Plan/Compensation Committee
determines the term and exercise price of each option under the 2000 Plan and
the time or times at which such option may be exercised in whole or in part, and
the method or methods by which, and the form or forms in which, payment of the
exercise price may be paid.
Upon the exercise of an option under the 2000 Plan, the option holder shall pay
us the exercise price plus the amount of the required federal and state
withholding taxes, if any. The 2000 Plan also allows participants to elect to
have shares withheld upon exercise for the payment of withholding taxes.
The unexercised portion of any option granted to a key employee under the 2000
Plan generally will be terminated (i) 30 days after the date on which the
optionee's employment is terminated for any reason other than (a) Cause (as
defined in the 2000 Plan), (b) retirement or mental or physical disability, or
(c) death; (ii) immediately upon the termination of the optionee's employment
for Cause; (iii) three months after the date on which the optionee's employment
is terminated by reason of retirement or mental or physical disability; or (iv)
(A) 12 months after the date on which the optionee's employment is terminated by
reason of his death or (B) three months after the date on which the optionee
shall die if such death occurs during the three-month period following the
termination of the optionee's employment by reason of retirement or mental or
physical disability. The Option Plan/Compensation Committee has in the past, and
may in the future, extend the period of time during which an optionee may
exercise options following the termination of his or her employment.
Under the 2000 Plan, an option generally may not be transferred by the optionee
other than by will or by the laws of descent and distribution. During the
lifetime of an optionee, an option under the 2000 Plan may be exercised only by
the optionee or, in certain instances, by the optionee's guardian or legal
representative, if any.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Total Number Maximum
of Number
Shares of Shares that
Purchased as May
Part of Yet Be
Total Number Average Publicly Purchased
of price Announced Under the
Shares Paid per Plans or Plans or
Period Purchased Share Programs Programs
---------------------------------------------------------------------------------------------------------------------------
October 1, 2007 -- October 31, 2007 1,233,905(1) $ 0.92 n/a n/a
November 1, 2007 -- November 30, 2007 - $ - n/a n/a
December 1, 2007 -- December 31, 2007 149,925(1) $ 0.90 n/a n/a
Total -- Three months ended December 31, 2007 1,383,830 $ 0.92 n/a n/a
16
(1) These shares were withheld by the Company to satisfy the tax withholding
obligations of certain officers and employees of the Company in connection with
the distribution of common stock in respect of deferred stock units held by such
officers and employees.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the
financial statements and the notes thereto and the information contained in Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Historical results are not necessarily indicative of future
results. The selected financial data for the years ended December 31, 2004 and
2003 and at December 31, 2005, 2004 and 2003 are derived from our audited
financial statements not included in this report. In January 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
stock-based payment transactions be recognized in the financial statements at
their fair values. Results for prior periods have not been restated for SFAS No.
123(R). All data is in thousands, except share data:
Year Ended December 31,
-----------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $91,493 $77,062 $58,811 $43,799 $ 37,928
Cost of sales 58,754 46,153 35,816 27,393 26,603
------ ------ ------ ------ ------
Gross profit 32,739 30,909 22,995 16,406 11,325
Selling and fulfillment expenses 18,898 15,808 12,880 11,783 10,163
Marketing expenses 16,063 14,196 6,961 2,120 1,898
General and administrative expenses 13,848 13,001 6,299 6,408 5,207
------ ------ ------ ------ ------
Total operating expenses 48,809 43,005 26,140 20,311 17,268
Operating loss(2) (16,070) (12,096) (3,145) (3,905) (5,943)
Interest expense (260) (599) (856) (733) (464)
Interest/other income 501 502 181 847 38
------ ------ ------ ------ ------
Net loss (15,829) (12,193) (3,820) (3,791) (6,369)
Basic and diluted loss per share: $(0.12) $(0.23) $(0.54) $(0.55) $(0.88)
Basic and diluted weighted average number of
common shares outstanding available to 130,911,295 80,170,532 16,153,020 14,586,752 11,171,018
common stockholders(1)
Balance Sheet Data: As of December 31,
------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Cash and cash equivalents $6,730 $20,188 $9,408 $7,938(3) $7,721
Inventories, net 28,492 24,189 16,893 12,958 11,340
Other current assets 3,589 4,229 3,536 2,559 1,863
Total assets 45,019 52,430 33,045 25,541 22,998
Current liabilities 17,922 14,603 11,936 9,413 8,459
Long term liabilities 60 -- 5,244 4,739 4,260
Shareholders' equity 27,037 37,827 15,865 11,389 10,279
(1) Weighted average shares increased to approximately 80.2 million in 2006 as a
result an equity financing consummated in June 2006 and the conversion of the
Company's preferred stock into common stock in connection with such financing.
(2) This amount includes non-cash expense of approximately $6.2 million and $4.5
million in 2007 and 2006, respectively, related to stock-based compensation,
recorded in accordance with SFAS 123R.
(3) Includes restricted cash of $1,253.
17
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our current
expectations and projections of future events. However, our actual results could
differ materially from those discussed herein as a result of the risks that we
face, including but not limited to those risks stated in "Risk Factors," or
faulty assumptions on our part. In addition, the following discussion should be
read in conjunction with the audited financial statements and the related notes
thereto included elsewhere in this report.
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.
During the third quarter of 2007, we completed our transition to a new third
party distribution center. In connection with this transition, we incurred
incremental expenses of approximately $721,000 in costs directly related to the
move (including trucking, labor, insurance, etc.). We took additional charges of
approximately $550,000 against our inventory during the third quarter of 2007
based on the reconciliation of inventory that we normally perform in connection
with each quarter's close. We believe that the charges that were taken were
sufficient to cover any loss of inventory resulting from the transition. We have
worked with the distribution center to implement necessary changes to their
inventory reporting systems as a result of the full physical inventory that was
performed in January 2008, following the end of the Holiday sales and returns
cycle. We believe that significant operational issues related to the move have
been resolved. Start-up issues associated with the transition to the new
distribution center also resulted in certain cancelled orders and other
incremental costs such as expedited shipping costs. As a result of the
transition, during the period from June 2007 through mid September 2007, a
portion of the Company's inventory was not available for sale to our customers
and, therefore, our revenue during this period was adversely affected. Because
the increased inventory level could adversely affect our flexibility in taking
advantage of other buying opportunities that may become available in the near
term, and because of our desire to keep our merchandise fresh we decided not to
carry some of this inventory into next season, and removed it from our Web site.
We believe that by doing so, we will improve the efficiency of the new
fulfillment center and enhance the customer experience. We have taken an
inventory write-down with respect to this merchandise because it is being
removed from our Web site. The net effect to the statement of operations of
removing this inventory from our site, was approximately $1.5 million.
In addition, during this transition period, the Company experienced some
processing issues with a small percentage of orders and returns. We believe we
have taken the appropriate action related to the customers affected by these
processing issues. In the long term, we expect the transition to the new
distribution center to improve customer service and increase efficiencies,
however, there can be no assurance that the transition will not continue to have
a negative impact upon our business, financial condition and results of
operations.
Our net sales increased nearly 19% to $91,493,000 for the year ended December
31, 2007 from $77,062,000 for the year ended December 31, 2006. On a quarterly
basis, our net sales increased by approximately 31%, 29%, 11% and 9%,
respectively, as compared to the same periods in 2006. Our gross margin
decreased to 35.8% from 40.1% in 2006. Our gross profit increased by nearly 6%
to $32,739,000 for the year ended December 31, 2007 from $30,909,000 for the
year ended December 31, 2006. The decrease in gross margin was primarily
related to (i) a write off of inventory (ii) a change in the merchandise mix
(iii) expedited shipping cost incurred in connection with our transition to the
new third-party fulfillment center and (iv) the additional reserves against
inventory taken as a result of the transition to the new fulfillment center, as
described above. Our operating loss increased by over 32%, to $16,070,000 in
2007, from $12,096,000 in 2006. This increase was primarily a result of a write
of inventory in the fourth quarter, an increase in stock-based compensation as a
result of equity awards granted in the fourth quarter of 2006 (stock based
compensation was $6.2 million for the year ended December 31, 2007 versus $4.5
million for the same period last year) as well as costs incurred in connection
with our transition to the new fulfillment center, and increased marketing
expenses.
Total marketing expenses increased by 13% to $16,063,000 for the full year 2007,
from $14,196,000 for the full year 2006. We increased our spending in marketing
(excluding staff related costs) by 14% to $14,908,000 for the full year 2007,
from
18
$13,040,000 for the full year 2006. The primary goal of our marketing campaign
is to build upon the awareness created by the initial launch of the campaign in
fall 2005, both with new customers as well as with our existing customers. A
large portion of the increased marketing expense was a result of the costs
associated with our sponsorships with entertainment properties. We believe that
this investment in marketing 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.
Our reserve for returns and credit card chargebacks remained unchanged at 39.6%
of gross sales for the years ended December 31, 2007 and 2006 respectively. In
general, our merchandise mix has been shifting towards higher end products which
tend to drive return rates higher. We continually try to refine our merchandise
mix to reduce the return rate. However, we believe that the higher return rates
will be more than offset by the higher gross margin dollars and average order
sizes. As such, we continually evaluate our merchandise mix in an effort to
reduce return rates.
A portion of our inventory includes merchandise that we either purchased with
the intention of holding for the appropriate season or were unable to sell
through in its entirety in a prior season and have determined to hold for the
next selling season, subject to appropriate mark-downs. We evaluate our
inventory on a quarterly basis to determine the lower of cost or the fair market
value of that inventory based upon age of the inventory, market factors, and
historical trends among other factors, and take the appropriate reserves against
inventory. In recent years we have increased the amount of inventory purchased
on a pack and hold basis in order to take advantage of opportunities in the
market.
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 $6,194,000 for the year ended December 31, 2007 and $4,454,000 for the year
ended December 31, 2006. Results for prior periods have not been restated due to
the adoption based on the modified prospective approach.
At December 31, 2007, we had an accumulated deficit of $131,826,000. 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 noncash 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
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the adequacy of the
allowances for sales returns, recoverability of inventories, useful lives of
property and equipment, the realization of deferred tax assets, and the
calculations related to stock-based compensation. Actual amounts could differ
significantly from these estimates.
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.
19
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" ("EITF No. 00-10").
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.
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.
This valuation requires us to make judgments based on currently available
information, about the saleability of such merchandise, the selling price, etc.
Based upon this evaluation, 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.
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes-- an interpretation of FASB
Statement No. 109" ("FIN 48"). FIN 48 prescribes a comprehensive model for the
manner in which a company should recognize, measure, present and disclose in
its financial statements all material uncertain tax positions that the Company
has taken or expects to take on a tax return. As of the date of adoption, there
were no tax positions for which it is reasonably possible that the total
amounts of unrecognized tax benefits will significantly increase or decrease
within twelve months from the date of adoption of FIN 48 or from December 31,
2007. As of December 31, 2007, the only tax jurisdiction to which the Company
is subject is the United States. Open tax years relate to years in which unused
net operating losses were generated. Upon the adoption of FIN 48, the Company's
open tax years extend back to 1998. In the event that the Company concludes
that it is subject to interest and/or penalties arising form uncertain tax
positions, the Company will present interest and penalties as a component of
income taxes. No amounts of interest or penalties were recognized in the
Company's Statement of Operations or Balance Sheet upon adoption of FIN 48 or
as of and for the year ended December 31, 2007.
Stock-Based Compensation
As of January 1, 2006, we adopted SFAS No. 123(R) which requires us to measure
compensation cost for stock awards at fair value and recognize compensation
over the service period for awards expected to vest. Determining the fair value
of stock- based awards at the grant date requires considerable judgment,
including estimating expected volatility, expected term, risk-free interest
rate and expected forfeitures. If factors change and we employ different
assumptions, stock-based compensation expense may differ significantly from
what we have recorded in the past.
Results Of Operations
The following table sets forth our statement of operations data for the years
ended December 31st. All data is in thousands except as indicated below:
2007 2006 2005
---- ---- ----
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
Net sales $91,493 100.0% $77,062 100.0% $58,811 100.0%
Cost of sales 58,754 64.2% 46,153 59.9% 35,816 60.9%
------ ------ ------
Gross profit 32,739 35.8% 30,909 40.1% 22,995 39.1%
Marketing expenses 16,063 17.6% 14,196 18.4% 6,961 11.8%
Selling and fulfillment expenses 18,898 20.7% 15,808 20.5% 12,880 21.9%
General and administrative expenses 13,848 15.1% 13,001 16.9% 6,299 10.7%
------ ------ -----
Total operating expenses 48,809 53.4% 43,005 55.8% 26,140 44.4%
Operating loss (16,070) (17.6)% (12,096) (15.7)% (3,145) (5.3)%
Interest (expense) other income 241 0.3% (97) (0.1)% (675) (1.2)%
--- ---- -----
Net loss $(15,829) (17.3)% $(12,193) (15.8)% $(3,820) (6.5)%
20
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 years ended December 31st, as indicated below:
2007 2006 2005
---- ---- ----
Average Order Size (including shipping & handling) $276.58 $257.64 $220.17
New Customers Added during the Year* 198,884 177,213 148,975
* 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.
For The Year Ended December 31, 2007 Compared To The Year Ended December 31,
2006
Net sales: Gross sales for the year ended December 31, 2007 increased by
approximately 19% to $151,435,000 from $127,556,000 for the year ended December
31, 2006. The increase in gross sales was partially offset by lost sales and
cancelled orders attributable to start-up issues at our new distribution
center. The provision for returns and credit card chargebacks and other credits
was approximately 39.6% for 2007 and 2006, resulting in a provision of
$59,942,000 for the year ended December 31, 2007 and $50,494,000 for the year
ended December 31, 2006.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2007 were $91,493,000. This represents an increase of nearly 19%
compared to the year ended December 31, 2006, in which net sales totaled
$77,062,000. The growth in net sales was largely driven by the increase in
gross average order size (approximately 7% higher than the full year 2006) and
an increase in the number of new customers acquired (approximately 12% higher
than the full year 2006). Shipping and handling revenue (which is included in
net sales) increased by 9% to $4,798,000 for the year ended December 31, 2007,
from $4,403,000 for the year ended December 31, 2006. Revenue from shipping and
handling increased at a lower rate than overall revenue due to shipping
concessions made during the warehouse move.
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 year ended December 31, 2007 totaled
$58,754,000, resulting in a gross margin of approximately 35.8%. Cost of sales
for the year ended December 31, 2006 totaled $46,153,000, resulting in a gross
margin of 40.1%. The decrease in gross margin percentage is largely attributed
to a write-off of inventory in the fourth quarter. The effect of this write-off
on gross margin dollars was approximately $1.5 million. In addition, the growth
in the high-end designer items has a significant impact on the Company's
overall merchandise mix, which continues to negatively impact the gross margin
percentage. The combination of the high demand amongst retailers for high-end
merchandise and the decline in value of the US Dollar relative to the Euro had
a negative impact on our gross margins related to designer accessory items.
21
In addition, the gross margin was negatively affected by additional inventory
reserves, and expedited shipping expenses that were recorded during the third
quarter and incurred in connection with our transition to a new fulfillment
center.
Gross Profit: As a result of the increases in net sales, gross profit increased
by nearly 6%, to $32,739,000 for the year ended December 31, 2007, from
$30,909,000 for the year ended December 31, 2006.
Marketing expenses: Marketing expenses increased by 13% to $16,063,000 for the
year ended December 31, 2007 from $14,196,000 for the year ended December 31,
2006. This increase was due to an increase in online advertising, offline
advertising and sponsorship and direct mail postcards. While overall marketing
expenses increased, marketing expenses as a percentage of net sales decreased
to 17.5% for the year ended December 31, 2007 from 18.4% for the year ended
December 31, 2006. We spent approximately $7.6 million and $7.1 million on our
national advertising campaign in 2007 and 2006, respectively.
Marketing expenses include expenses related to our national ad campaign,
sponsorships, online and print advertising, "sweepstakes" promotions as well as
staff related costs. Costs in connection with the national campaign are
recorded as the magazines and commercials are being released.
Selling and fulfillment expenses: Selling and fulfillment expenses increased by
approximately 20% for the year ended 2007 compared to the year ended 2006.
Selling and fulfillment expenses were comprised of the following:
Year Ended Year Ended Percentage Difference
---------- ---------- ---------------------
December 31, 2007 December 31, 2006 increase (decrease)
----------------- ----------------- ---------------------
Operating 10,554,000 8,353,000 26%
Technology 4,693,000 4,203,000 12%
E-Commerce 3,651,000 3,252,000 12%
----------- -----------
$18,898,000 $15,808,000 20%
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in 2007 by 26% compared to 2006 as a result of variable costs
associated with the increased sales volume (e.g., picking and packing orders,
processing returns and credit card fees), and an increase in customer service
and salary related expenses as well as incremental costs of approximately
$721,000 incurred in connection with our transition to the new third party
distribution center. Variable operating expenses as a percentage of sales
decreased in 2007 to approximately 7% from 8% in 2006.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web site hosting. For the year ended December 31, 2007,
technology expenses increased by approximately 12% compared to the year ended
December 31, 2006. This increase was attributed to an increase in staff and
related costs, software support, depreciation and training and was partially
offset by a decrease in consulting expenses. A majority of the consulting
expenses incurred for the year ended December 31, 2007 were related to the
continued development of our Web site and capitalized accordingly. As of
December 31, 2007, approximately $3,633,000 was capitalized in connection with
the continued development of our Web site.
E-Commerce expenses include expenses related to our photo studio, image
processing, third party software and Web site design. For the year ended
December 31, 2007, this amount increased by approximately 12% as compared to
the year ended December 31, 2006. This increase is due to increased expense
related to SFAS No. 123R costs, salary related expenses, as well as an increase
in expenses associated with software used to support the Web site.
General and administrative expenses: General and administrative expenses
include merchandising, finance and administrative salaries and related
expenses, insurance costs, accounting and legal fees, depreciation and other
office related expenses. General and administrative expenses for the year ended
December 31, 2007 increased to $13,848,000 as compared to $13,001,000 for the
year ended December 31, 2006. The increase in general and administrative
expenses was primarily the result of a $1,646,000 increase in equity based
compensation, $431,000 increase in salary and salary related expense related to
additional headcount and increased consulting and professional fees of
$302,000. These increases were partially offset by a decrease in bad debt
expense of $400,000 related to a receivable due from a third party service
provider that purchased inventory from us to be distributed internationally in
2006, public company expenses of $242,000 as well as a decrease in bonuses paid
compared to 2006 of $1,016,000.
As a percentage of net sales, general and administrative expenses decreased to
15.1% in 2007 from 16.9% in 2006.
22
Loss from operations: Operating loss increased by over 32% in 2007, to
$16,070,000 from $12,096,000 in 2006. While net sales increased this year, the
increase in net sales was offset by the recording of a write-off of the
Company's inventory which resulted in a charge of approximately $1.5 million,
additional stock based compensation expense of approximately $1.7 million in
accordance with SFAS No.123(R) and the $550,000 inventory charge.
Interest expense and interest, net: Interest and other income for the year
ended December 31, 2007 was relatively unchanged compared to December 31, 2006.
These amounts relate primarily to interest earned on our cash balances.
Interest expense, is comprised primarily of interest paid on our loan facility
and convertible notes which had been held by Soros. For the year ended 2007,
interest expense decreased to $260,000 compared to $599,000 for the year ended
2006. The convertible notes were repaid in June 2006, which resulted in the
decrease in interest expense for 2007.
Net loss per share: Net loss per share decreased to $0.12 per share from $0.23
per share, as the number of weighted average shares outstanding increased to
130.9 million in 2007 as a result of the equity financing consummated in June
2006 and the conversion of the Company's preferred stock into common stock in
connection with such financing.
For The Year Ended December 31, 2006 Compared To The Year Ended December 31,
2005
Net sales: Gross sales for the year ended December 31, 2006 increased by
approximately 35% to $127,556,000 from $94,586,000 for the year ended December
31, 2005. The provision for returns and credit card chargebacks and other
credits was approximately 40% for 2006 and 38% for 2005, resulting in a
provision of $50,494,000 for the year ended December 31, 2006 and $35,775,000
for the year ended December 31, 2005.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2006 were $77,062,000. This represented an increase of over 31%
compared to the year ended December 31, 2005, in which net sales totaled
$58,811,000. The growth in net sales was largely driven by the increase in
gross average order size (approximately 17% higher than the full year 2005) and
an increase in the number of new customers acquired (approximately 19% higher
than the full year 2005). Shipping and handling revenue (which is included in
net sales) increased by 14% to $4,403,000 for the year ended December 31, 2006,
from $3,874,000 for the year ended December 31, 2005. Revenue from shipping and
handling increased at a lower rate than overall revenue, due to the increase in
our average order size.
Cost of sales: Cost of sales for the year ended December 31, 2006 totaled
$46,153,000, resulting in a gross margin of approximately 40.1%. Cost of sales
for the year ended December 31, 2005 totaled $35,816,000, resulting in a gross
margin of 39.1%. The increase in gross margin was driven by our focus on
negotiating better prices with vendors as well as our strategy of selling more
in-season product, which has more value to our customer and therefore demands
higher margins, and the timing of our promotions.
Gross Profit: As a result of the increases in net sales and gross margin, gross
profit increased by over 34%, to $30,909,000 for the year ended December 31,
2006, from $22,995,000 for the year ended December 31, 2005.
Marketing expenses: Marketing expenses increased by 104% to $14,196,000 for the
year ended December 31, 2006 from $6,961,000 for the year ended December 31,
2005.
As a percentage of net sales, our marketing expenses increased to 18.4% for the
year ended December 31, 2006 from 11.8% for the year ended December 31, 2005.
The increase in marketing expenses as a percentage of net sales resulted
primarily from costs associated with our national advertising campaign (which
was launched in September 2005).
Marketing expenses increased by a higher percentage than revenue as a result of
the costs associated with our national marketing campaign.
Selling and fulfillment expenses: Selling and fulfillment expenses increased by
approximately 23% for the year 2006 compared to the year ended 2005. Selling
and fulfillment expenses were comprised of the following:
Year Ended Year Ended Percentage Difference
---------- ---------- ---------------------
December 31, 2006 December 31, 2005 increase (decrease)
----------------- ----------------- ---------------------
Operating 8,353,000 6,925,000 21%
Technology 4,203,000 3,567,000 18%
E-Commerce 3,252,000 2,388,000 36%
----------- ------------
$15,808,000 $ 12,880,000 23%
23
Operating expenses increased in 2006 by 21% compared to 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), and an increase in
customer service and salary related expenses. Operating costs as a percentage
of sales decreased as a result of economies of scale. Variable expenses related
to picking and packing orders increased by 24% to $2.1 million from $1.7
million. Credit card fees during 2006 and 2005 remained relatively unchanged at
$1.8 million, as the fees incurred in 2006 were partially offset by a refund of
approximately $274,000 from one of our credit card processors. Both expenses
remained relatively constant as a percentage of gross sales at 2% for 2006 and
2005.
For the year ended December 31, 2006, technology expenses increased by
approximately 18% compared to the year ended December 31, 2005. This increase
resulted from an increase in headcount and salary related expenses, consulting
expenses and costs associated with software support and was partially offset by
a decrease in depreciation expense and a decrease in web hosting expense.
For the year ended December 31, 2006, this amount increased by approximately
36% as compared to the year ended December 31, 2005, primarily due to an
increase in salary related expenses as well as increased expenses related to
photo shoots. These amounts were partially offset by a decrease in expenses
associated with analytic tools.
General and administrative expenses: General and administrative expenses for
the year ended December 31, 2006 increased to $13,001,000 as compared to
$6,299,000 for the year ended December 31, 2005. The increase in general and
administrative expenses was primarily the result of the recording of $3,895,000
of expense related to restricted stock, restricted stock units and 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 $392,000, increased public company expenses of $301,000
and increased depreciation expense of $278,000. In June 2006, we paid
approximately $650,000 of executive bonuses in connection with the financing
that closed during the second quarter of 2006. Most of these bonuses were
included in general and administrative expenses. In addition, in November 2006,
in connection with their new employment agreements, the company paid bonuses in
the aggregate amount of $517,890 to the CEO and CFO intended to compensate them
for the income taxes payable on restricted stock awards, received in exchange
for their forfeiting their right to certain fully vested and out-of-the-money
stock options that would have been exercisable.
As a percentage of net sales, general and administrative expenses increased to
16.9% in 2006 from 10.7% in 2005.
Loss from operations: Operating loss increased by over 284% in 2006, to
$12,096,000 from $3,145,000 in 2005.
Interest expense and interest and other income, net: Interest and other income
for the year ended December 31, 2006 increased to $502,000 from $181,000 for
the year ended December 31, 2005. Interest and other income was higher in 2006,
compared to 2005 primarily due to an increase in interest income earned on our
cash balances.
For the year ended 2006, interest expense decreased to $599,000 compared to
$856,000 for the year ended 2005. The convertible notes were repaid in June
2006, which resulted in the decrease in interest expense for 2006 compared to
2005.
Liquidity And Capital Resources
General
At December 31, 2007, we had approximately $6.7 million in the form of cash and
cash equivalents, as compared to $20.2 million at December 31, 2006 and $9.4
million at December 31, 2005. Working capital at December 31, 2007, 2006 and
2005 was $20.9 million, $34.0 million and $17.9 million, respectively. In
addition, as of December 31, 2007, we had approximately $3.7 million committed
under the Credit Facility, leaving approximately $3.8 million of availability,
compared to availability of $4.3 million and $3.75 million at December 31, 2006
and 2005, respectively.
In March 2008, we entered into an agreement with Soros and Maverick pursuant to
which they agreed to provide up to $3 million of debt financing to us, on a
standby basis, 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 subordinated
24
convertible notes (the "Subordinated Notes") that have a term expiring on the
later of June 26, 2011 and three years from the date of the 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 to the extent
required by the NASDAQ Capital Market), at the holder's option (a) into
equity securities that the Company might issue in any subsequent round of
financing at a price that was equal to the lowest price per share paid
by any investor in such subsequent round of financing or (b) into 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 note. In connection with the
Commitment, we issued warrants to Soros and Maverick to purchase an aggregate
of 525,002 shares of Common Stock at an exercise price equal to the
trailing 20-day average stock price on the date of grant.
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 our Credit Facility
with Wells Fargo 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 December 31, 2007, we had approximately
$294,000 of prepaid inventory and $483,000 of prepaid advertising on our
balance sheet, as compared to $616,000 and $102,000 as of December 31, 2006 and
$485,000 and $677,000 as of December 31, 2005.
Our inventory levels as of December 31, 2007 were approximately $4.3 million
higher than at December 31, 2006. The increase in inventory generally reflects
a ramp up in connection with our sales growth but also is a result of some of
our inventory not being available for sale during our move to our new third
party fulfillment center. As a result we expect to carry some of this inventory
into next season. However, the increased inventory level could adversely affect
our flexibility in taking advantage of other buying opportunities that may
become available in the near term.
We believe that our current funds, together with working capital, and operating
cash flow, and availability under our existing credit facility and standby
commitment from Soros and Maverick will be sufficient to enable us to meet our
planned expenditures through at least the next twelve months.
Credit Facility
In July 2005, we entered into a new three year revolving Credit Facility with
Wells Fargo. Pursuant to the Credit Facility, Wells Fargo provides us with a
revolving loan and issues letters of credit in favor of suppliers or factors.
The Credit Facility is secured by a lien on all of our assets. Historically,
the Credit Facility had also been secured by a letter of credit issued by Soros
("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), so long as we maintain a minimum cash balance of
$5,000,000. Furthermore, our Credit Facility prohibits us from paying cash
dividends without the consent of our lender. See Note 11 to the Financial
Statements.
Availability under the Credit Facility is determined by a formula that considers
a certain percentage of our inventory and a certain percentage of 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
December 31, 2007, total availability under the Credit Facility was
approximately $7,500,000 of which $3,700,000 was committed, leaving
approximately $3,800,000 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% for average excess availability less
than $3.0 million and the prime rate plus 0.50% or LIBOR plus 2.50% for 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 0.35%. 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. Subsequent to year
end, we amended the agreement with Wells Fargo, see "Recent Developments" for a
full description of the amendment.
Commitments and Long Term Obligations
As of December 31, 2007, we had the following commitments and long term
obligations:
More
Less than 1-3 3-5 than 5
Total 1 year years years years
Marketing and Advertising 2,172,000 2,172,000 -- -- --
Purchase Orders 17,155,000 17,155,00 -- -- --
Operating Leases 936,000 449,000 487,000 -- --
Employment Contracts 2,090,000 1,440,000 650,000 -- --
----------- ----------- ---------- ----- ------
Grand total $22,353,000 $21,216,000 $1,137,000 -- --
25
We believe that in order to grow our 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 as well as the amount of additional capital that we raise.
Off Balance Sheet Arrangements
Certain warrants issued in conjunction with certain preferred stock financing
transactions 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. See
Note 8 to the financial statements and the Statement of Shareholders' Equity
for more information.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"), which requires the acquiring entity in a business combination to record
all assets acquired and liabilities assumed at their respective
acquisition-date fair values, changes the recognition of assets acquired and
liabilities assumed arising from contingencies, changes the recognition and
measurement of contingent consideration, and requires the expensing of
acquisition-related costs as incurred. SFAS 141R also requires additional
disclosure of information surrounding a business combination, such that users
of the entity's financial statements can fully understand the nature and
financial impact of the business combination. SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The provisions of SFAS 141R will only impact us if we are party to a
business combination after the pronouncement has been adopted.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"), which defines the fair value, establishes a framework for
measuring fair value and expands disclosure 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. Relative to SFAS No. 157, FASB Staff Position (FSP) 157-b delays the
effective date of SFAS No. 157 for all non-financial assets and liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. We are evaluating the impact that this
statement will have on our financial statements.
Effective January 1, 2007, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes-- an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
prescribes a comprehensive model for the manner in which a company should
recognize, measure, present and disclose in its financial statements all
material uncertain tax positions that the Company has taken or expects to take
on a tax return. As of the date of adoption, there were no tax positions for
which it is reasonably possible that the total amounts of unrecognized tax
benefits will significantly increase or decrease within twelve months from the
date of adoption of FIN 48 or from December 31, 2007. As of December 31, 2007,
the only tax jurisdiction to which the Company is subject is the United States.
Open tax years relate to years in which unused net operating losses were
generated. Upon the adoption of FIN 48, the Company's open tax years extend
back to 1998. In the event that the Company concludes that it is subject to
interest and/or penalties arising form uncertain tax positions, the Company
will present interest and penalties as a component of income taxes. No amounts
of interest or penalties were recognized in the Company's Statement of
Operations or Balance Sheet upon adoption of FIN 48 or as of and for the year
ended December 31, 2007.
Item 7A. 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 investments we have
determined that the risks associated with interest rate fluctuations related to
these financial instruments do not pose a material risk to us.
26
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are
included in Part IV, Item 15 of this Form 10-K and are presented beginning on
page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A(T). Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-K, 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 to ensure that information required to be disclosed 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 Securities and
Exchange Commission's rules and forms, and such information is accumulated and
communicated to our management, as appropriate, to allow timely decisions
regarding required disclosure.
Internal Control Over Financial Reporting
Management's Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a - 15(f) and
15d - 15(f) under the Securities Exchange Act of 1934, as amended. Our
management has assessed the effectiveness of our internal control over
financial reporting based on the criteria set forth in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). Based on its assessment under the criteria set
forth in Internal Control - Integrated Framework, our management concluded that
our internal control over financial reporting was effective as of December 31,
2007. This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B. Other Information
In March 2008, we entered into an agreement with Soros and Maverick pursuant to
which they agreed to provide up to $3 million of debt financing to us, on a
standby basis, 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 subordinated convertible notes that have a term expiring on
the later of June 26, 2011 and three years from the date of the 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 to the extent required by
the NASDAQ Capital Market), at the holder's option (a) into equity securities
that the Company might issue in any subsequent round of financing at a price
that was equal to the lowest price per share paid by any investor in such
subsequent round of financing or (b) into 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 note. In connection with the Commitment, we issued warrants to
Soros and Maverick to purchase an aggregate of 525,002 shares of Common Stock at
an exercise price equal to the trailing 20-day average stock price on the date
of grant.
27
In March 2008, the Company amended its Credit Facility with Wells Fargo to,
among other things, (i) extend the term until July 26, 2011; (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 $3,333.33 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 March 2008, the Company awarded a $200,000 bonus to Melissa Payner-Gregor,
its Cheif Executive Officer. The bonus is payable in nine equal monthly
installments commencing April 2008, subject to her continued employment by the
Company.
Part III
--------
Item 10. Directors and Executive Officers and Corporate Governance
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement for the 2008 annual meeting of
stockholders.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement for the 2008 annual meeting of
stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement for the 2008 annual meeting of
stockholders.
Item 13. Certain Relationships and Related Transactions and Director
Independence
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement for the 2008 annual meeting of
stockholders.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement for the 2008 annual meeting of
stockholders.
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements:
--------------------
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2007 and 2006
Statements of Operations for the three years ended December 31, 2007,
2006 and 2005
Statements of Changes in Shareholders' Equity for the three years ended
December 31, 2007, 2006 and 2005
Statements of Cash Flows for the three years ended December 31, 2007,
2006 and 2005
Notes to Financial Statements
2. Financial Statement Schedules:
-----------------------------
Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
--------
28
Exhibit No. Description
---------- -----------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000).
3.2 By-Laws of the Company.
3.3 Amendment to Bylaws of the Company.
3.4 Certificate of Powers, Designations, Preferences and rights of
Series F Preferred Stock of the Company (incorporated by
reference to the Company' Current Report on Form 8-K, dated June
28, 2005.
10.1 Amended and Restated 1997 Stock Option Plan (incorporated by
reference to the Company's Definitive Proxy Statement on Schedule
14A, filed with the Commission on June 29, 2004).
10.2 Lease Agreement by and between the Company and John R. Perlman,
et al., dated as of May 5, 1997 (incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarterly
period ended March 31, 1997).
10.3 Lease Agreement by and between the Company and Adams & Co. Real
Estate, Inc., dated March 22, 1999 (incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended June 30, 1999).
10.4 Lease Agreement by and between the Company and Adams & Co. Real
Estate, Inc., dated May 4, 2000 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000).
10.5 Bluefly, Inc. 2000 Stock Option Plan (incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000).
10.6 Investment Agreement, dated November 13, 2000, by and among the
Company, Bluefly Merger Sub, Inc., Quantum Industrial Partners
LDC and SFM Domestic Investments LLC (incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000).
*10.7 Software License and Services Agreement, dated March 12, 2002, by
and among the Company and Blue Martini Software, Inc.
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2001).
10.8 Common Stock and Warrant Purchase Agreement, dated May 24, 2002,
by and between the Registrant and the investors listed on
Schedule 1 thereto (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2002).
10.9 Note and Warrant Purchase Agreement, dated January 28, 2003, by
and between the Registrant and the investors listed on Schedule 1
thereto (incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002).
10.10 Common Stock and Warrant Purchase Agreement dated January 9, 2004
by and among the Company and the Investors listed on Schedule 1
thereto (incorporated by reference to the Company's Current
Report on Form 8-K, dated January 13, 2004).
29
*10.11 Master Service Agreement, dated as of February 28, 2005, by and
between the Company and Level 3 Communications, LLC (incorporated
by reference to the Company's Current Report on Form 8-K, dated
March 4, 2005).
*10.12 Customer Order Addendum, dated as of February 28, 2005, by and
between the Company and Level 3 Communications, LLC (incorporated
by reference to the Company's Current Report on Form 8-K, dated
March 4, 2005).
10.13 Preferred Stock and Warrant Purchase Agreement, dated as of June
24, 2005, by and among the Company and the Investors listed on
the signature page thereto (incorporated by reference to the
Company's Current Report on Form 8-K, dated June 28, 2005).
10.14 Loan and Security Agreement, dated July 26, 2005, by and between
the Company and Wells Fargo Retail Finance, LLC (incorporated by
reference to the Company's Current Report on Form 8-K, dated July
29, 2005).
10.15 Employment Agreement, dated as of September 19, 2005, by and
between the Company and Bradford Matson (incorporated by
reference to the Company's Current Report on Form 8-K, dated
September 22, 2005).
10.16 Stock Purchase Agreement, dated as of June 5, 2006, by and among
Bluefly, Inc., Quantum Industrial Partners LDC, SFM Domestic
Investments, LLC and the investors listed on the signature pages
attached thereto (incorporated by reference to the Company's
Current Report on Form 8-K, dated June 7, 2006).
10.17 Form of Voting Agreement by and among Bluefly, Inc., Quantum
Industrial Partners LDC, SFM Domestic Investments, LLC, Maverick
Fund USA, Ltd., Maverick Fund, L.D.C., Maverick Fund II, Ltd. And
Prentice-Bluefly, LLC (incorporated by reference to the Company's
Current Report on Form 8-K, dated June 7, 2006).
10.18 Fee Letter, dated June 5, 2006, by and among Bluefly, Inc.,
Quantum Industrial Partners LDC and SFM Domestic Investments, LLC
(incorporated by reference to the Company's Current Report on
Form 8-K, dated June 7, 2006).
10.19 Waiver Letter, dated June 5, 2006, by and between Bluefly, Inc.
and Wells Fargo Retail Finance, LLC (incorporated by reference to
the Company's Current Report on Form 8-K, dated June 7, 2006).
10.20 First Amendment to Loan and Security Agreement, dated as of
August 14, 2006, by and between the Company and Wells Fargo
Retail Finance, LLC (incorporated by reference to the Company's
Current Report on Form 8-K, dated August 14, 2006).
10.21 Master License Agreement, dated as of September 28, 2006, by and
between the Company and Art Technology Group, Inc. (incorporated
by reference to the Company's Current Report on Form 8-K, dated
October 3, 2006).
10.22 Bluefly, Inc. Amended and Restated 2005 Stock Incentive Plan
(incorporated by reference to the Company's Definitive Proxy
Statement on Schedule 14A, filed with the Commission on April 16,
2007).
10.23 Employment Agreement, dated as of November 14, 2006 by and
between Bluefly, Inc. and Melissa Payner-Gregor (incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 2007).
*10.24 Fulfillment Services Agreement, dated as of April 11, 2007, by
and between the Company and Fulfillment Technologies, LLC
(incorporated by reference to the Company's Current Report on
Form 8-K, dated April 17, 2006).
10.25 Service Agreement, dated as of May 9, 2007, by and between the
Company and VIPdesk Connect, Inc. (incorporated by reference to
the Company's Current Report on Form 8-K, dated May 10, 2007)
*10.26 Letter Agreement, dated as of December 21, 2007, by and between
the Company and Fulfillment Technologies, LLC (incorporated by
reference to the Company's Current Report on Form 8-K, dated
December 27, 2007).
30
10.27 Employment Agreement, dated as of January 28, 2008, by and
between the Company and Barry Erdos (incorporated by reference to
the Company's Current Report on Form 8-K, dated January 28, 2008).
10.28 Employment Agreement, dated as of January 28, 2008, by and between
the Company and Patrick Barry (incorporated by reference to the
Company's Current Report on Form 8-K, dated January 28, 2008).
10.29 Lease Agreement by and between the Company and 42-52 West 39th
Street, LLC, dated February 7, 2008.
10.30 Second Amendment to Loan and Security Agreement, dated as of
November 15, 2007, by and between the Company and Wells Fargo
Retail Finance, LLC.
10.31 Third Amendment to Loan and Security Agreement, dated as of
January 17, 2008 and effective as of January 15, 2008, by and
between the Company and Wells Fargo Retail Finance, LLC.
10.32 Amended and Restated Employment Agreement, dated as of March 19,
2008, by and between the Company and Kara B. Jenny (incorporated
by reference to the Company's Current Report on Form 8-K, dated
March 19, 2008).
10.33 Fourth Amendment to Loan and Security Agreement, dated as of
March 26, 2008, by and between the Company and Wells Fargo Retail
Finance, LLC.
10.34 Standby Commitment Agreement, dated as of March 26, 2008, by
Quantum Industrial Partners LDC, SFM Domestic Investments LLC and
private funds associated with Maverick Capital, Ltd. in favor of
the Company.
10.35 Warrant No. 1 dated March 26, 2008, issued to Quantum Industrial
Partners LDC.
10.36 Warrant No. 2 dated March 26, 2008, issued to SFM Domestic
Investments LLC.
10.37 Warrant No. 3 dated March 26, 2008, issued to Maverick Fund USA,
Ltd.
10.38 Warrant No. 4 dated March 26, 2008, issued to Maverick Fund LDC.
10.39 Warrant No. 5 dated March 26, 2008, issued to Maverick Fund II,
Ltd.
23.1 Consent of PricewaterhouseCoopers LLP.
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.
* Confidential treatment has been granted as to certain portions of this
Exhibit. Such portions have been redacted.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly 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 and President
March 27, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ David Wassong Interim Chairman of Board March 27, 2008
-----------------
David Wassong
/s/ Melissa Payner-Gregor Chief Executive Officer March 27, 2008
------------------------- (Principal Executive Officer),
Melissa Payner-Gregor President and Director
/s/ Barry Erdos President, and Chief March 27, 2008
------------------------- Operating Officer
Barry Erdos
/s/ Kara B. Jenny Chief Financial Officer March 27, 2008
----------------- (Principal Accounting Officer)
Kara B. Jenny
/s/ Riad Abrahams Director March 27, 2008
-----------------
Riad Abrahams
/s/ Ann Jackson Director March 27, 2008
---------------
Ann Jackson
/s/ Martin Miller Director March 27, 2008
-----------------
Martin Miller
/s/ Neal Moszkowski Director March 27, 2008
-------------------
Neal Moszkowski
/s/Christopher McCann Director March 27,2008
---------------------
Christopher McCann
/s/ Anthony Plesner Director March 27, 2008
-------------------
Anthony Plesner
/s/ Lawrence J. Zigerelli Director March 27, 2008
-------------------------
Larry Zigerelli
32
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Bluefly, Inc.:
In our opinion, the financial statements listed in the index appearing under
Item 15 present fairly, in all material respects, the financial position of
Bluefly, Inc. at December 31, 2007 and December 31, 2006, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 15 presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 2 to the financial statements, the Company changed the
manner in which it accounts for uncertain tax positions in 2007 and changed the
manner in which it accounts for stock-based compensation in 2006.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 26, 2008
F-1
Bluefly, Inc.
Balance Sheets
December 31, 2007 and 2006
(dollars rounded to the nearest thousand)
--------------------------------------------------------------------------------
2007 2006
Assets
Current assets
Cash and cash equivalents $ 6,730,000 $ 20,188,000
Inventories, net 28,492,000 24,189,000
Accounts receivable, net of allowance for doubtful accounts 2,102,000 2,719,000
Prepaid expenses and other current assets 1,487,000 1,510,000
------------- -------------
Total current assets 38,811,000 48,606,000
Property and equipment, net 6,019,000 3,573,000
Other assets 189,000 251,000
------------- -------------
Total assets $ 45,019,000 $ 52,430,000
============= =============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 8,460,000 $ 4,822,000
Allowance for sales returns 4,204,000 5,043,000
Accrued expenses and other current liabilities 2,052,000 1,908,000
Deferred revenue 3,206,000 2,830,000
------------- -------------
Total current liabilities 17,922,000 14,603,000
Other long-tern obligations 60,000 -
------------- -------------
Total liabilities 17,982,000 14,603,000
============= =============
Commitments and contingencies (Note 7)
Shareholders' equity
Series F Preferred Stock - $.01 par value; 7,000 shares authorized, 571.43
issued and outstanding as of December 31, 2007 and 2006, respectively
(liquidation preference at December 31, 2007: $571,000 plus $105,000 of
accrued dividends, at December 31, 2006: $571,000
plus accrued dividends of $62,000) - -
Common Stock - $.01 par value; 200,000,000 and 152,000,000 shares authorized,
134,268,034 and 134,484,854 shares issued and 132,757,301 and 130,484,854
shares outstanding as of December 31, 2007 and 2006, respectively 1,328,000 1,305,000
Treasury Stock (1,430,000) -
Additional paid-in capital 158,965,000 152,519,000
Accumulated deficit (131,826,000) (115,997,000)
------------- -------------
Total shareholders' equity 27,037,000 37,827,000
------------- -------------
Total liabilities and shareholders' equity $ 45,019,000 $ 52,430,000
============= =============
The accompanying notes are an integral part of these financial statements.
F-2
Bluefly, Inc.
Statements of Operations
Years Ended December 31, 2007, 2006 and 2005
(dollars Rounded to the nearest thousand)
--------------------------------------------------------------------------------
2007 2006 2005
Net sales $ 91,493,000 $ 77,062,000 $58,811,000
Cost of sales 58,754,000 46,153,000 35,816,000
------------ ------------ -----------
Gross profit 32,739,000 30,909,000 22,995,000
Marketing expenses 16,063,000 14,196,000 6,961,000
Selling and fulfillment expenses 18,898,000 15,808,000 12,880,000
General and administrative expenses 13,848,000 13,001,000 6,299,000
------------ ------------ -----------
Total operating expenses 48,809,000 43,005,000 26,140,000
------------ ------------ -----------
Operating loss (16,070,000) (12,096,000) (3,145,000)
Interest expense (260,000) (599,000) (856,000)
Interest income 501,000 502,000 181,000
------------ ------------ -----------
Net loss (15,829,000) (12,193,000) (3,820,000)
------------ ------------ -----------
Preferred stock dividends (44,000) (2,252,000) (4,958,000)
Deemed dividend related to beneficial conversion feature
on Series F Preferred Stock - (3,857,000) -
------------ ------------ -----------
Net loss available to common shareholders $(15,873,000) $(18,302,000) $(8,778,000)
============ ============ ===========
Basic and diluted loss per common share $ (0.12) $ (0.23) $ (0.54)
============ ============ ===========
Weighted average number of shares outstanding used in
calculating basic and diluted loss per common share 130,911,295 80,170,532 16,153,020
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-3
Bluefly, Inc.
Statements of Changes in Shareholders' Equity
Years Ended December 31, 2007, 2006 and 2005
(dollars rounded to the nearest thousand)
--------------------------------------------------------------------------------
Preferred Stock Common Stock
$.01 Par Value $.01 Par Value
---------------------------- --------------------------
Number of Number of
Shares Amount Shares Amount
------------- ---------- ------------ -----------
Balance at January 1, 2005 9,358,550 94,000 15,241,756 $ 152,000
------------- ---------- ------------ -----------
Sale of Series F Preferred Stock ($1,000 per share
net of expenses of $249,000) 7,000 - - -
Shares Of Series D Preferred Stock
Converted into Common Stock (823) - 1,454,645 15,000
Shares Of Series F Preferred Stock
Converted into Common Stock (1,720) - 765,481 8,000
Expense recognized in connection with Issuance of Options - - - -
Exercise of Employee Options - - 1,597,284 16,000
Net Loss - - - -
------------- ---------- ------------ -----------
Balance at December 31, 2005 9,363,007 94,000 19,059,166 $ 191,000
------------- ---------- ------------ -----------
Conversion of Preferred Stock (9,362,436) (94,000) 48,545,527 485,000
Stock based compensation - - - -
Sale of Common Stock, net of issuance expenses
of approximately $2.0 million - - 60,975,610 610,000
Issuance of Common Stock to Placement Agent - - 1,000,000 10,000
Warrants Issued to Third-Party - - - -
Dividends Paid to Related Party Shareholders - - - -
Deemed Dividends related to beneficial conversion on
Series F Preferred Stock - - - -
Exercise of Employee Options - - 43,330 -
Issuance of Restricted Stock - - 861,221 9,000
Net Loss - - - -
------------- ---------- ------------ -----------
Balance at December 31, 2006 571 - 130,484,854 $1,305,000
------------- ---------- ------------ -----------
Stock based compensation - - (29,678) -
Issuance of Restricted Stock - - 426,192 4,000
Delivery of Restricted Stock Units - - 1,846,012 19,000
Purchase of Treasury Stock - - - -
Exercise of Employee Options - - 28,061 -
Reversal of legal expenses related to June 2006 financing - - - -
Exercise of Related Party Warrant - - 1,860 -
Net Loss - - - -
------------- ---------- ------------ -----------
Balance at December 31, 2007 571 - 132,757,301 $1,328,000
------------- ---------- ------------ -----------
Treasury Stock
------------------------- Additional Total
Number of Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
----------- ----------- ------------ ------------- ------------
Balance at January 1, 2005 - $ - $107,270,000 $ (96,127,000) $ 11,389,000
----------- ----------- ------------ ------------- ------------
Sale of Series F Preferred Stock ($1,000 per share
net of expenses of $249,000) - - 6,751,000 - 6,751,000
Shares Of Series D Preferred Stock
Converted into Common Stock - - (15,000) - -
Shares Of Series F Preferred Stock
Converted into Common Stock - - (8,000) - -
Expense recognized in connection with Issuance of Options - - 41,000 - 41,000
Exercise of Employee Options - - 1,488,000 - 1,504,000
Net Loss - - - (3,820,000) (3,820,000)
----------- ----------- ------------ ------------- ------------
Balance at December 31, 2005 - $ - $115,527,000 $ (99,947,000) $ 15,865,000
----------- ----------- ------------ ------------- ------------
Conversion of Preferred Stock - - (391,000) - -
Stock based compensation - - 4,454,000 - 4,454,000
Sale of Common Stock, net of issuance expenses
of approximately $2.0 million - - 47,420,000 - 48,030,000
Issuance of Common Stock to Placement Agent - - 1,070,000 - 1,080,000
Warrants Issued to Third-Party - - 67,000 - 67,000
Dividends Paid to Related Party Shareholders - - (19,512,000) - (19,512,000)
Deemed Dividends related to beneficial conversion on
Series F Preferred Stock - - 3,857,000 (3,857,000) -
Exercise of Employee Options - - 36,000 - 36,000
Issuance of Restricted Stock - - (9,000) - -
Net Loss - - - (12,193,000) (12,193,000)
----------- ----------- ------------ ------------- ------------
Balance at December 31, 2006 - $ - $152,519,000 $(115,997,000) $ 37,827,000
----------- ----------- ------------ ------------- ------------
Stock based compensation - - 6,194,000 - 6,194,000
Issuance of Restricted Stock - - (4,000) - -
Delivery of Restricted Stock Units - - (19,000) - -
Purchase of Treasury Stock 1,510,733 (1,430,000) - - (1,430,000)
Exercise of Employee Options - - 25,000 - 25,000
Reversal of legal expenses related to June 2006 financing - - 250,000 - 250,000
Exercise of Related Party Warrant - - - - -
Net Loss - - - (15,829,000) (15,829,000)
----------- ----------- ------------ ------------- ------------
Balance at December 31, 2007 1,510,733 $(1,430,000) $158,965,000 $(131,826,000) $ 27,037,000
----------- ----------- ------------ ------------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Bluefly, Inc.
Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
--------------------------------------------------------------------------------
2007 2006 2005
Cash flows from operating activities
Net loss $(15,829,000) $(12,193,000) $(3,820,000)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 1,726,000 1,532,000 1,259,000
Non-cash expense related to warrants issued to supplier - 153,000 347,000
Provision for returns (840,000) 1,636,000 1,233,000
Bad debt expense 669,000 643,000 270,000
Reserve for inventory obsolesence 2,735,000 1,000,000 659,000
Stock based compensation 6,194,000 4,454,000 41,000
Warrant issued to consultant - 67,000 -
Changes in operating assets and liabilities
(Increase) decrease in
Inventories (7,038,000) (8,449,000) (4,941,000)
Accounts receivable (52,000) (1,645,000) (778,000)
Other current assets (1,293,000) (134,000) 554,000
Prepaid expenses (114,000) 443,000 (1,020,000)
Other assets - - (187,000)
(Decrease) increase in:
Accounts payable 3,698,000 (840,000) 1,472,000
Accrued expenses and other liabilities 1,839,000 1,932,000 (171,000)
Interest payable to related party shareholders - (1,217,000) 559,000
Deferred revenue 376,000 1,046,000 87,000
------------ ------------ -----------
Net cash used in operating activities (7,929,000) (11,572,000) (4,436,000)
------------ ------------ -----------
Cash flows from investing activities
Cash collateral in connection with Rosenthal Pledge Agreement - - 1,250,000
Purchase of property and equipment (4,110,000) (2,148,000) (2,194,000)
------------ ------------ -----------
Net cash used in investing activities (4,110,000) (2,148,000) (944,000)
------------ ------------ -----------
Cash flows from financing activities
Net proceeds from June 2006 financing - 48,030,000 -
Net proceeds from June 2005 financing - - 6,751,000
Purchase of Treasury Stock (1,430,000) - -
Net proceeds from exercise of Stock Options 25,000 36,000 1,504,000
Payments of capital lease obligation (14,000) (54,000) (152,000)
Dividends paid to related party shareholders - (19,512,000) -
Repayment of related party notes - (4,000,000) -
------------ ------------ -----------
Net cash provided by financing activities (1,419,000) 24,500,000 8,103,000
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents (13,458,000) 10,780,000 2,723,000
Cash and cash equivalents
Beginning of year 20,188,000 9,408,000 6,685,000
------------ ------------ -----------
End of year $ 6,730,000 $ 20,188,000 $ 9,408,000
============ ============ ===========
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 130,000 $ 1,658,000 $ 147,000
------------ ------------ -----------
Non-cash investing and financing activites
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 $ - $ 391,000 -
------------ ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
1. The Company
Bluefly, Inc., a Delaware corporation, (the "Company"), is a leading
Internet retailer that sells over 350 brands of designer apparel,
accessories and home products at discount prices. The Company's
e-commerce Web site ("Bluefly.com" or "Web site") was launched in
September 1998. The Company operates in one business segment that has no
operations outside the United States.
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 upon
its ability to establish profitable operations or raise additional
financing through public or private debt or equity financing, or other
sources of financing to fund operations. The Company believes that its
existing resources, together with working capital should be sufficient to
satisfy its cash requirements through at least December 31, 2008. The
Company may seek additional equity or debt financings to maximize the
growth of its business or if anticipated operating results are not
achieved. Subsequent to year end, the Company received a commitment for
financing in the amount of $3 million from two of its majority
shareholders and renewed its Credit Facility. See Note 12 for a complete
description.
On August 16, 2007, the Company was notified by The Nasdaq Stock Market,
Inc. ("Nasdaq") 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 was given a 180-day
grace period to regain compliance, which extended to February 11, 2008.
On February 13, 2008, the Company received a Nasdaq Staff Determination
Letter indicating that the Company's common stock had not regained
compliance with the $1 minimum bid price continued listing requirement
set forth in Marketplace Rule 4310(c)(4) during the 180-day extension
period provided the Company in August 2007. The Company would have been
entitled to an additional 180-day extension period had it met the initial
listing criteria of the Nasdaq Capital Market (other than the minimum bid
price requirement) as of the expiration of the initial 180-day period.
For a majority of the initial 180-day period, the Company met these
criteria and therefore expected that it would be granted the additional
extension. However, due to the decrease in the price of the Company's
common stock over the first few weeks of 2008, it did not meet the public
float requirement of Nasdaq's initial listing criteria as of the
determination date, and therefore was not granted the additional
extension. Accordingly, the Nasdaq Staff determined that the Company's
common stock was subject to delisting from the Nasdaq Capital Market. The
Company requested a hearing before a Nasdaq Listing Qualifications Panel
to review the Staff Determination, and the delisting action was stayed
pending the issuance of a final decision by the Panel.
In advance of the hearing, on March 13, 2008, the Board of Directors
approved a 1-for-10 reverse stock split, which will be effective as of
April 3, 2008. Subsequently, the Company's common stock price per share
will increase to reflect the 1-for-10 reverse stock split.
Although the Company has not received a formal decision from the Nasdaq
Listing Qualifications Panel, the Company expects that it will be
provided with a short grace period to regain compliance with the minimum
bid price requirement following the effectiveness of the reverse stock
split. In order to regain compliance with the minimum bid price
requirement, the Company's common stock would need to close at or above
$1 for 10 consecutive business days following the reverse stock split.
F-6
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
The Company has not retroactively restated its results and accordingly
all amounts presented herein are on a pre-split basis.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting
Bulletin No. 104 "Revenue Recognition" ("SAB 104") 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 tax. 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 is 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" ("EITF No. 00-10").
Provisions for Sales Returns and Doubtful Accounts
The Company generally permits returns for any reason within 90 days of
the sale. The Company performs credit card authorizations and checks
the verifications of its customers prior to shipment of merchandise.
Accordingly, the Company establishes a reserve for estimated future
sales returns and allowance for doubtful accounts at the time of
shipment based primarily on historical data. Accounts receivable is
presented on the consolidated balance sheet net of the allowance for
doubtful accounts. As of December 31, 2007 and 2006, the allowance for
doubtful accounts was $106,000 and $397,000, respectively, and the
allowance for sales returns was $4,204,000 and $5,043,000, respectively.
Deferred revenue, which consists primarily of goods shipped to customers
but not yet received and customer credits, totaled approximately
$3,206,000 and $2,830,000 as of December 31, 2007 and 2006, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents.
Inventories
Inventories, which consist of finished goods, are stated at the lower of
cost or market. Cost is determined by the first-in, first-out ("FIFO")
method. The Company reviews its inventory levels in order to identify
slow-moving merchandise and establishes a reserve for such merchandise.
Inventory reserves are established based on historical data and
management's best estimate of excess inventory. Inventory may be marked
down below cost if management determines that the
F-7
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
inventory stock will not sell at its currently marked price. Inventory
is presented net of reserves on the consolidated balance sheet.
As of December 31, 2007 and 2006, inventories, net consists of the
following:
2007 2006
Inventory on hand $30,146,000 $23,150,000
Inventory to be received due to returns 2,032,000 2,094,000
Inventory reserves (3,686,000) (1,055,000)
----------- -----------
Total inventories, net $28,492,000 $24,189,000
=========== ===========
Property and Equipment
Property and equipment are stated at cost net of depreciation. Equipment
and software are depreciated on a straight-line basis over two to seven
years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the lease. Lease amortization is
included in depreciation expense. Maintenance and repairs are expensed
as incurred.
Certain equipment held under capital leases is classified as property and
equipment and amortized using the straight-line method over the lease
terms and the related obligations are recorded as liabilities.
Web Site Development Costs
In September 2006, the Company entered into a Master License Agreement
(the "Master License Agreement") with a service provider, pursuant to
which the Company will license certain technology to be used as a
platform for future versions of the Company's Web site. The service
provider will provide certain support and consulting services in
connection with this project. Beginning in January 2007, the Company
began the process of developing an improved version of its Web site based
on the new software. In connection with this Master License Agreement,
the Company has spent $3,633,000. The entire balance is being capitalized
until put into service.
Costs related to the upgrade and development of the Web Site are
accounted for in accordance with EITF Issue No. 00-02 "Accounting for
Website Development Costs", and to the extent they are capitalized, are
amortized over 36 months.
Long-Lived Assets
The Company's policy is to evaluate long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. This evaluation
is based on a number of factors, including expectations for operating
income and undiscounted cash flows that will result from the use of such
assets. The Company has not identified any such impairment of assets.
Income Taxes
The Company recognizes deferred income tax assets and liabilities on the
differences between the financial statement and tax bases of assets and
liabilities using enacted statutory tax 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 includes the enactment date. In
F-8
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
addition, valuation allowances are established when it is more likely
than not that deferred tax assets will not be realized.
Effective January 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") -- Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 prescribes a comprehensive model for the manner in
which a company should recognize, measure, present and disclose in its
financial statements all material uncertain tax positions that the
Company has taken or expects to take on a tax return. As of the date of
adoption, there were no tax positions for which it is reasonably possible
that the total amounts of unrecognized tax benefits will significantly
increase or decrease within twelve months from the date of adoption of
FIN 48 or from December 31, 2007. As of December 31, 2007, the only tax
jurisdiction to which the Company is subject is the United States. Open
tax years relate to years in which unused net operating losses were
generated. Upon the adoption of FIN 48, the Company's open tax years
extend back to 1998. In the event that the Company concludes that it is
subject to interest and/or penalties arising form uncertain tax
positions, the Company will present interest and penalties as a component
of income taxes. No amounts of interest or penalties were recognized in
the Company's Statement of Operations or Balance Sheet upon adoption of
FIN 48 or as of and for the year ended December 31, 2007.
Stock-Based Compensation
The Company's Board of Directors has adopted three stock based employee
compensation plans, one in April 2005, one in July 2000 and the other in
May 1997 (collectively the "Plans"), which are described more fully in
Note 8. The Plans, which provide for the granting of restricted stock,
deferred stock unit awards and stock options, and other equity and cash
awards, 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. Vesting term for restricted stock generally range from one
quarter to one year, while deferred stock unit awards vest quarterly over
one to three years. Options are granted in terms not to exceed ten years
and become exercisable as specified when the option is granted and
vesting terms 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
F-9
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
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
years ended December 31, 2007 and 2006 was $6,194,000 and $4,454,000,
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 an effect on full
year 2006 reported amounts relative to amounts that would have been
reported using the intrinsic value method under previous accounting. As a
result of adopting SFAS No. 123(R), the Company's operating loss and net
loss for the year ended December 31, 2006 was $4,424,000 higher than if
it had continued to account for share-based compensation under APB No.
25. Basic and diluted loss per share for the year ended December 31, 2006
would have been $0.06 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 year ended
December 31, 2005 as if the Company had applied the fair value
recognition provisions for stock-based employee compensation of SFAS No.
123(R). For the year ended December 31, 2005 compensation expense of
$30,000 was recorded in connection with certain options issued below
market value to the Company's Chief Executive Officer in accordance with
the terms of her employment agreement. Except for these options, no
compensation expense has been recorded for the year ended December 31,
2005 in connection with stock option grants to employees, because the
exercise price of employee stock options equals or exceeds the market
price of the underlying stock on the date of grant. 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):
F-10
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
Year Ended
December 31,
2005
Net loss, as reported (3,820,000)
Deduct: total stock-based employee
compensation expense determined
under fair value based methods for all
awards, net of related tax effects (2,731,000)
Add: Stock-based employee compensation
expense included in reported net loss 30,000
Adjusted for Preferred Stock Dividends (4,958,000)
-----------
Pro forma net loss available to
common shareholders (11,479,000)
Loss per share
Basic and diluted, as reported ($0.54)
Basic and diluted, pro forma ($0.71)
Net Loss Per Share
The Company calculated net loss per share in accordance with 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.
For purposes of calculating basic and diluted loss per share, the
Company presents the amount of dividends earned but unpaid on the
face of the statement of operations.
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, the following shares of Common Stock
issuable pursuant to options, warrants, Preferred Stock and
Convertible Notes were not included in the computation of diluted
earnings per share because the result of such inclusion would be
antidilutive:
------------------------------------------
Common Stock Issuable
------------------------------------------ Exercise
2007 2006 2005 Prices
Security
Options 3,428,777 5,417,116 8,038,528 $0.80 - $2.73
Restricted Stock Awards 7,543,963(2) 10,723,488(2) - n/a
Warrants 1,214,249 1,695,893 1,883,393 $0.78 - $3.96
Preferred stock 758,620(1) 758,620(1) 44,516,119
(1) At December 31, 2007 and 2006, there were 571 shares of Series F
Convertible Preferred Stock outstanding that are convertible into
approximately 696,341 shares of Common Stock (excluding dividends).
(2) Includes both Restricted Stock and Restricted Stock Units
As discussed in Note 12 below, in March 2008, the Company announced that
it would effect a reverse stock split (the "Reverse Stock Split"). In
connection with the Reverse Stock Split holders of the Company's Common
Stock would receive one share of Common Stock for every 10 shares of
Common Stock that they held as of April 3, 2008, the record date.
F-11
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
Upon effectiveness of the Reverse Stock Split, the net loss per share on
a proforma basis would be as follows:
2007 (Unaudited) 2006 (Unaudited) 2005 (Unaudited)
net loss per share - as reported $(0.12) $(0.23) $(0.54)
net loss per share - after split $(1.21) $(2.28) $(5.43)
Marketing Expenses
In addition to marketing salaries, marketing expenses consist primarily
of online advertising, print and media advertising, costs associated with
sweepstakes, direct mail campaigns as well as the related external
production costs. In accordance with SOP 93-7 "Reporting on Advertising
Costs," the costs associated with online and print advertising are
expensed as incurred, with the exception of production costs related to
print and television advertising which are expensed entirely the first
time the advertising takes place. The costs associated with direct mail
campaigns are capitalized and charged to expense over the expected future
revenue stream. There were no amounts associated with direct mail
campaigns capitalized at December 31, 2007 and 2006. For the year ended
December 31, 2007, 2006 and 2005 marketing spend (excluding staff related
costs) were, $14.9 million, $13.0 million and $6.7 million, respectively.
Fulfillment Expenses
The Company utilizes a third party to perform all of its order
fulfillment including warehousing, administrative support, returns
processing and receiving labor. For the years ended December 31, 2007,
2006 and 2005, fulfillment expenses totaled $4,390,000, $4,409,000 and
$3,642,000, respectively.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, other assets, accounts payable, and accrued
liabilities, approximate fair value due to their short maturities.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations"
("SFAS 141R"), which requires the acquiring entity in a business
combination to record all assets acquired and liabilities assumed at
their respective acquisition-date fair values, changes the recognition of
assets acquired and liabilities assumed arising from contingencies,
changes the recognition and measurement of contingent consideration, and
requires the expensing of acquisition-related costs as incurred. SFAS
141R also requires additional disclosure of information surrounding a
business combination, such that users of the entity's financial
statements can fully understand the nature and financial impact of the
business combination. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after December 15,
2008. The provisions of SFAS 141R will only impact the Company if it is
party to a business combination after the pronouncement has been adopted.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS No. 157"), which defines the fair value, establishes
a framework for measuring fair value and expands disclosure 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. Relative to SFAS No. 157, FASB Staff
Position (FSP) 157-b delays the effective date of SFAS No. 157 for all
non-financial assets and liabilities, except those that are recognized or
F-12
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
disclosed at fair value in the financial statements on a recurring basis.
The Company is evaluating the impact that this statement will have on its
consolidated financial statements.
Effective January 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 prescribes a comprehensive model for the manner in
which a company should recognize, measure, present and disclose in its
financial statements all material uncertain tax positions that the
Company has taken or expects to take on a tax return. As of the date of
adoption, there were no tax positions for which it is reasonably possible
that the total amounts of unrecognized tax benefits will significantly
increase or decrease within twelve months from the date of adoption of
FIN 48 or from December 31, 2007. As of December 31, 2007, the only tax
jurisdiction to which the Company is subject is the United States. Open
tax years relate to years in which unused net operating losses were
generated. Thus upon adoptions of FIN 48, the Company's open tax years
extend back to 1998. In the event that the Company concludes that it is
subject to interest and/or penalties arising from uncertain tax
positions, the Company will present interest and penalties as a component
of income taxes. No amounts of interest or penalties were recognized in
the Company's Statement of Operations or Balance Sheet upon adoption of
FIN 48 or as of and for the year ended December 31, 2007.
Concentration
The Company acquired approximately 38.3% and 27.5% of its inventory from
one supplier for fiscal 2007 and 2006, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates and assumptions
include the adequacy of the allowances for sales returns, recoverability
of inventories, useful lives of property and equipment, realization of
deferred tax assets, and the calculations related to stock-based
compensation. Actual results could differ from those estimates.
3. Property and Equipment
As of December 31, 2007 and 2006, property and equipment consists of the
following:
2007 2006
Leasehold improvements $ 1,853,000 $ 1,814,000
Office equipment 627,000 594,000
Computer equipment and software 13,138,000 9,101,000
------------ -----------
15,618,000 11,509,000
Less: Accumulated depreciation (9,599,000) (7,936,000)
------------ -----------
$ 6,019,000 $ 3,573,000
============ ===========
Depreciation and amortization of property and equipment was
approximately $1,639,000, $1,419,000 and $1,145,000, for the years ended
December 31, 2007, 2006 and 2005, respectively.
F-13
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
4. Prepaid Expenses and Other Current Assets
As of December 31, 2007 and 2006, prepaid expenses and other current
assets consist of the following:
2007 2006
Prepaid expenses $ 777,000 $ 341,000
Prepaid inventory 294,000 616,000
Other current assets 416,000 553,000
---------- ----------
$1,487,000 $1,510,000
========== ==========
5. Accrued Expenses and Other Current Liabilities
As of December 31, 2007 and 2006, accrued expenses and other current
liabilities consist of the following:
2007 2006
Salary, vacation and bonus accrual $ 802,000 $ 763,000
Accrued media expenses 977,000 667,000
Other accrued expenses 273,000 478,000
---------- ----------
$2,052,000 $1,908,000
========== ==========
6. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities as of December 31, are summarized as follows:
2007 2006
Deferred tax assets
Net operating losses $ 34,765,000 $ 33,437,000
Depreciation and amortization 213,000 285,000
Accounts receivable and inventory reserves 374,000 587,000
Other accruals 304,000 313,000
Stock options 2,146,000 (2,201,000)
Returns reserve 1,641,000 2,038,000
------------ ------------
39,443,000 34,459,000
Valuation Allowance (39,443,000) (34,459,000)
------------ ------------
Net deferred tax asset (liability) $ - $ -
============ ============
The Company is in an accumulated loss position for both financial and
income tax reporting purposes. The Company has U.S. Federal net
operating loss carryforwards of approximately
F-14
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
$89,043,000 at December 31, 2007 which have expiration dates from 2018
through 2027. Pursuant to Section 382 of the Internal Revenue Code, the
usage of these net operating loss carryforwards may be limited due to
changes in ownership that have occurred or that may occur in the future.
The Company has not yet determined the impact, if any, that changes in
ownership have had on net operating loss carryforwards. The Company
provided a full valuation allowance on the entire deferred tax asset
balance to reflect the uncertainty regarding the realizability of these
assets due to operating losses incurred since inception.
The Company's effective tax rate differs from the U.S. Federal Statutory
income tax rate of 34% as follows:
2007 2006 2005
Statutory federal income tax rate (34.00)% (35.00)% (35.00)%
State tax benefit, net of federal taxes (5.04)% (5.41)% (5.41)%
Other 0.93% 2.23% 0.27%
Valuation allowance on deferred tax asset 38.11% 38.18% 40.14%
------ ------- ------
Effective tax rate 0.00% 0.00% 0.00%
====== ======= ======
7. Commitments and Contingencies
Employment Contracts
The Company has employment agreements with certain of its executive
officers. These employment agreements have terms expiring through July
2009. As of December 31, 2007, the Company's aggregate cash commitment
for future base salary under these employment contracts is:
2008 $1,440,000
2009 425,000
2010 225,000
----------
$2,090,000
==========
Leases
The Company leases space under operating leases that expire at various
dates through 2010. Future minimum lease payments under these operating
leases, excluding utilities, that have initial or remaining non-
cancelable terms in excess of one year are as follows:
Operating
Leases
2008 $449,000
2009 342,000
2010 145,000
Thereafter -
--------
Total minimum payments $936,000
========
F-15
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
Rent expense (including amounts related to commercial rent tax)
aggregated approximately $500,000, $566,000 and $450,000 for the years
ended December 31, 2007, 2006, and 2005, respectively.
Marketing Commitments
As of December 31, 2007, the Company has advertising and marketing
commitments in connection with email services, agency fees and costs in
connection with a national ad campaign of approximately $2,172,000
through December 31, 2008.
Legal Proceedings
The Company is, from time to time, involved in litigation incidental to
the conduct of its business. However, the Company is not party to any
lawsuit or proceeding which, in the opinion of management is likely to
have a material adverse effect on its financial condition.
8. Shareholders' Equity
Authorized Shares
The Company is incorporated in Delaware and has 200,000,000 authorized
shares of common stock, $.01 par value per share ("Common Stock"), and
25,000,000 authorized shares of preferred stock, $.01 par value per
share (the "Preferred Stock"). The Preferred Stock is designated as
follows: 500,000 shares of Series A Convertible Preferred Stock (the
"Series A Preferred Stock"); 9,000,000 shares of Series B Convertible
Preferred Stock (the "Series B Preferred Stock"); 3,500 shares of
Series C Convertible Preferred Stock (the "Series C Preferred Stock");
2,100 shares of Series 2002 Convertible Preferred Stock (the "Series 2002
Convertible Preferred Stock"); 7,150 shares of Series D Convertible
Preferred Stock (the "Series D Preferred Stock"); 1,000 shares of Series
E Convertible Preferred Stock (the "Series E Preferred Stock"); 7,000
shares of Series F Convertible Preferred Stock (the "Series F Preferred
Stock"); and 15,479,250 shares undesignated and available for issuance.
Preferred Stock
Outstanding Shares
The Company's currently has 571.43 shares of Series F Preferred Stock
outstanding with a stated value of approximately $571,430. In June 2006,
all of the Series A, B, C, D and E shares of Preferred Stock, as well as
a significant portion of the Series F Preferred Stock, were converted in
to shares of Common Stock, as more fully discussed in the "June 2006
Financing" below.
Dividends
Each share of Series F Preferred Stock bears a cumulative compounding
dividend, payable upon conversion in cash or Common Stock, at the
Company's option, at the rate of 7% per annum.
Ranking
The Series F Preferred Stock ranks senior to the Common Stock, with
respect to the payment of distributions on liquidation, dissolution or
winding up of the Company and with respect to the payment of dividends.
Conversion
The Series F Preferred Stock is convertible into Common Stock at the
rate of $2.32 in stated value per share of Common Stock.
F-16
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
The Series F Preferred Stock contains anti-dilution provisions pursuant
to which, subject to certain exceptions, in the event that the Company
issues or sells its Common Stock or new securities convertible into its
Common Stock in the future for less than the conversion price of the
Series F Preferred Stock, the conversion price of the Series F preferred
stock would be decreased to the price at which such Common Stock or other
new securities are sold. As more fully described below, the conversion
price of the Series F Preferred Stock was reduced from $2.32 per share to
$0.82 per share in connection with the June 2006 Financing as a result of
these anti-dilution provisions.
Voting Rights
The Series F Preferred Stock votes with the Common Stock on an as-
converted basis.
Redemption
The Company is entitled to redeem the shares of Series F Preferred Stock
for cash at a price equal to the stated value, plus accrued and unpaid
dividends.
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
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 placement agent for the Private
Placement 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 proceeds were 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.
F-17
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
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.
In connection with the June 2006 Private Placement, $603,928 of
cumulative unpaid dividends was settled through the issuance of 794,642
shares of Common Shares. These shares were computed by using the
conversion price of the Series D Preferred Stock ($0.76) as required by
the terms of the Private Placement.
In connection with the June 2006 Financing, the Company repaid the
Convertible Promissory Notes issued to Soros in July and October 2003
(the "Notes"). The Company paid $4,000,000 of principal and $1,488,376
of interest. The Notes were set to mature in May 2007 and bore interest
at 12% per annum.
June 2005 Financing
The Company raised over $7,000,000 in equity financing in June 2005. The
financing was effected through a private placement (the "June 2005
Financing") that closed on June 24, 2005. The Company raised $7,075,431
through the sale of 7,000 shares of newly designated Series F Preferred
Stock for an aggregate purchase price of $7,000,000 and warrants to
purchase an additional 603,448 shares of its common stock at an exercise
price of $2.87 per share. The warrants have an expiration date of June
24, 2008. The aggregate purchase price for the warrants was $75,431, or
$0.125 per warrant, and all of the warrants were purchased by the New
Investors described below. The investors participating in the June 2005
Financing included eight private equity funds that had not previously
participated in the Company's financing transactions (the "New
Investors"), and two private equity funds affiliated with Soros. In
connection with the June 2005 Financing, the New Investors also purchased
from Soros previously issued shares of the Company's Series D Preferred
Stock with an aggregate liquidation preference and accrued dividends of
$3,000,000.
Warrants to Purchase Common Stock
Warrants Issued to Investors
The Company used the Black-Scholes option pricing method (assumption:
volatility 79%, risk free rate 3.86% one and a half year expected life
and zero dividend yield) to calculate the value of the 603,448 warrants
issued in connection with the June 2005 Financing. Using those
assumptions a value of approximately $423,000 was assigned to the
warrant. In accordance with EITF 00-27, Application of EITF Issue No.
98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" the Company
evaluated the total value ascribed to the warrants under Black-Scholes
and compared that to the total proceeds raised. In connection with that
the Company recognized a beneficial conversion feature of approximately
$87,000.
F-18
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
Warrants to Soros
The Company has issued warrants to Soros in connection with past and
recent financings as well as in connection with the Company's previous
Loan Facility (which has since been refinanced). Warrants issued in
connection with the Company's Loan Facility are included in the table
below and are described more fully in Note 10.
Warrants Issued to Consultant
In February 2006, the Company issued a warrant to a consultant in
exchange for investor relations services. The Company used the Black-
Scholes option pricing method (assumption: volatility 118%, risk free
rate 4.49%, five years expected life and zero dividend yield) to
calculate the value of the 100,000 warrants issued in connection with a
warrant issued to a consultant. Using those assumptions a value of
approximately $67,000 was assigned to the warrant and charged to general
and administrative expenses. These warrants expire in February 2011.
The following table represents warrants issued to purchase Common Stock
as of December 31, 2007:
Number of
Party Warrants Exercise Price Range Expiration Dates
Investors 989,249 $2.87 - $3.96 June 2008 - January 2009
Soros 125,000 $0.78 - $0.88 September 2011 - March 2013
Consultant 100,000 $1.00 February 2011
---------
1,214,249
=========
Stock-Based Compensation Plans
The Company's Board of Directors has adopted three stock based employee
compensation plans. The Plans, which provide for the granting of
restricted stock, restricted stock units, stock options and other equity
and cash awards, 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.
In November 2006, the Company entered into three year employment
contracts with its Chief Executive Officer ("CEO") and then Chief
Financial Officer ("CFO"). In connection with these agreements, the CEO
and CFO were entitled to, among other things, (i) restricted stock awards
under our Plans for a total of 861,221 shares of our Common Stock, (which
vested in full on January 1, 2007) plus cash bonuses of $517,890
(intended to compensate them for the income taxes payable on such
restricted stock awards) in exchange for the forfeiting of their right to
certain fully vested and out-of-the-money stock options that would have
been exercisable to purchase an aggregate of 2,518,458 shares of Common
Stock; (ii) deferred stock unit awards under the Plan for 172,741
underlying shares of Common Stock (which vest quarterly over a two year
period), in exchange for the forfeiting of their right to certain
unvested and out-of-the-money stock options that would have been
exercisable to purchase an aggregate of 326,454 shares of Common Stock;
and (iii) subject to the approval of the Company's stockholders of
certain amendments to the Plans, deferred stock unit awards representing
8,264,524 shares of Common Stock with one-third of such deferred stock
units vesting quarterly, in equal amounts, over a twelve month period,
one-third vesting quarterly, in equal amounts, over a twenty-four month
period, and one-third vesting quarterly, in equal amounts, over a thirty-
six month period. The vesting period for all awards
F-19
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
commences on October 1, 2006. In May 2007 the Company's stockholders
approved these amendments to the Plans.
The Company recorded the exchange of the options for restricted stock and
deferred stock unit awards as replacement awards, and therefore under
SFAS No. 123R treated the exchange as a modification of the original
option grant and recorded incremental compensation cost measured as the
excess of the fair value of the replacement awards, measured immediately
after modification, over the fair value of the cancelled award, measured
immediately before modification, at the modification date. Total
incremental compensation expense was approximately $507,000. In
connection with these new awards, the Company recognized an expense of
$9.3 million over three years. Approximately $4.5 million and $2.1
million of this expense was recognized in 2007 and 2006, respectively.
In connection with these grants described above, the Company has given
the employee holders of the shares of Restricted Stock and Restricted
Stock Units the ability to settle taxes due upon delivery of the shares
on a net share basis. Shares used to satisfy taxes are then charged to
Treasury Stock. During 2007, the Company acquired 1,510,733 shares of
Treasury Stock.
Restricted Stock and Deferred Stock Unit Awards
The following table is a summary of activity related to restricted stock
and deferred stock units grants for key employees at December 31, 2007:
Weighted Weighted
Average Average
Grant Deferred Grant
Restricted Date Fair Stock Date Fair
Stock Value Unit Awards Value
Balance at January 1, 2006 -- --
Shares/Units Granted 861,221 $0.95 9,862,267 $0.94
Shares/Units Forfeited -- --
Balance at December 31, 2006 861,221 $0.95 9,862,267 $0.94
Shares/Units Granted 426,192 $1.26 544,405 $1.22
Shares/Units Forfeited (29,678) $1.27 (29,381) $1.27
Shares/Units Restriction Lapses (861,221) $0.95 (3,229,842) $0.94
Balance at December 31, 2007 396,514 $1.26 7,147,449 $0.96
Aggregate Grant Date Fair Value $499,608 $6,861,551
Vesting Service Period of Shares Granted 1 year 12 - 36
months
Number of shares/units vested during
December 31, 2006 -- --
Number of shares/units unvested at
December 31, 2006 861,221 9,862,267
Number of shares/units vested during
December 31, 2007 861,221 3,229,842
Number of shares/units unvested at
December 31, 2007 396,514 7,147,449
F-20
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
For the years ended December 31, 2007 and 2006 the Company recognized
expense of approximately $5,678,000 and $2,159,000 in connection with
these awards.
As of December 31, 2007 the total compensation cost related to non-vested
restricted stock and deferred stock units not yet recognized was $3.8
million.
Stock Options
The following table summarizes the Company's stock option activity:
Number Weighted
of Average
Shares Exercise Price
Balance at January 1, 2005 9,813,379 $2.28
Options granted 2,039,000 $1.39
Options canceled (2,216,567) $3.56
Options exercised (1,597,284) $0.94
----------
Balance at December 31, 2005 8,038,528 $1.97
----------
Options granted 521,000 $0.96
Options canceled (3,099,082) $2.32
Options exercised (43,330) $0.82
----------
Balance at December 31, 2006 5,417,116 $1.68
----------
Options granted 60,000 $0.97
Options canceled (2,020,278) $2.76
Options exercised (28,061) $0.89
----------
Balance at December 31, 2007 3,428,777 $1.06
----------
Vested at December 31, 2005 4,969,929 $2.15
Vested at December 31, 2006 3,682,877 $1.83
Vested at December 31, 2007 2,871,126 $1.04
The stock options are exercisable in different periods through 2017.
Additional information with respect to the outstanding options as of
December 31, 2007, is as follows:
F-21
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------- ----------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Contractual Life Price Exercisable Price
$0.51 - $1.00 2,006,331 5.5 Years $0.91 1,842,691 $0.91
$1.01 - $1.50 1,373,644 7.4 Years $1.24 992,177 $1.25
$1.51 - $2.00 41,302 4.3 Years $1.66 27,758 $1.64
$2.01 - $2.50 3,750 3.1 Years $2.16 3,750 $2.16
$2.51 - $3.00 3,750 2.9 Years $2.73 3,750 $2.73
$0.51 - $3.00 3,428,777 6.2 Years $1.06 2,870,126 $1.04
The total fair value of the 2,545,143 options that vested during the year
was approximately $2,638,000. At December 31, 2007, the aggregate
intrinsic value of the fully vested options was $0 and the weighted
average remaining contractual life of the options was 5.9 years. The
Company has not capitalized any compensation cost, or modified any of its
stock option grants for the years ended December 31, 2007 and 2006,
except for those described in connection with the Offer to Exchange.
Other selected information is as follows:
2007 2006 2005
Aggregate intrinsic value of outstanding options $0 $881,000 $399,000
Aggregate intrinsic value of options exercised $7,000 $7,000 $1,088,000
Weighted average fair value of options granted $0.97 $0.79 $1.24
As of December 31, 2007, the total compensation cost related to non-
vested stock option awards not yet recognized was $520,000. Total
compensation cost is expected to be recognized over 1.3 years on a
weighted average basis.
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 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 for the year ended December 31, 2007, 2006 and 2005
respectively:
F-22
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------
2007 2006 2005
Risk-free interest rates 4.56% 4.65% 4.22%
Expected life (in years) 5.5 6 6
Dividend yield 0% 0% 0%
Expected volatility 94% 101% 138%
In January 2007, the Company commenced an exchange offer pursuant to
which it is offering to exchange certain outstanding stock options issued
to employees and non-employee directors for restricted stock awards
and/or deferred stock unit awards. See Note 9 below.
9. Offer to Exchange
In January 2007, the Company commenced an exchange offer (the "Offer")
pursuant to which it offered to exchange certain outstanding stock
options issued to employees and non-employee directors for restricted
stock awards and/or deferred stock unit awards.
Employees (other than the CEO and CFO, who already had exchanged certain
of their options pursuant to their employment agreements) and non-
employee directors who held stock options with an exercise price greater
than $1.50 were eligible to participate in the Offer. Eligible options
that were vested as of August 31, 2006 could be exchanged for restricted
stock awards, and eligible options that were not vested as of that date
could be exchanged for deferred stock unit awards. Both the restricted
stock awards and the deferred stock unit awards are subject to vesting
provisions. The number of restricted stock awards and/or deferred stock
unit awards issued in exchanged for an eligible option grant was
determined by the exchange ratio applicable to that particular option.
The Company had instituted the exchange offer because a considerable
number of its employees had held options that had exercise prices higher
than the current and recent trading prices of its common stock. The
purpose of the exchange offer was to promote the interests of the
Company's stockholders by strengthening its ability to motivate and
retain valued employees.
The exchange offer began on January 25, 2007 and ended on February 23,
2007. In connection with the Offer, an aggregate of 1,562,000 options
were tendered in exchange for an aggregate of 472,471 shares of
restricted stock and 394,405 shares of deferred stock unit awards. This
represented approximately 95% of the total options that were eligible for
exchange. The Company accounted for the exchange of Options for
restricted stock and deferred stock unit awards as replacement awards in
accordance with SFAS No. 123(R) and recognized an expense of $436,000 for
the year ended December 31, 2007.
In February, 2008, the Company delivered 268,572 shares of Restricted
Stock Issued in connection with this Offer.
10. Financing Agreement
In July 2005, the Company entered into a new three year revolving credit
facility ("Credit Facility") with Wells Fargo Retail Finance, LLC ("Wells
Fargo"). The Credit Facility refinanced the Company's previous credit
facility (the "Rosenthal Facility") with Rosenthal & Rosenthal, Inc.
F-23
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
("Rosenthal"). 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 all of the Company's assets. Historically, the
Credit Facility was also 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 no longer requires an
availability reserve (although it has the right under the Credit Facility
to establish reserves in the future, as it deems appropriate) so long as
the Company maintains a minimum cash balance of $5,000,000. Furthermore,
our Credit Facility prohibits us from paying cash dividends without the
consent of our lender.
Availability under the Credit Facility is determined by a formula that
considers a certain percentage of our inventory and a certain percentage
of 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 December 31, 2007, total availability under the
Credit Facility, was approximately $7,500,000 of which $3,700,000 was
committed, leaving approximately $3,800,000 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% for average excess
availability less than $3.0 million and the prime rate plus 0.50% or
LIBOR plus 2.50% for average excess availability greater than $3.0
million. 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 years ended December 31, 2007, 2006 and 2005 total interest
expense and fees related to the credit facilities totaled approximately
$130,000, $170,000 and $196,000, respectively.
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 it is
then in default under the Credit Facility. Subsequent to year end the
Credit Facility was Amended - See Note 12 below.
Soros Warrants in Connection with Loan Facility
Prior to April 2004, Soros guaranteed repayment of the Company's previous
Loan Facility (the "Soros Guarantee"). The Company issued warrants to
Soros in consideration for the establishment and continuance of the Soros
Guarantee as described below.
The following table represents the warrants issued to Soros in connection
with the Loan Facility:
Number of Date Exercise Expiration Assumptions Under
Warrants Issued Price Date Black-Scholes Reason
--------- ------ ----- ---- ---------------- ------
100,000 March 31, $0.88(1) September 11, Risk Free Rate - 4.86% As consideration for
2001 2011 Volatility - 117% Soros establishing
Term - 5 years the Soros Guarantee
25,000 March 17, $0.78(2) March 17, Risk Free Rate - 3.31% In consideration for
2003 2013 Volatility - 123% Soros extending the
Term - 4 years Soros Guarantee
until 11/15/2004
F-24
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
(1) represents the 20 day trailing average of the closing sale price of
the Company's Common Stock on the date of issuance
(2) represents the 10 day trailing average of the closing sale price of
the Company's Common Stock on the date of issuance
The Company accounted for the warrants in accordance with Accounting
Principles Board Opinion No. 14 ("APB No. 14") by valuing the warrants
using the Black-Scholes option pricing model and crediting additional
paid in capital. These amounts were amortized to interest expense over
the life of the Loan Facility.
11. Quarterly Results of Operations (Unaudited)
Amounts in thousands, except per share data:
Quarter Ended
------------------------------------------------------
2007 March 31 June 30 September 30 December 31
Net Sales $22,108 $21,608 $18,079 $29,698
------- ------- ------- -------
Gross Profit(2) $ 8,374 $ 8,463 $ 5,728 $10,174
------- ------- ------- -------
Net Loss(2) $(3,103) $(2,142) $(5,028) $(5,556)
------- ------- ------- -------
Preferred stock dividends $ (11) $ (11) $ (11) $ (11)
------- ------- ------- -------
Net loss available to common shareholders(2) $(3,114) $(2,153) $(5,039) $(5,567)
------- ------- ------- -------
Loss per common share - basic and diluted(2) $ (0.02) $ (0.02) $ (0.04) $ (0.04)
------- ------- ------- -------
Quarter Ended
------------------------------------------------------
2006 March 31 June 30 September 30 December 31
Net Sales $16,876 $16,793 $16,322 $27,071
------- ------- ------- -------
Gross Profit $ 6,839 $ 7,046 $ 6,111 $10,913
------- ------- ------- -------
Net Loss $(3,264) $(1,901) $(3,485) $(3,543)
------- ------- ------- -------
Preferred stock dividends $(1,231) $ (990) $ (16) $ (15)
------- ------- ------- -------
Net loss available to common shareholders $(4,495) $(6,748) $(3,501) $(3,558)
------- ------- ------- -------
Loss per common share - basic and diluted(1) $ (0.22) $ (0.17) $ (0.03) $ (0.03)
------- ------- ------- -------
(1) Weighted average shares increased to 80.2 million for the year ended
December 31, 2006 as a result of the June 2006 financing and the
conversion of the Company's preferred stock into common stock in
connection with the financing.
(2) Amount includes a write-off of approximately $1.5 million of
inventory recorded in the fourth quarter.
12. Subsequent Events
2008 Financing
In March 2008, the Company entered into an agreement (the "Commitment")
Soros and private funds associated with Maverick Capital, Ltd.
("Maverick") pursuant to which they agreed to provide up to $3 million of
debt financing to the Company, on a standby basis, during the next year,
provided that the
F-25
Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------
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 our 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 the 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 to the extent required by the NASDAQ
Capital Market) at the holder's option (a) into equity securities that
the Company might issue in any subsequent round of financing at a price
that was equal to the lowest price per share paid by any investor
in such subsequent round of financing or (b) into 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 note. In connection with the
Commitment, the Compnay issued warrants to Soros and Maverick to purchase
an aggregate of 525,002 shares of Common Stock at an exercise price equal
to the trailing 20-day average stock price on the date of grant.
Wells Fargo Amendment
On March 26, 2008, the Company amended its credit facility ("Credit
Facility") with Wells Fargo Retail Finance, LLC. ("Wells Fargo") to (i)
extend the term until July 26, 2011; (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 $3,333.33 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 calls for no revolving credit loans to be made
unless the full amount available pursuant to the Subordinated Notes
(described above) has been advanced to the Company and is outstanding.
Under the terms of a Subordination and Intercreditor Agreement, dated as
of March 26, 2008, Soros and Maverick have the right to purchase all of
the Company's obligations from Wells Fargo at anytime if the Company is
then in default under the Credit Facility. In connection with this
amendment, the Company paid Wells Fargo a $35,000 amendment fee.
Reverse Stock Split
In March 2008, the Company announced that it would effect a reverse stock
split (the "Reverse Stock Split") in order to regain compliance with the
minimum bid price requirement of the Nasdaq rules. In connection with the
Reverse Stock Split holders of the Company's Common Stock would receive
one share of Common Stock for every 10 shares of Common Stock that they
held as of April 3, 2008, the record date. The effective date of the
Reverse Stock Split is expected to be April 3, 2008.
Upon effectiveness of the Reverse Stock Split, the number of weighted
shares outstanding and the loss per share on a proforma basis would be as
follows:
Unaudited
--------------------------------------------------------------
December 31, 2007 December 31, 2006 December 31, 2005
Weighted Average Shares
Outstanding 13,091,129 8,017,053 1,615,302
Loss Per Share $(1.21) $(2.28) $(5.43)
F-26
Schedule II - Valuation and Qualifying Accounts
For the Three Years Ended December 31, 2007
-----------------------------------
Column A Column B Column C Column D Column E
-----------------------------------
(1) (2)
----------------------------------------------------------------------------------------------------------------------------------
Description Beginning Balance Charged to Costs Charged to other Deductions Balance end of Period
-------------------------------- at January 1, 2007 and Expenses Accounts ---------- December 31, 2007
-------------------------------------------------------- ---------------------
Allowance for Sales Returns (5,043,000) (59,107,000) - 59,946,000 (4,204,000)
Allowance for Doubtful Accounts (397,000) (669,000) - 960,000 (106,000)
Inventory Reserves (1,055,000) (2,735,000) - 104,000 (3,686,000)
Deferred Tax Valuation Allowance (34,459,000) (5,460,000) 476,000 - (39,443,000)
-----------------------------------
Column A Column B Column C Column D Column E
-----------------------------------
(1) (2)
----------------------------------------------------------------------------------------------------------------------------------
Description Beginning Balance Charged to Costs Charged to other Deductions Balance end of Period
-------------------------------- at January 1, 2006 and Expenses Accounts ---------- December 31, 2006
-------------------------------------------------------- ---------------------
Allowance for Sales Returns (3,407,000) (50,126,000) - 48,490,000 (5,043,000)
Allowance for Doubtful Accounts (78,000) (643,000) - 324,000 (397,000)
Inventory Reserves (782,000) (1,000,000) - 727,000 (1,055,000)
Deferred Tax Valuation Allowance (30,712,000) (4,656,000) 909,000 - (34,459,000)
-----------------------------------
Column A Column B Column C Column D Column E
-----------------------------------
(1) (2)
----------------------------------------------------------------------------------------------------------------------------------
Description Beginning Balance Charged to Costs Charged to other Deductions Balance end of Period
-------------------------------- at January 1, 2005 and Expenses Accounts ---------- December 31, 2005
-------------------------------------------------------- ---------------------
Allowance for Sales Returns (2,174,000) (34,820,000) - 33,587,000 (3,407,000)
Allowance for Doubtful Accounts (44,000) (270,000) - 236,000 (78,000)
Inventory Reserves (835,000) (659,000) - 712,000 (782,000)
Deferred Tax Valuation Allowance (28,738,000) (1,533,000) (441,000) - (30,712,000)
S-1