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EX-31.2 - BLUEFLY INC | k174797_ex31-2.htm |
EX-32.1 - BLUEFLY INC | k174797_ex32-1.htm |
EX-23.1 - BLUEFLY INC | k174797_ex23-1.htm |
EX-31.1 - BLUEFLY INC | k174797_ex31-1.htm |
EX-32.2 - BLUEFLY INC | k174797_ex32-2.htm |
EX-10.41 - BLUEFLY INC | k174797_ex10-41.htm |
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,
2009
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OR
o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from_________ to
__________
|
Commission
File Number 001-14498
BLUEFLY,
INC.
(Name
of registrant as specified in its charter)
Delaware
|
13-3612110
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification Number)
|
|
42
West 39th
Street, New York, NY
(Address
of principal executive offices)
|
10018
(Zip
Code)
|
Registrant’s telephone
number:(212) 944-8000
Securities
registered pursuant to Section 12(b) of the Securities Exchange Act of
1934:
Title of each class
Common
stock, par value $.01 per share
|
Name of Exchange on Which
Registered
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 o 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 o No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 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
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the past 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No
o
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
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 o No
x
As of
February 15, 2010, there were 18,551,987 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 30, 2009,
based upon the last sale price of such equity reported on the Nasdaq Capital
Market, was approximately $2.9 million. For purposes of this
disclosure, shares of common stock held by persons who hold more than 10% of the
outstanding shares of common stock and shares held by officers and directors of
the registrant have been excluded as these persons may be deemed
affiliates. This determination is not necessarily a conclusive
determination for other purposes.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information required by Part III of Form 10-K is incorporated by reference from
the Registrant’s definitive information statement, as filed on February 3, 2010,
and proxy statement for the 2010 Annual Stockholders Meeting, which will be
filed, with the Securities and Exchange Commission.
ANNUAL
REPORT ON FORM 10-K
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F –
1
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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 (the “Exchange Act”). 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.
General
Bluefly,
Inc. is a leading online retailer of designer brands, fashion trends and
superior value. During 2009, 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 and a half million customers.
Our
common stock is listed on the Nasdaq Capital Market under the symbol “BFLY” and
we are incorporated in the state of 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 Securities and
Exchange Commission (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
On
December 21, 2009, we entered into a Securities Purchase Agreement with Rho
Ventures, L.P. (“Rho”), pursuant to which we agreed to issue and sell to Rho up
to 8,823,529 newly issued shares (the “Private Placement Shares”) of our common
stock, par value $.01 per share (the “Common Stock”), for an aggregate purchase
price of $15,000,000, or $1.70 per share, in a private placement transaction
(the “Private Placement”). We issued and sold 2,786,337 of the Private
Placement Shares to Rho at an initial closing (the “Initial Closing”) held on
December 21, 2009 for an aggregate purchase price of approximately
$4,737,000. We will issue and sell the remaining 6,037,192 of the Private
Placement Shares following the receipt of stockholder approval and the
consummation of the Private Placement. At the Initial Closing, affiliates
of Soros Fund Management L.L.C. (“Soros”) and private funds associated with
Maverick Capital, Ltd. (“Maverick”) converted $3,000,000 in aggregate principal
amount of subordinated notes into an aggregate of 1,764,706 shares of Common
Stock at a conversion price of $1.70 per share. In addition, following the
receipt of stockholder approval and consummation of the Private Placement, our
board of directors (the “Board”) will be restructured to include 10 members,
consisting of three classes of directors with staggered terms.
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 discounted
prices. 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
site. The
frequent addition of new on-trend products to our Web site is also one of the
key factors to our marketing strategy, as it gives our shoppers reason to visit
the site often.
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
believe that the Internet is the optimal medium to support our retail
strategy. We are able to communicate frequently and in a timely manner
with our customer base. We are also able to apply direct marketing
customer file management principles that allow us to optimize sales
opportunities from the customer file and to augment that response by offering
our loyal customers targeted promotions including previews and early access to
special product assortment and exclusive offers. Additionally, we can
offer our customers a wide range of products as 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 our offering 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 competes with full-price
retailers and 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.
E-Commerce
And The Online Apparel Market
The
continued growth of e-commerce has been widely reported. According to
projections published by eMarketer, U.S. online retail sales are expected to
grow 7.5% to $141 billion in 2010, with continued increases through 2013 to over
$189 billion.
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, we
began a national advertising campaign that featured both print and television.
Over the past four and a half years we have increased awareness by targeting
general advertising efforts to a more fashion focused customer. Over the past
three years we further refined our marketing strategy by aligning ourselves with
entertainment properties, such as Project Runway, BravoTV, Lifetime TV and
targeted shows on The CW including Gossip Girl and America’s Next Top
Model.
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 our Web site 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. In both 2009 and 2008, we
purchased approximately 31% of our inventory from one supplier.
Warehousing
And Fulfillment
When we
receive an order, the information is transmitted to our third party warehouse
and fulfillment center located in Ohio, 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.
We focus
on customer satisfaction throughout our organization. In December 2009, during
our peak weeks of the holiday season, the vast majority of our orders were
shipped within one business day from receipt of the customer’s
order.
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 service representatives from a third party call center that has
a team dedicated to our business. We also maintain a supervisor in our
corporate office, who provides special services and assists 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
60 days of the sale for a full refund.
In
November 2008 we were awarded the “International Service Excellence Award” from
the International Council of Customer Service Organizations. This award
recognizes customer service excellence in management systems worldwide. We have
also twice been awarded the “E-tailing Excellence Award” from the e-tailing
group. This award recognizes online merchants who excel in customer
service.
Technology
We have
implemented a broad array of technologies that facilitate Web site management,
complex database search functionality, customer interaction and personalization,
transaction processing and customer service functionality. Such technologies
include a combination of proprietary technology and commercially available,
licensed 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
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 facility in New York.
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 also
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 and/or 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. 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 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.
Seasonality
And Fashion Trends
Our
business is affected by seasonality, which historically has resulted in higher
sales volume during our fourth quarter, which ends December 31. We
recognized 30%, 29% and 33% of our annual revenue during the fourth quarter of
2009, 2008 and 2007, respectively. In addition, our business fluctuates
according to changes in customer preferences dictated in part by fashion
trends. The cyclical nature of our business requires us to carry a
significant amount of inventory, especially prior to peak selling seasons when
we generally build up our inventory levels. As a result, we are vulnerable
to demand and pricing shifts and to errors in selection and timing of
merchandise purchases.
Employees
As of
February 15, 2010, we had 81 full-time employees and 2 part-time employees, as
compared to 93 full-time employees and 1 part-time employee as of February 15,
2009. None of our employees are represented by a labor union.
We Have A History Of Losses And
Losses May Continue In The Future. As of December 31, 2009, we had
an accumulated deficit of $147,468,000. We incurred net losses of
$4,369,000, $11,340,000 and $15,829,000 for the years ended December 31, 2009,
2008 and 2007, respectively. We have incurred negative cash flows and
cumulative net losses since inception. Although we have experienced
revenue growth in recent years, this growth should not be considered indicative
of future performance, particularly given the challenging economic environment
that we now face.
Rho, 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 February
15, 2010, Rho owned approximately 15% of our Common Stock, Soros owned
approximately 33% of our Common Stock, Maverick owned approximately 20% of our
Common Stock and investment entities and accounts managed and advised by
Prentice Capital Management, LP (“Prentice”) owned approximately 16% of our
Common Stock. We entered into an Amended and Restated Voting Agreement
with Rho, Soros, Maverick and Prentice (the “Voting Agreement”), pursuant to
which Rho and Soros each has the right to designate two designees to our Board,
and Maverick and Prentice each has the right to designate one designee to our
Board, in each case, subject to minimum ownership thresholds and compliance with
applicable rules of the Nasdaq Stock Market LLC. The Voting Agreement also
provides that one designee of each of Rho, Soros, Maverick and Prentice has the
right to serve on each committee of our Board. If we establish an
Executive Committee, a designee of each of Rho, Soros, Maverick and Prentice
will be entitled to serve on such committee.
In view
of their large percentage of ownership, Rho, 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 or a going private
transaction.
The Continued Disruption in the
Global Economic Environment, and Resulting Declines in Consumer Confidence and
Spending, Could Have an Adverse Effect on Our Operating Results.
The global economic environment continued to deteriorate substantially during
2009. This has affected our business as our business is dependent on
consumer demand for our products. As a result, during the fourth quarter
of 2009 and 2008, our revenues declined by approximately 11% and 8%, compared to
the fourth quarters of 2008 and 2007, respectively. If the global economic
environment continues to be weak or deteriorates further, there will likely be a
negative effect on our revenues and earnings for the current fiscal year and
continuing into fiscal 2011.
Our Lender Has Liens On Substantially
All Of Our Assets And Could Foreclose In The Event That We Default Under Our
Credit Facility. Under the terms of our credit facility, our lender
has a first priority lien on substantially all of our assets,
including
our cash balances. If we default under the credit facility, our lender
would be entitled to, among other things, foreclose on our assets (whether
inside or outside a bankruptcy proceeding) in order to satisfy our obligations
under the credit facility.
Our Ability To Maintain And Pay Our
Indebtedness Under Our Credit Facility Is Dependent Upon Meeting Our Business
Plan. We are required to pay interest under our credit 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 credit facility and maintain our minimum availability requirement throughout
the term of the credit facility. If we fall short of our business plan and
are unable to raise additional capital, we could default under our credit
facility. In the event of a default under the credit 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
credit facility. See “Risk Factors – Our Lender Has Liens On Substantially
All Of Our Assets And Could Foreclose In The Event That We Default Under Our
Credit 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 credit facility. See
“Risk Factors – Our Ability To Maintain And Pay Our Indebtedness Under Our
Credit 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 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
both 2009 and 2008, we purchased approximately 31% 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 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.”
Unexpected Changes In Fashion Trends
Could Cause Us To Have Either Excess or Insufficient Inventory.
Fashion trends can change rapidly, and our business is highly 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.
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. The recent
economic downturn has affected retailers especially hard. 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 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 remediate 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 Our Vendors And
Therefore The Availability Of Merchandise Is At Risk.”
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 UPS and the United States
Postal Service, and credit card processing companies such as Paymentech, Paypal
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 would 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 would cause similar
effects.
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 dynamic, high-growth
market and is rapidly changing and intensely competitive. Our competition
for customers comes from a variety of sources including:
|
·
|
existing
land-based, full price retailers, that are using the Internet to expand
their channels of distribution;
|
|
·
|
less
established online companies;
|
|
·
|
internet
sites;
|
|
·
|
traditional
direct marketers; and
|
|
·
|
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:
|
·
|
brand
recognition;
|
|
·
|
merchandise
selection;
|
|
·
|
price;
|
|
·
|
convenience;
|
|
·
|
customer
service;
|
|
·
|
order
delivery performance; and
|
|
·
|
Web
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 our Web
site will depend largely on our success in providing a high quality online
experience supported by a high level of customer service, which cannot be
assured. In addition, to attract and retain online users, and to promote
and maintain our Web site 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 our Web site, or if
we incur excessive expenses in an attempt to promote and maintain our Web site,
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. The satisfactory performance, reliability and
availability of our Web site, 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 depend on the number of visitors who shop on our Web site 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 our Web site 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 our Web site 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 our Web site, 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.
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 2009, 2008 and 2007 has been 37.8%, 39.1% and 39.6%,
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 and Chief Financial Officer run through January 1, 2013 and
our agreements with our Chief Marketing Officer and SVP of eCommerce run through
September 2012. 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.
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, patents and other intellectual property
rights of third parties. These claims and any 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. 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 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 us, 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.
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 Board 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 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.
Our Ability To Utilize Our Net
Operating Loss Carryforwards May Be Limited. Our federal net
operating loss carryforwards are subject to limitation on how much may be
utilized on an annual basis. The use of the net operating loss
carryforwards may have additional limitations resulting from certain future
ownership changes or other factors pursuant to Section 382 of the Internal
Revenue Code (the “Code”), including the consummation of the Private Placement
which has made us more vulnerable to an “ownership change” for purposes of
Section 382 of the Code. If our net operating loss carryforwards are
further limited, and we have taxable income which exceeds the available net
operating loss carryforwards for that period, we would incur an income tax
liability even though net operating loss carryforwards may be available in
future years prior to their expiration, which may adversely affect our future
financial position, financial results and cash flow.
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, 2010. 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.
None.
We lease
approximately 18,000 square feet of office space in New York City. The property
is in good operating condition. The leases covering such office space will
expire through 2012. Our total lease expense for such office space during 2009
was approximately $665,000.
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.
No matter
was submitted to a vote of stockholders of the Company during the fourth quarter
of 2009.
Market
Information
Our
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:
Year Ended December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Quarter
|
High
|
Low
|
High
|
Low
|
||||||||||||
First
|
$ | 0.99 | $ | 0.32 | $ | 7.90 | $ | 3.80 | ||||||||
Second
|
$ | 1.79 | $ | 0.98 | $ | 5.00 | $ | 2.05 | ||||||||
Third
|
$ | 2.24 | $ | 1.00 | $ | 4.17 | $ | 1.64 | ||||||||
Fourth
|
$ | 2.65 | $ | 1.59 | $ | 2.54 | $ | 0.55 |
On March
13, 2008, the Board of Directors approved a one for ten reverse stock split,
which went into effect on April 3, 2008. Retroactive restatement has been
given to all share numbers in this report, and accordingly, all amounts
including per share amounts are shown on a post-split basis.
Holders
As of
February 15, 2010, there were less than 500 holders of record of the Common
Stock. We believe that there were less than 5,000 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. 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, 2009 with respect to
our equity compensation plans which have been approved by its stockholders. We
have one equity compensation plan that was not approved by its
stockholders.
(a)
|
(c)
|
|||||||||||
Number of
|
Number of Securities
|
|||||||||||
Securities
|
Remaining Available for
|
|||||||||||
to Be Issued
|
(b)
|
Future Issuance under
|
||||||||||
upon Exercise of
|
Weighted Average
|
Equity Compensation
|
||||||||||
Outstanding
|
Exercise Price of
|
Plans
|
||||||||||
Options,
|
Outstanding Options,
|
(Excluding Securities
|
||||||||||
Plan Category
|
Warrants and Rights
|
Warrants and Rights
|
Reflected in Column (a))
|
|||||||||
Equity
compensation plans approved by security holders
|
204,064 |
(1)
|
$ | 8.53 |
(2)
|
1,184,752 |
(3)
|
|||||
Equity
compensation plans not approved by security holders
|
16,010 | $ | 9.24 | — | ||||||||
Total
|
220,074 |
(1)
|
$ | 8.58 |
(2)
|
1,184,752 |
|
(1)
|
Includes
191,750 options to purchase shares of Common Stock and 12,314 Deferred
Stock Units.
|
|
(2)
|
Weighted
average exercise price includes options to purchase shares of Common Stock
and Deferred Stock Units referred to in Note (1)
above.
|
|
(3)
|
Subsequent
to year end, the 2005 Plan was amended to increase the number of
securities remaining available for future issuance by an additional
1,500,000 shares.
|
The
following is a summary of the material provisions of the Bluefly, Inc. 2000
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.
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 of
|
||||||||||||||||
Shares Purchased
|
||||||||||||||||
Average
|
as
|
Maximum Dollar
|
||||||||||||||
Total Number
|
Price
|
Part of Publicly
|
Value that May Yet
|
|||||||||||||
of Shares
|
Paid
|
Announced
|
be Purchased Under
|
|||||||||||||
Period
|
Purchased(1)
|
per Share
|
Programs
|
the Programs
|
||||||||||||
October 1,
2009 – October 31, 2009
|
56,066 | $ | 1.65 | N/A | N/A | |||||||||||
November 1,
2009 – November 30, 2009
|
25,000 | $ | 2.41 | N/A | N/A | |||||||||||
December 1,
2009 – December 31, 2009
|
15,846 | $ | 2.47 | N/A | N/A | |||||||||||
Total
– Three months ended December 31, 2009
|
96,912 | $ | 1.98 | N/A | N/A |
(1)
|
These
shares were withheld by us to satisfy the income 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.
|
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, 2006 and
2005 and at December 31, 2007, 2006 and 2005 are derived from our audited
financial statements not included in this report. All data is in thousands,
except share data:
Statements
of Operations Data:
|
Year Ended
December 31,
|
|||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Net
sales
|
$ | 81,222 | $ | 95,774 | $ | 91,493 | $ | 77,062 | $ | 58,811 | ||||||||||
Cost
of sales
|
49,665 | 60,288 | 58,754 | 46,153 | 35,816 | |||||||||||||||
Gross
profit
|
31,557 | 35,486 | 32,739 | 30,909 | 22,995 | |||||||||||||||
Selling
and fulfillment expenses
|
16,675 | 19,620 | 18,898 | 15,808 | 12,880 | |||||||||||||||
Marketing
expenses
|
8,404 | 14,523 | 16,063 | 14,196 | 6,961 | |||||||||||||||
General
and administrative expenses
|
9,139 | 12,191 | 13,848 | 13,001 | 6,299 | |||||||||||||||
Total
operating expenses
|
34,218 | 46,334 | 48,809 | 43,005 | 26,140 | |||||||||||||||
Operating
loss(1)
|
(2,661 | ) | (10,848 | ) | (16,070 | ) | (12,096 | ) | (3,145 | ) | ||||||||||
Interest
expense(2)
|
(1,733 | ) | (554 | ) | (260 | ) | (599 | ) | (856 | ) | ||||||||||
Interest
and other income
|
25 | 62 | 501 | 502 | 181 | |||||||||||||||
Net
loss(3)
|
$ | (4,369 | ) | $ | (11,340 | ) | $ | (15,829 | ) | $ | (12,193 | ) | $ | (3,820 | ) | |||||
Basic
and diluted net loss per common share(1)
|
$ | (0.31 | ) | $ | (0.90 | ) | $ | (1.21 | ) | $ | (2.28 | ) | $ | (5.43 | ) | |||||
Basic
and diluted weighted average common shares outstanding(4),
(5)
|
14,003,534 | 13,369,257 | 13,091,130 | 8,017,053 | 1,615,302 |
Balance Sheet Data:
|
As of December 31,
|
|||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 10,049 | $ | 4,004 | $ | 6,730 | $ | 20,188 | $ | 9,408 | ||||||||||
Inventories,
net
|
17,668 | 23,157 | 28,492 | 24,189 | 16,893 | |||||||||||||||
Other
current assets
|
4,278 | 4,347 | 3,589 | 4,229 | 3,536 | |||||||||||||||
Total
assets
|
35,646 | 37,750 | 45,019 | 52,430 | 33,045 | |||||||||||||||
Current
liabilities
|
12,611 | 16,250 | 17,922 | 14,603 | 11,936 | |||||||||||||||
Total
liabilities(6)
|
12,611 | 19,356 | 17,982 | 14,603 | 17,180 | |||||||||||||||
Stockholders’
equity
|
23,035 | 18,394 | 27,037 | 37,827 | 15,865 |
|
(1)
|
This
amount includes non-cash expense of approximately $612,000, $2.7 million,
$6.2 million and $4.5 million in 2009, 2008, 2007 and 2006, respectively,
relating to authoritative guidance regarding stock-based compensation,
which we adopted in 2006. Results prior to 2006 have not been
restated.
|
|
(2)
|
This
amount includes approximately $1.4 million in interest expense to related
party stockholders in connection with our subordinated notes in
2009.
|
|
(3)
|
Excludes
preferred stock dividends of $37,000, $44,000, $2.2 million and $5.0
million in 2008, 2007, 2006 and 2005, respectively, and excludes
beneficial conversion feature expenses of $712,000 and $3.9 million in
2008 and 2006, respectively.
|
|
(4)
|
All
share amounts, including per share amounts, have been restated to reflect
a one for ten reverse stock split that occurred in
2008.
|
|
(5)
|
Weighted
average shares increased to approximately 8.02 million in 2006 as a result
of an equity financing consummated in June 2006 and the conversion of our
preferred stock into common stock in connection with such
financing.
|
|
(6)
|
For
the 2008 and 2005 periods, respectively, this amount includes
approximately $3.1 million and $5.2 million of notes and interest payable
to related party stockholders.
|
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.
Our net
sales decreased approximately 15% to $81,222,000 for the year ended December 31,
2009 from $95,774,000 for the year ended December 31, 2008. Our gross margin
increased to 38.9% for the year ended December 31, 2009 from 37.1% in 2008. The
increase in gross margin was primarily related to an increase in improved
product margins and a decrease in inventory reserves, in connection with the
increase in improved product margins, caused by a shift in our merchandise
mix. Our gross profit decreased by approximately 11% to $31,557,000 for
the year ended December 31, 2009 from $35,486,000 for the year ended December
31, 2008. The decrease in gross profit is primarily attributable to a
decrease in net sales.
Total
marketing expenses (including staff related costs) decreased by 42% to
$8,404,000 for the year ended December 31, 2009 from $14,523,000 for year ended
December 31, 2008. We decreased our spending in marketing (excluding staff
related costs) by 44% to $7,603,000 for the full year 2009 from $13,562,000 for
the full year 2008. This decrease consisted primarily of a decrease in fixed
costs relating to offline programs of approximately 60% and a decrease in
variable costs related to online programs. The decreased spending resulted
from a planned decrease in inventory purchases in response to the overall
decline in consumer spending. Inventory spending decreased approximately
22% compared to 2008. Marketing expenses as a percentage of net sales decreased
to 10.4% for the year ended December 31, 2009 from 15.2% for the year ended
December 31, 2008. During 2009, offline advertising expenses decreased, which
caused the mix of marketing expenditures to shift toward online media.
Management determined that online marketing programs were more efficient and
more easily measurable.
We
incurred an operating loss of $2,661,000 for the year ended December 31, 2009 as
compared to $10,848,000 for the year ended December 31, 2008. The
improvement in operating loss was primarily a result of decreases in variable
operating fulfillment expenses, marketing expenses and general and
administrative expenses. We believe that the decrease in net sales was primarily
attributable to our planned decrease in inventory purchases in response to the
overall decline in consumer spending.
Our
reserve for returns and credit card chargebacks for the year ended December 31,
2009 decreased to 37.8% compared to 39.1% and 39.6% of gross sales for the years
ended December 31, 2008 and 2007, respectively. Historically, our merchandise
mix had been shifting towards higher end products, which tended to drive return
rates higher. During 2009, we refined our merchandising mix to shift towards
more contemporary merchandise and we believe this resulted in a decrease in the
return rate. Additionally, we believe that the reduction in return rate was
partially caused by customers making fewer impulse purchases, which are
generally more likely to be returned.
A portion
of our inventory includes merchandise on a pack and hold basis, where we either
purchased with the intention of holding for the appropriate season or were
unable to sell through in its entirety in a prior season and have determined to
hold for the next selling season, subject (in some cases) to appropriate
mark-downs. While we have historically increased the amount of inventory
purchased on a pack and hold basis, we have made increased selective purchases
of inventory in order to take advantage of opportunities in the current economic
environment.
We
recorded total share-based compensation expenses of $612,000, $2,706,000 and
$6,194,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
At
December 31, 2009, we had an accumulated deficit of $147,468,000. The net losses
and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site and building our infrastructure, as well
as non-cash beneficial conversion charges resulting from decreases in the
conversion price of our Preferred Stock and the payment of dividends to holders
of Preferred Stock.
Critical
Accounting Policies
Management
Estimates
The
preparation of the 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 disclosures of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Significant estimates and assumptions include 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.
In
addition, we currently estimate that we will have adequate liquidity to fund
operations beyond December 31, 2010. Such estimate is based on projected
revenues, expenses and timing of various payments. Should unforeseen events
occur or should actual results differ from current estimates, we may be unable
to meet payment obligations as they come due which would have a material adverse
impact on our operations.
Revenue
Recognition
We
recognize revenue when the earnings process is complete and revenue is
measurable. Gross sales consist primarily of revenue from product sales and
shipping and handling charges and are net of promotional discounts. Net sales
represent gross sales, less provision for returns, credit card chargebacks, and
adjustments for uncollected sales taxes. Revenue is recognized when all the
following criteria are met:
|
·
|
A
customer executes an order.
|
|
·
|
The
product price and the shipping and handling fee have been
determined.
|
|
·
|
Credit
card authorization has occurred and collection is reasonably
assured.
|
|
·
|
The
product has been shipped and received by the
customer.
|
Deferred
revenue, which consists primarily of goods shipped to customers but not yet
received and customer credits is classified as current liabilities on our
Balance Sheets.
Shipping
and handling billed to customers are classified as revenue and freight cost
incurred in connection with purchasing merchandise is classified as cost of
goods sold.
Provision
for Sales Returns and Doubtful Accounts
We now
permit returns for any reason within 60 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. For the years ended
December 31, 2009, 2008 and 2007, our returns reserves were 37.8%, 39.1% and
39.6%, respectively, of gross sales. Actual charges have not varied
materially from historical percentages.
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 and the selling price,
among other factors. 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, we adopted authoritative guidance relating to uncertainty in
income taxes. It 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 they have taken or expect
to take on a tax return. As of December 31, 2009 and 2008, the only tax
jurisdiction to which we are subject to is the United States. Open tax years
relate to years in which unused net operating losses were generated. As of the
adoption of this authoritative guidance, our open tax years extend back to 1998.
In the event that we conclude that we are subject to interest and/or penalties
arising from uncertain tax positions, we will present interest and penalties as
a component of income taxes. No amounts of interest or penalties were recognized
in our Statements of Operations or Balance Sheets upon adoption of this
authoritative guidance or as of and for the years ended December 31, 2009 and
2008.
Stock-Based
Compensation
Authoritative
guidance relating to stock-based compensation 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 Statements of Operations data for the years ended
December 31st. All data is in thousands except as indicated below:
2009
|
2008
|
2007
|
||||||||||||||||||||||
As a % of
|
As a % of
|
As a % of
|
||||||||||||||||||||||
Net Sales
|
Net Sales
|
Net Sales
|
||||||||||||||||||||||
Net
sales
|
$ | 81,222 | 100.0 | % | $ | 95,774 | 100.0 | % | $ | 91,493 | 100.0 | % | ||||||||||||
Cost
of sales
|
49,665 | 61.1 | 60,288 | 62.9 | 58,754 | 64.2 | ||||||||||||||||||
Gross
profit
|
31,557 | 38.9 | 35,486 | 37.1 | 32,739 | 35.8 | ||||||||||||||||||
Selling
and fulfillment expenses
|
16,675 | 20.5 | 19,620 | 20.5 | 18,898 | 20.7 | ||||||||||||||||||
Marketing
expenses
|
8,404 | 10.4 | 14,523 | 15.2 | 16,063 | 17.6 | ||||||||||||||||||
General
and administrative expenses
|
9,139 | 11.2 | 12,191 | 12.7 | 13,848 | 15.1 | ||||||||||||||||||
Total
operating expenses
|
34,218 | 42.1 | % | 46,334 | 48.4 | 48,809 | 53.4 | |||||||||||||||||
Operating
loss
|
(2,661 | ) | (3.3 | ) | (10,848 | ) | (11.3 | ) | (16,070 | ) | (17.6 | ) | ||||||||||||
Interest
(expense) income, net
|
(1,708 | ) | (2.1 | ) | (492 | ) | (0.5 | ) | 241 | 0.3 | ||||||||||||||
Net
loss
|
$ | (4,369 | ) | (5.4 | )% | $ | (11,340 | ) | (11.8 | )% | $ | (15,829 | ) | (17.3 | )% |
We also
measure and evaluate ourselves against certain other key operational metrics.
The following table sets forth our actual results based on these other metrics
for the years ended December 31st, as
indicated below:
2009
|
2008
|
2007
|
||||||||||
Average
order size (including shipping & handling)
|
$ | 266.66 | $ | 279.72 | $ | 276.58 | ||||||
New
customers added during the year*
|
173,550 | 201,044 | 198,884 |
*Based
on unique email addresses
In
addition to the financial statement items and metrics listed above, which are
non-GAAP financial measurements, we also report gross sales, another non-GAAP
financial measurement. 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 it provides an alternative measure of the total demand for the
products sold by us and it provides a basis upon 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, 2009 Compared To The Year Ended December 31,
2008
Net sales: Gross sales for the
year ended December 31, 2009 decreased by approximately 17% to $130,531,000 from
$157,248,000 for the year ended December 31, 2008. The decrease in
gross sales was primarily attributable to our planned decrease in inventory
purchases in response to the overall decline in consumer spending and our
streamlined business plan prior to our recent private placement. The
provision for returns and credit card chargebacks and other credits was
approximately 37.8% and 39.1% for 2009 and 2008, respectively, resulting in a
provision of approximately $49,309,000 and $61,474,000 for the years ended
December 31, 2009 and 2008, respectively. The decrease in this provision as a
percentage of gross sales resulted from a reduction in the return rate, which
was, in part, caused by a shift in our merchandise mix. In addition, we believe
that the reduction in return rate was partially caused by customers making fewer
impulse purchases, which are generally more likely to be returned. We
refined our merchandising mix in 2008 to shift to more contemporary merchandise
as part of our streamlined business plan prior to our recent private placement.
Accordingly, we believe we experienced a corresponding decrease in the return
rate. However, in 2010 we intend on shifting towards higher end
products, which may result in higher return rates.
After the
necessary provisions for returns, credit card chargebacks and adjustments for
uncollected sales taxes, our net sales for the year ended December 31, 2009 was
$81,222,000. This represents a decrease of approximately 15% compared
to the year ended December 31, 2008, in which net sales totaled
$95,774,000. The decrease in net sales resulted primarily from a 14%
decrease in the number of new customers acquired and a 5% decrease in average
order size compared to the prior year. We believe that the decrease in both of
these measures was primarily attributable to our planned decrease in inventory
purchases in response to the overall decline in consumer
spending. Shipping and handling revenue (which is included in net
sales) decreased by 18% to $4,420,000 for the year ended December 31, 2009, from
$5,380,000 for the year ended December 31, 2008. Shipping and handling revenue
decreased at a higher percentage than net sales as a result of a decreased
number of customer orders compared to the prior year.
Cost of sales: Cost
of sales consists of the cost of products 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, 2009 totaled $49,665,000,
resulting in a gross margin of approximately 38.9%. Cost of sales for the year
ended December 31, 2008 totaled $60,288,000, resulting in a gross margin of
37.1%. The increase in gross margin was attributable to improved product
margins, a decrease in inventory reserves and a decrease in the rate of returns
caused by a shift in our merchandise mix.
Gross Profit: As a
result of the decrease in net sales, gross profit decreased by approximately
11%, to $31,557,000 for the year ended December 31, 2009, from $35,486,000 for
the year ended December 31, 2008. The decrease in gross profit was primarily the
result of a decrease in net sales attributable to our planned decrease in
inventory purchases in response to the overall decline in consumer spending and
our streamlined business plan prior to our recent private placement, which was
slightly offset by improved product margins.
Selling and fulfillment
expenses: Selling and fulfillment expenses decreased by 15%
for the year ended December 31, 2009 compared to the year ended December 31,
2008. Selling and fulfillment expenses were comprised of the
following:
Year Ended December 31,
|
Percentage
|
|||||||||||||||||||
(All data in thousands)
|
2009
|
2008
|
Difference
|
|||||||||||||||||
As a % of
|
As a % of
|
Increase
|
||||||||||||||||||
Net Sales
|
Net Sales
|
(Decrease)
|
||||||||||||||||||
Operating
|
$ | 7,857 | 9.6 | % | $ | 10,179 | 10.6 | % | (22.8 | )% | ||||||||||
Technology
|
5,602 | 6.9 | 5,979 | 6.2 | (6.3 | ) | ||||||||||||||
E-Commerce
|
3,216 | 4.0 | 3,462 | 3.6 | (7.1 | ) | ||||||||||||||
Total
selling and fulfillment expenses
|
$ | 16,675 | 20.5 | % | $ | 19,620 | 20.5 | % | (15.0 | )% |
As a
percentage of net sales, our selling and fulfillment expenses remained unchanged
at 20.5% for the years ended December 31, 2009 and 2008.
Operating
expenses include all costs related to inventory management, fulfillment,
customer service, and credit card processing. Operating expenses for the year
ended December 31, 2009 decreased by approximately 23% compared to the year
ended December 31, 2008 as a result of decreased variable costs associated with
fulfillment costs (e.g., picking and packing orders and processing returns),
decreased credit card fees, a decrease in salary expenses and fees associated
with our customer service call center. Operating expenses decreased
at a higher percentage than net sales as a result of our streamlined business
plan, which included, among other things, reductions in capital expenditures and
delayed new hires.
Technology
expenses consist primarily of staff related costs, amortization of capitalized
costs and Web site hosting. For the year ended December 31, 2009, technology
expenses decreased by approximately 6% compared to the year ended December 31,
2008. This decrease was attributable to a decrease in salary and salary related
expenses of approximately $478,000, a decrease in consulting fees of
approximately $281,000 and a decrease in web hosting and software support
expenses of approximately $149,000, which were partially offset by an increase
in depreciation expenses, included in technology expenses, of approximately
$618,000.
E-Commerce expenses include expenses
related to our photo design studio, image processing, and Web site design. For
the year ended December 31, 2009, e-commerce expenses decreased by approximately
7% compared to the year ended December 31, 2008. This decrease was
attributable to decreases in salary and salary related expenses of approximately
$108,000 and expenses associated with photo shoots of approximately
$36,000.
Marketing
expenses: Marketing expenses decreased by 42% to $8,404,000
for the year ended December 31, 2009 from $14,523,000 for the year ended
December 31, 2008.
Marketing
expenses include expenses related to paid search, online and print advertising,
television, fees to marketing affiliates, direct mail campaigns as well as staff
related costs. As a percentage of net sales, our marketing expenses decreased to
10.4% for the year ended December 31, 2009 from 15.2% for the year ended
December 31, 2008. Total expenses related to the national print and
television advertising campaign for the year ended December 31, 2009 totaled
$1,877,000 compared to $6,030,000 for the year ended December 31,
2008. This decrease of approximately $4,153,000 was primarily due to
a reduction in offline marketing spend, specifically, production costs and
placement fees. However, in 2010 we intend to increase marketing expenses to
accelerate revenue growth and accordingly, there can be no assurance that
marketing expenses will continue to decrease. Total marketing
expenses (excluding staff related costs) for the year ended December 31, 2009
decreased by approximately $5,959,000 as compared to December 31, 2008. Expenses
related to paid search, online integration and comparison engines decreased by
$992,000, $403,000 and $201,000, respectively.
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, 2009 decreased by
approximately 25% to $9,139,000 as compared to $12,191,000 for the year ended
December 31, 2008. The decrease in general and administrative
expenses was primarily the result of a decrease in stock-based compensation
related to equity awards of approximately $1,908,000, a decrease in salary and
salary related expenses of approximately $230,000 and a decrease in overall
professional fees of approximately $336,000.
As a
percentage of net sales, general and administrative expenses for the year ended
December 31, 2009 decreased to approximately 11.2% from 12.7% for the year ended
December 31, 2008.
Loss from
operations: Operating loss decreased for the year ended
December 31, 2009 to $2,661,000 from $10,848,000 for the year ended December 31,
2008.
Interest (expense) income, net:
Interest income for the year ended December 31, 2009 decreased to $25,000
from $62,000 for the year ended December 31, 2008. These amounts related
primarily to interest income earned on our cash balances.
Interest
expense to related party stockholders for the year ended December 31, 2009
increased to $1,413,000 compared to $235,000 for the year ended December 31,
2008. The increase in interest expense to related party stockholders was
primarily the result of the recognition of the embedded derivative financial
liability relating to the embedded conversion feature within the subordinated
convertible notes to related parties of approximately $785,000 (which were
converted into equity in December 2009), amortization of the debt discount of
approximately $343,000 and interest expense of approximately $241,000 relating
to our subordinated convertible notes.
Other
interest expense for the year ended December 31, 2009 totaled $320,000 compared
to $319,000 for the year ended December 31, 2008. Interest expense
consists of fees paid in connection with our credit facility.
Net loss per
share: Net loss per share decreased to $0.31 per share for the
year ended December 31, 2009 from $0.90 per share for the year ended December
31, 2008.
For
The Year Ended December 31, 2008 Compared To The Year Ended December 31,
2007
Net sales: Gross sales for the
year ended December 31, 2008 increased by approximately 4% to $157,248,000 from
$151,435,000 for the year ended December 31, 2007. The increase in
gross sales was primarily attributable to increased sales orders and a slight
increase in average order size. The provision for returns and credit
card chargebacks and other credits was approximately 39.1% and 39.6% for 2008
and 2007, respectively, resulting in a provision of approximately $61,474,000
and $59,942,000 for the years ended December 31, 2008 and 2007,
respectively.
After the
necessary provisions for returns, credit card chargebacks and adjustments for
uncollected sales taxes, our net sales for the year ended December 31, 2008 was
$95,774,000. This represented an increase of approximately 5%
compared to the year ended December 31, 2007, in which net sales totaled
$91,493,000. The increase in net sales resulted primarily from a
slight increase in the number of new customers acquired and in the gross average
order size compared to the prior year. Net sales grew at a slightly higher rate
than gross sales because of a slight improvement in return rates. Shipping and
handling revenue (which is included in net sales) increased by 12% to $5,380,000
for the year ended December 31, 2008, from $4,798,000 for the year ended
December 31, 2007. Shipping and handling revenue for 2008 increased at a greater
percentage than revenue as a whole as a result of an increased number of
customer orders shipped express compared to 2007. In addition during
part of 2007, in connection with the transition to the new warehouse, we were
not able to offer customers express shipping.
Cost of sales: Cost
of sales for the year ended December 31, 2008 totaled $60,288,000, resulting in
a gross margin of approximately 37.1%. Cost of sales for the year ended December
31, 2007 totaled $58,754,000, resulting in a gross margin of 35.8%. The increase
in gross margin was attributable to a decrease in inventory reserves (as 2007
included approximately $550,000 of additional inventory reserves relating to our
transition to a new fulfillment center and a write-off of approximately
$1,500,000 of inventory in the fourth quarter of 2007) which were partially
offset by decreased product margins.
Gross Profit: As a
result of the increases in net sales from 2007 to 2008, gross profit increased
by approximately 8%, to $35,486,000 for the year ended December 31, 2008, from
$32,739,000 for the year ended December 31, 2007. The increase in gross profit
was primarily the result of an increase in net sales and a decrease in cost
of sales resulting from a decrease in inventory reserves and a slight decrease
in the rate of returns of products with higher product margins.
Selling and fulfillment
expenses: Selling and fulfillment expenses increased by 4% for
the year ended December 31, 2008 compared to the year ended December 31, 2007.
Selling and fulfillment expenses were comprised of the following:
Year Ended December 31,
|
Percentage
|
|||||||||||||||||||
(All data in thousands)
|
2008
|
2007
|
Difference
|
|||||||||||||||||
As a % of
|
As a % of
|
Increase
|
||||||||||||||||||
Net Sales
|
Net Sales
|
(Decrease)
|
||||||||||||||||||
Operating
|
$ | 10,179 | 10.6 | % | $ | 10,554 | 11.6 | % | (3.6 | )% | ||||||||||
Technology
|
5,979 | 6.2 | 4,693 | 5.1 | 27.4 | |||||||||||||||
E-Commerce
|
3,462 | 3.6 | 3,651 | 4.0 | (5.2 | ) | ||||||||||||||
Total
selling and fulfillment expenses
|
$ | 19,620 | 20.5 | % | $ | 18,898 | 20.7 | % | 3.8 | % |
As a
percentage of net sales, our selling and fulfillment expenses decreased to 20.5%
for the year ended December 31, 2008 from 20.7% for the year ended December 31,
2007.
Operating
expenses for the year ended December 31, 2008 decreased by approximately 3.6%
compared to the year ended December 31, 2007 as a result of decreased variable
costs related to fulfillment rates per unit associated with order fulfillment
(e.g., picking and packing orders and processing returns) and a decrease in
incremental expenses relating to our transition of the fulfillment center of
approximately $721,000 incurred in 2007. These decreases were offset
by increases in credit card fees of approximately $162,000 compared to
2007.
For the
year ended December 31, 2008, technology expenses increased by approximately
27.4% compared to the year ended December 31, 2007. This increase, primarily
driven by the new site, resulted from an increase in depreciation, software
support, web hosting expenses and consulting expenses. Consulting
expenses incurred for 2008 were related to the development of our new Web site
and capitalized accordingly. Approximately $5,299,000 of expenses were
capitalized in connection with the development of our new Web site, of which
$1,666,000 was incurred during 2008. Depreciation expenses relating to the new
Web site were approximately $736,000 and were included in technology
expenses.
For the
year ended December 31, 2008, e-commerce expenses decreased by approximately
5.2% compared to the year ended December 31, 2007, as increases in salary
expenses were offset by decreased expenses associated with photo
shoots.
Marketing
expenses: Marketing expenses decreased by 10% to $14,523,000
for the year ended December 31, 2008 from $16,063,000 for the year ended
December 31, 2007.
As a
percentage of net sales, our marketing expenses decreased to 15.2% for the year
ended December 31, 2008 from 17.6% for the year ended December 31,
2007. Total expenses related to the national print and television
advertising campaign for the year ended December 31, 2008 were $6,030,000
compared to $7,600,000 for the year ended December 31, 2007. This
decrease of approximately $1,570,000 was primarily due to a reduction in
production costs and a decrease in placement and agency fees. Total marketing
expenses for the year ended December 31, 2008 decreased by approximately
$1,346,000 as compared to December 31, 2007. Expenses related to affiliates,
comparison engines and online integration increased by $123,000, $358,000 and
$400,000, respectively. These increases were offset by the following
decreases: $137,000 related to paid search, $162,000 related to sweepstakes and
$202,000 related to direct mail campaigns.
General and administrative
expenses:
General and administrative expenses for the year ended December 31, 2008
decreased by approximately 12.0% to $12,191,000 as compared to $13,848,000 for
the year ended December 31, 2007. The decrease in general and
administrative expenses was primarily the result of a decrease in stock-based
compensation related to equity awards of approximately $3,150,000 included in
the 2007 period. These amounts were offset by increases in rent expense of
$163,000, consultants and professional fees of $88,000, and an increase in
salary and salary related expenses of $1,154,000. Salary expenses
include approximately $551,000 of expenses in connection with compensation of
former executives.
As a
percentage of net sales, general and administrative expenses for the year ended
December 31, 2008 decreased to approximately 12.7% from 15.1% for the year ended
December 31, 2007.
Loss from
operations: Operating loss decreased for the year ended
December 31, 2008 to $10,848,000 from $16,070,000 for the year ended December
31, 2007.
Interest (expense) income, net:
Interest and other income for the year ended December 31, 2008 decreased
to $62,000 from $501,000 for the year ended December 31, 2007.
We
incurred interest expense to related party stockholders for the year ended
December 31, 2008 of approximately $235,000. Interest expense to related party
stockholders consisted of amortization expense from warrants issued to certain
related parties and interest expense relating to our then outstanding
subordinated convertible notes issued to Soros and Maverick in July
2008.
Other
interest expense for the year ended December 31, 2008 totaled $319,000 compared
to $260,000 for the year ended December 31, 2007.
Net loss per
share: Net loss per share decreased to $0.90 per share for the
year ended December 31, 2008 from $1.21 per share for the year ended December
31, 2007.
Liquidity
And Capital Resources
General
At
December 31, 2009, we had approximately $10.0 million in cash and cash
equivalents compared to $4.0 million and $6.7 million at December 31, 2008 and
2007, respectively. Working capital at December 31, 2009, 2008 and 2007 was
$19.4 million, $15.3 million and $20.9 million, respectively.
As of
December 31, 2009, we had an accumulated deficit of $147.5
million. We have incurred negative cash flows and cumulative net
losses since inception. The continued global economic downturn has
negatively impacted, and may in the future negatively impact, our
liquidity. Prior to the beginning of the economic downturn in the
second half of 2008, we had experienced consistent revenue growth. This growth
should not be considered indicative of our future performance, particularly
given the challenging economic environment that we now face.
We
believe that our existing cash balance, combined with working capital and
proceeds from the December 2009 Private Placement, described further below, will
be sufficient to enable us to meet planned expenditures through at least the
next 12 months. There can be no assurance that we will achieve or
sustain positive cash flows from operations or profitability. If we are unable
to maintain adequate liquidity, future operations will need to be scaled back or
discontinued.
Recent
Developments
On
December 21, 2009, we entered into a Securities Purchase Agreement with Rho,
pursuant to which we agreed to issue and sell to Rho up to 8,823,529 Private
Placement Shares of our Common Stock, for an aggregate purchase price of
$15,000,000, or $1.70 per share, in a Private Placement. We issued
and sold 2,786,337 of the Private Placement Shares to Rho at an
Initial
Closing
held on December 21, 2009 for an aggregate purchase price of approximately
$4,737,000. We will issue and sell the remaining 6,037,192 of the
Private Placement Shares following the receipt of stockholder approval and the
consummation of the Private Placement. At, and as a condition to, the
Initial Closing, Soros and Maverick converted $3,000,000 in aggregate principal
amount of subordinated notes into an aggregate of 1,764,706 shares of Common
Stock at a conversion price of $1.70 per share. At conversion, we
paid in cash approximately $347,000 of interest on the subordinated convertible
notes.
Credit
Facility
Pursuant
to the terms of our credit facility, as amended, 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 substantially
all of our assets. Availability under the credit facility is determined by a
formula that takes into account a certain percentage of our inventory and a
certain percentage of our accounts receivable. The maximum availability is
currently $7,500,000, but can be increased to $12,500,000 at our request,
subject to certain conditions. As of December 31, 2009, total
availability under the credit facility was approximately $3.2 million of which
$2.9 million was committed for letters of credit in favor of suppliers, leaving
approximately $233,000 available for further borrowings. The terms of
the credit facility contain a material adverse condition clause. In
the event of a material adverse change in our financial condition, we would not
be able to obtain additional borrowings under the credit facility and existing
borrowings would become due and payable.
Interest
accrues monthly on the average daily amount outstanding under the credit
facility during the preceding month at a per annum rate equal to the prime rate
plus 0.75% or LIBOR plus 3.25%. We also pay a monthly commitment fee on the
unused portion of the credit facility (i.e., $7,500,000 less the amount of loans
outstanding) equal to 0.50%, which has since been amended in connection with the
December 2009 Private Placement to increase the monthly commitment fee on the
unused portion of the credit facility from 0.50% to 0.75%, and a servicing fee
of $3,333 per month. We also pay Wells Fargo certain fees to open
letters of credit and guarantees in an amount equal to a certain specified
percentage of the face amount of the letter of credit for each thirty (30) days
of such letter of credit, or a portion thereof, remains open.
Both
availability under our 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 provide credit support under our
credit facility. In some instances, new vendors may require
prepayments. We may make prepayments in order to open up these new
relationships, or to gain access to inventory that would not otherwise be
available to us. In addition, from time to time we make prepayments in
connection with our advertising campaign, as in some circumstances we need to
pay in advance of production. As of December 31, 2009, we had approximately
$238,000 of prepaid inventory and approximately $12,000 of prepaid
marketing on our Balance Sheet compared to $155,000 and $174,000 as of December
31, 2008 and $294,000 and $483,000 as of December 31, 2007.
Commitments
and Long Term Obligations
As of
December 31, 2009, we had the following commitments and long term
obligations:
Less Than
|
More Than
|
|||||||||||||||||||
Total
|
1 Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
||||||||||||||||
Employment
Contracts(1)
|
$ | 6,674,000 | $ | 3,251,000 | $ | 3,423,000 | $ | — | $ | — | ||||||||||
Operating
Leases
|
946,000 | 469,000 | 477,000 | — | — | |||||||||||||||
Marketing
and Advertising
|
2,401,000 | 2,401,000 | — | — | — | |||||||||||||||
Total
commitments and long-term obligations
|
$ | 10,021,000 | $ | 6,121,000 | $ | 3,900,000 | $ | — | $ | — |
|
(1)
|
Includes
approximately $1,300,000 in executive bonuses, of which $108,000 was paid
in January 2010.
|
While we
believe that in order to grow the business, we will need to make additional
marketing and advertising commitments in the future. However, our
marketing budget is subject to a number of factors, including our results of
operations.
Off
Balance Sheet Arrangements
Warrants
issued in conjunction with certain preferred stock financing transactions that
we entered into in prior years are equity linked derivatives and accordingly
represent an off balance sheet arrangement. These warrants were not
classified as derivatives, but instead included as a component of stockholders’
equity. See Statements of Changes in Stockholders’ Equity for more
information.
Recent
Accounting Pronouncements
In May
2008, the Financial Accounting Standards Board (“FASB”) issued authoritative
guidance relating to convertible debt instruments that may be settled in cash
upon conversion (including partial cash settlement). This
authoritative guidance requires the liability and equity components of
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) to be separately accounted for in a manner
that reflects the issuer's nonconvertible debt borrowing rate. The resulting
debt discount is amortized over the period during which the debt is expected to
be outstanding (i.e., through the first optional redemption date) as additional
non-cash interest expense. The equity component is determined by
deducting the fair value of the liability component. This
authoritative guidance is effective beginning in our first quarter of 2009
and is required to be applied retrospectively to all presented periods, as
applicable. As our Subordinated Notes could not have been settled in
cash upon conversion, the adoption of this authoritative guidance on January 1,
2009 did not impact our financial position or operating results relating to
our convertible debt.
In June
2008, the FASB issued authoritative guidance relating to determining whether
instruments granted in share-based payment transactions are participating
securities, which address whether financial instruments granted in share-based
payment transactions are participating securities prior to vesting and,
therefore, need to be included in the computation of earnings per share under
the two-class method. As our financial instruments granted in
share-based payment transactions are not participating securities prior to
vesting, the adoption of this authoritative guidance on January 1, 2009 did not
impact our financial position or operating results relating to the financial
instruments granted pursuant to our share-based payment programs.
In June
2008, the FASB issued authoritative guidance relating to determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock, which is
effective January 1, 2009. It provides guidance in assessing whether an
equity-linked financial instrument (or embedded feature) is indexed to an
entity's own stock for purposes of determining whether the equity-linked
instrument qualifies as a derivative instrument. We adopted this
authoritative guidance on January 1, 2009. We have determined that our
convertible notes contained an embedded conversion feature that is not indexed
to our stock and, therefore, was classified as a derivative
instrument. Upon adoption, we recognized and recorded a cumulative
effect of a change in accounting principle of approximately $779,000 as a
decrease in accumulated deficit at January 1, 2009.
In April
2009, the FASB issued authoritative guidance relating to interim disclosures
about fair values of financial instruments, which is effective June 15,
2009. It requires us to disclose the fair values of certain
instruments in interim financial statements. We adopted the
provisions of this authoritative guidance on June 30, 2009. The
adoption of this authoritative guidance did not impact our financial position or
operating results relating to our financial instruments.
In May
2009, the FASB issued authoritative guidance relating to subsequent events,
which is effective June 15, 2009. It provides guidance for disclosing
events that occur after the balance sheet date, but prior to the issuance of the
financial statements. We adopted this authoritative guidance on June 30,
2009. The adoption of this authoritative guidance did not have any
impact upon our financial position or operating results.
In June
2009, the FASB issued authoritative guidance relating to the hierarchy of
generally accepted accounting principles, which is effective September 15,
2009. It does not alter current U.S. generally accepted accounting
principles, but rather integrates existing accounting standards with other
authoritative guidance. As a result of the integration, it will be a
single source of authoritative guidance for non-governmental entities and will
also supersede all other previously issued non-SEC accounting and reporting
guidance. We adopted the provisions of this authoritative guidance on
September 30, 2009. The adoption of this authoritative guidance did
not have any impact upon our financial position or operating results other
than to change the references in the financial statement footnotes.
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.
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.
None.
Disclosure
Controls and Procedures
As of the
end of the period covered by this Form 10-K (the “Evaluation Date”), we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and 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 and Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in ensuring that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act were
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms, and were effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act was accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, 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,
2009. This annual report does not include an attestation report of
the our registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the our independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us 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 our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
On
February 17, 2010, the Compensation Committee (the “Committee”) of the Board of
Directors of the Company approved a discretionary cash bonus of $150,000 for
Melissa Payner-Gregor, the Company’s Chief Executive Officer for 2009
performance. This bonus was awarded in recognition of the Company’s
2009 performance, which significantly exceeded the expectations of the
Committee. This bonus was awarded as a supplement to the formulaic
bonus previously approved by the Committee, based upon adjusted EBITDA target
levels, which resulted in a $600,000 cash bonus for Ms. Payner-Gregor and a
$240,000 cash bonus for Kara Jenny, the Company’s Chief Financial
Officer.
The
information required by this Item is incorporated by reference
from our definitive information statement filed with the
SEC.
The
information required by this Item is incorporated by reference
from our definitive information statement filed with the
SEC.
The
information required by this Item is incorporated by reference
from our definitive information statement filed with the
SEC.
The
information required by this Item is incorporated by reference
from our definitive information statement filed with the
SEC.
The
information required by this Item is incorporated by reference from our
definitive proxy statement for the 2010 annual meeting of
stockholders.
(a)
|
(1)
|
Financial
Statements:
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
|
|
FINANCIAL
STATEMENTS:
|
|
Balance
Sheets as of December 31, 2009 and 2008
|
|
Statements
of Operations for the Years Ended December 31, 2009, 2008 and
2007
|
|
Statements
of Changes in Stockholders’ Equity for the Years Ended December 31, 2009,
2008 and 2007
|
|
Statements
of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
|
|
Notes
to Financial Statements
|
|
(2)
|
Financial
Statement Schedule:
|
SCHEDULE
II — Valuation and Qualifying Accounts For the Three Years Ended December
31, 2009
|
(3)
|
Exhibits:
|
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
|
Certificate
of Amendment to Certificate of Incorporation of the Company, dated April
3, 2008 (incorporated by reference to the Company’s Current Report on Form
8-K, dated April 4, 2008).
|
|
3.3
|
By-Laws
of the Company (incorporated by reference to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007).
|
|
3.4
|
Amendment
to Bylaws of the Company (incorporated by reference to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2007).
|
|
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 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).
|
10.3
|
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).
|
|
10.4
|
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).
|
|
10.5
|
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).
|
|
10.6
|
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).
|
|
10.7
|
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).
|
|
*10.8
|
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).
|
|
*10.9
|
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).
|
|
10.10
|
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).
|
|
10.11
|
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).
|
|
10.12
|
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).
|
|
10.13
|
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).
|
|
10.14
|
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).
|
|
10.15
|
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).
|
|
10.16
|
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). | ||
*10.17
|
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).
|
|
10.18
|
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).
|
|
*10.19
|
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).
|
|
10.20
|
Lease
Agreement by and between the Company and 42-52 West 39th
Street, LLC, dated February 7, 2008 (incorporated by reference to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007).
|
|
10.21
|
Second
Amendment to Loan and Security Agreement, dated as of November 15, 2007,
by and between the Company and Wells Fargo Retail Finance, LLC
(incorporated by reference to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2007).
|
|
10.22
|
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 (incorporated by reference to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2007).
|
|
10.23
|
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).
|
|
10.24
|
Fourth
Amendment to Loan and Security Agreement, dated as of March 26, 2008 by
and between the Company and Wells Fargo Retail Finance, LLC (incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007).
|
|
10.25
|
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 (incorporated by
reference to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007).
|
|
10.26
|
Amended
and Restated Warrant No. 1, dated April 8, 2008 and effective as of March
26, 2008, issued to Quantum Industrial Partners LDC (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008).
|
|
10.27
|
Amended
and Restated Warrant No. 2 dated April 8, 2008 and effective as of March
26, 2008, issued to SFM Domestic Investments LLC (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008).
|
|
10.28
|
Amended
and Restated Warrant No. 3 dated April 8, 2008 and effective as of March
26, 2008, issued to Maverick Fund USA, Ltd. (incorporated by reference to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2008).
|
|
10.29
|
Amended
and Restated Warrant No. 4 dated April 8, 2008 and effective as of March
26, 2008, issued to Maverick Fund LDC (incorporated by reference to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2008).
|
10.30
|
Amended
and Restated Warrant No. 5 dated April 8, 2008 and effective as of March
26, 2008, issued to Maverick Fund II, Ltd. (incorporated by reference to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2008).
|
|
10.31
|
Fifth
Amendment, dated as of June 30, 2008, to Loan and Security Agreement,
dated as of July 25, 2006, by and between the Company Wells Fargo Retail
Finance, LLC (incorporated by reference to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2008).
|
|
*10.32
|
Letter
Agreement, dated as of November 19, 2008, by and between the Company and
Fulfillment Technologies, LLC (incorporated by reference to the Company’s
Current Report on Form 8-K, dated November 24, 2008).
|
|
10.33
|
Amendment
No. 1 to Employment Agreement, effective as of December 18, 2008, by and
between the Company and Melissa Payner (incorporated by reference to the
Company’s Annual Report on Form 10-K, dated March 5,
2009).
|
|
10.34
|
Amendment
No. 1 to Employment Agreement, effective as of December 18, 2008, by and
between the Company and Kara B. Jenny (incorporated by reference to the
Company’s Annual Report on Form 10-K, dated March 5,
2009).
|
|
10.35
|
Sixth
Amendment, dated as of February 17, 2009, to Loan and Security Agreement,
dated as of July 25, 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 February 19, 2009).
|
|
10.36
|
Employment
Agreement, dated as of August 31, 2009, by and between the Company and
Bradford Matson (incorporated by reference to the Company’s Current Report
on Form 8-K, dated September 22, 2009).
|
|
10.37
|
Securities
Purchase Agreement, dated as of December 21, 2009, between Bluefly, Inc.
and Rho Ventures VI, LP (incorporated by reference to the Company’s
Current Report on Form 8-K, dated December 24, 2009).
|
|
10.38
|
Amended
and Restated Voting Agreement, dated as of December 21, 2009, among
Bluefly, Inc., Quantum Industrial Partners LDC, SFM Domestic Investments,
LLC, Maverick Fund USA, Ltd., Maverick Fund, L.D.C., Maverick Fund II,
Ltd., Prentice Capital Partners, LP, Prentice Capital Partners QP, LP,
Prentice Capital Offshore, Ltd., S.A.C. Capital Associates, LLC, GPC
XLIII, LLC, PEC I, LLC and Rho Ventures VI, LP (incorporated by reference
to the Company’s Current Report on Form 8-K, dated December 24,
2009).
|
|
10.39
|
Registration
Rights Agreement, dated as of December 21, 2009, among Bluefly, Inc.,
Quantum Industrial Partners LDC, SFM Domestic Investments, LLC, Maverick
Fund USA, Ltd., Maverick Fund, L.D.C., Maverick Fund II, Ltd., Prentice
Capital Partners, LP, Prentice Capital Partners QP, LP, Prentice Capital
Offshore, Ltd., S.A.C. Capital Associates, LLC, GPC XLIII, LLC, PEC I, LLC
and Rho Ventures VI, LP (incorporated by reference to the Company’s
Current Report on Form 8-K, dated December 24, 2009).
|
|
10.40
|
Consent
and Seventh Amendment to Loan and Security Agreement, dated as of December
21, 2009, between the Company and Wells Fargo Retail Finance, LLC
(incorporated by reference to the Company’s Current Report on Form 8-K,
dated December 24, 2009).
|
|
10.41
|
Employment
Agreement, dated as of October 20, 2009, by and between the Company and
Martin Keane.
|
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 and were filed separately
with the Securities and Exchange Commission.
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
|
February
18, 2010
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
|
||||
David
Wassong
|
Interim
Chairman of the Board
|
February
18, 2010
|
||
/s/ Melissa Payner Gregor
|
||||
Melissa
Payner-Gregor
|
Chief
Executive Officer (Principal Executive Officer)
Director
|
February
18, 2010
|
||
/s/ Kara B. Jenny
|
||||
Kara
B. Jenny
|
Chief
Financial Officer (Principal Accounting Officer)
|
February
18, 2010
|
||
/s/ Mario Ciampi
|
||||
Mario
Ciampi
|
Director
|
February
18, 2010
|
||
/s/ Michael Helfand
|
||||
Michael
Helfand
|
Director
|
February
18, 2010
|
||
/s/ Habib Kairouz
|
||||
Habib
Kairouz
|
Director
|
February
18, 2010
|
||
/s/ David Janke
|
||||
David
Janke
|
Director
|
February
18, 2010
|
||
/s/ Martin Miller
|
||||
Martin
Miller
|
Director
|
February
18, 2010
|
||
/s/ Neal Moszkowski
|
||||
Neal
Moszkowski
|
Director
|
February
18, 2010
|
||
/s/ Anthony Plesner
|
||||
Anthony
Plesner
|
Director
|
February
18, 2010
|
INDEX TO FINANCIAL
STATEMENTS AND SCHEDULE
Page
|
||
Number
|
||
F –
1 to F – 2
|
||
F –
3
|
||
F –
4
|
||
F –
5
|
||
F –
6
|
||
F –
7 to F – 24
|
||
S –
1
|
To the
Board of Directors and Stockholders
of
Bluefly, Inc.
We have
audited the accompanying balance sheet of Bluefly, Inc. (the “Company”) as of
December 31, 2009, and the related statements of operations, changes in
stockholders’ equity and cash flows for the year then ended. Our
audit also included the financial statement schedule listed at Item 15. These
financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We
conducted our audit 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. We were
not engaged to perform an audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Bluefly, Inc. as of December 31,
2009, and the results of their operations and their cash flows for the year then
ended in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As
discussed in Note 2 and Note 10 to the financial statements, the Company changed
its method for accounting convertible debt. The Company adopted
authoritative guidance relating to determining whether an instrument (or
embedded feature) is indexed to an entity’s own stock.
/s/
Weiser LLP
New York,
New York
February
18, 2010
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders
of
Bluefly, Inc.
In our
opinion, the balance sheet as of December 31, 2008 and the related statements of
income, stockholders’ equity and cash flows for each of the two years in the
period ended December 31, 2008 present fairly, in all material respects, the
financial position of Bluefly, Inc. at December 31, 2008, and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 2008, 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(a)(2) for each of the two years in the period ended December 31, 2008
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.
/s/
PricewaterhouseCoopers LLP
New York,
New York
March 5,
2009
Balance
Sheets
December
31, 2009 and 2008
(dollars
rounded to the nearest thousand)
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 10,049,000 | $ | 4,004,000 | ||||
Accounts
receivable, net of allowance for doubtful accounts
|
3,319,000 | 3,300,000 | ||||||
Inventories,
net
|
17,668,000 | 23,157,000 | ||||||
Prepaid
expenses and other current assets
|
959,000 | 1,047,000 | ||||||
Total
current assets
|
31,995,000 | 31,508,000 | ||||||
Property
and equipment, net
|
3,506,000 | 6,058,000 | ||||||
Other
assets
|
145,000 | 184,000 | ||||||
Total
assets
|
$ | 35,646,000 | $ | 37,750,000 | ||||
Liabilities
and Stockholders’ Equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 4,363,000 | $ | 8,344,000 | ||||
Allowance
for sales returns
|
2,627,000 | 3,707,000 | ||||||
Accrued
expenses and other current liabilities
|
2,105,000 | 1,323,000 | ||||||
Deferred
revenue
|
3,516,000 | 2,876,000 | ||||||
Total
current liabilities
|
12,611,000 | 16,250,000 | ||||||
Notes
payable to related party stockholders
|
— | 3,000,000 | ||||||
Interest
payable to related party stockholders
|
— | 106,000 | ||||||
Total
liabilities
|
12,611,000 | 19,356,000 | ||||||
Commitments
and contingencies (Note 8)
|
||||||||
Stockholders’
equity:
|
||||||||
Common
stock – $.01 par
value; 200,000,000 shares authorized; 18,885,239 and 14,061,237
shares issued as of December 31, 2009 and 2008, respectively; and
18,552,737 and 13,831,950 shares outstanding as of December 31, 2009 and
2008, respectively
|
185,000 | 138,000 | ||||||
Treasury
stock
|
(1,809,000 | ) | (1,612,000 | ) | ||||
Additional
paid-in capital
|
172,127,000 | 163,746,000 | ||||||
Accumulated
deficit
|
(147,468,000 | ) | (143,878,000 | ) | ||||
Total
stockholders’ equity
|
23,035,000 | 18,394,000 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 35,646,000 | $ | 37,750,000 |
The
accompanying notes are an integral part of these financial
statements.
Statements
of Operations
Years
Ended December 31, 2009, 2008 and 2007
(dollars
rounded to the nearest thousand, except per share data)
2009
|
2008
|
2007
|
||||||||||
Net sales
|
$ | 81,222,000 | $ | 95,774,000 | $ | 91,493,000 | ||||||
Cost
of sales
|
49,665,000 | 60,288,000 | 58,754,000 | |||||||||
Gross
profit
|
31,557,000 | 35,486,000 | 32,739,000 | |||||||||
Selling
and fulfillment expenses
|
16,675,000 | 19,620,000 | 18,898,000 | |||||||||
Marketing
expenses
|
8,404,000 | 14,523,000 | 16,063,000 | |||||||||
General
and administrative expenses
|
9,139,000 | 12,191,000 | 13,848,000 | |||||||||
Total
operating expenses
|
34,218,000 | 46,334,000 | 48,809,000 | |||||||||
Operating
loss
|
(2,661,000 | ) | (10,848,000 | ) | (16,070,000 | ) | ||||||
Interest
expense to related party stockholders
|
(1,413,000 | ) | (235,000 | ) | — | |||||||
Other
interest (expense) income, net
|
(295,000 | ) | (257,000 | ) | 241,000 | |||||||
Net
loss
|
(4,369,000 | ) | (11,340,000 | ) | (15,829,000 | ) | ||||||
Preferred
stock dividends
|
— | (37,000 | ) | (44,000 | ) | |||||||
Deemed
dividend related to beneficial conversion feature on
|
||||||||||||
Series
F Preferred Stock
|
— | (712,000 | ) | — | ||||||||
Net
loss available to common stockholders
|
$ | (4,369,000 | ) | $ | (12,089,000 | ) | $ | (15,873,000 | ) | |||
Basic
and diluted net loss per common share
|
$ | (0.31 | ) | $ | (0.90 | ) | $ | (1.21 | ) | |||
Weighted
average common shares outstanding (basic and diluted)
|
14,003,534 | 13,369,257 | 13,091,130 |
The
accompanying notes are an integral part of these financial
statements.
Statements
of Changes in Stockholders’ Equity
Years
Ended December 31, 2009, 2008 and 2007
(dollars
rounded to the nearest thousand)
Preferred
Stock
|
Common
Stock
|
|||||||||||||||||||||||||||||||||||
$.01
Par value
|
$.01
Par Value
|
Treasury
Stock
|
Additional
|
Total
|
||||||||||||||||||||||||||||||||
Number
of
|
Number
of
|
Number
of
|
Paid-in
|
Accumulated
|
Stockholders'
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||||||||||||||
Balance
at January 1, 2007
|
571 | $ | - | 13,048,486 | $ | 131,000 | - | $ | - | $ | 153,693,000 | $ | (115,997,000 | ) | $ | 37,827,000 | ||||||||||||||||||||
Stock
based compensation
|
- | - | (2,968 | ) | - | - | - | 6,194,000 | - | 6,194,000 | ||||||||||||||||||||||||||
Issuance
of Restricted Stock
|
- | - | 42,619 | - | - | - | - | - | - | |||||||||||||||||||||||||||
Issuance
of Restricted Stock Units
|
- | - | 184,601 | 2,000 | - | - | (2,000 | ) | - | - | ||||||||||||||||||||||||||
Issuance
of Treasury Stock
|
- | - | - | - | 151,073 | (1,430,000 | ) | - | - | (1,430,000 | ) | |||||||||||||||||||||||||
Exercise
of Options
|
- | - | 2,806 | - | - | - | 25,000 | - | 25,000 | |||||||||||||||||||||||||||
Reversal
of legal expenses related to June 2006 financing
|
- | - | - | - | - | - | 250,000 | - | 250,000 | |||||||||||||||||||||||||||
Exercise
of Related Party Warrant
|
- | - | 186 | - | - | - | - | - | - | |||||||||||||||||||||||||||
Net
Loss
|
- | - | - | - | - | - | - | (15,829,000 | ) | (15,829,000 | ) | |||||||||||||||||||||||||
Balance
at December 31, 2007
|
571 | $ | - | 13,275,730 | $ | 133,000 | 151,073 | $ | (1,430,000 | ) | $ | 160,160,000 | $ | (131,826,000 | ) | $ | 27,037,000 | |||||||||||||||||||
Stock
based compensation
|
- | - | - | - | - | - | 2,706,000 | - | 2,706,000 | |||||||||||||||||||||||||||
Issuance
of Restricted Stock Units
|
- | - | 301,454 | 3,000 | - | - | (3,000 | ) | - | - | ||||||||||||||||||||||||||
Shares
of Series F Preferred Stock Converted into Common
Stock
|
(571 | ) | - | 254,766 | 2,000 | - | - | (2,000 | ) | - | - | |||||||||||||||||||||||||
Warrants
Issued to Third-Party
|
- | - | - | - | - | - | 173,000 | - | 173,000 | |||||||||||||||||||||||||||
Issuance
of Treasury Stock
|
- | - | - | - | 78,214 | (182,000 | ) | - | - | (182,000 | ) | |||||||||||||||||||||||||
Deemed
Dividends related to beneficial conversion on Series F Preferred
Stock
|
- | - | - | - | - | - | 712,000 | (712,000 | ) | - | ||||||||||||||||||||||||||
Net
Loss
|
- | - | - | - | - | - | - | (11,340,000 | ) | (11,340,000 | ) | |||||||||||||||||||||||||
Balance
at December 31, 2008
|
- | $ | - | 13,831,950 | $ | 138,000 | 229,287 | $ | (1,612,000 | ) | $ | 163,746,000 | $ | (143,878,000 | ) | $ | 18,394,000 | |||||||||||||||||||
Stock
based compensation
|
- | - | - | - | - | - | 612,000 | - | 612,000 | |||||||||||||||||||||||||||
Issuance
of restricted stock
|
- | - | 10,312 | - | - | - | - | - | - | |||||||||||||||||||||||||||
Retirement
of unvested restricted stock
|
- | - | (750 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||
Cumulative
effect of a change in accounting principle
|
- | - | - | - | - | - | - | 779,000 | 779,000 | |||||||||||||||||||||||||||
Delivery
of deferred stock units
|
- | - | 160,182 | 2,000 | - | - | (2,000 | ) | - | - | ||||||||||||||||||||||||||
Purchase
of treasury stock
|
- | - | - | - | 103,215 | (197,000 | ) | - | - | (197,000 | ) | |||||||||||||||||||||||||
Conversion
of subordinated notes
|
- | - | 1,764,706 | 17,000 | - | - | 3,331,000 | - | 3,348,000 | |||||||||||||||||||||||||||
Sale
of common stock in connection with 2009 private placement (net of
$269,000 issuance costs)
|
- | - | 2,786,337 | 28,000 | - | - | 4,440,000 | - | 4,468,000 | |||||||||||||||||||||||||||
Net
Loss
|
- | - | - | - | - | - | - | (4,369,000 | ) | (4,369,000 | ) | |||||||||||||||||||||||||
Balance
at December 31, 2009
|
- | $ | - | 18,552,737 | $ | 185,000 | 332,502 | $ | (1,809,000 | ) | $ | 172,127,000 | $ | (147,468,000 | ) | $ | 23,035,000 |
The
accompanying notes are an integral part of these financial
statements.
Statements
of Cash Flows
Years
Ended December 31, 2009, 2008 and 2007
(dollars
rounded to the nearest thousand)
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$ | (4,369,000 | ) | $ | (11,340,000 | ) | $ | (15,829,000 | ) | |||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||||||
Depreciation
and amortization
|
2,943,000 | 2,476,000 | 1,726,000 | |||||||||
Provisions
for returns
|
(1,080,000 | ) | (496,000 | ) | (840,000 | ) | ||||||
Bad
debt expense
|
350,000 | 553,000 | 669,000 | |||||||||
Reserve
for inventory obsolescence
|
(534,000 | ) | 290,000 | 2,735,000 | ||||||||
Stock
based compensation
|
612,000 | 2,706,000 | 6,194,000 | |||||||||
Amortization
of discount on notes payable to related party stockholders
|
343,000 | — | — | |||||||||
Change
in fair value of embedded derivative financial liability to related party
stockholders
|
785,000 | — | — | |||||||||
Change
in operating assets and liabilities:
|
||||||||||||
(Increase)
decrease in:
|
||||||||||||
Accounts
receivable
|
(369,000 | ) | (1,751,000 | ) | (52,000 | ) | ||||||
Inventories
|
6,023,000 | 5,045,000 | (7,038,000 | ) | ||||||||
Prepaid
expenses and other current assets
|
(51,000 | ) | 446,000 | (1,293,000 | ) | |||||||
Other
assets
|
— | (198,000 | ) | (114,000 | ) | |||||||
Increase
(decrease) in:
|
||||||||||||
Accounts
payable
|
(3,981,000 | ) | (176,000 | ) | 3,698,000 | |||||||
Accrued
expenses and other current liabilities
|
943,000 | (548,000 | ) | 1,839,000 | ||||||||
Interest
payable to related party stockholders
|
(106,000 | ) | 106,000 | — | ||||||||
Deferred
revenue
|
640,000 | (330,000 | ) | 376,000 | ||||||||
Net
cash provided by (used in) operating activities
|
2,149,000 | (3,217,000 | ) | (7,929,000 | ) | |||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of property and equipment
|
(375,000 | ) | (2,327,000 | ) | (4,110,000 | ) | ||||||
Net
cash used in investing activities
|
(375,000 | ) | (2,327,000 | ) | (4,110,000 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Purchase
of treasury stock
|
(197,000 | ) | (182,000 | ) | (1,430,000 | ) | ||||||
Payments
of capital lease obligation
|
— | — | (14,000 | ) | ||||||||
Net
proceeds from exercise of stock options
|
— | — | 25,000 | |||||||||
Proceeds
from notes issued to related party stockholders
|
— | 3,000,000 | — | |||||||||
Net
proceeds from common stock issuance
|
4,468,000 | — | — | |||||||||
Net
cash provided by (used in) financing activities
|
4,271,000 | 2,818,000 | (1,419,000 | ) | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
6,045,000 | (2,726,000 | ) | (13,458,000 | ) | |||||||
Cash
and cash equivalents – beginning of year
|
4,004,000 | 6,730,000 | 20,188,000 | |||||||||
Cash
and cash equivalents – end of year
|
$ | 10,049,000 | $ | 4,004,000 | $ | 6,730,000 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the year for interest
|
$ | 239,000 | $ | 264,000 | $ | 130,000 | ||||||
Cash
paid during the year for interest to related party
stockholders
|
$ | 347,000 | — | — | ||||||||
Supplemental
non-cash financing disclosure of cash flow information:
|
||||||||||||
Conversion
of notes payable to related party stockholders
|
$ | 3,348,000 | $ | — | $ | — | ||||||
Deemed
dividend related to beneficial conversion feature on Series F
Preferred Stock
|
$ | — | $ | 712,000 | $ | — | ||||||
Warrants
issued to related party stockholders
|
$ | — | 173,000 | — | ||||||||
Conversion
of preferred stock to common stock
|
$ | — | $ | 2,000 | $ | — |
The
accompanying notes are an integral part of these financial
statements.
NOTE
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 cumulative net losses and negative cash flows from
operations since inception. As of December 31, 2009, the Company had
an accumulated deficit of $147,468,000. The Company’s ability to meet
its obligations in the ordinary course of business is dependent on its ability
to establish profitable operations, or find sources to fund
operations. The Company believes that its existing cash balance,
combined with working capital, proceeds from the December 2009 Private Placement
described further below in Note 11 – Stockholders’ Equity, and the funds
available from the Company’s existing credit facility, will be sufficient to
enable the Company to meet planned expenditures through at least the next 12
months.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
The
Company recognizes revenue when the earnings process is complete and revenue is
measurable. Gross sales consist primarily of revenue from product sales and
shipping and handling charges and are net of promotional
discounts. Net sales represent gross sales, less provision for
returns, credit card chargebacks and adjustments for uncollected sales
tax. Revenue is recognized when all the following criteria are
met:
|
·
|
A
customer executes an order.
|
|
·
|
The
product price and the shipping and handling fee have been
determined.
|
|
·
|
Credit
card authorization has occurred and collection is reasonably
assured.
|
|
·
|
The
product has been shipped and received by the
customer.
|
Deferred
revenue, which consists primarily of goods shipped to customers but not yet
received and customer credits, totaled approximately $3,516,000 and $2,876,000
as of December 31, 2009 and 2008, respectively.
Shipping
and handling billed to customers is classified as revenue and freight cost
incurred in connection with purchasing merchandise is classified as cost of
goods.
Provisions
for Sales Returns and Doubtful Accounts
The
Company generally permits returns for any reason within 60 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 Balance Sheets net of the allowance for doubtful
accounts. As of December 31, 2009 and 2008, the allowance for
doubtful accounts was $91,000 and $80,000, respectively, and the allowance for
sales returns was $2,627,000 and $3,707,000, 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. The Company is exposed to
risk in the event of default by financial institutions to the extent that cash
balances with financial institutions are in excess of insured
limits.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
Inventories,
net
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 inventory stock will not sell at its currently
marked price. Inventory is presented net of reserves on the Balance
Sheets.
As of
December 31, 2009 and 2008, inventories, net consist of the following,
respectively:
2009
|
2008
|
|||||||
Inventory
on hand
|
$ | 17,566,000 | $ | 22,751,000 | ||||
Inventory
to be recovered due to returns
|
1,388,000 | 2,095,000 | ||||||
Inventory
reserves
|
(1,286,000 | ) | (1,689,000 | ) | ||||
Total
inventories, net
|
$ | 17,668,000 | $ | 23,157,000 |
Property
and equipment, net
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 2007,
the Company began the process of developing an improved version of its Web site
based on new licensed software pursuant to a Master License Agreement with a
service provider. In connection with the new version of its Web site,
the Company has spent approximately $5,299,000, which has been
capitalized. In August 2008, the Company’s new version of its Web
site was placed into service.
Costs
related to the upgrade and development of the Web Site, 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 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 authoritative guidance relating to
uncertainty in income taxes. It 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 they have taken
or expect to take on a tax return. As of December 31, 2009 and 2008, 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. As of
the adoption of this authoritative guidance, the Company’s open tax
years
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
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 Statements of Operations
or Balance Sheets upon adoption of this authoritative guidance or as of and for
the years ended December 31, 2009 and 2008.
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 one in May 1997
(collectively the “Plans”), which are described more fully in Note 11 –
Stockholders’ Equity. The Plans, which provide for the granting of
restricted stock, deferred stock unit awards, 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 terms 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. As
of December 31, 2009, The Plans have an aggregate of 1,184,752 shares remaining
available for future issuance. Total stock-based compensation expense recorded
in the Statements of Operations for the years ended December 31, 2009, 2008 and
2007 was $612,000, $2,706,000 and $6,194,000, respectively.
Treasury
Stock
Treasury
stock represents common stock withheld by the Company to satisfy income 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.
Net
Loss per Share
Basic net
loss per share excludes dilution and is computed by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding for the period.
Diluted
net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for the
period, adjusted to reflect potentially dilutive securities using the treasury
stock method for options, warrants, restricted stock awards and deferred stock
unit awards, and the if-converted method for preferred stock and the
Subordinated Notes, as defined in Note 10 – Subordinated Convertible Notes. Due
to the Company’s net loss, (i) options and warrants to purchase shares of Common
Stock, (ii) preferred stock and Subordinated Notes convertible into shares of
Common Stock, (iii) restricted stock awards that have not yet vested and (iv)
deferred stock unit awards for shares that have not yet been delivered were not
included in the computation of diluted loss per share, as the effects would be
anti-dilutive. Accordingly, basic and diluted weighted average shares
outstanding are equal for the following periods presented:
2009
|
2008
|
2007
|
||||||||||
Net
loss
|
$ | (4,369,000 | ) | $ | (11,340,000 | ) | $ | (15,829,000 | ) | |||
Preferred
stock dividends
|
— | (37,000 | ) | (44,000 | ) | |||||||
Deemed
dividend related to beneficial conversion feature on
|
||||||||||||
Series
F Preferred Stock
|
— | (712,000 | ) | — | ||||||||
Net
loss available to common stockholders
|
$ | (4,369,000 | ) | $ | (12,089,000 | ) | $ | (15,873,000 | ) | |||
Weighted
average common shares outstanding (basic)
|
14,003,534 | 13,369,257 | 13,091,130 | |||||||||
Options and warrants(1),
(2)
|
— | — | — |
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
Preferred stock and subordinated notes(1)
|
—
|
—
|
—
|
|||||||||
Restricted stock and deferred stock awards(1)
|
—
|
—
|
—
|
|||||||||
Weighted
average common shares outstanding (diluted)
|
14,003,534
|
13,369,257
|
13,091,130
|
(1)
|
As
of December 31, 2009, 2008 and 2007, respectively, the Company had
weighted average shares of the following potentially dilutive securities
that were excluded from the computation of net loss per
share:
|
Options
and warrants
|
2,849
|
—
|
29,228
|
|||||||||
Preferred
stock and subordinated notes
|
—
|
364,231
|
571
|
|||||||||
Restricted
stock and deferred stock awards
|
227,382
|
1,134,312
|
1,051,458
|
(2)
|
Under
the treasury-stock method, the Company excluded all options and warrants
from the computation of weighted average shares as a result of the average
market price of the Company’s Common Stock being greater than the exercise
price of the options and warrants.
|
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. 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,
2009 and 2008. For the years ended December 31, 2009, 2008 and 2007 marketing
expenditures (excluding staff related costs) were approximately $7,603,000,
$13,562,000 and $14,908,000, 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, 2009,
2008 and 2007, fulfillment expenses totaled $4,020,000, $5,352,000 and
$4,390,000, respectively.
Fair Value of
Financial Instruments
Effective
January 1, 2008, the Company implemented authoritative
guidance relating to fair value measurements and disclosures, which defines fair
value, establishes a framework for measuring fair value and expands
disclosure about fair value measurements except as it
applied to the non-financial assets and non-financial liabilities. The
Company adopted authoritative guidance relating to fair value measurements and
disclosures applied to non-financial assets and non-financial liabilities on
January 1, 2009. The Company’s financial instruments consist of cash and
cash equivalents, other assets, accounts payable and accrued expenses. The
carrying amounts of these financial instruments approximate fair value due to
their short maturities. The fair value hierarchy for disclosure of fair value
measurements is as follows:
Level 1 -
Quoted prices in active markets for identical assets or liabilities
Level 2 -
Quoted prices for similar assets and liabilities in active markets
or inputs that are observable
Level 3 -
Inputs that are unobservable (for example cash flow modeling inputs based
on assumptions)
Derivative
Financial Instrument
As a
result of the adoption of authoritative guidance relating to determining whether
an instrument (or embedded feature) is indexed to an entity’s own stock,
described more fully in Note 10 – Subordinated Convertible Notes, the Company
carried an embedded derivative financial instrument on its Balance Sheet
relating to its convertible debt, which was converted into
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
common
stock in December 2009 in connection with the 2009 Private Placement, described
more fully in Note 11 – Stockholders’ Equity. The Company did not use the
embedded derivative financial instrument to manage financial exposure or enter
into hedging activities.
The
Company recorded its embedded derivative financial instrument on its Balance
Sheet at fair value and on a recurring basis to determine the appropriate level
to classify it for each reporting period during 2009. This determination
required significant judgment as determined by the Company. The fair value
was based on a valuation model that required inputs including contractual terms,
market prices, yield curves and measures of volatility. The Company’s
embedded derivative financial instrument was classified as a Level II value on
its Balance Sheet. Any changes in fair value of the embedded derivative
financial instrument are reflected in its Statement of Operations.
Reclassifications
Certain
amounts in the financial statements of the prior periods have been reclassified
to conform to the current period presentation for comparative
purposes.
Recent
Accounting Pronouncements
In May
2008, the FASB issued authoritative guidance relating to convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement). This authoritative guidance requires the liability and equity
components of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) to be separately accounted for in
a manner that reflects the issuer's nonconvertible debt borrowing rate. The
resulting debt discount is amortized over the period during which the debt is
expected to be outstanding (i.e., through the first optional redemption date) as
additional non-cash interest expense. The equity component is determined by
deducting the fair value of the liability component. This authoritative
guidance is effective beginning in the Company’s first quarter of 2009 and
is required to be applied retrospectively to all presented periods, as
applicable. As the Company’s Subordinated Notes may not be settled in cash
upon conversion, the adoption of this authoritative guidance on January 1,
2009 did not impact the Company’s financial position or operating results
relating to its convertible debt.
In June
2008, the FASB issued authoritative guidance relating to determining whether
instruments granted in share-based payment transactions are participating
securities, which address whether financial instruments granted in share-based
payment transactions are participating securities prior to vesting and,
therefore, need to be included in the computation of earnings per share under
the two-class method. As the Company’s financial instruments granted in
share-based payment transactions are not participating securities prior to
vesting, the adoption of this authoritative guidance on January 1, 2009 did not
impact the Company’s financial position or operating results relating to the
financial instruments granted pursuant to its share-based payment
programs.
In June
2008, the FASB issued authoritative guidance relating to determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock, which is
effective January 1, 2009. It provides guidance in assessing whether an
equity-linked financial instrument (or embedded feature) is indexed to an
entity's own stock for purposes of determining whether the equity-linked
instrument qualifies as a derivative instrument. The Company adopted this
authoritative guidance on January 1, 2009. The Company has determined that
its convertible notes contained an embedded conversion feature that is not
indexed to its own stock and, therefore, was classified as a derivative
instrument. Upon adoption, the Company recognized and recorded a cumulative
effect of a change in accounting principle of approximately $779,000 as a
decrease in accumulated deficit at January 1, 2009.
In April
2009, the FASB issued authoritative guidance relating to interim disclosures
about fair values of financial instruments, which is effective June 15,
2009. It requires the Company to disclose the fair values of certain
instruments in interim financial statements. The Company adopted this
authoritative guidance on June 30, 2009. The adoption of this authoritative
guidance did not impact the Company’s financial position or operating results
relating to the Company’s financial instruments.
In May
2009, the FASB issued authoritative guidance relating to subsequent events,
which is effective June 15, 2009. It provides guidance for disclosing
events that occur after the balance sheet date, but prior to the issuance of the
financial
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
statements.
The Company adopted this authoritative guidance on June 30, 2009. The
adoption of this authoritative guidance did not have any impact to the Company’s
financial position or operating results other than additional disclosures
included in the Notes to Financial Statements.
In June
2009, the FASB issued authoritative guidance relating to the hierarchy of
generally accepted accounting principles, which is effective September 15,
2009. It does not alter current U.S. generally accepted accounting
principles, but rather integrates existing accounting standards with other
authoritative guidance. As a result of the integration, it will be a single
source of authoritative guidance for non-governmental entities and will also
supersede all other previously issued non-SEC accounting and reporting
guidance. The Company adopted the provisions of this authoritative guidance
on September 30, 2009. The adoption of this authoritative guidance did not
have any impact to the Company’s financial position or operating results other
than to change the references in the financial statement footnotes.
Concentration
The
Company acquired approximately 31% of its inventory from one supplier for both
fiscal 2009 and 2008.
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 the disclosures of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting
periods. 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.
The
Company currently estimates that it will have adequate liquidity to fund
operations beyond December 31, 2010. Such estimate is based on projected
revenues, expenses and timing of various payments. Should unforeseen events
occur or should actual results differ from current estimates, the Company maybe
unable to meet payment obligations as they come due which would have a material
adverse impact on our operations.
Subsequent
Events
In
preparing these financial statements, the Company has evaluated subsequent
events through February 18, 2010, which is the date that the financial
statements were issued. All appropriate subsequent event disclosures, if
any, have been made in the notes to the financial statements.
NOTE
3 – REVERSE STOCK SPLIT
On March
13, 2008, the Company’s Board of Directors approved a 1-for-10 reverse stock
split of the Company’s Common Stock. The record date for the reverse stock split
was April 3, 2008, and the reverse stock split was effective as of 11:59 P.M.
EST on the same date. Retroactive restatement has been given to all share
numbers in this report, and accordingly, all amounts including per share amounts
are shown on a post-split basis.
NOTE 4 – PROPERTY AND
EQUIPMENT
As of
December 31, 2009 and 2008, property and equipment, net consists of the
following:
2009
|
2008
|
|||||||
Leasehold
improvements
|
$ | 1,140,000 | $ | 1,924,000 | ||||
Office
equipment
|
151,000 | 632,000 | ||||||
Computer
equipment and software
|
2,938,000 | 10,090,000 | ||||||
Capitalized
web site development costs
|
5,299,000 | 5,299,000 | ||||||
9,528,000 | 17,945,000 | |||||||
Less:
accumulated depreciation
|
(6,022,000 | ) | (11,887,000 | ) | ||||
$ | 3,506,000 | $ | 6,058,000 |
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
Depreciation
and amortization of property and equipment was approximately $2,927,000,
$2,288,000 and $1,639,000, for the years ended December 31, 2009, 2008 and
2007, respectively.
NOTE
5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of
December 31, 2009 and 2008, prepaid expenses and other current assets consists
of the following:
2009
|
2008
|
|||||||
Prepaid
expenses
|
$ | 208,000 | $ | 470,000 | ||||
Prepaid
inventory
|
238,000 | 155,000 | ||||||
Other
current assets
|
513,000 | 422,000 | ||||||
$ | 959,000 | $ | 1,047,000 |
NOTE
6 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of
December 31, 2009 and 2008, accrued expenses and other current liabilities
consists of the following:
2009
|
2008
|
|||||||
Salary,
vacation and bonus accrual
|
$ | 1,496,000 | $ | 435,000 | ||||
Accrued
media expenses
|
184,000 | 686,000 | ||||||
Other
accrued expenses
|
425,000 | 202,000 | ||||||
$ | 2,105,000 | $ | 1,323,000 |
NOTE
7 – INCOME TAXES
Significant
components of the Company’s deferred tax assets and liabilities as of December
31, 2009 and 2008 are summarized as follows:
2009
|
2008
|
|||||||
Net
operating losses
|
$ | 43,867,000 | $ | 37,927,000 | ||||
Accounts
receivable and inventory reserves
|
1,465,000 | 852,000 | ||||||
Deferred
revenue
|
1,368,000 | — | ||||||
Returns
reserve
|
1,023,000 | 1,448,000 | ||||||
Stock
options
|
204,000 | 1,705,000 | ||||||
Other
accruals
|
45,000 | 139,000 | ||||||
Depreciation
and amortization
|
(584,000 | ) | 22,000 | |||||
47,388,000 | 42,093,000 | |||||||
Valuation
allowance
|
(47,388,000 | ) | (42,093,000 | ) | ||||
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 $112,701,000 at
December 31, 2009 which have expiration dates from 2019 through 2029.
Section 382 of the Internal Revenue Code limits the utilization of net operating
losses when
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
ownership
changes, as defined by that section, occur. The Company has performed an
analysis of its historical Section 382 ownership changes prior to 2001 and has
determined that the utilization of certain of its net operating loss
carryforwards may be limited in connection with pre-2001 net operating losses.
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 35% as follows:
2009
|
2008
|
2007
|
||||||||||
Statutory
federal income tax rate
|
(35.00 | )% | (35.00 | )% | (34.00 | )% | ||||||
State
tax benefit, net of federal taxes
|
(3.92 | )% | (4.06 | )% | (5.04 | )% | ||||||
Other
|
0.14 | % | 1.16 | % | 0.93 | % | ||||||
Adjustment
for prior year taxes
|
1.99 | % | 5.24 | % | 0.00 | % | ||||||
Equity
compensation
|
17.11 | % | 8.95 | % | 0.00 | % | ||||||
Valuation
allowance on deferred tax asset (liability)
|
19.68 | % | 23.71 | % | 38.11 | % | ||||||
Effective tax rate
|
00.00 | % | 00.00 | % | 00.00 | % |
NOTE
8 – COMMITMENTS AND CONTINGENCIES
Employment
Contracts
The
Company has employment agreements with certain of its executive officers. These
employment agreements have terms expiring through January 1, 2013. As of
December 31, 2009, the Company's aggregate cash commitment for future base
salary under these employment contracts is as follows:
2010
|
$
|
1,951,000
|
||
2011
|
1,795,000
|
|||
2012
|
1,628,000
|
|||
2013
& thereafter
|
—
|
|||
$
|
5,374,000
|
Leases
The
Company leases space under operating leases that expire at various dates through
2012. 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:
2010
|
$
|
469,000
|
||
2011
|
335,000
|
|||
2012
|
142,000
|
|||
2013
& thereafter
|
—
|
|||
$
|
946,000
|
Rent
expense (including amounts related to commercial rent tax) aggregated
approximately $692,000, $663,000 and $500,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
Marketing
Commitments
As of
December 31, 2009, 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 $2,401,000 through December 31,
2010.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
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.
NOTE 9 – 2008 COMMITMENT FROM RELATED
PARTY
In March
2008, the Company entered into an agreement (the “Commitment”) with affiliates
of Soros Fund Management LLC (“Soros”) and private funds associated with
Maverick Capital, Ltd. (“Maverick”) pursuant to which they agreed to provide up
to $3,000,000 of debt financing to the Company, on a standby basis, available
until March 2009, provided that the commitment amount would be reduced by the
gross proceeds of any equity financing consummated during the year. The
Company drew down the entire $3,000,000 of debt in July 2008. The draw
down was evidenced by subordinated convertible notes (the “Subordinated Notes”)
that had a term expiring three years from the date of issuance and bore interest
at the rate of 8% per annum, compounded annually. The terms of the
Subordinated Notes also provided that interest is payable upon maturity or
conversion. The Subordinated Notes were convertible, at the holder’s
option into (a) equity securities that the Company might issue in any subsequent
round of financing at a price equal to the lowest price per share paid by any
investor in such subsequent round of financing or (b) Common Stock at a price
per share equal to $3.65, which represented the 20-day trailing average stock
price on the date of issuance of the Subordinated Notes. As discussed more fully
in Note 10 – Subordinated Convertible Notes and Note 11 – Stockholders’ Equity,
all outstanding Subordinated Notes were converted, and interest in the amount of
$347,000 was paid, in December 2009.
The
Company recorded approximately $106,000 of interest expense to related party
stockholders in its Statement of Operations for the year ended December 31, 2008
and recorded approximately $106,000 as long-term interest payable to related
party stockholders in its Balance Sheet as of December 31, 2008.
As a
result of the issuance of the Subordinated Notes, the conversion price of the
Company's Series F Convertible Preferred Stock, automatically decreased from
$8.20 to $3.65. This reduction in the conversion price of the Company's Series F
Preferred Stock resulted in a beneficial conversion feature of approximately
$712,000 as part of its third quarter 2008 financial results. This non-cash
charge, which is analogous to a dividend, resulted in a reduction in net loss
available to common stockholders and, consequently an adjustment to the
Company's computation of net loss per share.
In
connection with the Commitment, the Company issued warrants to Soros and
Maverick to purchase an aggregate of 52,497 shares of Common Stock at an
exercise price equal to the trailing 20-day average stock price, or $4.40. On
April 8, 2008, the warrants were amended to increase the exercise price from
$4.40 per share to $5.10 per share. The exercise price of $5.10 per share equals
the closing price of the Company’s Common Stock on the day immediately preceding
the issuance of the warrants. The modification had no accounting
impact.
The
Company used the Black-Scholes option pricing method (assumptions: volatility
79.6%, risk free rate 2.96%, a five year expected life and zero dividend yield)
to calculate the value of the 52,497 warrants issued in connection with the
Commitment. Using those assumptions, a value of approximately $173,000 was
assigned to the warrants. This amount was credited to additional paid-in capital
and is being accounted for as interest expense over the life of the Commitment
which is one year. As of December 31, 2009, the value of the warrants issued is
fully amortized.
NOTE
10 – SUBORDINATED CONVERTIBLE NOTES
As
discussed in Note 9 – 2008 Commitment From Related Party, in July 2008, the
Company issued Subordinated Notes in the aggregate principal amount of
$3,000,000 that had a term expiring three years from the date of issuance and
bore interest at the rate of 8% per annum, compounded annually, which is payable
in cash upon maturity or conversion (the “Subordinated Notes”). In December
2009, all outstanding Subordinated Notes were converted.
The
Subordinated Notes were convertible, at the holder’s option into (a) equity
securities that the Company might issue in any subsequent round of financing at
a price equal to the lowest price per share paid by any investor in such
subsequent round of financing in addition to (b) Common Stock at a price per
share equal to $3.65, which represented the 20-day trailing average stock price
on the date of issuance of the Subordinated Notes (collectively, the “Embedded
Conversion Feature”).
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
In
connection with the adoption of authoritative guidance relating to determining
whether an instrument (or embedded feature) is indexed to an entity’s own stock,
on January 1, 2009, the Company determined that the embedded conversion feature
in the Subordinated Notes is not indexed to the Company’s own stock and,
therefore, is an embedded derivative financial liability (the “Embedded
Derivative”), which requires bifurcation and must be separately accounted for as
a separate instrument.
The
Company measured the fair value of the Embedded Derivative using a Black-Scholes
valuation model as of January 1, 2009 to determine the cumulative effect of the
change in accounting principle to be recorded. Expected volatility is based
on the historical volatility of the price of the Company’s Common Stock,
measured over the same period of time as the remaining maturity life of the
Subordinated Notes. The risk free interest rate is based on the interest
rate for U.S. Treasury Notes having a maturity period equal to the remaining
maturity life of the Subordinated Notes.
The
Company recorded a cumulative effect of the change in accounting principle of
approximately $779,000, which was recognized as a decrease in accumulated
deficit at January 1, 2009. The amount recognized in the Company’s Balance
Sheet upon the initial adoption of the authoritative guidance described above
was determined based on the amounts that would have been recognized if the
authoritative guidance had been applied from the issuance date of the
Subordinated Notes and the amount recognized in the Company’s Balance Sheet upon
the initial application of the authoritative guidance. In addition, as a
result of the bifurcation, the Company recognized an Embedded Derivative of
approximately $98,000 and a discount on the Subordinated Notes of $877,000,
which reduced the carrying value of the Subordinated Notes at the date of
adoption. This discount represents additional non-cash interest expense
that is to be amortized over the remaining life of the Subordinated
Notes.
The
Company also re-measured the fair value of the Embedded Derivative at each
interim date. Any change in fair value is recorded as part of interest
expense to related party stockholders.
In
connection with, and as a condition to, the December 2009 Private Placement,
further described in Note 11 – Stockholders’ Equity, both Soros and Maverick
converted the $3,000,000 aggregate principal balance outstanding into an
aggregate of 1,764,706 shares of common stock at a conversion rate of $1.70 per
share. Additionally, the Company paid in cash approximately $347,000 of
accrued interest at the Initial Closing of the December 2009 Private
Placement.
As a
result of the Company accounting for the Subordinated Notes separate from the
Embedded Conversion Feature, the Company reclassified the net carrying amount of
the Subordinated Notes of approximately $2,466,000 on the date of conversion in
equity with no gain or loss recognized.
The
Company also remeasured the fair value of the Embedded Derivative at the date of
conversion using an intrinsic valuation method as the price of the Company’s
common stock was greater than the conversion rate of $1.70. The fair value
of the Embedded Derivative was approximately $882,000 at the date of conversion
and the change in fair value from the interim date was recorded as part of
interest expense to related party stockholders through the date of
conversion. The fair value of the Embedded Derivative at the date of
conversion of approximately $882,000 was reclassified to equity.
For the
years ended December 31, 2009, 2008 and 2007, the Company recognized interest
expense in connection with its Subordinated Notes, including changes in fair
value of the Embedded Derivative, which were included in total interest expense
to related party stockholders in the Statements of Operations, as
follows:
2009
|
2008
|
2007
|
||||||||||
Appreciation
in fair value of embedded derivative financial liability to related party
stockholders
|
$ | 785,000 | $ | — | $ | — | ||||||
Amortization
of discount on notes payable to related party stockholders
|
343,000 | — | — | |||||||||
Interest
expense to related party stockholders
|
241,000 | 106,000 | — | |||||||||
Amortization
expense of warrants issued to related party stockholders
|
44,000 | 129,000 | — | |||||||||
Total
interest expense to related party stockholders
|
$ | 1,413,000 | $ | 235,000 | $ | — |
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
NOTE
11 – STOCKHOLDERS’ EQUITY
Authorized
Shares
The
Company is incorporated in the State of 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.
Following
the effective date of the reverse stock split as described in Note 3 – Reverse
Stock Split, the par value of the Common Stock remained unchanged at $.01 per
share. As a result, the Company has reclassified certain amounts within
Stockholders’ Equity by reducing Common Stock in the Balance Sheets and
Statements of Changes in Stockholders Equity included herein on a retroactive
basis for all periods presented, with a corresponding increase to Additional
paid-in capital.
In
addition, following the completion of the second closing of the December 2009
Private Placement, the Company will amend its certificate of incorporation to
decrease the number of authorized shares of Common Stock from 200,000,000 shares
to 50,000,000 shares and to decrease the number of authorized shares of
Preferred Stock from 25,000,000 shares to 1,000,000 shares.
Preferred
Stock
Outstanding
Shares
On
December 31, 2008, at the option of the holders of the Series F Preferred Stock,
all of the Company’s remaining Series F Preferred Stock, plus all outstanding
accrued dividends, was converted into shares of Common Stock.
The terms
of the Series F Preferred Stock were as follows:
Dividends
Each
share of Series F Preferred Stock bore 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 ranked 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 contained anti-dilution provisions pursuant to which,
subject to certain exceptions, in the event that the Company issued or sold 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. The conversion
price of the Series F Preferred Stock was reduced from a stated value of $23.20
per share to $8.20 per share in connection with the June 2006 Financing as a
result of these anti-dilution provisions.
As more
fully described in Note 9 – 2008 Commitment From Related Party, as a result of
the Company’s issuance of Subordinated Notes in 2008, the conversion price of
the Series F Preferred Stock was further reduced from $8.20 per share to $3.65
per share in connection with the 2008 Commitment from a related
party.
Warrants to Purchase Common
Stock
Warrants
to Soros
The
Company has issued warrants to Soros in connection with past and recent
financings, including the 2008 Commitment described in Note 9 – 2008 Commitment
From Related Party, as well as in connection with the Company’s previous loan
facility (which has since been refinanced).
Notes
to Financial Statements
December
31, 2009
Warrants Issued to
Maverick
In
connection with the 2008 Commitment described in Note 9 – 2008 Commitment From
Related Party, the Company issued warrants to Maverick to purchase shares of
Common Stock, which are included in the table below.
The
following table represents warrants issued to purchase Common Stock as of
December 31, 2009:
Number
of
|
Exercise
Price
|
|||||||
Party
|
Warrants
|
Range
|
Expiration
Dates
|
|||||
Soros
|
45,201 |
$5.10
– $8.80
|
September
2011 – March 2013
|
|||||
Maverick
|
19,796 |
$5.10
|
March
2013
|
|||||
Consultant
|
10,000 |
$10.00
|
February
2011
|
|||||
74,997 |
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, deferred
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 86,122 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 251,849 shares of Common Stock; (ii)
deferred stock unit awards under the Plan for 17,274 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 32,645 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 826,452
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 commenced 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, the Company 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 for
2006. In connection with these new awards, the Company recognized an expense of
approximately $353,000, $2.0 million and $4.5 million of this expense was
recognized in 2009, 2008 and 2007, respectively.
In
connection with these grants described above, the Company has given the employee
holders of the shares of Restricted Stock and Deferred 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 2009, the
Company acquired an aggregate of 103,215 shares of Treasury Stock.
Furthermore,
in connection with the December 2009 Private Placement, the Company will amend
the 2005 Plan to increase the number of
securities remaining available for future issuance by an additional 1,500,000
shares.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
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, 2009:
Weighted
Average
|
Deferred
|
Weighted
Average
|
||||||||||||||
Restricted
|
Grant
Date
|
Stock
|
Grant
Date
|
|||||||||||||
Stock
|
Fair
Value
|
Unit
Awards
|
Fair
Value
|
|||||||||||||
Balance
at December 31, 2006
|
86,122 | $ | 9.50 | 986,227 | $ | 9.40 | ||||||||||
Shares
/ Units Granted
|
42,619 | $ | 12.60 | 54,440 | $ | 12.20 | ||||||||||
Shares
/ Units Forfeited
|
(2,968 | ) | $ | 12.70 | (2,938 | ) | $ | 12.70 | ||||||||
Shares
/ Units Restriction Lapses
|
(86,122 | ) | $ | 9.50 | (322,984 | ) | $ | 9.40 | ||||||||
Balance
at December 31, 2007
|
39,651 | $ | 12.60 | 714,745 | $ | 9.60 | ||||||||||
Shares
/ Units Granted
|
8,625 | $ | 3.71 | 250,000 | $ | 4.99 | ||||||||||
Shares
/ Units Forfeited
|
(1,875 | ) | $ | 4.08 | (305,627 | ) | $ | 6.82 | ||||||||
Shares
/ Units Restriction Lapses
|
(39,651 | ) | $ | 12.60 | (372,943 | ) | $ | 9.41 | ||||||||
Balance
at December 31, 2008
|
6,750 | $ | 3.60 | 286,175 | $ | 8.80 | ||||||||||
Shares
/ Units Granted
|
10,312 | $ | 1.04 | — | $ | — | ||||||||||
Shares
/ Units Forfeited
|
(750 | ) | $ | 0.73 | (10,464 | ) | $ | 7.05 | ||||||||
Shares
/ Units Restriction Lapses
|
(7,875 | ) | $ | 4.12 | (263,397 | ) | $ | 7.26 | ||||||||
Balance
at December 31, 2009
|
8,437 | $ | 0.92 | 12,314 | $ | 12.70 | ||||||||||
Aggregate
Grant Date Fair Value
|
$ | 8,000 | $ | 156,000 | ||||||||||||
Vesting
Service Period of Shares Granted
|
1
year
|
12
– 36 months
|
||||||||||||||
Number
of Shares / Units Vested During December 31, 2007
|
86,122 | 322,984 | ||||||||||||||
Number
of Shares / Units Non-vested at December 31, 2007
|
39,651 | 714,745 | ||||||||||||||
Number
of Shares / Units Vested During December 31, 2008
|
39,651 | 372,943 | ||||||||||||||
Number
of Shares / Units Non-vested at December 31, 2008
|
6,750 | 56,327 | ||||||||||||||
Number
of Shares / Units Vested During December 31, 2009
|
6,750 | 11,925 | ||||||||||||||
|
||||||||||||||||
Number
of Shares / Units Non-vested at December 31, 2009
|
8,437 | 389 |
For the
years ended December 31, 2009, 2008 and 2007 the Company recognized expense of
approximately $534,000, $2,274,000 and $5,678,000, respectively, in connection
with these awards.
As of
December 31, 2009, the total compensation cost related to non-vested restricted
stock and deferred stock units not yet recognized was $13,000. Total
compensation cost is expected to be recognized over one year on a weighted
average basis.
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
Stock
Options
The following table summarizes the
Company’s stock option activity:
Number
of
|
Weighted
Average
|
|||||||
Shares
|
Exercise
Price
|
|||||||
Balance
at December 31, 2006
|
541,712
|
$
|
16.80
|
|||||
Options
granted
|
6,000
|
$
|
9.70
|
|||||
Options
cancelled
|
(202,028
|
)
|
$
|
27.60
|
||||
Options
exercised
|
(2,806
|
)
|
$
|
8.90
|
||||
Balance
at December 31, 2007
|
342,878
|
$
|
10.60
|
|||||
Options
granted
|
38,000
|
$
|
4.40
|
|||||
Options
cancelled
|
(26,022
|
)
|
$
|
10.87
|
||||
Options
exercised
|
—
|
$
|
—
|
|||||
Balance
at December 31, 2008
|
354,856
|
$
|
9.83
|
|||||
Options
granted
|
11,000
|
$
|
1.49
|
|||||
Options
cancelled
|
(158,096
|
)
|
$
|
10.18
|
||||
Options
exercised
|
—
|
$
|
—
|
|||||
Balance
at December 31, 2009
|
207,760
|
$
|
9.09
|
|||||
Vested
at December 31, 2007
|
287,113
|
$
|
10.40
|
|||||
Vested
at December 31, 2008
|
317,064
|
$
|
10.32
|
|||||
Vested
at December 31, 2009
|
180,787
|
$
|
9.94
|
The stock
options are exercisable in different periods through 2019. Additional
information with respect to the outstanding options as of December 31,
2009, is as follows:
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||
Average
|
Weighted
|
Weighted
|
Average
|
|||||||||||||||||||||
Remaining
|
Average
|
Average
|
Remaining
|
|||||||||||||||||||||
Options
|
Contractual
|
Exercise
|
Options
|
Exercise
|
Contractual
|
|||||||||||||||||||
Range
of Exercise Prices
|
Outstanding
|
Life
|
Price
|
Exercisable
|
Price
|
Life
|
||||||||||||||||||
$0.51
– $2.50
|
14,000 |
9.2
Years
|
$ | 1.66 | 2,444 | $ | 1.83 |
9.2
Years
|
||||||||||||||||
$2.51
– $5.00
|
33,000 |
8.2
Years
|
$ | 4.58 | 18,832 | $ | 4.59 |
8.2
Years
|
||||||||||||||||
$5.01
– $7.50
|
— | — | $ | — | — | $ | — | — | ||||||||||||||||
$7.51
– $10.00
|
86,235 |
5.2
Years
|
$ | 9.03 | 85,443 | $ | 9.03 |
5.2
Years
|
||||||||||||||||
$10.01
– $12.50
|
31,250 |
6.2
Years
|
$ | 11.87 | 31,168 | $ | 11.88 |
6.2
Years
|
||||||||||||||||
$12.51
– $15.50
|
42,900 |
4.9
Years
|
$ | 12.96 | 42,525 | $ | 12.95 |
4.9
Years
|
||||||||||||||||
$15.51
– $17.50
|
— | — | $ | — | — | $ | — | — | ||||||||||||||||
$17.51
– $20.00
|
— | — | $ | — | — | $ | — | — | ||||||||||||||||
$20.51
– $25.00
|
375 |
1.1
Years
|
$ | 21.60 | 375 | $ | 21.60 |
1.1
Years
|
||||||||||||||||
$0.51
– $25.00
|
207,760 |
6.9
Years
|
$ | 9.09 | 180,787 | $ | 9.94 |
6.9
Years
|
The total
fair value of the 26,726 options that vested during the year was approximately
$172,000. At December 31, 2009, the aggregate intrinsic value of the
fully vested options was $0 and the weighted average remaining contractual life
of the options was approximately 5 years. The Company has not capitalized any
compensation cost, or modified any of its stock option grants for the years
ended December 31, 2009, 2008 and 2007, except for those described in connection
with the Offer to Exchange. Other selected information is as
follows:
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
2009
|
2008
|
2007
|
||||||||||
Aggregate
intrinsic value of outstanding options
|
$ | 11,000 | $ | — | $ | — | ||||||
Aggregate
intrinsic value of options exercised
|
$ | — | $ | — | $ | 7,000 | ||||||
Weighted
average fair value of options granted
|
$ | 1.08 | $ | 2.86 | $ | 9.70 |
As of
December 31, 2009, the total compensation cost related to non-vested stock
option awards not yet recognized was $56,000. Total compensation cost is
expected to be recognized over two 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 the U.S. Treasury note in effect on the date of
the grant.
The table
below presents the assumptions used to calculate the fair value of options
granted for the year ended December 31, 2009, 2008 and 2007
respectively:
2009
|
2008
|
2007
|
||||||||||
Risk-free
interest rate
|
2.66 | % | 2.65 | % | 4.56 | % | ||||||
Expected
life (in years)
|
5.8 | 5.0 | 5.5 | |||||||||
Dividend
yield
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Expected
volatility
|
86.25 | % | 79.47 | % | 94.00 | % |
For the
years ended December 31, 2009, 2008 and 2007 the Company recognized expense of
approximately $77,000, $433,000 and $516,000, respectively, in connection with
these awards.
December
2009 Private Placement
On
December 21, 2009, the Company entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with Rho Ventures VI, L.P. (“Rho”) pursuant to
which the Company agreed to issue and sell to Rho up to 8,823,529 newly issued
shares (the “Private Placement Shares”) of its common stock, par value $.01 per
share (the “Common Stock”), for an aggregate purchase price of $15,000,000, or
$1.70 per share, in a private placement transaction (the “Private
Placement”). The Company issued and sold 2,786,337 of the Private
Placement Shares to Rho at an initial closing (the “Initial Closing”) held on
December 21, 2009 for an aggregate purchase price of approximately
$4,737,000. The remaining 6,037,192 Private Placement Shares (the
“Second Closing Shares”) will be issued and sold to Rho by the Company in a
second closing to be held following the receipt of stockholder
approval.
At the
Initial Closing, and as a condition thereto, Soros and Maverick converted into
an aggregate of 1,764,706 shares of Common Stock the $3,000,000 aggregate
principal amount outstanding pursuant to the terms of the Subordinated Notes,
each dated as of July 23, 2008, issued by the Company to Soros and Maverick for
shares of Common Stock at a conversion rate of $1.70 per share. All
accrued and unpaid interest of approximately $347,000 was paid by the Company in
cash at the Initial Closing.
Registration
Rights and Warrants Issuance
At the
initial closing, and as a condition to the Private Placement, the Company
entered into a registration rights agreement (the “Registration Rights
Agreement”) with Soros, Maverick, Prentice and Rho. Under the terms
of the Registration Rights Agreement, the Company agreed to (i) file a
registration statement with respect to the shares of Common Stock issued to Rho
in the Private Placement (the “Rho Shelf Registration Statement”), (ii) grant
Rho piggy-back registration rights applicable in certain circumstances upon an
underwritten offering by the Company and the right to two demand registrations
and (iii) terminate all registration rights previously granted by us to Soros,
Maverick and Prentice and replace such registration rights
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
with
piggy-back registration rights applicable in certain circumstances upon an
underwritten offering by the Company and, in the case of Soros, the right to two
demand registrations in addition to such piggy-back registration
rights.
The
Company also agreed in the Registration Rights Agreement to issue warrants to
Rho if:
|
s
|
the
Company fails to file the Rho Shelf Registration Statement within 30 days
following the first to occur of (x) the Second Closing or (y) the date on
which we receive a notice from Rho stating that it will not consummate the
Second Closing because our stockholders did not approve the actions (or 45
days following such date in (x) or (y) if such 30 day deadline falls
within the period during which we are preparing our audited financial
statements) (the “Filing Deadline”),
or
|
|
s
|
the
Rho Shelf Registration Statement is not declared effective by the
Securities and Exchange Commission within 180 days following the first to
occur of (x) the Second Closing or (y) the date on which we receive a
notice from Rho stating that it will not consummate the Second Closing
because our stockholders did not approve the actions (the “Effectiveness
Deadline”).
|
In
accordance with the terms of the Registration Rights Agreement, the Company
would be required to grant Rho warrants representing the right to purchase
shares of Common Stock equal to 1% of the fully diluted outstanding shares of
Common Stock for each full 30-day period following the Filing Deadline or the
required Effectiveness Deadline (as applicable). The Company would
not be required under the Registration Rights Agreement to issue warrants to Rho
representing an aggregate number of shares greater than 10% of the fully diluted
outstanding shares of Common Stock. The warrants, if issued under the
Registration Rights Agreement, would have a 5-year term, an exercise price of
$1.70 per share of Common Stock and would include customary provisions requiring
adjustments of the number of shares of Common Stock issuable thereunder
following a stock dividend, stock split or other similar adjustment to our
capital structure.
Assuming
that the Company does not issue any shares of Common Stock, or securities
convertible into or exercisable for shares of Common Stock, prior to Rho’s
exercise of the warrants, if any, issued to it under the Registration Rights
Agreement, the maximum number of shares of Common Stock issuable to Rho upon
exercise of the warrants would be 2,713,010 shares of Common Stock (the “Warrant
Shares”). The maximum proceeds to the Company upon the exercise of
the warrants under such circumstances would be approximately $4,613,000, which
proceeds would be used for general corporate purposes. If the Company
issue additional shares of Common Stock or securities convertible into or
exercisable for shares of Common Stock before the Company is required to issue
Warrants to Rho under the Registration Rights Agreement, if at all, the Company
would be required to issue to Rho warrants to purchase such larger number of
shares of Common Stock as would equal 10% of the fully diluted outstanding
shares of Common Stock as of the date of the issuance of the
warrants.
If the
issuance of the warrants and the Warrant Shares is not approved by our
stockholders, then, in the event of a Filing Default or an Effectiveness
Default, Rho will be entitled to receive, in lieu of any warrants issuable to it
as described above, an amount in cash equal to 1% of the aggregate amount
invested by Rho in the Company for each full 30-day period following the Filing
Deadline or the Required Effectiveness Deadline (as applicable), up to a maximum
of 10% of such invested amount.
NOTE
12 – FINANCING AGREEMENT
In
February 2009 and in March 2008, the Company agreed to amendments to its credit
facility (the credit facility as amended is hereafter referred to as the “Credit
Facility”) with Wells Fargo Retail Finance, LLC (“Wells Fargo”) to (i) extend
the term until July 26, 2011 from July 26, 2008; (ii) increase 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%; (iii) increase the monthly commitment fee on the unused
portion of the Credit Facility to 0.50% from 0.35%, which has since been amended
in December 2009 as a condition to the December 2009 Private Placement to
increase the monthly commitment fee on the unused portion of the Credit Facility
from 0.50% to 0.75%; (iv) include a servicing fee of $3,333 per month; (v)
increase the early termination fee to 1% of the revolving credit ceiling, from
0.50% through maturity; and (vi) amend the standby and documentary letter of
credit fees to 3.25% and 2.75%, respectively.
Under the
terms of the Credit Facility, Wells Fargo provides the Company with a revolving
credit facility and issues letters of credit in favor of suppliers or
factors. The Credit Facility is secured by a lien on substantially
all of the Company’s assets. Availability under the Credit Facility is
determined by a formula that takes into account a certain percentage of the
amount of
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
the
Company’s inventory and a certain percentage of the Company’s accounts
receivable. The maximum availability is currently $7,500,000, but can be
increased to $12,500,000 at the Company’s request, subject to certain
conditions. As of December 31, 2009, total availability under the
Credit Facility was approximately $3,183,000, of which $2,950,000 was committed
for letters of credit in favor of suppliers, leaving approximately $233,000
available for further borrowings. The terms of the credit facility contain a
material adverse condition clause. This feature may limit the
Company’s ability to obtain additional borrowings or result in a default on
current outstanding letters of credit.
For the
years ended December 31, 2009, 2008 and 2007, the Company incurred approximately
$239,000, $264,000 and $130,000 of interest expense and fees, respectively,
under the Credit Facility.
NOTE
13 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Amounts
in thousands, except per share data:
Quarter Ended | ||||||||||||||||
2009
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
||||||||||||
Net
sales
|
$ | 19,902 | $ | 19,858 | $ | 17,108 | $ | 24,354 | ||||||||
Gross
profit
|
$ | 6,775 | $ | 7,884 | $ | 6,839 | $ | 10,059 | ||||||||
Net
loss
|
$ | (3,120 | ) | $ | (186 | ) | $ | (915 | ) | $ | (148 | ) | ||||
Net
loss per common share – basic and diluted(1)
|
$ | (0.23 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.01 | ) |
Quarter
Ended
|
||||||||||||||||
2008
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
||||||||||||
Net
sales
|
$ | 25,245 | $ | 23,334 | $ | 19,802 | $ | 27,393 | ||||||||
Gross
profit
|
$ | 8,936 | $ | 9,098 | $ | 7,307 | $ | 10,145 | ||||||||
Net
loss
|
$ | (2,938 | ) | $ | (2,036 | ) | $ | (4,993 | ) | $ | (1,373 | ) | ||||
Preferred
stock dividends(2)
|
$ | (11 | ) | $ | (11 | ) | $ | (12 | ) | $ | (3 | ) | ||||
Net
loss available to common stockholders(3)
|
$ | (2,949 | ) | $ | (2,047 | ) | $ | (5,717 | ) | $ | (1,376 | ) | ||||
Net
loss per common share – basic and diluted(3)
|
$ | (0.22 | ) | $ | (0.15 | ) | $ | (0.43 | ) | $ | (0.10 | ) |
Quarter
Ended
|
||||||||||||||||
2007
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
||||||||||||
Net
sales
|
$ | 22,108 | $ | 21,608 | $ | 18,079 | $ | 29,698 | ||||||||
Gross
profit
|
$ | 8,374 | $ | 8,463 | $ | 5,728 | $ | 10,174 | ||||||||
Net
loss
|
$ | (3,103 | ) | $ | (2,142 | ) | $ | (5,028 | ) | $ | (5,556 | ) | ||||
Preferred
stock dividends
|
$ | (11 | ) | $ | (11 | ) | $ | (11 | ) | $ | (11 | ) | ||||
Net
loss available to common stockholders(4)
|
$ | (3,114 | ) | $ | (2,153 | ) | $ | (5,039 | ) | $ | (5,567 | ) | ||||
Net
loss per common share – basic and diluted(4)
|
$ | (0.24 | ) | $ | (0.16 | ) | $ | (0.39 | ) | $ | (0.42 | ) |
(1)
|
Based
on weighted average common shares outstanding – basic and diluted of
14,517,313 as of December 31, 2009.
|
Bluefly,
Inc.
Notes
to Financial Statements
December
31, 2009
(2)
|
As
of December 31, 2008, all Series F Preferred Stock have been converted
into Common Stock.
|
(3)
|
Includes
a beneficial conversion feature charge of approximately $712,000 in the
third quarter.
|
(4)
|
Amount
includes a write-off of approximately $1.5 million of inventory recorded
in the fourth quarter.
|
For
the Three Years Ended December 31, 2009
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
||||||||||||||||
Charged to
|
Charged to
|
|||||||||||||||||||
Ending Balance at
|
Costs and Other
|
Other
|
Ending Balance at
|
|||||||||||||||||
Description
|
December 31, 2008
|
Expenses
|
Accounts
|
Deductions
|
December 31, 2009
|
|||||||||||||||
Allowance
for Sales Returns
|
$ | (3,707,000 | ) | $ | (48,934,000 | ) | $ | — | $ | 50,014,000 | $ | (2,627,000 | ) | |||||||
Allowance
for Doubtful Accounts
|
$ | (80,000 | ) | $ | (350,000 | ) | $ | — | $ | 339,000 | $ | (91,000 | ) | |||||||
Inventory
Reserves
|
$ | (1,689,000 | ) | $ | 534,000 | $ | — | $ | (131,000 | ) | $ | (1,286,000 | ) | |||||||
Deferred
Tax Valuation Allowance
|
$ | (42,093,000 | ) | $ | (6,660,000 | ) | $ | 1,365,000 | $ | — | $ | (47,388,000 | ) |
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
||||||||||||||||
Charged to
|
Charged to
|
|||||||||||||||||||
Ending Balance at
|
Costs and Other
|
Other
|
Ending Balance at
|
|||||||||||||||||
Description
|
December 31, 2007
|
Expenses
|
Accounts
|
Deductions
|
December 31, 2008
|
|||||||||||||||
Allowance
for Sales Returns
|
$ | (4,204,000 | ) | $ | (59,665,000 | ) | $ | — | $ | 60,162,000 | $ | (3,707,000 | ) | |||||||
Allowance
for Doubtful Accounts
|
$ | (106,000 | ) | $ | (553,000 | ) | $ | — | $ | 579,000 | $ | (80,000 | ) | |||||||
Inventory
Reserves
|
$ | (3,686,000 | ) | $ | (290,000 | ) | $ | — | $ | 2,287,000 | $ | (1,689,000 | ) | |||||||
Deferred
Tax Valuation Allowance
|
$ | (39,443,000 | ) | $ | (3,257,000 | ) | $ | 607,000 | $ | — | $ | (42,093,000 | ) |
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
||||||||||||||||
Charged to
|
Charged to
|
|||||||||||||||||||
Ending Balance at
|
Costs and Other
|
Other
|
Ending Balance at
|
|||||||||||||||||
Description
|
December 31, 2006
|
Expenses
|
Accounts
|
Deductions
|
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 | ) |
S
– 1