Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[ X
]
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30,
2010
|
[ ]
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from_________ to
__________
|
Commission
File Number 001-14498
___________________________________
(Exact
name of registrant as specified in its charter)
___________________________________
Delaware
|
13-3612110
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
42
West 39th
Street, New York, NY
(Address of
principal executive offices)
|
10018
(Zip
Code)
|
Registrant’s
telephone number, including area code: (212) 944-8000
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
[X] No
[ ]
Indicate
by check mark whether the registrant 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 preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
[ ] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act:
Large accelerated
filer [ ] |
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller reporting
company [ X ]
|
|
|
(Do not check if a
smaller reporting company)
|
|
Indicate
by check mark if the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
[ ] No [X]
As of
November 4, 2010, there were 24,607,338 shares of Common Stock, $.01 par value,
of the registrant outstanding.
BLUEFLY,
INC.
TABLE
OF CONTENTS
SEPTEMBER
30, 2010
|
|
PAGE
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|
PART
I –
|
FINANCIAL
INFORMATION
|
|
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Item 1.
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Balance
Sheets as of September 30, 2010 (unaudited) and
December 31, 2009
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3
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Statements
of Operations for the three months ended September
30, 2010 and 2009 (unaudited)
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4
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Statements
of Operations for the nine months ended September
30, 2010 and 2009 (unaudited)
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5
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Statements
of Cash Flows for the nine months ended September
30, 2010 and 2009 (unaudited)
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6
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Notes
to Financial Statements (unaudited)
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7 – 12
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Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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13 – 19
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Item 4T.
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Controls
and Procedures
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19
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PART
II –
|
OTHER
INFORMATION
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Item 6.
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Exhibits
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21
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Signatures |
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22
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Part
I – FINANCIAL INFORMATION
Item
1. – Financial Statements
BLUEFLY,
INC.
BALANCE
SHEETS
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|
(Unaudited)
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|
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September 30,
|
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December
31,
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2010
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2009
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Assets
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Current assets:
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Cash and cash
equivalents
|
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$
|
6,640,000
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$
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10,049,000
|
|
Accounts receivable — net of
allowance for doubtful accounts
|
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3,385,000
|
|
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3,319,000
|
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Inventories,
net
|
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30,236,000
|
|
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17,668,000
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Prepaid
inventory
|
|
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1,466,000
|
|
|
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238,000
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Prepaid
expenses
|
|
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287,000
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|
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208,000
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Other current
assets
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452,000
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513,000
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Total current
assets
|
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42,466,000
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31,995,000
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Property and equipment,
net
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3,154,000
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3,506,000
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|
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Other assets
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136,000
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145,000
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Total assets
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$
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45,756,000
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$
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35,646,000
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Liabilities and Stockholders’
Equity
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Current liabilities:
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Accounts
payable
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$
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8,520,000
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$
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4,363,000
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Allowance for sales
returns
|
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3,633,000
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2,627,000
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Accrued expenses and other current
liabilities
|
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1,388,000
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2,105,000
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Deferred
revenue
|
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3,037,000
|
|
|
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3,516,000
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Total current
liabilities
|
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16,578,000
|
|
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12,611,000
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|
|
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|
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|
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Total
liabilities
|
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16,578,000
|
|
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12,611,000
|
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Commitments and contingencies (Note 4)
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Stockholders’ equity:
|
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Common stock – $.01 par
value; 50,000,000 and 200,000,000 shares authorized as of
September 30, 2010 and December 31, 2009, respectively; 24,945,736 and
18,885,239 shares issued as of September 30, 2010 and December 31, 2009,
respectively, 24,607,338 and 18,552,737 shares outstanding as of September
30, 2010 and December 31, 2009, respectively
|
|
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246,000
|
|
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185,000
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Treasury
stock
|
|
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(1,824,000
|
)
|
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(1,809,000
|
)
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Additional paid-in
capital
|
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182,526,000
|
|
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172,127,000
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Accumulated deficit
|
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(151,770,000
|
)
|
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(147,468,000
|
)
|
|
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Total stockholders’
equity
|
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29,178,000
|
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23,035,000
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Total liabilities and stockholders’ equity
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$
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45,756,000
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$
|
35,646,000
|
|
The
accompanying notes are an integral part of these financial
statements.
BLUEFLY,
INC.
STATEMENTS
OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
Net
sales
|
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$
|
19,202,000
|
|
|
$
|
17,108,000
|
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Cost
of sales
|
|
|
12,278,000
|
|
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10,269,000
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Gross profit
|
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6,924,000
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6,839,000
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Selling
and fulfillment expenses
|
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4,115,000
|
|
|
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3,752,000
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Marketing
expenses
|
|
|
2,944,000
|
|
|
|
1,491,000
|
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General
and administrative expenses
|
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1,895,000
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2,061,000
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Total operating
expenses
|
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8,954,000
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|
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7,304,000
|
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|
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Operating
loss
|
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(2,030,000
|
)
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|
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(465,000
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)
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|
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Interest
expense to related party
stockholders
|
|
|
--
|
|
|
|
(405,000
|
)
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Other
interest expense, net
|
|
|
(47,000
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)
|
|
|
(45,000
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)
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Net
loss
|
|
$
|
(2,077,000
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)
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$
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(915,000
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)
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Basic
and diluted net loss per common share
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$
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(0.08
|
)
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$
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(0.07
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)
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Weighted
average common shares outstanding
|
|
|
|
|
|
|
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(basic
and diluted)
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24,598,151
|
|
|
|
13,844,637
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|
The
accompanying notes are an integral part of these financial
statements.
BLUEFLY,
INC.
STATEMENTS
OF OPERATIONS
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
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Net
sales
|
|
$
|
59,987,000
|
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|
$
|
56,868,000
|
|
Cost
of sales
|
|
|
36,748,000
|
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|
35,370,000
|
|
Gross profit
|
|
|
23,239,000
|
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21,498,000
|
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|
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Selling
and fulfillment expenses
|
|
|
12,090,000
|
|
|
|
12,177,000
|
|
Marketing
expenses
|
|
|
9,451,000
|
|
|
|
6,271,000
|
|
General
and administrative expenses
|
|
|
5,852,000
|
|
|
|
6,160,000
|
|
Total operating
expenses
|
|
|
27,393,000
|
|
|
|
24,608,000
|
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|
|
|
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|
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Operating
loss
|
|
|
(4,154,000
|
)
|
|
|
(3,110,000
|
)
|
|
|
|
|
|
|
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Interest
expense to related party
stockholders
|
|
|
--
|
|
|
|
(917,000
|
)
|
Other
interest expense, net
|
|
|
(148,000
|
)
|
|
|
(194,000
|
)
|
|
|
|
|
|
|
|
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|
Net
loss
|
|
$
|
(4,302,000
|
)
|
|
$
|
(4,221,000
|
)
|
|
|
|
|
|
|
|
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Basic
and diluted net loss per common share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.31
|
)
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|
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|
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Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
(basic
and diluted)
|
|
|
23,377,501
|
|
|
|
13,840,733
|
|
The
accompanying notes are an integral part of these financial
statements.
BLUEFLY,
INC.
STATEMENTS
OF CASH FLOWS
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,302,000
|
)
|
|
$
|
(4,221,000
|
)
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
1,864,000
|
|
|
|
2,281,000
|
|
Stock based
compensation
|
|
|
441,000
|
|
|
|
466,000
|
|
Provisions for
returns
|
|
|
1,006,000
|
|
|
|
(650,000
|
)
|
Bad debt
expense
|
|
|
222,000
|
|
|
|
250,000
|
|
Reserve for inventory
obsolescence
|
|
|
328,000
|
|
|
|
(370,000
|
)
|
Amortization of discount on notes payable to
related party stockholders
|
|
|
--
|
|
|
|
263,000
|
|
Change
in fair value of embedded derivative financial liability to related
party stockholders
|
|
|
--
|
|
|
|
428,000
|
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(288,000
|
)
|
|
|
(704,000
|
)
|
Inventories
|
|
|
(12,896,000
|
)
|
|
|
5,620,000
|
|
Prepaid
inventory
|
|
|
(1,228,000
|
)
|
|
|
26,000
|
|
Prepaid
expenses
|
|
|
(79,000
|
)
|
|
|
265,000
|
|
Other assets
|
|
|
46,000
|
|
|
|
(98,000
|
)
|
Increase (decrease)
in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
4,157,000
|
|
|
|
(3,182,000
|
)
|
Accrued expenses and other
current liabilities
|
|
|
(702,000
|
)
|
|
|
(272,000
|
)
|
Deferred
revenue
|
|
|
(479,000
|
)
|
|
|
183,000
|
|
Interest payable to related
party stockholders
|
|
|
--
|
|
|
|
(62,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(11,910,000
|
)
|
|
|
223,000
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
(1,504,000
|
)
|
|
|
(161,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,504,000
|
)
|
|
|
(161,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from common stock
issuance
|
|
|
10,020,000
|
|
|
|
--
|
|
Purchase of treasury
stock
|
|
|
(15,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
10,005,000
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(3,409,000
|
)
|
|
|
57,000
|
|
Cash
and cash equivalents – beginning of period
|
|
|
10,049,000
|
|
|
|
4,004,000
|
|
Cash
and cash equivalents – end of period
|
|
$
|
6,640,000
|
|
|
$
|
4,061,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
expense
|
|
$
|
181,000
|
|
|
$
|
181,000
|
|
The
accompanying notes are an integral part of these financial
statements.
BLUEFLY,
INC.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER
30, 2010
NOTE
1 – BASIS OF PRESENTATION
The
accompanying financial statements include the accounts of Bluefly, Inc. (the
“Company”). The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnote disclosures required by accounting principles generally accepted in
the United States of America for complete financial statements. In the opinion
of management, all adjustments (consisting mainly of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations of any interim period are not necessarily indicative of the results
of operations to be expected for the fiscal year due to seasonal and other
factors. For further information, refer to the financial statements and
accompanying footnotes included in the Company's Form 10-K for the year ended
December 31, 2009.
The Company has sustained cumulative net losses and negative cash flows from
operations since inception. As of September 30, 2010,
the Company had an accumulated deficit of $151,770,000. 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 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.
Reclassifications
Certain amounts in the financial
statements of the prior periods have been reclassified to conform to the current
period presentation for comparative purposes.
Concentration
For the three months ended September 30,
2010 and 2009, the Company acquired approximately 38% and 14%, respectively, of
its inventory from one supplier.
For the nine months ended September 30,
2010 and 2009, the Company acquired approximately 42% and 25%, respectively, of
its inventory from one supplier.
NOTE
2 – THE COMPANY
The
Company is a leading Internet retailer that sells over 350 brands of designer
apparel and accessories at discounts of up to 75% off of retail
value. The Company’s e-commerce Web site, bluefly.com (“Bluefly.com”
or “Web Site”), was launched in September 1998.
NOTE
3 – FAIR VALUE
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.
NOTE
4 – COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases space under operating leases that expire on various dates through
2020. In March 2010, the Company entered into a lease agreement extending the
term of the lease for space it already occupies for an additional ten years
ending on December 31, 2020. Future remaining minimum lease payments
under these operating leases, excluding utilities, which have initial or
remaining non-cancelable terms in excess of one year, as of September 30, 2010,
are as follows:
2010
|
|
$ |
63,000 |
|
2011
|
|
|
386,000 |
|
2012
|
|
|
535,000 |
|
2013
|
|
|
554,000 |
|
2014
|
|
|
573,000 |
|
2015
& thereafter
|
|
|
3,887,000 |
|
|
|
$ |
5,998,000 |
|
BLUEFLY,
INC.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER
30, 2010
Rent
expense (including amounts related to commercial rent tax) aggregated
approximately $146,000 and $158,000 for the three months ended
September 30, 2010 and 2009, respectively, and $467,000 and $530,000 for
the nine months ended September 30, 2010 and 2009, respectively.
NOTE
5 – STOCKHOLDERS’ EQUITY
Authorized
Shares
The
Company is incorporated in the State of Delaware. In February 2010,
the Company amended its certificate of incorporation to decrease the number of
authorized shares of Common Stock, $.01 par value per share (the “Common
Stock”), from 200,000,000 shares to 50,000,000 shares and to decrease the number
of authorized shares of Preferred Stock, $.01 par value per share (the
“Preferred Stock”), from 25,000,000 shares to 1,000,000 shares.
Private
Placement
On December 21, 2009, the Company
entered into a 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 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 Company received
proceeds from the Initial Closing of approximately $4,468,000, net of $269,000
of issuance costs.
On
February 25, 2010, the Company completed the second closing (the “Second
Closing”) of the Private Placement. At the Second Closing, the Company issued
and sold the remaining 6,037,192 Private Placement Shares to Rho for an
aggregate purchase price of approximately $10,263,000. The Company received
proceeds from the Second Closing of approximately $10,020,000, net of $243,000
of issuance costs.
Registration
Rights and Warrants Issuance
In
connection with the Private Placement, the Company entered into a Registration
Rights Agreement pursuant to which it agreed to file a registration statement
with respect to the Private Placement Shares within 30 days following the date
of the Second Closing (the “Filing Deadline”) and to cause such registration
statement to be declared effective by the Securities and Exchange Commission
within 180 days following the date of the Second Closing (the “Effectiveness
Deadline”). The Registration Rights Agreement provided that the Company would be
obligated to issue warrants to Rho in certain circumstances if the registration
statement was not filed by the Filing Deadline or declared effective by the
Effectiveness Deadline. The Company filed a registration statement with the
Securities and Exchange Commission covering the Private Placement Shares on
March 10, 2010 and the registration statement was declared effective on May 25,
2010. As the registration statement was filed within the Filing
Deadline and was declared effective within the Effectiveness Deadline, the
Company did not record any amounts in the financial statements with regards to
warrants.
NOTE
6 – SHARE-BASED COMPENSATION
Authoritative guidance relating to
share-based compensation requires
the Company to measure compensation cost for
share-based
compensation awards at fair
value and recognize compensation over the service period for awards expected to
vest. Total share-based compensation expense recorded in the Statements of
Operations was $157,000
and $137,000 for the three months ended September 30, 2010 and 2009, respectively, and $441,000 and $466,000 for the nine
months ended September 30, 2010 and 2009, respectively.
In February 2010, the Company amended
its Amended and Restated 2005 Stock Incentive Plan (the “Plan”) to increase the
aggregate number of shares of Common Stock that may be the subject of
share-based compensation awards granted pursuant to
BLUEFLY,
INC.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER
30, 2010
the Plan by 1,500,000 shares and, in
June 2010, the Company again amended the Plan to increase the aggregate number
of shares of Common Stock that may be the subject of share-based compensation
awards granted pursuant to the Plan by an additional 1,586,392
shares.
Stock
Options
The fair value of options granted is
estimated on the date of grant using a Black-Scholes option pricing model.
Expected volatilities are calculated based on the historical volatility of
the price of the Company's Common Stock. Management monitors share option
exercise and employee termination patterns to estimate forfeiture rates within
the valuation model. The expected holding period of options represents the
period of time that options granted are expected to be outstanding. The
risk-free interest rate for periods within the expected life of the option is
based on the interest rate of U.S. Treasury notes in effect on the date of the
grant.
The following table summarizes the
Company’s stock option activity:
|
Number of
|
|
|
Weighted Average
|
|
|
Shares
|
|
|
Exercise Price
|
|
Balance at December 31, 2009
|
|
207,760
|
|
|
$
|
9.09
|
|
Options
granted
|
|
1,850,000
|
|
|
$
|
2.40
|
|
Options
cancelled
|
|
(20,479
|
)
|
|
$
|
3.96
|
|
Options
exercised
|
|
--
|
|
|
$
|
--
|
|
Balance at September 30, 2010
|
|
2,037,281
|
|
|
$
|
3.06
|
|
|
|
|
|
|
|
|
|
Vested at December 31,
2009
|
|
180,787
|
|
|
$
|
9.94
|
|
|
|
|
|
|
|
|
|
Vested at September 30,
2010
|
|
401,325
|
|
|
$
|
5.63
|
|
During the third quarter of 2010, 4,635 options were cancelled through
normal employee attrition, of which 156 options were vested and 4,479 options were
non-vested. During the third quarter of 2010, total
number of options that vested was 113,285 options. The total fair value of the options that
vested during the third
quarter of 2010 was approximately $198,000. There were 85,000 options granted during the third quarter of 2010. At September 30, 2010, the aggregate intrinsic value of the
fully vested options was
$9,000 and the weighted average remaining
contractual life of the options was approximately nine years. The Company did not capitalize any compensation cost,
or modify any of its stock option grants during
the three and nine months
ended September 30, 2010.
During the third quarter of
2010, no options were
exercised and no cash was used to settle equity instruments granted under the
Company’s equity incentive
plans.
As of
September 30, 2010, the total compensation cost related to non-vested stock
option awards not yet recognized was $2,018,000. Total compensation cost is
expected to be recognized over three years on a weighted average
basis.
Restricted
Stock Awards and Deferred Stock Unit Awards
The following table is a summary of
activity related to restricted stock awards and deferred stock unit awards for employees at September 30,
2010:
|
|
Restricted
|
|
|
Deferred
Stock
|
|
|
|
Stock
Awards
|
|
|
Unit
Awards
|
|
Balance
at December 31, 2009
|
|
|
8,437 |
|
|
|
12,314 |
|
Shares/Units
granted
|
|
|
8,062 |
|
|
|
-- |
|
Shares/Units
forfeited
|
|
|
(750
|
) |
|
|
(51
|
) |
Shares/Units
restriction lapses
|
|
|
(6,562
|
) |
|
|
(12,263
|
) |
Balance
at September 30, 2010
|
|
|
9,187 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
Weighted
average grant date fair value per share
|
|
$ |
2.24 |
|
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
Aggregate
grant date fair value
|
|
$ |
21,000 |
|
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
Weighted
average vesting service period of shares granted
|
|
12
Months
|
|
|
12-36
Months
|
|
|
|
|
|
|
|
|
|
|
Number
of shares/units vested at September 30, 2010
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
Number
of shares/units non-vested at September 30, 2010
|
|
|
9,187 |
|
|
|
-- |
|
BLUEFLY,
INC.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER
30, 2010
As of
September 30, 2010, the total compensation cost related to non-vested restricted
stock not yet recognized was $7,000. Total compensation cost is
expected to be recognized within a one year period on a weighted average
basis.
NOTE
7 – SUBORDINATED CONVERTIBLE NOTES
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 was payable in cash upon
maturity or conversion (the “Subordinated Notes”). In December 2009,
in connection with the Private Placement, all outstanding Subordinated Notes
were converted into shares of Common Stock at a conversion price of $1.70 per
share.
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
included in each
of the Subordinated Notes
was not indexed to the Company’s own stock
and, therefore, such
feature qualified as an
embedded derivative financial liability (the “Embedded Derivative”), which
required 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. 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
represented additional non-cash interest expense
that was to be amortized over the remaining
life of the Subordinated Notes.
The Company also re-measured the fair
value of the Embedded Derivative at September 30, 2009. Any change in
fair value was recorded as part of interest expense to related party
stockholders. The assumptions used at September 30, 2009 were as
follows:
|
(Unaudited)
|
|
|
September
30, 2009
|
|
|
|
|
|
|
Risk-free
interest rate
|
0.95
|
% |
|
Expected
life (in years)
|
1.81
|
|
|
Dividend
yield
|
0.00
|
% |
|
Expected
volatility
|
110.94
|
% |
|
Expected volatility was 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 was based on the interest rate for
U.S. Treasury Notes having a maturity period equal to the then remaining
maturity life of the Subordinated Notes.
For the three and nine months ended
September 30, 2009, 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 Statement of Operations, as follows:
BLUEFLY,
INC.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER
30, 2010
|
|
(Unaudited)
|
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2009
|
|
|
|
|
|
Appreciation
in fair value of embedded derivative financial liability to related
party
stockholders
|
|
$ |
253,000 |
|
Amortization
of discount on notes payable to related party stockholders
|
|
|
88,000 |
|
Interest
expense to related party stockholders
|
|
|
64,000 |
|
|
|
|
|
|
Total
interest expense to related party stockholders
|
|
$ |
405,000 |
|
|
|
(Unaudited)
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2009
|
|
|
|
|
|
Appreciation
in fair value of embedded derivative financial liability to related
party
stockholders
|
|
$ |
428,000 |
|
Amortization
of discount on notes payable to related party stockholders
|
|
|
306,000 |
|
Interest
expense to related party stockholders
|
|
|
183,000 |
|
|
|
|
|
|
Total
interest expense to related party stockholders
|
|
$ |
917,000 |
|
NOTE
8 – 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. 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 each of the
following periods presented:
|
|
Three
Months Ended
|
|
|
September
30,
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,077,000
|
)
|
|
$
|
(915,000
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (basic)
|
|
|
24,598,151
|
|
|
|
13,844,637
|
|
|
|
|
|
|
|
|
|
|
Options and warrants(1)(2)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Preferred stock and
subordinated notes(1)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and deferred
stock awards(1)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (diluted)
|
|
|
24,598,151
|
|
|
|
13,844,637
|
|
BLUEFLY,
INC.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER
30, 2010
|
(1)
|
For the
three months ended September 30, 2010 and 2009, the Company had weighted
average shares of the following potentially dilutive securities that were
excluded as
the effects would be
anti-dilutive:
|
Options and
warrants
|
|
|
2,961
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock and subordinated notes
|
|
|
--
|
|
|
|
821,918
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock and deferred stock awards
|
|
|
9,187
|
|
|
|
265,965
|
|
|
(2)
|
Under the
treasury-stock method, the Company excluded all options and warrants from
the computation of weighted average shares outstanding as a result of the
exercise price of the options and warrants being greater than the average
market price of the Company’s Common
Stock.
|
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,302,000
|
)
|
|
$
|
(4,221,000
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (basic)
|
|
|
23,377,501
|
|
|
|
13,840,733
|
|
|
|
|
|
|
|
|
|
|
Options and warrants(1)(2)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Preferred stock and
subordinated notes(1)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and deferred
stock awards(1)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (diluted)
|
|
|
23,377,501
|
|
|
|
13,840,733
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the
nine months ended September 30, 2010 and 2009, the Company had weighted
average shares of the following potentially dilutive securities that were
excluded as
the effects would be
anti-dilutive:
|
Options and
warrants
|
|
|
3,873
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock and subordinated notes
|
|
|
--
|
|
|
|
821,918
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock and deferred stock awards
|
|
|
12,698
|
|
|
|
272,116
|
|
|
(2)
|
Under the
treasury-stock method, the Company excluded all options and warrants from
the computation of weighted average shares outstanding as a result of the
exercise price of the options and warrants being greater than the average
market price of the Company’s Common
Stock.
|
NOTE
9 – RECENT ACCOUNTING PRONOUNCEMENTS
In February 2010, the Financial
Accounting Standards Board (“FASB”) issued an update to authoritative guidance
relating to subsequent events, which was effective upon the issuance of the
update. The Company adopted this authoritative guidance on February
28, 2010. The update to the authoritative guidance relating to
subsequent events removes the requirement for Securities and Exchange Commission
filers to disclose the date through which subsequent events have been evaluated
in both issued and revised financial statements. The adoption of this
update to the authoritative guidance relating to subsequent events did not
impact the Company’s financial position or operating results other than removing
the disclosure.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Bluefly,
Inc. is a leading Internet retailer that sells over 350 brands of designer
apparel and accessories at discounts of up to 75% off of retail
value. We launched our Web Site in September 1998.
Our net
sales increased by approximately 12% to $19,202,000 for the three months ended
September 30, 2010 from $17,108,000 for the three months ended September 30,
2009. Our gross margin percentage decreased to 36.1% for the three
months ended September 30, 2010 from 40.0% for the three months ended September
30, 2009. Our gross profit increased slightly to $6,924,000 for the three months
ended September 30, 2010 compared to $6,839,000 for the three months ended
September 30, 2009. The decrease in our gross margin percentage was primarily
attributable to a decrease in our product margins relating to the continued
growth of our luxury designer merchandise, which historically has lower margins
compared to our contemporary merchandise but also leads to a higher average
order size. Gross margin percentage also decreased as a result of an
increase in inventory reserves in connection with an increase in inventory
balances to support the fourth quarter. We incurred an operating loss of
$2,030,000 for the three months ended September 30, 2010 as compared to an
operating loss of $465,000 for the three months ended September 30,
2009. The increase in operating loss was primarily the result of a
planned increase in marketing expenses in online and offline marketing
programs.
Marketing
expenses (excluding staff related costs) increased to $2,641,000 for the three
months ended September 30, 2010 from $1,319,000 for the three months ended
September 30, 2009. Marketing expenses (excluding staff related
costs) increased primarily as a result of an increase in both online and offline
marketing programs of $443,000 and $706,000, respectively, and an increase in
our integrated social media marketing programs of $172,000. This increase is
directly attributable to an increase in traffic driving marketing activities,
specifically a new promotion entitled Closet Confessions, which has aired on
Bravo. This unique and highly recognized program has been successful
in bringing new visitors to our Web Site since it launched in early September
2010. We believe that this program will favorably impact our sales
during the holiday season. Marketing expenses (including staff
related costs) as a percentage of net sales increased to 15.3% for the three
months ended September 30, 2010 compared to 8.7% for the three months ended
September 30, 2009. General and administrative expenses decreased to $1,895,000
from $2,061,000 for the three months ended September 30, 2009. This
decrease is attributable to a decrease in salary and salary related expenses of
$146,000 and amortization expenses related to leasehold improvements and
internally-developed software related to financial application systems recorded
in 2009 of $105,000, which were partially offset by increases in professional
fees of $96,000.
Our
reserve for returns and credit card chargeback’s increased to 39.2% of gross
sales for the third quarter of 2010 compared to 37.9% for the third quarter of
2009. The increase was primarily caused by a continued shift in our
merchandise mix towards luxury designer merchandise, which traditionally have a
higher average order size but also slightly higher return rates. We
believe that this increase in return rates has been more than offset by higher
average order sizes that have been generated by this shift in merchandise
mix.
At
September 30, 2010, we had an accumulated deficit of $151,770,000. The
cumulative 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 then outstanding preferred stock and
the payment of dividends to holders of our preferred stock.
Results
Of Operations
For The Three Months Ended September 30, 2010 Compared To The Three Months Ended
September 30,
2009.
The
following table sets forth our Statements of Operations data for the three
months ended September 30th. All
data is in thousands except as indicated below:
|
|
2010
|
|
|
2009 |
|
|
|
|
|
|
As
a % of
Net
Sales
|
|
|
|
|
|
As
a % of
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
19,202
|
|
100.0
|
%
|
|
$
|
17,108
|
|
100.0
|
%
|
Cost
of sales
|
|
|
12,278
|
|
63.9
|
|
|
|
10,269
|
|
60.0
|
|
Gross
profit
|
|
|
6,924
|
|
36.1
|
|
|
|
6,839
|
|
40.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and fulfillment expenses
|
|
|
4,115
|
|
21.4
|
|
|
|
3,752
|
|
21.9
|
|
Marketing
expenses
|
|
|
2,944
|
|
15.3
|
|
|
|
1,491
|
|
8.7
|
|
General
and administrative expenses
|
|
|
1,895
|
|
9.9
|
|
|
|
2,061
|
|
12.1
|
|
Total
operating expenses
|
|
|
8,954
|
|
46.6
|
|
|
|
7,304
|
|
42.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(2,030
|
)
|
(10.5
|
)
|
|
|
(465
|
)
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(47
|
)
|
(0.3
|
)
|
|
|
(450
|
)
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,077
|
)
|
(10.8
|
)%
|
|
$
|
(915
|
)
|
(5.3
|
)%
|
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 three months ended September 30th, as
indicated below:
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Average order size (including shipping &
handling)
|
|
$
|
321.33
|
|
|
$
|
274.58
|
|
New customers added during the period*
|
|
|
34,601
|
|
|
|
34,753
|
|
*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 measure. We define gross sales as the total dollar amount
of orders received by customers (including shipping and handling) net of
customer credits, but before any reserves are taken for returns or bad
debt. We believe that the presentation of gross sales is useful to
investors because (a) it provides an alternative measure of the total demand for
the products sold by us and (b) 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.
Net sales: Gross sales for the
three months ended September 30, 2010 increased by approximately 15% to
$31,563,000 from $27,555,000 for the three months ended September 30, 2009. For
the three months ended September 30, 2010, we recorded a provision for returns
and credit card chargeback’s and other discounts of $12,361,000, or
approximately 39.2% of gross sales. For the three months ended September 30,
2009, the provision for returns and credit card chargeback’s and other discounts
was $10,447,000, or approximately 37.9% of gross sales. The increase in this
provision as a percentage of gross sales resulted from a continued shift in our
merchandise mix towards luxury designer merchandise, which traditionally have a
higher average order size but also slightly higher return rates. We believe that
this increase in return rates has been more than offset by higher average order
sizes that have been generated by this shift in merchandise mix.
After the
necessary provisions for returns and credit card chargeback’s, our net sales for
the three months ended September 30, 2010 was $19,202,000. This represents an
increase of approximately 12% compared to the three months ended September 30,
2009, in which net sales totaled $17,108,000. The increase in net sales resulted
primarily from a 17% increase in average order size and traffic driving
marketing activities, including Closet Confessions aired on Bravo, which was
partially offset by a decrease in the number of customer orders. For the three
months ended September 30, 2010, revenue from shipping and handling (which is
included in net sales) decreased approximately 6% to $900,000 from $961,000 for
the three months ended September 30, 2009. Shipping and handling
revenue decreased primarily as a result of a decrease in the number of customer
orders, which was offset by higher average order sizes.
Cost of sales: Cost
of sales consists of the cost of product sold to customers, in-bound and
out-bound shipping costs, inventory reserves, commissions and packing materials.
Cost of sales for the three months ended September 30, 2010 was $12,278,000
resulting in a gross margin percentage of approximately 36.1%. Cost of sales for
the three months ended September 30, 2009 was $10,269,000, resulting in a gross
margin percentage of 40.0%. Gross profit increased slightly to $6,924,000 for
the three months ended September 30, 2010 compared to $6,839,000 for the three
months ended September 30, 2009. The decrease in gross margin percentage is
attributable to a decrease in product margins relating to the continued growth
of our luxury designer merchandise, which historically has lower margins
compared to our contemporary merchandise but creates a higher average order
size. Gross margin percentage also decreased as a result of an
increase in inventory reserves in connection with an increase in inventory
balances to support the fourth quarter.
Selling and fulfillment
expenses: Selling and fulfillment expenses increased by
approximately 10% for the three months ended September 30, 2010 compared to the
three months ended September 30, 2009. Selling and fulfillment expenses were
comprised of the following:
|
|
Three
Months Ended September 30,
|
|
Percentage
|
|
(All data
in thousands)
|
|
2010
|
|
2009
|
|
Difference
|
|
|
|
|
|
|
As
a % of
|
|
|
|
|
|
As
a % of
|
|
Increase
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
Net
Sales
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
1,747
|
|
|
9.1
|
%
|
|
$
|
1,662
|
|
|
9.7
|
%
|
|
5.1
|
% |
|
|
Technology
|
|
|
1,387
|
|
|
7.2
|
|
|
|
1,265
|
|
|
7.4
|
|
|
9.6
|
|
|
|
E-Commerce
|
|
|
981
|
|
|
5.1
|
|
|
|
825
|
|
|
4.8
|
|
|
18.9
|
|
|
|
Total selling and fulfillment
expenses
|
|
$
|
4,115
|
|
|
21.4
|
%
|
|
$
|
3,752
|
|
|
21.9
|
%
|
|
10.0
|
% |
|
|
As a
percentage of net sales, our selling and fulfillment expenses remained
relatively unchanged at approximately 21% for the three months ended September
30, 2010 compared to the three months ended September 30, 2009.
Operating
expenses include all costs related to inventory management, fulfillment,
customer service, and credit card processing. Operating expenses increased by
5.1% for the three months ended September 30, 2010 compared to the three months
ended September 30, 2009 primarily as a result of an increase in credit card
fees.
Technology
expenses consist primarily of staff related costs, amortization of capitalized
costs and Web Site hosting. For the three months ended September 30, 2010,
technology expenses increased by 9.6% compared to the three months ended
September 30, 2009. This increase was primarily attributable to an increase in
expenses related to software support expenses of $103,000 and technology
consulting expenses of $46,000. These expenses were partially offset
by a decrease in salary and salary related expenses of $44,000, of which
$38,000, related to the development of mobile platform applications such as our
iPhone app and on-going Web Site enhancements, was capitalized.
E-Commerce expenses include expenses
related to our photo design studio, image processing, and Web Site design. For
the three months ended September 30, 2010, e-commerce expenses increased by
approximately 18.9% as compared to the three months ended September 30, 2010
primarily as a result of increases in consulting fees relating to the
development of new Web Site features, functionalities and enhanced Web Site
experience of $63,000, short-term staffing expenses of $47,000, salary and
salary related expenses of $24,000 and expenses associated with our photo shoots
of approximately $11,000.
Marketing
expenses: Marketing expenses (including staff related costs)
increased to $2,944,000 for the three months ended September 30, 2010 from
$1,491,000 for the three months ended September 30, 2009.
Marketing
expenses include expenses related to our offline advertising; online programs
such as paid search, fees to affiliates, comparison engines and email campaigns;
integrated social media marketing programs and direct mail campaigns; as well as
staff related costs. As a percentage of net sales, our marketing expenses
(including staff related costs) increased to 15.3% for the three months ended
September 30, 2010 from 8.7% for the three months ended September 30,
2009.
The
increase in total marketing expenses (excluding staff related costs) was
primarily a result of traffic building marketing programs of $443,000 related to
our online marketing programs, $706,000 related to our offline advertising and
$172,000 related to our integrated social media marketing programs. The Closet
Confessions program aired on Bravo program was the single biggest driver of the
increase in marketing expenses. This unique and highly recognized program has
been successful in bringing new visitors to our Web Site since it launched in
early September 2010. We expect the impact of this investment to
continue providing dividends during the holiday season.
General and administrative
expenses:
General and administrative expenses include merchandising, finance and
administrative salaries and related expenses, insurance costs, accounting and
legal fees, depreciation and other office related expenses. General
and administrative expenses for the three months ended September 30, 2010
decreased by approximately 8% to $1,895,000 as compared to $2,061,000 for the
three months ended September 30, 2009. The decrease in general and
administrative expenses was primarily the result of decreases in salary and
salary related expenses of $146,000 and amortization expenses related to
leasehold improvements and internally-developed software related to product
application systems recorded in 2009 of $105,000, which were partially offset by
increases in professional fees of $96,000.
As a
percentage of net sales, general and administrative expenses for the three
months ended September 30, 2010 decreased to 9.9% from 12.1% for the three
months ended September 30, 2009.
Loss from
operations: In the three months ended September 30, 2010,
operating loss increased to $2,030,000 from $465,000 in the three months ended
September 30, 2009.
Interest expense to related party
stockholders: Interest
expense to related party stockholders for the three months ended September 30,
2010 decreased to $0 as compared to $405,000 for the three months ended
September 30, 2009. Interest expense to related party stockholders consisted of
stated interest expense, non-cash changes in fair value of the embedded
derivative and non-cash amortization of the discount relating to our outstanding
subordinated convertible notes issued to certain related
parties. There was no interest expense to related party stockholders
for the three months ended September 30, 2010 as the subordinated convertible
notes were converted to common stock in connection with the Private Placement
transaction in December 2009.
Other interest expense,
net: Interest
income for the three months ended September 30, 2010 decreased slightly to
$7,000 from $8,000 for the three months ended September 30, 2009. These amounts
related primarily to interest income earned on our cash balances.
Interest
expense for the three months ended September 30, 2010 increased slightly to
$54,000 compared to $53,000 for the three months ended September 30, 2009.
Interest expense consists primarily of fees paid in connection with our credit
facility.
For The Nine Months Ended September 30, 2010 Compared To The Nine Months Ended September 30, 2009.
The
following table sets forth our Statements of Operations data for the nine months
ended September 30th. All
data is in thousands except as indicated below:
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
As
a % of
|
|
|
|
|
|
As
a % of
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
59,987 |
|
|
|
100.0 |
% |
|
$ |
56,868 |
|
|
|
100.0 |
% |
Cost
of sales
|
|
|
36,748 |
|
|
|
61.3 |
|
|
|
35,370 |
|
|
|
62.2 |
|
Gross profit
|
|
|
23,239 |
|
|
|
38.7 |
|
|
|
21,498 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and fulfillment expenses
|
|
|
12,090 |
|
|
|
20.2 |
|
|
|
12,177 |
|
|
|
21.4 |
|
Marketing
expenses
|
|
|
9,451 |
|
|
|
15.8 |
|
|
|
6,271 |
|
|
|
11.0 |
|
General
and administrative expenses
|
|
|
5,852 |
|
|
|
9.7 |
|
|
|
6,160 |
|
|
|
10.9 |
|
Total operating expenses
|
|
|
27,393 |
|
|
|
45.7 |
|
|
|
24,608 |
|
|
|
43.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,154 |
) |
|
|
(7.0 |
) |
|
|
(3,110 |
) |
|
|
(5.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(148 |
) |
|
|
(0.2 |
) |
|
|
(1,111 |
) |
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(4,302 |
) |
|
|
(7.2 |
)% |
|
$ |
(4,221 |
) |
|
|
(7.4 |
)% |
We also
measure and evaluate ourselves against certain other key operational metrics.
The following table sets forth our actual results based on these other metrics
for the nine months ended September 30th, as
indicated below:
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Average order size (including shipping &
handling)
|
|
$
|
303.19
|
|
|
$
|
263.38
|
|
New customers added during the period*
|
|
|
113,927
|
|
|
|
120,076
|
|
|
|
|
|
|
|
|
|
|
*Based
on unique email addresses
|
|
|
|
|
|
|
|
|
Net sales: Gross sales for the
nine months ended September 30, 2010 increased by approximately 7% to
$99,092,000 from $92,511,000 for the nine months ended September 30, 2009. For
the nine months ended September 30, 2010, we recorded a provision for returns
and credit card chargeback’s and other discounts of $39,105,000 or approximately
39.5% of gross sales. For the nine months ended September 30, 2009, the
provision for returns and credit card chargeback’s and other discounts was
$35,643,000, or approximately 38.5% of gross sales. The increase in this
provision as a percentage of gross sales resulted from a continued shift in our
merchandise mix towards luxury designer merchandise, which traditionally have a
higher average order size but also slightly higher return rates. We believe that
this increase in return rates has been more than offset by higher average order
sizes that have been generated by this shift in merchandise mix.
After the
necessary provisions for returns and credit card chargeback’s, our net sales for
the nine months ended September 30, 2010 was $59,987,000. This represents an
increase of approximately 5% compared to the nine months ended September 30,
2009, in which net sales totaled $56,868,000. The increase in net sales resulted
primarily from a 15% increase in average order size and traffic driving
marketing activities, including Closet Confessions aired on Bravo, which was
partially offset by a decrease in the number of customer orders. For the nine
months ended September 30, 2010, revenue from shipping and handling (which is
included in net sales) decreased approximately 9% to $3,038,000 from $3,341,000
for the nine months ended September 30, 2009. Shipping and handling
revenue decreased primarily as a result of a decrease in the number of customer
orders, which was offset by higher average order sizes.
Cost of sales: Cost of sales
for the nine months ended September 30, 2010 totaled $36,748,000 resulting in a
gross margin percentage of approximately 38.7%. Cost of sales for the nine
months ended September 30, 2009 totaled $35,370,000, resulting in a gross margin
percentage of 37.8%. Gross profit increased by approximately 8% to $23,239,000
for the nine months ended September 30, 2010 compared to $21,498,000 for the
nine months ended September 30, 2009. The increase in both gross margin
percentage and gross profit was attributable to an increase in overall product
margins due to a reduction in promotional incentives relative to 2009, which was
partially offset by an increase in inventory reserves in connection with an
increase in inventory balances to support the fourth quarter.
Selling and fulfillment
expenses: Selling and fulfillment expenses decreased slightly
to $12,090,000 for the nine months ended September 30, 2010 compared to
$12,177,000 for the nine months ended September 30, 2009. Selling and
fulfillment expenses were comprised of the following:
|
|
Nine
Months Ended September 30,
|
|
Percentage
|
|
(All data
in thousands)
|
|
2010
|
|
2009
|
|
Difference
|
|
|
|
|
|
|
As
a % of
|
|
|
|
|
|
As
a % of
|
|
Increase
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
Net
Sales
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
5,459
|
|
|
9.1
|
%
|
|
$
|
5,586
|
|
|
9.8
|
%
|
|
(2.3
|
)
|
%
|
|
Technology
|
|
|
4,029
|
|
|
6.7
|
|
|
|
4,233
|
|
|
7.4
|
|
|
(4.8
|
)
|
|
|
E-Commerce
|
|
|
2,602
|
|
|
4.4
|
|
|
|
2,358
|
|
|
4.2
|
|
|
10.3
|
|
|
|
Total selling and fulfillment
expenses
|
|
$
|
12,090
|
|
|
20.2
|
%
|
|
$
|
12,177
|
|
|
21.4
|
%
|
|
(0.7
|
)
|
%
|
|
As a
percentage of net sales, our selling and fulfillment expenses decreased slightly
to 20.2% for the nine months ended September 30, 2010 from 21.4% for the nine
months ended September 30, 2009.
Operating
expenses decreased for the nine months ended September 30, 2010 by approximately
2.3% compared to the nine months ended September 30, 2009 as a result of
decrease in variable costs associated with fulfillment expenses (e.g., picking
and packing orders and processing returns) of $354,000, which was partially
offset by increases in credit card fees of $189,000.
For the
nine months ended September 30, 2010, technology expenses decreased by
approximately 4.8% compared to the nine months ended September 30, 2009. This
decrease was attributable to decreased depreciation expenses, included in
technology expenses, of approximately $205,000 and salary and salary related
expenses of $172,000, of which $87,000, related to the development of mobile
platform applications such as our iPhone app and on-going Web Site enhancements,
was capitalized. These expenses were partially offset by an increase
in software support expenses of approximately $167,000.
For the
nine months ended September 30, 2010, e-commerce expenses increased by
approximately 10.3% as compared to the nine months ended September 30, 2009
primarily as a result of increases in consulting fees relating to the
development of new Web Site features and functionalities of $139,000, short-term
staffing expenses of $91,000 and shipping expenses of $39,000, which were
partially offset by a decrease in salary and salary related expenses of
$20,000.
Marketing
expenses: Marketing expenses (including staff related costs)
increased to $9,451,000 for the nine months ended September 30, 2010 from
$6,271,000 for the nine months ended September 30, 2009.
As a
percentage of net sales, our marketing expenses (including staff related costs)
increased to 15.8% for the nine months ended September 30, 2010 from 11.0% for
the nine months ended September 30, 2009.
The
increase in total marketing expenses (excluding staff related costs) was
primarily a result of increases in traffic building marketing programs of
$898,000 related to our online marketing programs, $1,352,000 related to our
offline advertising and $552,000 related to our integrated social media
marketing programs. The Closet Confessions program aired on Bravo was the single
biggest driver of the increase in marketing expenses. This unique and
highly recognized program has been successful in bringing new visitors to our
Web Site since it launched in early September 2010. We expect the
impact of this investment to continue providing dividends during the holiday
season.
General and administrative
expenses:
General and administrative expenses for the nine months ended September 30, 2010
decreased by approximately 5% to $5,852,000 as compared to $6,160,000 for the
nine months ended September 30, 2009. The decrease in general and
administrative expenses was primarily the result of a decrease in amortization
expenses related to leasehold improvements and internally-developed software
related to product application systems recorded in 2009 of $195,000, salary
and salary related expenses of $108,000 and rent expense of
$63,000. These decreases in general and administrative expenses were
partially offset by an increase in franchise taxes of $94,000.
As a
percentage of net sales, general and administrative expenses for the nine months
ended September 30, 2010 decreased to approximately 9.7% from 10.9% for the nine
months ended September 30, 2009.
Loss from
operations: For the nine months ended September 30, 2010,
operating loss increased to $4,154,000 from $3,110,000 for the nine months ended
September 30, 2009.
Interest expense to related party
stockholders: Interest
expense to related party stockholders for the nine months ended September 30,
2010 decreased to $0 as compared to $917,000 for the nine months ended September
30, 2009. Interest expense to related party stockholders consisted primarily of
stated interest expense, non-cash changes in fair value of the embedded
derivative and non-cash amortization of the discount relating to our outstanding
subordinated convertible notes issued to certain related parties. There was no
interest expense to related party stockholders for the nine months ended
September 30, 2010 as the subordinated convertible notes were converted to
common stock in connection with the Private Placement transaction in December
2009.
Other interest expense,
net: Interest
income for the nine months ended September 30, 2010 increased to $31,000 from
$18,000 for the nine months ended September 30, 2009.
Interest
expense for the nine months ended September 30, 2010 decreased to $179,000
compared to $212,000 for the nine months ended September 30, 2009.
Liquidity
And Capital Resources
General
At
September 30, 2010, we had approximately $6.6 million in cash and cash
equivalents compared to $10.0 million and $4.1 million at December 31, 2009 and
September 30, 2009, respectively. Working capital, which is computed as total
current assets less total current liabilities and represents a measure of
operating liquidity, at September 30, 2010 and 2009 was $25.9 million and $14.5
million, respectively. Working capital at December 31, 2009 was $19.4
million. As of September 30, 2010, we had an accumulated deficit of
approximately $151.8 million. We have incurred negative cash flows
and cumulative net losses since inception.
Changes
in cash and cash equivalents at September 30, 2010 compared to December 31, 2009
are primarily attributable to normal increases in working capital requirements
relating to changes in operating assets and liabilities, which includes an
increase in inventory purchases of approximately $12.9 million, in advance of
and, to support the fourth quarter. This increase in inventory
purchases was partially offset by an increase in accounts payable of
approximately $4.2 million relating to the timing of invoices and
payments.
In
February 2010, we completed the Second Closing of the Private Placement
financing with Rho in which we received approximately $10,020,000, net of
$243,000 of issuance costs.
We
believe that our existing cash balance, combined with working capital and the
funds available from our credit facility 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.
Credit
Facility
We have a
credit facility with Wells Fargo Retail Finance LLC (“Wells
Fargo”). Pursuant to the terms of the credit facility, Wells Fargo
provides us with a revolving loan and issues letters of credit in favor of
suppliers or factors. The credit facility is secured by a lien on
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 September 30, 2010,
total availability under the credit facility was approximately $7.5 million, of
which $3.5 million was committed for letters of credit in favor of suppliers,
leaving approximately $4.0 million 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 immediately 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 0.75% 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 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 media placements. As of September 30, 2010, we had
approximately $1,466,000 of prepaid inventory and approximately $87,000 of
prepaid marketing expenses on our Balance Sheet compared to $238,000 and
$12,000, respectively, as of December 31, 2009 and $128,000 and $34,000,
respectively, as of September 30, 2009.
Commitments
and Long-Term Obligations
As of
September 30, 2010, we had the following commitments and long-term
obligations:
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
|
More
Than
|
|
|
Total
|
|
|
|
1 Year
|
|
|
|
1-3 Years
|
|
|
|
3-5 Years
|
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and advertising
|
$
|
3,136,000
|
|
|
$
|
3,136,000
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
Operating leases
|
|
5,998,000
|
|
|
|
383,000
|
|
|
|
1,014,000
|
|
|
|
1,157,000
|
|
|
|
3,444,000
|
Employment contracts
|
|
4,670,000
|
|
|
|
2,101,000
|
|
|
|
2,569,000
|
|
|
|
--
|
|
|
|
--
|
Total commitments and long-term
obligations
|
$
|
13,804,000
|
|
|
$
|
5,620,000
|
|
|
$
|
3,583,000
|
|
|
$
|
1,157,000
|
|
|
$
|
3,444,000
|
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.
Item
4T. Controls and Procedures.
As of the end of the period covered by
this Form 10-Q (the
“Evaluation Date”), we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer 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. There
have been no changes in our internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Special Note Regarding Forward Looking
Statements
This
report may include statements that constitute "forward-looking" statements,
usually containing the words "believe", "project", "expect", or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by us with the
Securities and Exchange Commission, including Forms 8-K, 10-Q and 10-K. These risks and uncertainties include,
but are not limited to, the following: our history of losses and
anticipated future losses;
our ability to realize
benefits from our increased marketing expenses; risks associated with the economic
downturn; risks associated with affiliates of Rho Ventures, LP,
affiliates of Soros Fund Management, private funds associated with
Maverick Capital Ltd. and affiliates of Prentice Capital Management, LP each
owning a significant portion of our stock; the potential failure to forecast
revenues and/or to make adjustments to our operating plans necessary as a result
of any failure to forecast accurately; unexpected changes in fashion trends;
cyclical variations in the apparel and e-commerce markets; risks associated with our dependence on
one supplier for a material portion of our inventory; the risk of default by us under
our credit facility and the consequences that might
arise from us having granted a lien on substantially all of our assets under
that agreement; risks of litigation related to the sale of unauthentic or damaged goods
and litigation risks related to sales in foreign countries; our potential exposure to product
liability claims in the event that products sold by us are defective;
the dependence on third
parties and certain relationships for certain services, including our dependence
on UPS and USPS (and the risks of a mail
slowdown due to terrorist activity) and our dependence on our third-party web
hosting, fulfillment and customer service centers; online commerce security
risks; our ability to raise additional capital, if needed, to support the growth of our business;
risks related to brand owners’ efforts to limit our ability to purchase products indirectly;
management of potential
growth; the competitive nature of our business and the potential for competitors
with greater resources to enter the business; the availability of merchandise;
the need to further establish brand name recognition; risks associated with our
ability to handle increased traffic and/or continued improvements to our Web
Site; rising return rates; dependence
upon executive personnel
who do not have long-term employment agreements; the successful hiring and retaining of
new personnel; risks associated with expanding our operations; risks associated
with potential infringement of other’s intellectual property; the potential
inability to protect our intellectual property; government regulation and legal
uncertainties; uncertainties relating to the imposition of sales tax on Internet
sales; our ability to
utilize our net operating losses; and the effectiveness of our internal
controls.
Part
II - OTHER INFORMATION
Item
6. Exhibits
The
following is a list of exhibits filed as part of this Report:
Exhibit Number |
Description |
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.
|
SIGNATURES
Pursuant
to the requirements 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
By: /s/ Kara B.
Jenny
Kara B. Jenny
Chief Financial Officer
November
8, 2010