UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
_______________
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2012
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OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from_________ to __________
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Commission File
Number 001-14498
BLUEFLY, INC.
(Exact name
of registrant as specified in its charter)
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Delaware
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13-3612110
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification Number)
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42 West 39
th
Street, New York, NY
(Address of principal executive offices)
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10018
(Zip Code)
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Registrant’s
telephone number, including area code: (212) 944-8000
Indicate by check mark whether the registrant
(1) filed all reports required to be filed by Section 13 or 15(d) of the 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 [X ] No [ ]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act:
Large accelerated filer
¨
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Accelerated filer
¨
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Non-accelerated filer
¨
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Smaller reporting company
x
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(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 19, 2012, there were 28,598,933
shares of Common Stock, $.01 par value, of the registrant outstanding.
BLUEFLY, INC.
TABLE OF CONTENTS
SEPTEMBER 30, 2012
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PAGE
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PART I –
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements:
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Consolidated Balance Sheets as of September 30, 2012 (unaudited)
and December 31, 2011
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3
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Consolidated Statements of Operations for the three months ended
September 30, 2012 and 2011 (unaudited)
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4
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Consolidated Statements of Operations for the nine months ended
September 30, 2012 and 2011 (unaudited)
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5
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Consolidated Statements of Changes in Stockholders’ Equity for the
nine months ended September 30, 2012 (unaudited)
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6
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Consolidated Statements of Cash Flows for the nine months ended
September 30, 2012 and 2011 (unaudited)
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7
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Notes to Consolidated Financial Statements (unaudited)
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8 – 17
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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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18 – 26
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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26
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Item 4.
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Controls and Procedures
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26
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PART II –
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OTHER INFORMATION
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Item 5.
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Other Information
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28
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Item 6.
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Exhibits
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28
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Signatures
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30
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Part I – FINANCIAL INFORMATION
Item 1. – Financial Statements
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
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September 30,
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December 31,
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2012
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2011
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Assets
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Current assets:
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Cash and cash equivalents
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$
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1,254,000
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$
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4,413,000
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Accounts receivable — net of allowance for doubtful accounts
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2,451,000
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2,597,000
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Inventories, net
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23,443,000
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32,083,000
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Prepaid inventory
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1,074,000
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2,690,000
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Prepaid expenses
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107,000
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247,000
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Other current assets
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1,617,000
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706,000
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Total current assets
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29,946,000
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42,736,000
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Property and equipment, net
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6,489,000
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5,705,000
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Intangible assets, net
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443,000
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--
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Other assets
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181,000
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185,000
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Total assets
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$
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37,059,000
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$
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48,626,000
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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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14,740,000
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$
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10,192,000
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Allowance for sales returns
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2,656,000
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3,124,000
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Accrued expenses and other current liabilities
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2,240,000
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4,446,000
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Deferred revenue
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4,401,000
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4,235,000
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Embedded derivative financial liability to related party stockholders
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373,000
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--
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Notes and interest payables to related party stockholders, net of discount
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2,312,000
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--
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Total current liabilities
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26,722,000
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21,997,000
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Deferred rent liability
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405,000
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373,000
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Total liabilities
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27,127,000
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22,370,000
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Commitments and contingencies (Note 6)
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Stockholders’ equity:
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Bluefly, Inc. stockholders’ equity:
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Common stock – $.01 par value; 50,000,000 shares authorized as of September 30, 2012 and December 31, 2011, respectively; 28,937,331 and 28,629,296 shares issued as of September 30, 2012 and December 31, 2011, respectively, 28,598,933 and 28,290,898 shares outstanding as of September 30, 2012 and December 31, 2011, respectively
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286,000
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283,000
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Treasury stock
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(1,824,000
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)
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(1,824,000
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)
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Additional paid-in capital
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193,213,000
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190,296,000
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Accumulated deficit
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(181,581,000
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)
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(162,485,000
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)
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Total Bluefly, Inc. stockholders’ equity
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10,094,000
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26,270,000
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Non-controlling interest in Eyefly LLC
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(162,000
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)
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(14,000
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)
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Total stockholders’ equity
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9,932,000
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26,256,000
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Total liabilities and stockholders’ equity
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$
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37,059,000
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$
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48,626,000
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The accompanying
notes are an integral part of these consolidated financial statements.
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
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September 30,
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2012
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2011
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Net sales
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$
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21,743,000
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$
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21,194,000
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Cost of sales
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18,781,000
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15,016,000
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Gross profit
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2,962,000
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6,178,000
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Selling and fulfillment expenses
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5,154,000
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4,525,000
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Marketing expenses
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1,848,000
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2,123,000
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General and administrative expenses
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1,922,000
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2,061,000
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Total operating expenses
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8,924,000
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8,709,000
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Operating loss
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(5,962,000
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)
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(2,531,000
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)
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Interest expense to related party stockholders
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(270,000
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)
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--
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Other interest expense, net
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(88,000
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)
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(65,000
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)
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Net loss
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(6,320,000
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)
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(2,596,000
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)
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Less: net loss attributable to non-controlling interest in Eyefly LLC
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(43,000
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)
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(102,000
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)
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Net loss attributable to Bluefly, Inc. stockholders
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$
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(6,277,000
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)
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$
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(2,494,000
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)
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Basic and diluted net loss per common share attributable
to Bluefly, Inc. stockholders
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$
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(0.22
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)
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$
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(0.10
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)
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Weighted average common shares outstanding
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(basic and diluted)
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28,576,612
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25,530,899
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The accompanying
notes are an integral part of these consolidated financial statements.
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Nine Months Ended
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September 30,
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2012
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2011
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Net sales
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$
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68,224,000
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$
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66,924,000
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Cost of sales
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57,088,000
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45,058,000
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Gross profit
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11,136,000
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21,866,000
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Selling and fulfillment expenses
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15,762,000
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13,471,000
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Marketing expenses
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6,657,000
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7,221,000
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General and administrative expenses
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7,418,000
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6,100,000
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Total operating expenses
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29,837,000
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26,792,000
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Operating loss
|
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(18,701,000
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)
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(4,926,000
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)
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Interest expense to related party stockholders
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(270,000
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)
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--
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Other interest expense, net
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(273,000
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)
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(216,000
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)
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Net loss
|
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(19,244,000
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)
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(5,142,000
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)
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Less: net loss attributable to non-controlling interest in Eyefly LLC
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(148,000
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)
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(338,000
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)
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Net loss attributable to Bluefly, Inc. stockholders
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$
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(19,096,000
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)
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$
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(4,804,000
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)
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|
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|
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Basic and diluted net loss per common share attributable
to Bluefly, Inc. stockholders
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$
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(0.67
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)
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$
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(0.19
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)
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Weighted average common shares outstanding
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(basic and diluted)
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28,558,885
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24,919,336
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|
The accompanying
notes are an integral part of these consolidated financial statements.
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
(Unaudited)
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Bluefly,
Inc. Stockholders' Equity
|
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|
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|
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Common
Stock
|
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$.01
Par Value
|
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Treasury
Stock
|
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Additional
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Total
|
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Number
of
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Number
of
|
|
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Paid-in
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Accumulated
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Noncontrolling
|
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|
Stockholders'
|
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Shares
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Amount
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Shares
|
|
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Amount
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Capital
|
|
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Deficit
|
|
|
Interest
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|
|
Equity
|
|
Balance at December 31, 2011
|
|
|
28,290,898
|
|
|
$
|
283,000
|
|
|
|
338,398
|
|
|
$
|
(1,824,000
|
)
|
|
$
|
190,296,000
|
|
|
$
|
(162,485,000
|
)
|
|
$
|
(14,000
|
)
|
|
$
|
26,256,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset acquisition purchase
|
|
|
285,714
|
|
|
|
3,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
597,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,546,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,546,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued to related-party stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
574,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
574,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued to third-party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
22,321
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,096,000
|
)
|
|
|
(148,000
|
)
|
|
|
(19,244,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30,
2012
|
|
|
28,598,933
|
|
|
$
|
286,000
|
|
|
|
338,398
|
|
|
$
|
(1,824,000
|
)
|
|
$
|
193,213,000
|
|
|
$
|
(181,581,000
|
)
|
|
$
|
(162,000
|
)
|
|
$
|
9,932,000
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
BLUEFLY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,244,000
|
)
|
|
$
|
(5,142,000
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses
|
|
|
2,306,000
|
|
|
|
1,879,000
|
|
Stock-based compensation expenses
|
|
|
1,546,000
|
|
|
|
730,000
|
|
Provisions for returns
|
|
|
(468,000
|
)
|
|
|
548,000
|
|
Bad debt expense
|
|
|
297,000
|
|
|
|
268,000
|
|
Reserve for inventory obsolescence
|
|
|
(339,000
|
)
|
|
|
203,000
|
|
Deferred rent expense
|
|
|
32,000
|
|
|
|
112,000
|
|
Amortization expense related to warrants issued to third-party
|
|
|
200,000
|
|
|
|
--
|
|
Change in fair value of embedded derivative financial liability to
related-party stockholders
|
|
|
99,000
|
|
|
|
--
|
|
Amortization expense of discount on notes payable to related-party
stockholders
|
|
|
106,000
|
|
|
|
--
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(161,000
|
)
|
|
|
(271,000
|
)
|
Inventories
|
|
|
9,072,000
|
|
|
|
(10,052,000
|
)
|
Prepaid inventory
|
|
|
1,523,000
|
|
|
|
(2,650,000
|
)
|
Prepaid expenses
|
|
|
140,000
|
|
|
|
(80,000
|
)
|
Other assets
|
|
|
(863,000
|
)
|
|
|
(134,000
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
4,548,000
|
|
|
|
4,834,000
|
|
Accrued expenses and other current liabilities
|
|
|
(2,206,000
|
)
|
|
|
(225,000
|
)
|
Deferred revenue
|
|
|
166,000
|
|
|
|
(330,000
|
)
|
Interest payable to related-party stockholders
|
|
|
55,000
|
|
|
|
--
|
|
Net cash used in operating activities
|
|
|
(3,191,000
|
)
|
|
|
(10,310,000
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,881,000
|
)
|
|
|
(2,842,000
|
)
|
Net cash used in investing activities
|
|
|
(2,881,000
|
)
|
|
|
(2,842,000
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from notes issued to related-party stockholders
|
|
|
3,000,000
|
|
|
|
--
|
|
Deferred financing costs
|
|
|
(87,000
|
)
|
|
|
--
|
|
Net proceeds from common stock issuance
|
|
|
--
|
|
|
|
6,494,000
|
|
Proceeds from capital contribution for the purchase of
non-controlling interest in subsidiary by third-party
|
|
|
--
|
|
|
|
336,000
|
|
Proceeds from exercise of stock options
|
|
|
--
|
|
|
|
18,000
|
|
Net cash provided by financing activities
|
|
|
2,913,000
|
|
|
|
6,848,000
|
|
Net decrease in cash and cash equivalents
|
|
|
(3,159,000
|
)
|
|
|
(6,304,000
|
)
|
Cash and cash equivalents – beginning of period
|
|
|
4,413,000
|
|
|
|
10,429,000
|
|
Cash and cash equivalents – end of period
|
|
$
|
1,254,000
|
|
|
$
|
4,125,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest expense
|
|
$
|
132,000
|
|
|
$
|
179,000
|
|
Supplemental disclosure of non-cash financing disclosure of cash flow
information:
|
|
|
|
|
|
|
|
|
Issuance of common stock for asset acquisition
|
|
$
|
600,000
|
|
|
$
|
--
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
NOTE 1 – THE COMPANY
Bluefly, Inc. (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. In December 2011, the Company expanded its portfolio of web sites by launching its belleandclive.com web site
(“Belle & Clive”), a members-only shopping destination that presents highly-curated selections of important brands
via limited-time sale events.
On January 3, 2012, the Company formed
a new wholly-owned subsidiary EVT Acquisition LLC, a New York limited liability company (“EVT”), in connection with
the Company’s acquisition of assets discussed further in Note 4 – Acquisition.
In 2011, the Company and A + D Labs LLC
(“A + D Labs” and, collectively with the Company, the “Members”) entered into a Limited Liability Company
Operating Agreement (the “Operating Agreement”) in connection with the formation of Eyefly LLC (“Eyefly”),
a Delaware limited liability company, which is owned 52% by the Company and 48% by A + D Labs. Eyefly was formed for the purposes
of developing and operating an e-commerce web site and related online and mobile applications focused on selling fashionable prescription
eyewear directly to consumers. Eyefly launched its e-commerce web site, eyefly.com (“Eyefly.com” and together with
Bluefly.com and Belle & Clive, the “Web Sites”), in June 2011.
As of September 30, 2012, the total assets
of Eyefly represent 1.2% of the total consolidated assets of the Company. For the three and nine months ended September 30, 2012,
the total net sales of Eyefly each represent less than 1% of the total consolidated net sales of the Company.
On October 25, 2012, the Company sold its
entire
52% controlling membership interest in Eyefly to A + D Labs as discussed further below in Note
9 – Subsequent Events.
NOTE 2 – BASIS OF PRESENTATION
The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. The consolidated 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, Article 8 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 consolidated 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 consolidated financial statements and accompanying footnotes included in the Company's Form 10-K for the year ended December
31, 2011.
The Company has sustained cumulative net
losses and negative cash flows from operations since inception. As of September 30, 2012, the Company had an accumulated deficit
of $181,581,000. 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, proceeds
from the August 2012 financing further discussed in Note 5 – 2012 Financing, combined with working capital and the funds
available from the Company’s new credit facility further discussed in Note 9 – Subsequent Events, will be sufficient
to enable the Company to meet planned expenditures through at least the next 12 months.
The Company is currently exploring sources
of additional capital in order to maximize the growth of its business. However, there can be no assurance that the Company will
be able to identify a source of such financing, or that such financing will be available on terms acceptable to the Company. Should
the Company experience unforeseen increases in expenditures or should estimated revenues not materialize, these conditions could
significantly impair its ability to fund future operations. Should the Company experience unanticipated losses or expenditures
that exceed current estimates, management would implement a cost reduction plan, that includes a reduction in work force as well
as reductions in overhead costs and capital expenditures, and/or attempt to raise additional debt or equity financing. There can
be no assurance that the Company will achieve or sustain positive
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
cash flows from operations or profitability. If the Company is
unable to maintain adequate liquidity, future operations will need to be scaled back or discontinued.
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 and sales-based taxes assessed by governmental authorities that are imposed
on and concurrent with sales transactions. Net sales represent gross sales, less provision for returns and credit card chargebacks.
Gross sales are recognized when all of
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 $4,401,000 and $4,235,000 as of
September 30, 2012 and December 31, 2011, respectively, which is classified as current liabilities in the Consolidated Balance
Sheets.
Shipping and handling billed to customers
is classified as revenue and freight cost incurred in connection with shipping customer orders is classified as cost of goods in
the Consolidated Statements of Operations.
Sales incentives
The Company frequently offers sales incentives
to customers to receive a reduction in the sales price of merchandise. Sales incentives include discounts, coupons, daily deal
programs and through our online marketing programs. For sales incentives issued to customers in conjunction with the sale of merchandise,
the Company recognizes the reduction in gross sales at the time of sale.
Intangible assets
Intangible assets are recorded at cost,
net of accumulated amortization and are amortized on a straight-line basis over their estimated useful lives. No significant residual
value is estimated for the intangible assets.
The Company evaluates the recoverability
of intangible assets at least annually for possible impairment or whenever events or circumstances indicate that the carrying value
of such assets may not be recoverable.
Derivative financial instrument
The Company carries an embedded derivative
financial instrument on its Consolidated Balance Sheet as discussed below in Note 5 – 2012 Financing. The Company does not
use the embedded derivative financial instrument to manage financial exposure or enter into hedging activities.
The Company records its embedded derivative
financial instrument on its Consolidated Balance Sheet at fair value. The fair value is based on a valuation model that requires
inputs including contractual terms, market prices, yield curves and measures of volatility. The Company’s embedded derivative
financial instrument is classified as Level 2 within the fair value hierarchy on
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
its Consolidated Balance Sheet. Any changes in
fair value of the embedded derivative financial instrument are recorded in the Consolidated Statements of Operations.
Concentration
For the three months ended September 30,
2012 and 2011, the Company, excluding Eyefly, acquired approximately 33% and 43%, respectively, of its inventory from its two largest
suppliers.
For the nine months ended September 30,
2012 and 2011, the Company, excluding Eyefly, acquired approximately 51% and 48%, respectively, of its inventory from its three
largest suppliers.
Related-party transactions
On August 13, 2012, the Company entered
into a Note and Warrant Purchase Agreement with certain related-party stockholders as further described below in Note 5 –
2012 Financing.
For the three months ended September 30,
2012 and 2011, Eyefly did not purchase any inventory from A + D Labs.
For the nine months ended September 30,
2012 and 2011, Eyefly purchased $98,000 and $170,000, respectively, of inventory from A + D Labs pursuant to a management services
agreement.
As of September 30, 2012 and December 31,
2011, Eyefly had related party amounts of $261,000 and $105,000 due to A + D Labs, respectively, which is presented as part of
Accounts payable within the Consolidated Balance Sheets.
As of September 30, 2012 and December 31,
2011, Eyefly had related party amounts of $246,000 and $227,000 due to the Company, respectively, which are eliminated in consolidation.
Recently issued, but not yet effective, accounting pronouncements
The Company is not aware of any recently
issued, but not yet effective, accounting pronouncements that would have a significant impact on the Company’s consolidated
financial position or results of operations.
NOTE 3 – FAIR VALUE
Authoritative guidance relating to fair
value establishes a framework for measuring fair value and expands disclosure about fair value measurements except as it applies
to non-financial assets and non-financial liabilities. The Company’s financial instruments consist of cash and cash equivalents,
accounts receivable, other assets, accounts payable and accrued expenses. The carrying amounts of these financial instruments approximate
fair value due to their short maturities. The following is the fair value hierarchy for disclosure of fair value measurements:
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)
In connection with the Embedded Derivative
in the Rho Notes discussed below in Note 5 – 2012 Financing, the Company evaluates the fair value measurement of the Embedded
Derivative on a recurring basis to determine the appropriate fair value level to classify the Embedded Derivative at each reporting
period. This determination requires significant estimates and judgments by the Company. The following table sets forth the Company’s
liabilities that were measured at fair value as of September 30, 2012, by level within the fair value hierarchy:
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
September 30, 2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative financial liability to
related
party stockholders
|
|
$
|
373,000
|
|
|
$
|
--
|
|
|
$
|
373,000
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total embedded derivative financial liability to
related
party stockholders
|
|
$
|
373,000
|
|
|
$
|
--
|
|
|
$
|
373,000
|
|
|
$
|
--
|
|
NOTE 4 – ACQUISITION
On January 10, 2012, the Company, through
a newly-formed wholly-owned subsidiary, EVT, entered into an asset purchase agreement with Moda for Friends LLC (the “Seller”)
and purchased certain intangible assets that include a contractual-related agreement, purchased customer list, developed technologies
and trademarks (the “Acquired Intangible Assets”) owned by the Seller for a total purchase price of $600,000 plus transaction
costs of $11,000. The Company paid the purchase price through the issuance of 285,714 shares of its Common Stock, with each share
being valued at $2.10 (the closing price of the Common Stock on the day prior to the consummation of the transaction). The Company
completed the asset acquisition because it would facilitate the launch and operation of its own flash sales business.
The Company has allocated the total purchase
price plus transactions costs of the acquisition among the assets, based on their relative fair values, as follows:
|
|
|
|
Contract-related intangible
|
|
$
|
428,000
|
|
Developed technology-related intangible
|
|
|
111,000
|
|
Customer-related intangible
|
|
|
62,000
|
|
Tradename
|
|
|
10,000
|
|
Total purchase price plus transaction costs
|
|
$
|
611,000
|
|
The carrying values of the Acquired Intangible
Assets at September 30, 2012 were as follows:
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
(Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Contract-related intangible
|
|
5
|
|
$
|
428,000
|
|
|
$
|
(61,000
|
)
|
|
$
|
367,000
|
|
Developed technology-related intangible
|
|
1
|
|
|
111,000
|
|
|
|
(78,000
|
)
|
|
|
33,000
|
|
Customer-related intangible
|
|
2
|
|
|
62,000
|
|
|
|
(22,000
|
)
|
|
|
40,000
|
|
Tradename
|
|
1
|
|
|
10,000
|
|
|
|
(7,000
|
)
|
|
|
3,000
|
|
|
|
|
|
$
|
611,000
|
|
|
$
|
(168,000
|
)
|
|
$
|
443,000
|
|
For the three and nine months ended September
30, 2012, the Company recorded $60,000 and $168,000, respectively, in amortization expenses in the Consolidated Statements of Operations
related to the Acquired Intangible Assets.
The estimated amortization expense for
the unamortized Acquired Intangible Assets for the next five years and thereafter is as follows:
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
|
|
|
|
2012
|
|
$
|
60,000
|
|
2013
|
|
|
122,000
|
|
2014
|
|
|
87,000
|
|
2015
|
|
|
86,000
|
|
2016
|
|
|
85,000
|
|
2017
|
|
|
3,000
|
|
|
|
$
|
443,000
|
|
NOTE 5 – 2012 FINANCING
On August 13, 2012 (the “Closing
Date”), the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with Rho Ventures
VI, L.P. (“Rho”) and Prentice Consumer Partners, LP (“Prentice”, and together with Rho, the “Purchasers”)
pursuant to which the Company issued (i) $1,500,000 aggregate principal amount of collateralized subordinated convertible promissory
notes to Rho (the “Rho Notes”) and (ii) $1,500,000 aggregate principal amount of collateralized subordinated promissory
notes to Prentice (the “Prentice Notes” and together with the Rho Notes, the “Notes”).
The Rho Notes bear interest at 12% per
annum, compounded annually, and interest is payable upon maturity or conversion. The Prentice Notes bear interest at 15%
per annum, compounded annually, and interest is payable quarterly. Prentice received an origination fee on the Closing Date
equal to two percent of the Prentice Notes.
The Rho Notes are convertible, at the holder's
option, (a) into equity securities that the Company might issue in any subsequent round of financing that results in proceeds to
the Company of at least $7,500,000 (a “Qualified Financing”) at a price equal to the lowest price per share paid by
any investor in such Qualified Financing or (b) into shares of the Company’s Common Stock at a price per share equal to $1.05,
which approximates the fair market value on the Closing Date (the “Rho Conversion Feature”).
The Notes have a one-year term but may
become due prior to the end of such term in the event of a change of control or a Qualified Financing. The Notes are collateralized
by second priority liens on all assets of the Company.
In connection with the issuance of the
Notes, the Company also issued warrants, with a seven year term, to purchase 476,190 shares of the Company’s Common
Stock (the “Warrants”) to each of Rho and Prentice at a price equal to $1.05 per share, which approximates the fair
market value of the Common Stock on the Closing Date.
The Notes contain a financial covenant
in which the Company is to maintain current assets in excess of $20,000,000 including cash and cash equivalents, accounts receivable,
inventories (which includes prepaid inventory), prepaid expenses and other current assets (the “Financial Covenant”).
In the event that the Company does not maintain this Financial Covenant, the outstanding principal and accrued interest expense
of the Notes shall be accelerated and automatically become due and payable.
In connection with the issuance of the
Notes, the Company incurred approximately $87,000 of debt issuance costs (“Deferred Financing Costs”), which primarily
consisted of legal and other professional fees. These Deferred Financing Costs were deferred and are being amortized to interest
expense to related party stockholders over the term of the Notes. The Deferred Financing Costs are recorded within Other Current
Assets in the Company’s Consolidated Balance Sheet.
As the Notes were issued with detachable
Warrants, the Company has initially allocated the proceeds received from the issuance between the Notes and Warrants on a relative
fair value basis. With respect to the Rho Notes, the Company then has evaluated the Rho Conversion Feature to determine whether
this feature qualifies as a beneficial conversion feature or derivative instrument. The Company noted that the Rho Conversion Feature
contains both a fixed conversion price and a contingently adjustable conversion price based on a future event.
Based
on the terms of the Rho Notes and authoritative guidance, the Company has concluded that the entire Rho Conversion Feature is an
embedded derivative liability (the “Embedded Derivative”), which requires bifurcation and must be separately accounted
for as a derivative instrument.
The Company measured the fair value of
the Embedded Derivative using a Black-Scholes valuation model as of the Closing Date. 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 Rho 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 Rho Notes. As a result of the
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
bifurcation, the Company recognized an Embedded Derivative
of approximately $274,000 with a corresponding discount on the Rho Notes, which reduced the carrying value of the Rho Notes on
the date of issuance. This discount represents additional non-cash interest expense that is to be amortized over the remaining
life of the Rho Notes.
The Company also remeasures 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 the Company’s Consolidated Statements of Operations.
The assumptions used at September 30, 2012
are as follows:
|
|
(Unaudited)
|
|
|
|
September 30, 2012
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.17
|
%
|
Expected life (in years)
|
|
|
0.87
|
|
Dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
83.85
|
%
|
As of September 30, 2012, the Company’s
Notes and interest payable to related party stockholders, net consists of the following:
|
|
(Unaudited)
|
|
|
|
September 30, 2012
|
|
|
|
|
|
Notes payable to related party stockholders
|
|
$
|
3,000,000
|
|
Unamortized discount on notes payable to related party stockholders
|
|
|
(743,000
|
)
|
Total notes payable to related party stockholders, net
|
|
|
2,257,000
|
|
|
|
|
|
|
Interest payable to related party stockholders
|
|
|
55,000
|
|
|
|
|
|
|
Total notes and interest payable to related party stockholders, net
|
|
$
|
2,312,000
|
|
For the three and nine months ended September
30, 2012, the Company recognized interest expense in connection with the Notes, including changes in fair value of the Embedded
Derivative and amortization of the debt discount, which were included in total interest expense to related party stockholders in
the Consolidated Statements of Operations, as follows:
|
|
2012
|
|
|
|
|
|
Amortization of discount on notes payable to related party stockholders
|
|
$
|
106,000
|
|
Appreciation in fair value of embedded derivative financial liability to related party
stockholders
|
|
|
99,000
|
|
Interest expense to related party stockholders
|
|
|
55,000
|
|
Amortization expense of deferred financing costs
|
|
|
10,000
|
|
|
|
|
|
|
Total interest expense to related party stockholders
|
|
$
|
270,000
|
|
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Employment contracts
The Company has employment agreements with
certain of its executive officers and other employees, which expire on various dates through June 30, 2015.
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
As of September 30, 2012, the Company's
aggregate cash commitment for all future base salary under these employment contracts is as follows:
|
|
|
|
2012
|
|
$
|
503,000
|
|
2013
|
|
|
972,000
|
|
2014
|
|
|
488,000
|
|
2015
|
|
|
150,000
|
|
|
|
$
|
2,113,000
|
|
NOTE 7 – STOCK-BASED COMPENSATION
Authoritative guidance relating to stock-based
compensation requires the Company to measure compensation cost for stock awards at fair value and recognize compensation over the
service period for awards expected to vest. Total stock-based compensation expense recorded in the Consolidated Statements of Operations
was $284,000 and $295,000 for the three months ended September 30, 2012 and 2011, respectively, and $1,546,000 and $730,000 for
the nine months ended September 30, 2012 and 2011, respectively.
Stock Option Awards
The fair value of stock option awards 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 stock option exercise and employee termination
patterns to estimate forfeiture rates within the valuation model. The expected holding period of stock options represents the period
of time that stock options granted are expected to be outstanding. The risk-free interest rate for periods within the expected
life of the stock option award 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 award activity:
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
Per Share
|
|
Balance at December 31, 2011
|
|
|
2,795,182
|
|
|
$
|
2.84
|
|
Options granted
|
|
|
1,303,260
|
|
|
$
|
1.66
|
|
Options cancelled
|
|
|
(289,956
|
)
|
|
$
|
2.32
|
|
Options expired
|
|
|
(950
|
)
|
|
$
|
14.13
|
|
Options exercised
|
|
|
--
|
|
|
$
|
--
|
|
Balance at September 30, 2012
|
|
|
3,807,536
|
|
|
$
|
2.48
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2011
|
|
|
901,341
|
|
|
$
|
3.76
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2012
|
|
|
1,840,629
|
|
|
$
|
3.01
|
|
During the third quarter of 2012, 186,054
stock option awards were cancelled through normal employee attrition, of which 24,641 stock option awards were vested and 161,413
stock option awards were non-vested. During the third quarter of 2012, 252,283 stock option awards vested. The total fair value
of the stock option awards that vested during the third quarter of 2012 was approximately $424,000. There were 156,747 stock option
awards granted during the third quarter of 2012. At September 30, 2012, there was no aggregate intrinsic value of the fully vested
stock option awards and the weighted average remaining contractual life of the stock option awards was approximately seven years.
The Company did not capitalize any compensation cost, or modify any of its stock option awards during the third quarter of 2012.
There were no stock option exercises and no cash was used to settle equity instruments granted under the Company’s equity
incentive plans during the third quarter of 2012.
As of September 30, 2012, the total compensation
cost related to non-vested stock option awards not yet recognized was $2,703,000. Total compensation cost is expected to be recognized
over approximately three years on a weighted average basis.
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
For the three months ended September 30,
2012 and 2011, the Company recognized expense of approximately $280,000 and $295,000, respectively, and $1,542,000 and $726,000
for the nine months ended September 30, 2012 and 2011, respectively, in connection with these awards.
Restricted Stock Awards
The following table is a summary of activity
related to restricted stock awards for key employees at September 30, 2012:
|
|
|
|
|
Weighted Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Stock
|
|
|
Fair Value
|
|
|
|
Awards
|
|
|
(per share)
|
|
Balance at December 31, 2011
|
|
|
--
|
|
|
$
|
--
|
|
Shares granted
|
|
|
22,321
|
|
|
$
|
1.12
|
|
Shares forfeited
|
|
|
--
|
|
|
$
|
--
|
|
Shares restriction lapses
|
|
|
--
|
|
|
$
|
--
|
|
Balance at September 30, 2012
|
|
|
22,321
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
Aggregate grant date fair value
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting service period of shares granted
|
|
|
1 year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares vested during the nine months ended September 30, 2012
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares non-vested at September 30, 2012
|
|
|
22,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012, the total compensation
cost related to non-vested restricted stock awards not yet recognized was $21,000. Total compensation cost is expected to be recognized
over less than one year on a weighted average basis.
For the three months ended September 30,
2012, the Company recognized expense of approximately $4,000 related to restricted stock awards. For the three months ended September
30, 2011, the Company did not recognize any expense related to restricted stock awards.
For each of the nine months ended September
30, 2012 and 2011, the Company recognized expense of approximately $4,000 related to restricted stock awards.
NOTE 8 – NET LOSS PER SHARE ATTRIBUTABLE TO BLUEFLY,
INC. STOCKHOLDERS
Basic net loss per common share attributable
to Bluefly, Inc. stockholders excludes dilution and is computed by dividing net loss attributable to Bluefly, Inc. stockholders
by the weighted average number of common shares outstanding for the period.
Diluted net loss per common share attributable
to Bluefly, Inc. stockholders is computed by dividing net loss attributable to Bluefly, Inc. 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 stock option awards, warrants, restricted stock awards, deferred stock unit awards, and the if-converted method for
the Rho Notes (as defined in Note 5 – 2012 Financing). Due to the Company’s net loss, (i) stock option awards and warrants
to purchase shares of Common Stock (ii) restricted stock awards that have not yet vested and (iii) Rho Notes convertible into shares
of Common Stock were not included in the computation of diluted loss per common share attributable to Bluefly, Inc. stockholders,
as the effects would be anti-dilutive. Accordingly, basic and diluted weighted average shares outstanding are equal for the following
periods presented:
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net loss attributable to Bluefly, Inc. stockholders
|
|
$
|
(6,277,000
|
)
|
|
$
|
(2,494,000
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic)
|
|
|
28,576,612
|
|
|
|
25,530,899
|
|
|
|
|
|
|
|
|
|
|
Stock
option awards and warrants
(1)(2)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards
(1)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Rho Notes
(1)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (diluted)
|
|
|
28,576,612
|
|
|
|
25,530,899
|
|
|
(1)
|
For the three months ended September 30, 2012 and 2011,
the Company had weighted average shares of the following potentially dilutive securities that were excluded:
|
Stock option awards and warrants
|
|
|
--
|
|
|
|
13,689
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
13,101
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Rho Notes
|
|
|
773,192
|
|
|
|
--
|
|
|
(2)
|
Under the treasury-stock method, the Company excluded
all stock option awards and warrants from the computation of weighted average shares outstanding as a result of the exercise price
of the stock option awards and warrants being greater than the average market price of the Company’s Common Stock.
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net loss attributable to Bluefly, Inc. stockholders
|
|
$
|
(19,096,000
|
)
|
|
$
|
(4,804,000
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic)
|
|
|
28,558,885
|
|
|
|
24,919,336
|
|
|
|
|
|
|
|
|
|
|
Stock
option awards and warrants
(1)(2)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards
(1)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Rho Notes
(1)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (diluted)
|
|
|
28,558,885
|
|
|
|
24,919,336
|
|
|
(1)
|
For the nine months ended September 30, 2012 and 2011,
the Company had weighted average shares of the following potentially dilutive securities that were excluded:
|
Stock option awards and warrants
|
|
|
--
|
|
|
|
111,859
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
4,399
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Rho Notes
|
|
|
259,612
|
|
|
|
--
|
|
|
(2)
|
Under the treasury-stock method, the Company excluded
all stock option awards and warrants from the computation of weighted average shares outstanding as a result of the exercise price
of the stock option awards and warrants being greater than the average market price of the Company’s Common Stock.
|
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2012
NOTE 9 – SUBSEQUENT EVENTS
On October 25, 2012 (the “Closing
Date”), the Company, A + D Labs and TwoRoger Associates, Ltd. (“Modo”) entered into a Unit Purchase Agreement
(“Purchase Agreement”) pursuant to which the Company sold its entire 52% controlling membership interest in Eyefly
to A + D Labs for a total cash consideration of $100,000 ($50,000 payable on the Closing Date with the remaining $50,000 paid in
ten equal monthly installments). The Company estimates it will record a gain from the sale of its controlling interest in Eyefly
of approximately $100,000. Prior to the Closing Date, Eyefly was a majority-owned subsidiary of the Company and was deconsolidated
on the Closing Date as the Company no longer has a controlling financial interest. The Company does not have any remaining interest
in Eyefly.
In connection with the Purchase Agreement,
Eyefly’s Operating Agreement was terminated, and accordingly, the Company does not have any obligation to make any further
capital contributions to Eyefly. In addition, the Company agreed to write off 75% of the intercompany debt owed to it by Eyefly
with the remaining 25% payable at a future date on which Eyefly has cash flow available to pay such debt.
On November 13, 2012, the Company entered
into a new three-year revolving credit facility (“Credit Facility”) with Salus Capital Partners, LLC (“Salus”)
secured by all assets of the Company. The Credit Facility refinanced the Company’s previous credit facility with Wells Fargo
Retail Finance, LLC (“Wells Fargo”). Pursuant to the terms of the Credit Facility, Salus provides the Company with
a revolving credit facility and facilitates the issuance of letters of credit in favor of suppliers or factors.
Availability under the Credit
Facility is determined by a formula that considers a specified percentage of the Company’s accounts receivable and a
specified percentage of the Company’s inventory. The maximum availability is $10 million, of which up to $5 million is
available for the issuance of letters of credit. Interest accrues under the Credit Facility at the prime rate plus 4.75%,
subject to a minimum rate of 8.00%. Letters of credit issued to third parties are cash collateralized by amounts drawn under
the Credit Facility. At closing, $4,700,000 was drawn under the Credit Facility to cash collateralize letters of credit
issued by Wells Fargo and were outstanding at such date. In addition, the Company paid an origination fee of $187,500
at closing, will pay a collateral monitoring fee of $3,000 per month and will pay unused commitment fees of 0.75%. A
termination fee of $75,000 was paid at closing to Wells Fargo.
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.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Recent Developments
In late October 2012, Hurricane Sandy caused
wide-spread damage and business interruption in the East Coast of the United States, with the most significant impact in the New
York City metropolitan area. This impact caused power outage at the Company’s corporate office and therefore, we were
unable to file this Form 10-Q by the original due date of November 14, 2012. We are relying upon the order of the U.S. Securities
and Exchange Commission contained in Release No. 68224 for the extended deadline of November 21, 2012 for this filing.
Preliminary assessments indicate that there
was a decline in average daily sales from customers in the New York City Metropolitan area of approximately 40% during the week
after Hurricane Sandy caused disruptions to the region. We are in the preliminary stages of assessing the financial and operational
impacts of the storm and we, therefore, are unable to estimate the full financial and operational impact.
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 bluefly.com
in September 1998 and expanded our portfolio of web sites in 2011 by launching Belle & Clive, a members-only shopping destination
that presents highly-curated selections of important brands via limited-time sale events, and launching Eyefly, an online retailer
of fashionable prescription glasses.
During the first quarter of 2012, we embarked
upon a new strategy that focuses on lowering our customer acquisition costs, increasing the lifetime value of our customers and
increasing our return on invested capital. To increase our return on invested capital, we have focused on improving our inventory turns
by being more competitive with our pricing. Management believes that these initiatives will take several quarters to materialize.
During the third quarter of 2012, this shift in strategy negatively impacted gross margin percentages as we were promotional. During
such quarter, we continued to deliberately reduce inventory receipts, as we have since the beginning of the year. Net sales for
the three months ended September 30, 2012 remained relatively unchanged, as compared to the three months ended September 30, 2011,
on 25% less average inventory than at September 30, 2011. We expect gross margin percentages to improve over time as these initiatives
take effect. Although it is not expected that our gross margin percentages will be as low as they were during the first three quarters
of 2012, our gross margin percentages may continue to be lower than they have been historically in future periods while we are
implementing this new strategy.
We also expect our overall customer economics
to improve with this new strategy as we increase traffic to both Bluefly.com and Belle & Clive and convert visitors to subscribers
of our email marketing program. This in turn should enable us to more cost effectively market to our customers without spending
significantly more marketing dollars, which would lower our customer acquisition costs and increase the lifetime value of our customers.
During the third quarter of 2012, we saw an increase in SEO and email traffic (free traffic) of 16%, an increase in first time
customers buying across bluefly.com and Belle & Clive of 26% and growth in international orders of 43% as compared to the prior
year. While we continue to see these improvements, our member acquisition costs for the third quarter of 2012 increased as we acquired
198,562 members for the three months ended September 30, 2012, compared to 315,815 members for the three months ended September
30, 2011. This increase was attributable to our continuing testing and optimization in new and existing marketing channels.
Our net sales increased by approximately
3% to $21,743,000 for the three months ended September 30, 2012, from $21,194,000 for the three months ended September 30, 2011.
Our gross margin percentage decreased to 13.6% for the three months ended September 30, 2012, from 29.1% for the three months ended
September 30, 2011. Our gross profit decreased by approximately 52% to $2,962,000 for the three months ended September 30, 2012,
from $6,178,000 for the three months ended September 30, 2011. The decrease in both our gross profit and gross margin percentage
was attributable to an increase in promotional activity and to the deliberate shift in our strategy discussed above as we increase
inventory turns by being more competitive with our pricing and selling merchandise at lower gross margin percentages. We incurred
an operating loss of $5,962,000 for the three months ended September 30, 2012 as compared to an operating loss of $2,531,000 for
the three months ended September 30, 2011. The increase in operating loss for the three months ended September 30, 2012, as compared
to the three months ended September 30, 2011, was primarily a result of a decrease in gross profit and an increase in selling and
fulfillment expenses.
As a percentage of net sales, selling and
fulfillment expenses increased to 23.7% for the three months ended September 30, 2012, compared to 21.3% for the three months ended
September 30, 2011. General and administrative expenses decreased to 8.8% for the three months ended September 30, 2012, compared
to 9.7% for the three months ended September 30, 2011.
Total marketing expenses (including staff
related costs) as a percentage of net sales decreased to 8.5% for the three months ended September 30, 2012, compared to 10.0%
for the three months ended September 30, 2011. Total marketing expenses (excluding staff related costs) increased to $1,679,000
for the three months ended September 30, 2012 from $1,618,000 for the three months ended September 30, 2011. Marketing expenses
(excluding staff related costs) increased primarily as a result of an increase in online marketing expenditures.
Our reserve for returns and credit card
chargebacks decreased to 34.8% of gross sales for the third quarter of 2012 compared to 37.9% for the third quarter of 2011. The
decrease was primarily caused by a reduction in our return rate, however, there can be no assurance that this trend will continue.
At September 30, 2012, we had an accumulated
deficit of $181,581,000. The net losses and accumulated deficit resulted primarily from operating losses including, but not limited
to, the costs associated with developing and marketing our Web Sites, and building our infrastructure, as well as non-cash effects
related to equity-linked instruments previously issued and payment of dividends to holders of our preferred stock.
Results Of Operations
For The Three Months Ended September
30, 2012 Compared To The Three Months Ended September 30, 2011.
The following table sets forth our Consolidated
Statements of Operations data for the three months ended September 30th. All data is in thousands except as indicated below:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
21,743
|
|
|
|
100.0
|
%
|
|
$
|
21,194
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
18,781
|
|
|
|
86.4
|
|
|
|
15,016
|
|
|
|
70.9
|
|
Gross profit
|
|
|
2,962
|
|
|
|
13.6
|
|
|
|
6,178
|
|
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and fulfillment expenses
|
|
|
5,154
|
|
|
|
23.7
|
|
|
|
4,525
|
|
|
|
21.3
|
|
Marketing expenses
|
|
|
1,848
|
|
|
|
8.5
|
|
|
|
2,123
|
|
|
|
10.0
|
|
General and administrative expenses
|
|
|
1,922
|
|
|
|
8.8
|
|
|
|
2,061
|
|
|
|
9.7
|
|
Total operating expenses
|
|
|
8,924
|
|
|
|
41.0
|
|
|
|
8,709
|
|
|
|
41.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,962
|
)
|
|
|
(27.4
|
)
|
|
|
(2,531
|
)
|
|
|
(11.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense to related party stockholders
|
|
|
(270
|
)
|
|
|
(1.2
|
)
|
|
|
--
|
|
|
|
--
|
|
Other interest expense, net
|
|
|
(88
|
)
|
|
|
(0.4
|
)
|
|
|
(65
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,320
|
)
|
|
|
(29.0
|
)%
|
|
$
|
(2,596
|
)
|
|
|
(12.2
|
)%
|
We also measure and evaluate ourselves
against certain other key operational metrics. The following table, which excludes Eyefly, sets forth our actual results based
on these other metrics for the three months ended September 30
th
, as indicated below:
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Average order size (including shipping & handling)
|
|
$
|
226.33
|
|
|
$
|
312.49
|
|
New members added during the period*
|
|
|
198,562
|
|
|
|
315,815
|
|
*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, 2012 decreased by approximately 2% to $33,356,000, from $34,140,000 for the three months ended September
30, 2011. For the three months ended September 30, 2012, we recorded a provision for returns and credit card chargebacks of $11,613,000,
or approximately 34.8% of gross sales. For the three months ended September 30, 2011, the provision for returns and credit card
chargebacks was $12,946,000, or approximately 37.9% of gross sales. The decrease in this provision as a percentage of gross sales
resulted from a reduction in our return rate, however, there can be no assurance that this trend will continue.
After the necessary provisions for returns,
credit card chargebacks, our net sales for the three months ended September 30, 2012 were $21,743,000. This represents an increase
of approximately 3% compared to the three months ended September 30, 2011, in which net sales totaled $21,194,000. The increase
in net sales resulted from a reduction in return rates as discussed above, which was partially offset by a decrease in average
order size, relating to an increase in promotional activity, and, in part, a planned decrease in inventory receipts since the beginning
of the year. For the three months ended September 30, 2012, revenue from shipping and handling (which is included in net sales)
decreased approximately 52% to $516,000, from $1,065,000 for the three months ended September 30, 2011. Revenue from shipping and
handling decreased primarily as the result of an increase in free shipping promotional activity offered to customers compared to
the third quarter of 2011.
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, 2012 was $18,781,000, resulting in a gross margin percentage of approximately
13.6%. Cost of sales for the three months ended September 30, 2011 was $15,016,000, resulting in a gross margin percentage of approximately
29.1%. Gross profit decreased by approximately 52% to $2,962,000 for the three months ended September 30, 2012, compared to $6,178,000
for the three months ended September 30, 2011. The decrease in both gross profit and gross margin percentage is attributable to
the deliberate shift in our strategy discussed above as we increase inventory turns by being more competitive with our pricing
and selling merchandise at lower gross margin percentages, and due to an increase in net freight costs due to free shipping, which
totaled over 250 basis points, and daily deal promotions that we offered to customers. While our gross profit and gross margin
percentage have decreased during the quarter, our inventory turns have improved by 81% for the three months ended September 30,
2012 compared to the three months ended September 30, 2011.
Selling and fulfillment expenses:
Selling and fulfillment expenses increased by approximately 14% for the three months ended September 30, 2012 compared to the three
months ended September 30, 2011. Selling and fulfillment expenses, which include a total of $58,000 and $145,000 of costs related
to Eyefly for the three months ended September 30, 2012 and 2011, respectively, were comprised of the following:
|
|
Three Months Ended September 30,
|
|
|
Percentage
|
|
(All data in thousands)
|
|
2012
|
|
|
2011
|
|
|
Difference
|
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
As a % of
|
|
|
Increase
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
2,180
|
|
|
|
10.0
|
%
|
|
$
|
1,983
|
|
|
|
9.4
|
%
|
|
|
9.9
|
%
|
Technology
|
|
|
1,678
|
|
|
|
7.7
|
|
|
|
1,367
|
|
|
|
6.4
|
|
|
|
22.8
|
|
E-Commerce
|
|
|
1,296
|
|
|
|
6.0
|
|
|
|
1,175
|
|
|
|
5.5
|
|
|
|
10.3
|
|
Total selling and fulfillment expenses
|
|
$
|
5,154
|
|
|
|
23.7
|
%
|
|
$
|
4,525
|
|
|
|
21.3
|
%
|
|
|
13.9
|
%
|
As a percentage of net sales, our selling
and fulfillment expenses increased to 23.7% for the three months ended September 30, 2012, as compared to 21.3% for the three months
ended September 30, 2011.
Operating expenses include all costs related
to inventory management, fulfillment, customer service, and credit card processing. Operating expenses increased by 9.9% to $2,180,000
for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, primarily as a result of an
increase in variable fulfillment costs (e.g., picking and packing orders and processing returns) associated with an increase in
customer orders and an increase in labor costs associated with our
customer service call center. The increases in these costs were
partially offset by a decrease in credit card fees associated with a decrease in average order size.
Technology expenses consist primarily of
staff related costs, amortization of capitalized costs and web site hosting expenses. For the three months ended September 30,
2012, technology expenses increased by 22.8% to $1,678,000, compared to the three months ended September 30, 2011. This increase
was attributable to an increase in depreciation expense, included in technology expenses, of $310,000, an increase in software
support expenses of $99,000 and an increase in web hosting expenses of $42,000. These increases were partially offset by a decrease
in salary and salary related expenses of $93,000 and a decrease in stock-based compensation expenses of $55,000.
E-Commerce
expenses include expenses related to our photo design studio, image processing, and Web Site design.
For the three months ended September 30, 2012, e-commerce expenses increased by approximately 10.3% to $1,296,000 as compared to
the three months ended September 30, 2011, primarily as a result of an increase in salary and salary related expenses of $72,000,
an increase in expenses related to photo shoots for Belle & Clive of $53,000 and an increase in short-term staffing expenses
of $48,000. These increases were partially offset by a decrease in expenses related to photo shoots and studio expenses of $86,000.
Marketing expenses:
Marketing expenses
(including staff related costs) decreased by approximately 13% to $1,848,000 for the three months ended September 30, 2012, from
$2,123,000 for the three months ended September 30, 2011.
Marketing expenses include expenses related
to (a) online marketing programs, which consist of social media programs, online integration partnerships, paid search, and fees
paid to marketing affiliates and comparison engines, (b) offline marketing programs, which consist of direct mail campaigns, television
advertising and production costs, as well as (c) staff related costs. As a percentage of net sales, our marketing expenses decreased
to 8.5% for the three months ended September 30, 2012 from 10.0% for the three months ended September 30, 2011.
For the three months ended September 30,
2012, total marketing expenses (excluding staff related costs) increased by 1% to $1,679,000 from $1,618,000 for the three months
ended September 30, 2011. The increase in total marketing expenses (excluding staff related costs) was attributable to an increase
in online marketing expenditures related to direct-email marketing programs resulting from an increase in our overall membership
file and fees paid to affiliate marketing programs.
The increase in online marketing expenditures
is also attributable to an increase in the associated marketing costs from our daily deal programs of approximately $249,000. While
these daily deal programs have led to a growth in our overall member file for future sales growth, there can be no assurance that
this trend will continue.
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, 2012 decreased to $1,922,000, as compared to $2,061,000 for the three months ended September 30, 2011.
The decrease in general and administrative expenses was primarily the result of a decrease in professional fees of $172,000, which
was partially offset by an increase in stock-based compensation expenses related to equity awards of $58,000.
As a percentage of net sales, general and
administrative expenses for the three months ended September 30, 2012 decreased to 8.8%, from 9.7% for the three months ended September
30, 2011.
Loss from operations:
For the three
months ended September 30, 2012, we incurred an operating loss of $5,962,000, compared to an operating loss of $2,531,000 for the
three months ended September 30, 2011.
Interest expense to related party stockholders:
Interest expense to related party stockholders for the three months ended September 30, 2012 was $270,000. There was no interest
expense to related party stockholders recognized for the three months ended September 30, 2011. Interest expense to related party
stockholders consists of non-cash amortization expense of the discount relating to our outstanding notes issued to certain related
parties in connection with the recent financing, non-cash changes in fair value of the embedded derivative, accrued interest expense
and amortization expense related to deferred financing charges.
Other interest expense, net
: Interest
expense for the three months ended September 30, 2012 increased to approximately $88,000, compared to $65,000 for the three months
ended September 30, 2011. Interest expense consists primarily of fees paid in connection with our Wells Facility (as described
further below).
We earned less than $1,000 in interest
income for the three months ended September 30, 2012 and 2011. These amounts related primarily to interest income earned on our
cash balances.
Net loss
per share attributable to Bluefly, Inc. stockholders:
Net loss per share attributable
to Bluefly, Inc. stockholders increased to $0.22 per share for the three months ended September 30, 2012, compared to $0.10 per
share for the three months ended September 30, 2011. The increase in net loss per share attributable to Bluefly, Inc. stockholders
was primarily attributable to an increase in our operating loss, which was partially offset by an increase in our weighted average
common shares outstanding for the three months ended September 30, 2012 of 28,576,612, compared to 25,530,899 weighted average
common shares outstanding for the three months ended September 30, 2011. The increase in our weighted average common shares outstanding
was attributable to a private placement in September 2011 at which time we issued 3,666,665 shares of common stock to certain related-party
stockholders.
For The Nine Months Ended September 30, 2012 Compared To
The Nine Months Ended September 30, 2011.
The following table sets forth our Consolidated
Statements of Operations data for the nine months ended September 30
th
. All data is in thousands except as indicated
below:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
68,224
|
|
|
|
100.0
|
%
|
|
$
|
66,924
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
57,088
|
|
|
|
83.7
|
|
|
|
45,058
|
|
|
|
67.3
|
|
Gross profit
|
|
|
11,136
|
|
|
|
16.3
|
|
|
|
21,866
|
|
|
|
32.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and fulfillment expenses
|
|
|
15,762
|
|
|
|
23.1
|
|
|
|
13,471
|
|
|
|
20.2
|
|
Marketing expenses
|
|
|
6,657
|
|
|
|
9.7
|
|
|
|
7,221
|
|
|
|
10.8
|
|
General and administrative expenses
|
|
|
7,418
|
|
|
|
10.9
|
|
|
|
6,100
|
|
|
|
9.1
|
|
Total operating expenses
|
|
|
29,837
|
|
|
|
43.7
|
|
|
|
26,792
|
|
|
|
40.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(18,701
|
)
|
|
|
(27.4
|
)
|
|
|
(4,926
|
)
|
|
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense to related party stockholders
|
|
|
(270
|
)
|
|
|
(0.4
|
)
|
|
|
--
|
|
|
|
--
|
|
Other interest expense, net
|
|
|
(273
|
)
|
|
|
(0.4
|
)
|
|
|
(216
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,244
|
)
|
|
|
(28.2
|
)%
|
|
$
|
(5,142
|
)
|
|
|
(7.7
|
)%
|
We also measure and evaluate ourselves
against certain other key operational metrics. The following table, which excludes Eyefly, sets forth our actual results based
on these other metrics for the nine months ended September 30
th
, as indicated below:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Average order size (including shipping & handling)
|
|
$
|
248.61
|
|
|
$
|
308.07
|
|
New members added during the period*
|
|
|
1,105,336
|
|
|
|
465,350
|
|
*Based on unique email addresses
Net sales
: Gross sales for the nine
months ended September 30, 2012 decreased by approximately 2% to $105,657,000 from $107,555,000 for the nine months ended September
30, 2011. For the nine months ended September 30, 2012, we recorded a provision for returns and credit card chargebacks of $37,433,000
or approximately 35.4% of gross sales. For the nine months ended September 30, 2011, the provision for returns and credit card
chargebacks was $40,631,000, or approximately 37.8% of
gross sales. The decrease in this provision as a percentage of gross sales
resulted from a reduction in our return rate. There can be no assurance that this trend will continue.
After the necessary provisions for returns
and credit card chargebacks, our net sales for the nine months ended September 30, 2012 was $68,224,000. This represents an increase
of approximately 2% compared to the nine months ended September 30, 2011, in which net sales totaled $66,924,000. The increase
in net sales resulted primarily from the reduction in return rates as discussed above. This increase was partially offset by a
decrease of approximately 19% in average order size, which resulted from sales incentives offered to customers as part of our promotional
activity. For the nine months ended September 30, 2012, revenue from shipping and handling (which is included in net sales) decreased
approximately 22% to $2,590,000 from $3,340,000 for the nine months ended September 30, 2011. Revenue from shipping and handling
decreased primarily as the result of an increase in free shipping promotional activity offered to customers compared to the nine
months ended September 30, 2011.
Cost of sales
: Cost of sales for
the nine months ended September 30, 2012 was $57,088,000 resulting in a gross margin percentage of approximately 16.3%. Cost of
sales for the nine months ended September 30, 2011 was $45,058,000, resulting in a gross margin percentage of 32.7%. Gross profit
decreased by approximately 49%, to $11,136,000 for the nine months ended September 30, 2012 compared to $21,866,000 for the nine
months ended September 30, 2011. The decrease in both our gross profit and gross margin percentage was attributable to an increase
in our promotional activity, which includes an increase in net freight costs due to free shipping promotions that we offered to
customers, and, in part, the deliberate shift in our strategy discussed above as we increase inventory turns by being more competitive
with our pricing and selling merchandise at lower gross margin percentages. While our gross profit and gross margin percentages
have decreased, our inventory turns have improved by 49% for the nine months ended September 30, 2012 compared to the nine months
ended September 30, 2011.
Selling and fulfillment expenses
:
Selling and fulfillment expenses increased by approximately 17% for the nine months ended September 30, 2012 compared to the nine
months ended September 30, 2011. Selling and fulfillment expenses, which includes a total of $281,000 and $418,000 of costs related
to Eyefly for the nine months ended September 30, 2012 and 2011, respectively, were comprised of the following:
|
|
Nine Months Ended September 30,
|
|
|
Percentage
|
|
(All data in thousands)
|
|
2012
|
|
|
2011
|
|
|
Difference
|
|
|
|
|
|
|
As a % of
|
|
|
|
|
|
As a % of
|
|
|
Increase
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
6,555
|
|
|
|
9.6
|
%
|
|
$
|
6,034
|
|
|
|
9.0
|
%
|
|
|
8.6
|
%
|
Technology
|
|
|
4,921
|
|
|
|
7.2
|
|
|
|
4,309
|
|
|
|
6.5
|
|
|
|
14.2
|
|
E-Commerce
|
|
|
4,286
|
|
|
|
6.3
|
|
|
|
3,128
|
|
|
|
4.7
|
|
|
|
37.0
|
|
Total selling and fulfillment expenses
|
|
$
|
15,762
|
|
|
|
23.1
|
%
|
|
$
|
13,471
|
|
|
|
20.2
|
%
|
|
|
17.0
|
%
|
As a percentage of net sales, our selling
and fulfillment expenses increased to 23.1% for the nine months ended September 30, 2012, as compared to 20.2% for the nine months
ended September 30, 2011.
Operating expenses increased for the nine
months ended September 30, 2012 by approximately 8.6% to $6,555,000 compared to the nine months ended September 30, 2011 as a result
of increases in variable fulfillment costs (e.g., picking and packing orders and processing returns) associated with an increase
in customer orders and fees associated with our customer service call center, which were partially offset by decreases in salary
and salary related expenses related to Eyefly personnel.
For the nine months ended September 30,
2012, technology expenses increased by approximately 14.2% to $4,921,000 compared to the nine months ended September 30, 2011.
This increase was attributable to an increase in software support expenses of $245,000, an increase in consulting fees related
to short-term staffing of $223,000, an increase in depreciation expenses, included in technology expenses, of $245,000 and an increase
in web site hosting expenses of $183,000. These increases were partially offset by a decrease in salary and salary related expenses
of approximately $276,000.
For the nine months ended September 30,
2012, e-commerce expenses increased by approximately 37.0% to $4,286,000 as compared to the nine months ended September 30, 2011,
primarily as a result of increases in expenses related to photo shoots for Belle & Clive of $514,000, salary and salary related
expenses of $384,000 and short-term staffing expenses of $102,000.
Marketing expenses
: Marketing expenses
(including staff related costs) decreased by approximately 8% to $6,657,000 for the nine months ended September 30, 2012, from
$7,221,000 for the nine months ended September 30, 2011.
As a percentage of net sales, total marketing
expenses (including staff related costs) decreased to 9.7% for the nine months ended September 30, 2012, compared to 10.8% for
the nine months ended September 30, 2011.
For the nine months ended September 30,
2012, total marketing expenses (excluding staff related costs) decreased by 1% to $5,986,000 from $5,993,000 for the nine months
ended September 30, 2011. The decrease in total marketing expenses (excluding staff related costs) was primarily attributable to
a reduction in offline marketing expenditures related to television advertising and a reduction in certain online marketing expenditures
related to paid search and comparison engines.
These decreases were partially offset by
increases in our online marketing expenditures related to email marketing programs, fees paid to marketing affiliates and associated
marketing costs from our daily deal programs of approximately $336,000. While these daily deal programs have led to a growth in
our overall member file for future sales growth, there can be no assurance that this trend will continue.
General and administrative expenses
:
General and administrative expenses for the nine months ended September 30, 2012 increased to $7,418,000, compared to $6,100,000
for the nine months ended September 30, 2011. The increase in general and administrative expenses was primarily the result of an
increase in stock-based compensation expenses related to equity awards of $892,000 and a net increase in salary and salary related
expenses of $580,000, which included $627,000 of severance payable to our former Chief Executive Officer. These increases were
partially offset by a decrease in professional fees of $212,000.
As a percentage of net sales, general and
administrative expenses for the nine months ended September 30, 2012 increased to approximately 10.9% from 9.1% for the nine months
ended September 30, 2011.
Loss from operations
: Operating
loss increased to $18,701,000 for the nine months ended September 30, 2012, compared to $4,926,000 for the nine months ended September
30, 2011.
Interest expense to related party stockholders:
Interest expense to related party stockholders for the nine months ended September 30, 2012 was $270,000. There was no interest
expense to related party stockholders recognized for the nine months ended September 30, 2011.
Other interest expense, net
: Interest
expense for the nine months ended September 30, 2012 increased to $274,000 compared to $228,000 for the nine months ended September
30, 2011.
Interest income for the nine months ended
September 30, 2012 decreased to $1,000 from $12,000 for the nine months ended September 30, 2011.
Net loss
per share attributable to Bluefly, Inc. stockholders:
Net loss per share attributable
to Bluefly, Inc. stockholders increased to $0.67 per share for the nine months ended September 30, 2012, compared to $0.19 per
share for the nine months ended September 30, 2011. The increase in net loss per share attributable to Bluefly, Inc. stockholders
was primarily attributable to an increase in our operating loss, which was partially offset by an increase in our weighted average
common shares outstanding for the nine months ended September 30, 2012 of 28,558,885, compared to 24,919,336 weighted average common
shares outstanding for the nine months ended September 30, 2011. The increase in our weighted average common shares outstanding
was attributable to a private placement in September 2011 at which time we issued 3,666,665 shares of common stock to certain related-party
stockholders.
Liquidity And Capital Resources
General
At September 30, 2012, we had approximately
$1.3 million in cash and cash equivalents compared to $4.4 million and $4.1 million at December 31, 2011 and September 30, 2011,
respectively. Working capital, which is computed as total current assets less total current liabilities and represents a measure
of operating liquidity, at September 30, 2012 and 2011 was $3.2 million and $28.1 million, respectively. Working capital at December
31, 2011 was $20.7 million. As of September 30, 2012, we had an accumulated deficit of approximately $181.6 million. We have incurred
negative cash flows and cumulative net losses since inception.
During the first quarter of 2012, we embarked
upon a new strategy that focuses on lowering our customer acquisition costs, increasing the lifetime value of our customers and
increasing our return on invested capital. To increase our return on invested capital, we have focused on improving our inventory turns
by being more competitive with our pricing. Management believes that these initiatives will take several quarters to materialize.
During the third quarter of 2012, this shift in strategy has continued to negatively impact gross margin percentages as we were
promotional. During such quarter, we continued to deliberately reduce inventory receipts, as we have since the beginning of the
year. However, we expect gross margin percentages to improve as these initiatives take effect. We believe that our existing cash
balance, proceeds from the August 2012 financing (as discussed further below), combined with working capital and the funds available
from our new 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.
In addition, unforeseen increases in expenditures
or shortfalls in estimated revenues could significantly impair our ability to fund future operations. Should we experience unanticipated
losses, shortfalls in revenues or expenditures that exceed current estimates, management would implement a cost reduction plan,
that includes a reduction in work force as well as reductions in overhead costs and capital expenditures, and/or attempt to raise
additional debt or equity financing. 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.
We believe that in order to grow the business,
we will need to make significant investments in marketing, business and technology development, and inventory. To that end,
in the normal course of business we have entered into agreements with suppliers and other business partners pursuant to which we
commit to significant expenditures or make payments if minimum levels of purchases are not made. However, our budget and
our ability to make such expenditures are subject to a number of factors, including our results of operations.
Credit Facility
On November 13, 2012, we entered into a
new three-year revolving credit facility (“Credit Facility”) with Salus Capital Partners, LLC (“Salus”)
secured by all of our assets. The Credit Facility refinanced our previous credit facility with Wells Fargo Retail Finance, LLC
(“Wells Fargo”).
Pursuant to the terms of the
Credit Facility, Salus provides us with a revolving credit facility and facilitates the issuance of letters of credit in
favor of suppliers or factors. Availability under the Credit Facility is determined by a formula that considers a specified
percentage of our accounts receivable and a specified percentage of our inventory. The maximum availability is $10 million,
of which up to $5 million is available for the issuance of letters of credit. Interest accrues under the Credit Facility at
the prime rate plus 4.75%, subject to a minimum rate of 8.00%. Letters of credit issued to third parties are cash
collateralized by amounts drawn under the Credit Facility. At closing, $4.7 million was drawn under the Credit Facility to
cash collateralize letters of credit issued by Wells Fargo and were outstanding at such date. In addition, we paid an
origination fee of $187,500 at closing, will pay a collateral monitoring fee of $3,000 per month and will pay unused
commitment fees of 0.75%. A termination fee of $75,000 was paid at closing to Wells Fargo.
The terms of the Credit Facility contain
a material adverse change clause. This feature may limit our ability to obtain additional borrowings or result in a default on
current outstanding letters of credit.
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. As of September 30, 2012, we had approximately $1,246,000 of prepaid inventory on our Consolidated Balance Sheet,
compared to $2,690,000 as of December 31, 2011.
2012 Financing Transaction
On August 13, 2012 (the “Closing
Date”), we entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with Rho Ventures VI,
L.P. (“Rho”) and Prentice Consumer Partners, LP (“Prentice” and together with Rho, the “Purchasers”)
pursuant to which we issued (i) $1,500,000 aggregate principal amount of collateralized subordinated convertible promissory notes
to Rho (the “Rho Notes”) and (ii) $1,500,000 aggregate principal amount of collateralized subordinated promissory notes
to Prentice (the “Prentice Notes” and together with the Rho Notes, the “Notes”). The Rho Notes bear
interest
at 12% per annum, compounded annually, and interest is payable upon maturity or conversion. The Prentice Notes bear
interest at 15% per annum, compounded annually, and interest is payable quarterly. Prentice received an origination fee on
the Closing Date equal to 2 percent of the Prentice Notes. The Rho Notes are convertible, at the holder's option, (a) into equity
securities that we might issue in any subsequent round of financing that results in proceeds to us of at least $7,500,000 (a “Qualified
Financing”) at a price equal to the lowest price per share paid by any investor in such Qualified Financing or (b) into shares
of our Common Stock at a price per share equal to $1.05, which represents the fair market value on the Closing Date.
The Notes have a one-year term but may
become due prior to the end of such term in the event of a change of control or a Qualified Financing. The Notes are collateralized
by second priority liens on all our assets.
In connection with the issuance of the
Notes, we also issued warrants, with a seven year term, to purchase 476,190 shares of our common stock (the “Warrants”)
to each of Rho and Prentice, respectively, at a price equal to $1.05 per share, which represents the fair market value of the Common
Stock on the Closing Date.
We incurred approximately $87,000 of debt
issuance costs (“Deferred Financing Costs”) related to the issuance of the Notes, which primarily consisted of legal
and other professional fees. These Deferred Financing Costs were deferred and are being amortized to interest expense to related
party stockholders over the term of the Notes.
Refer to the consolidated financial statements within Note 5
– Financing for further details.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
We have assessed our vulnerability to certain
market risks, including interest rate risk associated with financial instruments included in cash and cash equivalents. Due to
the short-term nature of these instruments, we have determined that the risks associated with interest rate fluctuations related
to these financial instruments do not pose a material risk to us.
Item 4. Controls and Procedures
As of the end of the period covered by
this Form 10-Q (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 our most recent fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our 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 the Company 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: the Company’s history of losses and anticipated future losses; the risk of
availability of additional capital, if required, to satisfy the Company’s needs for cash flow, inventory supply and growth
of the business; the Company’s ability to realize benefits from new initiatives such as its members-only web site Belle and
Clive; risks associated with the Company’s shift in strategy to emphasize inventory turns over product margin; the risks
that our reduction in spending on offline marketing in favor of online methods will continue to be successful; risks associated
with the continuing difficulties in the unfavorable general economic environment; 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 certain concentration of suppliers 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 Sites;
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 and our ability to utilize our net operating
losses.
Part II - OTHER INFORMATION
Item 5. Other Information
Departure of Certain Officers
On November 20, 2012, the Company entered
into a separation agreement with Kara Jenny, the Company's Chief Financial Officer. Pursuant to the agreement, Ms. Jenny will
continue to serve as the Company's Chief Financial Officer until a date to be determined by the Company, but no later than December
31, 2012. Following her last day of employment, Ms. Jenny will provide consulting services for a period of up to four months.
The Company will provide Ms. Jenny with two months’ base salary plus consulting fees equivalent to four months’ base
salary, together totaling an aggregate amount of $150,000 payable over a six month period following her last day of service. Ms.
Jenny will also receive the continuation of certain fringe benefits. In addition, any stock options that would have vested within
six months of her last day of service shall automatically vest on her last day of employment and she will have one year from such
date to exercise any vested options.
In connection with the separation agreement,
Ms. Jenny will enter into a customary release. The foregoing description of the amendment is not intended to be complete and is
qualified in its entirety by the complete text of the agreement, which is filed as Exhibit 10.1 hereto and is incorporated herein
by reference.
Item 6. Exhibits
The following is a list of exhibits filed
as part of this Report:
Exhibit Number
|
|
Description
|
10.1
|
|
Separation Agreement and Release of Claims,
dated November 20, 2012, by and between the Company and Kara Jenny.
|
|
|
|
10.2
|
|
Amended and Restated Employment Agreement, dated February 2, 2012, by and between the Company and Joseph C. Park.
|
|
|
|
10.3
|
|
Credit Agreement and related Security Agreement, each dated November 13, 2012, by and among the Company, its subsidiary EVT Acquisition Co., LLC and Salus Capital Partners, LLC (incorporated by reference to the Company’s Current Report on Form 8-K, dated November 19, 2012).
|
|
|
|
10.4
|
|
Amendment No. 1 to Secured Subordinated Promissory Note, dated November 13, 2012, by and between the Company and Prentice Consumer Partners LP (incorporated by reference to the Company’s Current Report on Form 8-K, dated November 19, 2012).
|
|
|
|
10.5
|
|
Amendment No. 1 to Secured Subordinated Convertible Promissory Note, dated November 13, 2012, by and between the Company and Rho Ventures VI, L.P. (incorporated by reference to the Company’s Current Report on Form 8-K, dated November 19, 2012).
|
|
|
|
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.
|
|
|
|
101.INS
|
|
XBRL Instance Document.
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema.
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase.
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase.
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase.
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase.
|
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/ Joseph C. Park
|
|
Joseph C. Park
|
|
Chief Executive Officer
|
|
|
|
|
|
By:
/s/ Kara B. Jenny
|
|
Kara B. Jenny
|
|
Chief Financial Officer
|
November 21, 2012
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