UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________

FORM 10-Q

~~_______________~~____________________

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2012
		For the quarterly period ended March 31, 2013
OR
¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from_________ to __________

Commission File Number 001-14498

BLUEFLY, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-3612110	~~13-3612110~~
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)	~~(I.R.S. Employer Identification Number)~~
42 West 39th Street, New York, NY (Address of principal executive offices)		10018 (Zip Code)
42 West 39th Street, New York, NY	10018
(Address of principal executive offices)	(Zip Code)

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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such ~~filing~~ filing requirements for the past 90 days. Yes ~~[X]~~ x No ~~[ ]~~¨

Indicate by check mark whether the ~~registrant~~ 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 ]~~ 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 ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x (Do not check if a smaller reporting company)

(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~~May 1915, ~~2012~~2013, there were 28,598,933 shares of Common Stock, $.01 par value, of the registrant outstanding.

BLUEFLY, INC.

TABLE OF CONTENTS

~~SEPTEMBER~~MARCH 3031, ~~2012~~2013

		PAGE
PART I –	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	3
	Consolidated Balance Sheets as of March 31, 2013 (unaudited)	3
	Consolidated Statements of Operations for the three months ended September 30, 2012 and 2011 (unaudited)	4
	and December 31, 2012
	Consolidated Statements of Operations for the nine months ended September 30, 2012 and 2011 (unaudited)	5
	Consolidated Statements of Operations for the three months ended	4
	Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2012 (unaudited)	6
	March 31, 2013 and 2012 (unaudited)
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)	7
	Consolidated Statements of Changes in Stockholders’ Equity for the	5
	Notes to Consolidated Financial Statements (unaudited)	8 – 17
	three months ended March 31, 2013 (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18 – 26
	Consolidated Statements of Cash Flows for the three months ended	6
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	March 31, 2013 and 2012 (unaudited)
Item 4.	Controls and Procedures	26
	Notes to Consolidated Financial Statements (unaudited)	7 – 16
PART II –	OTHER INFORMATION
Item 2.	Management’s Discussion and Analysis of Financial Condition	16 – 21
Item 5.	Other Information	28
	and Results of Operations
Item 6.	Exhibits	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Signatures		30
Item 4.	Controls and Procedures	21
PART II –	OTHER INFORMATION	23
Item 5.	Other Information	23
Item 6.	Exhibits	23
Signatures		24

Part I – FINANCIAL INFORMATION

Item 1. – Financial Statements

BLUEFLY, INC.

CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	September 30,			December 31,
	March 31,			December 31,
	2012			2011
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	~~1,254,000~~--		$	41,~~413~~283,000
Accounts receivable — net of allowance for doubtful accounts		2,451,000			2,597,000
Restricted cash securing letters of credit		4,635,000			4,635,000
Inventories, net		23,443,000			32,083,000
Accounts receivable, net		1,695,000			2,433,000
Prepaid inventory		1,074,000			2,690,000
Inventories, net		16,203,000			20,521,000
Prepaid expenses		107,000			247,000
Prepaid expenses and other current assets		1,061,000			1,412,000
Other current assets		1,617,000			706,000
Total current assets		23,594,000			30,284,000
Total current assets		29,946,000			42,736,000
Property and equipment, net		5,235,000			5,714,000
Property and equipment, net		6,489,000			5,705,000
Other assets, net		508,000			545,000
Intangible assets, net		443,000			--
Total assets	$	29,337,000		$	36,543,000
Other assets		181,000			185,000
Total assets	$	37,059,000		$	48,626,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	14,740,000		$	10,192,000
Revolving credit facility, expiring November 2015	$	4,551,000		$	5,311,000
Allowance for sales returns		2,656,000			3,124,000
Accounts payable		14,349,000			13,722,000
Accrued expenses and other current liabilities		2,240,000			4,446,000
Allowance for sales returns		1,700,000			2,081,000
Deferred revenue		4,401,000			4,235,000
Accrued expenses and other current liabilities		1,606,000			2,720,000
Embedded derivative financial liability to related party stockholders		373,000			--
Deferred revenue		2,850,000			4,381,000
Notes and interest payables to related party stockholders, net of discount		2,312,000			--
Embedded derivative financial liability to related party stockholders		250,000			379,000
Total current liabilities		26,722,000			21,997,000
Notes and interest payables to related party stockholders, net of discount		2,861,000			2,599,000
Deferred rent liability		405,000			373,000
Total current liabilities		28,167,000			31,193,000
Total liabilities		27,127,000			22,370,000
Deferred rent liability		420,000			413,000
Commitments and contingencies (Note 6)
Total liabilities		28,587,000			31,606,000
Commitments and contingencies (Note 8)
Stockholders’ equity:
Bluefly, Inc. stockholders’ equity:
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		286,000			283,000
Preferred stock - $0.01 par value; 1,000,000 shares authorize and none issued or
outstanding		--			--
Common stock– $.01 par value; 50,000,000 shares authorized as of March 31, 2013 and December 31, 2012, respectively; 28,937,311 shares issued and 28,598,933 shares outstanding as of March 31, 2013 and December 31, 2012, respectively		286,000			286,000
Treasury stock		(1,824,000	)		(1,824,000	)
Additional paid-in capital		193,~~213~~827,000			~~190~~193,~~296~~574,000
Accumulated deficit		(~~181~~191,~~581~~539,000	)		(~~162~~187,~~485~~099,000	)
Total Bluefly, Inc. stockholders’ equity		10,094,000			26,270,000
Total stockholders’ equity		750,000			4,937,000
Non-controlling interest in Eyefly LLC		(162,000	)		(14,000	)
Total liabilities and stockholders’ equity	$	29,337,000		$	36,543,000
Total stockholders’ equity		9,932,000			26,256,000
Total liabilities and stockholders’ equity	$	37,059,000		$	48,626,000

The ~~accompanying~~ accompanying notes are an integral part of these unaudited consolidated financial statements.

BLUEFLY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	September 30,
	March 31,
	2012			2011
	2013			2012
Net sales	$	2119,~~743~~794,000		$	2124,~~194~~266,000
Cost of sales		1815,~~781~~813,000			1520,~~016~~521,000
Gross profit		23,~~962~~981,000			63,~~178~~745,000
Selling and fulfillment expenses		54,~~154~~708,000			45,~~525~~458,000
Marketing expenses		1,~~848~~231,000			2,~~123~~578,000
General and administrative expenses		12,~~922~~035,000			23,~~061~~541,000
Total operating expenses		87,~~924~~974,000			811,~~709~~577,000
Operating loss		(53,~~962~~993,000	)		(27,~~531~~832,000	)
Interest expense to related party stockholders		(270,000	)		--
Interest expense to related-party stockholders		(222,000	)		--
Other interest expense, net		(88,000	)		(65,000	)
Other interest expense and other income, net		(225,000	)		(72,000	)
Net loss		(64,~~320~~440,000	)		(27,~~596~~904,000	)
Less: net loss attributable to non-controlling interest in Eyefly LLC		(43,000	)		(102,000	)
Less: Net loss attributable to non-controlling interest in Eyefly LLC		--			(34,000	)
Net loss attributable to Bluefly, Inc. stockholders	$	(64,~~277~~440,000	)	$	(27,~~494~~870,000	)
Basic and diluted net loss per common share attributable to Bluefly, Inc. stockholders	$	(0.22	)	$	(0.10	)
Basic and diluted net loss per common share
attributable to Bluefly, Inc. stockholders	$	(0.16	)	$	(0.28	)
Weighted average common shares outstanding
(basic and diluted)		28,576,612			2528,~~530~~523,~~899~~237

The accompanying notes are an integral part of these unaudited consolidated financial statements.

BLUEFLY, INC.

CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

	Nine Months Ended
	Common Stock
	September 30,
	$.01 Par Value						Treasury Stock					Additional							Total
	2012			2011
	Number of						Number of					Paid-in		Accumulated			Noncontrolling		Stockholders'
Net sales	$	68,224,000		$	66,924,000
	Shares			Amount			Shares		Amount			Capital		Deficit			Interest		Equity
Cost of sales		57,088,000			45,058,000
Balance at December 31, 2012		28,598,933		$	286,000			338,398	$	(1,824,000	)	$	193,574,000	$	(187,099,000	)	$	-	$	4,937,000
Gross profit		11,136,000			21,866,000
Stock-based compensation		-			-			-		-			253,000		-			-		253,000
Selling and fulfillment expenses		15,762,000			13,471,000
Net loss		-			-			-		-			-		(4,440,000	)		-		(4,440,000	)
Marketing expenses		6,657,000			7,221,000
Balance at March 31, 2013		28,598,933		$	286,000			338,398	$	(1,824,000	)	$	193,827,000	$	(191,539,000	)	$	-	$	750,000
General and administrative expenses		7,418,000			6,100,000
Total operating expenses		29,837,000			26,792,000
Operating loss		(18,701,000	)		(4,926,000	)
Interest expense to related party stockholders		(270,000	)		--
Other interest expense, net		(273,000	)		(216,000	)
Net loss		(19,244,000	)		(5,142,000	)
Less: net loss attributable to non-controlling interest in Eyefly LLC		(148,000	)		(338,000	)
Net loss attributable to Bluefly, Inc. stockholders	$	(19,096,000	)	$	(4,804,000	)
Basic and diluted net loss per common share attributable to Bluefly, Inc. stockholders	$	(0.67	)	$	(0.19	)
Weighted average common shares outstanding
(basic and diluted)		28,558,885			24,919,336

The accompanying notes are an integral part of these unaudited consolidated financial statements.

BLUEFLY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

	Bluefly, Inc. Stockholders' Equity
	Common Stock
	$.01 Par Value				Treasury Stock					Additional								Total
	Number of				Number of					Paid-in		Accumulated			Noncontrolling			Stockholders'
	Shares		Amount		Shares		Amount			Capital		Deficit			Interest			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
	Three Months Ended
	September 30,
	March 31,
	2012			2011
	2013			2012
Cash flows from operating activities:
Net loss	$	(194,~~244~~440,000	)	$	(57,~~142~~904,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expenses		2820,~~306,~~000			1667,~~879,~~000
Stock-based compensation expenses		1,546,000			730,000
Provisions for returns		(381,000	)		381,000
Provisions for returns		(468,000	)		548,000
Bad debt expense		96,000			129,000
Bad debt expense		297,000			268,000
Reserve for inventory obsolescence		(300,000	)		(562,000	)
Reserve for inventory obsolescence		(339,000	)		203,000
Stock-based compensation expense		253,000			975,000
Deferred rent expense		327,000			~~112~~12,000
Amortization expense related to warrants issued to third-party		~~200,000~~--			--150,000
Change in fair value of embedded derivative financial liability to related-party stockholders		99,000			--
Amortization of discount on notes payable to related-party stockholders		212,000			--
Amortization expense of discount on notes payable to related-party stockholders		106,000			--
Change in fair value of embedded derivative financial liability to
related-party stockholders		(129,000	)		--
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable		~~(161~~642,000	)		~~(271~~411,000	)
Inventories		94,~~072~~618,000			~~(10~~5,~~052~~186,000	)
Prepaid inventory		1,523,000			(2,650,000	)
Prepaid expenses and other current assets		319,000			1,562,000
Prepaid expenses		140,000			(80,000	)
Other assets		--			220,000
Other assets		(863,000	)		(134,000	)
Increase (decrease) in:		--
Increase (decrease) in:
Accounts payable		627,000			(68,000	)
Accounts payable		4,548,000			4,834,000
Accrued expenses and other current liabilities		(1,114,000	)		(1,481,000	)
Accrued expenses and other current liabilities		(2,206,000	)		(225,000	)
Interest payable to related-party stockholders		50,000			--
Deferred revenue		~~166~~(1,531,000	)		(~~330~~405,000	)
Interest payable to related-party stockholders		55,000			--
Net cash used in operating activities		(251,000	)		(727,000	)
Net cash used in operating activities		(3,191,000	)		(10,310,000	)
Cash flows from investing activities:
Purchases of property and equipment		(2272,~~881,~~000	)		(21,~~842~~166,000	)
Net cash used in investing activities		(2272,~~881,~~000	)		(21,~~842~~166,000	)
Cash flows from financing activities:
Proceeds from notes issued to related-party stockholders		3,000,000			--
Borrowings under revolving credit facility		17,555,000			--
Deferred financing costs		(87,000	)		--
Repayments under revolving credit facility		(18,315,000	)		--
Net proceeds from common stock issuance		--			6,494,000
Net cash provided by financing activities		(760,000	)		--
Proceeds from capital contribution for the purchase of non-controlling interest in subsidiary by third-party		--			336,000
Net decrease in cash and cash equivalents		(1,283,000	)		(1,893,000	)
Proceeds from exercise of stock options		--			18,000
Cash and cash equivalents – beginning of period		1,283,000			4,413,000
Net cash provided by financing activities		2,913,000			6,848,000
Cash and cash equivalents – end of period	$	--		$	2,520,000
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
Cash paid during the period for interest expense	$	171,000		$	65,000
Cash paid during the period for interest expense to related-party stockholders	$	58,000		$	--
Supplemental disclosure of non-cash financing disclosure of cash flow information:
Issuance of common stock for asset acquisition	$	~~600,000~~--		$	--600,000

The accompanying notes are an integral part of these unaudited consolidated financial statements.

BLUEFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2012

NOTE 1 – THE COMPANY

Bluefly, Inc., a Delaware corporation, (the “Company”) , is a leading off-price Internet retailer ~~that~~of ~~sells~~designer, ~~over~~contemporary ~~350~~and ~~brands~~private-label ~~of designer~~ apparel and accessories, atproviding ~~discounts~~its ofcustomers upwith unique access to ~~75%~~in-season ~~off~~products ~~of retail~~at ~~value~~superior values. The Company’s e-commerce ~~web site~~ website, www.bluefly.com (“Bluefly.com” ~~or “Web Site”~~), was launched in September 1998. In December 2011, the Company expanded its website portfolio ~~of web sites~~ by launching its www.belleandclive.com ~~web~~website ~~site~~ (“~~Belle~~Belleandclive.com” &and, ~~Clive~~collectively with Bluefly.com, the “Websites”), a members-only shopping destination that presents highly-curated selections of important brands via limited-time flash sale events.

OnIn ~~January 3~~2011, ~~2012,~~ the Company ~~formed~~and A + D Labs LLC (“A + D Labs”) entered into a ~~new~~limited ~~wholly-owned~~liability ~~subsidiary~~company ~~EVT~~operating ~~Acquisition~~agreement in connection with the formation of Eyefly LLC (“Eyefly”), a ~~New~~Delaware ~~York~~ limited liability company, which was initially owned 52% by the Company and 48% by A + D Labs. Eyefly was formed for the purposes of developing and operating an e-commerce website and related online and mobile applications focused on selling fashionable prescription eyewear directly to consumers. Eyefly launched its e-commerce website, www.eyefly.com (“~~EVT~~Eyefly.com”), in ~~connection~~June ~~with~~ 2011. On October 25, 2012, the Company’s ~~acquisition~~sold ofits ~~assets~~entire 52% controlling membership interest in Eyefly to A + D Labs as discussed further in Note 43 – ~~Acquisition~~Summary of Significant Accounting Policies.

InOn ~~2011~~January 3, 2012, the Company ~~and~~formed a Anew +wholly-owned Dsubsidiary ~~Labs~~EVT ~~LLC (“A~~Acquisition ~~+ D Labs” and~~Co., ~~collectively with the Company~~LLC, ~~the “Members”) entered into~~ a ~~Limited~~New ~~Liability~~York ~~Company Operating~~limited ~~Agreement~~liability ~~(the~~company (“~~Operating Agreement~~EVT”), in connection with the ~~formation of Eyefly LLC (“Eyefly”), a Delaware limited liability company, which is owned 52% by the~~ Company’s ~~and~~acquisition ~~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~~assets. ~~Eyefly~~See ~~launched~~Note ~~its~~5 ~~e-commerce~~– ~~web~~Acquisition ~~site,~~for ~~eyefly.com~~additional ~~(“Eyefly~~information.~~com” and together with Bluefly.com and Belle & Clive, the “Web Sites”), in June 2011.~~

AsThe ofCompany ~~September~~operates ~~30,~~in ~~2012,~~one ~~the~~business ~~total assets~~segment ofand ~~Eyefly~~has ~~represent~~no ~~1.2%~~operations ofoutside the ~~total~~United ~~consolidated~~States. ~~assets~~International ofnet ~~the~~sales ~~Company.~~for ~~For~~ the ~~three~~period ~~and~~March ~~nine~~31, ~~months~~2013 ~~ended~~and ~~September~~2012 ~~30,~~represented ~~2012,~~5.6% ~~the~~and ~~total net sales of Eyefly each represent less than~~ 6.1%, respectively, of ~~the~~ total ~~consolidated~~ net sales ~~of the Company~~.

OnNOTE ~~October~~2 ~~25,~~– ~~2012,~~BASIS ~~the~~OF ~~Company sold its~~PRESENTATION, ~~entire~~LIQUIDITY ~~52%~~AND ~~controlling~~MANAGEMENT’S ~~membership interest in Eyefly to A + D Labs as discussed further below in Note 9 – Subsequent Events.~~PLAN

~~NOTE~~These 2Consolidated Financial –Statements ~~BASIS~~(unaudited) OFhave ~~PRESENTATION~~been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation of results for the interim periods have been reflected in these Consolidated Financial Statements (unaudited), and the presentations and disclosures herein are adequate when read in conjunction with the Audited Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2012 and Auditor’s Report, which included an explanatory paragraph reporting a going concern.

~~The~~Operating ~~accompanying~~results 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~~three tomonths ~~Form 10-Q, Article 8 and Article 10 of Regulation S-X. Accordingly, they do not include all of the information~~ended ~~and~~March ~~footnote disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management~~31, ~~all~~2013 ~~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 ofthat ~~operations~~may to be expected for the ~~fiscal~~entire year ~~due to seasonal and other factors~~. ~~For~~The ~~further~~Unaudited ~~information, refer~~Consolidated toFinancial ~~the~~Statements ~~consolidated~~include ~~financial~~the ~~statements~~accounts and ~~accompanying~~operations ~~footnotes~~of ~~included~~Bluefly, inInc. ~~the~~and ~~Company's~~its ~~Form~~subsidiaries. ~~10-K~~All ~~for~~intercompany ~~the~~accounts ~~year~~and ~~ended December~~transactions ~~31,~~have ~~2011~~been eliminated in consolidation.

The Consolidated Financial Statements contemplate continuation of the Company as a going concern. The Company has sustained cumulative net losses and negative cash flows from operations since inception. As of ~~September~~March 3031, ~~2012~~2013, the Company had an accumulated deficit of $~~181~~191,~~581~~539,000. ~~The~~and ~~Company’s~~incurred ~~ability~~a tonet ~~meet~~loss ~~its~~attributable ~~obligations in the ordinary course of business is dependent on its ability~~ to ~~establish profitable operations~~Bluefly, ~~or find sources to fund operations~~Inc. ~~The~~stockholders ~~Company~~of ~~believes that its existing cash balance~~$4, ~~proceeds from the August 2012 financing further discussed in Note 5 – 2012 Financing~~440,000 ~~combined~~for ~~with working capital and~~ the ~~funds~~ ~~available~~three ~~from~~months ~~the~~ended ~~Company’s~~March ~~new credit facility further discussed in Note 9 – Subsequent Events~~31, ~~will be sufficient to enable the Company to meet planned expenditures through at least the next 12 months~~2013.

The Company is currently ~~exploring~~in ~~sources of~~active ~~additional~~discussions ~~capital~~regarding ina ~~order~~strategic totransaction ~~maximize~~under the ~~growth~~direction of ~~its~~a ~~business.~~special committee ~~However,~~consisting ~~there~~of ~~can~~independent bemembers noof ~~assurance that~~ the ~~Company~~Board ~~will be~~of ~~able~~Directors, totogether ~~identify~~with athe ~~source~~assistance of ~~such~~an ~~financing,~~independent financial oradvisor ~~that~~(“Proposed ~~such~~Strategic ~~financing~~Transaction”). The ~~will~~Company beexpects ~~available~~that the consideration onpayable ~~terms acceptable~~ to ~~the~~shareholders ~~Company.~~of ~~Should~~ the Company ~~experience~~will ~~unforeseen~~be ~~increases~~minimal. inWe ~~expenditures~~currently orhave ~~should~~sufficient ~~estimated~~funds ~~revenues~~from ~~not materialize, these conditions could~~operations ~~significantly~~and ~~impair~~from ~~its~~our ~~ability~~Credit Facility to ~~fund~~support ~~future~~our operations. ~~Should~~until the ~~Company~~anticipated ~~experience~~closing ~~unanticipated~~of ~~losses~~the orProposed ~~expenditures~~Strategic ~~that~~Transaction. Management ~~exceed~~believes ~~current~~that ~~estimates,~~the ~~management~~Proposed ~~would~~Strategic ~~implement~~Transaction, aif ~~cost~~and when ~~reduction plan~~consummated, ~~that~~will ~~includes~~provide athe ~~reduction~~necessary inliquidity ~~work force as well~~to support the working ascapital ~~reductions~~needs inof ~~overhead~~the ~~costs~~Company and ~~capital~~eliminate ~~expenditures,~~the ~~and/or~~factors ~~attempt~~that toresulted ~~raise~~in ~~additional~~the ~~debt~~going orconcern ~~equity financing~~uncertainty. There can be be no assurance that the ~~Company~~Proposed ~~will~~Strategic ~~achieve~~Transaction orcan ~~sustain~~be ~~positive~~consummated.

8If the Company is unable to complete the Proposed Strategic Transaction or an alternative strategic transaction, or to secure additional financing to fund our operations, the Company will not be able to sustain its operations. The Company has implemented certain cost containment measures, which includes reduction in workforce and overhead, and delaying payments to suppliers.

~~BLUEFLY, INC.~~7

~~NOTES~~NOTE TO3 ~~CONSOLIDATED~~– ~~FINANCIAL~~SUMMARY ~~STATEMENTS~~OF SIGNIFICANT ACCOUNTING POLICIES

~~(UNAUDITED)~~Use of estimates

~~SEPTEMBER~~The 30preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions include the adequacy of the allowances for doubtful accounts and sales returns, ~~2012~~recoverability of inventories, useful lives of property and equipment (including website development costs) and intangible assets, realization of deferred tax assets, and the calculations related to stock-based compensation expense. Actual results could differ from those estimates. The Company’s success is largely dependent on its ability to anticipate, identify and respond to unexpected changes in fashion trends and to provide merchandise that satisfies consumer preferences and demand. The Company’s failure to anticipate, identify or respond to unexpected changes in fashion trends and consumer preferences could adversely affect its financial condition and results of operations.

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~~completed, 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~~provisions for returns and credit card chargebacks.

Gross sales are recognized when all of the following criteria are met: (1) a customer executes an order, (2) the product price and the shipping and handling fee have been determined, (3) credit card authorization has occurred and collection is reasonably assured, and (4) the product has been shipped and received by the customer.

·Deferred Arevenue (which consists primarily of goods shipped to customers, but not yet received, and customer ~~executes~~credits) antotaled ~~order~~approximately $2,850,000 and $4,381,000 as of March 31, 2013 and December 31, 2012, respectively, which are presented as Current liabilities in the Consolidated Balance Sheets.

·Shipping ~~The~~and ~~product~~handling ~~price~~fees billed to customers are presented and ~~the~~included as part of gross sales, and freight costs incurred in connection with shipping customer orders are presented and ~~handling~~included ~~fee~~as ~~have~~part ~~been~~of ~~determined~~Cost of sales in the Consolidated Statements of Operations.

· 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, but are not limited to discounts, coupons, daily deal programs and ~~through~~e-mail ~~our~~promotions through 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~~Provisions ~~assets~~for sales returns and doubtful accounts

~~Intangible~~The ~~assets~~Company ~~are~~generally ~~recorded~~permits atreturns ~~cost,~~for ~~net~~up to 40 days from the date of ~~accumulated~~sale. ~~amortization~~The Company performs credit card authorizations and ~~are~~checks ~~amortized~~the onverifications aof ~~straight-line~~its ~~basis~~customers prior ~~over~~to ~~their~~shipment of the merchandise. Accordingly, the Company establishes a reserve for estimated ~~useful~~future ~~lives~~sales returns and allowance for doubtful accounts at the time of shipment based primarily on historical data. NoAccounts ~~significant~~receivable ~~residual~~(which represents billed ~~value~~credit card transactions in process to be collected and a trade receivable (discussed further below) is ~~estimated~~presented ~~for~~in the ~~intangible~~Consolidated Balance ~~assets~~Sheets net of the allowance for doubtful accounts.

~~The~~Stock-based ~~Company~~compensation ~~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.~~expenses

~~Derivative~~The ~~financial~~Company’s ~~instrument~~Board of Directors has adopted three stock-based employee compensation plans, one in April 2005, one in July 2000 (which expired in December 2012) and one in May 1997 (collectively, the “Plans”). The Plans, which provide for the granting of restricted stock awards, deferred stock unit awards, stock option awards, and other equity and cash awards, were adopted for the purpose of encouraging key employees, consultants and directors who are not employees to acquire a proprietary interest in the growth and performance of the Company, and are similar in nature. Vesting terms for restricted stock generally range from three months to one year, while deferred stock unit awards vest every three months over a period of one to three years. Stock option awards are granted in terms not to exceed ten years and become exercisable as specified when the option is granted and vesting terms range from immediately to a ratable vesting period of four years. As of March 31, 2013, the Plans have an aggregate balance of 1,153,103 shares available for future issuance.

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.8

~~The~~Income 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 ontaxes

Income taxes represent income taxes paid or payable (or received or receivable) for the current year and includes any changes in deferred taxes during the year. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Basic and diluted net loss per common 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. Due to the Company’s net losses for the periods presented, (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.

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. The Company’s cash and cash equivalents are placed and maintained with financial institutions that it believes are of high credit quality. However, the Company’s cash and cash equivalents are potentially exposed to concentration of credit risk in the event of default by financial institutions to the extent that cash balances with financial institutions are in excess of insured limits. At March 31, 2013, the Company reclassed overdraft amounts of approximately $26,000 to the Revolving Credit Facility.

Restricted cash

As of March 31, 2013, the Company had $4,635,000 in restricted cash, which has been funded by and deducted against the availability of the Company’s revolving Credit Facility that was held as cash collateral against the Company’s outstanding letters of credit issued, and outstanding under its previous credit facility with Wells Fargo Retail Finance, LLC (“Wells Fargo”).

Fair value of financial instruments

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.

Inventories, net

Inventories, which consist of finished goods, are stated at the lower of cost or market value. Cost is determined by the first-in, first-out (“FIFO”) method. The Company reviews its inventory levels in order to identify slow-moving and unsellable merchandise and establishes a reserve for such merchandise. Inventory reserves are established based on historical data and management’s best estimate. Inventory may be marked down below cost if management determines that the inventory stock will not sell at or above its cost. Inventory is presented net of reserves in the Consolidated Balance Sheets.

~~BLUEFLY~~Property and equipment, ~~INC.~~net

~~NOTES~~Property TOand ~~CONSOLIDATED~~equipment ~~FINANCIAL~~are ~~STATEMENTS~~stated at cost net of accumulated depreciation and amortization expenses. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the lease. Lease amortization is included in depreciation expense. Equipment and software are depreciated on a straight-line basis over two to five years. Costs related to maintenance and repairs are expensed as incurred.

~~(UNAUDITED)~~Website development costs

~~SEPTEMBER~~Website 30development costs, ~~2012~~which consist primarily of external direct costs, relate to the Company’s Websites. All costs incurred by the Company related to the development phase, including costs incurred for enhancements that are expected to result in additional new functionality, are capitalized. Such costs are amortized on a straight-line basis over 36 months. All costs related to the planning and post-implementation phase, including training and maintenance are expensed as incurred. Capitalized costs related to website development are included in Property and equipment, net in the Company’s Consolidated Balance Sheets.

~~its~~Long-lived ~~Consolidated Balance Sheet. Any changes in fair value of the embedded derivative financial instrument are recorded in the Consolidated Statements of Operations.~~assets

~~Concentration~~The Company’s policy is to evaluate long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This evaluation is based on a number of factors, including expectations for future operating income and undiscounted cash flows that will result from the use of such assets. The Company has not identified any such impairment of its long-lived assets at March 31, 2013 and 2012.

~~For~~Deferred ~~the~~rent ~~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.~~liability

~~For~~The ~~the~~Company ~~nine~~recognizes ~~months~~and ~~ended~~records ~~September~~rent expense 30related to its lease agreement, ~~2012~~ ~~and~~which ~~2011~~includes scheduled rent increases, on a straight-line basis beginning on the ~~Company,~~commencement date ~~excluding~~over ~~Eyefly,~~the ~~acquired~~life ~~approximately~~of ~~51%~~the lease. The Company also recognizes and ~~48%~~records rent concessions, ~~respectively~~in the form of reduced rent payments, on a straight-line basis over the life of ~~its~~the ~~inventory~~lease ~~from~~agreement. ~~its~~Differences ~~three~~between straight-line rent expense and actual rent payments ~~largest~~are ~~suppliers~~recorded as Deferred rent liability and presented as a long-term liability in the Consolidated Balance Sheets.

~~Related-party~~Treasury ~~transactions~~stock

OnTreasury ~~August~~stock ~~13,~~represents ~~2012,~~Common Stock withheld by the Company ~~entered into~~to asatisfy ~~Note~~income tax withholding obligations of certain officers and ~~Warrant~~employees ~~Purchase~~of ~~Agreement~~the ~~with~~Company ~~certain~~in ~~related-party~~connection with ~~stockholders~~the asdistribution ~~further~~of ~~described~~Common ~~below~~Stock in ~~Note~~respect 5of ~~– 2012~~deferred ~~Financing~~stock units held by such officers and employees.

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 34 – 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~~In connection with the Embedded Derivative in the Rho Notes discussed below in Note 6 – 2012 Financing, ~~INC~~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 March 31, 2013, by level within the fair value hierarchy:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

			Quoted Prices in
			Active Markets		Significant		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	March 31, 2013		(Level 1)		(Level 2)		(Level 3)

Liabilities:

Embedded derivative financial liability to related
party stockholders	$	250,000	$	--	$	250,000	$	--

Total embedded derivative financial liability to
related party stockholders	$	250,000	$	--	$	250,000	$	--

~~(UNAUDITED)~~NOTE 5 – ACQUISITION

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~~At ~~Company~~December ~~has~~31, ~~allocated~~2012, the ~~total~~Acquired ~~purchase~~Intangible ~~price~~Assets ~~plus~~were ~~transactions~~deemed ~~costs~~to ofbe impaired and the ~~acquisition~~fair ~~among~~value ~~the~~was ~~assets,~~determined ~~based~~to onbe ~~their~~zero ~~relative~~(Level 3 in the fair ~~values,~~value ashierarchy) ~~follows:~~due to the Company’s potential inability to meet its obligations under the terms and conditions of the contract given the Company’s current limited financial resources.

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

For the year ended December 31, 2012, the Company recorded $383,000 of impairment loss in total amortization expense in the Consolidated Statement of Operations related to the Acquired Intangible Assets.

~~The~~NOTE ~~carrying~~6 ~~values~~– ~~of the Acquired Intangible Assets at September 30,~~ 2012 ~~were as follows:~~FINANCING

	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 the event we are unable to complete the proposed strategic transaction; there can be no assurance that we will remain in compliance with the Financial Covenant.

In connection with the issuance of the Notes, the Company incurred approximately $87127,000 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 of the Embedded Derivative using a Black-Scholes valuation model as of the Closing Date. Expected volatility is based on the ~~historical~~ 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 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 reporting 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 March 31, 2013 are as follows:

Risk-free interest rate	0.11	%
Expected life (in years)	0.37
Dividend yield	0.00	%
Expected volatility	125.92	%

As of March 31, 2013, the Company’s Notes and interest payable to related party stockholders, net consists of the following:

Notes payable to related party stockholders	$	3,000,000
Unamortized discount on notes payable to related party stockholders		(318,000	)
Total notes payable to related party stockholders, net		2,682,000

Interest payable to related party stockholders		180,000

Total notes and interest payable to related party stockholders, net	$	2,862,000

For the three months ended March 31, 2013, 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:

BLUEFLY, INC.

Amortization of discount on notes payable to related party stockholders	$	212,000
Appreciation in fair value of embedded derivative financial liability to related party stockholders		(129,000	)
Interest expense to related party stockholders		107,000
Amortization expense of deferred financing costs		32,000

Total interest expense to related party stockholders	$	222,000

~~NOTES~~Costs TOincurred ~~CONSOLIDATED~~in ~~FINANCIAL~~connection ~~STATEMENTS~~with the Company's financing activities are deferred and amortized over the terms of the related agreements using the straight-line method. During 2012, we deferred approximately $127,000 and $432,000 relating to the August 2012 financing, and the new revolving credit facility with Wells Fargo Capital Finance, and Salus Capital Partners, LLC, respectively. Amortization of these costs, which is recognized in other interest expense and other income, net, in the accompanying consolidated statements of operations, totaled approximately $32,000 for the three months ended March 31, 2013. Deferred financing costs, net of accumulated amortization, included in other assets, net, amounted to approximately $47,000 as of March 31, 2013.

~~(UNAUDITED)~~NOTE 7 – REVOLVING CREDIT FACILITY FINANCING AGREEMENT

~~SEPTEMBER~~On 30November 13, 2012, the Company entered into a new three-year revolving credit facility, expiring November 2015 (“Credit Facility”) with Salus Capital Partners, LLC (“Salus”) collateralized by all assets of the Company. The Credit Facility refinanced the Company’s previous credit facility with 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.

~~bifurcation,~~Availability under the Credit Facility is determined by a formula that considers a specified percentage of the Company’s ~~recognized~~accounts anreceivable ~~Embedded~~and ~~Derivative~~a specified percentage of ~~approximately~~the Company’s inventory. The maximum availability is $~~274~~10 million,~~000~~ ~~with~~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 ~~corresponding~~minimum ~~discount~~rate onof 8.00%. Letters of credit issued to third parties are cash collateralized by amounts drawn under the ~~Rho~~Credit ~~Notes~~Facility. At closing, $4,700,000 was drawn under the Credit Facility, which reduced the ~~carrying~~availability ~~value~~ of the ~~Rho~~Credit ~~Notes~~Facility, onto cash collateralize letters of credit ~~the~~issued by Wells Fargo, which were outstanding at such date. In addition, the Company paid financing costs of ~~issuance.~~$432,000 ~~This~~at ~~discount~~closing, which ~~represents~~were ~~additional~~capitalized, ~~non-cash~~and ~~interest~~will ~~expense~~pay ~~that~~a iscollateral tomonitoring befee ~~amortized~~of ~~over~~$3,000 per month and will pay unused commitment fees of 0.75% of the remaining ~~life~~ availability under the Credit Facility. A termination fee of $75,000 was paid at closing to Wells Fargo, which was included in Other interest expense in the ~~Rho~~2012 ~~Notes~~Consolidated Statement of Operations.

~~The~~As ~~Company~~of ~~also~~March ~~remeasures~~31, ~~the~~2013, ~~fair~~maximum ~~value~~total availability ofunder the ~~Embedded~~Credit ~~Derivative~~Facility atwas ~~each~~approximately ~~interim date~~$5.0 ~~Any~~million, ~~change~~of inwhich ~~fair~~$4.6 ~~value~~was isoutstanding, ~~recorded~~leaving asapproximately ~~part~~$0.4 ofmillion ~~interest expense to related party~~available ~~stockholders~~for infurther ~~the Company’s Consolidated Statements of Operations~~borrowings.

The ~~assumptions~~terms ~~used~~of atthe ~~September~~Credit ~~30,~~Facility ~~2012~~contain ~~are~~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. The terms of the Credit Facility contain a material adverse effect clause defined as ~~follows:~~a material adverse change in the ability of the Company to perform its obligations under the Credit Agreement or, upon the operations, business, properties, liabilities (actual or contingent) or condition (financial or otherwise), or impairment of the rights and remedies of the Agent or any lender under the Credit Facility, or upon the legality, validity, binding effect or enforceability against any party to the Credit Facility. This feature may limit our ability to obtain additional borrowings or result in a default on current outstanding letters of credit.

	(Unaudited)
	September 30, 2012
Risk-free interest rate		0.17	%
Expected life (in years)		0.87
Dividend yield		0.00	%
Expected volatility		83.85	%

For the three months ended March 31, 2013, the Company paid approximately $135,000 in interest expense and fees under the Credit Facility.

AsThe ofCredit ~~September~~Facility 30was amended on April 11, ~~2012~~2013 to modify certain borrowing availability formulas for sixty days, ~~the~~which ~~Company’s Notes~~increased ~~and~~borrowing ~~interest~~availability ~~payable~~by up to ~~related~~$650,000. The ~~party~~Company ~~stockholders~~paid a $100,000 ~~net~~fee ~~consists~~in connection with the amendment. Salus also waived covenant violations caused by the late delivery of 2012 audited financial statements and the ~~following:~~explanatory paragraph regarding a going concern uncertainty contained in the auditor’s unqualified opinion for such financial statements.

	(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

NOTE 8 – COMMITMENTS AND CONTINGENCIES

~~For~~The ~~the~~Company’s ~~three~~commitment and ~~nine months ended September~~contingencies ~~30,~~associated ~~2012, the Company recognized interest expense in connection~~ with ~~the~~marketing ~~Notes~~contracts, ~~including~~lease ~~changes~~obligations, ~~in fair value of the Embedded Derivative~~ and ~~amortization~~employment ofagreements ~~the~~did ~~debt~~not ~~discount,~~change ~~which~~materially ~~were~~from ~~included~~that disclosed in ~~total~~the ~~interest~~Form ~~expense~~10-K tofiling ~~related~~for ~~party stockholders in~~ the ~~Consolidated~~year ~~Statements~~ended ofDecember ~~Operations~~31, ~~as follows:~~2012.

	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,~~NOTE ~~INC.~~9 – STOCK-BASED COMPENSATION

~~NOTES~~Authoritative TOguidance ~~CONSOLIDATED~~relating ~~FINANCIAL~~to ~~STATEMENTS~~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 $253,000 and $975,000 for the three months ended March 31, 2013 and 2012, respectively.

(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
Balance at December 31, 2012		4,205,881		$	2.11
Options granted		1293,~~303,260~~500		$	10.6675
Options cancelled		(~~289~~171,~~956~~947	)	$	21.3280
Options expired		(~~950~~1,088,689	)	$	143.1327
Options exercised		--		$	--
Balance at September 30, 2012		3,807,536		$	2.48
Balance at March 31, 2013		3,238,745		$	1.74
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~~293,~~747~~500 stock option awards granted during the ~~third~~first quarter of ~~2012~~2013. At ~~September~~March 3031, ~~2012~~2013, there was no aggregate intrinsic value of the fully ~~vested~~ vested stock option awards and the weighted average remaining contractual life of the stock option awards was approximately eight ~~seven~~ years. The Company did not capitalize any compensation cost, or modify any of its stock option awards during the ~~third~~ first quarter of ~~2012~~2013. 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~~first quarter of ~~2012~~2013.

AsFor ofthe ~~September~~three ~~30,~~months ~~2012,~~ended ~~the~~March ~~total~~31, ~~compensation~~2013 ~~cost~~and ~~related~~2012, tothe ~~non-vested~~Company ~~stock~~recognized ~~option~~expense ~~awards~~of ~~not~~approximately ~~yet~~$247,000 ~~recognized~~and ~~was~~ $2975,~~703,~~000., ~~Total~~respectively, ~~compensation~~in ~~cost~~connection iswith ~~expected~~these ~~to be recognized over approximately three years on a weighted average basis~~awards.

14Stock Option 1997 and 2000 Plans

~~BLUEFLY~~On May 1, ~~INC~~2013, the 750 stock option awards outstanding in the 1997 Plan contractually expired and there were no remaining shares in the 2000 Plan.

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~~March 3031, ~~2012~~2013:

			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.

			Weighted Average
	Restricted		Grant Date
	Stock		Fair Value
	Awards		(per share)
Balance at December 31, 2012		22,321	$	1.12
Shares granted		--	$	--
Shares forfeited		--	$	--
Shares restriction lapses		--	$	--
Balance at March 31, 2013		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 three months ended March 31, 2013		--

Number of shares non-vested at March 31, 2013		22,321

For the three months ended ~~September~~March 3031, ~~2012,~~ 2013, the Company recognized expense of approximately $46,000 related to restricted stock awards. ~~For~~There were no restricted stock awards issued during the three months ended ~~September 30~~March 31, ~~2011~~2012 or outstanding as of March 31, 2012 and, accordingly, the Company did not recognize any expense related to restricted stock awards.

~~For~~NOTE ~~each~~10 of– ~~the~~NET ~~nine~~LOSS ~~months~~PER ~~ended~~SHARE ~~September 30,~~ATTRIBUTABLE ~~2012~~TO ~~and 2011~~BLUEFLY, ~~the Company recognized expense of approximately $4,000 related to restricted stock awards~~ INC. STOCKHOLDERS

NOTE 8 – NET LOSS PER SHARE ATTRIBUTABLE TO BLUEFLY, INC. STOCKHOLDERS

Diluted net loss per common share ~~attributable~~ 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 56 – 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:

	Three Months Ended
	March 31,
	2013			2012

Net loss attributable to Bluefly, Inc. stockholders	$	(4,440,000	)	$	(7,870,000	)

Weighted average common shares outstanding (basic)		28,576,612			28,523,237

Weighted average common shares outstanding (diluted)		28,576,612			28,523,237

NOTE 11 – NASDAQ COMPLIANCE

On February 15, 2013, the Company was notified by the Nasdaq Stock Market that it is not in compliance with the continued listing requirements for the Nasdaq Capital Market because shares of the Company’s Common Stock had closed at a per share bid price of less than $1.00 for at least 30 consecutive trading days. Under Nasdaq rules, the Company was given a 180-day grace period to regain compliance, which extends to August 14, 2013. In order to regain compliance, shares of the Company’s Common Stock would need to close at a price of $1.00 per share or more for at least ten consecutive trading days at any time prior to August 14, 2013. The Company may be granted an additional 180-day grace period to regain compliance, if, at that time, it meets the initial listing criteria of the Nasdaq Capital Market, other than the minimum bid price requirement. In the event that the Company does not regain compliance within the requisite time period, it would have the right to appeal any delisting. The failure to maintain listing on the Nasdaq Capital Market may have an adverse effect on the price and/or liquidity of the Company’s Common Stock.

~~BLUEFLY,~~NOTE ~~INC.~~12 – SUBSEQUENT EVENTS

~~NOTES~~Bonus ~~TO CONSOLIDATED FINANCIAL STATEMENTS~~Arrangement

~~(UNAUDITED)~~On April 2, 2013, the special committee approved a bonus arrangement for Joseph Park, the Company’s Chief Executive Officer that had been recommended by the Company’s compensation committee. The bonus arrangement is intended to incentivize Mr. Park to secure the best possible price in any sale of the Company. Under the arrangement, Mr. Park will receive five per cent of the net proceeds, which would otherwise have been payable to the shareholders of the Company, of any transaction constituting a sale of the Company approved by the Board. The special committee reserved the right to make any determinations requiring the interpretation of the incentive, in its sole discretion.

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	--

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

InThe Company ~~late~~is ~~October~~currently ~~2012,~~in ~~Hurricane~~active ~~Sandy~~discussions ~~caused wide-spread~~regarding ~~damage~~a ~~and~~strategic ~~business~~transaction ~~interruption~~under in the ~~East~~direction ~~Coast~~of a special committee consisting of independent members of the ~~United~~Board ~~States~~of Directors, together with the ~~most~~assistance ~~significant~~of ~~impact~~an inindependent ~~the~~financial ~~New~~advisor (“Proposed ~~York~~Strategic ~~City~~Transaction”). The ~~metropolitan~~Company ~~area. This~~expects ~~impact~~that the ~~caused~~consideration ~~power~~payable to ~~outage~~shareholders atof the Company’s ~~corporate~~will ~~office~~be ~~and~~minimal. ~~therefore,~~We wecurrently ~~were unable~~have sufficient funds to ~~file~~support ~~this~~our ~~Form~~operations ~~10-Q~~until bythe anticipated closing of the ~~original~~Proposed ~~due~~Strategic ~~date~~Transaction. Management ofbelieves ~~November~~that 14the Proposed Strategic Transaction, ~~2012.~~if Weand ~~are~~when ~~relying~~consummated, ~~upon~~will provide the ~~order~~necessary liquidity to support the working capital needs of the ~~U.S.~~Company ~~Securities~~ and ~~Exchange~~eliminate ~~Commission~~the ~~contained~~factors that resulted in ~~Release~~the ~~No.~~going ~~68224~~concern ~~for~~uncertainty. There ~~the~~can ~~extended~~be ~~deadline~~no ofassurance that ~~November~~the ~~21,~~Proposed ~~2012~~Strategic ~~for~~Transaction ~~this~~can ~~filing~~be consummated.

~~Preliminary assessments indicate that there~~If ~~was~~the aCompany ~~decline~~is inunable ~~average~~to ~~daily~~complete ~~sales from customers in~~ the ~~New~~Proposed ~~York~~Strategic ~~City~~Transaction ~~Metropolitan~~or ~~area~~an ofalternative ~~approximately~~strategic ~~40% during the week~~transaction, or ~~after~~to ~~Hurricane~~secure ~~Sandy~~additional ~~caused~~financing ~~disruptions~~ to ~~the~~fund ~~region. We~~our ~~are~~operations, in the ~~preliminary~~Company ~~stages~~will ofnot ~~assessing~~be ~~the~~able ~~financial and operational impacts of the storm and we, therefore, are unable~~ to ~~estimate~~sustain ~~the~~its ~~full financial and operational impact~~operations.

Our revolving credit facility with Salus Capital Partners, LLC (“Salus”) was amended on April 11, 2013 to modify certain borrowing availability formulas for sixty days. The amendment increased borrowing availability by up to $650,000. The Company paid a $100,000 fee in connection with the amendment. Salus waived covenant violations caused by the late delivery of 2012 audited financial statements and the going concern uncertainty paragraph contained in the Auditor’s Report for such financial statements.

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~~Subject to appropriate levels of working capital, management believes that these initiatives will take several additional quarters to materialize. During the ~~third~~three ~~quarter~~months ofended ~~2012~~March 31, 2013, this shift in strategy ~~negatively~~ positively impacted gross profit margin percentages as wecompared ~~were~~to ~~promotional~~prior year. ~~During such~~We ~~quarter, we~~ continued to deliberately reduce inventory receipts from March 31, as2012 weto ~~have~~March ~~since~~31, ~~the~~2013. ~~beginning~~This ofreduction ~~the~~contributed ~~year.~~to ~~Net~~a decrease in net sales whereby net sales for the three months ended ~~September~~March 3031, ~~2012~~2013 ~~remained~~declined ~~relatively~~by ~~unchanged~~18.4%, as compared to the three months ended ~~September~~March 3031, ~~2011, on~~2012. ~~25% less average inventory than at September 30~~However, ~~2011.~~while Weour ~~expect~~net ~~gross~~sales ~~margin percentages to improve over time as these initiatives~~declined, ~~take~~we ~~effect~~had $4.3 ~~Although~~million itless isinventory ~~not~~than ~~expected~~at ~~that~~December ~~our~~31, ~~gross~~2012 ~~margin~~and, ~~percentages will be as low as they were during the first three quarters of 2012~~therefore, ~~our~~we ~~gross~~started ~~margin~~seeing ~~percentages~~improvements ~~may continue to be lower than they have been historically~~ in ~~future~~our ~~periods~~returns ~~while~~on ~~we are~~invested ~~implementing~~capital ~~this~~related ~~new~~to ~~strategy~~inventory.

WeOur ~~also~~net ~~expect~~sales ~~our~~decreased ~~overall~~by ~~customer economics~~approximately ~~to improve with this new strategy as we increase traffic to both Bluefly~~18.~~com~~4% ~~and Belle & Clive and convert visitors~~ to ~~subscribers of~~$19,794,000 ~~our~~for ~~email~~the ~~marketing~~three ~~program.~~months ~~This~~ended inMarch ~~turn~~31, ~~should~~2013, ~~enable~~from us$24,266,000 tofor ~~more~~the ~~cost~~three ~~effectively~~months ~~market~~ended toMarch ~~our~~31, ~~customers~~2012. ~~without spending~~Our ~~significantly~~gross ~~more~~margin ~~marketing~~percentage ~~dollars,~~increased ~~which~~to ~~would~~20.1% ~~lower~~for ~~our customer acquisition costs and increase~~ the ~~lifetime~~three ~~value~~months ofended ~~our~~March ~~customers. During the third quarter of 2012~~31, ~~we saw an increase in SEO and email traffic (free traffic) of 16%~~2013, anfrom ~~increase in first time customers buying across bluefly~~15.~~com and Belle & Clive of 26~~4% ~~and~~for ~~growth in international orders of 43% as compared to~~ the ~~prior year.~~three ~~While~~months weended ~~continue to see these improvements~~March 31, ~~our~~2012. ~~member~~Our ~~acquisition~~gross ~~costs~~profit ~~for~~increased ~~the~~by ~~third~~approximately ~~quarter~~6.3% ofto ~~2012 increased as we acquired 198~~$3,~~562~~981,000 ~~members~~ for the three months ended ~~September~~March 3031, ~~2012~~2013, ~~compared~~from ~~to 315~~$3,~~815 members~~ 745,000 for the three months ended ~~September 30~~March 31, ~~2011~~2012. ~~This~~We ~~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.16

18incurred an operating loss of $3,993,000 for the three months ended March 31, 2013 as compared to an operating loss of $7,832,000 for the three months ended March 31, 2012. The decrease in operating loss for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, was primarily a result of an increase in gross profit and a decrease in total operating expenses.

As a percentage of net sales, selling and fulfillment expenses increased to 23.78% or $4,708,000 for the three months ended ~~September~~March 3031, ~~2012~~2013, compared to 2122.35% or $5,458,000 for the three months ended ~~September~~ 30March 31, ~~2011~~2012. General and administrative expenses decreased to 810.83% or $2,035,000 for the three months ended ~~September~~March 3031, ~~2012~~2013, compared to 914.76% or $3,541,000 for the three months ended ~~September~~March 3031, ~~2011~~2012.

Total marketing expenses (including staff related costs) as a percentage of net sales decreased to 86.52% or $1,231,000 for the three months ended ~~September~~March 3031, ~~2012~~2013, compared to 10.06% or $2,578,000 for the three months ended ~~September~~March 3031, ~~2011~~2012. Total marketing expenses (excluding staff related costs) ~~increased~~ decreased to $1,~~679~~231,000 for the three months ended ~~September~~March 3031, ~~2012~~2013 from $12,~~618~~578,000 for the three months ended ~~September~~March 3031, ~~2011~~2012. Marketing expenses (excluding staff related costs) ~~increased~~decreased primarily as a result of ana ~~increase~~decrease in offline marketing expenditures related to television advertising and as a result of the reduction in certain online marketing expenditures.

Our reserve for returns and credit card chargebacks decreased to 3433.84% of gross sales for the ~~third~~first quarter of ~~2012~~2013 compared to 3735.93% for the ~~third~~first quarter of ~~2011~~2012. The decrease was primarily caused by a reduction in our return rate, however, there can be no assurance that this trend will continue in the future.

At ~~September~~March 3031, ~~2012~~2013, we had an accumulated deficit of $~~181~~191,~~581~~539,000. The net losses and accumulated deficit resulted primarily from operating losses including, but not limited to, the costs associated with ~~developing~~the ~~and~~strategic ~~marketing~~change in our ~~Web~~product ~~Sites,~~mix and ~~building~~sales ~~our infrastructure~~incentives, asdecreases ~~well~~in asaverage ~~non-cash~~over ~~effects~~size, selling ~~related~~products toat ~~equity-linked~~lower ~~instruments~~gross ~~previously~~margin ~~issued~~percentages, and ~~payment~~to ofa ~~dividends~~lesser toextent, ~~holders~~the non-cash effects of ~~our~~equity-linked ~~preferred~~instruments ~~stock~~previously issued.

Results Of Operations

For The Three Months Ended ~~September 30~~March 31, 2013 ~~2012~~ Compared To The Three Months Ended ~~September~~March 3031, ~~2011~~2012.

The following table sets forth our Consolidated Statements of Operations data for the three months ended ~~September~~March ~~30th~~31. All data is in thousands except as indicated below:

	2012						2011
	2013						2012
				As a % of						As a % of
				Net Sales						Net Sales
Net sales	$	2119,~~743~~794			100.0	%	$	2124,~~194~~266			100.0	%
Cost of sales		1815,~~781~~813			8679.49			1520,~~016~~521			7084.96
Gross profit		23,~~962~~981			1320.61			63,~~178~~745			2915.14
Selling and fulfillment expenses		54,~~154~~708			23.78			45,~~525~~458			2122.35
Marketing expenses		1,~~848~~231			86.52			2,~~123~~578			10.06
General and administrative expenses		12,~~922~~035			810.83			23,~~061~~541			914.76
Total operating expenses		87,~~924~~974			4140.03			811,~~709~~577			4147.07
Operating loss		(53,~~962~~993	)		(2720.42	)		(27,~~531~~832	)		(1132.93	)
Interest expense to related party stockholders		(~~270~~222	)		(1.21	)		--			--
Other interest expense, net		(88225	)		(01.41	)		(6572	)		(0.3	)
Net loss	$	(64,~~320~~440	)		(2922.04	)%	$	(27,~~596~~904	)		(1232.26	)%

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~~March ~~30th~~31, 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

	2013		2012

Average order size (including shipping and handling)	$	244.97	$	242.58
New members added during the period*		137,025		489,181

^{*Based
on unique email addresses}

19In addition to the financial statement items and metrics listed, which are non-GAAP financial measurements above, 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.

InNet ~~addition~~sales: toGross ~~the~~sales ~~financial~~for ~~statement~~the three ~~items~~months ~~and~~ended ~~metrics~~March ~~listed above~~31, ~~which~~2013 ~~are~~decreased ~~non-GAAP~~by ~~financial~~approximately ~~measurements~~20.7% to $29,716,000, wefrom ~~also~~$37,461,000 ~~report~~for ~~gross~~the ~~sales,~~three ~~another~~months ~~non-GAAP~~ended ~~financial~~March ~~measure~~31, 2012. WeFor ~~define~~the ~~gross~~three ~~sales~~months asended ~~the~~March ~~total~~31, ~~dollar~~2013, ~~amount~~we ofrecorded ~~orders~~a ~~received~~provision byfor ~~customers~~returns ~~(including~~and ~~shipping~~credit ~~and~~card ~~handling)~~chargebacks ~~net~~ of ~~customer credits~~$9,922,000, or ~~but~~approximately ~~before~~33.4% ~~any~~of ~~reserves~~gross ~~are~~sales. ~~taken~~For ~~for~~the ~~returns~~three ormonths ~~bad~~ended ~~debt.~~March We31, ~~believe~~2012, ~~that~~ the ~~presentation~~provision offor ~~gross~~returns ~~sales is~~and ~~useful~~credit tocard ~~investors~~chargebacks was ~~because~~$13,195,000, ~~(a)~~or itapproximately ~~provides~~35.2% anof ~~alternative~~gross ~~measure~~sales. ofThe ~~the~~decrease ~~total~~in ~~demand~~this ~~for~~provision ~~the~~as ~~products~~a ~~sold~~percentage byof usgross ~~and~~sales ~~(b) it~~resulted ~~provides~~from a ~~basis~~decrease ~~upon~~in ~~which~~sales, toand ~~measure~~a ~~the~~decrease ~~percentage~~in ofreturn ~~total~~rate ~~demand~~to ~~that~~33.1% isat ~~reserved~~March ~~for~~31, ~~both~~2013 ~~returns~~from ~~and~~35.2% ~~bad~~at ~~debt~~March 31, 2012. ~~Management uses~~There ~~the~~can ~~gross~~be ~~sales~~no assurance ~~measure~~that ~~for~~this ~~these~~trend ~~same~~will ~~reasons~~continue.

~~Net~~After ~~sales:~~the ~~Gross~~necessary ~~sales~~provisions for ~~the three~~returns, ~~months~~credit ~~ended~~card ~~September 30~~chargebacks, ~~2012~~our ~~decreased~~net bysales ~~approximately 2% to $33,356,000, from $34,140,000~~ for the three months ended ~~September 30~~March 31, ~~2011.~~2013 ~~For~~were ~~the three months ended September 30~~$19, ~~2012~~794,000. weThis ~~recorded~~represents a ~~provision~~decrease ~~for returns and credit card chargebacks~~ of ~~$11,613,000,~~ or approximately 3418.84% ofcompared ~~gross~~to ~~sales. For~~ the three months ended ~~September~~March 3031, ~~2011~~2012, ~~the~~in ~~provision~~which ~~for~~net ~~returns~~sales ~~and~~totaled ~~credit card chargebacks was~~ $1224,~~946~~266,000~~, 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~~Cost ~~the~~of ~~necessary~~sales: ~~provisions~~Cost ~~for~~of ~~returns,~~sales consists ~~credit~~of ~~card~~the ~~chargebacks,~~cost ~~our~~of ~~net~~product ~~sales~~sold ~~for~~to ~~the~~customers, ~~three~~in-bound ~~months~~and ~~ended~~out-bound ~~September~~shipping 30costs, ~~2012~~inventory ~~were $21~~reserves,~~743,000.~~ ~~This~~commissions ~~represents~~and anpacking ~~increase~~materials. Cost of ~~approximately~~sales 3%for ~~compared to~~ the three months ended ~~September~~March 3031, ~~2011,~~2013 inwas ~~which net sales totaled~~ $2115,~~194~~813,000., ~~The~~resulting ~~increase~~ in ~~net~~a ~~sales~~gross ~~resulted~~margin ~~from~~percentage aof ~~reduction~~approximately 20.1%. inCost ~~return~~of ~~rates~~sales asfor ~~discussed~~the ~~above~~three months ended March 31, ~~which~~2012 was ~~partially~~$20,521,000 ~~offset~~resulting byin a ~~decrease~~gross inmargin ~~average~~percentage of approximately ~~order~~15.4%. ~~size,~~Gross ~~relating~~profit toincreased anby ~~increase~~approximately in4.7% ~~promotional~~to ~~activity~~$3, ~~and~~981,000 infor ~~part,~~the athree ~~planned~~months ~~decrease~~ended inMarch ~~inventory~~31, ~~receipts~~2013, ~~since~~compared ~~the~~to ~~beginning~~$3,745,000 offor the ~~year. For the~~ three months ended ~~September~~March 3031, 2012,. ~~revenue~~The ~~from~~increase ~~shipping~~in both gross profit and ~~handling~~gross ~~(which~~margin percentage is ~~included~~attributable into ~~net sales)~~the ~~decreased~~deliberate ~~approximately~~shift ~~52%~~in toour ~~$516,000,~~strategy ~~from~~discussed ~~$1,065,000~~above ~~for~~as ~~the~~we ~~three~~increased ~~months~~inventory ~~ended~~turns ~~September~~by ~~30,~~being ~~2011.~~more ~~Revenue~~competitive ~~from~~with ~~shipping~~our pricing and ~~handling~~selling ~~decreased~~merchandise ~~primarily~~at ascloser ~~the~~to ~~result~~cost. In addition, cost of anproduct ~~increase~~decreased inprimarily ~~free~~as ~~shipping~~a ~~promotional~~result ~~activity~~of ~~offered~~a toreduction ~~customers~~of ~~compared~~sales, toas ~~the~~well ~~third~~as ~~quarter~~an ofincrease ~~2011~~in product margin.

~~Cost~~Selling and offulfillment ~~sales~~expenses: ~~Cost~~Selling ~~of sales consists of the cost of product sold to customers, in-bound~~ and ~~out-bound~~fulfillment ~~shipping~~expenses ~~costs,~~decreased ~~inventory~~by ~~reserves,~~approximately ~~commissions and packing materials~~13. ~~Cost~~7% ~~of sales~~ for the three months ended March ~~September 30~~31, ~~2012~~2013 ~~was~~compared ~~$18,781,000,~~to ~~resulting in a gross margin percentage of approximately 13.6%. Cost of sales for~~ the three months ended ~~September~~March 3031, ~~2011~~2012. ~~was~~Selling ~~$15,016,000,~~and ~~resulting~~fulfillment inexpenses include a ~~gross~~total ~~margin percentage~~ of ~~approximately~~$0 ~~29.1%.~~and ~~Gross~~$105,000 ~~profit~~of ~~decreased~~costs byrelated ~~approximately 52%~~ to ~~$2,962,000~~Eyefly for the three months ended ~~September~~March 3031, ~~2012,~~2013 ~~compared~~and ~~to $6~~2012,~~178,000 for~~ ~~the three months ended September 30, 2011~~respectively. The decrease in Selling ~~both gross profit~~ and ~~gross~~fulfillment ~~margin percentage~~ is primarily attributable to the ~~deliberate~~following: ~~shift~~(a) inFulfillment ~~our~~costs ~~strategy~~– ~~discussed~~lower ~~above~~order ~~as we increase inventory turns by being more competitive with our pricing~~volume, ~~and selling merchandise at~~ lower ~~gross~~fulfillment ~~margin~~and ~~percentages,~~credit ~~and~~card ~~due~~fees to(b) anEcommerce ~~increase~~- decrease in ~~net~~personnel ~~freight~~ costs/photo ~~due~~shoot/temporary tohelp ~~free~~costs ~~shipping, which~~(c) ~~totaled~~Technology ~~over~~– ~~250~~increase ~~basis~~in ~~points,~~depreciation ~~and~~expense ~~daily deal promotions that we offered to customers. While our gross profit~~ and ~~gross~~software ~~margin percentage~~support ~~have decreased~~ during the ~~quarter, our inventory turns have improved by 81% for the~~ three months ended ~~September~~March 3031, ~~2012~~ ~~compared to the three months ended September 30, 2011~~2013.

~~Selling~~Marketing ~~and~~expenses: ~~fulfillment~~Marketing expenses: ~~Selling~~(including ~~and~~staff ~~fulfillment~~related ~~expenses~~costs) ~~increased~~decreased by approximately 1452.2% ~~for~~to ~~the three months ended September 30~~$1,231,000 ~~2012~~for ~~compared to~~ the three months ended ~~September~~March 3031, ~~2011. Selling and fulfillment expenses~~2013, ~~which include a total of~~ from $582,~~000 and $145~~578,000 ~~of costs related to Eyefly~~ for the three months ended ~~September~~March 3031, 2012. ~~and~~The ~~2011,~~decrease ~~respectively,~~is ~~were~~primarily ~~comprised~~attributable ofto ~~the~~decreased ~~following:~~customer acquisition costs.

	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	%

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 6.2% for the three months ended March 31, 2013 from 10.6% for the three months ended March 31, 2012.

AsGeneral aand ~~percentage~~administrative ofexpenses: General ~~net~~and ~~sales~~administrative expenses include merchandising, ~~our~~finance ~~selling~~ and ~~fulfillment~~administrative salaries and related expenses, ~~increased~~insurance costs, toaccounting 23and legal fees, depreciation and other office related expenses.7% General and administrative expenses for the three months ended ~~September~~March 3031, ~~2012~~2013 decreased to $2,035,000, as compared to ~~21.~~$3%,541,000 for the three months ended ~~September~~March 3031, ~~2011~~2012. The decrease in general and administrative expenses was primarily the result of a decrease in severance costs.

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 our18

20As a percentage of net sales, general and administrative expenses for the three months ended March 31, 2013 decreased to 10.3%, from 14.6% for the three months ended March 31, 2012.

~~customer~~Loss ~~service~~from ~~call~~operations: ~~center.~~For ~~The~~the ~~increases~~three months inended ~~these~~March ~~costs~~31, ~~were partially~~2013, ~~offset~~we byincurred aan ~~decrease~~operating inloss ~~credit~~of ~~card~~$3,993,000, ~~fees~~compared ~~associated~~to ~~with~~an aoperating ~~decrease~~loss inof ~~average~~$7,832,000 ~~order~~for ~~size~~the three months ended March 31, 2012.

~~Technology~~Interest ~~expenses~~expense ~~consist~~to ~~primarily~~related ofparty ~~staff~~stockholders: ~~related~~Interest ~~costs,~~expense ~~amortization~~to ofrelated ~~capitalized~~party ~~costs~~stockholders ~~and~~for ~~web site hosting expenses. For~~ the three months ended ~~September~~March 3031, ~~2012,~~ ~~technology~~2013 ~~expenses~~was ~~increased by 22.8% to~~ $1222,~~678,~~000~~, compared to the three months ended September 30, 2011~~. ~~This increase~~ ~~was~~Interest ~~attributable~~expense to anrelated ~~increase~~party instockholders ~~depreciation~~consists ~~expense,~~of ~~included~~non-cash inamortization ~~technology~~expense ~~expenses,~~ of ~~$310,000,~~the andiscount ~~increase~~relating into ~~software~~our ~~support~~outstanding ~~expenses~~notes ofissued ~~$99,000~~to ~~and~~certain anrelated ~~increase~~parties in ~~web~~connection ~~hosting~~with ~~expenses~~the ofrecent ~~$42~~financing,~~000.~~ ~~These~~non-cash ~~increases~~changes ~~were~~in ~~partially~~fair ~~offset by a decrease~~value inof ~~salary~~the ~~and~~embedded ~~salary~~derivative, ~~related~~accrued ~~expenses~~interest ofexpense ~~$93,000~~ and aamortization ~~decrease~~expense inrelated ~~stock-based~~to ~~compensation~~deferred ~~expenses~~financing ~~of $55,000~~charges.

~~E-Commerce expenses~~Other ~~include~~interest ~~expenses related to our photo design studio~~expense, ~~image~~net: ~~processing, and Web Site design.~~Interest ~~For~~expense for the three months ended ~~September~~March 3031, ~~2012,~~2013 ~~e-commerce expenses~~ increased byto approximately ~~10.3% to~~ $1225,~~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~~the &three ~~Clive~~months ended ofMarch ~~$53~~31,~~000~~ ~~and~~2012. anInterest ~~increase~~expense inconsists ~~short-term~~primarily ~~staffing expenses~~ of ~~$48,000.~~fees ~~These~~paid ~~increases were partially offset by a decrease~~ in ~~expenses~~connection ~~related~~with toour ~~photo~~financing ~~shoots~~facilities ~~and~~(as ~~studio~~described further ~~expenses of $86,000~~below).

~~Marketing~~We ~~expenses:~~earned ~~Marketing~~less ~~expenses (including~~than ~~staff related costs) decreased by approximately 13% to~~ $1,~~848,~~000 in interest income for the three months ended ~~September~~March 3031, 2013 and 2012,. ~~from $2,123,000~~These ~~for~~amounts ~~the~~related ~~three~~primarily ~~months~~to ~~ended~~interest ~~September~~income ~~30,~~earned ~~2011~~on our cash balances.

~~Marketing~~Net ~~expenses~~loss ~~include~~per ~~expenses~~share ~~related~~ attributable to ~~(a) online marketing programs~~Bluefly, Inc. ~~which~~stockholders: ~~consist~~Net ofloss ~~social~~per ~~media~~share ~~programs,~~attributable ~~online~~to ~~integration partnerships~~Bluefly, ~~paid~~Inc. ~~search,~~stockholders ~~and~~decreased ~~fees paid~~ to ~~marketing~~$0.16 ~~affiliates~~per ~~and~~share ~~comparison~~for ~~engines,~~the ~~(b)~~three months ~~offline~~ended ~~marketing~~March ~~programs~~31, ~~which~~2013, ~~consist~~compared ofto ~~direct~~$0.28 ~~mail~~per ~~campaigns,~~share ~~television advertising~~for ~~and~~the ~~production~~three ~~costs,~~months asended ~~well~~March as31, ~~(c) staff related costs~~2012. AsThe adecrease ~~percentage~~in of net ~~sales,~~loss ~~our~~per share ~~marketing~~attributable ~~expenses decreased~~ to ~~8.5% for the three months ended September 30~~Bluefly, ~~2012~~Inc. ~~from~~stockholders ~~10.0%~~was ~~for~~primarily ~~the~~attributable ~~three~~to ~~months~~a ~~ended~~decrease ~~September~~in ~~30,~~our ~~2011~~operating loss.

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 30th. 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 30th, 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~~March 3031, ~~2012~~2013, we had approximately ~~$1.3~~ ~~million~~zero in cash and cash equivalents compared to $41.43 million and $42.15 million at December 31, ~~2011~~2012 and ~~September~~March 31, 302012, ~~2011~~respectively. As of March 31, 2013 we had availability under the Credit Facility of $0.4 million. Subsequently, ~~respectively~~we amended the Credit Facility, which increased our overall availability. (See Note 7 - Revolving Credit Facility Financing Agreement.) Working capital, which is computed as total current assets less total current liabilities and represents a measure of operating liquidity, at ~~September~~March 3031, ~~2012~~2013 and ~~2011~~December 31, 2012 was $3(4.26) million and $28(0.19) million, respectively. ~~Working capital at December 31, 2011 was $20.7 million.~~ As of March ~~September 30~~31, ~~2012~~2013, we had an accumulated deficit of approximately $~~181~~191.65 million. We have incurred negative cash flows and cumulative net losses since inception.

24Working capital levels at any specific date are subject to variability based upon seasonality, inventory management and sales levels. These factors, in turn, affect the levels of accounts receivable and inventory.

~~During~~Our ~~the~~needs ~~first~~for ~~quarter~~liquidity have been primarily to support operating losses, satisfy our working capital requirements, make capital expenditures, and make principal and interest payments on debt obligations. Historically, such requirements have been funded through normal operations and through the use of our financing arrangements and capital raising activities. During 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. and ~~Management~~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.

InThe Company ~~addition,~~is ~~unforeseen~~currently ~~increases~~ in ~~expenditures or~~active ~~shortfalls~~discussions inregarding ~~estimated~~a ~~revenues~~strategic ~~could~~transaction ~~significantly~~under ~~impair~~the ~~our~~direction ~~ability~~of toa ~~fund~~special committee ~~future~~consisting ~~operations.~~of ~~Should~~independent wemembers ~~experience~~of ~~unanticipated losses,~~the ~~shortfalls~~Board inof ~~revenues~~Directors, ortogether ~~expenditures~~with ~~that~~the ~~exceed~~assistance ~~current~~of ~~estimates,~~an ~~management~~independent financial ~~would~~advisor ~~implement~~(“Proposed aStrategic ~~cost~~Transaction”). The ~~reduction~~Company ~~plan,~~ expects that the consideration ~~includes~~payable ato ~~reduction~~shareholders inof ~~work~~the ~~force~~Company aswill ~~well~~be asminimal. ~~reductions~~We incurrently ~~overhead~~have ~~costs~~sufficient ~~and~~funds ~~capital~~from ~~expenditures,~~operations and~~/or~~ under ~~attempt~~our Credit Facility to ~~raise additional~~support ~~debt~~our oroperations ~~equity~~until ~~financing.~~the ~~There~~anticipated ~~can~~closing beof nothe ~~assurance~~Proposed Strategic Transaction. Management believes that wethe ~~will~~Proposed ~~achieve~~Strategic orTransaction, ~~sustain~~if ~~positive~~and when ~~cash~~consummated, ~~flows~~will ~~from~~provide ~~operations~~the necessary liquidity to support the working orcapital ~~profitability.~~needs Ifof wethe ~~are~~Company ~~unable~~and toeliminate ~~maintain~~the ~~adequate~~factors ~~liquidity,~~that ~~future~~resulted ~~operations~~in ~~will~~the ~~need~~going toconcern uncertainty. There can be no ~~scaled~~assurance ~~back~~that orthe ~~discontinued~~Proposed Strategic Transaction can be consummated.

WeIf the ~~believe~~Company ~~that~~is inunable ~~order~~ to ~~grow~~complete the ~~business, we~~Proposed ~~will~~Strategic ~~need~~Transaction toor ~~make~~an ~~significant~~alternative strategic ~~investments in marketing~~transaction, or ~~business~~to ~~and~~secure ~~technology~~additional ~~development,~~financing ~~and~~to ~~inventory. To~~fund ~~that~~our ~~end~~operations, in the ~~normal~~Company ~~course~~will ofnot ~~business~~be weable ~~have~~to ~~entered~~sustain ~~into~~its ~~agreements~~operations. The ~~with~~Company ~~suppliers~~has ~~and~~implemented ~~other~~certain ~~business~~cost ~~partners~~containment measures, ~~pursuant to~~ which ~~we commit~~includes toreduction ~~significant~~in ~~expenditures~~workforce orand ~~make payments if minimum levels of purchases are not made. However~~overhead, ~~our budget~~ and ~~our~~ ~~ability~~delaying topayments ~~make such expenditures are subject~~ to ~~a number of factors, including our results of operations~~suppliers.

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~~ 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~~ 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~~which 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% of the remaining availability under the Credit Facility. A termination fee of $75,000 was paid at closing to Wells Fargo.

~~The~~As ~~terms~~ of ~~the~~March ~~Credit~~31, ~~Facility~~2013, ~~contain a~~maximum ~~material~~total ~~adverse~~availability under ~~change~~the ~~clause.~~Credit ~~This~~Facility ~~feature~~was ~~may~~approximately ~~limit~~$5.0 ~~our~~million, ~~ability~~of towhich ~~obtain~~$4.6 ~~additional~~was ~~borrowings~~outstanding orat ~~result~~March in31, a2013, ~~default~~leaving onapproximately ~~current~~$0.4 ~~outstanding~~million ~~letters~~available offor ~~credit~~further borrowings.

~~Both~~The ~~availability~~terms ~~under~~of ~~our~~the Credit Facility contain ~~and~~a ~~our~~material ~~operating~~adverse ~~cash~~effect ~~flows~~clause ~~are~~defined ~~affected~~as bya ~~the~~material ~~payment~~adverse ~~terms~~change ~~that~~in wethe ~~receive~~ability ~~from~~of ~~suppliers~~the ~~and~~Company ~~service~~to ~~providers,~~perform ~~and~~its obligations under the ~~extent to~~Credit ~~which~~Agreement ~~suppliers~~or, ~~require~~upon usthe tooperations, ~~provide~~business, ~~credit~~properties, ~~support~~liabilities ~~under~~(actual ~~our~~or ~~Credit~~contingent) ~~Facility.~~or Incondition ~~some~~(financial or ~~instances~~otherwise), ~~new~~or ~~vendors~~impairment ~~may~~of ~~require~~the ~~prepayments. We~~rights ~~may~~and ~~make~~remedies ~~prepayments~~of inthe ~~order~~Agent toor ~~open~~any uplender ~~these~~under ~~new~~the ~~relationships~~Credit Facility, or toupon ~~gain~~the ~~access~~legality, validity, tobinding ~~inventory~~effect ~~that~~or ~~would~~enforceability ~~not~~against ~~otherwise~~any ~~be available~~party to ~~us.~~the AsCredit ofFacility. ~~September~~This ~~30,~~feature ~~2012,~~may welimit ~~had~~our ~~approximately~~ability ~~$1,246,000~~to ofobtain additional ~~prepaid~~borrowings ~~inventory~~or onresult ~~our~~in ~~Consolidated~~a ~~Balance~~default ~~Sheet, compared~~on tocurrent ~~$2,690,000~~outstanding asletters of ~~December 31, 2011~~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 March 31, 2013, we had approximately $0.3 million of prepaid inventory in our Consolidated Balance Sheet, compared to $0.5 million as December 31, 2012.

The Credit Facility was amended on April 11, 2013 to modify certain borrowing availability formulas for a sixty day period. This amendment increased borrowing availability by up to $650,000. The Company paid a $100,000 fee in connection with the amendment. The interest rate payable under the facility was increased by one percent for sixty days and thereafter the rate will be the greater of (i) the prime rate plus 8.75% and (ii) 12.00%. Salus also waived covenant violations caused by the late delivery of 2012 audited financial statements and the explanatory paragraph regarding a going concern uncertainty contained in the auditor’s opinion for such financial statements. Salus has waived our going concern uncertainty at December 31, 2012 and increased our borrowing availability only through mid-June, 2013, after which we would need additional waivers and/or accommodations from Salus.

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.

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.

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 $87127,000 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 56 – 2012 Financing for further details.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We ~~have~~are ~~assessed~~a ~~our~~smaller ~~vulnerability~~reporting toCompany ~~certain~~as defined ~~market~~by ~~risks,~~regulation ~~including~~S-K ~~interest rate risk associated with financial instruments included in cash~~ and ~~cash~~as ~~equivalents. Due to the short-term nature of these instruments~~such, weare ~~have~~not ~~determined~~required ~~that the risks associated with interest rate fluctuations related~~ to ~~these~~provide ~~financial~~this ~~instruments do not pose a material risk to us~~information.

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~~need offor ~~losses~~additional capital and ~~anticipated~~dependence ~~future~~upon ~~losses~~consummation of a strategic transaction to resolve its liquidity constraints; the risk of ~~availability~~ ofdefault ~~additional~~by ~~capital,~~us ifunder ~~required,~~our tocredit ~~satisfy~~facility and the ~~Company’s~~consequences ~~needs~~that ~~for~~might ~~cash~~arise ~~flow,~~from ~~inventory~~us ~~supply~~having ~~and~~granted ~~growth~~a lien on substantially all of ~~the~~our ~~business~~assets under that agreement; the Company’s history of losses and anticipated future losses; 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; 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

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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.

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Part II - OTHER INFORMATION

Item 5. Other Information

~~Departure~~None ~~of Certain Officers~~noted.

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	~~Description~~
10.1		Separation Agreement and Release of Claims, dated November 20, 2012, by and between the Company and Kara Jenny.
31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a).
10.2		Amended and Restated Employment Agreement, dated February 2, 2012, by and between the Company and Joseph C. Park.
31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a).
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).
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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).
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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).
101.INS	XBRL Instance Document.
31.1		Certification Pursuant to Rule 13a-14(a)/15d-14(a).
101.SCH	XBRL Taxonomy Extension Schema.
31.2		Certification Pursuant to Rule 13a-14(a)/15d-14(a).
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.DEF	XBRL Taxonomy Extension Definition Linkbase.
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.LAB	XBRL Taxonomy Extension Label Linkbase.
101.INS		XBRL Instance Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.
101.SCH		XBRL Taxonomy Extension Schema.

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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~~James B.Gallagher ~~Jenny~~James ~~Kara~~Gallagher ~~B. Jenny~~ Chief Financial Officer

~~November~~May 2117, ~~2012~~2013

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Filing Compare · BLUEFLY INC