ITEM 1. BUSINESS
Background
Prior to May 2006, we were an online retailer of high quality diamonds and fine jewelry, current season brand name watches and luxury goods through three websites, www.diamond.com, www.worldofwatches.com and www.ashford.com. In May 2006, we sold assets related to our online diamond and jewelry business operations, including our domain name www.diamond.com. In December 2006, we sold assets related to our online watch business operations, including our domain name www.worldofwatches.com. In February 2007, we entered into a renewable arrangement with Ice.com, Inc. (“Ice”) which initially runs through December 31, 2007, whereby Ice hosts our www.ashford.com homepage and visitors to our www.ashford.com website are redirected to websites owned and operated by Ice. We earn commissions based on a percentage of gross sales made to customers of Ice’s websites who click thru from www.ashford.com. Ice paid us a $70,000 refundable down payment against these commissions. Under this arrangement with Ice, we are not be the seller of record of any products sold. In addition, pursuant to this arrangement and for so long as the arrangement exists, we have granted to Ice a right of first refusal to acquire www.ashford.com. On March 27, 2007, we entered into a letter of intent with an unrelated third party to sell all of our rights to the domain name www.ashford.com and related intellectual property rights, product images and other intangibles for $300,000 which purchase price was increased to $400,000 on April 1, 2007 subject to the transaction closing on or prior to April 11, 2007. As part of the letter of intent, we received a non-refundable deposit of $100,000 against the anticipated purchase price. The closing of the sale of these assets is subject to the execution of a definitive agreement and due diligence. There can be no assurances that we will close the sale of these assets.
Future Plans
Except for our arrangement with Ice to host our www.ashford.com website, we are a non operating shell corporation. We intend to effect a merger, acquisition or other business combination with an operating company by using a combination of capital stock, cash on hand, or other funding sources, if available. We intend to devote substantially all of our time to identifying potential merger or acquisition candidates. There can be no assurances that we will enter into such a transaction in the near future or on terms favorable to us, or that other funding sources will be available.
Going Concern
Our independent registered public accounting firm’s report on our financial statements for the fiscal year ended December 31, 2006 includes an explanatory paragraph regarding our ability to continue as a going concern. As shown in our historical financial statements, we have incurred significant recurring net losses for the past several years and as of December 31, 2006, our financial statements reflect negative working capital and a stockholders’equity deficiency. These conditions raise substantial doubt about our ability to continue as a going concern. Further, the registered public accounting firm’s report states that the financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As of March 26, 2007 we have borrowed from Alan Lipton, our Chairman of the Board of Directors the sum of $530,000. We issued to Mr. Lipton two separate 8% promissory notes in exchange for the funds (the “Notes”). Under one of the Notes (the “First Note”), $500,000 plus all interest under the First Note is repayable by the Company upon the earlier to occur of (a) January 16, 2010; or (ii) the occurrence of a change in control of the Company. Our repayment obligation under the First Note is secured by all of the Company’s assets. Under the other note, (the “Second Note”), $30,000 plus accrued interest is payable by the Company to Mr. Lipton on demand. Our repayment obligation under the Second Note is unsecured. We used the proceeds of the loans from Mr. Lipton for working capital purposes, including payment of our existing liabilities. We may seek to raise additional capital through the issuance of equity or debt, including loans from related parties, to acquire sufficient liquidity to satisfy our future liabilities. Such additional capital may not be available timely or on terms acceptable to us, if at all. Our plans to repay our liabilities as they become due may be impacted adversely by our inability to have sufficient liquid assets to satisfy our liabilities.
Employees
Amerisa Kornblum, our Chief Executive Officer and Chief Financial Officer and two other administrative employees are our only employees.
Available Information
We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Our corporate Internet address is www.odimo.com. The information found on our website is not part of this or any other report filed with or furnished to the SEC. All of our filings with the SEC may be obtained at the SEC’s Public Reference Room. The SEC maintains an Internet site that contains reports, proxy and other information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
ITEM 1A.
ITEM 1A. RISK FACTORS
Some of the statements in this report and in particular, statements found in Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not historical in nature may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words “will,” “should,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “hope,” or similar expressions. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. These factors, risks and uncertainties include, but are not limited to, the factors described below.
Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the
events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact they will have on our results of operations or financial condition. In view of these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We expressly disclaim any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date hereof.
You should carefully consider the risks and uncertainties described below, together with all other information included in this report, including the consolidated financial statements and the related notes herein, as well as in our other public filings, before making any investment decision regarding our stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects would likely be materially and adversely affected. In that event, the market price of our stock could decline and you could lose all or part of your investment.
Except for our arrangement with a third party to host our www.ashford.com website, we are a non-operating shell company.
Except for our limited operations needed in connection with Ice hosting our www.ashford.com website, we are a public shell company with no operations and we are seeking to effect a merger, acquisition or other business combination with an operating company by using a combination of capital stock, cash on hand, or other funding sources, if available. There can be no assurances that we will be successful in identifying acquisition candidates or that if identified we will be able to consummate a transaction on terms acceptable to us.
While we anticipate having sufficient liquid assets to satisfy our liabilities, if we do not have sufficient liquid assets to satisfy our liabilities we will seek to raise additional capital through the issuance of equity or debt, including loans from related parties. Such additional capital may not be available timely or on terms acceptable to us, if at all. Our plans to repay our liabilities as they become due may be impacted adversely by our inability to have sufficient liquid assets to satisfy our liabilities.
We do not intend to pay dividends on our common stock, and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth.
Legal claims against us could be costly and result in substantial liabilities or the loss of significant rights.
We are currently a party to a proceeding with an uncertain outcome, which could result in significant judgments against us. In January 2006, we were served with a complaint which was a consolidation of two previously served complaints. The complaint names the Company, Alan Lipton, and Amerisa Kornblum as defendants and is pending in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida on behalf of a purported class of purchasers of our common stock in or traceable to our initial public offering. The complaint generally alleges that we and the other defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 due to allegedly false and misleading statements in public disclosures in connection with our initial public offering regarding the impact to our operations of advertising expenses. We believe that the lawsuits are without merit and intend to vigorously defend ourselves. We are currently unable to predict the outcome of the actions or the length of time it will take to resolve the actions.
Our common stock is currently quoted for trading on the Over the Counter Bulletin Board which may adversely impact the liquidity of our shares and reduce the value of an investment in our stock.
Effective August 14, 2006, our common stock was delisted from quotation on the Nasdaq Global Market (formerly known as the Nasdaq National Market) and on the same day our common stock became
quoted on the Over-The-Counter Market on the NASD Electronic Bulletin Board (OTCBB). Our common stock has historically been sporadically or “thinly traded” (meaning that the number of persons interested in purchasing our shares at or near ask prices at any given time may be relatively small or non-existent) and no assurances can be given that a broader or more active public trading market for our common stock will develop or be sustained in the future or that current trading levels will be sustained. You may be unable to sell at or near ask prices or at all if you desire to liquidate your shares. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.
Because our common stock is considered a “penny stock” any investment in our common stock is considered to be a high-risk investment and is subject to restrictions on marketability.
Our common stock is currently traded on the Over-The-Counter Bulletin Board (“OTC Bulletin Board”) and is considered a “penny stock.” The OTC Bulletin Board is generally regarded as a less efficient trading market than the NASDAQ SmallCap Market.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.
Since our common stock is subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus your ability to sell our common stock in the secondary market. There is no assurance our common stock will be quoted on NASDAQ or the NYSE or listed on any exchange, even if eligible.
Our stock price has been and may continue to be volatile.
The market price for our common stock has been and is likely to continue to be volatile. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control.
Future sales of our common stock may cause our stock price to decline.
A small number of our current stockholders hold a substantial number of shares of our common stock. Shares held by our officers, directors and principal stockholders are considered “restricted securities” within the meaning of Rule 144 under the Securities Act and, are eligible for resale subject to the volume, manner of sale, holding period and other limitations of Rule 144.
Sales of a substantial number of shares, or the expectation that such sale may occur, could significantly reduce the market price of our common stock. Moreover, the holders of a substantial number of our shares of common stock have rights to require us to file registration statements to permit the resale of their shares in the public market or to include their shares in registration statements that we may file for ourselves or other stockholders. We also have registered all common stock that we may issue under our stock incentive plan. Accordingly, these shares, when registered, can be freely sold in the public market upon issuance, subject to restrictions under the securities laws. If any of these stockholders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
Our restated certificate of incorporation and restated bylaws contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:
•
Our board of directors has the exclusive right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
•
Our stockholders may not act by written consent. As a result, a holder or holders controlling a majority of our capital stock would be able to take certain actions only at a stockholders’ meeting;
•
No stockholder may call a special meeting of stockholders. This may make it more difficult for stockholders to take certain actions;
•
Our stockholders may not remove a director without cause, and our certificate of incorporation provides for a classified board of directors with staggered, three-year terms. As a result, it could take up to three years for stockholders to replace the entire board;
•
Our certificate of incorporation does not provide for cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates;
•
Stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting. These provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and
•
Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us.
A significant portion of our voting power is concentrated and, as a result, our other stockholders’ ability to influence corporate matters may be limited.
Elao, LLC, a limited liability company controlled by Alan Lipton, owns approximately 41% of our outstanding voting stock. Accordingly, Mr. Lipton will have significant influence over the management and affairs of Odimo and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of Odimo or its assets, for the foreseeable future. This concentrated control limits the ability of our other stockholders to influence corporate matters and, as a result, Mr. Lipton may take actions that Odimo’s other stockholders do not view as beneficial.
Our ability to use net operating loss carryforwards may be limited.
Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. We have preliminarily internally reviewed the applicability of the annual limitations imposed by Section 382 caused by previous changes in our stock ownership and believe such limitations may be significant. This limitation may adversely effect our ability to attract certain business combination candidates and/or consummate a business combination with an operating business.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate office is located in Sunrise, Florida, where we lease approximately 900 square feet pursuant to a month to month agreement. We pay approximately $850 per month for this office space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are currently a party to a proceeding with an uncertain outcome, which could result in significant judgments against us. In January 2006, we were served with a complaint which was a consolidation of two previously served complaints. The consolidated complaint names the Company, Alan Lipton, our former Chief Executive Officer and President and current Chairman of the Board of Directors and Amerisa Kornblum, our current Chief Executive Officer and Chief Financial Officer as defendants and is pending in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida on behalf of a purported class of purchasers of our common stock in or traceable to our initial public offering. The complaint generally alleges that we and the other defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 due to allegedly false and misleading statements in public disclosures in connection with our initial public offering regarding the impact to our operations of advertising expenses. We believe that the lawsuits are without merit and intend to vigorously defend ourselves. We and the individual defendants filed a motion to dismiss the complaint which was granted in part and denied in part. We and the individual defendants have filed an answer to the complaint and have exchanged initial discovery and interrogatories with the plaintiffs. The plaintiffs have filed a motion for class certification which has not yet been heard. As discovery has only proceeded through the very preliminary stages, we are currently unable to predict the outcome of the actions or the length of time it will take to resolve the actions.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock was quoted for trading on the Nasdaq National Market from February 15, 2005 through August 13, 2006 and has been quoted for trading on the OTCBB since August 14, 2006 under the symbol ODMO. Prior to February 15, 2005, there was no public market for our common stock. The following table sets forth the high and low closing sales prices for our common stock as reported on the Nasdaq National Market for the quarterly periods from February 15, 2005 through August 13, 2006 and the reported low bid and high bid per share quotations for our common stock for the quarterly periods since August 14, 2006. The high and low bid prices for the periods indicated reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.
The approximate number of holders of record of our common stock as of March 2, 2007 is 47, inclusive of those brokerage firms and/or clearing houses holding shares of common stock for their clientele (with each such brokerage house and/or clearing house being considered as one holder).
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
Equity Compensation Plan
The following table details our equity compensation plan as of December 31, 2006:
2006 EQUITY COMPENSATION PLAN INFORMATION
Recent Sales of Unregistered Securities
None
Repurchases of Equity Securities
None
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below is derived from our audited consolidated financial statements and is not indicative of future operating results since we currently only engage in limited operations. The following selected financial data should be read in conjunction with the Consolidated Financial Statements for Odimo Incorporated and notes thereto and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein. Amounts are in thousands, except per share amounts.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth previously under the caption “Risk Factors.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report.
Overview
All information contained in this report reflects our operations as an online retailer of jewelry, diamonds, watches and luxury goods on www.diamond.com; www.ashford.com; and www. worldofwatches.com through May 11, 2006 and watches and luxury goods on www.worldofwatches and www.ashford.com from May 12, 2006 through November 30, 2006 and watches and luxury goods on www.ashford.com from May 12, 2006 through December 31, 2006.
Our independent registered public accounting firm’s report on our financial statements for the fiscal year ended December 31, 2006 includes an explanatory paragraph regarding our ability to continue as a going concern. As shown in our historical financial statements, we have incurred significant recurring net losses for the past several years and as of December 31, 2006, our financial statements reflect negative working capital and a stockholders’ equity deficiency. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis of Presentation
Net sales consists of revenue from the sale of our products, net of estimated returns by customers, promotional discounts and, to a much lesser extent, revenue from upgrades to our standard free shipping.
Gross profit is calculated by subtracting the cost of sales from net sales. Our cost of sales consists of the cost of the products we sell, including inbound freight costs and assembly costs. Our gross profit fluctuates based on several factors, including product acquisition costs, product mix and pricing decisions. Due to the seasonality of our business, our gross profit as a percentage of net sales is typically greater in the fourth quarter. In general, we realize higher gross profit on the sale of our luxury goods, jewelry and watches in comparison to diamonds.
Fulfillment expenses include outbound freight costs paid by us, commissions paid to sales associates, credit card processing fees and packaging and other shipping supplies. Commissions are paid based on a percentage of the price of the goods sold and are expensed when the goods are sold.
Marketing expenses consist primarily of online advertising expenses, affiliate program fees and commissions, public relations costs and other marketing expenses.
General and administrative expenses include payroll and related employee benefits, costs to maintain our websites, professional fees, insurance, rent, travel and other general corporate expenses.
Results of Operations
The following table sets forth information for years ended December 31, 2006, 2005 and 2004 about our net sales, cost of sales, gross profit, operating expenses, losses from operations, net interest income (expense), and net losses both in dollars and as a percentage of net sales:
Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005
Net Sales. Net sales for the year ended December 31, 2006 decreased to $19.0 million from $51.8 million for the year ended December 31, 2005. In the aggregate, across our three websites, we experienced a significant decrease in visitors to our websites during the year ended December 31, 2006 as compared to the year ended December 31, 2005. This substantial decrease in customer traffic resulted in substantially lower number of orders in 2006 as compared with 2005. In addition, to attract online customers and to sell through our inventory, during 2006, we offered discounts and promotions on our product offerings. This resulted in sales of items at reduced prices, in certain cases, below cost.
Gross Profit. Gross profit for the year ended December 31, 2006 decreased 75.0% to $3.1 million from $12.5 million for the year ended December 31, 2005 due to our exiting the diamond and jewelry business in May 2006, the sale of our www.worldofwatches.com website in December 2006, the discounts and promotions offered on the sale of products through 2006 and the liquidation of our remaining inventory during the fourth quarter of 2006. Our gross profit as a percentage of net sales decreased to 16.5% for the year ended December 31, 2006 compared to 24.2% during the year ended December 31, 2005. The decrease in gross profit as a percentage of net sales for the year ended December 31, 2006 was primarily the result of our discounts and promotions offered on the sale of products through 2006 and the liquidation of our remaining inventory during the fourth quarter of 2006.
Fulfillment. Fulfillment expenses for the year ended December 31, 2006 decreased to $1.4 million from $3.6 million for the year ended December 31, 2005. As a percentage of net sales, fulfillment expenses for the year ended December 31, 2006 increased slightly to 7.4% compared to 7.0% for the year ended December 31, 2005. This was primarily driven by higher shipping costs and the addition of third party drop shippers during the fourth quarter of 2006.
Marketing. Marketing expenses for the year ended December 31, 2006 decreased 72.4% to $2.1 million from $7.6 million for the year ended December 31, 2005. The decrease was primarily due to a significant reduction in our online advertising for the year ended December 31, 2006, partially due to our winding down the operations of www.worldofwatches.com and www.ashford.com. As a percentage of net sales, marketing expenses for the year ended December 31, 2006 decreased to 11.4% compared to 14.7% for the year ended December 31, 2005.
General and Administrative. General and administrative expenses for the year ended December 31, 2006 decreased 15.5% to $9.6 million from $11.3 million for the year ended December 31, 2005. This decrease was due to decreased salary and related expenses associated with the termination, during 2006, of substantially all of our workforce. As a percentage of net sales, general and administrative expenses for the year ended December 31, 2006 increased to 50.5% compared to 21.8% for the year ended December 31, 2005.
Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31, 2006 and 2005 was $3.6 million. As a percentage of net sales depreciation and amortization increased to 19.0% from 6.9% due to decreased net sales in 2006.
Goodwill Impairment. For the year ended December 31, 2005 we recorded an impairment charge of $9.8 million related to the impairment of goodwill.
Impairment of Long-Lived Assets. In December 2006, we recorded an impairment charge of $5.4 million related to our 2007 sale of machinery and equipment, including computers, software and equipment, for $250,000.
Gain on Sale of Assets. In connection with the May 2006 sale of assets related to our online diamond and jewelry business operations, including our domain name www.diamond.com, we recorded a net gain on sale of assets of $6.9 million in the second quarter of 2006. In connection with the December 2006 sale of assets related to our online watch business operations, including our domain name www.worldofwatches.com, we recorded a net gain on sale of assets of $281,000.
Interest Expense, Net. Interest expense, net, for the year ended December 31, 2006 decreased 75.8% to $16,000 from $66,000 for the year ended December 31, 2005. This decrease is due to a decrease in borrowed capital for the year ended December 31, 2006.
Net Loss. Net loss for the year ended December 31, 2006 was $11.8 million as compared to $23.5 million for the year ended December 31, 2005. The decrease was primarily attributable to a decrease in gross profit and a decrease in online marketing costs for the year ended December 31, 2006 compared to the year ended December 31, 2005. In addition, net loss for the year ended December 31, 2005 includes a non-cash charge of $9.8 million, related to the impairment of goodwill. For the year ended December 31, 2006, net loss includes a gain on sale of assets of $1.8 million related to the sale of certain assets of the Company. Excluding the gain on sale of assets during 2006 and non-cash charges incurred during the year ended December 31, 2005, our net loss would be $13.6 million for each of the years ended December 31, 2006 and December 31, 2005.
Comparison of Year Ended December 31, 2005 to Year Ended December 31, 2004
Net Sales. Net sales for the year ended December 31, 2005 decreased slightly to $51.8 million from $52.2 million for the year ended December 31, 2004.
Number of orders for the year ended December 31, 2005, decreased 2.7% to 151,700 from 155,840 for the year ended December 31, 2004. This slight decrease resulted from a 2.1% decrease in new customers offset by increased sales to existing customers. However, for the year ended December 31, 2005, our average order value increased 3.4% to $387 from $374 for the year ended December 31, 2004. In the aggregate,
however, across our three websites, we experienced a 24.7 % decrease in visitors to our websites during the year ended December 31, 2005 as compared to the year ended December 31, 2004.
This increase in average order value is due to our increased sales of diamonds and jewelry in 2005 which have greater average order values than watches and luxury goods. In 2005 we offered promotions and discounts which resulted in sales of certain items, including handbags, at reduced prices resulting in an offset to our increase in average order value in 2005.
Gross Profit. Gross profit for the year ended December 31, 2005 decreased 17.0% to $12.5 million from $15.1 million for the year ended December 31, 2004 due to discounts and promotions offered on the sale of luxury goods in 2005. Our gross profit as a percentage of net sales decreased to 24.2% for the year ended December 31, 2005 compared to 28.9% during the year ended December 31, 2004. The decrease in gross profit as a percentage of net sales for the year ended December 31, 2005 was primarily the result of an increased proportion of net sales being derived from diamonds which had a lower margin than luxury goods and the sale of luxury goods discounted through promotions and offers on www.ashford.com.
Fulfillment. Fulfillment expenses for the year ended December 31, 2005 increased slightly to $3.6 million from $3.5 million for the year ended December 31, 2004. As a percentage of net sales, fulfillment expenses for the year ended December 31, 2005 increased slightly to 7.0% compared to 6.7% for the year ended December 31, 2004. This was primarily driven by a shift in our product mix towards diamonds and fine jewelry in 2005 which had higher shipping costs per order.
Marketing. Marketing expenses for the year ended December 31, 2005 increased 15.0% to $7.6 million from $6.6 million for the year ended December 31, 2004. The increase was primarily due to significantly increased online advertising costs. As a percentage of net sales, marketing expenses for the year ended December 31, 2005 increased to 14.7% compared to 12.7% for the year ended December 31, 2004.
General and Administrative. General and administrative expenses for the year ended December 31, 2005 decreased 19.8% to $11.3 million from $14.1 million for the year ended December 31, 2004. The general and administrative expense for the year ended 2004 includes $4.7 million of stock-based compensation expense due to the granting of immediately vested options to purchase 290,000 shares of common stock to employees. No stock based compensation expense was incurred for the year ended December 31, 2005. Excluding the $4.7 million of stock-based compensation expense in 2004, our general and administrative expense increased by approximately $1.8 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. This increase was due to an increase in insurance expenses, professional fees and public company costs.
As a percentage of net sales, general and administrative expenses for the year ended December 31, 2005 decreased to 21.8% compared to 27.1% for the year ended December 31, 2004. Excluding the stock-based compensation expense of $4.7 million incurred for year ended December 31, 2004, general and administrative expenses as a percentage of net sales for the year ended December 31, 2004 would have been 18.1%.
Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31, 2005 increased 33.4% to $3.6 million from $2.7 million for the year ended December 31, 2004. This increase is attributable to the addition of computer equipment and software development costs placed in service during the year ended December 31, 2005.
Goodwill Impairment. For the year ended December 31, 2005 we recorded an impairment charge of $9.8 million related to the impairment of goodwill.
Interest Expense, Net. Interest expense, net, for the year ended December 31, 2005 decreased 89.0% to $66,000 from $585,000 for the year ended December 31, 2004. This decrease is due to a decrease in borrowed capital for the year ended December 31, 2005.
Net Loss. Net loss for the year ended December 31, 2005 was $23.5 million as compared to $12.5 million for the year ended December 31, 2004. The increase was primarily attributable to a decrease in gross profit and an increase in online marketing costs for the year ended December 31, 2005 compared to the year ended December 31, 2004. In addition, net loss for the year ended December 31, 2005 includes a non-cash charge of $9.8 million related to the impairment of goodwill. Excluding non-cash charges incurred during the years ended December 31, 2005 and December 31, 2004, our net loss increased by $5.0 million for the year ended December 31, 2005 compared to the year ended December 31, 2004.
Quarterly Operations Data
The following tables set forth quarterly consolidated statements of operations data for each of the eight quarters ended December 31, 2006, including amounts expressed as a percentage of net sales. This quarterly information is unaudited, but has been prepared on the same basis as the annual consolidated financial statements and, in the opinion of our management, reflects all adjustments necessary for a fair presentation of the information for the periods presented. This quarterly statement of operations data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this report. Operating results for any quarter are not necessarily indicative of results for any future period.
Historically, our net sales were highly seasonal, with increased sales around the major gift-giving holidays. A large percentage of our net sales was generated during the December holiday season and to a lesser extent in February and May due to Valentine’s Day and Mother’s Day. During the fourth quarter, our fulfillment costs typically increased as a percentage of net sales primarily as a result of shipping upgrades. Our general and administrative expenses were also seasonal as we increased our staffing in anticipation of increased sales activity.
Liquidity and Capital Resources
Historically, we funded our operations primarily through private placements of securities, with borrowings under our bank credit facility, from the net proceeds of $22.4 million from the initial public offering of our common stock in February 2005, and approximately $1.4 million from the exercise of warrants prior to the closing of our initial public offering.
Discussion of Cash Flows
Net cash used in operating activities for the year ended December 31, 2006 was $10.5 million compared to net cash used in operating activities for the year ended December 31, 2005 of $11.4 million. Included in the net cash used in operating activities for the year ended December 31, 2006 is a $12.6 million reduction in accounts payable and accrued liabilities offset by a $10.0 million decrease in inventory.
Net cash provided by investing activities in the year ended December 31, 2006 was $6.5 million compared to net cash used in investing activities of $3.4 million in the year ended December 31, 2005. Since our inception, our investing activities have consisted primarily of purchases of fixed assets and capital expenditures for our technology systems and software development. Included in net cash provided by investing activities in the year ended December 31, 2006 is $7.2 million of net proceeds from the sale of assets.
Net cash provided by financing activities in the year ended December 31, 2006 was $300,000 as compared to $16.9 million of net cash provided by financing activities during the year ended December 31, 2005. Included in net cash provided by financing activities for the year ended December 31, 2005 is $24.8 million in net proceeds from our public offering (which when netted with initial public offering costs of $2.4 million incurred in 2004 results in net proceeds from our initial public offering of $22.4 million) and $1.3 million in proceeds from the exercise of warrants in February 2005 offset by repayment of our bank credit facility of $9.3 million. Net cash provided by financing activities in 2006 consists of $300,000 in proceeds from a related party notes payable.
If and to the extent that our net income before income taxes, interest income and expense, depreciation expense, amortization expense, and other non-cash expenses (as defined in the agreement with GSI) is positive during 2007, we will be obligated to make a payment to GSI Commerce, Inc., the entity from which we purchased the www.ashford.com domain name in December 2002, equal to 10% of such amount for such year, up to a maximum aggregate amount of $2.0 million. To the extent that we are required to make any such payments, our cash flow will be reduced accordingly.
Liquidity Sources
Our principal sources of short-term liquidity consist of cash and cash equivalents, our borrowings and to a much lesser extent, our cash generated from our limited operations.
As of December 31, 2006, we had $75,000 of cash and cash equivalents (and $108,000 of deposits with a credit card processing company) compared to $3.8 million of cash and cash equivalents (and $755,000 of deposits with a credit card processing company) as of December 31, 2005. Until required for other purposes, our cash and cash equivalents are maintained in deposit accounts or highly liquid investments with original maturities of 90 days or less at the time of purchase.
As of March 26, 2007 we have borrowed from Alan Lipton, our Chairman of the Board of Directors the sum of $530,000. We issued to Mr. Lipton two separate 8% promissory notes in exchange for the funds (the “Notes”). Under one of the Notes (the “First Note”), $500,000 plus all interest under the First Note is repayable by the Company upon the earlier to occur of (a) January 16, 2010; or (ii) the occurrence of a change in control of the Company. Our repayment obligation under the First Note is secured by all of the Company’s assets. Under the other note, (the “Second Note”), $30,000 plus accrued interest is payable by the Company to Mr. Lipton on demand. Our repayment obligation under the Second Note is unsecured. We used the proceeds of the loans from Mr. Lipton for working capital purposes, including payment of our existing liabilities. We may seek to raise additional capital through the issuance of equity or debt, including loans from related parties, to acquire sufficient liquidity to satisfy our future liabilities. Such additional capital may not be available timely or on terms acceptable to us, if at all. Our plans to repay our liabilities as they become due may be impacted adversely by our inability to have sufficient liquid assets to satisfy our liabilities.
Our independent registered public accounting firm’s report on our financial statements for the fiscal year ended December 31, 2006 includes an explanatory paragraph regarding our ability to continue as a going concern. As shown in our historical financial statements, we have incurred significant recurring net losses for the past several years and as of December 31, 2006, our financial statements reflect negative working capital and a stockholders’ equity deficiency. These conditions raise substantial doubt about our ability to continue as a going concern. Further, the registered public accounting firm’s report states that the financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Contractual Obligations
Future payments due under contractual obligations as of December 31, 2006 are listed below:
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Outstanding Stock Options
As of December 31, 2006, we had outstanding vested options to purchase approximately 131,525 shares of common stock, at a weighted average exercise price of $ 12.26 per share. We have no outstanding unvested options. The per share value of each share of common stock underlying the vested options, based on the difference between the weighted average exercise price per option and the estimated fair market value of the shares at the dates of the grant of the options (also referred to as intrinsic value), ranges from $0 to $16.25 per share.
The fair market values of the shares at the dates of grant were originally estimated by our board of directors, with input from management. We did not obtain contemporaneous valuations by an unrelated valuation specialist because we based these valuations on preliminary, informal discussions with the investment banks in our initial public offering. Determining the fair value of our stock requires making complex and subjective judgments. We used two separate valuation approaches for our valuations. These approaches were the Comparable Company Analysis (or Market Multiple) Approach and the Discounted Cash Flow Approach. Using these approaches we calculated an enterprise value range.
Under the Market Multiple Approach, we utilized external market pricing evidence for companies involved in lines of business similar to us. Pricing multiples, in particular enterprise value to revenue, were calculated using publicly available information. We selected multiples based on a risk assessment of Odimo relative to companies deemed comparable to us. Under the Discounted Cash Analysis Approach, we utilized our projected financial statements and estimates of working capital to estimate free cash flows. The free cash flows (on a debt-free basis) were discounted at a rate that reflected the uncertainty associated with achievement of such cash flows. A value was calculated assuming a sale of Odimo in year two (2005) and this amount was discounted to the present at the same risk-adjusted rate utilized for the cash flows. The results of each approach were weighted (the Market Multiple was weighted 75% and the Discounted Cash Flow was weighted 25%).
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowances for sales returns, inventories, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 1 to our consolidated financial statements included in this report, we believe the policies discussed below are the most critical to understanding our financial position and results of operations.
Revenue Recognition
We recognize revenue from product sales or services rendered when the following four revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or
services have been rendered, (3) the selling price is fixed or determinable and (4) collectibility is reasonably assured.
Product sales, net of promotional discounts, rebates, and return allowances, are recorded when the products are delivered and title passes to customers. We require payment before shipping products, so we estimate receipt of delivery by our customers based on shipping time data provided by our carriers. Retail items sold to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon delivery to the customer. Return allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience.
Inventories
Inventories, consisting of products available for sale, are accounted for using the first-in first-out method, and are valued at the lower of cost or market value. This valuation requires us to make judgments, based on currently-available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors or liquidations, and expected recoverable values of each disposition category. Based on this evaluation, we record a valuation write-down, when needed, to adjust the carrying amount of our inventories to lower of cost or market value.
Goodwill and Other Long-Lived Assets
Our long-lived assets include goodwill and other intangible assets. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) requires that goodwill be tested for impairment on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires significant judgment to estimate the fair value, including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value. For 2006 and 2005, we have determined that we have one reporting unit. For the year ended December 31, 2005, we recorded an impairment charge of $9.8 million related to the impairment of goodwill.
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), requires that we record an impairment charge on finite-lived intangibles or long-lived assets to be held and used when we determine that the carrying value of intangible assets and long-lived assets may not be recoverable. Based on the existence of one or more indicators of impairment, we measure any impairment of intangibles or long-lived assets based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our business model. Our estimates of cash flows require significant judgment based on our historical results and anticipated results and are subject to many factors. During 2006, we recorded impairment charges related to long lived assets of approximately $5.4 million.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against our deferred tax assets. We have recorded a full valuation allowance against our deferred tax assets since we have determined that it is more likely than not that we may not be able to realize our deferred tax asset in the future.
Stock-Based Compensation
We historically accounted for stock-based compensation paid to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (“APB Opinion 25”), Accounting for
Stock Issued to Employees and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25 (“FIN 44”). Compensation for stock options granted to employees (including members of the board of directors), if any, was measured as the excess of the market price of the Company’s stock at the date of grant over the amount the employee must pay to purchase the stock. Any compensation expense related to such grants was deferred and amortized to expense over the vesting period of the related options.
Compensation expense related to options granted to non-employees was calculated using the fair-value based method of accounting prescribed by Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation (“SFAS No. 123”). SFAS No. 123 established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. We elected to account for stock options granted to employees, as prescribed by APB Opinion 25, and adopted the disclosure-only requirements of SFAS No. 123. Accordingly, prior to January 1, 2006, no employee compensation cost related to share-based awards was recognized in net income of the Company for these plans. However, on January 1, 2006, we prospectively adopted the provisions of SFAS 123R, Share-Based Payment, which requires all share-based awards to employees be recognized in the income statement based on their fair values. We had no unvested stock options as of January 1, 2006. No stock options were granted during 2006 nor were any options exercised during the period. As a result, there was no impact of SFAS 123R on our Consolidated Statements of Operations for the year ended December 31, 2006.
Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We expect to adopt SFAS No. 159 on January 1, 2008 and has not yet determined the impact on the consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulleting (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB No. 108 requires registrants to quantify misstatements using both an income statement and balance sheet approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that have been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings as of the beginning of the fiscal year of adoption. We have reviewed, and implemented, the provisions of SAB No. 108 as of December 31, 2006, and have determined that it did not have a material impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. Management believes the adoption of this pronouncement will not have a material impact on our consolidated financial statements.
In July 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the statement of financial condition; and provides transition and interim-period guidance, among other provisions. The provisions of FIN 48 are effective as of the beginning of our first fiscal year that begins after December 15, 2006. Management is currently evaluating the impact of the adoption of this pronouncement; however, it is not expected to have a material impact on our consolidated financial position, results of operation or cash flows.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Given our current limited operations, we do not believe we have any substantial exposure to market risk due to changes in interest rates. Our limited exposure relates primarily to the increase or decrease in the amount of interest income we can earn on our cash on hand and the amount of interest expense we incur for borrowed capital. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the list of financial statements filed with this report under Item 15 below.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
On August 31, 2005, we were notified by Deloitte & Touche LLP (“Deloitte”) that effective August 31, 2005 Deloitte had resigned as our independent registered public accounting firm.
The audit report of Deloitte on Odimo’s financial statements for the fiscal year ended December 31, 2004 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. The audit report of Deloitte on Odimo’s financial statements for the fiscal year ending December 31, 2003 contained an explanatory paragraph for the restatement of the financial statements.
During the two most recent fiscal years and the subsequent interim period through the date of Deloitte’s resignation, Odimo had no disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to their satisfaction, would have caused Deloitte to make reference to the subject matter of the disagreement in connection with their reports. In addition, during that time there were no reportable events (as defined in Item 304(a)(1)(iv) of Regulation S-K).
Odimo provided Deloitte with a copy of the disclosures, and requested Deloitte to furnish Odimo with a letter addressed to the Securities and Exchange Commission stating whether Deloitte agreed with the statements made by Odimo. The letter was attached to Odimo’s Report on Form 8-K filed on September 2, 2005, as Exhibit 16.1 thereto.
Effective September 2, 2005, we retained Rachlin Cohen & Holtz LLP as our independent registered public accounting firm.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We carried out an evaluation, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Commencing January 2007, Amerisa Kornblum began to serve as both our Chief Executive Officer and Chief Financial Officer whereas prior to that date, Ms. Kornblum was the Chief Financial Officer. Subsequent to the end of the period covered by this report, Ms. Kornblum has observed that, although our operations subsequent to the year ended December 31, 2006 are limited, we have a material weakness in our internal controls over financial reporting in that we create, review and process financial data without internal independent review due to our not having sufficient personnel. Due to this material weakness, there is more than a remote likelihood that a material misstatement of our financial statements could occur and not be detected, prevented or corrected.
Notwithstanding this material weakness, management believes that financial statements to be included in future reports will fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods and dates then presented.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth our executive officer and each Class I director, Class II director, and Class III director, their ages and present positions with Odimo as of March 28, 2007.
(1)
Member of the Audit Committee, the Compensation Committee and the Nominating Committee.
(2)
Member of the Compensation Committee and Nominating Committee
(3)
Member of the Audit Committee.
Alan Lipton has been our Chairman of the Board of Directors since May 2004 and a member of our Board of Directors since November 1999. From November 1999 through May 11, 2006, Mr. Lipton was our Chief Executive Officer and President. From 1983 to 1994 Mr. Lipton was the Chief Executive Officer of Jan Bell Marketing, Inc., which was a publicly held watch and jewelry retailer and supplier to wholesale price clubs. After retiring from Jan Bell Marketing in 1994, Mr. Lipton founded the Lipton Foundation, a philanthropic organization. From 1994 to the present, Mr. Lipton has been involved with the Lipton Foundation and in various real estate development projects in South Florida.
Amerisa Kornblum has been our Chief Financial Officer and Treasurer since November 1999, our Secretary since November 2005 and our Chief Executive Officer since January 2007. From October 1997 to November 1999, Ms. Kornblum served as Chief Financial Officer of Gold Coast Media, Inc. From 1994 through 1997, Ms. Kornblum was a financial systems consultant, for various catalog and retail companies. From 1988 to 1993, Ms. Kornblum worked for Jan Bell Marketing, Inc. in various capacities, including Controller, Director of Internal Audit, and Director of Investor Relations. From 1985 to 1988, Ms. Kornblum was a senior auditor for Deloitte & Touche LLP. Ms. Kornblum is a certified public accountant in the State of Florida. Ms. Kornblum is married to Jeff Kornblum, our former President and Chief Executive Officer.
Sidney Feltenstein has been a member of our Board of Directors since May 2004. Since June 2005, Mr. Feltenstein has been the Chairman of Sagittarius Brands, a restaurant holding company. From 1995 to 2002, Mr. Feltenstein served as Chairman, President and Chief Executive Officer of Yorkshire Global Restaurants, an operator of A&W Restaurants and Long John Silver’s restaurants. Mr. Feltenstein has served in a variety of operations and marketing management positions in the restaurant business including Chief Marketing Officer for Dunkin Donuts and Executive President of Worldwide Marketing for Burger King Corporation. Mr. Feltenstein is active in various organizations, including the International Franchise Association. From 2002 to May 2004, Mr. Feltenstein pursued personal investment opportunities. Since 2003, Mr. Feltenstein has been a director of BUCA, Inc., a public company that operates restaurants.
Stanley Stern was a member of our Board of Directors from November 1999 through May 2004 and rejoined the Board in February 2005. Since March 2004, Mr. Stern has been a Managing Director and head of investment banking with Oppenheimer & Co. Inc., an investment banking firm. From February 2002 to March 2004, Mr. Stern served as a Managing Director and head of investment banking with C.E. Unterberg, Towbin, an investment banking firm. From January 2000 to February 2002, Mr. Stern served as Managing Director of STI Ventures Advisory USA Inc. and as a member of the board of directors and the investment committee of STI Ventures, a venture capital company that was affiliated with Beny Steinmetz. From 1990 until January 2000, Mr. Stern was employed at CIBC Oppenheimer, a financial services company. Mr. Stern also serves as the chairman of the board of Tucows, Inc., and is a director of Fundtech, a provider of financial payment processing solutions.
Steven Tishman has been a member of our Board of Directors since February 2005. Since October 2002, he has been a Managing Director of Rothschild Inc., a merchant banking firm. From November 1999 to July 2002, Mr. Tishman was a Managing Director of Robertson Stephens, Inc., an investment banking firm. From July 1993 to November 1999, he was a Senior Managing Director of Bear, Stearns & Co. Inc., an investment banking firm. Mr. Tishman is also a director of Cedar Fair, L.P., an operator of amusement parks, and Claire’s Stores, Inc., a specialty retailer of costume jewelry, accessories and cosmetics.
Compensation Committee Interlocks and Insider Participation
The compensation of our executive officers for the year ended December 31, 2006 was determined by our Compensation Committee based on performance. No member of our Compensation Committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.
Director Compensation
We do not pay directors compensation but reimburse directors for certain expenses incurred by them in connection with their duties to the Company.
Communications with Directors
Stockholders may communicate with our Board of Directors or one or more directors by sending a letter addressed to our Board or to any one or more directors in care of our Corporate Secretary, Odimo Incorporated, 14051 NW 14th Street, Sunrise, Florida 33323, in an envelope clearly marked “Stockholder Communication.” Our Corporate Secretary’s office will forward such correspondence unopened to Mr. Feltenstein or Mr. Tishman, or another independent director as the Board of Directors may specify from time to time, unless the envelope specifies that it should be delivered to another director. If multiple communications are received on a similar topic, our Corporate Secretary may, in her discretion, forward only representative correspondence.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Compensation Philosophy and Objectives
Amerisa Kornblum currently serves as our only executive officer at a salary of $2500 per month. She serves us in this capacity with no written employment agreement. Due to our severely limited resources we are unable to attract other executive talent. While we have, in the past and may in the future grant stock options as a means to attract and provide equity incentives to executives, no options have been granted since 2004 and all options that have heretofore been granted to prior executive officers have been cancelled.
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding the compensation paid, distributed, or accrued for services rendered by our principal executive officer, our principal financial officer and our other executive officers whose total salary and bonus exceeded $100,000 (collectively, the “Named Executives “) for services rendered in all capacities to us during the years indicated.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table sets forth for each of our Named Executive Officers (i) the aggregated options exercised in the last fiscal year, (ii) the number of shares underlying unexercised options at December 31, 2006 and (iii) the option values of unexercised in-the-money options at December 31, 2006. As of January 15, 2007, all options granted to Jeff Kornblum, Amerisa Kornblum and George Grous have been cancelled and are no longer outstanding.
Employment Agreements with Executive Officer
We employ Amerisa Kornblum as our Chief Executive Officer and Chief Financial Officer on a month to month basis, pursuant to an oral agreement, at a base salary of $2500 per month.
Report of the Compensation Committee
The following is the report of our Compensation Committee with respect to the compensation paid to our executive officers during the fiscal year ended December 31, 2006.
Introduction
The Compensation Committee of the Board of Directors establishes Odimo’s general compensation policies, approves and evaluates the compensation plans and specific compensation levels for executive officers and directors and administers its stock incentive plan. Odimo’s executive compensation philosophy is to attract and retain executive officers capable of leading Odimo to fulfillment of its business objectives by offering competitive compensation opportunities that reward individual contributions as well as corporate performance.
Compensation Programs
Base Salary. The Committee approves and evaluates base salaries for executive officers, and reviews such salaries when it deems appropriate. In general, the salaries of executive officers are based upon the Compensation Committee’s goal of ensuring that our executive compensation programs are competitive with those companies in our industry and of a similar size to Odimo.
Bonuses. The Committee approves and evaluates bonuses for executive officers. Each executive officer is evaluated individually to determine a bonus for the fiscal year based on performance criteria, including, among other criteria, progress towards or achievement of business milestones in such executive’s area of responsibility and with respect to our financial and operating performance generally. No bonuses were given to executive officers for their performance during fiscal year 2006.
Stock Options and Restricted Stock Awards. The Committee believes that stock options and restricted stock awards provide additional incentive to officers to work towards maximizing stockholder value. The Compensation Committee views stock options and restricted stock grants as one of the more important components of Odimo’s long-term, performance-based compensation philosophy. Stock options have typically been provided through initial grants at or near the date of hire and through subsequent periodic grants. Stock options granted to our executive officers and other employees have exercise prices equal to the fair market value at the time of grant. This approach is designed to focus executives on the enhancement of stockholder value over the long term and encourage equity ownership in the Company. Options vest and become exercisable at such time as determined by the Compensation Committee. The initial option grant is designed to be competitive with those of comparable companies for the level of the job that the executive holds and motivate the executive to make the kind of decisions and implement strategies and programs that will contribute to an increase in our stock price over time. Periodic additional stock options within the comparable range for the job may be granted to reflect the executives’ ongoing contributions to the Company, to create an incentive to remain at the Company and to provide a long-term incentive to achieve or exceed the Company’s financial goals. To date, the Compensation Committee has not granted restricted stock awards as additional compensation to our executive officers but may do so in the future.
Compensation for the Chief Executive Officer
Alan Lipton served as our President and Chief Executive Officer from November 1999 through May 11, 2006. Jeff Kornblum served as our President and Chief Executive Officer from May 12, 2006 through January 15, 2007. Amerisa Kornblum has served as our Chief Executive Officer since January 16, 2007.
Both Mr. Lipton’s and Mr. Kornblum’s compensation for 2006, were determined within the same framework established for all of our executives. Neither Mr. Lipton nor Mr. Kornblum received a bonus for 2006.
Compensation Limitations
The Compensation Committee considered the potential future effects of Section 162(m) of the Internal Revenue Code on the compensation paid to the Company’s executive officers. Under Section 162(m) of the Internal Revenue Code, and regulations adopted thereunder by the Internal Revenue Service, publicly-held companies may be precluded from deducting certain compensation paid to an executive officer in excess of $1.0 million in a year. The regulations exclude from this limit performance-based compensation and stock options provided certain requirements, such as stockholder approval, are satisfied. The potential tax implications of Section 162(m) will continue to be evaluated with respect to Odimo’s strategies involving executive compensation.
Respectfully Submitted By:
MEMBERS OF THE COMPENSATION COMMITTEE
Sidney Feltenstein
Stanley Stern
Dated: March 26, 2007
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Stock Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 30, 2007, certain information with respect to the beneficial ownership of Odimo’s Common Stock by (i) each stockholder known by Odimo to be the beneficial owner of more than 5% of Odimo’s Common Stock, (ii) each director of Odimo, (iii) each executive officer named in the Summary Compensation Table above, and (iv) all directors and executive officers of Odimo as a group. This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G filed with the SEC.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the shares. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days after April 21, 2006, are deemed outstanding, while the shares are not deemed outstanding for purposes of computing percentage ownership of any other person. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.
Applicable percentage ownership in the following table is based on 7,038,958 shares of common stock outstanding as of March 30, 2007.
PRINCIPAL STOCKHOLDERS
*
Denotes less than 1%.
(1)
Lily Maya Family Trust (the “Lily Trust”) is the sole member of Elao, LLC, a Florida limited liability company. Alan Lipton is the sole trustee of the Lily Trust and his minor daughter Lily Maya Lipton is the sole lifetime beneficiary. Both the Lily Trust and Alan Lipton have shared voting and dispositive power with respect to these shares.
(2)
Messrs. Marxe and Greenhouse have shared voting and investment power over 119,042 shares of Common Stock owned by Special Situations Cayman Fund, L.P., 33,737 shares of Common Stock owned by Special Situations Fund III, L.P. and 384,977 shares of Common Stock owned by Special Situations Fund III QP, L.P. Messrs. Marxe and Greenhouse are the controlling principals of AWM Investment Company, Inc. (“AWM”), the general partner of and investment adviser to Special Situations Cayman Fund, L.P. AWM also serves as the general partner of MGP Advisers Limited Partnership, the general partner of and investment adviser to Special Situations Fund III, L.P. and general partner of Special Situations Fund III QP, L.P.
(3)
Rima Management, LLC and Richard Mashaal have shared voting and dispositive power over these shares.
(4)
Includes 1,682 shares held by Lipton Partnership, a general partnership in which Alan Lipton has a beneficial interest.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that our directors and executive officers and persons who own more than 10% of our common stock file initial reports of ownership and reports of changes of ownership with the SEC. Reporting persons are required by the SEC regulations to furnish us with copies of all Section 16(a) forms they file. These reports are available for review on our website at www.odimo.com under the section entitled Investor Relations - SEC Filings. Based solely on a review of these reports, we believe that all directors and executive officers complied with all Section 16(a) filing requirements for 2006.
Changes In Control
We are not aware of any arrangement that might result in a change of control in the future.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stanley Stern, a member of our Board of Directors is head of investment banking at Oppenheimer & Co. In May 2006, we paid Oppenheimer & Co. $300,000 as a fee for advisory and other related services in connection with our sale of our diamond and jewelry business assets to Ice.com.
As of March 26, 2007 we have borrowed from Alan Lipton, our Chairman of the Board of Directors the sum of $530,000. We issued to Mr. Lipton two separate 8% promissory notes in exchange for the funds (the “Notes”). Under one of the Notes (the “First Note”), $500,000 plus all interest under the First Note is repayable by the Company upon the earlier to occur of (a) January 16, 2010; or (ii) the occurrence of a change in control of the Company. Our repayment obligation under the First Note is secured by all of the Company’s assets. Under the other note, (the “Second Note”), $30,000 plus accrued interest is payable by the Company to Mr. Lipton on demand. Our repayment obligation under the Second Note is unsecured. We used the proceeds of the loans from Mr. Lipton for working capital purposes, including payment of our existing liabilities. We may seek to raise additional capital through the issuance of equity or debt , including loans from related parties, to acquire sufficient liquidity to satisfy our future liabilities. Such additional capital may not be available timely or on terms acceptable to us, if at all. Our plans to repay our liabilities as they become due may be impacted adversely by our inability to have sufficient liquid assets to satisfy our liabilities.
Payment for Use of Jet Aircraft
During 2005, we paid Mey-Al Corporation an aggregate amount of approximately $84,000 for the use of the aircraft. All amounts reimbursed were based on actual variable costs such as hourly fees for use of aircraft and fuel costs incurred by Mey-Al Corporation in connection with our usage of its aircraft. We did not reimburse Mey-Al Corporation for any fixed expenses such as management fees or aircraft maintenance fees. We made no payments to Mey-Al Corporation during 2006 for use of the aircraft.
General
We believe that all of the transactions set forth above that were consummated with parties that may be deemed to be affiliated with us were made on terms no less favorable to us than could have been obtained from unaffiliated third parties.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit and Non-Audit Fees
The following table sets forth fees billed to us by Rachlin Cohen & Holtz LLP for services provided during the period from September 2, 2005 until December 31, 2005 and for the year ended December 31, 2006:
The following table sets forth fees billed to us by Deloitte & Touche LLP for audit and audit related services provided for the period from January 1, 2005 until September 1, 2005. Audit related services consisted of accounting assistance related to our filing of a registration statement on Form S-1 and our initial public offering generally, which initial public offering closed in February 2005.
Audit Fees. Consists of fees billed for professional services rendered for the audit of Odimo’s consolidated financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by its independent registered accounting firms in connection with statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of Odimo’s financial statements and are not reported under “Audit Fees.” These services include audits of financial statements of employee benefit plans, accounting consultations related to acquisitions, attest services that are not required by statute or regulation and consultations regarding financial accounting and reporting standards.
Tax Fees. Odimo did not incur any additional fees under this category.
All Other Fees. Odimo did not incur any additional fees under this category.
Audit Committee Pre-Approval Policies And Procedures
The Audit Committee’s policy is to pre-approve all audit, audit-related and permissible non-audit services provided by the independent registered public accountants in order to assure that the provision of such services does not impair the auditor’s independence. These services may include audit services, audit-related services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Management is required to periodically report to the Audit Committee regarding the extent of
services provided by the independent registered public accountants in accordance with this pre-approval, and the fees for the services performed to date. During fiscal year 2006, all services were pre-approved by the Audit Committee in accordance with this policy.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report.
1.
The following financial statements of Odimo Incorporated and Reports of Rachlin Cohen & Holtz LLP and Deloitte & Touche LLP, independent registered public accounting firms, are included in this report:
2.
Financial statement schedule:
Schedule II - Valuation and Qualifying Accounts
Schedules not filed herewith are either not applicable, the required information is not material, or the required information is set forth in the consolidated financial statements or footnotes thereto.
3.
List of exhibits required by Item 601 of Regulation S-K. See part (b) below.
(b) Exhibits. The following exhibits are filed as a part of this report:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Schedules not filed herewith are either not applicable, the required information is not material, or the required information is set forth in the consolidated financial statements or footnotes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Odimo Incorporated
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of Odimo Incorporated and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the accompanying Index to Consolidated Financial Statements. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Odimo Incorporated and Subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule for the years ended December 31, 2006 and 2005, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered significant recurring net losses and negative net cash flows from operations and, as of December 31, 2006, reflects negative working capital and a stockholders’ equity deficiency. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans regarding these matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
March 29, 2007 except for the second
paragraph of Note 18
as to which the date
is April 1, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Odimo Incorporated:
We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of Odimo Incorporated and subsidiaries (the “Company”) for the year ended December 31, 2004. Our audit also included the financial statement schedule for the year ended December 31, 2004 listed in the accompanying Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the Company’s results of operations and cash flows for the year ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule for the year ended December 31, 2004, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 29, 2005
ODIMO, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
See notes to consolidated financial statements.
ODIMO, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
See notes to consolidated financial statements.
ODIMO, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
(in thousands, except per share data)
See notes to consolidated financial statements.
ODIMO, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See notes to consolidated financial statements.
ODIMO INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Prior to May 2006, the Company was an online retailer of high quality diamonds and fine jewelry, current season brand name watches and luxury goods through three websites, www.diamond.com, www.worldofwatches.com and www.ashford.com. In May 2006, the Company sold assets related to its online diamond and jewelry business operations, including the domain name www.diamond.com. In December 2006, the Company sold assets related to its online watch business operations, including its domain name www.worldofwatches.com. In February 2007, the Company entered into a renewable arrangement with Ice.com, Inc. (“Ice”) which initially runs through December 31, 2007, whereby Ice hosts the Company’s www.ashford.com homepage and visitors to its www.ashford.com website are redirected to websites owned and operated by Ice. The Company will earn commissions based on a percentage of gross sales made to customers of Ice’s websites who click through from www.ashford.com. Ice paid the Company a $70,000 refundable down payment against these commissions. Under this arrangement with Ice, the Company will not be the seller of record of any products sold. In addition, pursuant to this arrangement and for so long as the arrangement exists, the Company has granted to Ice a right of first refusal to acquire www.ashford.com. (See Note 4).
Basis of Presentation - The consolidated financial statements reflect the financial position and results of operations of Odimo Incorporated and its wholly-owned subsidiaries on a consolidated basis. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates include the reserve for sales returns, the carrying value of inventories and other long-lived assets, the deferred tax asset valuation reserve, and the estimated fair value of stock based compensation. Actual results could differ from those estimates.
Concentration of Risk - The Company maintains the majority of its cash and cash equivalents in accounts with one high quality financial institution in the United States of America, in the form of demand deposits and money market accounts. Deposits in this bank may exceed the amounts of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
During the years ended December 31, 2006, 2005 and 2004, the Company purchased a significant portion of its diamonds from several affiliated diamond suppliers. In addition, the Company purchased watches, jewelry and luxury goods from unaffiliated vendors with whom the Company did not maintain a contractual relationship. During the years ended December 31, 2006, 2005 and 2004, the Company did not purchase goods from any unaffiliated vendor that represented more than 10% of the Company’s total purchases from unaffiliated vendors.
Other Risks - The Company is subject to certain risks which include, but are not limited to: brand owners’ objections to the Company’s pricing on sales of merchandise purchased in the parallel markets, non-guaranteed supply of watches and luxury goods, the sale of decoded watches in certain states, susceptibility to general economic downturns, competition from traditional retailers, dependence on third-party carriers, dependence on the Internet and related security risks, and the uncertain ability to protect proprietary intellectual property.
Cash and Cash Equivalents - The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable - Accounts receivable are carried at amounts management deems collectible. Accordingly, an allowance is provided in the event an account is considered uncollectible. As of December 31, 2006 and 2005, no such allowances have been provided as management believes all accounts receivable are fully collectible.
Inventories - Inventories, which consist of brand name watches, luxury goods, diamonds, and diamond-related and fine jewelry are stated at the lower of cost (using the first-in, first-out method) or market. The Company records a write-down, as needed, to adjust the carrying amount of the specific inventory item to lower of cost or market. During the years ended December 31, 2006, 2005 and 2004, the Company recorded approximately $181,000, $49,000 and $40,000 of inventory write-downs. The Company also maintained consigned inventories, consisting primarily of diamonds and watches, of approximately $1.2 million as of December 31, 2005 which were displayed on the Company’s websites. The consigned diamonds (through March 2004) were under certain exclusive supply agreements with related parties (see Note 16). The cost of these consigned inventories and the related contingent obligation are not included in the Company’s consolidated balance sheets. At the time consigned inventories were sold and the sale was recorded, the Company also recorded the cost of the merchandise purchased in accounts payable and in cost of sales.
Property and Equipment - Property and equipment are stated at cost less accumulated depreciation. Maintenance costs are expensed as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized by the straight-line method over the remaining term of the applicable lease or their useful lives, whichever is shorter. The cost and related accumulated depreciation or amortization of assets sold or otherwise disposed of is removed from the accounts and the related gain or loss is reported in the consolidated statement of operations.
Software and Website Development Costs - The Company capitalizes internally developed software and website development costs in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use and Emerging Issues Task Force Issue 00-2, Accounting for Web Site Development Costs. Capitalized costs are amortized on a straight-line basis over the estimated useful life of the software once it is available for use. The ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to estimated economic life and changes in software and hardware technologies. During 2006, the Company recorded impairment charges related to capitalized software and development costs of approximately $3.2 million.
Long-Lived Assets - Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets is initially estimated by comparison of the carrying amount of the asset to the net future undiscounted cash flows expected to be generated by the asset. To the extent future undiscounted cash flows are less than the carrying amount, an impairment loss would be recognized. During 2006, the Company recorded impairment charges related to its property and equipment of approximately $2.2 million.
Goodwill - Goodwill represented the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of a business acquired in 2000 and accounted for under the purchase method.
Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). With the adoption of SFAS No. 142, goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value based test. The Company completed its annual assessment as of December 31, 2004 and determined that there was no impairment of goodwill. As of December 31, 2005, the Company performed its annual impairment analysis and determined that the goodwill was fully impaired and as a result recorded a $9.8 million impairment charge in the accompanying consolidated statement of operations (see Note 7).
Intangible Assets - Intangible assets are recorded at amortized cost and consist primarily of marketing-related intangible assets (trademarks, trade-names and Internet domain names). Intangible assets are amortized on a straight-line basis over their estimated useful life which range from 4 to 5 years.
Warranty Costs - The Company records an accrual for costs that it estimates will be needed to cover future product warranty obligations for watches sold. This estimate is based upon the Company’s historical experience as well as current sales levels.
Fair Value of Financial Instruments - The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and debt approximate their carrying fair values due to their short-term nature as of December 31, 2006 and 2005.
Revenue Recognition - Net sales consist of revenue from the sale of the Company’s products and upgrades to the Company’s standard free shipping, net of estimated returns and promotional discounts. The Company recognizes revenues when all of the following have occurred: persuasive evidence of an agreement with the customer exists; products are shipped and the customer takes delivery and assumes the risk of loss; the selling price is fixed or determinable; and collectibility of the selling price is reasonably
assured. The Company has evaluated Emerging Issues Task Force Issue 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and has determined that through December 31, 2006 it did not function as an agent or broker for its suppliers; therefore, the Company has recorded the gross amount of product sales and related costs instead of a net amount earned. Effective January 2007, under the terms of a renewable agreement with Ice (see Business note above) the Company will record the net amount earned as revenue.
The Company requires payment at the point of sale. Any amounts received prior to delivery of goods to customers are recorded as deferred revenue. As of December 31, 2005, the Company had deferred revenue of approximately $169,000 which is included in accrued liabilities in the accompanying consolidated balance sheets. The Company offers a return policy of generally 15 to 30 days and provides a reserve for sales returns during the period in which the sales are made. At December 31, 2005, the reserve for sales returns was approximately $312,000 and was recorded as an accrued liability in the accompanying consolidated balance sheets. Net sales and cost of sales reported in the consolidated statement of operations are reduced to reflect estimated returns.
Cost of Sales - Cost of sales includes the cost of products sold to customers, including inbound shipping costs and assembly costs. Cost of sales also includes amortization of the inventory-related intangible asset (see Note 8). For the years ended December 31, 2006, 2005 and 2004, the Company recorded amortization of approximately $206,000, $144,000, and $84,000, respectively, related to the inventory-related intangible asset, which is included in cost of sales in the accompanying consolidated statements of operations.
Fulfillment Expenses - Fulfillment expenses (approximately $1.4 million, $3.6 million, and $3.5 million for each of the years ended December 31, 2006, 2005 and 2004, respectively) include outbound freight paid by the Company, commissions paid to sales associates, credit card processing fees and packaging and other shipping supplies. Commissions are paid based on a percentage of the price of goods sold and are expensed when the goods are sold.
Marketing Expenses - Marketing expenses consist primarily of online advertising costs, affiliate program fees and commissions, public relations costs and other marketing expenses. Advertising costs are expensed as incurred. Costs of advertising associated with print and other media are expensed when such services are used. Costs associated with web portal advertising contracts are amortized over the period such advertising is expected to be used. Advertising expense was approximately $1.2 million, $3.6 million, and $4.0 million for each of the years ended December 31, 2006, 2005 and 2004, respectively.
General and Administrative Expenses - General and administrative expenses include payroll and related employee benefits (including employee stock-based compensation), costs to maintain the Company’s websites, professional fees, insurance, rent, travel and other general corporate expenses.
Stock-Based Compensation - The Company historically accounted for stock-based compensation paid to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (“APB Opinion 25”), Accounting for Stock Issued to Employees and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25 (“FIN 44”). Compensation for stock options granted to employees (including members of the board of directors), if any, was measured as the excess of the market price of the Company’s stock at the date of grant over the amount the employee must pay to purchase the stock. Any compensation expense related to such grants was deferred and amortized to expense over the vesting period of the related options.
Compensation expense related to options granted to non-employees was calculated using the fair-value based method of accounting prescribed by Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation (“SFAS No. 123”). SFAS No. 123 established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. The Company elected to account for stock options granted to employees, as prescribed by APB Opinion 25, and adopted the disclosure-only requirements of SFAS No. 123. Accordingly, prior to January 1, 2006, no employee compensation cost related to share-based awards was recognized in net income of the Company for these plans. However, on January 1, 2006, the Company prospectively adopted the provisions of SFAS 123R, Share-Based Payment, which requires all share-based awards to employees be recognized in the income statement based on their fair values. The Company had no unvested stock options as of January 1, 2006. No stock options were granted during 2006 nor were any options exercised during the period. As a result, there was no impact of SFAS 123R on the Company’s Consolidated Statements of Operations for the year ended December 31, 2006.
Had compensation cost for the Company’s stock options been determined based on the fair value of the options at the date of grant, the Company’s pro forma net loss attributable to common stockholders and net loss per share would have been as shown below (in thousands, except per share data):
The fair value of each option grant under the Company’s stock incentive plan is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average fair value of stock options granted during the year ended December 31, 2004 was $5.25. There were no options granted in 2006 or 2005. The following weighted average assumptions were used for grants for the year ended December 31, 2004.
Income Taxes - The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset and liability approach. Under this method, a deferred tax asset or liability is recognized with respect to all temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities and with respect to the benefit from utilizing tax loss carryforwards. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefit, or that future deductibility is prohibited or uncertain.
Loss Per Share - Basic loss per share is computed based on the average number of common shares outstanding and diluted earnings per share is computed based on the average number of common and potential common shares outstanding under the treasury stock method. The calculation of diluted loss per share was the same as the basic loss per share for each period presented since the inclusion of potential common stock in the computation would be antidilutive.
All of the Company’s outstanding convertible preferred stock, preferred stock warrants and stock options during the respective periods have been excluded from the calculations because the effect on net loss per share would have been antidilutive.
For the year ended December 31, 2005 and 2004, dividends to preferred stockholders include approximately $832,000 and $5.7 million, respectively, of undeclared dividends on the Company’s convertible preferred stock. For the year ended December 31, 2004 dividends to preferred stockholders also includes approximately $9.7 million related to the issuance of Series C convertible preferred stock to existing stockholders (see Notes 11 and 16). This amount represents the excess of the estimated fair value of the Series C preferred stock over the consideration received by the Company.
Segments - The Company has one operating segment, online retail of brand name watches, other luxury goods, diamonds, and fine jewelry. No foreign country or geographic area accounted for more than 10% of net sales in any of the periods presented and the Company does not have any long-lived assets located in foreign countries.
Stock Splits - On January 24, 2005, the Company effected a 1 for 25 reverse split of its common stock and convertible preferred stock. All references to the number of shares, per share amounts and any other references to shares in the accompanying consolidated financial statements and the notes, unless otherwise indicated, have been adjusted to reflect the reverse stock splits on a retroactive
basis. Previously awarded stock options and preferred stock warrants have been retroactively adjusted to reflect the reverse stock splits.
New Accounting Pronouncements-In February 2007, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We expect to adopt SFAS No. 159 on January 1, 2008 and has not yet determined the impact on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. Management believes the adoption of this pronouncement will not have a material impact on the Company’s consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulleting (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB No. 108 requires registrants to quantify misstatements using both an income statement and balance sheet approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that have been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings as of the beginning of the fiscal year of adoption. The Company has reviewed, and implemented, the provisions of SAB No. 108 as of December 31, 2006, and has determined that it did not have a material impact on its financial statements.
In July 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the statement of financial condition; and provides transition and interim-period guidance, among other provisions. The provisions of FIN 48 are effective as of the beginning of our first fiscal year that begins after December 15, 2006. Management is currently evaluating the impact of the adoption of this pronouncement; however, it is not expected to have a material impact on our consolidated financial position, results of operation or cash flows.
In March 2006, the FASB issued FASB Staff Position No. FAS 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140 (“FAS 156”). FAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value and requires additional disclosures and separate presentation in the statement of financial position of the carrying amounts of servicing assets and servicing liabilities that an entity elects to subsequently measure at fair value to address concerns about comparability that may result from the use of elective measurement methods. The provisions of this FASB Staff Position are effective as of the beginning of our first fiscal year that begins after September 15, 2006. Management believes the adoption of this pronouncement will not have a material impact on the Company’s consolidated financial statements.
2. GOING CONCERN CONSIDERATIONS
The financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the historical financial statements, the Company has incurred significant recurring net losses for the past several years and, as of December 31, 2006, reflects negative working capital and a stockholders’ equity deficiency. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans regarding these matters include the following courses of action.
As of December 31, 2006, the Company sold substantially all of its remaining inventory and ceased operations as an online retailer. Upon cessation of its online retail operations, except for its arrangement with Ice to host its www.ashford.com website, the Company has become a public shell company with limited, if any, operations and is
considering all available alternatives, including the acquisition of a new business and/or the redeployment of its remaining business assets. There can be no assurances that the Company will be successful in identifying acquisition candidates or that if identified it will be able to consummate a transaction on terms acceptable to the Company.
On January 5, 2007, the Company entered into an agreement with Ice.com for the sale of certain machinery and equipment for $250,000. As a result of the sale to Ice.com, the Company recorded an impairment charge of $5.4 million related to the sale of the Company’s computers, software and equipment as of December 31, 2006.
While the Company anticipates having sufficient liquid assets to satisfy its liabilities, if it does not have sufficient liquid assets to satisfy liabilities, the Company will seek to raise additional capital through the issuance of equity or debt including loans from related parties (See Note 10). Such additional capital may not be available timely or on terms acceptable to the Company, if at all. The Company’s plans to repay its liabilities as they become due may be impacted adversely by its inability to have sufficient liquid assets to satisfy liabilities. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
3. ASSET PURCHASE
In December 2002, the Company executed an asset purchase agreement (the “Agreement”) with Ashford.com Inc. (“Ashford”), a wholly-owned subsidiary of GSI Commerce, Inc. (“GSI”), setting forth the terms and conditions of the asset purchase. Pursuant to the Agreement, the Company purchased the www.ashford.com domain name and related trademarks and tradenames, incomplete individual customer information (e.g., e-mail addresses with no physical address, e-mail addresses with no additional corresponding customer information, names and addresses with no e-mail address, etc.) for customers who had placed orders through the www.ashford.com website during the nine months that GSI operated it (which did not include any customers prior to GSI’s acquisition of Ashford) (the “Purchased Assets”), and limited items of pre-selected remaining inventory (the “Pre-Selected Inventory”).
In consideration for the Purchased Assets, the Company issued GSI a $4.5 million secured subordinated note payable over five years and approximately 624,000 shares (and warrants to purchase approximately 107,000 shares) of the Company’s Series D Convertible Preferred Stock (the “Series D”) with an estimated fair value of approximately $2.7 million, for a total consideration of approximately $7.2 million. The Company has assigned the value of the total consideration given to a marketing related intangible asset with an estimated useful life of four years (see Note 6). None of the consideration given was assigned to a customer related intangible asset as the Company was able to subsequently determine that net sales to customers included as part of the incomplete individual customer information obtained was not significant compared to the Company’s total 2003 net sales.
To accommodate the purchase, the Company also purchased the Pre-Selected Inventory for approximately $1.1 million in cash.
In addition, per the Agreement, GSI has a right to receive 10% of the Company’s annual consolidated EBITDA, if positive, as defined in the Agreement (the “EBITDA Payment”), from 2003 through 2007 up to a maximum aggregate amount of $2.0 million. As of December 31, 2002, the Company could not determine if the conditions requiring the EBITDA Payment would be met and therefore did not record a liability as of December 31, 2002. The Company will record the EBITDA Payment when the conditions are met and the EBITDA Payment becomes due. The conditions requiring payment have not been met and therefore no amounts were recorded as of December 31, 2006 and 2005.
4. SALE OF ASSETS
Sale of Diamond.com URL and Certain Assets- On May 11, 2006 the Company sold to Ice.com, (“Ice”): (i) certain specified assets, including all if its rights to the domain name www.diamond.com, and related trademarks, copyrights, product images and other intangibles in exchange for $7.5 million; and (ii) the remaining diamond and jewelry inventory and corporate packaging for an additional $2.0 million, which represented the cost for the inventory and packaging, pursuant to the terms of an Asset Purchase Agreement and related agreements entered contemporaneous therewith.
Under the terms of the Asset Purchase Agreement with Ice, the Company received $9.0 million at the closing and Ice delivered $500,000 to an escrow agent to be held for six months as security for the Company’s indemnification and other obligations under the Purchase Agreement and related agreements. As a result of the sale, the Company became prohibited from engaging in the online retail sale of jewelry and diamonds. Copies of the Asset Purchase Agreement and the Transition Services Agreement were filed as Exhibits 10.1 and 10.2 to the Form 8-K the Company filed with the Securities and Exchange Commission on May 12, 2006.
In connection with the sale of the assets to Ice, the Company entered into a Transition Services Agreement which provides that for a period of up to 60 days, the Company shall provide to Ice certain services relating to the maintenance and operation of the diamond.com website, including technology support and fulfillment services. The Transition Services Agreement was terminated on June 9, 2006.
The Company paid a $300,000 fee for advisory and other related services in connection with this sale to Ice.com to a firm of which a member of the Board of Directors is the head of investment banking.
Contemporaneous with the closing of the sale of the assets to Ice, Alan Lipton and the Company entered into a Separation Agreement whereby, effective immediately, Mr. Lipton resigned as the Company’s Chief Executive Officer. Mr. Lipton remains as the Chairman of the Board of Directors of the Company. Under the Separation Agreement, Mr. Lipton received his salary through the effective date of his resignation and the Company agreed to pay up to $18,000 over a one year period for Mr. Lipton’s and his dependents’ health insurance premiums. In connection with his resignation as an officer of the Company, all of Mr. Lipton’s stock options granted to him by the Company have been cancelled. The Company appointed Jeff Kornblum, its Chief Operating Officer as Chief Executive Officer and President of the Company.
Contemporaneous with the closing of the sale of assets to Ice, the Company’s credit facility with Silicon Valley Bank was paid in full and terminated.
Sale of Worldofwatches.com URL and Certain Assets-On December 1, 2006, the Company sold to ILS Holdings, LLC, certain specified assets including all of its rights to the domain name www.worldofwatches.com and related trademarks, copyrights, images and other intangibles and selected equipment in exchange for $410,000 pursuant to the terms of an asset purchase agreement.
5. INVENTORIES
Inventories consist of the following (in thousands) as of:
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands) as of:
Depreciation expense amounted to approximately $1.9 million, $1.8 million, and $1.0 million for each of the years ended December 31, 2006, 2005 and 2004, respectively.
Capitalized software costs include external direct costs and internal direct labor and related employee benefits costs. Amortization begins in the period in which the software is ready for its intended use.
On January 5, 2007, the Company entered into an agreement with Ice.com for the sale of certain machinery and equipment for $250,000. As a result of the sale to Ice.com, the Company recorded an impairment charge of $5.4 million related to the sale of the Company’s computers, software and equipment as of December 31, 2006.
7. GOODWILL
The changes in the carrying amount of goodwill for the year ended December 31, 2005, are as follows:
The Company tested its goodwill for impairment under SFAS 142. Under step one, the overall enterprise value of the Company was assessed and was compared to the overall carrying value of the enterprise. Based on the results of this analysis, it was determined that the goodwill was fully impaired. Accordingly, a goodwill impairment loss of $9.8 million has been recognized in 2005.
8. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following (in thousands) as of:
During February 2005, approximately $2.6 million of deferred offering costs was netted in equity against the proceeds received from the initial public offering (IPO). Amortization expense for marketing-related intangible assets amounted to approximately $1.6 million, $1.8 million, and $1.8 million for each of the years ended December 31, 2006, 2005 and 2004. Amortization expense for inventory-related intangible assets is included in cost of sales (see Note 1).
The www.diamond.com domain name and the affinity phone number assets were fully amortized and the Company sold these assets during 2006 (see Note 4). In addition, during 2006, the Company terminated the 2004 Supply Agreement and the balance of $206,000 was written off (see Note 16).
During June 2004, the Company entered into an amended supply agreement with SDG Marketing, Inc. (“SDG”), which is affiliated with a stockholder, to supply diamond inventory (see Note 16). In connection with this transaction, the Company recorded an inventory-related intangible asset of approximately $0.4 million in June 2004, based on the estimated fair value of the supply agreement.
9. BANK CREDIT FACILITY
The Company had a credit facility which, as amended, allowed the Company to borrow up to either $10.0 million or $12.0 million depending on the time of year and subject to the Company’s inventory levels.
The Company repaid the amount outstanding during February 2005 with the proceeds from its IPO. The Company’s borrowing capacity decreased to either $5.0 million or $8.0 million depending on the time of year and subject to the Company’s inventory levels. There were no amounts outstanding as of December 31, 2005.
The Company’s credit facility was paid in full and terminated during 2006.
10. NOTE PAYABLE TO RELATED PARTY
As of December 31, 2006, Alan Lipton, the Chairman of the Board of Directors loaned to the Company the sum of $300,000, which amount was increased as of February 16, 2007 to $400,000, further increased to $500,000 on March 1, 2007 and further increased to $530,000 on March 21, 2007. The Company issued to Mr. Lipton two separate 8% promissory notes in exchange for the funds (the “Notes”). Under one of the Notes (the “First Note”), $500,000 plus all interest under the First Note is repayable by the Company upon the earlier to occur of (a) January 16, 2010; or (ii) the occurrence of a change in control of the Company. The Company’s repayment obligation under the First Note is secured by all of the Company’s assets. Under the other note, (the “Second Note”), $30,000 plus accrued interest is payable by the Company to Mr. Lipton on demand. The Company’s repayment obligation under the Second Note is unsecured.
Inasmuch as it is presently undeterminable as to if and when a change in control may occur, this obligation has been presented as a long-term obligation in the accompanying financial statements as of December 31, 2006.
11. STOCKHOLDER NOTES
As discussed in Note 3, during December 2002, the Company issued a five year $4.5 million secured subordinated note as part of the purchase price of the Purchased Assets. The secured subordinated note bore interest at 7% per annum, and required quarterly principal payments of $225,000 which commenced in March 2003 and was to conclude in December 2007. Interest was payable quarterly in arrears at the same time the quarterly principal payments were required. The secured subordinated note was collateralized by a lien on substantially all of the Company’s assets and was subordinate to any indebtedness to fund the Company’s working capital requirements.
During October 2002, the Company issued to existing stockholders $2.0 million of secured subordinated notes with warrants to purchase approximately 43,000 shares of Series C convertible preferred stock (Series C). The secured subordinated notes bore interest at 8% per annum, and were scheduled to mature on December 31, 2002. In December 2002, the notes were subsequently amended and restated whereby the maturity date was extended to December 31, 2004. No other terms of the notes were amended or restated. The notes were secured by a first priority security interest in all of the Company’s right, title and interest in and to all of the assets of the Company. The warrants were valued at approximately $375,000 (see Note 14) and were recorded as a discount on the notes. The Company recognized interest expense related to the amortization of the discount on the notes of approximately $174,000 during the year ended December 31, 2004.
In March 2004, $2.0 million of stockholder notes and accrued interest of approximately $211,000 were exchanged for approximately 223,000 shares of Series C, with warrants to purchase approximately 34,000 shares of Series C at approximately $9.00 per share. The Series C and warrants were valued at approximately $6.4 million based on the estimated fair value of the Company’s Series C with consideration given to the anticipated initial public offering. The warrants were exercisable effective March 20, 2004 and were to expire March 20, 2014. The difference of approximately $4.1 million between the estimated fair value of the Series C and warrants and the approximately $2.3 million carrying value (including approximately $211,000 of accrued interest) of the stockholder notes was recorded as a preferred dividend to the Series C stockholders.
In April 2004, $730,000 of stockholder notes were exchanged for approximately 82,000 shares of Series C, with warrants to purchase approximately 12,000 shares of Series C at approximately $9.00 per share. The Series C and warrants were valued at approximately $2.4 million based on the estimated fair value of the Company’s Series C with consideration given to the anticipated initial public offering. The warrants were exercisable effective April 28, 2004 and were to expire April 28, 2014. The difference of approximately $1.6 million between the estimated fair value of the Series C and warrants and the $730,000 carrying value of the stockholder notes was recorded as a preferred dividend to the Series C stockholder.
In August 2004, the balance of the stockholder notes were repaid with proceeds from the new bank credit facility discussed in Note 9.
In February 2005, all warrants were exercised immediately prior to the completion of the Company’s initial public offering. See Note 17.
12. INCOME TAXES
A reconciliation of the statutory Federal income tax rate to the effective income tax rate for the year ended December 31 is as follows (in thousands, except tax rates):
Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets are as follows (in thousands) as of:
At December 31, 2006 the Company had net operating loss carryforwards available for tax purposes of approximately $74.3 million. These carryforwards expire in varying amounts and in various years from 2019 through 2026. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the utilization of net operating loss carryforwards may be limited if the Company experiences a cumulative change in ownership of greater than 50% in a moving three year period. Due to issuance of additional shares of the Company’s common stock and the conversions of the preferred stock into common stock since February 2005, and various significant changes in the Company’s ownership interests as defined in the Code, the Company has subsequently substantially limited the availability of its net operating loss carryforwards. As a result of these limitations, a portion or all of the Company’s net operating loss carryforwards may expire without being used.
13. COMMITMENTS AND CONTINGENCIES
Leases - The Company was obligated under a non-cancelable operating lease agreement relating to the Company’s offices and warehouse facilities, which expired in December 2005. During July 2004, the Company entered into a new non-cancelable operating lease for an additional warehouse facility and distribution center that expires in 2010. The Company moved its corporate offices to this facility in March 2006.
In December 2006, the Company terminated its lease agreement for its corporate office space by delivering to its landlord $500,000 and releasing its rights to a security deposit of approximately $80,000. The Company has relocated its office space and leases offices on a month to month basis. Rent expense under these operating leases totaled approximately $632,000, $590,000, and $485,000 for the years ended December 31, 2006, 2005, and 2004, respectively, and includes payments for operating expenses, such as sales and property taxes and insurance.
Litigation - From time to time, the Company is subject to legal proceedings and claims, including complaints from trademark owners objecting to the Company’s sales of their products below manufacturer’s retail pricing, and/or threatening litigation, in the ordinary course of business. Management currently believes, after considering a number of factors and the nature of the contingencies to which the Company is subject, that the ultimate disposition of these contingencies either cannot be determined at the present time or will not have, individually or in the aggregate, a material adverse effect on its financial position or results of operations.
The Company is currently a party to a proceeding with an uncertain outcome, which could result in significant judgments against the Company. In January 2006, the Company was served with a complaint which was a consolidation of two previously served complaints. The consolidated complaint names the Company, its Chief Executive Officer and President and Chairman of the Board of Directors and its Chief Financial Officer as defendants and is pending in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida on behalf of a purported class of purchasers of the Company’s common stock in or traceable to its initial public offering. The complaint generally alleges that the Company and the other defendants violated Sections 11, 12(a) (2) and 15 of the Securities Act of 1933 due to allegedly false and misleading statements in public disclosures in connection with its initial public offering regarding the impact to its operations of advertising expenses. The Company believes that the lawsuits are without merit and intend to vigorously defend itself. The Company and the individual defendants have filed an answer to the consolidated complaint
and the parties have exchanged initial discovery and interrogatories. As discovery has only proceeded through the very preliminary stages, the Company is currently unable to predict the outcome of the actions or the length of time it will take to resolve the actions.
The Company acquired most of the brand name watches and luxury goods products it sold through the parallel market (products are not obtained directly from the brand owners or their authorized distributors). The Company received in the past communications from brand owners alleging that certain items sold through the Company’s websites infringe on such brand owners’ trademarks, patents, copyrights and other intellectual property rights. The Company is also subject to lawsuits by brand owners and their authorized distributors based on infringement claims.
Employment Agreements - In July 2004 (and as amended in August 2004), the Company entered into employment agreements with four of its executives which provide for an initial term of three years with successive one year extensions unless the Company or the employee provides notice of the intent not to renew the agreement. Under such agreements, the base salaries of these executives collectively amount to $910,000 per year, plus discretionary annual cash bonuses determined by the Company’s board of directors. The agreements also contain certain “non-compete” and “change of control” provisions.
In May 2006, Alan Lipton and the Company entered into a Separation Agreement whereby, effective immediately, Mr. Lipton resigned as the Company’s Chief Executive Officer. Mr. Lipton remains as the Chairman of the Board of Directors of the Company. Under the Separation Agreement, Mr. Lipton received his salary through the effective date of his resignation and the Company agreed to pay up to $18,000 over a one year period for Mr. Lipton’s and his dependents’ health insurance premiums. In connection with his resignation as an officer of the Company, all of Mr. Lipton’s stock options granted to him by the Company have been cancelled. The Company appointed Jeff Kornblum, its Chief Operating Officer as Chief Executive Officer and President of the Company.
On January 16, 2007, Jeffrey Kornblum, the Company’s Chief Executive Officer and President and George Grous, the Company’s Chief Technology Officer each entered into Separation Agreements with the Company whereby, effective immediately, Messrs. Kornblum and Grous resigned their positions with the Company. Under the Separation Agreements, Messrs. Kornblum and Grous received their salaries through January 15, 2007 and $50,000. In addition, all stock options granted to each of Messrs. Kornblum and Grous have been cancelled.
On January 16, 2007, the Company and Amerisa Kornblum, its Chief Financial Officer and Treasurer entered into a Termination Agreement whereby Ms. Kornblum’s employment agreement was terminated. Under the Termination Agreement, Ms. Kornblum received her salary through January 15, 2007 and $50,000. In addition, all stock options granted to Ms. Kornblum have been cancelled. Ms. Kornblum has agreed to continue to be employed by the Company as its Chief Financial Officer and in addition, serve as its Acting Chief Executive Officer on a month to month basis pursuant to an oral agreement at a base salary of $2,500 per month.
14. CONVERTIBLE PREFERRED STOCK
The Company has authorized 50,000,000 shares of convertible preferred stock as of December 31, 2005. No shares were outstanding as of December 31, 2005. The Company had authorized and outstanding approximately 2,370,000 shares of convertible preferred stock as of December 31, 2004. Shares of convertible preferred stock may be issued from time to time in one or more series, with designations, preferences, and limitations established by the Company’s board of directors. The Company has designated four series of convertible preferred stock: Series A, B, C and D. All series of convertible preferred stock are at $0.001 par value.
The following table summarizes information about convertible preferred stock for the years ended December 31 (in thousands):
Conversion and Dividend Features - Each share of Series A, B, C and D is convertible, at the option of the holder, into shares of the Company’s common stock at any time. Additionally, the shares are mandatorily convertible into common stock upon the Company completing an IPO which results in net proceeds to the Company of at least $30 million and the value of the Company immediately prior to such IPO is at least $150 million. The Company entered into a warrant exercise and preferred stock conversion agreement which amended the mandatory conversion feature of the Preferred Stock to provide that the Preferred Shares are mandatorily convertible into common stock upon the Company completing an IPO closing (the “Conversion Agreement”, see Note 17).
The holders of Series D convertible preferred stock are entitled to receive dividends at a rate of 8% per annum of the original Series D issue price prior to any dividend distributions being made by the Company to any of its other stockholders. Subject to the prior rights of Series D, the holders of Series C, and subject to the prior rights of Series D and C, the holders of Series B, and subject to the prior rights of Series D, C and B, the holders of Series A are also entitled to receive dividends at a rate of 8% per annum. Dividends will be payable when and if declared by the board of directors and shall be cumulative, except for Series A. To date, the board of directors has not declared any such dividends.
Common shares issuable upon conversion for Series B in the tables above include approximately 37,000 shares issuable to Series B holders as a result of anti-dilution adjustment provisions of the Series B.
Liquidation Preferences - In the event of any liquidation, dissolution or winding up of the Company or upon any event which constitutes a deemed liquidation event, either voluntary or involuntary, any payments or distributions to be received by the stockholders of the Company shall be made in the order of priority as follows:
•
Holders of Series D preferred stock are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the other stockholders including holders of any other series of convertible preferred stock, by reason of their ownership thereof, in cash, an amount per share equal to (a) if the valuation of the Company in connection with a liquidation event is $70 million or less, then 10% of such valuation amount, plus any accrued but unpaid dividends, or (b) if the valuation amount is more than $70 million, then $7 million plus 20% of the valuation amount in excess of $70 million, plus any accrued but unpaid dividends. If the assets are insufficient to permit payment of the Series D liquidation amount in full to all holders of Series D, the assets will be distributed ratably to the holders of Series D in proportion to the amount each such holder would otherwise be entitled to receive.
•
After payment of the Series D liquidation amount to the holders of Series D to the extent there are additional assets available for distribution to stockholders, the holders of Series C are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Series A, Series B and common stockholders, by reason of their ownership thereof, in cash, an amount per share equal to two times the original Series C issue price, plus any accrued but unpaid dividends. If the assets are insufficient to permit payment of the Series C liquidation amount in full to all holders of Series C, the assets will be distributed ratably to the holders of Series C in proportion to the amount each such holder would otherwise be entitled to receive.
•
After payment of the Series C liquidation amount to the holders of Series C to the extent there are additional assets available for distribution to stockholders, the holders of Series B are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Series A and common stockholders, by reason of their ownership thereof, in cash, an amount per share equal to the original Series B issue price, plus any accrued but unpaid dividends. If the assets are insufficient to permit payment of the Series B liquidation amount in full to all holders of Series B, the assets will be distributed ratably to the holders of Series B in proportion to the amount each such holder would otherwise be entitled to receive.
•
After payment of the Series B liquidation amount to the holders of Series B to the extent there are additional assets available for distribution to stockholders, the holders of Series A are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the common stockholders, by reason of their ownership thereof, in cash, an amount per share equal to the original Series A issue price, plus any accrued but unpaid dividends.
Preferred Stock Warrants - In 2002, in connection with the issuance of $2.0 million in stockholder notes (see Note 10), the Company issued warrants to purchase approximately 43,000 shares of Series C at $9.00 per share. The warrants were valued at approximately $375,000 as determined using the Black-Scholes option-pricing model and were recorded as a discount on the notes. The warrants are exercisable effective December 31, 2002 and expire December 31, 2012.
Additionally, in 2002, in connection with the issuance of Series D (see Note 4), the Company issued warrants to purchase 107,000 shares of Series D at $0.25 per share. The warrants were valued at approximately $384,000, as determined using the Black-Scholes option-pricing model and taking into effect the liquidation preferences. The warrants are exercisable effective December 6, 2002 and expire December 6, 2012.
In connection with the September 2003 issuance of Series C discussed above, the Company issued warrants to purchase approximately 8,000 shares of Series C at approximately $9.00 per share. The warrants were valued at approximately $73,000 as determined using the Black-Scholes option-pricing model. The warrants are exercisable effective September 15, 2003 and expire September 14, 2013.
Additionally, in 2003, in connection with the issuance of $3.0 million of stockholder notes, the Company issued warrants to purchase approximately 50,000 shares of Series C at approximately $9.00 per share. The warrants were valued at approximately $436,000 as determined using the Black-Scholes option-pricing model and were recorded as a discount on the notes and amortized to interest expense. In December 2003, the $3.0 million of stockholder notes were repaid by the Company. The warrants are exercisable effective September 15, 2003 and expire September 14, 2013.
During March 2004 and April 2004, the Company issued warrants to purchase approximately 34,000 shares and 12,000 shares, respectively, of Series C (see Note 11).
The following table summarizes information about warrants outstanding to acquire convertible preferred stock (amounts in thousands, except exercise price) as of:
The fair value of the warrants issued during 2004 was estimated using the following assumptions:
As of December 31, 2004, the Company had approximately 3,268,000 shares of common stock reserved for future conversions of convertible preferred stock and warrants. All shares of convertible preferred stock and warrants were converted immediately prior to the Company’s IPO in February 2005. (See Note 17).
15. STOCK OPTION PLAN
The Company adopted its employee stock option plan in 1999. The Plan was amended in April 2004 and renamed the Odimo Incorporated Amended and Restated Stock Incentive Plan (the “Plan”) and reserved for issuance an aggregate of 559,391 shares under the Plan. The Plan is administered by the compensation committee of the board of directors, which has discretion over who will receive awards, the type of the awards, the number of shares awarded, and the vesting terms of the awards. Options granted under the Plan generally vest ratably over the vesting period, which is generally 3 years. Vested options expire 2 to 10 years after vesting. Once vested, the options become exercisable upon the occurrence of a “realization” event (i.e., an IPO, merger, etc.) as defined in the Plan. Upon either an involuntary or voluntary termination of employment, vested options are not forfeited, and must be exercised within three months after a “realization” event. Options granted under the Plan are generally granted at fair value on the date of the grant. The Company has historically determined the fair value of its shares through the consideration of previous sales of shares to third parties and independent appraisals.
During 2004 the Company granted employees options to purchase approximately 290,000 shares of common stock at an exercise price of $8.75 per share, of which approximately 1,000 shares vest over 3 years and the remaining shares vested immediately. Two-thirds of the shares issuable under these options are subject to contractual restrictions on transfer: one-third of the shares issuable upon exercise of the options may only be transferred after the first anniversary of the grant date, and one-third may only be transferred after the second anniversary grant date. The Company recorded approximately $4.7 million of stock-based compensation expense, based on the estimated fair value of the Company’s common stock, with consideration given to the anticipated initial public offering.
During the year ended December 31, 2004 the Company recorded expense of $7,000 related to the issuance of stock options to non-employees which is included in general and administrative expenses in the accompanying consolidated statements of operations.
There were no stock options granted to non-employees during 2006 and 2005.
The stock option transactions related to the Plan are summarized as follows (in thousands, except weighted average exercise price) for the years ended December 31 2006, 2005 and 2004:
The following table summarizes information regarding outstanding stock options at December 31, 2006:
16. RELATED PARTY TRANSACTIONS
Diamond and Jewelry Purchases and Sales - The Company purchased certain of its diamonds from SDG, and certain other entities (collectively, the “Suppliers”) affiliated with certain stockholders and directors of the Company. During each of the years ended December 31, 2006, 2005 and 2004, purchases from the Suppliers totaled approximately $584,000, $8.7 million, and $9.4 million, respectively. In addition, the Company purchased approximately $1.9 million of jewelry from SDG in 2005. As of December 31, 2005 the total amount payable to the Suppliers was approximately $3.3 million. During 2004 the Company sold approximately $0.3 million of diamonds to entities affiliated with certain stockholders. These diamonds were purchased from unaffiliated parties.
Supply Agreement - Certain of the purchases described above were made under exclusive supply agreements that were entered into with these entities in January 2000. Pursuant to the terms of these agreements, the Suppliers would supply the Company on consignment an inventory of diamonds to be held at the Company’s offices and a list of certain Suppliers’ inventory to be available for advertisement and display on the Company’s web site.
During 2000, in connection with the exclusive supply agreements, the Company issued approximately 49,000 shares of common stock at a price of $15.00 per share to the Suppliers or their affiliates. The Company received cash proceeds of approximately $740,000 from the sale of this common stock. Management estimated the fair value of the Company’s common stock at such date was $47.75 per share. As such, the Company recorded a deferred charge related to these issuances in the amount of approximately $1,616,000. This deferred charge, which is included in intangible assets as the “2000 Supply Agreement” (see Note 7), was being amortized to cost of sales (see Note 1) based on the total amount of estimated purchases under the terms of the agreement. In connection with the 2004 Supply Agreement entered into in March 2004 (as described below), which decreased the Company’s emphasis on consigned inventory, the Company terminated the exclusive supply agreements that were entered into in January 2000.
Stock Purchase and Supply Agreement - In March 2004, the Company entered into an agreement with SDG, pursuant to which SDG was to provide the Company with $4.0 million of independently certified diamonds through April 2007 at cash market prices with extended payment terms. The Company sold to SDG approximately 129,000 shares of Series C at $9.75 per share in March 2004 and extended a right to this affiliate to acquire an additional approximately 73,000 shares at $10.25 per share in the first quarter of 2005 and approximately 67,000 shares at $11.25 per share in the first quarter of 2006. In order to purchase the second installment of shares, SDG was to maintain a $4.0 million supply of available inventory during 2004. In order to purchase the third installment of shares, SDG was to maintain $5.0 million of available inventory during 2005. If SDG purchased the third installment, it was to supply the Company with $6.0 million of diamond inventory shortly thereafter. In addition, the Company granted SDG the right of first refusal to provide the Company diamonds and fine jewelry based on the Company’s projected purchase needs.
During June 2004, the Company amended the stock purchase agreement whereby SDG was no longer required to maintain the indicated level of inventory in order to obtain the right to purchase the remaining shares under the terms of the original agreement. Upon execution of the amended agreement, SDG exercised its right to purchase the remaining shares, for which the Company received $1.5 million during June 2004. In addition, during June 2004 the Company entered into a separate supply agreement which obligated SDG to supply inventory that included similar terms related to the supply of available inventory through 2006 as described above. In connection with this transaction, the Company recorded preferred dividends of approximately $2.2 million and $1.7 million during March 2004 and June 2004, respectively, based on the excess of the estimated fair value of the Company’s Series C (with consideration given to the anticipated initial public offering) over the consideration received by the Company.
Due to the decreasing percentage of the Company’s diamond sales being derived from diamonds supplied by SDG, and the comparably greater risks of holding and carrying inventory, during the first quarter of 2006, the Company commenced discussions to wind down the supply agreement with SDG Marketing with the objective of reducing the risks and carrying costs of holding inventory. In March 2006, the Company entered into a Termination Agreement with SDG Marketing, Inc. whereby the Supply Agreement was terminated. As part of the termination of the Supply Agreement, in March 2006 the Company returned approximately $4.0 million of diamond inventory against a related party payable to SDG Marketing and approximately $700,000 of diamond inventory as payment in kind to satisfy a $700,000 payable.
Other Inventory Purchases-The Company purchased watches from an entity controlled by a stockholder who formerly owned and controlled www.worldofwatches.com. During each of the years ended December 31, 2006, 2005 and 2004, the Company had purchases from the entity controlled by the stockholder of approximately $313,000, $1.2 million, and $2.9 million, respectively. As of December 31, 2006 and 2005, there were no amounts payable to the entity controlled by the stockholder.
Use of Jet Aircraft-During 2005 and 2004, the Company reimbursed Mey-Al Corporation, an entity owned and controlled by the Company’s then President and CEO, for the use of an aircraft by the executive officers of the Company for business-related purposes. For each of the years ended December 31, 2005 and 2004, the Company paid Mey-Al Corporation an aggregate amount of approximately $84,000 for the use of the aircraft. There were no payments to Mey-Al Corporation during 2006 for use of the aircraft.
17. INITIAL PUBLIC OFFERING
The Company completed an initial public offering of 3,125,000 shares of common stock at $9.00 per share on February 15, 2005 (closed on February 18, 2005), which generated net proceeds of approximately $22.4 million. On the same date, in accordance with the Conversion Agreement described in Note 11, holders of the Company’s preferred stock warrants, exercised their warrants into approximately 147,000 and 107,000 shares of Series C and Series D, respectively. These exercises generated proceeds of approximately $1.4 million for the Company. In addition, all holders of the Company’s Series A, B, C and D (including the shares from the exercise of warrants) converted these shares into approximately 3,408,000 shares of common stock.
18. SUBSEQUENT EVENTS
On February 5, 2007, the Company entered into a renewable agreement with Ice.com, Inc. (“Ice”) which initially runs through December 31, 2007, whereby Ice will host the Company’s www.ashford.com homepage and visitors to its www.ashford.com website will be redirected to websites owned and operated by Ice. The Company will earn commissions based on a percentage of gross sales made to customers of Ice’s websites who click through from www.ashford.com. Ice paid the Company a $70,000 refundable down payment against these commissions. Under this agreement with Ice, the Company will not be the seller of record of any products sold. In addition, pursuant to this arrangement and for so long as the arrangement exists, the Company has granted to Ice a right of first refusal to acquire www.ashford.com.
On March 27, 2007, the Company entered into a letter of intent with an unrelated third party to sell all of its rights to the domain name www.ashford.com and related intellectual property rights, product images and other intangibles for $300,000 which purchase price was increased to $400,000 on April 1, 2007 subject to the transaction closing on or prior to April 11, 2007. As part of the letter of intent, the Company received a non-refundable deposit of $100,000 against the anticipated purchase price. The closing of the sale of these assets is subject to the execution of a definitive agreement and due diligence. There can be no assurances that Odimo will close the sale of these assets.
19. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected financial information for the quarterly periods in 2006 and 2005 is presented below:
ODIMO INCORPORATED AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(1)
Consists of actual sales returns in each period.