##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended March 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to Commission file number 000-51161 Odimo Incorporated (Exact name of registrant as specified in its charter)
 Delaware
    
    22-3607813(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 14001 N.W. 4th Street, Sunrise, Florida
    
    33325(Address of principal executive offices)
    
    (Zip Code)
 (954) 835-2233(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934).Yes o No x As of May 11, 2005, the registrant had 7,161,923 shares of common stock outstanding.




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##### Table of Contents



ODIMO INCORPORATED  
 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
    
    
    3ITEM 1. Financial Statements
    
    
    3ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    32ITEM 4. CONTROLS AND PROCEDURES
    
    
    32PART II. OTHER INFORMATION
    
    
    33ITEM 1. LEGAL PROCEEDINGS
    
    
    33ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    33ITEM 6. EXHIBITS
    
    
    33SIGNATURES
    
    
    36Section 302 CEO CertificationSection 302 CEO CertificationSection 906 CEO CertificationSection 906 CFO Certification
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements ODIMO INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(Unaudited) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    7,627
    
    
    $
    1,663Restricted cash
    
    
    906
    
    
    
    813Accounts receivable
    
    
    449
    
    
    
    476Inventories
    
    
    12,970
    
    
    
    14,321Deposits with vendors
    
    
    1,201
    
    
    
    660Prepaid expenses and other current assets
    
    
    1,442
    
    
    
    961Total current assets
    
    
    24,595
    
    
    
    18,894PROPERTY AND EQUIPMENT  net
    
    
    5,643
    
    
    
    5,320GOODWILL
    
    
    9,792
    
    
    
    9,792INTANGIBLE AND OTHER ASSETS  net
    
    
    3,463
    
    
    
    6,504TOTAL
    
    $
    43,493
    
    
    $
    40,510LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    7,901
    
    
    $
    10,833Accounts payable to related parties
    
    
    1,961
    
    
    
    5,691Accrued liabilities
    
    
    1,481
    
    
    
    3,499Bank credit facility
    
    
    
    
    
    
    9,282Total liabilities
    
    
    11,343
    
    
    
    29,305COMMITMENTS AND CONTINGENCIES (Note 7)STOCKHOLDERS EQUITY:Preferred stock, $0.001 par value,
50,000 and 2,370 shares authorized; 0
and 2,370 shares issued and outstanding
at March 31, 2005 and December 31, 2004
respectively (liquidation value of
$139,271 at December 31, 2004)
    
    
    
    
    
    
    3Common stock, $0.001 par value, 300,000
shares authorized at March 31, 2005 and
4,800 shares authorized at December 31,
2004; 7,162 and 629 shares issued and
outstanding at March 31, 2005 and
December 31, 2004, respectively
    
    
    7
    
    
    
    1Additional paid-in capital
    
    
    103,765
    
    
    
    80,074Accumulated deficit
    
    
    (71,622
    )
    
    
    (68,873
    )Total stockholders equity
    
    
    32,150
    
    
    
    11,205TOTAL
    
    $
    43,493
    
    
    $
    40,510
 See notes to condensed consolidated financial statements 3




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ODIMO INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited) Three months endedMarch 31,
    
    
    March 31,2005
    
    
    2004NET SALES
    
    $
    12,784
    
    
    $
    10,444COST OF SALES
    
    
    9,532
    
    
    
    7,376Gross profit
    
    
    3,252
    
    
    
    3,068OPERATING EXPENSES:Fulfillment(1)
    
    
    888
    
    
    
    669Marketing(1)
    
    
    1,718
    
    
    
    1,113General and administrative(1)
    
    
    2,467
    
    
    
    6,667Depreciation and amortization
    
    
    852
    
    
    
    749Total operating expenses
    
    
    5,925
    
    
    
    9,198LOSS FROM OPERATIONS
    
    
    (2,673
    )
    
    
    (6,130
    )INTEREST EXPENSE, Net
    
    
    (76
    )
    
    
    (253
    )NET LOSS
    
    
    (2,749
    )
    
    
    (6,383
    )DIVIDENDS TO PREFERRED STOCKHOLDERS
    
    
    (832
    )
    
    
    (7,467
    )NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS
    
    $
    ( 3,581
    )
    
    $
    (13,850
    )Net loss per common share attributable
to common stockholders:Basic and diluted
    
    $
    (0.97
    )
    
    $
    (22.02
    )Weighted average number of shares:Basic and diluted
    
    
    3,677
    
    
    
    629
   (1)
    
    Non-cash stock-based compensation included in these amounts are as follows: Fulfillment
    
    $
    
    
    
    $
    Marketing
    
    
    
    
    
    
    General and administrative
    
    
    
    
    
    
    4,689$
    
    
    
    $
    4,689
 See notes to condensed consolidated financial statements 4




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ODIMO INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
(Unaudited) Preferred Stock
    
    
    Common Stock
    
    
    Additional
    
    
    
    
    
    
    TotalPar
    
    
    
    
    
    
    Par
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Value
    
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    EquityBALANCE December 31, 2004
    
    
    2,370
    
    
    $
    3
    
    
    
    629
    
    
    $
    1
    
    
    $
    80,074
    
    
    $
    (68,873
    )
    
    $
    11,205Proceeds from exercise of warrants
    
    
    254
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,349
    
    
    
    
    
    
    
    1,349Conversion of convertible preferred stock to common stock
    
    
    (2,624
    )
    
    
    (3
    )
    
    
    3,408
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock, net of offering expenses
    
    
    
    
    
    
    
    
    
    
    3,125
    
    
    
    3
    
    
    
    22,342
    
    
    
    
    
    
    
    22,345Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,749
    )
    
    
    (2,749
    )BALANCE March 31, 2005
    
    
    
    
    
    $
    
    
    
    
    7,162
    
    
    $
    7
    
    
    $
    103,765
    
    
    $
    (71,622
    )
    
    $
    32,150
 See notes to condensed consolidated financial statements 5




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ODIMO INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Three months endedMarch 31,2005
    
    
    2004OPERATING ACTIVITIES:Net loss
    
    $
    (2,749
    )
    
    $
    (6,383
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    852
    
    
    
    749Stock-based compensation
    
    
    
    
    
    
    4,689Amortization of supply agreement
    
    
    36
    
    
    
    5Amortization of discount on stockholder notes
    
    
    
    
    
    
    87Changes in operating assets and liabilities:Increase in restricted cash
    
    
    (93
    )
    
    
    (65
    )Decrease in accounts receivable
    
    
    27
    
    
    
    84Decrease (increase) in inventories
    
    
    1,351
    
    
    
    (37
    )(Increase) decrease in deposits with vendors
    
    
    (541
    )
    
    
    226Increase in prepaid expenses and other current assets
    
    
    (481
    )
    
    
    (360
    )Decrease (increase) in other assets
    
    
    2,556
    
    
    
    (147
    )Decrease in accounts payable
    
    
    (2,931
    )
    
    
    (2,659
    )Decrease in accounts payable to related parties
    
    
    (3,730
    )
    
    
    (424
    )Decrease in accrued liabilities
    
    
    (2,018
    )
    
    
    (1,357
    )Net cash used in operating activities
    
    
    (7,721
    )
    
    
    (5,592
    )INVESTING ACTIVITIES -Purchase of property and equipment
    
    
    (727
    )
    
    
    (301
    )FINANCING ACTIVITIES:Payments on stockholder notes
    
    
    
    
    
    
    (225
    )Net(repayments of) borrowings under bank credit facility
    
    
    (9,282
    )
    
    
    1,500Proceeds from exercise of warrants
    
    
    1,349Proceeds from issuance of common stock, net of expenses
    
    
    22,345Net cash provided by financing activities
    
    
    14,412
    
    
    
    1,275INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    5,964
    
    
    
    (4,618
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    1,663
    
    
    
    5,135CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    7,627
    
    
    $
    517SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid
    
    $
    76
    
    
    $
    63SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Exchange of stockholder notes (including accrued interest of $211) for
convertible preferred stock and warrants
    
    
    
    
    
    $
    2,266
 See notes to condensed consolidated financial statements 6




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ODIMO INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(in thousands)
(Unaudited) 1. GENERAL Business- Odimo Incorporated and subsidiaries (the Company) is an online retailer of brand name
watches, luxury goods, high quality diamonds and fine jewelry. The Company was incorporated in
January 1998 and is based in Sunrise, Florida. The Company currently operates three web sites,
www.diamond.com, www.ashford.com, and www.worldofwatches.com. Operating Losses and Liquidity- The Company has had significant losses since inception and has not
generated positive net cash flows from operations. Based on the Companys strategy for 2005, the
Company believes that its current cash and cash equivalents, availability from its secured credit
facility, expected cash from operations and net proceeds from its recently completed initial public
offering (IPO) (see Note 6) will be sufficient to fund its operations and capital expenditures
for at least the next twelve months. There can be no assurance, however, that the Companys
strategy will be accomplished and will generate sufficient cash flows to meet the Companys cash
flows and working capital needs. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation- The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Notes to Consolidated Financial Statements contained in the
Companys Annual Report on Form 10-K for the year ended December 31, 2004. These financial
statements are presented on a condensed consolidated basis and include the accounts of Odimo
Incorporated and its wholly-owned subsidiaries. Intercompany balances have been eliminated in
consolidation. The same accounting policies are followed for preparing quarterly and annual
financial statements. In the opinion of management, the unaudited condensed consolidated financial
statements include all adjustments (consisting only of normal recurring adjustments) necessary for
the fair presentation of the financial position and results of operations for such periods. The
operating results for the three months ended March 31, 2005 are not necessarily indicative of the
operating results to be expected for the remainder of calendar year 2005 or for any future period. 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, goodwill 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. Stock-based Compensation- The Company accounts 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 Employeesand 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 its board of directors),
if any, is 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 is deferred and amortized to expense over the vesting period of the related options. Compensation expense related to options granted to non-employees is 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 has elected to account for stock options granted to employees, as
prescribed by APB Opinion 25, and has adopted the disclosure-only requirements of SFAS No. 123. 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): 7




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Three Months Ended March 31,2005
    
    
    2004Net loss attributable to common stockholders, as reported
    
    $
    (3,581
    )
    
    $
    (13,850
    )Add: Stock-based compensation expense, as reported
    
    
    
    
    
    
    4,689Deduct: Stock-based employee compensation expense determined
under fair-value-based method
    
    
    (3
    )
    
    
    (5,615
    )Pro forma net loss
    
    $
    (3,584
    )
    
    $
    (14,776
    )Net loss per share:Basic and diluted  as reported
    
    $
    ( 0.97
    )
    
    $
    (22.02
    )Basic and diluted  pro forma
    
    $
    (0.98
    )
    
    $
    (23.49
    )
 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 three months ended March 31, 2004 was $5.25. There were no
options issued during the three months ended March 31, 2005. In December 2004, the FASB issued SFAS No. 123 (Revised 2004) (SFAS No. 123(R)), Share-Based
Payment.SFAS No. 123(R) requires companies to expense the estimated fair value of stock options
and similar equity instruments issued to employees. Currently, companies are required to calculate
the estimated fair value of these share-based payments and can elect to either include the
estimated cost in earnings or disclose the pro forma effect in the footnotes to their financial
statements. As discussed above, the Company has chosen to disclose the pro forma effect. The fair
value concepts were not changed significantly in SFAS No. 123(R); however, in adopting SFAS N0.
123(R), companies must choose among alternative valuation models and amortization assumptions. The valuation model and amortization assumption used by the Company continues to be available;
however, the Company has not yet completed its assessment of the alternatives. SFAS No. 123(R) will
be effective for the Company beginning on January 1, 2006. Transition options allow companies to
choose whether to adopt prospectively, restate results to the beginning of the year, or to restate
prior periods with the amounts that have been included in the footnotes. The Company has not yet
concluded on which transition option it will select. See above for the pro forma effect for the
each of the periods presented herein, using the Companys existing valuation and amortization
assumptions. 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 (in 2004 only), preferred stock
warrants (in 2004 only) 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 three months ended March 31, 2005 and 2004, dividends to preferred stockholders includes
approximately $832,000 and $1.2 million of undeclared dividends on the Companys
convertible preferred stock. For the three months ended March 31, 2004 dividends to preferred
stockholders also includes approximately $6.3 million related to the issuance of Series C
convertible preferred stock (Series C Preferred Stock) to existing stockholders
(See Note 8). This amount represents the excess of the estimated fair value of the Series C
preferred stock over the consideration received by the Company. 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 condensed 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. 8




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3. INVENTORIES Inventories consist of the following (in thousands) as of: March 31,
    
    
    December 31,2005
    
    
    2004Diamonds
    
    $
    5,013
    
    
    $
    5,488Fine jewelry
    
    
    2,456
    
    
    
    2,967Watches
    
    
    3,233
    
    
    
    3,344Luxury goods
    
    
    2,268
    
    
    
    2,522Total inventories
    
    $
    12,970
    
    
    $
    14,321
 The Company also maintains consigned inventories consisting primarily of diamonds and watches of
approximately $1.5 million as of March 31, 2005 and December 31, 2004, respectively, which are
displayed on the Companys websites. The cost of these consigned inventories and the related
contingent obligation are not included in the Companys condensed consolidated balance sheets. At
the time consigned inventories are sold and the sale is recorded, the Company also records the cost
of the merchandise purchased in accounts payable and in cost of sales. 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands) as of: EstimatedUseful Lives
    
    March 31,
    
    
    December 31,(in Years)
    
    2005
    
    
    2004Computers, software and equipment
    
    3
    
    $
    9,212
    
    
    $
    9,049Leasehold improvements
    
    4
    
    
    1,054
    
    
    
    1,066Furniture and fixtures
    
    5
    
    
    593
    
    
    
    59810,859
    
    
    
    10,713Less: accumulated depreciation
    
    
    
    
    (7,141
    )
    
    
    (6,737
    )3,718
    
    
    
    3,976Software development in process
    
    
    
    
    1,925
    
    
    
    1,344Property and equipment  net
    
    
    
    $
    5,643
    
    
    $
    5,320
 Depreciation expense amounted to approximately $404,000 and $300,000 for the three months ended
March 31, 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. The Company had no unamortized internally developed computer software (other than the
software development in process reflected above) and website development costs at March 31, 2005
and December 31, 2004, respectively. 5. BANK CREDIT FACILITY In July 2004, the Company entered into a new secured credit facility with a national financial
institution. Under the
new secured credit facility, the Company is able to borrow up to either $7.0 million or $12.0
million depending on the time of the year and subject to the Companys inventory levels.
Outstanding advances will be charged interest at the greater of the lenders prime rate plus 0.5%
or 4% (6.25 % at March 31, 2005). The new secured credit facility matures in August 2006 and is
secured by a first lien on the Companys assets. One of the Companys stockholders has guaranteed
the Companys repayment obligation under the new secured credit facility. On January 7, 2005, the
credit facility was amended and allows 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. On February
18, 2005, 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. The Company repaid the amount outstanding during February 2005 with the proceeds from its IPO. The
Company currently has $5 million available under the current bank credit facility. 9




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6. 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 a Conversion Agreement, holders
of the Companys preferred stock warrants, exercised their warrants into approximately 147,000 and
107,000 shares of Series C Preferred Stock and Series D Preferred Stock, 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. 7. COMMITMENTS AND CONTINGENCIES 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 acquires most of the brand name watches and luxury goods products it sells through the
parallel market (products are not obtained directly from the brand owners or their authorized
distributors). The Company has received in the past, and anticipates that it will receive in the
future, 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. 8. RELATED PARTY TRANSACTIONS Stock Purchase and Supply Agreement- In March 2004, the Company entered into an agreement with
SDG Marketing, Inc. (SDG), an entity affiliated with certain stockholders and directors of the
Company, pursuant to which SDG may 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 Preferred Stock 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. During June 2004, the Company amended the stock purchase 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 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 over the consideration received by the Company. Diamond Purchases and Sales- The Company purchases certain of its diamonds from SDG, and certain
other entities (collectively, the Suppliers) affiliated with certain stockholders and directors
of the Company. During the three months ended March 31, 2005 and 2004, purchases from the Suppliers
totaled approximately $658,000 and $723,000, respectively. As of March 31, 2005 and December 31,
2004, the total amount payable to the Suppliers was approximately $2.0 million and $5.7 million,
respectively. Other Inventory Purchases- The Company purchases watches from an entity controlled by a
stockholder who formerly owned and controlled www.worldofwatches.com.During the three months ended
March 31, 2005 and 2004, the Company had purchases from the entity controlled by the stockholder of
approximately $352,000 and $474,000, respectively. As of March 31, 2005 and December 31, 2004,
there were no amounts payable to the entity controlled by the stockholder. Use of Jet Aircraft- From time to time, the Company reimburses Mey-Al Corporation, an entity
owned and controlled by the Companys President and CEO, for the use of an aircraft by the
executive officers of the Company for business-related purposes. For the three months ended March
31, 2005 and 2004, the Company paid Mey-Al Corporation an aggregate amount of approximately $30,000
and $43,000, respectively, for the use of the aircraft. Stockholder Notes In March 2004, $2.0 million of then outstanding stockholder notes and accrued
interest of approximately $211,000 were exchanged for approximately 223,000 shares of Series C
Preferred Stock, with warrants to purchase approximately 34,000 shares of Series C Preferred Stock
at approximately $9.00 per share. The Series C Preferred Stock and warrants were valued at
approximately $6.4 million based on the estimated fair value of the Companys Series C Preferred
Stock. The difference of approximately $4.1 million between the estimated fair value of the Series
C Preferred Stock 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. 10




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with Odimo Incorporateds (Odimo, the
Company, we, our, us,) Condensed Consolidated Financial Statements and the related Notes
contained elsewhere in this quarterly report onForm 10-Q. All statements in the following
discussion that are not reports of historical information or descriptions of current accounting
policy are forward-looking statements. Please consider our forward-looking statements in light of
the factors that may affect operating results set forth herein. Overview Odimo is an online retailer of current season brand name watches and luxury goods, high
quality diamonds and fine jewelry. We offer our products through three websites, www.diamond.com,
www.ashford.comand www.worldofwatches.com.Substantially all of our brand name watches and other
luxury goods are offered at prices below suggested retail prices. We also showcase diamonds and a
wide range of precious and semi-precious jewelry at competitive prices. We commenced operations in 1998 by offering diamonds and a limited selection of jewelry
products through the website www.diamonddepot.com.In early 2000, we began offering an expanded
product line that included a large selection of brand name watches and a broader selection of
diamonds and fine jewelry through two websites, www.diamond.comand www.worldofwatches.com.In
December 2002, we purchased the domain name www.ashford.com.In January 2003, we re-launched the
www.ashford.comwebsite and began offering luxury goods such as brand name handbags and other
fashion accessories, fine writing instruments, home accents, fragrances and sunglasses. We acquire
most of these brand name watches and luxury goods products through the parallel market (products
obtained from sources other than brand owners or their authorized distributors). As discussed in
Risk Factors and note 7 to the condensed consolidated financial statements included elsewhere in
this report, our purchases in the parallel market may subject us to challenges from brand owners
which might impact our supply of brand name watches and luxury goods. We have six subsidiaries
through which we conduct our purchasing operations. Since 2003, we have focused and intend to
continue to focus our marketing efforts primarily on the www.ashford.comand www.diamond.com
websites. In March 2004, we entered into an agreement with an affiliate of The Steinmetz Diamond Group
(Steinmetz) which permits us to select and purchase diamonds at cash market prices. Cash market
prices are typically the lowest available wholesale price where the buyer pays the seller cash at
the time of sale, and reflect a discount of 5.0% to 7.5% from prices for diamonds purchased on a
credit basis. Under this agreement with Steinmetz, however, we can defer payment up to 180 days
which substantially reduces our working capital needs. In addition, Steinmetz allows us to return
unsold goods, which reduces our inventory risk. Key Business Metrics We periodically review certain key business metrics to evaluate the effectiveness of our
operational strategies and the financial performance of our business. These key metrics include the
following: 11




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##### Table of Contents



Number of Orders This represents the total number of orders shipped in a specified period. We analyze the
number of orders to evaluate the effectiveness of our merchandising and advertising strategies as
well as to monitor our inventory management. Average Order Value Average order value is the ratio of gross sales divided by the number of orders generated
within a given time period. We analyze average order value primarily to monitor fulfillment costs
and other operating expenses. Product Mix Product mix represents the revenue contribution of the primary products that we feature by
category. We review product mix to determine customer preferences and manage our inventory. Product
mix is a primary determinant of our gross margin. Gross margin is gross profit as a percentage of
net sales. Quarter Ended March 31,Measure
    
    2004
    
    
    2005Number of orders
    
    
    33,142
    
    
    
    36,081Average order value
    
    $
    346
    
    
    $
    396Product Mix:Watches
    
    
    43.0
    %
    
    
    33.9
    %Diamonds
    
    
    23.0
    %
    
    
    34.3
    %Jewelry
    
    
    16.8
    %
    
    
    19.0
    %Luxury goods
    
    
    17.2
    %
    
    
    12.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 In addition to these key metrics, we also periodically review customer repeat rates and
customer acquisition costs to evaluate our operations. 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. 12




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##### Table of Contents



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 the quarters ended March 31, 2004 and 2005
about our net sales, cost of sales, gross profit, operating expenses, losses from operations, net
interest expense, and net losses both in dollars and as a percentage of net sales: Quarter Ended March 31,(in thousands, except percentage data)2004
    
    
    % of Net Sales
    
    
    2005
    
    
    % of Net SalesNet sales
    
    $
    10,444
    
    
    
    100.0
    %
    
    $
    12,784
    
    
    
    100.0
    %Cost of sales
    
    
    7,376
    
    
    
    70.6
    
    
    
    9,532
    
    
    
    74.6Gross profit
    
    
    3,068
    
    
    
    29.4
    
    
    
    3,252
    
    
    
    25.4Operating expenses:Fulfillment
    
    
    669
    
    
    
    6.4
    
    
    
    888
    
    
    
    6.9Marketing
    
    
    1,113
    
    
    
    10.7
    
    
    
    1,718
    
    
    
    13.4General and administrative(1)
    
    
    6,667
    
    
    
    63.8
    
    
    
    2,467
    
    
    
    19.3Depreciation and amortization
    
    
    749
    
    
    
    7.2
    
    
    
    852
    
    
    
    6.7Total operating expenses
    
    
    9,198
    
    
    
    88.1
    
    
    
    5,925
    
    
    
    46.3Loss from operations
    
    
    (6,130
    )
    
    
    (58.7
    )
    
    
    (2,673
    )
    
    
    (20.9
    )Interest expense, net
    
    
    (253
    )
    
    
    (2.4
    )
    
    
    (76
    )
    
    
    (0.6
    )Net loss
    
    $
    (6,383
    )
    
    
    (61.1
    )%
    
    $
    (2,749
    )
    
    
    (21.5
    )%
   (1)
    
    Includes non-cash stock-based compensation of $4.7 million
during the quarter ended March 31, 2004. Comparison of Quarter Ended March 31, 2005 to Quarter Ended March 31, 2004 Net Sales.Net sales for the quarter ended March 31, 2005 increased 22.4% to $12.8 million
from $10.4 million for the quarter ended March 31, 2004. Approximately $2.7 million of this
increase resulted from sales of diamonds and fine jewelry, which were primarily sold through
www.diamond.comoffset by a decrease of $300,000 in sales of watches and luxury goods. Number of orders for the quarter ended March 31, 2005, increased 8.9% to 36,081 from 33,142
for the quarter ended March 31, 2004. This increase was a result of an increase in new customers as
well as increased sales to existing customers across our expanded product categories. In the
aggregate, however, across our three websites, we experienced a 16.3% decrease in visitors to our
websites during the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004.
For the quarter ended March 31, 2005, our average order value increased 14.5% to $396 from $346 for
the quarter ended March 31, 2004. This increase in orders and increase in average order value is
due to the increase in the sale of diamonds and fine jewelry which tend to have a higher average
order value than watches and other luxury goods. Gross Profit.Gross profit for the quarter ended March 31, 2005 increased 6.0% to $3.3 million
from $3.1 million for the quarter ended March 31, 2004 due to increased sales volume. Our gross
profit as a percentage of net sales decreased to 25.4% for the quarter ended March 31, 2005
compared to 29.4% for the quarter ended March 31, 2004. The decrease in gross profit as a
percentage of net sales for the quarter ended March 31, 2005 was primarily the result of an
increased proportion of net sales being derived from diamonds which have a lower margin than
luxury goods. 13




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Fulfillment.Fulfillment expenses for the quarter ended March 31, 2005 increased 32.7% to
$888,000 from $669,000 for the quarter ended March 31, 2004. This was primarily due to an 8.9%
increase in orders and resulting increases in credit card processing fees and shipping costs. As a
percentage of net sales, fulfillment expenses for the quarter ended March 31, 2005 increased to
6.9% compared to 6.4% for the quarter ended March 31, 2004. The increase was primarily driven by a
shift in our product mix towards diamonds and fine jewelry which have higher shipping and related
costs per order. Marketing.Marketing expenses for the quarter ended March 31, 2005 increased 54.4% to $1.7
million from $1.1 million for the quarter ended March 31, 2004. The increase was primarily due to
increased online advertising costs. As a percentage of net sales, marketing expenses for the
quarter ended March 31, 2005 increased to 13.4% compared to 10.7% for the quarter ended March 31,
2004. General and Administrative Expenses.General and administrative expenses for the quarter ended
March 31, 2005 decreased 63.0% to $2.5 million from $6.7 million for the quarter ended March 31,
2004. The decrease was primarily due to $4.7 million of stock based compensation expense for the
quarter ended March 31, 2004 with no corresponding expense in the quarter ended March 31, 2005,
offset by the addition of costs associated with being a public company including legal and
professional fees and higher director and officer insurance premiums. As a percentage of net
sales, general and administrative expenses for the quarter ended March 31, 2005 decreased to 19.3%
compared to 63.8% for the quarter ended March 31, 2004. The decrease was primarily due to stock
based compensation expense noted above. We expect general and administrative expenses to continue
to increase in absolute dollars in the future as a result of continued expansion of our
administrative infrastructure to support our increased sales and increased expenses associated with
being a public company. Depreciation and Amortization.Depreciation and amortization expense for the quarter ended
March 31, 2005 increased 13.8% to $ 852,000 from $749,000 for the quarter ended March 31, 2004 due
to the addition of computer equipment and software. Interest Expense, Net.Interest expense, net, for the quarter ended March 31, 2005 decreased
70.0% to $76,000 from $253,000 for the quarter ended March 31, 2004. This decrease is attributable
to the repayment of the bank credit facility during February 2005. Net Loss.Net loss for the quarter ended March 31, 2005 was $2.7 million as compared to $6.4
million for the quarter ended March 31, 2004. The decrease was primarily attributable to the $4.7
million of stock-based compensation expense for the quarter ended March 31, 2004 for which there
was no corresponding expense for the quarter ended March 31, 2005. Liquidity and Capital Resources Prior to the closing of our initial public offering of our common stock in February 2005, we
funded our operations primarily through private placements of securities and borrowings under our
bank credit facility. In February 2005 we received net proceeds of $22.4 million from the initial
public offering and approximately $1.4 million from the exercise of warrants. Discussion of Cash Flows Net cash used in operating activities for the quarter ended March 31, 2005 was $7.7 million
compared to $5.6 million for the quarter ended March 31, 2004. This increase was primarily
attributable to decreases in accounts payable, payables to related parties and other accrued
expenses offset by a decrease in inventories and a decrease in other assets. 14




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##### Table of Contents



Net cash used in investing activities for the quarter ended March 31, 2005 was $727,000
compared to $301,000 for the quarter ended March 31, 2004. This increase was primarily attributable
to expenditures for computer and related equipment and software development costs. Net cash provided by financing activities for the quarter ended March 31, 2005 was $14.4
million compared to $1.3 million for the quarter ended March 31, 2004. This change was the result
of $22.4 million in proceeds from our public offering and $1.4 million in proceeds from the
exercise of warrants in February 2005 offset by repayment of our bank credit facility of $9.3
million. We currently anticipate that we will have annual expenditures ranging from $2.5 million to
$3.5 million for technology and systems upgrades. As a public company, we expect to incur legal,
accounting and other additional expenses between $1.0 million and $2.0 million annually for, among
other things, compliance with recently adopted corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, as well a rules implemented by the SEC and
Nasdaq. In addition, we will have to hire additional personnel to assist us with complying with
these requirements. 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 Commerce, Inc.) is positive during 2005, 2006, and 2007, we will be obligated to
make a payment to GSI Commerce, Inc., the entity from which we purchased the www.ashford.comdomain
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 correspondingly. Liquidity Sources Our principal sources of short-term liquidity consist of cash and cash equivalents, borrowings
available under our bank credit facility and cash generated from operations. As of March 31, 2005, we had $7.6 million of cash and cash equivalents (and $906,000 of
restricted cash pledged as collateral to a credit card processing company), compared to $1.7
million of cash and cash equivalents (and $813,000 of restricted cash pledged as collateral to a
credit card processing company) as of December 31, 2004. 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. We 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 (after underwriters discounts of approximately $1.9 million and offering expenses of
approximately $3.8 million). At the closing of the initial public offering, holders of warrants to
o purchase 147,000 and 107,000 shares of Series C Preferred Stock and Series D Preferred Stock,
respectively, exercised in full their warrants for an aggregate purchase price of $1.4 million. Our secured revolving credit facility allows us to borrow up to a maximum amount equal to the
lesser of (i) up to $8 million from September 1 through December 31 of each year and up to $5
million from January 1 through August 31 of each year; or (ii) 75% of the value of our inventory.
Amounts borrowed under this credit facility bear interest at a variable annual rate equal to the
greater of the current prime rate plus 0.5% or 6.25% at March 31, 2005. During the term of the
credit facility, we are obligated to pay interest amounts owed monthly. All principal and unpaid
interest under the credit facility is due August 2006. Our repayment obligations under the credit
facility are secured by a first lien on our assets 15




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##### Table of Contents



and are guaranteed by entities affiliated with Softbank Capital Partners, one of our principal
stockholders. We are negotiating to amend the terms of the credit facility to, among other things,
remove Softbank Capital as the guarantor under the credit facility. As of May 11 2005, we had no
indebtedness outstanding under our credit facility. Changes in our operating plans, lower than anticipated net sales, increased expenses or other
events, may cause us to seek additional debt or equity financing in the future. Financing may not
be available on acceptable terms, or at all, and our failure to raise capital when needed could
negatively impact our growth plans and our financial condition and results of operations.
Additional equity financing may be dilutive to the holders of our common stock and debt financing,
if available, may involve significant cash payment obligations and covenants and/or financial
ratios that restrict our ability to operate our business. Contractual Obligations Future payments due under contractual obligations as of March 31, 2005 are listed
below: Payments Due by Period(in thousands)Less thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 YearsBank Credit Facility
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    1,434
    
    
    
    217
    
    
    
    486
    
    
    
    731Total
    
    $
    1,434
    
    
    $
    217
    
    
    $
    486
    
    
    $
    731
 Off Balance Sheet Arrangements We do not have any off balance sheet arrangements. Critical Accounting Policies and Estimates Our condensed 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 estimates and judgments that affect the reported amounts of assets,
liabilities, sales and expenses. We base our estimates on historical experience and on various
other assumptions that we believe 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. Our critical accounting policies are set forth below. 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 16




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##### Table of Contents



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 2004, we have determined that we have one reporting unit. Using
the income approach, we performed an annual assessment of goodwill and concluded that there was no
impairment as of December 31, 2004. 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. 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 assets in the future. Stock-Based Compensation We account for our employee compensation plans under the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. We amortize stock-based compensation using the straight-line method
over the vesting period of the related options, which is generally four years. 17




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##### Table of Contents



We have recorded deferred stock-based compensation representing the difference between the
option exercise price and the deemed fair value of our common stock on the grant date for financial
reporting purposes. We determined the deemed fair value of our common stock based upon several
factors, including independent third party valuations. Had different assumptions or criteria been
used to determine the deemed fair value of our common stock, different amounts of stock-based
compensation would have been reported. Pro forma information regarding net loss and net loss per share is required in order to show
our net loss as if we had accounted for employee stock options under the fair value method of SFAS
No. 123, Accounting for Stock-Based Compensation,as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition Disclosure.This information is contained in Note 2 to our
condensed consolidated financial statements. The fair values of options and shares issued pursuant
to our option plan at each grant date were estimated using the Black-Scholes option pricing model. In December 2004, the FASB issued SFAS No. 123 (Revised 2004) (SFAS No. 123®), Share-Based
Payment.SFAS No. 123® requires companies to expense the estimated fair value of stock options
and similar equity instruments issued to employees. Currently, companies are required to calculate
the estimated fair value of these share-based payments and can elect to either include the
estimated cost in earnings or disclose the pro forma effect in the footnotes to their financial
statements. As discussed above, the Company has chosen to disclose the pro forma effect. The fair
value concepts were not changed significantly in SFAS No. 123®; however, in adopting SFAS N0.
123®, companies must choose among alternative valuation models and amortization assumptions. The valuation model and amortization assumption used by the Company continues to be available;
however, the Company has not yet completed its assessment of the alternatives. SFAS No. 123® will
be effective for the Company beginning on January 1, 2006. Transition options allow companies to
choose whether to adopt prospectively, restate results to the beginning of the year, or to restate
prior periods with the amounts that have been included in the footnotes. The Company has not yet
concluded on which transition option it will select. See Note 2 to our condensed consolidated
financial for the pro forma effects for the each of the periods presented, using our
existing valuation and amortization assumptions. Cautionary Note Regarding Forward-Looking Statements This report contains various forward-looking statements regarding our business, financial
condition, results of operations and future plans and projects. Forward-looking statements discuss
matters that are not historical facts and can be identified by the use of words such as believes,
expects, anticipates, intends, estimates, projects, can, could, may, will,
would or similar expressions. In this report, for example, we make forward-looking statements
regarding, among other things, our expectations about the rate of revenue growth in specific
business segments and the reasons for that growth and our profitability. Although these forward-looking statements reflect the good faith judgment of our management,
such statements can only be based upon facts and factors currently known to us. Forward-looking
statements are inherently subject to risks and uncertainties, many of which are beyond our control.
As a result, our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth below under
the caption Factors that May Affect Future Operating Results and elsewhere in this report. For
these statements, we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on
these forward-looking statements, which speak only as of the date on which they were made. They
give our expectations regarding the future but are not
guarantees. We undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise, unless required by
law. 18




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##### Table of Contents



Factors that May Affect Future Operating Results You should carefully consider the risks and uncertainties described below, together with all
other information included in this report, including the condensed 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. Risks Related to Our Business and Industry We have incurred operating losses since our inception. If we do not achieve operating
profitability, we may need additional capital, and our stock price could suffer. We have incurred operating losses since our inception in 1998. As of March 31, 2005, our
accumulated deficit was $71.6 million, including a net loss of approximately $2.7 million for the
quarter ended March 31, 2005. Our ability to become profitable depends on our ability to generate
and sustain substantially higher net sales that exceed historical levels while maintaining
reasonable expense levels. Since our inception, we have incurred significant operating expenses and
capital expenditures for technology, website development, advertising, personnel and other
operating costs. During the next 12 months, we expect to incur approximately $12.0 million of costs
and capital expenditures related to:  
    marketing, advertising and other promotional activities;
    the expansion of our fulfillment operations, which includes supply
procurement, inventory management, order receipt, packaging and shipment; and
    the continued development of our websites and our computer network. Even if we do achieve profitability, we cannot be certain that we would be able to sustain or
increase profitability on a quarterly or annual basis in the future, or that we will meet our
capital requirements. If we are unable to achieve or sustain profitability, or meet our capital
requirements, we may need additional capital, and our stock price could suffer. Because we do not have a predictable or guaranteed supply of brand name watches and luxury goods,
we may lose customers and sales if we are unable to meet our customers demand for particular
products. We do not have any written agreements or formal arrangements to acquire merchandise other than
for diamonds and fine jewelry. As a result, we do not have a predictable or guaranteed supply of
brand name watches and luxury goods. The availability of these products depends on many factors,
including consumer demand, brand owner pricing and distribution practices, manufacturer production
and fashion trends. If we are unable to acquire a sufficient supply and selection of products in a
timely manner at competitive prices, we may lose customers and our sales could decline. We acquire most of the brand name watches and luxury goods we sell through the parallel market, or
grey market as it is also called, which increases the risk that we may inadvertently sell
counterfeit or stolen goods or merchandise which is physically materially different from
merchandise acquired from channels authorized by the brand owners, which could expose us to
liability for intellectual property infringement claims and damage our reputation. 19




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##### Table of Contents



Approximately 39% and 47% of our net sales (75% and 71% of our net sales excluding diamonds
and fine jewelry) during the quarter ended March 31, 2005 and 2004, respectively, were generated
from sales of merchandise that we did not acquire directly from the brand owners or their
authorized distributors. These alternative distribution channels are commonly referred to as the
parallel market or the grey market. Merchandise purchased from these alternative distribution
channels includes authentic trademarked and copyrighted products that are intended for sale in
foreign countries. In addition to our own compliance and quality testing procedures, we rely on
assurances from our suppliers as to the authenticity of these products to ensure that products we
receive are genuine. Our purchase of merchandise in the parallel market increases the risk that we
will mistakenly purchase and sell counterfeit goods, stolen goods or merchandise which is
physically materially different from merchandise acquired from channels authorized by the brand
owners. We may have difficulty demonstrating that the merchandise we sell is authentic because many
of the distributors and other intermediaries from whom we purchase merchandise may be unwilling to
disclose their suppliers. If we sell goods that are counterfeit, stolen or are determined to be
physically materially different, we may be subject to significant liability for infringement of
trademarks, incur legal defense costs and suffer damage to our reputation and decreased sales. We have received in the past, and anticipate that we will receive in the future,
communications from brand owners alleging that certain items sold through our websites infringe on
such brand owners trademarks, patents, copyrights and other intellectual property rights. We may
be subject to lawsuits by brand owners and their authorized distributors based on allegations that
we sell physically materially different merchandise, counterfeit goods or stolen goods. For
example, in August 2004, we settled for a nominal amount an action filed against us in March 2004
by Prada, S.A. seeking an injunction and unspecified damages alleging that we sold counterfeit
goods. Claims by brand owners, with or without merit, could be time consuming, result in costly
litigation, generate bad publicity for us, or subject us to large claims for damages. If brand owners take action to limit or prevent us from acquiring their products in the parallel
market, we may not be able to find alternative sources of supply for such products at satisfactory
prices or at all, which would result in reduced sales. Some brand owners such as Rolex and Raymond Weil have implemented, and are likely to continue
to implement, procedures to limit the ability of third parties, including Odimo, to purchase
products through the parallel market by designating an exclusive legal importer of their brands
into the United States. In the event we acquire such products from distributors and other
intermediaries who may not have complied with applicable laws and regulations, such goods may be
subject to seizure from our inventory by the U.S. Customs Service, and the brand owner may have a
civil action for damages against us. Such limitations or controls could affect our ability to
obtain products at satisfactory prices, or at all. When we are aware of these policies we do not
sell such brand names. However, we do not contact brand owners to determine whether such
restrictions exist prior to purchasing these goods from our suppliers. If more brand owners adopt
such a policy, the number of products we are able to sell will decrease. Brand owners may also
decide to more closely monitor their distribution chain, to prevent their authorized distributors
from selling goods in the parallel markets. Courts could find that we have tortiously interfered with contractual arrangements between a
brand owner and its authorized wholesalers and retailers where those contractual arrangements
restrict authorized wholesalers and retailers from selling to entities, such as Odimo, that will
resell the products. In addition, United States copyright law may prohibit importation of genuine
goods without the brand owners permission when the goods are packaged together with goods that are
protected by a United States copyright such as the non-mechanical design features of watches,
artistic features of home accessories and the package design of fragrances we sell. 20




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If it is determined that our sales of decoded watches violate state laws, we would be subject to
claims for damages, fines or other penalties or be unable to sell decoded watches in such states. Many of the brand name watches we sell have had their serial numbers removed (decoded). We
have reviewed the laws of each of the 50 states, and have identified 41 states that have statutes
that prohibit the sale or possession of certain products that have been decoded. Among the 41
states, only California, Georgia and South Dakota have statutes that specifically refer to decoded
watches. In 11 states (in which our net sales of decoded watches were approximately $206,000 and
$262,000 during the quarter ended March 31, 2005 and 2004, respectively), the statutes contain
exceptions for products that have not been stolen or if there was no intent to defraud, deceive or
misrepresent. However, in 30 states (in which our aggregate net sales of decoded watches were
approximately $888,000 and $1.2 million during the quarter ended March 31, 2005 and 2004,
respectively), including California, Georgia and South Dakota, the statutes do not contain these
exceptions. As a result, there is uncertainty as to whether these laws apply to sales of decoded
watches if the goods are not stolen or if there is no intent to defraud, deceive or misrepresent.
In addition, if we inadvertently purchase stolen watches, we may be unable to rely on these
exceptions. We do not engage in the same in-house compliance and quality testing procedures for
watches as we do for our other merchandise. The only procedures we follow to ensure that the
watches we purchase are not stolen are that we purchase in significant quantities and we purchase
watches only from suppliers with whom we have a pre-existing relationship or to whom we have been
referred. Accordingly, we face increased risk that the watches we buy may be stolen or counterfeit
because we do not have access to source documentation for our watches. If a court were to determine
that our sales of decoded watches violate the laws of any state, we would be subject to claims for
damages, and fines or other penalties, and we would be unable to continue to sell decoded watches
in that state. We derived approximately $1.2 million and $1.6 million of net sales from decoded
watches during the quarter ended March 31, 2005 and 2004, respectively, which represented
approximately 28% and 37% of our net sales of watches and approximately 10% and 16% of our total
net sales during the quarter ended March 31, 2005 and 2004, respectively. In addition to the statutes described above, seventeen states (in which net sales of decoded
watches was approximately $856,000 and $ 1.2 million during the quarter ended March 31, 2005 and
2004, respectively) have statutes that regulate the sale of decoded watches. These laws categorize
decoded watches as grey market goods or secondhand watches and impose specific disclosure
requirements. For example, laws in California and New York prohibit anyone from offering grey
market goods without affixing to the product a label or tag disclosing, among other things, that
the item is secondhand and is not covered by the manufacturers express written warranty, even
though the item has never been used. We have recently implemented procedures, such as affixing a
tag disclosing that the item is secondhand, and designed our websites to contain the requisite
disclosure (i.e. no manufacturers warranty) to comply with the laws in these states that regulate
the sale of decoded watches. However, if a court were to determine that we failed to comply with
such laws in a particular state, we could be subject to claims for damages, fines or other
penalties or prohibited from selling decoded watches in that state. Our supply contract with The Steinmetz Diamond Group expires in November 2006. If we fail to renew
it, we may have to purchase diamonds from other suppliers at less favorable prices and terms. Our ability to acquire diamonds at attractive pricing and on favorable terms is a key
component of our strategy to increase diamond sales. In March 2004, we entered into an agreement
with SDG Marketing, Inc., an affiliate of The Steinmetz Diamond Group, to purchase diamonds through
2006. The Steinmetz Diamond Group supplied 15% and 21% of our net sales of diamonds for the quarter
ended March 31, 2005 and 2004, respectively. If we are unable to renew our contract with Steinmetz
beyond 21




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2006, we may have to purchase diamonds from other sources which may be at less favorable
prices and terms. As a result, our diamond costs could increase and our diamond sales could
decrease. If we fail to identify and rapidly respond to fashion trends, we may be forced to absorb excess
inventory or lower the sales prices for our goods. The fashion industry is subject to rapidly changing trends and shifting consumer demand.
Accordingly, our success depends on the priority that our target customers place on fashion and our
ability to anticipate, identify and capitalize upon emerging fashion trends. Our failure to
anticipate, identify or react appropriately to changes in styles or trends could lead to, among
other things, excess inventories and markdowns, as well as decreased appeal of our merchandise. If our new product offerings are not successful, we may have difficulty achieving growth in sales. From time to time, we offer new products on our websites. We have sold luxury goods other than
diamonds, jewelry and watches only since January 2003, when we re-launched the www.ashford.com
website. We recently introduced a line of Ashford branded products that we expect will eventually
expand to include watches, handbags and accessories. This line of our business has a limited
operating history, which subjects us to the risks, uncertainties and difficulties presented by new
product lines, such as uncertain customer demand and the uncertainties associated with a relatively
limited time in which to implement and evaluate our marketing strategy for this product line.
Expanding the sales of Ashford branded products will require us to incur additional marketing
expenses, develop relationships with new suppliers and comply with applicable laws and regulations.
These requirements could strain our management and our financial and operational resources. We may
begin selling other new product lines with which we have little or no prior experience, and we may
face challenges similar to those we encounter in establishing our Ashford brand. If we are not
successful in establishing our Ashford brand or other new product lines, we may not recoup the
marketing and other expenses associated with such new products, we may experience write downs of
inventory, and we may have difficulty increasing our sales. Our net sales and operating results are volatile and difficult to predict, which may adversely
affect the trading price of our common stock. Our net sales and operating results have historically fluctuated significantly from quarter to
quarter and we expect they will continue to fluctuate significantly in the future. Because our net
sales and operating results are volatile and difficult to predict, we believe that quarterly
comparisons of our net sales and results of operations are not necessarily meaningful and you
should not rely on the results of one quarter as an indication of our future performance. Competition from traditional and online retail companies with greater brand recognition and
resources may adversely affect our sales. The retail industry is intensely competitive, and we expect competition in the sale of brand
name watches and luxury goods, diamonds and fine jewelry to increase in the future. Increased
competition may result in decreased net sales, lower margins, and loss of market share or increased
marketing expenditures, any of which could substantially harm our business, financial condition and
results of operations. Our competitors include:  
    independent and chain stores that sell jewelry, watches or other luxury products, such
as Tiffany & Co., Zales and Signet PLCs Kay Jewelers; 22




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
    other online retailers that sell diamonds, fine jewelry, brand name watches and/or
luxury products, such as Amazon.com and Blue Nile;
    department stores;
    boutiques and websites operated by brand owners;
    mass retailers and warehouse clubs that sell jewelry, watches or other luxury products;
    catalog and television shopping retailers; and
    online auction houses and closeout retailers. Competition in the e-commerce market may intensify, because the Internet lowers the barriers
to entry and facilitates comparison-shopping. In addition, manufacturers and brand owners may
create their own websites to sell their own merchandise. Many of our current and potential
competitors have greater brand recognition, longer operating histories, more extensive customer
bases, broader product and service offerings and greater resources for marketing, research and
product development, strategic acquisitions, alliances and joint ventures than we do. As a result,
these competitors may be able to secure merchandise from suppliers on more favorable terms, and may
be able to adopt more aggressive pricing policies. If our advertising relationships with Internet portals and other websites fail to create consumer
awareness of our websites and product offerings, our sales may suffer. Substantially all of our sales come from customers who link to our websites from websites
operated by other online retailers or Internet portals with whom we advertise. Establishing and
maintaining relationships with leading Internet portals and other online retailers through our
affiliate program is competitive and expensive. During the quarter ended March 31, 2005 and 2004,
we spent $1.7 million and $1.1 million, respectively, on online advertising, affiliate programs and
public relations. We do not maintain long-term contracts or arrangements with Internet portals, and
we may not successfully enter into additional relationships or renew existing ones beyond their
current terms. We expect that we will have to pay increasing fees to maintain, expand or enter into
new relationships of this type. In addition, traffic to our websites could decline if our Internet
portal and online marketing programs become less effective or if the traffic to the website of an
Internet portal on which we advertise decreases. Our business could be materially adversely
affected if any of our online advertisers experience financial or operational difficulties or if
they experience other corporate developments that adversely affect their performance. A failure to
maintain, expand or enter into Internet portal relationships or to establish additional online
advertising relationships that generate a significant amount of traffic from other websites could
result in decreased sales or limit the growth of our business. If online advertising rates continue to rise, we may purchase less advertising and our sales could
decrease. Approximately 90% of our marketing expenses are for online advertising. Over the last six
months online advertising rates, including banner advertisements and selected key words on search
engines, have significantly increased. If the cost of online advertising continues to increase, our
ability to purchase online advertising may be limited which in turn could have an adverse effect on
our sales. 23




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Because we carry almost all of our brand name watches, jewelry and luxury goods in inventory, if we
are unable to accurately predict and plan for changes in consumer demand, our net sales and gross
margins may decrease. We held approximately $8.0 million and $8.8 million of brand name watches, fine jewelry and
luxury goods in inventory as of March 31, 2005 and December 31, 2004, respectively. If our sales
levels increase, we will increase our inventory proportionately. Consumer tastes and preferences
for luxury products can change rapidly, thus exposing us to significant inventory risks. The demand
for specific products can change between the time the products are ordered and the date of receipt.
We do not have return privileges with respect to all of our inventory (other than diamonds). As a
result, if we do not accurately predict these trends or if we overstock unpopular products, we may
be required to take significant inventory markdowns, which could reduce our net sales and gross
margins. Our operating results are subject to seasonal fluctuations, and adverse results in our fourth
quarter will have a disproportionate impact on our results of operations for the year. We have experienced, and expect to continue to experience, seasonal fluctuations in our net
sales, with a disproportionate amount of our net sales realized during the fourth quarter ending
December 31, as a result of the holiday buying season. Over 39.4%, 43.8% and 41.2% of our net sales
in the years ended December 31, 2002, 2003 and 2004, respectively, were generated during the fourth
quarter. If we were to experience lower than expected net sales during any fourth quarter, it would
have a disproportionately large impact on our operating results and financial condition for that
year. Also, in anticipation of increased sales activity during the fourth quarter, we increase our
inventories and staffing in our fulfillment and customer support operations and incur other
additional expenses, which may have a negative effect on our cash flow. We are dependent on Alan Lipton, our Chief Executive Officer and President, and other members of
our management team. The loss of any of them could harm our business. Our performance is substantially dependent upon the services and performance of our senior
management team: Alan Lipton, our Chief Executive Officer and President, Jeffrey Kornblum, our
Chief Operating Officer, Amerisa Kornblum, our Chief Financial Officer and Treasurer, and George
Grous, our Chief Technology Officer. We have employment agreements with each of these four key
employees, with terms through July 2007. All members of our management team may terminate their
employment with us at any time. The loss of the services of any of our senior management team or
certain of our key employees for any reason could adversely affect our operations or otherwise have
a material adverse effect on our business. We may not be able to increase capacity or respond to rapid technological changes in a timely
manner or without service interruptions, which may cause customer dissatisfaction. A key element of our strategy is to generate a high volume of traffic on our websites. Our
servers and communication systems operate at between 20% and 90% of capacity, depending on the time
of year and current promotions and advertising levels. Over the past year, we have experienced
server and communication interruptions for periods of routine maintenance and systems upgrades. As
traffic on our websites grows, we may not be able to accommodate all of the growth in user demand
on our websites and in our customer service center. If we are unable to upgrade our existing
technology or network infrastructure and the systems used to process customers orders and payments
to accommodate increased sales volume, our potential customers may be dissatisfied and may purchase
merchandise from our competitors. We may also fail to provide enough capacity in our customer
service center to answer 24




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phones or provide adequate customer service. A failure to implement new systems and increase
customer service center capacity effectively or within a reasonable period of time could adversely
affect our sales. We also intend to introduce additional or enhanced features and services to retain current
customers and attract new customers to our websites. If we introduce a feature or a service that is
not favorably received, our current customers may not use our websites as frequently and we may not
be successful in attracting new customers. We may also experience difficulties that could delay or
prevent us from introducing new services and features. These new services or features may contain
errors that are discovered only after they are introduced and we may need to significantly modify
the design of these services or features to correct these errors. If customers encounter difficulty
with or do not accept new services or features, they may decide to purchase instead from one of our
competitors, decreasing our sales. Our costs will increase because we are a public company. As a public company, we will incur significant legal, accounting and other expenses that we
did not incur as a private company. We expect these expenses to be between $1.0 million and $2.0
million annually. We will incur costs associated with our public company reporting requirements. We
also anticipate that we will incur costs associated with recently adopted corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules
implemented by the SEC and Nasdaq National Market. We expect these rules and regulations to
increase our legal and financial compliance costs and to make some activities more time-consuming
and costly. In addition, we will have to hire additional personnel to assist us in complying with these
requirements. If we are unable to attract and retain such personnel, we may have difficulty
satisfying the periodic reporting and disclosure obligations of public companies. We also expect
these new rules and regulations may make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar coverage. As a
result, it may be more difficult for us to attract and retain qualified individuals to serve on our
board of directors or as executive officers. If we fail to comply with the requirements applicable
to public companies, we may incur fines or penalties, and may be subject to enforcement action by
the SEC or delisting from the Nasdaq National Market. All of our operations are located at our Sunrise, Florida facilities, and disruptions at these
facilities could prevent us from receiving orders or fulfilling orders for our customers in a
timely manner. Our fulfillment operations and our computer and communications systems are located at leased
facilities in Sunrise, Florida. Our ability to fulfill customer orders through our Sunrise
facilities in a timely manner, or at all, could be affected by a number of factors, including any
disruption of our computer or communications systems, an employee strike or other labor stoppage, a
disruption in the transportation infrastructure or hurricanes or other natural disasters. If we are
unable to fulfill our customers orders through the Sunrise facilities, we may not be able to
quickly secure a replacement distribution facility on terms acceptable to us or at all. Our
computer and communications systems are particularly vulnerable to power loss, telecommunications
failure, general Internet failure or failures of Internet service providers, human error, computer
viruses and physical or electronic break-ins. Any of these events could lead to system damage or
interruptions, delays and loss of critical data, and make our websites or customer service center
inaccessible to our customers or prevent us from efficiently fulfilling orders. Frequent or long
service delays or interruptions in our service or disruptions during a peak holiday season will
reduce our net sales and profits, and damage our reputation. Future net sales and profits will be
harmed if our customers believe that our system is unreliable. 25




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Our planned move to a new facility in 2005 may disrupt our operations. We intend to move our entire logistics and distribution operations to a new facility during
the second quarter of 2005, and to begin relocating the rest of our operations to that facility in
the fall of 2005, immediately prior to the quarter in which we historically have increased sales
activity. In connection with these moves, we may experience some interruptions in our operations.
Any failure to successfully manage our move to the new facility could detract from our customers
experience, which would damage our reputation and decrease our sales. The availability and price of diamonds are significantly influenced by a small number of diamond
mining firms as well as the political situation in diamond-producing countries. A decrease in the
availability or an increase in the price of diamonds may make it difficult for us to procure enough
diamonds at competitive prices to supply our customers. The supply and price of rough (uncut and unpolished) diamonds in the principal world markets
have been and continue to be significantly influenced by a small number of diamond mining firms. As
a result, any decisions made to restrict the supply of rough diamonds by these diamond mining firms
to our suppliers could substantially impair our ability to acquire diamonds at reasonable prices.
We do not currently have any direct supply relationships with these diamond mining firms, nor do we
expect to pursue such a relationship. The availability and price of diamonds to our suppliers may
fluctuate depending on the political situation in diamond-producing countries. Sustained
interruption in the supply of rough diamonds, an overabundance of supply or a substantial change in
the relationship between the major mining firms and our suppliers, including the loss by Steinmetz
of its De Beers sight-holder status, could adversely affect us. Our recent experience suggests that
the price of rough diamonds is increasing. A failure to secure diamonds at reasonable commercial
prices and in sufficient quantities would lower our revenues and adversely impact our results of
operations. In addition, increases in the price of diamonds may adversely affect consumer demand,
which could cause a decline in our net sales. Increases in the cost of precious metals and precious and semi-precious stones would increase the
cost of our jewelry products, which could result in reduced margins or increased prices and reduced
sales of such products. The jewelry industry in general is affected by fluctuations in the prices of precious metals
and precious and semi-precious stones. The availability and prices of gold, silver and platinum and
other precious metals and precious and semi-precious stones may be influenced by such factors as
cartels, political instability in exporting countries, changes in global demand and inflation.
Shortages of these materials or a rise in their price could result in reduced margins or increased
prices causing reduced sales of such products. Increased product returns and the failure to accurately predict product returns could reduce our
gross margins and result in excess inventory. We offer our customers a 15- or 30-day return policy that allows our customers to return most
products if they are not satisfied for any reason. We make allowances for product returns in our
financial statements based on historical return rates. Actual merchandise returns are difficult to
predict and may significantly exceed our allowances. Any significant increase in merchandise
returns above our allowances would reduce our gross margins and could result in excess inventory or
inventory write-downs. Once a product is purchased from the parallel market and has been inspected
and accepted by us, we cannot return the product to our supplier. 26




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If we attain specified levels of financial performance, we are obligated to make earn-out payments
to one of our stockholders. 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 Commerce, Inc.) is positive during the 2005, 2006 and 2007 fiscal years, we will
be obligated to make a payment to GSI Commerce, Inc., the entity from which we purchased the
www.ashford.comdomain name in December 2002, equal to 10% of such amount for such year, up to a
maximum aggregate amount of $2.0 million. This payment is tied to income derived from our entire
business, not just from our www.ashford.comwebsite. Other online retailers may use domain names that are similar to ours. If customers associate these
websites with us, our brands may be harmed and we may lose sales. Our Internet domain names are an important aspect of our business. Under current domain name
registration practices, no one else can obtain an identical domain name, but they can obtain a
similar name, or the identical name with a different suffix, such as .net or .org, or with a
different country designation such as jp for Japan. For example, we do not own the domain name
www.diamonds.comor www.diamonds-usa.com.As a result, third parties may use domain names that
are similar to ours, which may result in confusion of potential customers, impairment of the value
of our brands and lost sales. 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. Therefore, you likely will not receive any dividends from us on our
common stock for the foreseeable future. Risks Relating to Doing Business on the Internet If we are required to collect sales and use taxes on the products we sell in jurisdictions outside
of Florida, we may be subject to liability for past sales and our future sales may decrease. In accordance with current industry practice and our interpretation of current law, we do not
currently collect sales and use taxes or other taxes with respect to shipments of goods into states
other than Florida. However, one or more states or foreign countries may seek to impose sales or
other tax collection obligations on us in the future. A successful assertion by one or more states
or foreign countries that we should be collecting sales or other taxes on the sale of our products
could result in substantial tax liabilities for past and future sales, discourage customers from
purchasing products from us, decrease our ability to compete with traditional retailers or
otherwise substantially harm our business, financial condition and results of operations. Various legal rules and regulations related to privacy and the collection, dissemination and
security of personal information may adversely affect our marketing efforts. We are subject to increasing regulation at the federal, state and international levels
relating to privacy and the use of personal user information, designed to protect the privacy of
personally identifiable information as well as to protect against its misuse. These laws include
the Federal Trade Commission Act, the CAN Spam Act, the Childrens Online Privacy Protection Act,
the Fair Credit Reporting Act and 27




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related regulations as well as other legal provisions. Several states have proposed
legislation that would limit the use of personal information gathered online or require online
services to establish privacy policies. These regulations and other laws, rules and regulations
enacted in the future, may adversely affect our ability to collect and disseminate or share
demographic and personal information from users and our ability to email or telephone users, which
could be costly and adversely affect our marketing efforts. Consumers may prefer to purchase brand name watches and luxury goods, diamonds and fine jewelry
from traditional retailers, which would adversely affect our sales. The online market for brand name watches and luxury goods, diamonds and fine jewelry is
significantly less developed than the online market for books, music, toys and other consumer
products. Our success will depend in part on our ability to attract consumers who have historically
purchased brand name watches and luxury goods, diamonds and fine jewelry through traditional
retailers. We may have difficulty attracting additional consumers to purchase products on our
websites for a variety of reasons, including:  
    concerns about buying expensive products without a physical storefront, face-to-face
interaction with sales personnel and the ability to physically handle and examine products;
    concerns over counterfeit or substandard goods;
    delivery times associated with Internet orders;
    product offerings that do not reflect consumer tastes and preferences;
    pricing that does not meet consumer expectations;
    concerns about the security of online transactions and the privacy of personal information;
    delayed shipments, theft or shipments of incorrect or damaged products; and
    inconvenience associated with returning or exchanging purchased items. If the Internet infrastructure fails to grow or deteriorates, our ability to grow our business will
be impaired. Our success will depend on the continued growth and maintenance of the Internet
infrastructure. This includes maintenance of a reliable network infrastructure with the necessary
speed, data capacity and security for providing reliable Internet services. Viruses, worms and
similar programs also harm the performance of the Internet. The Internet has experienced a variety
of outages and other delays as a result of damage to portions of its infrastructure, and it could
face outages and delays in the future. These outages and delays could reduce the level of Internet
usage as well as our ability to provide our solutions. 28




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Risks Related to the Securities Markets and Ownership of Our Common Stock

Our stock price may be volatile.

The market price for our common stock has been and is likely to continue to be volatile. In
addition, the market price of our common stock may fluctuate significantly in response to a number
of factors, most of which we cannot control, including:



| |  | actual or anticipated fluctuations in our results of operations;                                                                                                  
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | variance in our financial performance from the expectations of market analysts;                                                                                   
|
| |  | developments with respect to intellectual property rights;                                                                                                        
|
| |  | announcements by us or our competitors of new product and service offerings,
significant contracts, acquisitions or strategic relationships;                      
|
| |  | our involvement in litigation;                                                                                                                                    
|
| |  | our sale of common stock or other securities in the future;                                                                                                       
|
| |  | market conditions in our industry;                                                                                                                                
|
| |  | recruitment or departure of key personnel;                                                                                                                        
|
| |  | changes in market valuation or earnings of our competitors;                                                                                                       
|
| |  | the trading volume of our common stock;                                                                                                                           
|
| |  | changes in the estimation of the future size and growth rate of our markets; and                                                                                  
|
| |  | general economic or market conditions and other factors, including factors
unrelated to our operating performance or the operating performance of our competitors.

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 that they will be able to sell in the public market in the future, subject to certain lock-up
agreements which restrict the sale of shares held by our officers, directors and principal
stockholders until August 2005 without the consent of the underwriters of our initial public
offering. Shares held by our officers, directors and principal stockholders will be considered
restricted securities within the meaning of Rule 144 under the Securities Act and, after the
lock-up period, will be eligible for resale subject to the volume, manner of sale, holding period
and other limitations of Rule 144.

Sales by our current stockholders 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 intend to register all common stock that we may issue under our employee benefit plans.
Accordingly, these shares, when registered, can be freely sold in the public market upon issuance,
subject to restrictions under the securities laws and the lock-up agreements described above. 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.

29



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Our common stock has been publicly traded for a short time and an active trading market may not be
sustained. Although we are currently listed for trading on the Nasdaq National Market, an active trading
market for our common stock may not be sustained. An inactive market may impair your ability to
sell shares at the time you wish to sell them or at a price that you consider reasonable.
Furthermore, an inactive market may impair our ability to raise capital by selling shares and may
impair our ability to acquire other businesses, products and technologies by using our shares as
consideration. 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.
    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 30




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directors has approved the transaction. Our board of directors could rely on Delaware law to
prevent or delay an acquisition of us. If our officers, directors and principal stockholders choose to act together, they may be able to
control our management and operations, acting in their best interests and not in the best interests
of other stockholders. Our officers, directors and holders of 5% or more of our outstanding common stock beneficially
own the majority of our outstanding common stock. As a result, these stockholders, acting together,
will be able to significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other business combination
transactions. The interests of this group of stockholders may not always coincide with our
interests or the interests of other stockholders, and they may act in a manner that advances their
best interests and not necessarily those of other stockholders. As a result of their actions or
inactions our stock price may decline. 31




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ITEM 3.
    Quantitative and Qualitative Disclosures about Market Risk Our exposure to market risk due to changes in interest rates relates primarily to the increase
or decrease in the amount of interest income we can earn on our cash equivalents. Our risk
associated with fluctuating interest rates is limited to our investments in interest rate sensitive
financial instruments. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We attempt to increase the safety and
preservation of our invested principal funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in investment grade securities. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield curve would not
materially affect the fair value of our interest sensitive financial instruments due to their
relatively short term nature. Declines in interest rates over time will, however, reduce our
interest income while increases in interest rates over time will increase our interest income. 
  ITEM 4.
    Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission (SEC) 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. As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, we carried out an
evaluation, under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as 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. There has been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting. 32




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PART II. OTHER INFORMATION 
 ITEM 1. Legal Proceedings We occasionally receive written letters of complaint from trademark owners objecting to our
sales of their products at low prices and/or threatening litigation. In the past, such situations
have rarely resulted in litigation, and, in the single case where litigation was instituted, the
matter was settled at nominal cost and with no change or disruption in our purchasing or sales
practices. As our business expands and our company grows larger, the number and significance of disputes
may increase. Any claims against us, whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management time, and result in the diversion of
significant operational resources. Other than the immediately preceding discussion, we are not currently a party to any material
legal or other proceedings. 
  ITEM 2.
    Unregistered Sales of Equity Securities and Use of Proceeds (b) On February 14, 2005, our registration statement on Form S-1 (Registration No. 333-117400)
for our initial public offering was declared effective. As of March 31, 2005, we have used
approximately $17 million of the $22.4 million of net proceeds from the offering in funding our
operations and general corporate purposes, including the repayment of $9.3 million of debt. 
 ITEM 6. Exhibits (a) Exhibits Exhibit No.
    
    Description2.1
    
    
    Asset Purchase Agreement among registrant and Ashford.com, Inc. dated December 6, 2002.
(1)3.1
    
    
    Amended and Restated Certificate of Incorporation. (1)3.2
    
    
    Amended and Restated Bylaws. (1)4.1
    
    
    Form of Specimen Stock Certificate. (1)4.2.1
    
    
    Investors Rights Agreement dated November 18, 1999 by and between the registrant and
certain holders of the registrants capital stock. (1)4.2.2
    
    
    Amended and Restated Registration Rights Agreement dated March 30, 2004 by and between
the registrant and certain holders of the registrants capital stock. (1)10.1.1
    
    
    Odimo Incorporated Amended and Restated Stock Incentive Plan. (1)10.1.2
    
    
    Form of Stock Option Agreement pursuant to the Odimo Incorporated Stock Incentive Plan.
(1)10.2
    
    
    Amended and Restated Series C Convertible Preferred Stock Purchase Agreement dated as
of March 30, 2004 between the registrant and SDG Marketing, Inc. (1)10.3.1
    
    
    Promissory Note dated December 6, 2002 by the registrant in favor of GSI Commerce
Solutions, Inc. (1)10.3.2
    
    
    Security Agreement dated December 6, 2002 between the registrant and GSI Commerce
Solutions, Inc., as assignee. (1)10.3.3
    
    
    Patents, Trademarks, Copyrights and Licenses Security Agreement dated December 6, 2002
between the registrant and GSI Commerce Solutions, Inc., as assignee. (1)10.4.1
    
    
    Lease Agreement dated December 14, 1999 between the registrant and MDR Fitness Corp. (1)
 33




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Exhibit No.
    
    Description10.4.2
    
    
    Lease Amendment and Extension Agreement dated January 8, 2003 between the registrant
and MDR Fitness Corp. (1)10.5.1
    
    
    Employment Agreement dated July 12, 2004 between the registrant and Alan Lipton. (1)10.5.2
    
    
    Employment Agreement dated July 12, 2004 between the registrant and Jeff Kornblum. (1)10.5.3
    
    
    Employment Agreement dated July 12, 2004 between the registrant and Amerisa Kornblum.
(1)10.5.4
    
    
    Employment Agreement dated July 12, 2004 between the registrant and George Grous. (1)10.5.5
    
    
    Lock-up Agreement dated July 12, 2004, between the registrant and Alan Lipton. (1)10.5.6
    
    
    Lock-up Agreement dated July 12, 2004, between the registrant and Jeff Kornblum. (1)10.5.7
    
    
    Lock-up Agreement dated July 12, 2004, between the registrant and Amerisa Kornblum. (1)10.5.8
    
    
    Lock-up Agreement dated July 12, 2004, between the registrant and George Grous. (1)10.5.9
    
    
    Lock-up Agreement dated July 12, 2004, between the registrant and Michael
DellArciprete. (1)10.5.10
    
    
    Amended and Restated Employment Agreement dated August 27, 2004 between the registrant
and Alan Lipton. (1)10.6
    
    
    Form of Indemnification Agreement between the registrant and each of its directors and
executive officers. (1)10.7
    
    
    Supply Agreement dated March 30, 2004 between the registrant and SDG Marketing, Inc. (1)10.8.1
    
    
    Loan and Security Agreement dated as of July 31, 2004 by and among Silicon Valley Bank,
the registrant and its subsidiaries Ashford.com, Inc. and D.I.A. Marketing, Inc. (1)10.8.2
    
    
    Revolving Promissory Note dated as of July 31, 2004 in favor of Silicon Valley Bank, by
the registrant and its subsidiaries Ashford.com, Inc. and D.I.A. Marketing, Inc. (1)10.8.3
    
    
    Intellectual Property Security Agreements dated as of July 31, 2004 in favor of Silicon
Valley Bank, by each of the registrant and Ashford.com, Inc. (1)10.8.4
    
    
    Unconditional Guaranties dated as of July 31, 2004 of Softbank Capital LP, Softbank
Capital Partners LP and Softbank Capital Advisors Fund LP. (1)10.9
    
    
    Commercial Lease dated as of January 1, 2006 between the registrant and IBB Realty,
LLC. (1)10.10
    
    
    First Loan Modification Agreement dated as of November 13, 2004 by and among Silicon
Valley Bank, the registrant and its subsidiaries Ashford.com, Inc. and D.I.A.
Marketing, Inc. (1)10.11
    
    
    First Amended and Restated Note dated as of November 13, 2004 in favor of Silicon
Valley Bank by the registrant and its subsidiaries Ashford.com, Inc. and D.I.A.
Marketing, Inc. (1)10.12
    
    
    Amendment and Reaffirmation of Guaranty dated as of November 13, 2004 of Softbank
Capital, LP, Softbank Capital Partners, LP and Softbank Capital Advisors Fund LP. (1)10.13
    
    
    Second Loan Modification Agreement dated as of January 7, 2005 by and among Silicon
Valley Bank, the registrant and its subsidiaries Ashford.com, Inc. and D.I.A.
Marketing, Inc. (1)10.14
    
    
    Second Amended and Restated Note dated as of January 7, 2005 in favor of Silicon Valley
Bank, by the registrant and its subsidiaries Ashford.com, Inc. and D.I.A. Marketing,
Inc. (1)10.15
    
    
    Second Amendment and Reaffirmation of Guaranty dated as of January 7, 2005 of Softbank
Capital, L.P., Softbank Capital Partners, LP and Softbank Capital Advisors Fund LP. (1)10.16
    
    
    Confirmation letter dated January 7, 2005 from Softbank Capital Partners LP, regarding
financial support. (1)14.1
    
    
    Code of Business Conduct and Ethics. (2)21.1
    
    
    Subsidiaries of Odimo Incorporated. (1)31.1
    
    
    Certification of Chief Executive Officer Required Under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    
    Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1*
    
    
    Certification of Chief Executive Officer Required Under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350.32.2*
    
    
    Certification of Principal Financial Officer Required Under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350.
   (1)
    
    Previously filed as an exhibit to Odimo Incorporateds Registration Statement on Form
S-1 (File No. 333-117400) originally filed with the SEC on July 16, 2004, as amended thereafter,
and incorporated herein by reference. 34




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(2)
    
    Previously filed as an exhibit to Odimo Incorporateds Annual Report on Form 10-K filed with
the SEC on March 31, 2005, and incorporated herein by reference.*
    
    The certifications attached as Exhibits 32.1 and 32.2 accompanies this Quarterly Report on
Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed
filed by Odimo Incorporated for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended. (b) Reports on Form 8-K On March 30, 2005, we filed a report on Form 8-K, which reported under Items 1.01 that we
granted bonuses to certain of our executive officers; and Items 2.02 and 9.01 that we issued a
press release announcing our financial results for the year ended December 31, 2004. On February 18, 2005, we filed a report on Form 8-K, which reported under Items 1.01, 3.02,
5.02, 5.03, 8.01 and 9.01 various events which occurred in connection with the closing of our
initial public offering of securities. 35




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ODIMO INCORPORATED 
RegistrantDate: May 13, 2005
    /s/ Amerisa KornblumAmerisa KornblumChief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer) 36




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EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    
    Certification of Chief Executive Officer Required Under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    
    Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    
    Certification of Chief Executive Officer Required Under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350.32.2
    
    
    Certification of Principal Financial Officer Required Under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350.