Odimo On the Rocks, Impact on Amazon, Blue Nile, GSI Commerce and Overstock? (AMZN, GSIC, NILE, ODMO, OSTK)

Online jewelry retailer Odimo Inc. (Nasdaq: ODMO), operator of Diamond.com, Ashford.com and WorldOfWatches.com, issued a going concern statement in its recently filed 10-K. Odimo is low on cash: it lost $13.9 million in Q4 of 2005, leaving it with a cash balance of only $3.8 million. Odimo's share price at the time of writing is $1.58. To conserve cash, the company has agreed to return $3.7 million worth of diamonds to SDG Marketing, Inc., a subsidiary of the Steinmetz Diamond Group, which supplied Odimo with 18% of the diamonds sold on its websites in 2005.

Important note: GSI Commerce, Inc. (GSIC) owns 12% of Odimo.

Odimo's business model always looked shaky. It disclosed in its IPO filing that it was a large reseller of "grey market" watches, and its IPO filed at the low end of the expected range.

But the real pressure on Odimo has come from rising customer acquisition costs through Internet channels. Among the risk factors in its 10-K, the company states that:

Our success depends upon our attracting customers in a cost-effective manner. We rely on relationships with, among others, online service providers, search engines, directories and other websites to direct traffic to our websites. The costs for these relationships has substantially increased over the last 12 months and the continued increase in such costs will lead us to not attract customers in a cost-effective manner which, in turn, will adversely impact our business.

Odimo's demise would reduce the number of online jewelry retailers by one, a positive for Amazon.com, Inc. (AMZN), Overstock.com, Inc. (OSTK) and Blue Nile Inc. (NILE). But the underlying cause of Odimo's demise -- rising customer acquisition costs and margin compression from excessive Internet-based competition -- impact all the players.

Here's the gory "going concern" wording from Odimo's 10-K:

There is substantial doubt about our ability to continue as a going concern due to our cash requirements which means that we may not be able to continue operations unless we obtain additional funding.

Our independent registered public accounting firm’s report on our financial statements for the fiscal year ended December 31, 2005 includes an explanatory paragraph regarding our ability to continue as a going concern. Note 2 to the financial statements states that our ability to continue operations, meet our operational goals and pursue our long-term strategy is dependent upon our raising additional capital, which raises substantial doubt about our ability to continue as a going concern. Further, the registered public accounting firm’s report states that the financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have incurred operating losses since our inception and anticipate incurring operating losses at least through 2006. We need additional capital to meet our future cash requirements and execute our business strategy.

We have incurred operating losses since our inception in 1998 and anticipate incurring operating losses at least through 2006. As of December 31, 2005, our accumulated deficit was $92.4 million, including a net loss of approximately $23.5 million and $12.5 million for the years ended December 31, 2005 and 2004, respectively. 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 $10 million of costs and capital expenditures...

We currently need additional capital to meet our future cash requirements and execute our business strategy. If we don’t raise funds on acceptable terms or complete an alternative transaction, we may not be able to continue our operations. Financing may not be available on acceptable terms, or at all. Additional financing, if available, may be dilutive to the holders of our common stock and involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate our business.