Abazias 10QSB 2007 Q3 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-QSB

 (Mark one)

        [X]   QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended: September 30, 2007

        [ ]   TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the transition period from ____________ to _____________

Commission file number: 0-27565

Abazias, Inc.

(Exact name of registrant as specified in its charter)

Delaware	0-23532	65-0636277
(State or other jurisdiction	(Commission	(IRS Employer
of incorporation)	File No.)	Identification No.)

5214 SW 91^st Terrace Suite A

Gainesville, FL 32608

(Address of principal executive offices) (Zip Code)

352-264-9940

(Registrant's telephone number)

Check whether the issuer (1) filed all reports required to be filed by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X] No [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes []  No[X]

Applicable only to corporate issuers:

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, $.001 par value 3,035,617 shares outstanding as of November 16, 2007.

Transitional Small Business Disclosure Format: Yes __ No X

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PART I.

Item 1. FINANCIAL INFORMATION

ABAZIAS, INC.

BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2007			2006
ASSETS
Current assets
Cash	$	266,141		$	457,354
Accounts receivable		320,554			543,418
Inventory		281,861			259,933
Total current assets		868,556			1,260,705
Property & equipment, net of accumulated
depreciation of $5,287 and $4,327 respectively		2,209			2,159
Website, net of accumulated amortization
of $17,617 and $4,501 respectively		17,617			30,830
Total Assets	$	888,382		$	1,293,694
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
Current Liabilities
Accounts payable	$	700,909		$	831,328
Stock payable		50,000			300,000
Loans from stockholders		112,031			68,235
Note payable		-			8,000
Deferred revenues		33,563			48,375
Total Current Liabilities		896,503			1,255,938
Commitments and Contingencies		-			-
Stockholders’ Equity/(Deficit)
Preferred stock, $.001 par value, 1,000,000
authorized, no shares issued and outstanding		-			-
Common stock, $.001 par value, 150,000,000 shares
authorized, 3,005,677 and 2,149,607
issued and outstanding respectively		3,006			2,150
Additional paid-in capital		5,560,890			3,939,978
Accumulated deficit		(5,572,017	)		(3,904,372	)
Total Stockholders’ Equity/(Deficit)		(8,121	)		37,756
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY/(DEFICIT)	$	888,382		$	1,293,694

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ABAZIAS, INC.

STATEMENTS OF OPERATIONS

Three and Nine Months Ended September 30, 2007 and 2006

(Unaudited)

	Three months						Nine months
	2007			2006			2007			2006
Sales	$	1,806,282		$	1,070,085		$	5,148,649		$	3,250,020
Cost of sales		1,672,173			975,951			4,567,564			2,838,250
Gross profit		134,109			94,134			581,085			411,770
General and administrative		442,531			164,583			2,246,030			530,224
Net operating loss		(308,422	)		(70,499	)		(1,664,945	)		(118,454	)
Interest expense		(754	)		(1,537	)		(2,699	)		(4,658	)
Net Loss	$	(309,176	)	$	(71,986	)	$	(1,667,644	)	$	(123,112	)
Basic and diluted loss per share	$	(0.10	)	$	(0.03	)		(0.59	)		(0.06	)
Weighted average shares outstanding		3,085,717			2,147,797			2,814,704			2,146,777

ABAZIAS, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

Nine Months Ended September 30, 2007

(Unaudited)

					Additional
	Common Stock				Paid-in		Retained
	Shares		Amount		Capital		Deficit			Totals
Balances,
December 31, 2006		2,149,607	$	2,150	$	3,939,978	$	(3,904,372	)	$	37,756
Shares issued for
Cash		289,821		290		449,710		-			450,000
Shares issued for
Services		66,250		66		141,659		-			141,725
Warrants/Options
issued for
services		-		-		1,002,344		-			1,002,344
Exercise of options		500,000		500		24,500		-			25,000
Imputed interest		-		-		2,699		-			2,699
Net loss								(1,667,645	)		(1,667,645	)
Balances,
September 30, 2007		3,005,677	$	3,006	$	5,560,890	$	(5,572,017	)	$	(8,121	)

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ABAZIAS, INC

STATEMENTS OF CASH FLOW

Nine Months Ended Sept 30, 2007 and 2006

(Unaudited)

	2007			2006
Cash Flows from Operating Activities
Net loss	$	(1,667,645	)	$	(123,112	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services		141,725			10,600
Options issued for services		1,002,344			-
Imputed interest on stockholder loan		2,699			4,658
Depreciation and amortization		13,933			961
Changes in:
Accounts receivable		222,864			(77,518	)
Inventory		(21,928	)		(51,134	)
Accounts payable		(130,419	)		48,108
Deferred revenues		(14,812	)		(27,484	)
Stock payable		50,000			-
Net Cash Used In Operating Activities		(401,239	)		(214,921	)
Cash Flows from Investing Activities
Purchase of assets		(770	)		(35,331	)
Net Cash Used In Investing Activities		(770	)		(35,331	)
Cash Flows from Financing Activities
Proceeds from subscription receivable		25,000			-
Proceeds from sale of common stock		150,000			-
Proceeds from stockholder’s loans		200,000			-
Payment on loans from stockholders		(164,204	)		(10,000	)
Net Cash Provided By/
(Used In) Financing Activities		210,796			(10,000	)
Net change in cash		(191,213	)		(260,252	)
Cash at beginning of year		457,354			294,527
Cash at end of year	$	266,141		$	34,275
Supplementary Disclosers:
Income tax paid	$	-		$	-
Interest paid		-			-
Non-cash operating and financing activities:
Common stock issued as payment on stock payable		300,000			-

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ABAZIAS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

The accompanying unaudited interim financial statements of Abazias, Inc., a Delaware corporation (“Abazias”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Abazias’ latest Annual Report filed with the SEC on Form 10-KSB.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year, 2006, as reported in Form 10-KSB, have been omitted.

NOTE 2 - EQUITY

On February 22, 2007, pursuant to an employment agreement, the CFO was granted options to purchase 125,000 shares of common stock. The options have an exercise price of $.05 per share and expire in two years. The fair value of the options is $250,586.  All of these options were exercised on February 22, 2007, and the cash was received subsequent to March 31, 2007.

On February 22, 2007, pursuant to an employment agreement, the CEO was granted options to purchase 250,000 shares of common stock. The options have an exercise price of $.05 per share and expire in two years. The fair value of the options is $501,172. All options were exercised on February 22, 2007, and the cash was received subsequent to March 31, 2007.

On February 19, 2007, 125,000 warrants were issued to purchase shares of common stock to a consultant. The warrants have an exercise price of $.05 and expire in two years. The fair value of the warrants is $250,586. All these warrants have been exercised and the cash was received subsequent to March 31, 2007.

On February 7, 2007, Abazias issued 200,000 shares of common stock for $300,000.

On February 2, 2007, 1,250 shares of common stock were issued to an employee for services with a fair value of $2,725.

On February 2, 2007, 50,000 shares of common stock were issued to a consultant for services with a fair value of $109,000.

On February 23, 2007, 15,000 shares of common stock were issued to a consultant for services with a fair value of $30,000.

On July 13, 2007, 89,821 shares of common stock were issued for $150,000.

NOTE 3 – SUBSEQUENT EVENTS

On October 2, 2007, Abazias issued 29,940 shares of common stock for $50,000.

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Item 2.                            Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Some of the statements contained in this Form 10-QSB that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties.  We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-QSB, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses.  No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.  Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:

·Our ability to maintain, attract and integrate internal management, technical information and management information systems;

·Our ability to generate customer demand for our services;

·The intensity of competition; and 

·General economic conditions.

All written and oral forward-looking statements made in connection with this Form 10-QSB that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.

Overview

We are an online retailer of high quality loose diamonds and fine jewelry settings for our diamonds. Our web site at www.abazias.com showcases over 100,000 diamonds almost all of which are independently certified and around 600 styles of fine jewelry, including rings, wedding bands, earrings, necklaces, and bracelets.

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RESULTS OF OPERATIONS

Three and Six Months Ended September 30, 2007 and 2006

(Unaudited)

	Three months						Nine months
	2007			2006			2007			2006
Sales	$	1,806,282		$	1,070,085		$	5,148,649		$	3,250,020
Cost of sales		1,672,173			975,951			4,567,564			2,838,250
Gross profit		134,109			94,134			581,085			411,770
General and administrative		442,531			164,583			2,246,030			530,224
Net operating loss		(308,422	)		(70,499	)		(1,664,945	)		(118,454	)
Interest expense		(754	)		(1,537	)		(2,699	)		(4,658	)
Net Loss	$	(309,176	)	$	(71,986	)	$	(1,667,644	)	$	(123,112	)
Basic and diluted loss per share	$	(0.10	)	$	(0.03	)		(0.59	)		(0.06	)
Weighted average shares outstanding		3,085,717			2,147,797			2,814,704			2,146,777

Three Months Ended September 30, 2007 and 2006

Our sales for the three months ended September 30, 2007 vs. three months ended September 30, 2006 increased 69% to $1,806,282 from $1,070,085 primarily due to an increase in online marketing campaigns, especially with respect to increasing our visibility on search engine rankings. This is a result of our extensive internal search engine optimization campaign and pay per performance search engine efforts. Additionally, an increased expenditure and its corresponding exposure in certain jewelry and general retail internet portals, like pricegrabber.com and pricescope.com, assisted in this increase in revenue.

Our cost of sales for the three months ended September 30, 2007 vs. three months ended September 30, 2006 increased 71% to $1,672,173 from $975,951 due to the corresponding increase in the amount of diamonds and jewelry sold for the period and diamond costs incurred from the previous quarter. This corresponding increase in costs is consistent with the increase in additional sales for the period.

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Our general and administrative expenses for the three months September 30, 2007 vs. three months ended September 30, 2006  increased 169% to $442,531 from $164,583 due primarily to $177,464 related to increased spending on internet related advertising including search engine optimization, pay per click advertising, and portal advertising cost.

Our interest expense for the three months ended September 30, 2007 vs. three months ended September 30, 2006 decreased 51% to $754. This was a result of a reduction in average outstanding  principal liability owed to our major stockholder Oscar Rodriguez during this period.

Accordingly, our net loss for the three months ended September 30, 2007 vs. three months ended September 30, 2006 increased 329% to $309,176 from $71,986 due primarily increased spending on internet related advertising including: search engine optimization, pay per click advertising, and portal advertising related cost.

Nine months ended September 30, 2007 and 2006

Our sales for the nine months ended September 30, 2007 vs. nine months ended September 30, 2006 increased 58% to $5,148,649 from,$3,250,020 primarily due to an increase in online marketing campaigns, especially with respect to increasing our visibility on search engine rankings. This is a result of our extensive internal search engine optimization campaign. Additionally, an increased expenditure and its corresponding exposure in certain jewelry and general retail internet portals, like pricegrabber.com and pricescope.com, assisted in this increase in revenue.

Our cost of sales for the nine months ended September 30, 2007 vs. nine months ended September 30, 2006 increased 61% to $4,567,564 from $2,838,250 due to the corresponding increase in the amount of diamonds and jewelry sold for the period. This corresponding increase in costs is consistent with the increase in additional sales for the period.

Our general and administrative expenses for the nine months ended September 30, 2007 vs. nine months ended September 30, 2006   increased 324% to $2,246,030from $530,224due primarily to $316,040 related to increased spending on internet related advertising including search engine optimization, pay per click advertising, and portal advertising cost and $1,144,069 of common stock and options issue for services.

Our interest expense for the nine months ended September 30, 2007 vs. nine months ended September 30, 2006 decreased 42% to $2,699. This was a result of a reduction in the average outstanding principal liability owed to our major stockholder Oscar Rodriguez during this period.

Accordingly, our net loss for the nine months ended September 30, 2007 vs. nine months ended September 30, 2006 increased 1,255% to $1,667,644 from $123,112 due primarily to $151,260 in increased spending on internet related advertising including: search engine optimization, pay per click advertising, and portal advertising related cost and $1,144,069  of common stock and options issued for services.

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Liquidity and Capital Resources

At September 30, 2007 we had assets of:

Cash	$	266,141
Accounts receivable		320,554
Inventory		281,861
Total current assets		868,556
Property & equipment, net of accumulated
depreciation of $5,287 and $4,327 respectively		2,209
Website, net of accumulated amortization
of $17,617 and $4,501 respectively		17,617
Total Assets	$	888,382
At September 30, 2007 we had current liabilities as follows:
Current Liabilities
Accounts payable	$	700,909
Stock Payable		50,000
Loans from stockholders		112,031
Deferred revenues		33,563
Total Current Liabilities		896,503

For the nine months ended September 30, 2007, we had average monthly gross profit of $64,565 and average monthly cash used on operation activities of $44,582.  Accordingly, we had a monthly cash loss of $56,327 for this period.

We expect that our average cash revenues to increase over the next twelve months based on recent historical trends. We also expect expenses to increase over the same period. We anticipate that this will result in an increase in gross profit should compensate for the current negative cash flow position, primarily because a significant portion of our expenses are fixed. While this may not always compensate for negative cash flow on a quarter by quarter basis due to the timing or certain large payables (ie. diamond vendors), over a larger period of time we expect this to be the case. We intend to raise additional funds from an offering of our stock in the future. Except for preliminary discussions, we have not taken any steps to effect this offering and we have no agreement, commitment or understanding for this financing.  The offering may not occur, or if it occurs, may not generate the required funding.  We may also consider securing debt financing.

Although this cash flow position is currently negative, management feels reasonably confident that it is in a position to maintain or increase the required level of sales, and/or reduce corresponding expenses as needed to fulfill its financial obligations from a cash flow perspective on an ongoing basis into the future, although there is no assurance we can do so. The majority stockholder advances money to Abazias on an as−needed basis. If needed, he has agreed to make further advances during fiscal 2007. The advances are due on demand, bear no interest and have no collateral.  At September 30, 2007, the amount of the advance was $112,031. Our recent negative cash flow has been funded by previous stock issuances to accredited investors and the majority stockholder.

As of September 30, 2007, we had $700,909 of trade accounts payable and receivables of $320,554 additionally we have $281,861 in inventory. .

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Certain Accounting Policies

Revenue recognition

a) Return Policy- For most of our products, we offer an unconditional 10-day return policy, under which customers desiring to return a product receive a return authorization by calling our customer service center. We have, based on historical return figures, been able to determine that returns have never had any material impact on our financial statements, and historically been less then than 5% of  total sales, based on analyzing historical return rates. We therefore expect no more than 5% of sales to be returned which can only occur within 10 days after the sale is made. Returned products are treated as merchandise credits and are subject to the same inventory accountability. Revenue is recognized when the diamonds are shipped, and returns immediately debited against current sales upon any return.

b) Since our inventory is purchased at the time of sale,, we have reviewed EITF 99-19, to clarify if we might be deemed a diamond agent and have to report sales on a net basis.  We clearly do not fit under the appropriate definition as an agent for several reasons. We purchase all of our diamonds under our credit facilities with our various wholesalers. This varies between many dealers and in same cases, requires us to wire funds before a diamond is shipped, to many dealers offering us credit terms of net 30 for payment. The customer that purchases a diamond or other product, does so with us solely, and is never even aware of our wholesaler relationships, and even at any time we’re aware, could not purchase from them. Consequently, regardless of whether we are paid or not for the diamond or other products we sell, we are obligated to pay our wholesaler for said product once shipped. We have purchased the diamond or product, and the responsibility of said product solely rests with us, including accepting a return from a customer, even when we in turn might not be able to return the same diamond to our wholesaler. Regardless of whether or not the company is deemed an agent, which we clearly are not, we would still fulfill all the indicators under EITF 99-19 for gross revenue reporting. We are the primary obligator in the arrangement, we maintain inventory risk in the event the product is returned, price establishment rests solely with us, we can and do modify the product frequently by mounting diamonds, as well as finishing them and other products, we can and do choose among many suppliers, all products sold are determined by us, we have physical loss risk, and additionally shoulder credit risk. Based on these reasons, we clearly are not an agent, and should report revenues on a gross basis.

Trade up policy

We have a lifetime trade up policy which provides a guaranteed trade up of 80% of the price of the original diamond purchase. This provides our customers with the ability and incentive to become and remain our customers for many years to come. This affords our customers an option that many of our competitors will not extend to them. If the buyer exercised his/her trade-in right (functionally an option written by us), we would exchange a new diamond in for the original. Under normal circumstances, any trade up policy exercised would be even more profitable than a sale not including an exercised policy. This is because, on average we would make our normal markup, in addition to getting a discount that is greater than our cost on the diamond traded. It is conceivably possible, in a catastrophic event to the diamond markets which caused the value of diamonds to drop, customers would want to take advantage of this policy. Our policy is limited to the value of the diamond traded in, being close to the value when purchased. As such, we are protected from the functional price guarantee as mentioned in EITF 00-24 and FIN 45. Specifically our policy is only valid when, the diamond is at least 80% of the wholesale per carat price at time of purchase, based on published wholesale prices in the Rappaport industry publication, which is the de-facto standard for diamond pricing. To date, no customers have exercised this policy with us. After reviewing EITF 00-24 and FIN 45, we would not  have any potential financial exposure to account for as a result of this policy, since our trade in value requirements based on current market conditions at the time of trade in, require the diamond to be worth 80% of the wholesale carat price, and if it does not, no trade up policy is valid.

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report on Form 10-QSB, our Chief Executive Officer and our Chief Financial Officer performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of the end of the period covered by this report on Form 10-QSBthat the Company's disclosure controls and procedures are not effective to provide reasonable assurance that: (i) information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure by the Company; and (ii) information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

The deficiencies in our internal controls relate to receivables and certain equity transactions. Receivables were understated by amounts collected for items that were not shipped by the end of the period, causing unearned revenues to be incorrect for the period. The adjustment was to increase receivables and reclassify to deferred revenues. Other adjustments were to record certain equity transactions for which cash was received for the purchase of stock, but as of the end of the period the stock was not yet authorized or issued.

Changes in Internal Control Over Financial Reporting

There were no significant changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the last fiscal quarter that have materially affected or that are reasonably likely to materially affect our internal control over financial reporting.

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                           PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None during the quarter ended September 30, 2007.

Item 3.   Default Upon Senior Securities

Not applicable.

Item 4.   Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5.   Other Information

Item 6.   Exhibits

(a) Exhibits:

Exhibit No.	Document Description
31.1	CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
	ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
	ACT OF 2002.
31.2	CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
	ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
	ACT OF 2002.
32.1	CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
	ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
	ACT OF 2002
32.2	CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
	ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
	ACT OF 2002

(b) Form 8-K.

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SIGNATURES

In accordance with Section 12 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Abazias, Inc.

By: /s/ Oscar Rodriguez

        Oscar Rodriguez, President and Director

By: /s/ Jesus Diaz

        Jesus Diaz, Principal Financial Officer

        and Principal Accounting Officer

Dated: November 19, 2007

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