Table of Contents

 

 

 
|   | **UNITED  STATES**                      | OMB APPROVAL                                                   |
|--------|-----------------------------------------|----------------------------------------------------------------|
|   | **SECURITIES  AND EXCHANGE COMMISSION** | OMB Number: 3235-0063                                          |
|   | **Washington, D.C. 20549**              | Expires: December 31, 2012                                     |
|   | ******FORM 10-K**                  | Estimated average  burden hours per  response: 2,101.00   |
|   |

 

**(Mark One)**

 

**x****                ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the fiscal year ended December 31, 2009**

 

**or**

 

**o****                   TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition periodfrom           to              **

 

**Commission file Number  000-51257**

 

**BIDZ.com, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                  | ** ** | **95-4728109**                        |
|---------------------------------------------------------------|------------|---------------------------------------|
| State or other jurisdiction of  incorporation or organization |       | (I.R.S. Employer  Identification No.) |
|                                                          |       |                                  |
| **3562 Eastham Drive, Culver City, California**               | ** ** | **90232**                             |
| (Address of principal executive offices)                      |       | (Zip Code)                            |

 

Registrant’s telephone number, including area code  **(310) 280-7373**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|----------------------------------------|------------|-----------------------------------------------------------------------------|
| **Common Stock, $.001 par value**      | ** ** | **NASDAQ Capital Market**                                                   |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

(Title of class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. o YES x NO

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. o YES x NO

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. x YES o NO

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes o  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§ 229.405 of this chapter) is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

| Large accelerated filer o                |   | Accelerated filer  x        |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act). o YES x NO

 

The aggregate market value of the voting stockheld by non-affiliates of the registrant based upon the price of the commonstock as of June 30, 2009 was approximately $31.7 million. For purposeshereof, directors, executive officers and 10% or greater shareholders have beendeemed affiliates.  This determination of affiliate status is notnecessarily a conclusive determination for others purposes.

 

Thenumber of shares outstanding of the registrant’s common stock was 22,114,257 asof February 28, 2010.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Information required by Part III(Items 10, 11, 12, 13 and 14) is incorporated by reference to portions ofour definitive proxy statement for our 2010 Annual Meeting of Stockholders,which will be filed with the Securities and Exchange Commission within120 days of December 31, 2009.

 

 

 

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**BIDZ.COM, INC.**

 

**ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2009**

 
| ** **                                                                                                                 | **Page** |
|----------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                       |     |
| PART I                                                                                                                | 3        |
| Item 1. Business                                                                                                           | 3        |
| Item  1A. Risk Factors                                                                                                     | 14       |
| Item 1B.Unresolved Staff Comments                                                                                          | 25       |
| Item 2.  Properties                                                                                                        | 25       |
| Item  3. Legal Proceedings                                                                                                 | 25       |
| Item 4. Submission of Matter to a Vote of Securities  Holders                                                              | 26       |
|                                                                                                                       |     |
| PART II                                                                                                               | 26       |
| Item 5. Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities | 26       |
| Item  6. Selected Financial data                                                                                           | 28       |
| Item 7. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        | 28       |
| Item 7A. Quantitative and Qualitative Disclosures  about Market Risk                                                       | 36       |
| Item 8. Financial Statements and Supplementary Data                                                                        | 36       |
| Item 9. Changes in and Disagreements With Accounting  on Accounting and Financial Disclosure                               | 36       |
| Item 9A. Controls and Procedures                                                                                           | 36       |
| Item  9B. Other Information                                                                                                | 37       |
|                                                                                                                       |     |
| PART III                                                                                                              | 37       |
| Item 10. Directors, Executive Officers and Corporate  Governance                                                           | 37       |
| Item 11. Executive Compensation                                                                                            | 38       |
| Item 12. Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                   | 38       |
| Item 13. Certain Relationships and Related  Transactions, and Director Independence                                        | 38       |
| Item 14. Principal Accounting Fees and Services                                                                            | 38       |
|                                                                                                                       |     |
| PART IV                                                                                                               | 38       |
| Item 15. Exhibits and Financial Statement Schedules                                                                        | 38       |

 

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**Part I**

 

**Item1.**           Business

** **

**Overview**

 

Weare a leading online retailer of jewelry, featuring a live auction format. Wehave established our retail brand in the online marketplace by offeringhigh-quality merchandise, a unique user-friendly shopping experience, and theopportunity for buyers to achieve significant cost savings versus traditionalretail channels. A key to our success has been our ability to efficiently andcost effectively source closeout and jewelry, watches, accessories and brandname merchandise, and rapidly respond to changing consumer demands for ourmerchandise. We offer our products through a continuous live format, featuringa $1 minimum opening bid, and a unique 15-second auction extension period that allowsour auctions to continue until all bids are received. On select auctions wemaintain a reserve price that must be met before a sale will be consummated. In2009, we started offering auctions with a minimum opening bid that is higherthan $1. The majority of our auctions are short-term, often lasting less thanone hour, providing immediate gratification to our customers and encouragingfrequent visits and active viewing of our website.

 

In addition to our auctionsite (*www.bidz.com*) we have afixed pricing format (*www.buyz.com*)that offers similar items of merchandise as those listed for auction.  This online store provides us access todifferent types of consumers, and we plan to offer customers the ability todesign their own jewelry including diamond earrings and rings in the nearfuture. The fixed price site may also be used to sell inventory that is held byour suppliers using a just in time ordering or drop ship model.

 

Ourproduct inventory includes gold, platinum, and silver jewelry set with diamonds,rubies, emeralds, sapphires, and other precious and semi-precious stones;watches, accessories and brand name merchandise. We believe we are the secondlargest online retailer of jewelry based on revenue and the largest onlinejewelry auction site based on web traffic.

 

Inline with our growth plans, we previously completed a major upgrade of ourauction platform at the end of 2007. The new auction system supports a broadrange of leading browser software including Microsoft Internet Explorer, FireFoxand Safari. The new system touts high availability, faster end-user responsetime and greater scalability among the key features delivered in this release.We have leveraged this new software solution to launch additional site featuresand our online retail store, buyz.com. We launched the Spanish,Arabic and German versions of our website in 2008.

 

The following aspects ofour innovative auction model differentiate us from other auction websites:

 

·                  $1 minimum bid format for many auctions,

 

·                  interactive auctions with 15-second timeextensions for all auctions each time a bid is received within 15 seconds oftermination of the auction, and

 

·                  short term auctions, often lasting lessthan one hour, providing our customers immediate gratification to encouragefrequent visits and active viewing of our website.

 

In 2009, we completed anddeployed an implementation of Dynamics AX, a robust ERP solution fromMicrosoft. Dynamics AX replaced our proprietary in-house business managementsoftware in the areas of inventory management, order management, customermanagement, logistics, purchasing, warehouse management, fulfillment, andaccounting.

 

We sell to consumers looking for reliable bargains on jewelry, watches,accessories and brand name merchandise. Because we purchase and retain all ofour inventory onsite, we can provide our customers with timely service anddelivery of their purchases. In addition, each item is inspected by one of ourtrained product specialists prior to its placement on our website, whichassures our customers of the quality of their purchases of our products. Weoperate in a highly competitive market with low barriers to entry. By sellingour own merchandise, we provide a buying environment in which we minimize thefraudulent activity and questionable product quality that are frequently associatedwith purchases from third-party sellers. We also provide a 15-day return policyon all merchandise, some of which may be subject to a restocking fee. Webelieve that many of our customers resell merchandise that they purchase fromour auctions on eBay, at local auctions, and through other retail channels. Ourauctions and fixed price sales are conducted 24 hours a day, seven days aweek. We also offer 24-hour customer support via telephone, email and onlinelive-help.

 

Thereis no charge to a potential buyer for registering on our website or placingbids. Buyers have access to a broad selection of items without expensiveadditional markups or commissions to intermediaries. Our website offersdetailed product information, including 

 

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photographsof our merchandise. Our website also provides a dynamic display ofauto-refreshing screens, enabling our customers to follow our in-progressauctions in real-time. Successful bidders are automatically notified when anauction is completed.

 

Wepurchase jewelry inventory directly from manufacturers and liquidators. We alsoclosely monitor our sales trends to assess consumer demand for certain jewelrystyles and categories and purchase such non-closeout inventory directly frommanufacturers. We have eliminated various inefficiencies and mark-upsassociated with traditional intermediaries in the jewelry market. Our sourcingmodel provides a critical alternative liquidation channel for manufacturers,for which disposal of closeout inventory represents a significant challenge. Wehave the flexibility to purchase a variety of lot sizes, and our centralizedwarehouse and fulfillment center enables our suppliers to ship their productsto a single location, easing the burden on their infrastructure. We havedeveloped a database of product descriptions and pictures that enables us torapidly post inventory for sale. In addition, we closely monitor sales andgross margin trends of our products on a daily basis, allowing us to carefullyselect additional products for purchase and adjust supplier pricing asnecessary.

 

**History**

 

We commenced operations in early 1998 by offering alimited selection of merchandise for sale on eBay’s website through ourpredecessor, Asset Lenders of America, a group of 11 collateral lending stores.In the fall of 1998, we formed Bidz.com, Inc. as a California corporation,acquired Asset Lenders of America, and purchased the domain name *www.bidz.com*. In February 1999, welaunched the *www.bidz.com*websiteand began offering closeout jewelry through our auction format. In November 1999,we merged Asset Lenders of America into our Company. In June 2006, theCompany reincorporated in the state of Delaware.

 

**IndustryOverview**

 

**Growth ofOnline Commerce and the Online Auction Market**

 

The Internet’s development into a significant globalmedium for communication, content, and commerce has led to substantial growthin online shopping and has provided online retailers with new opportunities toeliminate intermediaries from the traditional retail supply chain. Internet usageand online commerce continue to grow worldwide. The growth can be attributed tofactors such as an increased awareness of the convenience of online shopping,an expanded range of products available online, improvements in security andelectronic payment technology, and increased access to broadband Internetconnections facilitating online shopping.

 

Online auction sites have created a robust globalmarketplace, which overcomes the inefficiencies associated with traditionalauction purchasing while offering the benefits of online commerce. Companiessuch as eBay spearheaded the creation of a centralized online auction market,offering buyers a significantly broader selection of goods to purchase. Today,online auction sites offer significant convenience, allowing trading at allhours and providing continually updated product offerings. By leveraging theinteractive nature of the Internet, our website also enables customers toexperience the excitement of live auctions, including the competitive bidding process.

 

**TheJewelry Market**

 

Jewelryis designed and manufactured by a large number of manufacturers. Jewelrymanufacturers sell to a variety of wholesalers, distributors, and retailers.Jewelry in turn is sold to consumers through a variety of jewelry stores. TheU.S. brick and mortar jewelry retail market consists primarily of small,independent stores, regional operators, and a limited number of national retailchains, such as Tiffany & Co., Zales, and Kay Jewelers. Multi-linedepartment and discount stores and others also sell jewelry, such as Wal-Mart,Target, J. C. Penney, and Costco, as well as enterprises such as QVC and HomeShopping Network. Despite the presence of major jewelry retail chains, amajority of the jewelry retail business remains fragmented.

 

Manufacturerstraditionally hold inventory to buffer against uncertain demand within theirnormal, offline sales channels. Manufacturers’ primary distribution channelsconsist of regular sales to major established retailers at wholesale prices andsales to wholesalers that service smaller retail chains. In recent years,several dynamics have shifted inventory risk from retailers to manufacturers,including the following:

 

·              dominant retailers insisting onjust-in-time deliveries from manufacturers,

 

·              dominant retailers often demandingto cancel orders mid-production and returning unsold merchandise,

 

·              rapid changes in style, color, ormodels, turning inventory into closeout merchandise,

 

·              incorrect estimates of consumerdemand leading to overproduction, and

 

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·              changes in a retailer’s financialsituation or strategy resulting in cancelled orders.

 

Disposalof closeout jewelry represents a significant challenge for many manufacturersand liquidators. Manufacturers often use multiple channels, such as catalogs,resellers, liquidators, and small retailers, to sell their closeout jewelryinventory as a result of the wide variety in lot size of their products.Multiple channels create additional logistical burdens, reduce the control ofmanufacturers over distribution and devalue the merchandise as inventory becomesavailable at discounted prices in multiple locations.

 

Manufacturersare often required to adhere to delivery and quantity specifications. If amanufacturer does not meet required delivery schedules or specifications, orproducts are unsold, the products may be returned to the manufacturer. In bothcases, manufacturers rarely meet their costs on their closeout products.Manufacturers often opt to melt down the jewelry into its component parts andreconstruct jewelry pieces with current season styles. The melt-down process isdifficult, requires skilled labor, and results in a very low return onmanufacturing costs.

 

**Our ValueProposition**

 

*Value to Buyers*

 

Throughonline auctions and the fixed price online store on our websites, we believethat we offer value to a broad range of customers by providing the following:

 

***Bargain prices.    ***The price of all our products is dictated by thebuyer alone based on that buyer’s valuation of the product. Therefore, manyitems offered on our website are sold at a substantial discount to the pricesin traditional retail channels, such as at jewelry stores located in shoppingmalls. Regardless of the closing price, once an auction is closed for thoseauctions without a reserve price, the final bidder will receive the product.

 

***Entertaining auction format.***    Weoffer our customers the excitement of winning an item that may not be availablein the future. We offer short-term, live auctions, many lasting less than onehour, providing our customers an alternative to the traditional, longer auctionformat. We believe the shorter time frame of our auctions encourages repeatvisits and active viewing of our website.

 

***Broad product selection.***    Weoffer a broad selection of jewelry, including rings, necklaces, earrings,bracelets, jewelry sets, watches, accessories and brand name merchandise. Ourselection includes gold and silver jewelry, as well as jewelry with preciousand semi-precious stones.

 

***Product quality assurance.***    Weprovide detailed and accurate descriptions of each product. Our trained productspecialists inspect our jewelry, utilizing the Gemological Institute of AmericaDiamond and Colored Stone Grading System prior to posting on our website forauction. We guarantee the quality of our products through our 15-day returnpolicy on all of our merchandise with a money-back guarantee if the product isnot as described on our website. Items that are returned that are identical totheir description are subject to a restocking fee, which is 15% of the originalpurchase price and shipping fees are non-refundable. Our commitment to qualityand product description accuracy is demonstrated by consistently low returnrates on our items, which were approximately 3% of all items sold in 2009.

 

***Prompt fulfillment and responsivecustomer service.***    We maintain ininventory all the products we offer on our website, enabling us to ensureprompt order fulfillment and delivery to our customers. Our customer servicerepresentatives are available seven days a week, via telephone, live-help ande-mail, and are trained to provide assistance and answer a broad range ofquestions regarding payment, delivery, and other matters.

 

***Positive shopping experience.***    Oureasy-to-navigate website provides our customers with clear and detailedinformation about our products, including multiple photographs of many items.Customers can bid on our products 24 hours a day, seven days a week. Buyers areprovided a two-day payment grace period on all products purchased.

 

*Value to Suppliers*

 

Jewelry,accessories and brand name manufacturers and suppliers continually look for acost-effective, efficient way to sell their regular and closeout inventory. Ourability to purchase merchandise in various quantities provides a critical one-stopinventory clearance alternative for manufacturers and suppliers and anefficient sales channel for liquidators that purchase closeout inventory frommanufacturers.

 

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***Single source for productdisposition.***    Unlike many multi-storeretail chains that often require large lot purchases to stock appropriatelevels of inventory at their multiple locations, we have the flexibility to buyand sell both small and large merchandise lots in a highly efficient manner. Asa single source for the sale of regular and closeout merchandise, we providesuppliers with greater control of distribution by reducing the need to spreadproducts across multiple channels. In addition, manufacturers and liquidatorsare often required to adhere to stringent product quantity and deliveryschedule requirements. Products not delivered on time or in exact amounts arereturned. We have the flexibility to tailor our purchasing to a supplier’sneeds with regard to quantity, variety, and timing.

 

***Resolution of channel conflict.***    Manufacturersseek to avoid liquidating their products through traditional retail channels inwhich their discounted products may be sold alongside their full-priceproducts. Such side-by-side selling can result in weaker pricing and decreasedbrand strength, which is known as channel conflict or sales channel pollution.As a result, many manufacturers turn to liquidation wholesalers and discountretailers. These liquidation channels, however, provide manufacturers limitedcontrol over distribution and are unreliable and expensive to manage. Becausewe offer an alternate online distribution channel that focuses on the auctionsale of merchandise, our suppliers are able to sell their discountedmerchandise independently of their full-priced products. We believe thisenables our suppliers to avoid customer confusion and potential loss of salesof their full-priced merchandise products.

 

***Profitable alternative forsuppliers.***    We eliminate variousinefficiencies and mark-ups associated with traditional intermediaries.Manufacturers can also sell excess jewelry products to us rather than expendthe labor and cost of melting and reworking their gold, platinum or silverproducts.

 

**Growth Strategy**

 

Ourobjective is to become the leading online retailer of jewelry, accessories andbrand name merchandise. We intend to achieve this objective through thefollowing strategies:

 

***Expanding our customer base***by maintainingand expanding our relationships with third-party search engines, affiliate partners, shopping comparisonsites, Internet portals, and websites and by increasing our onlineadvertising expenditures within these channels;

 

***Enhancing sourcing relationships***by expandingthe number of suppliers from which we purchase regular and closeout inventory,thereby assuring consistent availability of a wide variety of designs andstyles of jewelry, accessories and brand name merchandise, and purchasing forcash from suppliers that do not extend credit terms and to obtain bettersupplier pricing;

 

***Increasing the breadth and depth ofour product offerings***by increasing availableinventory within specific merchandise categories, allowing us to make morevariety available and enabling us to list more auction items on a daily basis;

 

***Continuing to build market share forour online jewelry retail store Buyz.com***by allowing fixed priceitems to be sold that will complement our core auction format; and

 

***Focusing on new internationalmarkets***by expanding into and creating a strong presence ina number of English-speaking countries, including the United Kingdom, Canada,Australia, Ireland, and New Zealand, along with the foreign language versionsof our website: Spanish, Arabic and German.

 

**Marketing**

 

Ourmarketing strategy is designed to generate consumer traffic by increasingawareness of our website and recognition of our brand, building a loyal buyerbase, and maximizing repeat purchases. Our website has experienced substantialgrowth in users and buyers, as evidenced through data compiled by us throughthe measurement tools on our website.

 

Ourmarketing and advertising efforts consist primarily of the followinginitiatives:

 

***Search marketing:    ***We purchase search engine advertising primarily at an auction basedprice, which is paid each time a potential customer clicks on one of ouradvertisements. We currently maintain advertising relationships with, amongothers, Google (US, Australia, Canada, European Union, South East Asia, MidEast and South America), Yahoo (US, and Australia), MSN for search engineadvertising.

 

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***Online banner marketing:***    Weutilize banner advertisements from the largest banner advertising channels. Wefocus on contextual and behavioral advertisements that appear on websitesrelated to jewelry, fashion, shopping and women’s lifestyle. The Companymaintains portal advertising relationships with Yahoo, MSN, Casale Media,Advertising.com, ValueClick Media, AOL and others. The fee structure forour purchase of banner advertisements is based on a set price for an action(such as clicks or new buyers), or on a cost per thousand basis, for which wepay a set fee per thousand banner advertisements that appear on the selectedwebsites.

 

***E-mail campaigns:***    Weutilize an electronic direct marketing program to encourage prospect activation,customer referrals, customer retention, repeat purchases and customeracquisition. This program includes permission-based e-mail marketing tovisitors who indicate a desire to continue to receive product recommendationsand promotional discounts. We purchase e-mail direct marketing for a set feeper thousand e-mails sent or for each new lead from websites and marketingagencies that meet our policies against spamming. We also purchase on a costper action basis such as clicks, new registrations and new buyers.

 

***Affiliate programs:***    Weattract customers by participating in affiliate programs. Our affiliateprograms offer other website operators an opportunity to earn commissions byproviding their visitors access to our website. We use Link Share for our U.S.affiliate programs and Commission Junction for our European affiliate programs.We also work with several other Affiliate Networks including Azoogle, HydraMedia, Neverblue Media and Zanox. In so doing, we intend to extend the reach ofour website and draw customers from a variety of other websites. Byparticipating in our affiliate programs, website publishers earn volume-basedcommissions by directing customers to our website.

 

***Refer a friend program:*********    Weattract new customers by having our existing customers participate in our refera friend program that started in 2010. The existing customer will earn storecredits when a friend has registered as a new customer and the first purchasehas shipped. The store credits will typically be valid for 6 months and can beapplied towards payments for purchases.

 

**Sourcing Strategy**

 

Wepurchase closeout inventory directly from manufacturers, distributors andliquidators. We also closely monitor our sales trends to assess consumer demandfor certain merchandise and categories and purchase regular merchandiseinventory directly from manufacturers. We have eliminated variousinefficiencies and mark-ups associated with traditional intermediaries in thejewelry, accessories and brand name market. Our sourcing model provides acritical alternative liquidation channel for manufacturers, for which disposalof closeout inventory represents a significant challenge. We have theflexibility to purchase a variety of lot sizes, and our centralized warehouseand fulfillment center enables our suppliers to ship their products to a singlelocation, easing the burden on their infrastructure and allows us to reducecost. We have developed a database of product descriptions and pictures thatenables us rapidly to post inventory for sale. In addition, we closely monitorsales and gross margin trends of our products on a daily basis, allowing us toselect carefully additional products for purchase and adjust supplier pricingas necessary.

 

Weidentify manufacturers, distributors and liquidators with high-value productsby capitalizing on our extensive experience in the industry. Our sourcing modelcapitalizes on our close industry relationships to avoid several layers ofsupply chain intermediaries and the mark-ups associated with additionalintermediaries. We closely monitor the historical sales trends of our productson a daily basis.

 

Wedo not have any formal or binding supply agreements with any of our suppliers,manufacturers, distributors, or other suppliers. We purchase and carryinventory in the majority of the products we offer for sale to ensureavailability and expedited delivery. In an effort to achieve a more diversesupplier base, we have started to acquire substantially more high-end brandname products. Currently, we acquire inventories from our suppliers on a cashand revolving credit basis with payment typically due within 60 to 90 dayswhen purchased on credit terms.

 

Wealso purchase, from time to time, loose diamonds and semi-precious stones anddeliver them to manufacturers to produce into finished jewelry inventory. On aselective and limited basis, we take consignment inventory from our vendors tosell on our website. Since we only make payment for the inventory when paymentis made by our customers this arrangement is beneficial to our cash flow. Salesof such merchandise remain small as our main focus is on closeout inventory.

 

**Merchandising Strategy**

 

We seek to maintain profitability while providingvariety and value to our customers by carefully selecting the types of productswe post on our website at any given time, the duration of the auction for eachitem, and the frequency with which we re-post comparable items after sales. Weactively monitor our auctions and sales so that we are able to adjust continuallythe makeup and quantity of goods on our website at any given time. Since bidson a large portion of our merchandise start at $1, losses are incurred on 

 

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approximately 15% to 25% of the items sold on anannual basis. The risks associated with a $1 minimum bid auction are mitigatedby profits generated from items sold at a gain and auctions that are sold withreserve prices, which resulted in an overall 30.5% gross profit margin in 2009.

 

We post more expensive items with longer auctiondurations, typically running for two to three days, allowing customers toperuse the piece and make thoughtful decisions. Less expensive items areselected for shorter auctions, typically running for an hour or less, creatingmore excitement for the product and providing the customer with more immediategratification. Items purchased in bulk are slotted for posting sequentially sothat all items simultaneously posted on our website are unique.

 

**Technology Operations**

 

Our system is dividedinto two main components: our website front-end and our back-office system. Our website isinternally developed. Ourback-office business management system has recently been converted to MicrosoftDynamics AX. This system maintains records for our registered users,sales invoicing and cash receipts, auction transactions, inventory control, andhistorical transaction data. Our system handles all aspects of the auctionprocess, including notifying users via e-mail of auction status.

 

Oursystem architecture is built on industry-standard platforms that are designedto provide continuous service 24 hours a day, 365 days per year. Ourwebsite and back-office servers are located at a third-party co-locationfacility operated by Savvis Inc. in El Segundo, CA. Savvis provides redundantinternet connectivity, physical security, climate control, redundant powerdelivered through a 100% uptime guarantee.

 

Oursystems include both Oracle and Microsoft SQL database engines operating in amulti-processing Microsoft Windows environment designed to accommodate largevolumes of online traffic and are configured for high fault tolerance withfail-over redundancy and load balancing. Our Internet servers utilizeVeriSign Inc. digital certificates to provide secure websitecommunications for sales and payment transactions.

 

In2009, we implemented a customized Microsoft Dynamics AX ERP system thatincludes Accounting, Inventory and Warehouse Management (WHMS), OrderProcessing (OMS), and Customer Relationship Management (CRM) along withreporting and analytics functions.

 

Weare currently planning to develop a second co-location in a differentgeographic region to provide greater load balancing and disaster recovery. Weutilize the firewall protection and the services of TrustWave, which providesregular scanning of our systems for security vulnerabilities and PCIcompliance.

 

AtDecember 31, 2009, we had a technology and development staff of 19. Wehave structured the technology and development functions into two distinctdepartments: software development and production support. We anticipate that wewill continue to devote significant resources to product development and productmanagement in the future as we add new features and functionality.

 

**Customer Service and Fulfillment Operations**

 

Animportant element of our sales strategy is to provide a high level of customerservice support in order to establish long-term relationships with ourcustomers and encourage repeat visits and purchases. Our customer servicesupport staff provides detailed payment, billing, and delivery guidance and istrained to answer a broad array of questions regarding auctions and paymentsconducted on our website. Our informed and helpful staff together with theinformative and educational aspects of our website, promote customer confidencein purchase decisions.

 

AtDecember 31, 2009, we had a customer service and billing staff of 23 andthe support of an outsourced international customer service center. We utilizeautomated online live-help, e-mail and phone systems to route traffic to ourcustomer service and billing support representatives to provide personalizedassistance. The customer service center operates seven days a week and24 hours a day for telephone support, online live-help and e-mail support.We outsource substantially all of our online telephone, live-help and e-mailsupport.

 

Customersmay utilize the following payment methods: credit card, PayPal, Bill-Me-Later,money orders, and checks. We also offer our customers the opportunity to makeLay-Away payments. We require payment to be received by us prior to shippingthe merchandise.

 

Wemaintain a fraud prevention department to detect suspect payments. Our internalsystem flags suspect payments when the billing address or other pertinentinformation does not match cardholder information. Our fraud preventiondepartment then requests that the customer provide additional information toverify identity before shipment is released.

 

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Weprovide our customers with a two-day grace period to pay for products wonthrough auctions. If payment is not received by the second day, the purchaseorder lapses and the product is cycled back into inventory. If a customerpurchases additional items during the two-day period, we offer the customer theopportunity to save on shipping by aggregating all purchased items into oneshipment. If payment is not made within the two-day period, the product isoffered for auction again and thus the same item may be auctioned more thanonce.

 

Ourgoal is to fulfill purchase orders on a timely, secure, and accurate basis. Weinspect and track each product at all stages of the receiving and orderfulfillment process. Following payment, the merchandise is processed forshipment. Customer orders are typically delivered within seven business days,depending on the shipping method. Many purchases are delivered with signatureor delivery confirmation. We ship all products via nationally recognizedcarriers, such as Federal Express and the U. S. Postal Service.

 

Wehave a 15-day return policy on all of our merchandise with a money-backguarantee if the product is not as described on our website. Items that arereturned that are as described are subject to a 15% restocking fee. Ourfacility has security controls with restricted access and has been designed forthe prompt receipt, storage, and shipment of our products. In addition, we havesecurity guards on duty 24 hours a day, seven days a week to patrol thepremises. Security is complemented by video and alarm surveillance.

 

**Seasonality**

 

Historically, sales in the jewelry industry areseasonal and have been higher in the fourth quarter as a result of higherconsumer spending during the December holiday shopping season.Approximately 33.8%, 16.9% and 24.9% of our net revenue was generated during thefourth quarter of 2007, 2008 and 2009, respectively. The fourth quarters of2008 and 2009 were exceptions as we encountered a significant slowdown in salesresulting from the 2008 financial and economic crisis that curtaileddiscretionary spending. As the economy recovers, we expect to experience morepronounced seasonal fluctuations in our net revenue and anticipate adisproportionate amount of our revenue will be in the fourth quarter.

 

**Competition**

 

Theonline jewelry, accessories and brand name merchandise auction market israpidly evolving, and intensely competitive with relatively low barriers toentry, as new competitors can launch websites at relatively low cost. Webelieve that competition in the online retail market is based predominantly onthe following:

 

·              Price,

 

·              Product quality and selection,

 

·              Vendor reliability,

 

·              Shopping convenience,

 

·              Customer service, and

 

·              Brand recognition.

 

Wecurrently compete with a variety of online auction sellers, such as eBay anduBid; online liquidation companies, such as Overstock; and online jewelryretailers, such as Blue Nile. We also compete with traditional offline jewelryretail chains, such as Zales, and Reed’s Jewelers, as well as with departmentand discount and other stores that sell at wholesale prices, such as Wal-Mart,Target, J. C. Penney, and Costco, as well as with QVC and Home ShoppingNetwork. We compete primarily on the basis of our prices, the selection ofmerchandise, and our website functionality and ease-of-use. The negative factorsrelating to our competitive position relate primarily to the relative size andname recognition of our competitors.

 

Asthe online liquidation market grows, we believe that companies involved inonline retail, as well as traditional retailers and liquidation brokers, willincrease their efforts to develop services that compete with our onlineservices. We also face potential competition from online companies not yetfocused on the liquidation market and from retail companies not yet operatingonline.

 

Manyof our competitors have greater brand recognition, longer operating histories,larger customer bases, and significantly greater financial, marketing, andother resources than we do. Smaller competitors may enter into strategic orcommercial relationships with larger, more established and well-financedcompanies. Some of our competitors could enter into exclusive distributionarrangements with our suppliers and deny us access to their products, devotegreater resources to marketing and promotional campaigns, and devotesubstantially more resources to their website and systems development than wedo. New technologies and the continued enhancement of existing technologiesalso may increase competitive pressures on us.

 

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**Intellectual Property**

 

We regard our domain names and similar intellectualproperty as critical to our success and hold registeredtrademarks for “Bidz.com” and the Bidz.com Logo. We currently do not hold anypatents pertaining to intellectual property surrounding the technology andbusiness processes utilized by Bidz.com. We also rely on a combination of laws and contractualrestrictions with our employees, customers, suppliers, affiliates, and othersto establish and protect our proprietary rights. Despite these precautions, itmay be possible for a third party to copy or otherwise obtain and use ourintellectual property without authorization. In addition, others mayindependently develop substantially similar intellectual property. Although wemay pursue the registration of our additional trademarks and patents in theUnited States, some of our trade names are not eligible to receive trademarkprotection. In addition, effective trademark and patent protection may not beavailable or may not be sought by us in every country in which our products aremade available online.

 

From time to time, we may be subject to legalproceedings and claims in the ordinary course of our business, including claimsof alleged infringement of the trademarks and other intellectual propertyrights of third parties. In addition, litigation may be necessary in the futureto enforce our intellectual property rights, to protect our trade secrets, orto determine the validity and scope of our intellectual proprietary rights andthose of others. Any such litigation, regardless of outcome or merit, couldresult in substantial costs and diversion of management and technicalresources, any of which could materially harm our business.

 

**Government Regulation**

 

Weare subject to federal and state consumer protection laws, including lawsprotecting the privacy of consumer non-public information and regulationsprohibiting unfair and deceptive trade practices. In particular, under federaland state financial privacy laws and regulations, we must provide notice toconsumers of our policies on sharing non-public information with third parties,must provide advance notice of any changes to our policies and, with limitedexceptions, must give consumers the right to prevent sharing of theirnon-public personal information with unaffiliated third parties. Furthermore,the growth and demand for online commerce could result in more stringentconsumer protection laws that impose additional compliance burdens on onlineretailers. These consumer protection laws could result in substantialcompliance costs and could interfere with the conduct of our business.

 

Moreover,there is currently great uncertainty in many states whether or how existinglaws governing issues such as property ownership, sales and other taxes, andlibel and personal privacy apply to the Internet and commercial onlineretailers. These issues may take years to resolve. For example, tax authoritiesin a number of states, as well as a Congressional advisory commission, arecurrently reviewing the appropriate tax treatment of companies engaged inonline commerce, and new state tax regulations may subject us to additionalstate sales and income taxes. New legislation or regulation, the application oflaws and regulations from jurisdictions whose laws do not currently apply toour business, or the application of existing laws and regulations to theInternet and commercial online services could result in significant additionaltaxes on our business. These taxes could have an adverse effect on our resultsof operations. Furthermore, there is a possibility that we may be subject tosignificant fines or other payments for any past failures to comply with theserequirements.

 

Numerousstates and foreign jurisdictions, including California, where our headquartersis located, have regulations regarding how auctions may be conducted and theliability of auctioneers in conducting such auctions. No final legaldetermination has been made whether the California regulations apply tobusinesses such as the business we conduct, and little precedent exists in thisarea. Several states and some foreign jurisdictions have attempted, and mayattempt in the future, to impose such regulations upon companies similar to usand their customers, which could harm our business. Regulatory and licensureclaims could result in costly litigation or could require us to change ourmanner of doing business in ways that increase our costs or reduce our revenueor force us to prohibit listings of certain items for some locations. We couldalso be subject to fines or other penalties. Any of these outcomes could harmour business.

 

California applies theburden of security risks to those owning and operating computer systems andnetworks, under a mandatory disclosure law (SB 1386).  Companies holding computerized personalinformation of California residents are required to take steps either toencrypt this personal information or adopt, as part of an information securitypolicy, notice and disclosure procedures for any computer security breaches,whether or not the breach occurs in California. If we were found to benoncompliant we would be subject to civil suits, including class actions, fordamages and injunctive remedies in California courts.

 

**Employees**

 

At December 31, 2009, we had 169 full-time and 3part-time employees. We may utilize part-time employees, temporary employees,and independent contractors to respond to fluctuations in our business. None ofour employees are covered by a collective bargaining agreement with us, and weconsider our relations with our employees to be good.

 

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We have an agreement with Administaff, a professionalemployer organization, to manage all payroll processing, workers’ compensation,health insurance, and other employment-related benefits for our employees.Although Administaff processes our payroll and pays our workers’ compensation,health insurance and other employment-related benefits, we are responsible forsuch payments and for complying with state and federal employment regulations,as well as all personnel management policies and procedures that are maintainedby Administaff. We pay Administaff a fee based on the aggregate salaries paidto our employees for these services.

 

**Delaware Reincorporation**

 

On June 22, 2006 the Company reincorporated inthe state of Delaware. In connection with our reincorporation in Delaware, weare authorized to issue 100,000,000 shares of common stock, $0.001 par value,and 4,000,000 shares of undesignated preferred stock, $0.001 par value.

 

Thefollowing discussion describes the Delaware Certificate of Incorporation andthe Bylaws that were adopted and is intended to be a summary and does notdescribe all provisions of our certificate of incorporation or bylaws orDelaware law that may be applicable to us. For a more thorough understanding ofthe terms of our capital stock, you should refer to our certificate ofincorporation and bylaws, which have been filed as exhibits to this report.

 

**Common Stock**

 

Theholders of common stock are entitled to one vote per share on all matters to bevoted upon by stockholders. There will be no cumulative voting. Subject topreferences that may be applicable to any outstanding preferred stock, holdersof common stock are entitled to receive ratably such dividends as may bedeclared by our Board of Directors out of funds legally available for thatpurpose. In the event of the liquidation, dissolution, or winding up of ourcompany, the holders of common stock are entitled to share ratably in all assetsremaining after payment of liabilities and the liquidation preferences of anyoutstanding preferred stock. The common stock has no preemptive or conversionrights, other subscription rights, or redemption or sinking fund provisions.

 

**Preferred Stock**

 

Ourcertificate of incorporation authorizes our Board of Directors, without anyvote or action by the holders of our common stock, to issue preferred stockfrom time to time in one or more series. Our Board of Directors is authorizedto determine the number of shares and to fix the designations, powers,preferences, and the relative, participating, optional, or other rights of anyseries of preferred stock. Issuances of preferred stock would be subject to theapplicable rules of Nasdaq or other organizations on which our securitiesare then quoted or listed. Depending upon the terms of preferred stockestablished by our Board of Directors, any or all series of preferred stockcould have preference over the common stock with respect to dividends and otherdistributions and upon our liquidation. If any shares of preferred stock areissued with voting powers, the voting power of the outstanding common stockwould be diluted. No shares of preferred stock are presently outstanding, andwe have no present intention to issue any shares of preferred stock.

 

**Anti-Takeover Effects of Provisions of the Certificate ofIncorporation and Bylaws**

 

*General*

 

OurDelaware certificate of incorporation, our bylaws, and the DGCL contain certainprovisions that could delay or make more difficult an acquisition of control ofour company not approved by our Board of Directors, whether by means of atender offer, open market purchases, a proxy contest, or otherwise. Theseprovisions have been implemented to enable us, particularly but not exclusivelyin the initial years of our existence as a publicly owned company, to developour business in a manner that will foster our long-term growth withoutdisruption caused by the threat of a takeover not deemed by our Board ofDirectors to be in the best interests of our company and our stockholders.These provisions could have the effect of discouraging third parties frommaking proposals involving an acquisition or change of control of our companyeven if such a proposal, if made, might be considered desirable by a majorityof our stockholders. These provisions may also have the effect of making itmore difficult for third parties to cause the replacement of our Board ofDirectors or our current management without the concurrence of our Board of Directors.

 

Thereis set forth below a description of the provisions contained in our Delawarecertificate of incorporation and bylaws and the DGCL that could impede or delayan acquisition of control of our company that our Board of Directors has notapproved. This description is intended as a summary only and is qualified inits entirety by reference to our certificate of incorporation and bylaws, whichare included as exhibits to this report, as well as the DGCL.

 

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*Authorized but Unissued Preferred Stock*

 

Ourcertificate of incorporation authorizes our Board of Directors to issue one ormore series of preferred stock and to determine, with respect to any series ofpreferred stock, the terms and rights of such series without any further voteor action by our stockholders. The existence of authorized but unissued sharesof preferred stock may enable our Board of Directors to render more difficultor discourage an attempt to obtain control of our company by means of a proxycontest, tender offer, or other extraordinary transaction. Any issuance ofpreferred stock with voting and conversion rights may adversely affect thevoting power of the holders of common stock, including the loss of votingcontrol to others. The existence of authorized but unissued shares of preferredstock will also enable our Board of Directors, without stockholder approval, toadopt a “poison pill” takeover defense mechanism. We have no present plans toissue any shares of preferred stock.

 

*Number of Directors; Removal; Filling Vacancies*

 

Ourcertificate of incorporation and bylaws provides that the number of directorsshall be fixed only by resolution of our Board of Directors from time to time.Our certificate of incorporation provides that directors may be removed bystockholders for cause by the affirmative vote of a majority of the sharesentitled to vote. Delaware law provides that vacancies on the Board ofDirectors may be filled only by a majority vote of the remaining directors orby the sole remaining director.

 

*Classified Board*

 

Ourcertificate of incorporation provides for our board to be divided into threeclasses, as nearly equal in number as possible, serving staggered terms.Approximately one-third of our board will be elected each year. The provisionfor a classified board could prevent a party who acquires control of a majorityof our outstanding common stock from obtaining control of the board until oursecond annual stockholders meeting following the date the acquirer obtains thecontrolling share interest. The classified board provision could have theeffect of discouraging a potential acquirer from making a tender offer or otherwiseattempting to obtain control of us and could increase the likelihood thatincumbent directors will retain their positions.

 

*Stockholder Action*

 

Ourcertificate of incorporation provides that stockholder action may be taken onlyat an annual or special meeting of stockholders. This provision prohibitsstockholder action by written consent in lieu of a meeting. Our certificate ofincorporation and bylaws further provide that special meetings of stockholdersmay be called only by our Chairman of the Board of Directors, Chief ExecutiveOfficer, President, or Secretary, and shall be called by any such person at therequest in writing of a majority of the Board of Directors. Stockholders arenot permitted to call a special meeting or to require our Board of Directors tocall a special meeting of stockholders.

 

Theprovisions of our certificate of incorporation and bylaws prohibitingstockholder action by written consent may have the effect of delayingconsideration of a stockholder proposal until the next annual meeting unless aspecial meeting is called as provided above.

 

Theseprovisions would also prevent the holders of a majority of the voting power ofour stock from unilaterally using the written consent procedure to takestockholder action. Moreover, a stockholder could not force stockholderconsideration of a proposal over the opposition of the Board of Directors bycalling a special meeting of stockholders prior to the time our chairman or amajority of the whole board believes such consideration to be appropriate.

 

*Advance Notice for Stockholder Proposals and DirectorNominations*

 

Ourbylaws establish an advance notice procedure for stockholder proposals to bebrought before any annual or special meeting of stockholders and fornominations by stockholders of candidates for election as directors at anannual meeting or a special meeting at which directors are to be elected.Subject to any other applicable requirements, including, without limitation, Rule 14a-8under the Exchange Act, only such business may be conducted at a meeting ofstockholders as has been brought before the meeting by, or at the direction of,our Board of Directors, or by a stockholder who has given our Secretary timelywritten notice, in proper form, of the stockholder’s intention to bring thatbusiness before the meeting. The presiding officer at such meeting has theauthority to make such determinations. Only persons who are nominated by, or atthe direction of, our Board of Directors, or who are nominated by a stockholderthat has given timely written notice, in proper form, to our Secretary prior toa meeting at which directors are to be elected, are eligible for election asdirectors.

 

*Amendments to Bylaws*

 

Ourcertificate of incorporation provides that only our Board of Directors or theholders of a majority of the shares entitled to vote at an annual or specialmeeting of stockholders have the power to amend or repeal our bylaws.

 

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*Amendments to Certificate of Incorporation*

 

Anyproposal to amend, alter, change, or repeal any provision of our certificate ofincorporation requires approval by the affirmative vote of a majority of thevoting power of all of the shares of our capital stock entitled to vote on suchmatters.

 

*Delaware Statutory Provisions*

 

Anti-TakeoverProvision of Delaware Law. Under Section 203 of the DGCL, no DelawareCorporation shall engage in a “business combination” with an “interestedstockholder” for a period of three years following the date that thestockholder became an interested stockholder. “Business combination” includes amerger, consolidation, asset sale, or other transaction resulting in financialbenefit to the interested stockholder. “Interested stockholder” is a personwho, together with affiliates and associates, owns, or within three years, didown 15% or more of the corporation’s voting stock. This prohibition does notapply if:

 

·                                          prior to thetime that the stockholder became an interested stockholder, the board ofdirectors of the corporation approved either the business combination or thetransaction resulting in the stockholder’s becoming an interested stockholder,

 

·                                          uponconsummation of the transaction resulting in the stockholder’s becoming aninterested stockholder, the stockholder owns at least 85% of the outstandingvoting stock of the corporation, excluding voting stock owned by directors whoare also officers and certain employee stock plans, or

 

·                                          at orsubsequent to the time that the stockholder became an interested stockholder,the business combination is approved by the board and authorized at an annualor special meeting of stockholders, and not by written consent, by theaffirmative vote of at least two-thirds of the outstanding voting stock thatthe interested stockholder does not own.

 

ADelaware corporation may elect not to be governed by these restrictions. Wehave not made such election. Although Marina Zinberg owns more than 15% of ourstock, she is not subject to the restrictions of Section 203.

 

**Limitation of Liability and Indemnification of Officers andDirectors**

 

Ourcertificate of incorporation limits the liability of our directors to thefullest extent permitted by the DGCL. In addition, our certificate ofincorporation and bylaws provide that we will indemnify our directors andofficers to the fullest extent permitted by law.

 

**Indemnification for Securities Act Liabilities**

 

Insofaras indemnification for liabilities arising under the Securities Act of 1933 maybe permitted for directors, officers, or controlling persons pursuant to theprovisions described in the preceding paragraph, we have been informed that inthe opinion of the SEC such indemnification is against public policy asexpressed in the Securities Act and is therefore unenforceable.

 

**Transfer Agent and Registrar**

 

Thetransfer agent and registrar for our common stock is American Stock Transfer &Trust Company. The transfer agent’s address is 6201 15th Avenue, Brooklyn, New York 11219 and itstelephone number is (718) 921-8124.

 

**AvailableInformation**

 

The Company is subject to the informationalrequirements of the Securities Exchange Act of 1934 (Exchange Act). The Companytherefore files periodic reports, proxy statements and other information withthe Securities and Exchange Commission (SEC). Such reports may be obtained byvisiting the Public Reference Room of the SEC at 100 F Street, NE,Washington, D.C. 20549,or by calling the SEC at (800) SEC-0330. In addition, the SECmaintains an internet site (www.sec.gov) that contains reports, proxy andinformation statements and other information.

 

Financial and other information can also be accessedon the shareholders’ information section of the Company’s website atwww.bidz.com. The Company makes available copies of its annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after filingsuch material electronically or otherwise furnishing it to the SEC.  You may obtain copies of financial and otherinformation free of charge by calling (310) 280-7333 or by sending arequest to Bidz.com, Inc.’s Investor Relations Department, 3562 EasthamDrive, Culver City, California 90232. Also posted on our website are the Company’s Corporate 

 

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Governance Principles, the charters of our AuditCommittee, Compensation Committee and Corporate Governance and NominatingCommittee.

 

Information on the Company’s website is notincorporated into this Form 10-K or the Company’s other securities filingsand is not a part of them.

 

**ITEM1A.  Risk Factors**

 

*Our business, financial condition, results of operations,cash flows, and prospects, and the prevailing market price and performance ofour common stock, may be adversely affected by a number of factors, includingthe matters discussed below. Certain statements and information set forth inthis Annual Report on Form 10-K, as well as other written or oralstatements made from time to time by us or by our authorized officers on ourbehalf, constitute “forward-looking statements” within the meaning of theFederal Private Securities Litigation Reform Act of 1995. Words such as “anticipates,”“believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “seeks,” “projects,”“will,” “would,” and similar expressions are intended to identify suchforward-looking statements. We intend for our forward-looking statements to becovered by the safe harbor provisions for forward-looking statements containedin the Private Securities Litigation Reform Act of 1995, and we set forth thisstatement in order to comply with such safe harbor provisions. You should notethat our forward-looking statements speak only as of the date of this AnnualReport on Form 10-K or when made and we undertake no duty or obligation toupdate or revise our forward-looking statements, whether as a result of newinformation, future events, or otherwise. Although we believe that theexpectations, plans, intentions, and projections reflected in ourforward-looking statements are reasonable, such statements are subject to knownand unknown risks, uncertainties, and other factors that may cause our actualresults, performance, or achievements to be materially different from anyfuture results, performance, or achievements expressed or implied by theforward-looking statements. The risks, uncertainties, and other factors thatour stockholders and prospective investors should consider include, but are notlimited to, the following:*

 

***The adverse domestic and global economic conditions or the perceptionof said conditions may have adverse effects on our growth and operatingresults.***

 

Thecontinued success of our business depends on the willingness of our customersto spend in a discretionary manner. While we do offer lower priced merchandise and may consequently farebetter than those who exclusively offer more expensive merchandise, jewelry isessentially perceived as a luxury good. If the economy continues to decline itwill cause people to feel less comfortable purchasing discretionary goods andwould cause a negative effect on our operating results. Our annual andquarterly operating results may vary significantly in the future based oneconomic factors over which we have little or no control. Because we havelittle or no control over these factors and/or their magnitude, our operatingresults are difficult to predict. Any substantial adverse change in theeconomic factors could negatively affect our business and results ofoperations.

 

***Our business has been and maycontinue to be significantly impacted by the decline in worldwide economicconditions, and the current uncertainty in the outlook for the global economymakes it more likely that our actual results will differ materially fromexpectations .***

 

Global financial markets have been experiencingextreme disruptions in recent months and years, including severely diminishedliquidity and credit availability, declines in consumer confidence, declines ineconomic growth, increases in unemployment rates, and uncertainty abouteconomic stability. There can be no assurance that there will not be furtherdeterioration in financial markets and confidence in economic conditions.  These economic uncertainties affectbusinesses such as ours in a number of ways, making it difficult to accuratelyforecast and plan our future business activities. The current tightening ofcredit in financial markets may lead consumers to postpone spending, which maycause our customers to reduce purchases of jewelry. Demand for jewelry is afunction of the health of the economies in the United States and around theworld. Since the US economy and other economies around the world are stillrecovering from a recession, the demand for jewelry has been and may continueto be adversely affected and therefore, demand for our jewelry products and ouroperating results have been and may continue to be adversely affected as well.We cannot predict the timing, strength or duration of any economic disruptionor subsequent economic recovery, worldwide, in the United States, in our industry,or in the jewelry market. These and other economic factors have had and maycontinue to have a material adverse effect on demand for our jewelry productsand on our financial condition and operating results.

 

***Our future operating results are highly dependent upon how well******we manage our business to respond tothe economic recession.***

 

Our annual and quarterlyoperating results may fluctuate based on how well we manage our business torespond to the economic recession. Some of these factors include the following:

 

·          our ability tomanage our sales and marketing efforts;

·          our ability tostructure our organization to achieve our operating objectives and to meet theneeds of our customers; and

 

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·          our ability tomanage expenses and inventory levels.

 

If we fail to manage ourbusiness effectively, our results of operations could be adversely affected.

 

***Growth of our business may depend on our ability tosuccessfully introduce and expand new product offerings, including modnique***

 

Our ability tosignificantly increase our net sales and maintain and increase ourprofitability may depend on our ability to successfully introduce and expandnew product lines beyond our current offerings. In February 2010,we launched modnique.com, a division that will be focused on onlineretailing of designer products, entertainment tickets, travel, and otherconsumer goods through a private sale concept that only sells to invitedmembers. If we offer a new product category such as modnique that is notaccepted by consumers, the Bidz.com brand and reputation could be adverselyaffected, our net sales may fall short of expectations and we may incursubstantial expenses that are not offset by increased net sales. Introductionand expansion of new product lines may also strain our management andoperational resources.

 

***Our business may be impacted by our ability to obtain debtfinancing for our operations and the unavailability of funding could adverselyaffect our business.***

 

As a result of current economic uncertainties, including with respectto global capital and credit markets and overall economic growth, we may findit more difficult or expensive to secure additional capital or credit to pursueactions we would consider beneficial to us or our shareholders. We maintain arevolving line of credit with Bank of America (formerly LaSalle Bank). Ourrevolving line of credit expires in July 2010. If we are unable to renewour line of credit beyond its expiration date or obtain alternative financingfrom another lender or lenders if our current line of credit is not renewed,or, in the future, if our lender or lenders are not willing to extend the termsof our existing loan or loans, or extend the terms of those loans on terms thatare acceptable to us, our business could be adversely impacted.  In addition, the maximum amount we can borrowunder our current revolving credit facility is subject to borrowing baselimitations, which are calculated as a percentage of our eligible inventory andaccounts receivable. If our inventory or accounts receivable are deemedineligible, the amount we can borrow under our revolving credit facility wouldbe reduced. This reduction could have a material adverse impact on ourliquidity and business. If we are unable to secure additional financing at theexpiration of any our debt facilities, our ability to continue operations couldbe dependent on our ability to obtain alternative debt and/or equity financing.The inability to obtain such financing could have a material adverse effect onour operations and financial condition.

 

***The trading price in our common stock may be volatile and you may loseall or part of your investment.***

 

Themarket price of our common stock has been subject to significant fluctuationsand these fluctuations could continue. Some factors that could affect themarket price of our common stock are as follows:

 

·                  actual oranticipated changes in our operating results,

 

·                  our stock issubject to short selling and may cause trading in our common stock to bevolatile,

 

·                  our stock issubject to margin calls and may cause trading in our common stock to bevolatile,

 

·                  changes inresearch analysts’ recommendations or estimates of financial performance,

 

·                  changes inmarket valuation of similar companies, economic and general market conditions,

 

·                  announcementsof significant contracts, company developments, commercial relationships,banking credit facilities, capital commitments, acquisitions or joint ventures,

 

·                  issuance ofadditional shares of common stock or other securities, and

 

·                  intellectualproperty or litigation developments.

 

Tradingin our common stock may experience significant price and volume fluctuationsand adversely affect the trading price of our common stock. Following periodsof volatility in the market price of a public company’s securities, securitiesclass action litigation has often been instituted against that company. Suchlitigation could result in substantial cost and a diversion of management’sattention and resources. See Item 3, Legal Proceedings, above.

 

***Repurchases of our common stock may not prove to be the bestuse of our cash resources.***

 

We have and plan tocontinue to repurchase shares of our common stock. Since the inception of ourshare repurchase program in June 2007, through February 28, 2010, we haverepurchased 3.3 million shares for a total of approximately$18.4 million. Our board of directors authorized the repurchase of up to$33.5 million of our common stock and a total of $15.1 million remainsavailable for repurchases. These repurchases and any repurchases we may make inthe future may not prove to be at optimal prices and our use of cash for thestock repurchase program may not prove to be the best use of our cash resourcesand may adversely impact our future liquidity.

 

***We have been and may continue to become the target ofsecurities class action suits and derivative suits which could result insubstantial costs and divert management attention and resources.***

 

Securities class action suits and derivative suits areoften brought against companies following periods of volatility in the marketprice of their securities, such as we experienced at the end of 2007. Defendingagainst these suits, even if meritless, can result in substantial costs to usand could divert the attention of our management. See Item 3, LegalProceedings, above.

 

***We may be at risk to accuratelyreport financial results or detect fraud if we fail to maintain an effectivesystem of internal controls.***

 

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, theSecurities and Exchange Commission adopted rules requiring publiccompanies to include a report that contains an assessment by management on thecompany’s internal control over financial reporting in their annual reports on Form 10-K.In addition, the independent registered public accounting firm auditing thecompany’s financial statements must attest to and report on our assessment ofthe effectiveness of the internal controls over financial reporting. While weare consistently working on improvements and conducting rigorous reviews of ourinternal controls over financial reporting, our independent auditors mayinterpret Section 404 requirements and apply related rules andregulations differently. If our independent auditors are not satisfied with ourinternal control over financial reporting or with the level at which it isdocumented, operated or reviewed, they may decline to attest to management’sassessment or issue a qualified report. Additionally, if we are not able tomeet all the requirements of Section 404 in a timely manner or withadequate compliance, we might be subject to sanctions or investigation byregulatory authorities, such as the Securities and Exchange Commission.

 

In conducting itsassessment, our management concluded that there were material weaknesses, asdefined in the Public Company Accounting Oversight Board’s Auditing Standard No. 5,in our disclosure controls and internal control over financial reporting as of December 31,2009.  We have implemented certaincontrols, and are in the process of implementing additional controls, toremediate these material weaknesses. Management believes these material weaknesses were not fully remediatedas of December 31, 2009 and through the date of this report. Seediscussion included in Item 9A “Controls and Procedures” below for additionalinformation regarding our disclosure controls and internal control overfinancial reporting.

 

We cannot assure you that significant deficiencies or materialweaknesses in our disclosure controls and internal control over financialreporting will not be identified in the future or that the identified materialweaknesses will be remediated in the first quarter of 2010.  Also, future changes in our accounting,financial reporting, and regulatory environment may create new areas of riskexposure. Failure to modify our existing control environment accordingly mayimpair our controls over financial reporting and cause our investors to loseconfidence in the reliability of our financial reporting, which may adverselyaffect our stock price.

 

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***Internalcontrols over IT could continue to adversely affect our system of internalcontrols***

 

OnOctober 2, 2009, we migrated from our proprietary enterprise operatingsystem to an ERP system running on a customized Microsoft Dynamics AX.  We have encountered unexpected deficienciesin implementing the new system, including control deficiencies that resulted inmaterial weaknesses in our system of internal controls. These deficiencies hada material adverse effect on our operations, results of operations and systemof internal controls in the fourth quarter of 2009. The new system will requirethat we design and adopt new internal controls, and any failure by us toimplement and test those new controls in a timely manner would continue toresult in material weaknesses in our system of internal controls.

 

***Ourbranded inventory may be vulnerable to complaints or claims of infringement onintellectual property rights***

 

We purchase branded merchandisefrom third party vendors and are relying on their licensing agreements with thebrand owners. In the event that a third party vendor misrepresents itslicensing rights, we are vulnerable to complaints or claims of infringement onintellectual property rights and could be subject to legal proceedings and/orbarred from selling the affected merchandise. If the third party vendor doesnot have the ability to take financial responsibility over the infringement ourresults of operations could be adversely affected.

 

***We will devote necessary resources to respondpromptly and thoroughly to the SEC investigation.***

 

OnFebruary 10, 2009 and October 27, 2009, the Securities and ExchangeCommission (“SEC”) issued subpoenas to us to produce documents relating to theCompany’s inventory reserve policies, vendor marketing contributions, as wellas other matters. We intend to cooperate fully with the SEC’s formalinvestigation, and our management will devote the resources required to respondpromptly and thoroughly to any request by the SEC for any additionalinformation or documents. Although the investigation is in its preliminarystages, and it is therefore difficult to predict the time required by seniormanagement to respond to it, we do not presently anticipate that theinvestigation will adversely affect management, our results of operations orour financial position. Until the investigation is concluded, however, it isdifficult to assess its impact on us.

 

***We must continue to generate a highvolume of visitor traffic to our website and convert those visitors intobuyers.***

 

Ournet revenue depends to a significant extent on the number of customers whovisit our website to purchase merchandise and the dollar amount of theirpurchases. Generating increased traffic to our website and converting thattraffic into buyers requires us to achieve effective results from our marketingcampaigns; offer a wide variety of products that our customers can purchase atfavorable prices; maintain a user-friendly shopping experience; ensure thesatisfactory availability, performance, and reliability of our website, networkinfrastructure, and transaction processing systems; and provide high-qualitycustomer service. Our business will be harmed if we are unable to increase ourcustomer base and the dollar volume of the orders customers place with us.

 

***We are subject to “prank” bidding by persons whoare not required to provide their identification.***

 

Presently,we do not require new users to our site to provide their identification uponregistration. Consequently, from time to time we are subject to “prank” bidderswho may win auctions but do not intend to purchase our merchandise.  Although the Company re-auctions merchandisenot purchased by such bidders, a large number of failed auctions in whichwinning bidders do not complete their purchases could adversely affect ourresults of operations.

 

***We may face increasing costs toacquire new customers.***

 

Theacquisition of new customers is a key factor in increasing demand for ourjewelry products and increasing our revenue. We currently attract new customersby driving traffic to our website using a marketing and advertising strategythat includes targeted keyword searches, online banner advertising, targetede-mail advertising, and participation in affiliate programs. We do not maintainlong-term contracts or arrangements with any companies, including any searchengines, Internet portals, or other websites, and we may not successfully enterinto additional relationships or maintain existing ones. In addition, trafficto our website could decline if our online marketing programs become lesseffective or the traffic decreases to the search engines, Internet portals, andwebsites with which we advertise. Our business could be materially and adverselyaffected if any substantial number of companies on which we advertiseexperience financial or operational difficulties or experience other corporatedevelopments that adversely affect their performance. A failure to maintain orexpand existing online advertising relationships or to establish additionalonline advertising relationships that generate a significant amount of trafficfrom other websites could result in decreased sales or limit the growth of ourbusiness.

 

***Our growth will depend on our abilityto increase the popularity of our website, and we may not be able to do soeffectively.***

 

Webelieve that continuing to increase the popularity of our website will becritical to expanding our business. Promoting and positioning our website willdepend largely on the success of our marketing efforts and our ability toprovide a variety and sufficient 

 

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quantityof high-quality products at attractive prices in a convenient manner. Promotingour website will require us to increase our marketing budget and otherwiseincrease our financial commitment to creating and maintaining brand loyaltyamong users. Brand promotion activities may not yield increased revenue, andeven if they do, any increased revenue may not offset the expenses we incur inbuilding our website popularity and our brand. If we do attract new users toour website, they may not conduct transactions on a frequent basis or insufficient dollar amounts. If we fail to promote and maintain our website orincur substantial expenses in an unsuccessful attempt to promote and maintainour brand, our business would be harmed.

 

***We anticipate expanding our internationalsales activities, causing our business to become increasingly susceptible tonumerous risks that could affect our profitability.***

 

In2008 and 2009, 23.9% and 31.7%, respectively, of our net revenue was generatedby shipments to customers outside of the United States. We plan, over time, toexpand our reach into international markets. We do not, however, currently haveany overseas fulfillment, distribution, or server facilities. We cannot becertain that we will be able to expand our global presence. In addition, thereare certain risks associated with doing business on an international basis,including regulatory requirements, legal uncertainty regarding liability,tariffs, and other trade barriers, longer payment cycles, and potentially adversetax consequences, any of which could adversely affect our business. Althoughour foreign sales historically have been denominated in U.S. dollars, we alsomay be subject to increased risks relating to foreign currency exchange ratefluctuations to the extent we decide to denominate our sales in foreigncurrencies.

 

***Customer complaints or negative publicity about ourcustomer service could adversely affect our reputation and, as a result, ourbusiness could suffer.***

 

Customercomplaints or negative publicity about our customer service could severelydiminish consumer confidence and the use of our website. Effective customerservice requires significant personnel expense, and this expense, if notmanaged properly, could significantly impact our profitability. The failure tomanage or train our customer service representatives properly could compromiseour ability to handle customer inquiries and complaints effectively. If we donot handle customer inquiries and complaints effectively, we may lose customerconfidence. As a result, our revenue could suffer and our operating margin maydecrease.

 

***Quarterly financial results may not be consistentand impact our stock price.***

 

Thereare numerous influences on our quarterly financial results that extend beyondthe normal seasonal trends. Fluctuations that are under our control include:our ability to influence the timing and quantity of items we place for auction;our decision to acquire merchandise at favorable prices; our expenditures onmarketing and our ability to attract customer visits to our website.Fluctuations that are not under our control that may directly impact ourquarterly financial results include: changes in market price for preciousmetals and gems; changes in consumers’ discretionary income and demand for ourproducts; and changes in fashion trends.

 

***We do not have a guaranteed supplyof jewelry products, and we have a concentration of inventory purchases fromour top two suppliers****.*

 

Thesuccess of our business depends, in part, on our ability to offer our customersa wide variety of jewelry that they can purchase at prices that aresubstantially below those of traditional jewelry retailers. We do not have anyformal or binding supply agreements with any of our manufacturers,distributors, or other suppliers for our supply of jewelry products. As aresult, we do not have a guaranteed supply of jewelry products at favorableprices. Our inability to maintain and expand our jewelry supply relationshipsor the inability of our suppliers to continue to supply us with jewelryproducts at favorable prices would substantially harm our business and resultsof operations.

 

Inaddition, we have a concentration of inventory purchases from a small number ofsuppliers. Our top vendors based on the amount of purchases vary from quarterto quarter.  The top two suppliersaccounted for approximately 24.0%, 14.6% and 27.7% of our total purchases in2007, 2008, and 2009, respectively.

 

***We may give substantial deposits ofinventory to our manufacturing vendors to produce finished jewelry products.***

 

Wemay be at risk of loss for the diamonds, precious and semi-precious gems thatwe have given to our manufacturing vendors to produce into finished jewelryproducts. If the businesses of the vendors fail, the diamond inventory is lostor stolen, the vendors do not have adequate insurance coverage or if thevendors fail to produce and deliver finished jewelry products, we would incursubstantial losses that would have a material impact on our net income andfinancial position.

 

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***Competition from online auctioneersand other online companies with greater brand recognition may adversely affectour sales.***

 

Themarket for online auctions is rapidly evolving and intensely competitive. Weexpect competition to intensify further in the future. Barriers to entry arerelatively low, and current and new competitors can launch new websites atrelatively low cost using commercially available software.

 

Wecurrently compete with a number of other companies, and other competitors mayappear in the future. Our competitors currently include various online auctionservices and retailers, including eBay, Blue Nile, Overstock, and uBid. We alsoencounter competition from national jewelry retail chains, such as Zales, KayJewelers, and Finlay Fine Jewelry, and mass retailers and other enterprises,such as Wal-Mart, Target, J. C. Penney, Costco, QVC, and Home Shopping Network.Many of our competitors have greater brand recognition, longer operatinghistories, larger customer bases, and significantly greater financial,marketing, and other resources than we do. Smaller competitors may enter intostrategic or commercial relationships with larger, more established, and betterfinanced companies. Other competitors may enter into exclusive distributionagreements with our suppliers that deny us access to suppliers’ products.Competitors may also devote greater resources to marketing and promotionalcampaigns and to website and systems technology than we do. We may not be ableto compete successfully against current and future competitors or addressincreased competitive pressures. Furthermore, attempts have been made in the pastto develop and market synthetic stones and gems to compete in the market forgemstones and gemstone jewelry. We expect such efforts to continue in thefuture. If any such efforts are successful in creating widespread demand forsynthetic or alternative gemstone products, demand and price levels for ourproducts could decline and our business and results of operations would besubstantially harmed.

 

***We rely heavily on the sale ofjewelry for our net revenue, and demand for these products could decline.***

 

Luxuryproducts, such as jewelry, are discretionary purchases for consumers. Thevolume and dollar amount of such purchases may be affected by adverse trends inthe general economy and consumer perceptions of those trends, and purchases maysignificantly decrease during economic downturns. The success of our businessdepends in part on macroeconomic factors, such as employment levels, salarylevels, tax rates, and credit availability, all of which affect disposableincome and consumer spending. Any reduction in disposable income or consumerspending may affect us more significantly than companies in other industries.

 

Ournet revenue and results of operations depend in part on the demand for jewelry.Consumers’ tastes are subject to frequent, significant, and sometimesunpredictable changes. Should prevailing consumer tastes for jewelry change orthe demand for jewelry decrease, the sale of our products could decline and ourbusiness and results of operations would suffer.

 

Furthermore,our ability to increase our net revenue and enhance our profitability maydepend on our ability to expand our product offerings beyond our currentofferings. If we offer new products that are not accepted by customers, ourbrand and reputation could be adversely affected, our sales may fall short ofexpectations, and we may incur substantial expenses that are not offset byincreased sales.

 

***Because we carry our jewelryproducts in inventory, our net revenue and gross margin may decrease if we areunable to predict and plan for changes in consumer demand.***

 

Ifour sales increase, we will be required to increase our inventoryproportionately. Consumer tastes and preferences for jewelry products canchange rapidly, thereby exposing us to significant inventory risks. Currently,because the products we sell also consist of closeout merchandise frommanufacturers, distributors, and other suppliers, we have less control over thespecific items that we offer for sale than we would if we primarily orderedgoods manufactured for us. In addition, it is important that we are able topurchase jewelry that we perceive to be in demand. The demand for specificproducts can change between the time we order items and when we sell them. As aresult, we may be required to take significant inventory markdowns, which couldreduce our gross margin, if we do not accurately predict these trends or if weoverstock unpopular merchandise.

 

***We may be subject to a tax liability for past sales and our futuresales may decrease if we are required to collect sales and use taxes on theproducts we sell.***

 

Inaccordance with current industry practice and our interpretation of currentlaw, we do not currently collect sales or other taxes with respect to shipmentsof goods into states other than California, New York and Rhode Island. However,additional states or foreign countries may seek to impose sales or other taxobligations on us in the future. A successful assertion by one or more statesor foreign countries that we should be collecting sales or other taxes on the saleof our products could result in substantial tax liabilities for past and futuresales, discourage customers from purchasing products from us, decrease ourability to compete with traditional retailers, and otherwise substantially harmour business, financial condition, and results of operations.

 

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***We rely on suppliers and third-partycarriers as part of our fulfillment process, and these third parties may failto meet shipping schedules or requirements****.*

 

Werely on suppliers to deliver our orders promptly, which we then carry ininventory to ensure availability and expedited delivery to our customers. Wealso rely on third-party carriers to ship our products to our customers. As aresult, we are subject to various risks, including employee strikes andinclement weather, associated with the ability of third-party carriers toprovide delivery services to meet our shipping needs and those of oursuppliers. The failure of our suppliers and third-party carriers to deliverproducts to us or our customers in a timely manner or otherwise to serve us orour customers adequately would damage our reputation and brand and substantiallyharm our business and results of operations.

 

***Increases in the cost of preciousmetals and precious and semi-precious stones would increase the cost of ourjewelry products.***

 

Thejewelry industry is affected by fluctuations in the prices of precious metalsand precious and semi-precious stones. The availability and prices of gold,silver, platinum, and other precious metals and precious and semi-preciousstones may be influenced by such factors as cartels, political instability inexporting countries, changes in global demand, and inflation. Shortages ofthese materials or an increase in their prices could reduce the quantity ofproducts we have available for sale and our ability to sell our products formore than our cost, causing reduced sales or lower margins compared to ourhistorical and expected sales and margins.

 

***The satisfactory availability,performance, and reliability of our website, network infrastructure, andtransaction processing systems are critical to our ability to attract, retain,and service customers.***

 

Anyproblems with the availability, performance, or reliability of our website,network infrastructure, or transaction processing systems could result indecreased customer traffic, reduced orders, reduced order fulfillment performance,and lower net revenue as well as negative publicity and damage to ourreputation. In order to remain competitive, we must continually seek to improveand expand the functionality and features of our website, networkinfrastructure, transaction processing systems, and delivery and shippingfunctions to accommodate any substantial increase in the volume of traffic toand orders from our website. We may not be successful in these efforts, and wemay not be able to project accurately the rate or timing of increases, if any,in the use of or sales from our website, or timely expand or upgrade ourwebsite, infrastructure, or systems to accommodate any such increases.Additionally, we may not be able to remedy any such availability, performance,or reliability problems in a timely manner, or at all, because we depend inpart on third parties for such availability, performance, and reliability. Ourwebsite and back-office servers are located at a third-party co-locationfacility operated by Savvis Inc. in El Segundo, CA which is vulnerable to fire,earthquakes, and similar events.

 

***Our business and results ofoperations would be harmed in the event of any failure of our auction andbidding systems hardware, which is located at a single third-party co-location facility,or any failure of our fulfillment and administrative hardware.***

 

Ourbusiness depends in part on the efficient and uninterrupted operation of ourcomputer and communications hardware. The servers and other hardware necessaryto operate our website, including our auction and bidding systems, are locatedat a single third-party co-location facility in El Segundo, CA. We rely on thatfacility to provide Internet access with the speed, capacity, and reliabilitywe require. Our servers and other hardware that run our transaction processing,order fulfillment, and office administration tasks are located at ourheadquarters. Our servers and other hardware are vulnerable to damage orinterruption from human error, fire, flood, power loss, telecommunicationsfailure, terrorist attacks, acts of war, break-ins, earthquakes, and similarevents. We do not currently have redundant systems in multiple locations or aformal disaster recovery plan, and our business interruption insurance may beinsufficient to compensate us for any losses that may occur. In addition, ourservers are vulnerable to computer viruses, physical or electronic break-ins,and similar disruptions, which could lead to interruptions, delays, loss ofcritical data, the inability to accept and fulfill customer orders, or theunauthorized disclosure of confidential customer data. System disruptions orfailures would also create a large number of customer questions and complaintsthat need to be addressed by our customer service support personnel. Theoccurrence of any of the foregoing risks could substantially harm our businessand results of operations. Our systems are vulnerable to damage or interruptionfrom earthquakes, floods, fires, power loss, telecommunication failures,terrorist attacks, computer viruses, computer denial-of-service attacks, andsimilar events.

 

***Our failure to protect confidentialinformation of our customers and our network against security breaches coulddamage our reputation and substantially harm our business and results ofoperations.***

 

Asignificant barrier to online commerce and communications is the securetransmission of confidential information over public networks. Third partiesmay have the technology or expertise to breach the security of customertransaction data. Our security measures may not prevent security breaches thatcould result in substantial harm to our business and results of operations anddamage to our reputation. Currently, a majority of our sales are billed to ourcustomers’ credit card accounts directly. Under current credit card practices,we are liable for fraudulent credit card transactions because we do not obtaincardholder signatures. We rely on encryption and authentication technologylicensed from third parties to effect secure transmission of confidentialinformation, including credit card numbers. We do not currently carry insuranceagainst this risk. Advances in computer capabilities, new discoveries in thefield of cryptography, or other developments may result in a compromise orbreach of the technology we use to protect customer transaction data. Inaddition, anyone who is able to circumvent our security measures couldmisappropriate proprietary information or cause 

 

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interruptionsin our operations. Any such compromise of our security could damage ourreputation and brand and expose us to a risk of loss or litigation and possibleliability, which would substantially harm our business and results ofoperations.

 

Inaddition, the Payment Card Industry (PCI) imposes strict customer credit carddata security standards that require us to provide quarterly self assessmentsto ensure that our customers credit card information is protected. Failure tomeet the PCI data security standards could result in substantial fines and/orloss of the right to collect credit card payments. The loss of credit cardactivity would materially impact operations.

 

***We are vulnerable to fraudulentactivities on our website, including unauthorized use of customer informationand identity theft by third parties****.*

 

Ournetwork security measures to prevent third parties from penetrating our networkand improperly accessing our customers’ personal information or credit cardinformation may not be successful. Although we have not experienced any theftof our customers’ credit card information to date, as new discoveries in thefield of cryptography and advances in computer capabilities occur, our securitymeasures may not effectively prevent others from obtaining improper access toour customer information. In addition, third parties may target our customersdirectly with fraudulent identity theft schemes designed to appear as legitimatee-mails from us. In March 2006, one such third party attempted to solicitcustomer information through a tactic, commonly known as “phishing,” whereby ane-mail purporting to be from us solicited customer information from recipientsof the e-mail. Any such security breach or fraud perpetrated on our customerscould expose us to increased costs and could harm our business and results ofoperations.

 

***Our ability to grow our businesswill be impaired by delays, interruptions, or failures of the Internet.***

 

Oursuccess depends on the continued growth and maintenance of the Internet. TheInternet has experienced, and is likely to continue to experience, significantgrowth in the numbers of users and amount of traffic. If Internet usagecontinues to grow as anticipated, the infrastructure may not be able to supportthe level of usage and its performance and reliability may decline. If outagesor delays on the Internet increase, overall Internet usage could grow moreslowly or decline. In addition, the performance of the Internet may be harmedby increased number of users or bandwidth requirements or by viruses, worms,and similar issues. The Internet has experienced a variety of outages and otherdelays as a result of damage to portions of its infrastructure, and it couldface outages and delays in the future. These outages and delays could reducethe level of Internet usage.

 

***We depend on the continued growthand acceptance of online commerce, and our business will be substantiallyimpaired if the growth of online commerce slows or does not grow as expected.***

 

Oursuccess depends on the widespread acceptance and use of the Internet as aneffective medium for commerce by consumers. The acceptance and use of theInternet may not continue to expand as expected, and a sufficient broad base ofconsumers necessary for its continued growth may not adopt the Internet as amedium for commerce. Consumers who historically have used traditional means ofcommerce may have concerns about privacy, the inability to physically inspectmerchandise before buying, delivery time, product damage during shipment, andthe costs and inconvenience involved in returning purchased items, which mayinhibit their crossover to e-commerce. In order to expand our user base, wemust appeal to and acquire consumers who historically have used traditionalmeans of commerce to purchase goods. If these new customers execute fewer orlower dollar amounts of orders than our historical users, and we are unable togain efficiencies in our operating costs, including the cost of acquiring newcustomers, our business and profits could be adversely affected.

 

***Increased product returns and thefailure to predict product returns could substantially harm our business andresults of operations.***

 

Aswe expand our business and product offerings, rates of product return mayincrease. Any significant increase in product returns above our returnassumptions and allowances could substantially harm our business and results ofoperations.

 

***Our inventory is vulnerable to damage or loss caused by fire, flood,earthquakes, and similar events, and we face the risk of theft of our productsfrom inventory or during shipment.***

 

Ourinventory is stored at our warehouse/office facility in Culver City,California. Consequently, our merchandise supply is vulnerable to fire, flood,earthquakes, and similar events that may impact our facility. Any damage to orloss of all or a significant portion of our inventory could cause significantdelays in shipment of goods to our customers, resulting in negative publicityabout and diminished customer confidence in our website. In addition, we mayexperience theft of our products while they are being held in inventory orduring the course of their shipment to our customers by third-party carriers.We have implemented security measures to prevent such theft and maintaininsurance to cover losses resulting from theft. Nevertheless, we could incursignificant losses from theft, which would substantially harm our business andresults of operations, if our security measures fail, losses exceed ourinsurance coverage, or we are not able to maintain insurance at a reasonablecost.

 

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***Increases in credit card processingfees could increase our costs.***

 

Ourmerchant bank processor, Visa, MasterCard, American Express, Discover Card,PayPal and Bill-Me-Later could increase the processing and interchange feesthat they charge for transactions using their cards or service. Increases inprocessing and interchange fees may result in increased operating costs andreduced profit margin.

 

***We may default on our obligations,if we are unable to generate sufficient cash through sales in a timely manner.***

 

Sinceour formation, we have funded our operations through the sale of equitysecurities and cash generated from operations. The working capitalcharacteristics of our business have allowed us to collect cash from sales tocustomers within several business days of the related sale, while we typicallyhave extended payment terms with our suppliers. We do not, however, have anyformal or binding supply agreements with any of our suppliers, manufacturers,distributors, or other suppliers or any other formal agreements with them onpayment terms. Accordingly, there is a risk that we may default on ourobligations if we are unable to generate sufficient cash through sales in atimely manner or through our credit facility.

 

***Seasonal fluctuations in our netrevenue could cause our quarterly results to fluctuate and cause our results ofoperations to be below expectations.***

 

Historically,sales in the jewelry industry are seasonal and have been higher in the fourthquarter of the calendar year as a result of higher consumer spending during theDecember holiday season. Approximately 33.8%, 16.9% and 24.9% of our netrevenue was generated during the fourth quarter of 2007, 2008 and 2009,respectively. Thefourth quarter of 2008 and 2009 were exceptions as we encountered a significantslowdown in sales resulting from the 2008 financial and economic crisis. Thefourth quarter of 2009 was further affected by the migration of our proprietaryenterprise operating system to an ERP system running on a customized MicrosoftDynamics AX as unexpected deficiencies in implementing the new system had amaterial adverse effect on our results operations. As we continue to recoverand grow, we expect to experience more pronounced seasonal fluctuations in ournet revenue and anticipate a disproportionate amount of our revenue will occurin the fourth quarter. In anticipation of any increased sales activity duringthe fourth quarter, we may incur significant additional expenses, includinghigher sales and marketing costs and additional staffing in our fulfillment andcustomer support operations. If we were to experience lower than expected salesduring any future fourth quarter, it would have a disproportionately largeimpact on our results of operations for that year. In the future, our seasonalsales patterns may become more pronounced, may strain our personnel andfulfillment activities, and may cause a shortfall in sales compared with expensesin a given period, which would substantially harm our business and results ofoperations.

 

***Sales growth in prior periods maynot be indicative of our future growth.***

 

Oursales have fluctuated significantly in the past, in part, as a result ofvarying amounts of funds we have spent on advertising and inventory levels andmay fluctuate significantly in the future because of varying advertising andinventory costs. These factors may prevent the meaningful use ofperiod-to-period comparisons of financial results. For these and other reasons,investors should not rely on past sales growth rates as a prediction of ourfuture sales growth.

 

***We had grown quickly, and ourbusiness will suffer if we fail to manage our future growth.***

 

Wehad expanded our operations at a rapid pace prior to the 2008 financial andeconomic crisis. This expansion had placed a significant strain on ourmanagement, operations, and financial resources. When the economy recovers, weanticipate adding personnel in the future, including managerial, technical, andoperations personnel. In order to manage the future growth of our operations,we also will be required to improve existing and implement newtransaction-processing, operational and financial systems, procedures, andcontrols. If we are unable to manage growth effectively, our business andresults of operations will be harmed.

 

***Descriptions of our jewelry itemsare not guarantees and may confuse, mislead, or disappoint our customers.***

 

Inan effort to provide accurate descriptions of jewelry posted on our website, weprovide appraisal summaries from third-party gemological laboratories for someof our jewelry items. All other jewelry and watch descriptions are provided byour full-time Gemological Institute of America, or GIA, trained gemologists andother experienced product specialists. Nevertheless, there is a subjectivecomponent involved with respect to assessing the clarity, color, and caratcharacteristics of diamonds and other gemstones. In addition, mistakes oromissions of important information in our descriptions may occur. Even if ourdescriptions are accurate, buying a product online may lead to disappointmentresulting in returned merchandise. For example, a customer may determine that apiece does not have the expected look, feel, and overall appearance of themerchandise that the buyer envisioned from the website photograph.

 

Additionally,in response to customer requests and as a courtesy to resellers, we provide “Compare,”and/or “Retail” prices for jewelry 

 

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itemslisted on our website. Compare prices are not meant to reflect fair marketvalues or manufacturer suggested retail prices, and in fact, may be higher thanprices found in local retail stores. As a consequence, perceivedmisrepresentations in item descriptions by disappointed buyers may occur,resulting in negative publicity about and diminished customer confidence in ourwebsite.

 

***We may unknowingly be involved in “conflict”diamond purchases that result in a negative public relationship impact.***

 

Therehas been an increase in attention to “conflict” diamonds originating out ofwar-torn regions of Africa. The proceeds from the sale of “conflict” diamondshave been used to fund ongoing aggression and terrorist activities throughoutthe world. We make every effort to evaluate our vendor sources to ensure theyare not a dealer in “conflict” diamonds. In addition we have implemented ananti-money laundering program to guard against both illicit purchase and salesactivities. If these risks were to occur, we may face a negative publicreaction to our brand name resulting in loss of sales.

 

***We may not be able to maintain ourdomain name uniqueness.***

 

OurInternet domain name is critical to our success. Under current domain nameregistration practices, no other entity can obtain an identical domain name,but 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. We have not registered our domain name with different suffixes norhave we registered our name in any other jurisdiction. As a result, thirdparties may use domain names that are similar to our domain name, which mayresult in confusion to potential customers and lost sales. We are aware thatother businesses have registered the name “bidz” with other suffixes and inother countries.

 

***We may be subject to assertions by third partiesfor infringement on their intellectual property rights.***

 

Thirdparties may in the future assert that we have infringed on their intellectualproperty rights as we self-develop our auction platform, sales transactionsystem, and inventory control system.  Wehave a larger exposure to being accused of intellectual property rightsinfringements than if we had purchased our technology off the shelf. We alsomay be at risk for selling items that infringe on other third party trade dressrights, copyright, or patent rights that may cause the offended party to bringan action against us. In either event of alleged infringement, we would facesubstantial litigation cost to defend ourselves and utilization of ourmanagement and personnel resources.

 

***We may be unable to protect orenforce our own intellectual property rights adequately, and we may becomesubject to intellectual property litigation.***

 

We regard the protection of our trademarks,copyrights, domain name, trade dress, and trade secrets as critical to oursuccess. We rely on a combination of common law as well as trademark,copyright, trade dress, and trade secret laws to protect our intellectualproperty rights. We also have entered into confidentiality and inventionassignment agreements with our employees and relevant contractors andnondisclosure agreements with relevant parties with whom we conduct business inorder to limit access to and disclosure of our proprietary information. Thesecontractual arrangements and other steps we have taken to protect ourintellectual property may not prevent misappropriation of our intellectualproperty or deter independent development of similar intellectual property byothers Effective trademark, copyright, patent, trade dress, trade secret, anddomain name protection is very expensive to maintain and may requirelitigation.

 

Third parties may from time to time claimthat we have infringed their intellectual property relating to our businessmodel or auction systems. We expect that participants in our marketincreasingly will be subject to infringement claims as the number of servicesand competitors in our industry segment grows. Any claim like this, whethermeritorious or not, could be time-consuming, result in costly litigation, causeservice upgrade delays, or require us to enter into royalty or licenseagreements. These royalty or license agreements may not be available onacceptable terms or at all. As a result, any such claim could harm ourbusiness.

 

***We may be unable to enforceprotection of our intellectual property rights under the laws of othercountries.***

 

Weanticipate that we will become increasingly subject to internationalintellectual property risks, including differing intellectual property laws,which may be insufficient to protect our intellectual property, unique locallaws, and lack of applicable law or clear precedent.

 

***Various legal rules andregulations related to privacy and the collection, dissemination, and securityof personal information may adversely affect our marketing efforts.***

 

Weare subject to increasing regulation at the federal, state, and internationallevels relating to privacy and the use of personal user information designed toprotect the privacy of personally identifiable information as well as toprotect against its misuse. These laws 

 

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includethe Federal Trade Commission Act, the CAN-SPAM Act of 2003, the Children’sOnline Privacy Protection Act, the Fair Credit Reporting Act, the HomelandSecurity Act, and related regulations. In May 2009, we received a CivilInvestigation Demand for Information from the Federal Trade Commissioner (“FTC”)relating to email marketing practices. We have been cooperating fully with theFTC regarding this matter. Several states have proposed legislation that wouldlimit the use of personal information gathered online or require onlineservices to establish privacy policies. Moreover, proposed legislation in theUnited States and existing laws in foreign countries require companies toestablish procedures to notify users of privacy and security policies, obtainconsent from users for collection and use of personal information, and/orprovide users with the ability to access, correct, and delete personalinformation stored by companies. These regulations and other laws, rules, andregulations enacted in the future may adversely affect our ability to collect,disseminate, or share demographic and personal information about users and ourability to e-mail or telephone users, which could be costly and adverselyaffect our marketing efforts**.**

 

***We may be subject to regulationsgoverning the conduct and liability of auctioneers, which could affect the wayin which we conduct our business or otherwise increase our cost of doingbusiness.***

 

Numerousstates and foreign jurisdictions, including California, where our headquartersare located, have regulations regarding how auctions may be conducted and theliability of auctioneers in conducting such auctions. No final legaldetermination has been made whether the California regulations apply to ourbusiness, and little precedent exists in this area. Several states and someforeign jurisdictions have attempted, and may attempt in the future, to imposeregulations that could affect us or our users, which could harm our business.

 

***We are subject to regulationsrelating to consumer privacy, which could increase the cost of our doingbusiness, expose us to litigation costs, increase our service or deliverycosts, and otherwise harm our business.***

 

Severalstates have proposed, and California, Minnesota, Utah, and Vermont haverecently passed, legislation that would limit the uses of personal userinformation gathered online or offline. Many states already have such laws andcontinually consider strengthening them, especially against online services.However, the Fair Credit Reporting Act, or FCRA, a federal statute enacted in1970 to protect consumer privacy, includes a provision preempting conflictingstate laws on the sharing of information between corporate affiliates. Thepreemptive provisions of FCRA were permanently extended in 2002, therebyensuring that we are not subject to the laws of each individual state with respectto matters within the scope of FCRA, but remain subject to the other provisionsof FCRA.

 

TheFederal Trade Commission also has settled several proceedings against companiesregarding the manner in which personal information is collected from users andprovided to third parties. As noted above, we are cooperating with the FTC inan investigation relating to email marketing. See Item 1, Legal Proceedings.Specific statutes intended to protect user privacy have been passed in manyforeign jurisdictions. Compliance with these laws, given the tight integrationof our systems across different countries and the need to move data tofacilitate transactions among our users, such as payment companies and shippingcompanies, is both necessary and difficult. Failure to comply could subject usto lawsuits, fines, criminal penalties, statutory damages, adverse publicity,and other losses that could harm our business. Changes to existing laws or thepassage of new laws intended to address these issues could directly affect theway we do business or could create uncertainty on the use of the Internet. Thiscould reduce demand for our products, increase the cost of our doing business,expose us to litigation costs, increase our service or delivery costs, orotherwise harm our business.

 

***New and existing regulations couldharm our business.***

 

Weare subject to the same foreign and domestic laws as other companies conductingboth online and offline business. There are still relatively few lawsspecifically directed towards online business. However, due to the increasingpopularity and use of the Internet and online services, many laws relating tothe Internet are being debated at all levels of government around the world,and it is possible that such laws and regulations will be adopted. These lawsand regulations could cover issues such as user privacy, freedom of expression,pricing, fraud, content and quality of products and services, taxation,advertising, intellectual property rights, and information security.Applicability to the Internet of existing laws governing issues, such asproperty ownership, copyrights and other intellectual property issues,taxation, libel and defamation, obscenity, and personal privacy is uncertain.The vast majority of these laws was adopted prior to the advent of the Internetand related technologies and, as a result, do not contemplate or address theunique issues of the Internet and related technologies. Those laws that doreference the Internet, such as the U.S. Digital Millennium Copyright Act andthe European Union’s Directive on Distance Selling and Electronic Commerce,have only recently begun to be interpreted by the courts and implemented by theEuropean Union member states, so their applicability and scope remainuncertain. As our activities and the types of goods listed on our websiteexpand, regulatory agencies may claim that we or our users are subject tolicensure in their jurisdiction, either with respect to our business ingeneral, or in order to allow the sale of certain items, such as real estate,event tickets, boats, and automobiles.

 

Inaddition, because our products are available over the Internet in multiplestates and because we sell merchandise to consumers residing in multiplestates, we could be required to qualify to do business as a foreign corporationin each state in which our products 

 

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areavailable. Our failure to qualify as a foreign corporation in a jurisdiction inwhich we are required to do so could subject us to penalties. Any newlegislation or regulation, or the application of laws or regulations fromjurisdictions whose laws do not currently apply to our business could have amaterial adverse affect on our business.

 

***We depend to a very significantextent on David Zinberg, our Chairman of the Board and Chief Executive Officer.***

 

Ourperformance depends substantially upon David Zinberg, our Chairman of the Boardand Chief Executive Officer, who has extensive experience with the purchase andsale of jewelry. We rely on Mr. Zinberg to make critical operationaldecisions on a daily basis, such as product offerings and purchases, and tomake key strategic plans. We have an employment agreement with Mr. Zinbergextending through July 2010 and renewable annually. The loss of theservices of Mr. Zinberg would adversely affect our business andoperations.

 

***Holders of common stock issued by usin prior offerings may be entitled to rescind their purchases.***

 

Fromour inception until mid-2003, we raised over $20.5 million in gross equitycapital by selling shares of our common stock to approximately 830 investors atprices ranging from $4.00 to $6.00 per share with a weighted average shareprice of $4.50. We also issued shares of common stock to about 30 persons inexchange for services and other non-cash consideration valued in excess of $5.5million and issued approximately 250 stock option grants to purchase commonstock at a weighted average exercise price of $4.45. After conducting thesesales of our securities, we determined that these sales were not exempt fromthe registration requirements under the Securities Act of 1933 and similarprovisions of laws of the states in which our stockholders reside, becausecertain of our employees who solicited investors engaged in a “generalsolicitation” of securities. In addition, these employees received compensationfor selling our common stock and were required to be licensed as broker-dealerswith the Securities and Exchange Commission, or SEC, and various stateauthorities, but they were not so licensed. In such situations, a number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs. We believe, however, that as to any options by investorsat this time or in the future, applicable statutes of limitations will mitigateour exposure to any civil remedies.

 

***We do not intend to pay dividends on our common stock, and,consequently, your only opportunity to achieve a return on your investment isif the price of our common stock appreciates.***

 

We have never declared orpaid any cash dividends on our common stock and do not intend to pay dividendson our common stock for the foreseeable future. We intend to invest any futureearnings to fund our business. Therefore, stockholders likely will not receiveany dividends on our common stock for the foreseeable future. Investors cannotbe certain that they will receive a positive return on their investment whenthey sell their shares or that they will not lose the entire amount of theirinvestment.

 

***The concentration of our capitalstock ownership with our founder and executive officers and directors and theiraffiliates will limit your ability to influence corporate matters.***

 

Ourfounder, executive officers, and directors together own approximately 37.6% ofour common stock as of December 31, 2009. Marina Zinberg, our VicePresident, who is the sister of David Zinberg, our Chairman and Chief ExecutiveOfficer, owns an additional 30.4% of our common stock.  As a result, these individuals will have significantinfluence over our management and affairs and over all matters requiringstockholder approval, including the election of directors and the approval ofsignificant corporate transactions, such as a merger or a sale of our companyor its assets, for the foreseeable future. This concentrated control will limitthe ability of other stockholders to influence corporate matters. Because ofthis, we may take actions that some of our stockholders do not view asbeneficial. As a result, the market price of our common stock could beadversely affected because stockholders may not view favorably theconcentration of control in the hands of management.

 

***Our charter documents and Delawarelaw could make it more difficult for a third party to acquire us, anddiscourage a takeover.***

 

On June 22, 2006, we reincorporated inDelaware, and the Delaware certificate of incorporation and the DelawareGeneral Corporation Law, or DGCL, contain provisions that may have the effectof making more difficult or delaying attempts by others to obtain control ofour company, even when these attempts may be in the best interests of ourstockholders. The Delaware certificate of incorporation also authorizes ourBoard of Directors, without stockholder approval, to issue one or more seriesof preferred stock, which could have voting and conversion rights thatadversely affect or dilute the voting power of the holders of common stock.Delaware law also imposes conditions on certain business combinationtransactions with “interested stockholders.” The Delaware certificate ofincorporation divides our Board of Directors into three classes, with one classto stand for election each year for a three-year term after the initialelection. The classification of directors tends to discourage a third party frominitiating a proxy solicitation or otherwise attempting to obtain control ofour company and may maintain the incumbency of our Board of Directors, as thisstructure generally increases the difficulty of, or may delay, replacing amajority of directors. The Delaware bylaws authorize our Board of 

 

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Directors to fill vacancies or newly createddirectorships. A majority of the directors then in office may elect a successorto fill any vacancies or newly created directorships.

 

**ITEM1B.      Unresolved Staff Comments**

 

Not applicable.

 

**Item 2.**                     **Properties.**

** **

We lease a 50,000 squarefoot facility in Culver City, California, which serves as our corporateheadquarters and houses our sales, marketing, research and development,customer service, fulfillment, and warehouse operations. In March 2009,we extended the lease on our 50,000 square-foot facility by 32 months to expirein June 2012. InAugust 2007, we leased a separate 12,000 square-foot warehouse in CulverCity, California and this lease expires in August 2012. In October 2009,we signed a new lease for a 26,000 square-foot office and warehouse space inMarina Del Rey, California beginning in November 2009 and expiring in October 2012.

 

**Item 3.****                    ****LegalProceedings**

** **

In May and June, 2009, the Company and certain ofits officers were named as defendants in three parallel class actionscomplaints filed in the United States District Court for the Central Districtof California (Ramon Gomez v. Bidz.com, Inc., et al., cv09-3216 (CBM)(C.D. Cal.; filed on May 7, 2009); James Mitchell v. Bidz.com, Inc.,et al., cv09-03671 (CBM) (C.D. Cal.; filed on May 22, 2009); Mark Walczykv. Bidz.com, Inc., et al., cv09-0397 (CBM) (C.D. Cal.; filed on June 3,2009)).  On July 30, 2009, the Courtordered the cases to be consolidated and appointed Roland Pomfret as the leadplaintiff.  The lawsuits purport torepresent the class of shareholders who purchased the Company’s common stockbetween August 13, 2007 and November 27, 2007.  The complaints charge the Company and certainof its officers and directors with violations of §10(b) and §20(a) ofthe Securities Exchange Act of 1934. The complaints allege that we failed todisclose unethical and fraudulent business practices that were alleged in a November 26,2007 report by Citron Research (Stocklemon.com), that we did not have controlsin place to prevent “shill bidding” and that we use unreliable or falseappraisal prices on our merchandise.  Thecourt granted the plaintiffs’ request to appoint Roland Pomfret as leadplaintiff, and a consolidated complaint was filed on October 13,2009.  In addition to the allegations inthe original complaint, the consolidated complaint alleges that the defendantsfailed to correctly account for and disclose in detail its co-op marketingcontributions and minimum gross profit guarantees.  We believe that the lawsuits are meritless andintend to defend the cases vigorously.

 

In May and July,2009, the Company and certain of its officers and its Board of Directors werenamed as defendants in two shareholder derivative lawsuits filed in theSuperior Court of California, County of Los Angeles, and the United StatesDistrict Court for the Central District of California, respectively (BahramAkhavan v. Bidz.com, Inc. et al. BC414198 (filed May 20, 2009);Farris Hassan v. Bidz.com, Inc., et al. , cv09-04984 (CBM) (C.D. Cal.;filed on July 10, 2009)) (a similar complaint was by David Hughes  on August 18, 2009).  The Complaint alleges violations of law,including breaches of fiduciary duties, waste of corporate assets, unjustenrichment and violations of California Corporations Code that occurred betweenAugust 2007 and the present and that have caused substantial monetary lossto the Company and other damages, such as to its reputation and goodwill.  On October 25, 2009, plaintiff filed anamended complaint that also includes allegations relating to the Company’sco-op marketing contributions and minimum gross profit guarantees.  We believe that the lawsuits are meritlessand intend to defend the cases vigorously.

 

In May 2009, theCompany received a Civil Investigative Demand for information from the FederalTrade Commission (“FTC”) relating to email marketing practices. We have been cooperating fully with the FTC regarding thismatter, and we do not believe that the investigation will adverselyaffect management, our results of operations, cash flows or our financialposition.

 

On February 10, 2009, the Securities and Exchange Commission (“SEC”)issued a subpoena to produce documents relating to the Company’s inventoryreserve policies, as well as other matters. We have been cooperating fully withthe SEC regarding this matter, our management and certain employees havecomplied with subpoenas for testimony, and we do not believe that the investigation will adverselyaffect management, our results of operations, cash flows or our financialposition.  On October 27,2009, the SEC issued a subpoena to produce documents relating to the Company’sco-op marketing contributions and minimum gross profit guarantees.

 

On or about June 25,2009, the Company was named as a defendant in a patent infringement lawsuitfiled in the United States District Court for the Eastern District of Texas,Tyler Division (Soverain Software LLC v. J.C. Penney Corporation, Inc.,Amway Corp., Avon Products, Inc., Bidz.com, Inc., Etronics, Inc.HSN, Inc., HSN Improvements, LLC, Cornerstone Brands, Inc., BallardDesigns, Inc., Garnet Hill, Inc., Smith & Noble, LLC, TheTerritory Ahead, Inc., QVC, Inc., Shutterfly, Inc., Victoria’sSecret Stores Brand Management, Inc., Victoria’s Secret Direct BrandManagement, LLC, VistaPrint, Ltd., and VistaPrint USA, Inc. cv6:09-CV-274).The Complaint alleges that defendants’ ecommerce sites infringe one or morepatents held by the plaintiff.   ThePlaintiff seeks a judgment that its patents are not invalid and enforceable, apreliminary and permanent injunction against infringement of the patents,damages 

 

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(including trebledamages) and attorneys fees. We believe that the lawsuit is meritless andintend to defend the case vigorously.

 

On or about September 29,2008, the Company, David Zinberg and Marina Zinberg were named as defendants ina complaint filed in the United States District Court for the Central Districtof California (Marla Tidenberg v. Bidz.com, Inc., et al., cv08 05553(PSG)).  On March 19, 2009,Tidenberg filed a Third Amended Complaint, which names only the Company as adefendant.  The lawsuit alleges, amongother things, that we engaged in unfair business practices by misrepresentingthe value of our merchandise and by “false” bidding. The complaint purports torepresent a class of persons who purchased any merchandise from us. On January 7,2010 the Court denied Marla Tidenberg’s Motion for Class Certification. OnFebruary 26, 2010, Marla Tidenberg accepted our offer to pay her TwentyThousand Dollars in exchange for a dismissal of her case with prejudice.

 

We are, from time to time, a party todisputes arising from normal business activities, including variousemployee-related matters. In the opinion of our management, resolution of thesematters, individually or collectively, will not have a material adverse effectupon our financial condition or future cash flows and operating results.

 

**Item 4.****                    ****Submissionof Matters to a Vote of Security Holders**

** **

We held our annualmeeting of stockholders on May 28, 2009. The following items were voted onby our stockholders:

 

Election of Class III member of our Board of Directors for a termexpiring in 2012

** **
| ** **      | ** ** | ** ** | ** ** | **FOR**    | ** ** | **WITHHELD/  AGAINST** | ** ** |
|-----------------|------------|------------|------------|------------|------------|------------------------|------------|
| Garry  Y. Itkin |       |       |       | 18,747,315 |       | 336,057                |       |

 
| ** **                                                                                                                                                                           | ** ** | **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Proposal  to approve the ratification of the appointment of Stonefield Josephson, Inc.  as the Company’s independent auditors for the fiscal year ended December 31,  2009 |       | 19,073,595 |       | 7,141       |       | 2,636       |       |

 

**Part II**

 

**Item 5.****                    ****Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities**

** **

Our common stock isquoted on The NASDAQ Stock Market LLC under the symbol “BIDZ.” The followingtable sets forth the high, low and closing market prices of our common stockduring each of the four calendar quarters for 2009:

 

| **For the quarter ended:** | ** ** | **High** | ** ** | **Low** | ** ** | **Close** | ** ** |
|-------------------------------------------|------------|----------|------------|---------|------------|-----------|------------|
|                                      |       |     |       |    |       |      |       |
| March 31, 2009                       |       | $        | 4.73       |    | $          | 2.25      |       | $ | 4.02 |   |
| June 30, 2009                        |       | $        | 4.84       |    | $          | 2.61      |       | $ | 2.82 |   |
| September 30, 2009                   |       | $        | 4.80       |    | $          | 2.67      |       | $ | 3.48 |   |
| December 31, 2009                    |       | $        | 3.48       |    | $          | 1.88      |       | $ | 2.00 |   |

 

Asof December 31, 2009, there were 22,114,357 shares of common stockoutstanding.

 

We have established apublic market for our common stock on the NASDAQ Capital Market since June 2007.We have registered for offer and sale the shares of common stock that arereserved for issuance pursuant to stock options covered by our stock optionplans. Shares covered by such registration statements upon the exercise ofstock options or warrants generally will be eligible for sale in the publicmarket, except that affiliates will continue to be subject to volumelimitations and other requirements of Rule 144. As of December 31,2009, the number of shares of our common stock that is subject to outstandingoptions to purchase common stock is 6,779,000.

 

Shares held by managementand affiliates of our company are subject to the resale limitations of Rule 144.In general, under Rule 144 as currently in effect, any person, or personswhose shares are aggregated for purposes of Rule 144, who beneficiallyowns restricted securities with respect to which at least six months haselapsed since the later of the date the shares were acquired from us, or froman affiliate of ours, is entitled to sell within any three-month period anumber of shares that does not exceed the greater of 1% of the then outstandingshares of our common stock and the average weekly trading volume in commonstock during the four calendar weeks preceding such sale. Sales under Rule 144also are subject to certain manner-of-sale provisions and notice requirementsand to the availability of current public information about us.

 

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**Dividends**

 

Wehave never declared or paid any dividends on our common stock and do notanticipate that we will pay any dividends to holders of our common stock in theforeseeable future. Instead, we currently plan to retain any earnings tofinance the growth of our business. Payments of any cash dividends in thefuture will be within the discretion of our Board of Directors and will dependon our financial condition, results of operations, and capital requirements aswell as other factors deemed relevant by our Board of Directors.

 

**Equity Compensation Plan Information**

 
| ** **                                                      | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **Number of securities**    | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **remaining available for** | ** ** |
| ** **                                                      | ** ** | **Number of securities**         | ** ** | ** **                        | ** ** | **future issuance under**   | ** ** |
| ** **                                                      | ** ** | **to be issued upon**       | ** ** | **Weighted-average**              | ** ** | **equity compensation**          | ** ** |
| ** **                                                      | ** ** | **exercise of**                       | ** ** | **exercise price of**   | ** ** | **plans (excluding**             | ** ** |
| ** **                                                      | ** ** | **outstanding options,**              | ** ** | **outstanding options,**     | ** ** | **securities reflected in** | ** ** |
| **Plan category**                                          | ** ** | **warrants and rights (1)** | ** ** | **warrants and rights** | ** ** | **column (a))**                  | ** ** |
| **Equity compensation plans  approved by security holders**     | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** **                            | ** ** |
| 2006 Stock award plan                                           |       | 290,500                                    |       | $                                 | 7.89       |                                  | 712,803    |   |
| 2002 Special stock option plan                                  |       | —                                     |       | $                                 | —     |                                  | —     |   |
|                                                            |       |                                       |       |                              |       |                                  |       |
| **Equity compensation plans not  approved by security holders** | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** **                            | ** ** |
| 2001 Stock option plan                                          |       | 488,500                                    |       | $                                 | 6.00       |                                  | —     |   |
| Non-statutory stock option (2)                                  |       | 6,000,000                                  |       | $                                 | 6.00       |                                  | —     |   |
|                                                            |       |                                       |       |                              |       |                                  |       |
| **Total**                                                       |       | 6,779,000                                  |       | $                                 | 6.08       |                                  | —     |   |

 

----

(1)                                The total number of sharesof common stock to be issued upon exercise of all outstanding stock options is6,779,000 as of December 31, 2009.

 

(2)                                Includes a non-statutorystock option to purchase 6,000,000 shares at an exercise price of $6.00 pershare granted to David Zinberg, our Chief Executive Officer.

 

**RecentSales of Unregistered Securities**

 

Duringthe past three years we have sold the following securities that were notregistered under the Securities Act of 1933. The share issuances were undertaken in reliance on the exemption fromregistration under the Securities Act of 1933 (the “Act”) set forth in Section 4(2) ofthe Act or Rule 701 under the Act.

 

In2009, we issued 666,000 restricted stock awards of our common stock, with 25% vesting at the end ofeach year over a four year period, under the 2006 Award Plan to management andkey employees for services rendered to our Company. No stock options weregranted in 2009.

 

In2008, we issued 24,800 restricted share awards of our common stock, with 25%vesting at the end of each year over a four year period, under the 2006 AwardPlan to 13 employees for services rendered to our company. No stock optionswere granted in 2008.

 

In2007, we issued 10,000 and 8,750 shares of our common stock to each of ouroutside directors, Peter Hanelt and Man Jit Singh, respectively, as payment ofindependent director fees. We also issued 40,000, 35,000 and 35,000 restrictedshare awards of our common stock, with 25% vesting at the end of each year overa four year period, under the 2006 Award Plan to each of our outside directors,Peter Hanelt, Man Jit Singh and Garry Itkin, respectively, as payment of independentdirector fees. We issued stock options to purchase an aggregate of 1,000,000shares in our common stock at an exercise price of $8.23 per share to 4 of ouremployees under our 2006 Award Plan for services rendered to the our company.We also issued 16,000 restricted share awards of our common stock, with 25%vesting at the end of each year over a four year period, under the 2006 AwardPlan to 5 employees for services rendered to our company.

 

**IssuerPurchases of Equity Securities**

 

Thefollowing table contains information about repurchases of our common stockduring the fourth quarter of 2009 and no shares were repurchased during thequarter:

 

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| ** **                              | ** ** | ** **    | ** ** | ** **  | ** ** | **Total number of** | ** **      | **Maximum**                    | ** ** |
|-----------------------------------------|------------|---------------|------------|-------------|------------|-------------------------------|-----------------|--------------------------------|------------|
| ** **                              | ** ** | ** **    | ** ** | ** **  | ** ** | **shares**                    | ** **      | **dollar value**          | ** ** |
| ** **                              | ** ** | **Total**     | ** ** | **Average** | ** ** | **purchased as**         | ** **      | **of shares that**   | ** ** |
| ** **                              | ** ** | **number**    | ** ** | **price**   | ** ** | **part of a**       | ** **      | **may**                        | ** ** |
| ** **                              | ** ** | **of**        | ** ** | **paid**    | ** ** | **publicly**                  | ** **      | **yet be purchased** | ** ** |
| ** **                              | ** ** | **shares**    | ** ** | **per**     | ** ** | **announced**                 | ** **      | **under the**             | ** ** |
| **2009**                                | ** ** | **purchased** | ** ** | **share**   | ** ** | **program**                   | ** **      | **program (1)**           | ** ** |
| October 1 — October 31   |       | —        |       | —      |       | 3,308,841                     |            | $                              | 15,095,825 |   |
| November 1 — November 30 |       | —        |       | $           | —     |                          | 3,308,841       |                           | $          | 15,095,825 |   |
| December 1 — December 31 |       | —        |       | $           | —     |                          | 3,308,841       |                           | $          | 15,095,825 |   |
| Total                                   |       | —        |       | $           | —     |                          |  3,308,841 |                           | $          | 15,095,825 |   |

 

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(1)           In June 2007, we authorized thestock buyback program for up to $5 million of our outstanding common stock tobe repurchased through the open market at prices deemed appropriate bymanagement.  In February 2008, we authorized an increase in the stock buybackprogram to $20 million from $5 million. In February 2009, we authorized anincrease in the stock buyback program to $33.5 million from $20.0 million. Asof February 28, 2010 we have repurchased a total of approximately 3.3million shares for a total of approximately $18.4 million. About $15.1 millionremain available under the buyback program to repurchase shares in the openmarket. The stock buyback will be at prices deemed appropriate by managementover a 24 month period.

 

**Item 6.       Selected FinancialData**

 

The selected financial data presented below has beenderived from our financial statements. The statement of income data for each ofthe fiscal years ended December 31, 2007, 2008, and 2009 and the balancesheet data at December 31, 2008 and 2009 are derived from our auditedfinancial statements that are included in this report. The statement ofoperations data for the years ended December 31, 2005 and 2006 and thebalance sheet data at December 31, 2005, 2006 and 2007 are derived fromaudited financial statements that are not included in this report. Thehistorical results presented below are not necessarily indicative of theresults to be expected in any future period. You should read this informationtogether with “Management’s discussion and analysis of financial condition andresults of operations” and our financial statements and the related notesincluded elsewhere in this report.

 
| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statement of income data:**                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Net revenue                                                        |       | $                                           | 90,579     |   | $ | 131,823 |   | $ | 187,131 |   | $ | 207,410 |   | $ | 110,394 |   |
| Cost of revenue                                                    |       | 71,257                                      |       | 100,633 |   | 132,683 |   | 148,688 |   | 76,667 |   |
| Gross profit                                                       |       | 19,322                                      |       | 31,190 |   | 54,448 |   | 58,722 |   | 33,727 |   |
| Operating expenses:                                                |       |                                        |       |   |   |   |   |   |   |   |   |
| General & administrative                                  |       | 10,938                                      |       | 13,853 |   | 20,458 |   | 21,209 |   | 19,444 |   |
| Sales & marketing                                         |       | 5,078                                       |       | 10,300 |   | 12,578 |   | 12,681 |   | 9,140 |   |
| Public offering costs                                              |       | 442                                         |       | 1,287 |   | — |   | — |   | — |   |
| Depreciation & amortization                               |       | 157                                         |       | 273 |   | 498 |   | 690 |   | 795 |   |
| Total operating expenses                                           |       | 16,615                                      |       | 25,713 |   | 33,534 |   | 34,580 |   | 29,379 |   |
| Income from operations                                             |       | 2,707                                       |       | 5,477 |   | 20,914 |   | 24,142 |   | 4,348 |   |
| Interest income (expense), net                                     |       | 22                                          |       | 32 |   | (250 | )  | (142 | ) | (73 | ) |
| Income tax expense                                                 |       | (82                                         | )          | (120 | ) | (2,538 | ) | (9,597 | ) | (1,814 | ) |
| Net income                                                         |       | $                                           | 2,647      |   | $ | 5,389 |   | $ | 18,126 |   | $ | 14,403 |   | $ | 2,461 |   |
| Net income common share:                                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                              |       | $                                           | 0.11       |   | $ | 0.23 |   | $ | 0.77 |   | $ | 0.61 |   | $ | 0.11 |   |
| Diluted                                                            |       | $                                           | 0.11       |   | $ | 0.23 |   | $ | 0.69 |   | $ | 0.57 |   | $ | 0.11 |   |
|                                                               |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance sheet data:**                                            | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash & cash equivalents                                   |       | $                                           | 7          |   | $ | 359 |   | $ | 4,808 |   | $ | 4,456 |   | $ | 1,121 |   |
| Working capital (deficit)                                          |       | 1,009                                       |       | 5,974 |   | 29,865 |   | 32,785 |   | 31,177 |   |
| Total assets                                                       |       | 17,746                                      |       | 38,542 |   | 70,965 |   | 48,405 |   | 51,419 |   |
| Revolving credit line                                              |       | —                                      |       | 3,941 |   | 5,924 |   | — |   | 2,898 |   |
| Total liabilities                                                  |       | 15,963                                      |       | 31,815 |   | 39,383 |   | 13,599 |   | 17,980 |   |
| Total stockholders’ equity                                    |       | $                                           | 1,783      |   | $ | 6,727 |   | $ | 31,582 |   | $ | 34,806 |   | $ | 33,439 |   |

 

**Item 7.       Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*Thefollowing discussion should be read in conjunction with the financialstatements and related notes which appear elsewhere in this form. Thisdiscussion contains forward-looking statements. Our actual results could differmaterially from those anticipated in these*

 

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*forward-lookingstatements as a result of various factors, including various risks anduncertainties discussed in Item 1A. “Risk Factors” and throughout this report.*

 

**Overview**

 

Weare a leading online retailer of jewelry, featuring a live auction format. Wehave established our retail brand in the online marketplace by offeringhigh-quality merchandise, a unique user-friendly shopping experience, and theopportunity for buyers to achieve significant cost savings versus traditionalretail channels. A key to our success has been our ability to efficiently andcost effectively source closeout and jewelry, watches, accessories and brandname merchandise, and rapidly respond to changing consumer demands for ourmerchandise. We offer our products through a continuous live format, featuringa $1 minimum opening bid, and a unique 15-second auction extension period thatallows our auctions to continue until all bids are received. On select auctionswe maintain a reserve price that must be met before a sale will be consummated.In 2009, we began offering auctions with a minimum opening bid that is higherthan $1. The majority of our auctions are short-term, often lasting less thanone hour, providing immediate gratification to our customers and encouragingfrequent visits and active viewing of our website.

 

In addition to our auctionsite we have a fixed pricing format that offers similar items of merchandise asthose listed for auction.  This onlinestore, buyz.com, provides us access to different types of consumers, and weplan to offer customers the ability to design their own jewelry includingdiamond earrings and rings in the near future. The fixed price site may also beused to sell inventory that is held by our suppliers using a just in timeordering or drop ship model.

 

Ourproduct inventory includes gold, platinum, and silver jewelry set withdiamonds, rubies, emeralds, sapphires, and other precious and semi-preciousstones; watches, accessories and brand name merchandise. We believe we are thesecond largest online retailer of jewelry based on revenue and the largestonline jewelry auction site based on web traffic.

 

Inline with our growth plans, we previously completed a major upgrade of ourauction platform at the end of 2007. The new auction system supports a broadrange of leading browser software including Microsoft Internet Explorer,FireFox and Safari. The new system touts high availability, faster end-userresponse time and greater scalability among the key features delivered in thisrelease. We have leveraged this new software solution to launch additional sitefeatures and our new online retail store, buyz.com. We launched the Spanish,Arabic and German versions of our website in 2008.

 

In 2009, we completed anddeployed an implementation of Dynamics AX, a robust ERP solution fromMicrosoft. Dynamics AX replaced our proprietary in-house business managementsoftware in the areas of inventory management, order management, customermanagement, logistics, purchasing, warehouse management and fulfillment.

 

We sell to consumers looking for reliable bargains on jewelry, watches,accessories and brand name merchandise. Because we purchase and retain all ofour inventory onsite, we can provide our customers with timely service anddelivery of their purchases. In addition, each item is inspected by one of ourtrained product specialists prior to its placement on our website, whichassures our customers of the quality of their purchases of our products. Weoperate in a highly competitive market with low barriers to entry. By sellingour own merchandise, we provide a buying environment in which we minimizefraudulent activity and questionable product quality frequently associated withpurchase transactions from third-party sellers. We also provide a 15-day returnpolicy on all merchandise. We believe that many of our customers resellmerchandise that they purchase from our auctions on eBay, at local auctions,and through other retail channels. Our auctions and fixed price sales areconducted 24 hours a day, seven days a week. We also offer 24-hourtelephone customer support and online live-help as well e-mail customersupport.

 

**Critical Accounting Policies**

 

The preparation of our financial statements requiresus to make certain estimates and judgments that affect amounts reported and disclosedin our financial statements and related notes. We base our estimates onhistorical experience and on other assumptions that we believe to be reasonableunder the circumstances. Actual results may differ from these estimates. Thefollowing are the critical accounting policies that we believe requiresignificant estimation and judgment.

 

*Revenue Recognition*

 

Wederive our revenue from four sources: merchandise sales, which includewholesale merchandise sales, shipping revenue, transaction fee revenue andother revenue. We recognize revenue from all four sources when the followingrevenue recognition criteria are met: (1) persuasive evidence of anarrangement exists; (2) the product has been shipped or the service hasbeen rendered and the customer takes ownership and assumes the risk of loss; (3) theselling price is fixed or determinable; and (4) collection of theresulting receivable is reasonably assured.

 

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For online sales through our website, we recognizemerchandise sales upon shipments made to consumers that are fulfilled from ourwarehouse. We require payment before we ship and the payment is generally madeonline by credit card or other electronic payment methods. We record amountsreceived or billed prior to shipment of goods to customers as deferred revenue.We reduce gross sales by returns and charge-backs from customers. For wholesalemerchandise sales, we recognize sales when the merchandise is delivered to thecustomer and credit terms may be offered to such customers.

 

Inthe Statement of Income all amounts billed to customers by us related toshipping and handling are included in “Net revenue” and our shipping costs areincluded in “Cost of revenue.”

 

Weinclude transaction fee revenue in net revenue. The 3% auction transaction feeis applied to all merchandise sales, including shipping and handling but not towholesale merchandise sales.

 

Wepresent sales tax liability on a net basis. Sales taxes are excluded fromrevenue and included as a liability.

 

Otherrevenue consists primarily of commissions we derive from hosting sales ofCertified Merchant merchandise that is owned by third parties and we recognizeonly the commission portion of the price our customers pay for the purchasedproducts because we are acting as an agent in such transactions.

 

*Cost of Revenue*

 

Costof revenue includes product costs, inbound and outbound shipping charges,packaging and shipping supplies, insurance on shipments, product repair andservice costs, and credit card and other electronic payment fees, and isrecorded in the same period in which related revenue has been recorded. Thecost of revenue is reduced by amortized co-op marketing contributions from ourvendors.

 

*Return and Allowance Reserve*

 

We estimate potential future product returns andcharge-backs related to current period revenue. We analyze historical returns,and changes in customer demand and acceptance of our products when evaluatingthe adequacy of the sales returns reserve and other allowances in anyaccounting period. If actual returns are greater than our estimates, we willrecord additional returns and allowances in addition to our estimates, which willresult in lower net revenue recorded during that period.  Reserves for returns and charge-backs areincluded in accrued expenses.

 

*Inventories*

 

Inventoriesconsist mainly of merchandise purchased for resale and are stated at the lowerof first-in, first-out (FIFO) cost or market.

 

*Inventory Reserve*

 

Theunique nature of our business model where customers set the prices they arewilling to pay may result in items selling below our cost, and we providereserves against our inventory based on the estimated difference between theaverage selling price and the cost of inventory if the average selling price islower than the cost of inventory. We also provide reserves for obsolescence andslow moving inventory.

 

*InventoryCo-op Marketing Contributions*

 

Inthe third quarter of 2007, we started to bill and collect from our inventoryvendors co-op marketing contributions as an incentive for us to market and selltheir merchandise on the Bidz website. We account for the co-op marketingcontributions that cannot be identified specifically to benefit the vendors asa reduction in the cost of inventory purchased and cost of sales. We cannotspecifically identify the benefits to each vendor, and consequently, co-opmarketing contributions are charged against inventory as a reduction of costsand amortized as a reduction of cost of sales, (and more fully described inNote 1 in our audited financial statements).

 

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*Stock-Based Compensation*

 

We recognize in our financial statements the cost resulting from allshare-based compensation transactions based on the fair value of the equityissued. We use the Black-Scholes option pricing model to estimate the value ofour options.  Our assessment of theestimated compensation charges will be affected by our stock price as well asassumptions regarding a number of subjective variables and the related taximpact. These variables include, but are not limited to, our stock pricevolatility, forfeiture rates and employee stock option exercise behaviors (orexpected term).

 

**Description of Our Revenue, Costs,and Expenses**

 

The following table presents our historical results ofoperations for the periods indicated as a percentage of net revenue.

 
| ** **                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                    | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                 |       |                                        |       |   |   |   |   |
| Net revenue                          |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Gross profit                         |       | 29.1                                        |       | 28.3 |   | 30.5 |   |
| Operating expenses:                  |       |                                        |       |   |   |   |   |
| General & administrative    |       | 10.9                                        |       | 10.3 |   | 17.6 |   |
| Sales & marketing           |       | 6.7                                         |       | 6.1 |   | 8.3 |   |
| Depreciation & amortization |       | 0.3                                         |       | 0.3 |   | 0.7 |   |
| Total operating expenses             |       | 17.9                                        |       | 16.7 |   | 26.6 |   |
| Income from operations               |       | 11.2                                        |       | 11.6 |   | 3.9 |   |
| Interest expense, net                |       | (0.1                                        | )     | (0.1 | ) | (0.1 | ) |
| Income tax expense                   |       | (1.4                                        | )          | (4.6 | ) | (1.6 | ) |
| Net income                           |       | 9.7                                         | %          | 6.9 | % | 2.2 | % |

 

*Net Revenue*

 

Substantially all of our net revenue consists ofjewelry sold via the Internet, net of returns. We also generate net revenuefrom wholesale merchandise sales that is not online, shipping and handling,transaction fee revenue, and other revenue.

 

The following table presents our sources of revenuefor the periods indicated as a percentage of net revenue.

 
| ** **                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                   | ** ** | **2008** | ** ** | **2009** | ** ** |
|                         |       |                                       |       |   |   |   |   |
| Net Revenue                  |       |                                       |       |   |   |   |   |
| Merchandise sales            |       | 84.6                                       | %          | 71.9 | % | 84.7 | % |
| Wholesale merchandise sales  |       | —                                     |       | 14.4 |   | 3.6 |   |
| Shipping & handling |       | 12.1                                       |       | 10.8 |   | 8.4 |   |
| Transaction fee              |       | 3.1                                        |       | 2.7 |   | 3.0 |   |
| Other revenue                |       | 0.2                                        |       | 0.2 |   | 0.3 |   |
| Total Net Revenue            |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

As described in note 12 to our audited financialstatements, net revenue by geographic area is presented based upon the countryof destination. No foreign country accounted for 10% or more of net revenue forany of the fiscal years presented. Net revenue by geographic area for theperiods indicated was as follows:

 
| ** **                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except percentages)** | ** ** | **2007**                                    | ** ** | **2008** | ** ** | **2009** | ** ** |
| **Geographic area**                              | ** ** | **Amount**                                  | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States                                         |       | $                                           | 145,412    |   | 77.7 | % | $ | 157,747 |   | 76.1 | % | $ | 75,360 |   | 68.3 | % |
| International                                         |       | 41,719                                      |       | 22.3 |   | 49,663 |   | 23.9 |   | 35,034 |   | 31.7 |   |
| Total                                                 |       | $                                           | 187,131    |   | 100.0 | % | $ | 207,410 |   | 100.0 | % | $ | 110,394 |   | 100.0 | % |

 

*Gross Profit*

 

Our gross profit consistsof net revenue less the cost of revenue. Our cost of revenue consists of thecost of merchandise sold to customers, amortized co-op marketing contributionsfrom vendors, inbound and outbound shipping costs, packaging and shipping 

 

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supplies, insurance onshipments, product repair and service costs, and credit card and othertransaction fees associated with payments.

 

*General and Administrative Expenses*

 

Our general andadministrative expenses consist primarily of payroll and related benefit costsfor our employees. These expenses also include fulfillment, customer service,technology, professional fees, other general corporate expenses, andstock-based compensation, consisting substantially of stock option grants andrestricted stock awards to employees and directors.

 

*Sales and Marketing Expenses*

 

Our sales and marketing expenses consist primarily ofcosts associated with paid website search marketing, online banner marketing,e-mail campaigns, affiliate programs and optimization services. These marketingprograms, which are designed to drive buyers to our website, are the mostimportant factor in maintaining demand for our jewelry products and increasingnet revenue.

 

**Results of Operations**

 

**Comparison of Year Ended December 31, 2009 with YearEnded December 31, 2008**

 

*Net Revenue*

 

Net revenue decreased46.8% to $110.4 million in 2009 from $207.4 million in 2008. Webelieve the decrease in net revenue was due primarily to declines in consumerconfidence caused by the financial and economic crisis that began in 2008. Weexperienced an overall decrease in online demand for our jewelry as consumersreduced their discretionary spending. We expect that demand forour discretionary merchandise will continue to remain weak in 2010 and have anegative effect on our revenue. The fourth quarter of 2009 was further adverselyaffected by the migration of our proprietary enterprise operating systemto a customized Microsoft Dynamics AX ERP system as unexpected deficiencies inimplementing the new system had a material adverse effect on our resultsoperations.

 

In 2008, we startedselling consignment inventory on a selective and limited basis and recordedrevenue of $635,000 and $703,000 for the years ended December 31, 2008 and2009, respectively, from sales of inventory that were on consignment fromvendors. Based on the terms of the consignment agreements, we record as revenuesales of the consignment inventory on a net basis.

 

*Gross Profit*

 

Grossprofit decreased 42.6% to $33.7 million in 2009 from $58.7 million in2008. The decrease in gross profit is due primarily to the 46.8% decrease innet revenue. Gross profit as a percentage of net revenue increased to 30.5% in2009 from 28.3% in 2008. The increase in gross profit percentage resultedprimarily from significantly less wholesale revenue that have lower grossprofit margin. Wholesale revenue decreased 86.6% to $4.0 million in 2009 from $29.9million in 2008.

 

InMay, 2007 we entered into an understanding with LA Jewelers (a related partyand more fully described in Note 15 in our audited financial statements),whereby they will guarantee that we will earn a certain minimum gross profitmargin on their merchandise. This agreement provides that in the event of agross profit margin shortfall we will be compensated for the difference betweenour actual gross profit margin and the guaranteed minimum gross profit margin.For 2008 and 2009, we recognized $588,000 and $192,000, respectively, underthis agreement as a reduction in cost of revenue. All business with LA Jewelersis conducted at arm’s length and the purchase price, terms and conditions thathave been negotiated are competitive with the market and other suppliers.

 

*General and Administrative Expenses*

 

Generaland administrative expenses decreased 8.3% to $19.4 million in 2009 from$21.2 million in 2008. The decrease in general and administrative expenseswas primarily due to a decrease in payroll expenses offset by an increase inlegal expenses. General and administrative expenses as a percentage of netrevenue increased to 17.6% in 2009 compared to 10.3% in 2008.

 

Animpairment charge of $400,000 was recorded in 2009 on advances made to employeesto purchase shares of our common stock when the value of our common stock heldas collateral for the advances fell below the amount of the advances. The154,000 shares of the common stock held as collateral were valued based on theclosing price for the year ended December 31, 2009.

 

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*Sales and Marketing Expenses*

 

Salesand marketing expenses decreased 27.9% to $9.1 million in 2009 from$12.7 million in 2008. We significantly reduced the sales and marketingexpenses in line with the significantly lower revenue. Sales and marketingexpenses as a percentage of net revenue increased to 8.3% in 2009 from 6.1% in2008.

 

**Comparison of Year Ended December 31, 2008 with YearEnded December 31, 2007**

 

*Net Revenue*

 

Net revenue increased10.8% to $207.4 million in 2008 from $187.1 million in 2007. Thisincrease in net revenue was due primarily to the growth in our wholesale salesof $29.9 million offset by a decline in our online sales of $9.6 million. In2008, we started selling consignment inventory on a selective and limited basisand recorded revenue of $635,000 from sales of inventory that were onconsignment from vendors. Based on the terms of the consignmentagreements, we record as revenue sales of the consignment inventory on a netbasis.

 

The financial andeconomic crisis of 2008 resulted in a major slowdown in our revenue in thefourth quarter of 2008. For the year ended December 31, 2008, there was anoverall decrease in online demand for our jewelry as consumers reduced theirdiscretionary spending.

 

*Gross Profit*

 

Grossprofit increased 7.9% to $58.7 million in 2008 from $54.4 million in2007. Gross profit as a percentage of net revenue decreased to 28.3% in 2008from 29.1% in 2007. The decrease in gross profit percentage resulted primarilyfrom lower gross margins from wholesale revenue offset by higher gross marginsfrom online revenue. Co-op marketing contributions from vendors contributedmore to gross margins in 2008 due to a full year of contribution compared to2007 when it was only implemented in the third quarter of 2007. The total grossprofit dollars increased despite the drop in the gross profit percentage due tothe increase in revenue.

 

InMay, 2007 we entered into an understanding with LA Jewelers, where one of itsmanagers is a stockholder who beneficially owns approximately 5.7% of ouroutstanding common stock as of December 31, 2009 (and more fully describedin Note 15 in our audited financial statements), whereby they willguarantee that we will earn a certain minimum gross profit margin on theirmerchandise. This agreement provides that in the event of a gross profit marginshortfall we will be compensated for the difference between our actual grossprofit margin and the guaranteed minimum gross profit margin. For the yearsended December 31, 2007 and 2008, we recognized $427,000 and $588,000,respectively, under this agreement as a reduction of cost of revenue. Allbusiness with LA Jewelers is conducted at arm’s length and the purchase price,terms and conditions that have been negotiated are competitive with the marketand other suppliers.

 

*General and Administrative Expenses*

 

Generaland administrative expenses increased 3.7% to $21.2 million in 2008 from$20.5 million in 2007. We managed to hold the general and administrativeexpenses relatively flat for the year after making significant cost reductionsin the fourth quarter of 2008. We reduced our personnel from 240 at year end2007 to 165 at year end 2008 with most of the reduction occurring in the fourthquarter of 2008. General and administrative expenses as a percentage of netrevenue declined to 10.3% in 2008 compared to 10.9% in 2007.

 

Animpairment charge of $256,000 was recorded in 2008 on advances made toemployees to purchase shares of our common stock when the value of our commonstock held as collateral for the advances fell below the amount of theadvances. The 154,000 shares of the common stock held as collateral were valuedbased on the closing price for the year ended December 31, 2008.

 

*Sales and Marketing Expenses*

 

Salesand marketing expenses increased 0.8% to $12.7 million in 2008 from$12.6 million in 2007. We reduced significantly the sales and marketingexpenses in the fourth quarter of 2008 in line with the significantly slowingonline revenue. Sales and marketing expenses as a percentage of net revenuedecreased to 6.1% in 2008 from 6.7% in 2007.

 

**Quarterly Operations Data**

 

The following tables set forth quarterly statements ofoperations data for the eight quarters ended December 31, 2009, includingamounts expressed as a percentage of net revenue. This quarterly information isunaudited, but has been prepared on the same basis as the annual financialstatements and, in our opinion, reflects all adjustments necessary for a fairrepresentation of the information for the periods presented. This quarterlystatement of operations data should be read in conjunction with our auditedfinancial statements 

 

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and the related notes included elsewhere in thisprospectus. Results of operations for any quarter are not necessarilyindicative of results for any future period.

 

Historically, sales in the jewelry industry areseasonal and have been higher in the fourth quarter as a result of higherconsumer spending during the December holiday season. Approximately 33.8%,16.9% and 24.9 % of our net revenue in 2007, 2008, and 2009, respectively, wasgenerated during the fourth quarter. The fourth quarters of 2008 and 2009 wereexceptions as we encountered a significant slowdown in sales resulting from the2008 financial and economic crisis. The fourth quarter of 2009 was furtheraffected by the migration of our proprietary enterprise operatingsystem to an ERP system running on a customized Microsoft Dynamics AX asunexpected deficiencies in implementing the new system had a material adverseeffect on our results operations. As we continue to recover and grow, we expect toexperience more pronounced seasonal fluctuations in our net revenue andanticipate a disproportionate amount of our revenue in the fourth quarter inthe future.

 
| ** **                                                                 | ** ** | **Quarters ended** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------|------------|
| **(in thousands,**                                                    | ** ** | **March 31,**      | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| **except per share data)**                                  | ** ** | **2008**                | ** ** | **2008** | ** ** | **2008** | ** ** | **2008** | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                                                                 | ** ** | **(unaudited)**         | ** ** |
| ** **                                                                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                                                |       | $                       | 61,929     |   | $ | 54,986 |   | $ | 55,356 |   | $ | 35,139 |   | $ | 31,177 |   | $ | 26,944 |   | $ | 24,786 |   | $ | 27,487 |   |
| Gross profit                                                               |       | 18,036                  |       | 15,318 |   | 13,294 |   | 12,075 |   | 10,186 |   | 8,235 |   | 7,164 |   | 8,142 |   |
| General and administrative                                                 |       | 5,907                   |       | 5,680 |   | 5,267 |   | 4,355 |   | 4,861 |   | 4,748 |   | 4,644 |   | 5,192 |   |
| Sales and marketing                                                        |       | 4,199                   |       | 3,131 |   | 2,314 |   | 3,037 |   | 2,605 |   | 2,127 |   | 2,235 |   | 2,172 |   |
| Depreciation and amortization                                              |       | 162                     |       | 172 |   | 172 |   | 185 |   | 180 |   | 193 |   | 200 |   | 222 |   |
| Income from operations                                                     |       | 7,768                   |       | 6,335 |   | 5,541 |   | 4,498 |   | 2,540 |   | 1,167 |   | 85 |   | 556 |   |
| Net income                                                                 |       | $                       | 4,605      |   | $ | 3,615 |   | $ | 3,259 |   | $ | 2,924 |   | $ | 1,515 |   | $ | 620 |   | $ | 39 |   | $ | 288 |   |
| Net income per share available to common  stockholders — Basic   |       | $                       | 0.19       |   | $ | 0.15 |   | $ | 0.14 |   | $ | 0.13 |   | $ | 0.07 |   | $ | 0.03 |   | $ | 0.00 |   | $ | 0.01 |   |
| Net income per share available to common  stockholders — Diluted |       | $                       | 0.18       |   | $ | 0.14 |   | $ | 0.13 |   | $ | 0.13 |   | $ | 0.07 |   | $ | 0.03 |   | $ | 0.00 |   | $ | 0.01 |   |
| Weighted average number of shares  outstanding — Basic           |       | 24,538                  |       | 23,828 |   | 23,523 |   | 23,312 |   | 22,899 |   | 22,937 |   | 22,207 |   | 22,114 |   |
| Weighted average number of shares  outstanding — Diluted         |       | 25,829                  |       | 25,739 |   | 25,213 |   | 23,313 |   | 22,899 |   | 22,937 |   | 22,207 |   | 22,114 |   |
|                                                                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                 | ** ** | **March 31,**      | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                                                 | ** ** | **2008**                | ** ** | **2008** | ** ** | **2008** | ** ** | **2008** | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                                                                 | ** ** | **(unaudited)**         | ** ** |
| Net revenue                                                                |       | 100.0                   | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 |   |
| Gross profit                                                               |       | 29.1                    |       | 27.9 |   | 24.0 |   | 34.4 |   | 32.7 |   | 30.6 |   | 28.9 |   | 29.6 |   |
| General and administrative                                                 |       | 9.5                     |       | 10.3 |   | 9.5 |   | 12.4 |   | 15.6 |   | 17.6 |   | 18.8 |   | 18.9 |   |
| Sales and marketing                                                        |       | 6.8                     |       | 5.7 |   | 4.2 |   | 8.7 |   | 8.4 |   | 7.9 |   | 9.0 |   | 7.9 |   |
| Depreciation and amortization                                              |       | 0.3                     |       | 0.3 |   | 0.3 |   | 0.5 |   | 0.6 |   | 0.7 |   | 0.8 |   | 0.8 |   |
| Operating income                                                           |       | 12.5                    |       | 11.6 |   | 10.0 |   | 12.8 |   | 8.1 |   | 4.3 |   | 0.3 |   | 2.0 |   |
| Net income                                                                 |       | 7.4                     | %          | 6.6 | % | 5.8 | % | 8.3 | % | 4.8 | % | 2.3 | % | 0.2 | % | 1.0 | % |
|                                                                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Additional operating data:                                                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                 | ** ** | **March 31,**      | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                                                 | ** ** | **2008**                | ** ** | **2008** | ** ** | **2008** | ** ** | **2008** | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                                                                 | ** ** | **(unaudited)**         | ** ** |
| Average gross order value                                                  |       | $                       | 182        |   | $ | 183 |   | $ | 175 |   | $ | 169 |   | $ | 180 |   | $ | 181 |   | $ | 187 |   | $ | 189 |   |
| Average orders per day                                                     |       | 3,734                   |       | 3,023 |   | 2,453 |   | 2,462 |   | 2,043 |   | 1,712 |   | 1,465 |   | 1,564 |   |
| Average items sold per day                                                 |       | 12,186                  |       | 10,082 |   | 8,431 |   | 8,287 |   | 6,110 |   | 5,956 |   | 6,899 |   | 6,773 |   |
| Cost per new buyer                                                         |       | $                       | 50         |   | $ | 48 |   | $ | 43 |   | $ | 51 |   | $ | 51 |   | $ | 55 |   | $ | 65 |   | $ | 48 |   |
| Number of new buyers                                                       |       | 83,179                  |       | 64,882 |   | 54,072 |   | 59,485 |   | 51,021 |   | 38.577 |   | 34,252 |   | 45,405 |   |
|                                                                            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Wholesale merchandisesales are excluded in computing additional quarterly data.

 

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**Liquidity and Capital Resources**

 

Thesignificant components of our working capital are inventory and liquid assetssuch as cash and accounts receivable, reduced by revolving credit line,accounts payable, accrued expenses and deferred revenue. Our business modelcontains beneficial working capital characteristics: while we collect cash fromsales to customers within several business days of the related online payment,we typically have extended payment terms with our suppliers.

 

Asof December 31, 2009, we had a working capital surplus of $31.2 millionand have no long-term debt obligations. Net cash is affected primarily bychanges in net income, inventories, accounts receivable, other receivable,other current assets, accounts payable, accrued expenses, and deferred revenue.Inventories, and accounts payable generally increase or decrease in line withchanges in our inventory strategy. Our inventory strategy is influenced by ourability to secure inventory that we believe will improve sales and/or our grossmargins.

 

Netcash used for operating activities was $178,000 in 2009 compared with net cashprovided by operating activities of $18.6 million in 2008 and net cash used foroperating activities of $2.0 million in 2007. Net income was $2.5 million in2009 compared with $14.4 million in 2008 and $18.1 million in 2007. Inventories(net of reserves) increased by $4.3 million in 2009 compared to a decrease of$19.3 million in 2008 and an increase of $23.0 million in 2007. Accountsreceivable decreased by $251,000 in 2009 compared to a decrease of $1.6 millionin 2008 and an increase of $216,000 in 2007. Other receivable increased by$413,000 in 2009 compared to a decrease of $2.0 million in 2008 and an increaseof $3.0 million in 2007. Other current assets increased by $3.2 million in 2009compared to an increase of $204,000 in 2008 and a decrease of $357,000 in 2007.Accounts payable increased by $2.5 million in 2009 compared to a decrease of$16.4 million in 2008 and an increase of $4.4 million in 2007. The increase ininventories and increase in accounts payable in 2009 despite the decliningbusiness and economic outlook is attributable to our strategy to stock up onattractively priced close-out merchandise. The decrease in inventories andcorresponding decrease in accounts payable in 2008 is attributable to thedeclining business and economic outlook. Accrued expenses decreased by $800,000in 2009 compared to a decrease of $1.4 million in 2008 and an increase of $2.6million in 2007. Deferred revenue decreased by $240,000 in 2009 compared to adecrease of $2.0 million in 2008 and a decrease of $1.0 million in 2007.

 

Netcash used for investing activities were $1.4 million, $1.0 million and $404,000in 2007, 2008 and 2009, respectively, and was primarily related to capitalexpenditures for our technology system infrastructure, including hardware andsoftware, and office equipment.

 

Net cash used for financing activities was $2.8million in 2009: $2.9 million was provided by our revolving credit line,$579,000 was used for long term deferred tax assets and $5.0 million was usedto purchase treasury shares. Net cash used for financing activities was $18.0million in 2008: $5.9 million was used to pay down our revolving creditfacility, $2.5 million was used to retire shares from the net exercise of stockoptions, and $12.5 million was used to purchase treasury shares, $2.1 millionwas provided by proceeds from the exercise of stock options and $716,000 fromthe tax benefit from exercise of stock options. Net cash provided by financing activities was $7.8 million in 2007; $2.0million was provided by our revolving credit line, $4.8 million was provided byproceeds from the exercise of stock options and $3.2 million was provided bytax benefit from the exercise of stock options and $866,000 was used for thepurchase of treasury shares.

 

In July 2006, we entered into a revolvingcredit line agreement with LaSalle Bank (Bank of America) to provide workingcapital financing secured by inventories and tangible assets (and more fullydescribed in Note 5 in our audited financial statements). All cash receipts from our revenues arerestricted to being deposited into a LaSalle Bank (Bank of America) account, tobe applied to current reported cash disbursements requirements, under apositive pay system, and then to the credit line outstanding balance. Asof December 31, 2009, there was an outstanding balance of $2.9 millionunder the revolving credit line and the unused balance was $22.1 million. However,as of December 31, 2009, our ability to borrow was limited to $17.2 million. Asof March 2, 2010, we had $0 balance outstanding under the revolving creditline after subsequently paying off the balance outstanding at year end 2009.The interest rate is at prime and there is an unused fee of 0.25% on the unusedportion of the revolving credit line. Theterm of the four year revolving credit line agreement ends in July 2010and there is no assurance that the credit line will be renewed or extended.

 

Webelieve that cash and cash equivalents currently on hand and cash flows fromoperations will be sufficient to continue our operations and to pursue ourgrowth strategy for the foreseeable future. Our future capital requirementswill depend on many factors, including the rate of our revenue growth; thetiming and extent of spending to enhance our website, network infrastructure,and transaction processing systems; the extent of our advertising and marketingprograms; the levels of the inventory we carry; and other factors relating toour business. Enhancement of our website, network infrastructure, andtransaction processing systems may require us to spend significantly more thanwe have in the past. Moreover, to date our spending in these areas has beenlower than industry averages. We may require additional financing in thefuture in order to execute our operating plan and we may not be able to obtainsuch financing. We cannot predict whether this additional financing will be inthe form of equity, debt, or a combination of debt and equity.

 

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**Contractual****Obligations**

 

The following table presents our contractualobligations at December 31, 2009, over the next five years and thereafter(in thousands):

 
| **Payments by period** | ** ** | **Total  amount** | ** ** | **Less than  1 year** | ** ** | **1 to 3  years** | ** ** | **3 to 5  years** | ** ** | **After 5  years** | ** ** |
|----------------------------------|------------|-------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **        | ** ** | ** **                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Property lease                   |       | $                 | 3,946      |                            | $          | 1,501                       |       | $                           | 2,445      |                    | $          | — |   | $ | — |   |
| Equipment lease                  |       | 151               |       | 52                              |       | 99                          |       | —                      |       | —                  |       |
|                             |       | $                 | 4,097      |                            | $          | 1,553                       |       | $                           | 2,544      |                    | $          | — |   | $ | — |   |

 

As more fully described in Note 8 to the auditedfinancial statements, we are obligated for the lease of our office andwarehouse space, and operating leases for copy machines.

 

**Impact of Inflation**

 

Theeffect of inflation and changing prices on our operations was not significantduring the periods presented.

 

**Item 7A.****           ****Quantitativeand Qualitative Disclosure about Market Risk**

** **

Market risk represents the risk of loss arising fromadverse changes in market rates and foreign exchange rates. We do not believethat a change in market interest rates would have a material effect on ourresults of operations or financial condition. Although we derive a portion ofour sales outside of the United States, all of our sales are denominated inU.S. dollars. We have limited exposure to financial market risks, includingchanges in interest rates and foreign currency exchange rates.

 

**Item 8.****                    ****FinancialStatements and Supplementary Data**

** **

See Item 15(a)

 

**Item 9.****                    ****Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

** **

None.

 

**Item 9A.****           ****Controlsand Procedures**

** **

***Evaluation ofDisclosure Controls and Procedures***

 

Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report.  Disclosure controls and procedures are thecontrols and other procedures that we designed to ensure that we record,process, summarize and report in a timely manner the information we mustdisclose in reports that we file with or submit to the Securities and ExchangeCommission.  Based on this evaluation, our Chief Executive Officer and ourChief Financial Officer concluded that, as of the date of their evaluation, ourdisclosure controls and procedures were not effective because of the materialweaknesses in our internal control over financial reporting discussedbelow.  Notwithstanding the materialweaknesses described below, management has concluded that our financialstatements for the periods covered by and included in this report are fairlystated in all material respects in accordance with generally acceptedaccounting principles in the United States for the periods presented herein.

 

***Report of Management on InternalControl over Financial Reporting***

 

Management is responsible for establishing andmaintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) ofthe 1934 Act. Our internal control over financial reporting is designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles in the United States. Internalcontrol over financial reporting include those policies and procedures that (1) pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect our transactions and dispositions of our assets; (2) providereasonable assurance that our transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles in the United States, and that our receipts andexpenditures are being made only in accordance with appropriate authorizations;and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use or disposition of our assets thatcould have a material effect on our financial statements.

 

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Weassessed the effectiveness of our internal control over financial reporting asof December 31, 2009, using the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control— Integrated Framework. Duringthe fourth quarter 2009, we identified control deficiencies that representmaterial weaknesses.  These controldeficiencies resulted primarily from the conversion during the fourth quarterfrom our internally developed proprietary legacy operating system to aMicrosoft Dynamics AX ERP system. These control deficiencies related to: (i) maintainingan effective control environment at the entity level specifically in havingadequate processes related to the conversion of the Company’s operating systemto the Microsoft AX ERP system and in executing a Company wide risk assessmentprogram related to the conversion process; (ii)maintaining an effective controlenvironment over Information Technology (IT) specifically in  user securityconfigurations, training and end user acceptance, quality control testing,design and monitoring of change controls, and security evaluations for theMicrosoft AX ERP system,and (iii) maintaining an effective control environment over managementoversight and anti-fraud controls specifically in processing of financialtransactions, vendor review and payment processing, employee hiring andtermination procedures, and timely review of payroll timecards and reports.. As a result of the foregoing, management concluded that theCompany’s internal control over financial reporting as of December 31,2009 was not effective.

 

Toensure that our financial statements were fairly stated in accordance withgenerally accepted accounting principles in the United States, we expandedprocedures to be performed in order to prepare the financial statements as of December 31,2009. These procedures included performing a physical inventory as of December 31,2009, additional analyses and review of the inventory processes and relatedbalances to fairly state inventory and the associated cost of goods sold in 2009.Additionally, we performed multiple levels of review within the financial statement closeprocess.

 

Stonefield Josephson, Inc., an independent registered public accounting firm,has issued an attestation report on management’s assessment of internal controlover financial reporting, a copy of which is included in this annual report on Form 10-K.

 

***Changes in Internal Control over Financial Reporting***

 

Other than asdescribed above, there were no changes in our internal control over financialreporting (as defined in Rule 13a-15(f) under the Securities ExchangeAct of 1934) during the year ended December 31, 2009, that our certifyingofficers concluded could materially affect our internal control over financialreporting.

 

To address the materialweaknesses described above, management has implemented a remediation program,which has been approved by our Audit Committee. We implemented the remediation program in the fourth quarter of 2009,and we anticipate that we will continue implementation of the program in thefirst and second quarter of 2010.  Aspart of our remediation program in the first quarter of 2010, we hired an ITinternal controls consultant, and we may increase the level of staffing incritical functional areas.

 

***Limitations onControls***

 

Managementdoes not expect that our disclosure controls and procedures or our internalcontrol over financial reporting will prevent or detect all error and fraud.Any control system, no matter how well designed and operated, is based uponcertain assumptions and can provide only reasonable, not absolute, assurancethat its objectives will be met. Further, no evaluation of controls can provideabsolute assurance that misstatements due to error or fraud will not occur orthat all control issues and instances of fraud, if any, within the Company havebeen detected. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

**Item 9B.****           ****Other Information**

 

None.

 

**Part III**

 

We have omitted the information required in Part IIIof this annual report because we intend to include that information in our definitiveproxy statement for our 2010 annual meeting of shareholders, which we expect tofile before 120 days after December 31, 2009. We incorporate thatinformation in this annual report by reference to our 2010 proxy statement.

 

**Item 10.****             ****Directors,Executive Officers and Corporate Governance.**

 

Information required by this item is incorporated byreference from the definitive proxy statement required to be filed pursuant toRegulation 14A for the 2010 Annual Meeting of our stockholders.

 

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We have adopted a code of conduct that applies toour Chief Executive Officer, Chief Financial Officer, and to all of our other officers,directors, employees and agents. The code of conduct is available at theCorporate Governance section of the Investor Relations link on our website at *www.bidz.com*. We intend to disclose future amendments to, orwaivers from, certain provisions of our code of ethics on the above website.

 

**Item 11.****             ****ExecutiveCompensation.**

 

Information required by this item is incorporated byreference from the definitive proxy statement required to be filed pursuant toRegulation 14A for the 2010 Annual Meeting of our stockholders.

 

**Item 12.****             ****SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

 

Information required by this item is incorporated byreference from the definitive proxy statement required to be filed pursuant to Regulation 14Afor the 2010 Annual Meeting of our stockholders.

 

**Item 13.****             ****CertainRelationships and Related Transactions, and Director Independence.**

 

Information required by this item is incorporated byreference from the definitive proxy statement required to be filed pursuant toRegulation 14A for the 2010 Annual Meeting of our stockholders.

 

**Item 14.****             ****PrincipalAccounting Fees and Services.**

 

Information required by this item is incorporated byreference from the definitive proxy statement required to be filed pursuant toRegulation 14A for the 2010 Annual Meeting of our stockholders.

 

**Part IV**

 

**Item 15.****             ****Exhibitsand Financial Statement Schedules**

 
|       | The  following documents are filed as part of this report: |
|------------|------------------------------------------------------------|
|       |                                                       |   |   |
| ** ** | **(a)**                                                    | ** ** | **Financial  Statements** |
|       |                                                       |   |   |
|       |                                                       |   | Reports  of Independent Registered Public Accounting Firm |
|       |                                                       |   | Balance  Sheets as of December 31, 2008 and 2009 |
|       |                                                       |   | Statements  of Income for the Years ended December 31, 2007, 2008, and 2009 |
|       |                                                       |   | Statement of Stockholders’ Equity for the Years ended December 31,  2007, 2008, and 2009 |
|       |                                                       |   | Statements  of Cash Flows for the Years ended December 31, 2007, 2008, and 2009 |
|       |                                                       |   | Notes  to Financial Statements |
|       |                                                       |   |   |
| ** ** | **(b)**                                                    | ** ** | **Financial  Statement Schedule** |
| ** ** | ** **                                                 | ** ** | ** ** |
| ** ** | ** **                                                 | ** ** | Schedule II — Valuation and Qualifying Accounts |

 

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**Report ofIndependent Registered Public Accounting Firm**

 

ToThe Board of Directors and Stockholders of Bidz.com, Inc.:

 

We have audited theaccompanying balance sheets of Bidz.com, Inc. (the “Company”) as of December 31,2008 and 2009, and the related statements of income, stockholders’ equity, andcash flows for each of the years in the three-year period ended December 31,2009. Our audits also included the financial statement schedule listed in theindex at Item 15. These financial statements and the schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Bidz.com, Inc. as of December 31,2008 and 2009, and the results of its operations and its cash flows for each ofthe years in the three-year period ended December 31, 2009, in conformitywith accounting principles generally accepted in the United States of America.Also in our opinion, the related financial statement schedule, when consideredin relation to the basic financial statements taken as a whole, presents fairlyin all material respects the information set forth therein.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of December 31,2009, based on criteria established in *Internal Control-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) and our report dated March 5,2010 expressed an adverse opinion.

 

/s/ StonefieldJosephson, Inc.

 

Los Angeles,California

March 5, 2010

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board ofDirectors and Stockholders of Bidz.com, Inc.

 

We have auditedBidz.com, Inc.’s (the “Company”) internal control over financial reporting asof December 31, 2009, based on criteria established in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).Bidz.com, Inc.’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying “*Report of Management on Internal Control over Financial Reporting*.”Our responsibility is to express an opinion on the company’s internal control overfinancial reporting based on our audit.

 

We conducted our auditin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our audit ofinternal control over financial reporting included obtaining an understandingof internal control over financial reporting, assessing the risk that amaterial weakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk. Our audit alsoincluded performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

A material weakness is acontrol deficiency, or combination of deficiencies, in internal control overfinancial reporting, such that there is a reasonable possibility that amaterial misstatement of the Company’s annual or interim financial statementswill not be prevented or detected on a timely basis. The following materialweaknesses have been identified and included in management’s assessment:

 

The Company did notmaintain an effective control environment at the entity level. Specifically,the Company identified the following material weaknesses:

 

·                  Management did not establish and maintainadequate processes related to the conversion of its operating system toMicrosoft AX ERP system, which included internal controls over financialreporting. Management was unable to promptly address any control deficienciesidentified due to time and resource constraints, including lack of periodicreviews of certain monthly key financial information by the process ownerswithin the Company.

 

·                  The Company did not develop and maintaina Company wide risk assessment program upon conversion to the Microsoft AX ERPsystem. Failures to develop, communicate, and ensure compliance with suchprograms increases the risk of financial statement errors either beingprevented or detected.

 

The Company did notmaintain an effective control environment over information technology (IT)General Controls.  Specifically, theCompany identified the following material weaknesses:

 

·                  The Company did not have effectiveinformation technology policies and procedures in place, which when in place,address financial reporting risks associated with the IT function. The materialweaknesses include inadequate user security configurations, insufficienttraining and acceptance by the end user to adequately perform their jobfunctions, non-performance of preventative and detective quality control tests,inadequate design and monitoring of change controls and insufficient securityevaluations for the Microsoft AX ERP system. The Company also did not have a structure for organization andmanagement oversight of the IT compliance functions.

 

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·                  The Company did not maintain sufficientcontrols related to the establishing, maintaining, and assigning of user accesssecurity levels in the Microsoft AX ERP system and Excel spreadsheets used toinitiate, process, record, report financial transactions and prepare financialstatements. Specifically, controls were not designed and in place to ensurethat access to certain financial applications were adequately restricted toonly employees requiring access to complete their job functions.

 

·                  The process owners at the Company hadsignificant difficulties in generating reports related to sales orders(invoicing/fulfillment, refunds) and inventory processing (receiving,verification and adjustments, location ID) from the Microsoft AX ERP system toadequately perform their functions.

 

The Company did notmaintain an effective control environment over management oversight, reviewprocedures and anti-fraud Controls. Specifically, the Company identified thefollowing material weaknesses:

 

·                  The Company did not maintain a companywide anti-fraud program over the initiating and processing of financialtransactions, as well as other company wide procedures which may have an impacton internal controls over financial reporting.

 

·                  The Company did not maintain sufficientcontrols over vendor review, invoice and payment processing.

 

·                  The Company did not maintain sufficientcontrols over the timely performance of background checks for new or re-hires,timely termination of user access to Microsoft AX ERP system for ex-employees,and the timely review of payroll timecards and reports.

 

These materialweaknesses were considered in determining the nature, timing, and extent ofaudit tests applied in our audit of the 2009 financial statements, and thisreport does not affect our report dated March 5, 2010 on those financialstatements.

 

In our opinion, becauseof the effect of the material weaknesses described above on the achievement ofthe objectives of the control criteria, the Company has not maintained effectiveinternal control over financial reporting as of December 31, 2009, basedon criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the balance sheets and the related statements of income,stockholders’ equity, and cash flows of Bidz.com, Inc., and our reportdated March 5, 2010 expressed an unqualified opinion.

 

/s/ Stonefield Josephson, Inc.

 

Los Angeles, California

March 5, 2010

 

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**Bidz.com, Inc.**

 

**Balance Sheets**

 

*(inthousands, except share and per share data)*

 
| ** **                                                                                                                                                         | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2008**              | ** ** | **2009** | ** ** |
| ** **                                                                                                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                                                                                                               |       |                  |       |   |   |
| **Assets**                                                                                                                                                         |       |                  |       |   |   |
| Current assets:                                                                                                                                                    |       |                  |       |   |   |
| Cash                                                                                                                                                               |       | $                     | 4,456      |   | $ | 1,121 |   |
| Accounts receivable                                                                                                                                                |       | 698                   |       | 447 |   |
| Inventories, net of reserves of $820 and $1,767 at  December 31, 2008 and 2009, respectively                                                                  |       | 37,657                |       | 40,961 |   |
| Other receivable (includes related party amounts of  $102 and $179 at December 31, 2008 and 2009, respectively)                                               |       | 1,041                 |       | 1,454 |   |
| Current deferred tax assets                                                                                                                                        |       | 1,950                 |       | 1,400 |   |
| Other current assets                                                                                                                                               |       | 582                   |       | 3,774 |   |
| Total current assets                                                                                                                                               |       | 46,384                |       | 49,157 |   |
| Long term deferred tax asset                                                                                                                                       |       | 84                    |       | 663 |   |
| Property and equipment, net                                                                                                                                        |       | 1,672                 |       | 1,202 |   |
| Intangible asset                                                                                                                                                   |       | 161                   |       | 240 |   |
| Deposits                                                                                                                                                           |       | 104                   |       | 157 |   |
| Total assets                                                                                                                                                       |       | $                     | 48,405     |   | $ | 51,419 |   |
|                                                                                                                                                               |       |                  |       |   |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                     |       |                  |       |   |   |
| Current liabilities:                                                                                                                                               |       |                  |       |   |   |
| Revolving credit line                                                                                                                                              |       | $                     | —     |   | $ | 2,898 |   |
| Accounts payable (includes related party amounts of  $1,364 and $1,513 at December 31, 2008 and 2009, respectively)                                           |       | 9,636                 |       | 12,159 |   |
| Accrued expenses                                                                                                                                                   |       | 3,091                 |       | 2,291 |   |
| Deferred revenue                                                                                                                                                   |       | 872                   |       | 632 |   |
| Total current liabilities                                                                                                                                          |       | 13,599                |       | 17,980 |   |
|                                                                                                                                                               |       |                  |       |   |   |
| Commitments and contingencies (Notes 8 and 14)                                                                                                                     |       |                  |       |   |   |
|                                                                                                                                                               |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                         |       |                  |       |   |   |
| Preferred stock: par value $0.001; authorized  4,000,000 shares; none issued and outstanding at December 31, 2008 and  2009, respectively                     |       | —                |       | — |   |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued and outstanding 22,917,918 and 22,114,257 at  December 31, 2008 and 2009, respectively |       | 23                    |       | 22 |   |
| Additional paid in capital                                                                                                                                         |       | 24,520                |       | 20,293 |   |
| Employees share purchase receivable                                                                                                                                |       | (708                  | )          | (308 | ) |
| Retained earnings                                                                                                                                                  |       | 10,971                |       | 13,432 |   |
| Total stockholders’ equity                                                                                                                                    |       | 34,806                |       | 33,439 |   |
|                                                                                                                                                               |       |                  |       |   |   |   |   |
|                                                                                                                                                               |       | $                     | 48,405     |   | $ | 51,419 |   |

 

See accompanying notes to financial statements

 

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**Bidz.com, Inc.**

 

**Statements of Income**

 

*(in thousands, except share and per share data)*

 
| ** **                                                                                 | ** ** | **Years  Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                           | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                                                                       |       |                               |       |   |   |   |   |
| Net revenue:                                                                               |       |                               |       |   |   |   |   |
| Merchandise sales                                                                          | ** ** | **$**                              | 186,830    | ** ** | **$** | 177,089 | ** ** | **$** | 106,043 | ** ** |
| Wholesale merchandise sales (includes related party  amounts of                            |       |                               |       |   |   |   |   |
| $0, $0 and $2,403 for the years ended  December 31, 2007, 2008 and 2009, respectively |       | —                             |       | 29,886 |   | 4,009 |   |
| Other revenue                                                                              |       | 301                                |       | 435 |   | 342 |   |
|                                                                                       |       | 187,131                            |       | 207,410 |   | 110,394 |   |
| Cost of revenue                                                                            |       | 132,683                            |       | 148,688 |   | 76,667 |   |
| Gross profit                                                                               |       | 54,448                             |       | 58,722 |   | 33,727 |   |
| Operating expenses:                                                                        |       |                               |       |   |   |   |   |
| General and administrative                                                                 |       | 20,458                             |       | 21,209 |   | 19,444 |   |
| Sales and marketing                                                                        |       | 12,578                             |       | 12,681 |   | 9,140 |   |
| Depreciation and amortization                                                              |       | 498                                |       | 690 |   | 795 |   |
| Total operating expenses                                                                   |       | 33,534                             |       | 34,580 |   | 29,379 |   |
| Income from operations                                                                     |       | 20,914                             |       | 24,142 |   | 4,348 |   |
| Other income - interest income                                                             |       | 41                                 |       | 40 |   | 1 |   |
| Other expense - interest (expense)                                                         |       | (291                               | )          | (182 | ) | (74 | ) |
| Income before income tax expense                                                           |       | 20,664                             |       | 24,000 |   | 4,275 |   |
| Income tax expense                                                                         |       | 2,538                              |       | 9,597 |   | 1,814 |   |
| Net income                                                                                 | ** ** | **$**                              | 18,126     | ** ** | **$** | 14,403 | ** ** | **$** | 2,461 | ** ** |
|                                                                                       |       |                               |       |   |   |   |   |
| Net income per share available to common  shareholders - basic                             | ** ** | **$**                              | 0.77       | ** ** | **$** | 0.61 | ** ** | **$** | 0.11 | ** ** |
| Net income per share available to common  shareholders - diluted                           | ** ** | **$**                              | 0.69       | ** ** | **$** | 0.57 | ** ** | **$** | 0.11 | ** ** |
| Weighted average number of shares outstanding -  basic                                     |       | 23,567,995                         |       | 23,798,338 |   | 22,517,367 |   |
| Weighted average number of shares outstanding -  diluted                                   |       | 26,266,008                         |       | 25,069,509 |   | 22,517,367 |   |

 

See accompanying notes to financial statements

 

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**Bidz.com, Inc.**

 

**Statement of Stockholders’ Equity**

 

*(in thousands)*

 
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | **Advance to**   | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------------|------------|------------------------|------------|------------|------------|
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | **employees to** | ** ** | **Retained**           | ** ** | **Total**  | ** ** |
| ** **                                                         | ** ** | **Common stock** | ** ** | **paid in** | ** ** | **Treasury**   | ** ** | **purchase** | ** ** | **earnings**     | ** ** | **stockholders’** | ** ** |
| ** **                                                         | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **capital**    | ** ** | **shares**   | ** ** | **shares**       | ** ** | **(deficit)**          | ** ** | **equity** | ** ** |
|                                                               |       |             |       |        |       |           |       |         |       |             |       |                   |       |       |       |
| Balance  at December 31, 2006                                 |       | 23,234           |       | $           | 23         |           | $          | 28,352       |       | $                | (90        | )                      | $          | —     |       | $ | (21,558 | ) | $ | 6,727 |   |
| Issuance  of common stock to directors                             |       | 19               |       | —      |       | 113            |       | —       |       | —           |       | —                 |       | 113        |       |
| Employees  share purchase receivable                               |       | —           |       | —      |       | —         |       | —       |       | (1,086           | )          | —                 |       | (1,086     | )          |
| Issuance  of common stock from exercise of stock options           |       | 1,192            |       | 2           |       | 4,770          |       | —       |       | —           |       | —                 |       | 4,772      |       |
| Tax  benefit from exercise of options                              |       | —           |       | —      |       | 3,155          |       | —       |       | —           |       | —                 |       | 3,155      |       |
| Fair  value of options granted to employees                        |       | —           |       | —      |       | 488            |       | —       |       | —           |       | —                 |       | 488        |       |
| Grant  of restricted stock awards to employees and directors       |       | 126              |       | —      |       | 173            |       | —       |       | —           |       | —                 |       | 173        |       |
| Retirements  of common stock                                       |       | (15              | )          | —      |       | (90            | )          | 90           |       | —           |       | —                 |       | —     |       |
| Purchase  of treasury stock                                        |       | —           |       | —      |       | —         |       | (886         | )          | —           |       | —                 |       | (886       | )          |
| Net  income                                                        |       | —           |       | —      |       | —         |       | —       |       | —           |       | 18,126                 |       | 18,126     |       |
| Balance  at December 31, 2007                                 |       | 24,556           |       | $           | 25         |           | $          | 36,961       |       | $                | (886       | )                      | $          | (1,086     | )          | $ | (3,432 | ) | $ | 31,582 |   |
|                                                               |       |             |       |        |       |           |       |         |       |             |       |                   |       |       |       |
| Issuance  of common stock for service                              |       | 1                |       | $           | —     |           | $          | 5            |       | $                | —     |                   | $          | —     |       | $ | — |   | $ | 5 |   |
| Employees  share purchase receivable                               |       | —           |       | —      |       | —         |       | —       |       | 122              |       | —                 |       | 122        |       |
| Impairment  in employees share purchase receivable                 |       | —           |       | —      |       | —         |       | —       |       | 256              |       | —                 |       | 256        |       |
| Retirements  of common stock from net vesting of restricted stocks |       | —           |       | —      |       | (10            | )          | —       |       | —           |       | —                 |       | (10        | )          |
| Issuance  of common stock from exercise of stock options           |       | 442              |       | —      |       | 2,095          |       | —       |       | —           |       | —                 |       | 2,095      |       |
| Retirement  of common stock from net exercise of stock options     |       | (250             | )          | —      |       | (2,480         | )          | —       |       | —           |       | —                 |       | (2,480     | )          |
| Tax  benefit from exercise of options                              |       | —           |       | —      |       | 716            |       | —       |       | —           |       | —                 |       | 716        |       |
| Fair  value of stock options granted to employees                  |       | —           |       | —      |       | 283            |       | —       |       | —           |       | —                 |       | 283        |       |
| Grant  of restricted stock awards to employees and directors       |       | 25               |       | —      |       | 358            |       | —       |       | —           |       | —                 |       | 358        |       |
| Cancellation  of restricted stock awards to employee               |       | (2               | )          | —      |       | —         |       | —       |       | —           |       | —                 |       | —     |       |
| Retirements  of common stock                                       |       | (1,854           | )          | (2          | )          | (13,408        | )          | 13,410       |       | —           |       | —                 |       | —     |       |
| Purchase  of treasury stock                                        |       | —           |       | —      |       | —         |       | (12,524      | )          | —           |       | —                 |       | (12,524    | )          |
| Net  income                                                        |       | —           |       | —      |       | —         |       | —       |       | —           |       | 14,403                 |       | 14,403     |       |
| Balance  at December 31, 2008                                 |       | 22,918           |       | $           | 23         |           | $          | 24,520       |       | $                | —     |                   | $          | (708       | )          | $ | 10,971 |   | $ | 34,806 |   |
|                                                               |       |             |       |        |       |           |       |         |       |             |       |                   |       |       |       |
| Impairment  in employees share purchase receivable                 |       | —           |       | $           | —     |           | $          | —       |       | $                | —     |                   | $          | 400        |       | $ | — |   | $ | 400 |   |
| Retirements  of common stock from net vesting of restricted stocks |       | (3               | )          | —      |       | (8             | )          | —       |       | —           |       | —                 |       | (8         | )          |
| Tax  benefit from stock based compensation                         |       | —           |       | —      |       | (70            | )          | —       |       | —           |       | —                 |       | (70        | )          |
| Grant  of restricted stock awards to employees                     |       | 666              |       | —      |       | 844            |       | —       |       | —           |       | —                 |       | 844        |       |
| Cancellation  of restricted stock awards to employees              |       | (12              | )          | —      |       | —         |       | —       |       | —           |       | —                 |       | —     |       |
| Retirements  of common stock                                       |       | (1,455           | )          | (1          | )          | (4,993         | )          | 4,994        |       | —           |       | —                 |       | —     |       |
| Purchase  of treasury stock                                        |       | —           |       | —      |       | —         |       | (4,994       | )          | —           |       | —                 |       | (4,994     | )          |
| Net  income                                                        |       | —           |       | —      |       | —         |       | —       |       | —           |       | 2,461                  |       | 2,461      |       |
| Balance  at December 31, 2009                                 |       | 22,114           |       | $           | 22         |           | $          | 20,293       |       | $                | —     |                   | $          | (308       | )          | $ | 13,432 |   | $ | 33,439 |   |

 

See accompanying notes to financial statements

 

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**Bidz.com, Inc.**

 

**Statements of Cash Flows**

 

*(in thousands)*

 
| ** **                                                                                        | ** ** | **Years  Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                        | ** ** | **2007**                           | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                                                                              |       |                               |       |   |   |   |   |
| **Cash flows provided by (used for)  operating activities:**                                      |       |                               |       |   |   |   |   |
| Net income                                                                                        |       | $                                  | 18,126     |   | $ | 14,403 |   | $ | 2,461 |   |
|                                                                                              |       |                               |       |   |   |   |   |
| **Adjustments to reconcile net  income to net cash provided by (used for) operating activities:** |       |                               |       |   |   |   |   |
| Depreciation and amortization                                                                     |       | 498                                |       | 690 |   | 795 |   |
| Change in inventory reserve                                                                       |       | 614                                |       | (255 | ) | 947 |   |
| Impairment in employees share purchase receivable                                                 |       | —                             |       | 256 |   | 400 |   |
| Stock-based compensation                                                                          |       | 774                                |       | 641 |   | 844 |   |
| **Changes in assets and liabilities:**                                                            |       |                               |       |   |   |   |   |
| **(Increase) decrease in assets:**                                                                |       |                               |       |   |   |   |   |
| Accounts receivable                                                                               |       | (216                               | )          | 1,555 |   | 251 |   |
| Inventories                                                                                       |       | (22,992                            | )          | 19,284 |   | (4,251 | ) |
| Other receivable                                                                                  |       | (3,002                             | )          | 1,961 |   | (413 | ) |
| Current deferred tax assets                                                                       |       | (2,121                             | )          | 171 |   | 550 |   |
| Other current assets                                                                              |       | 357                                |       | (204 | ) | (3,192 | ) |
| Deposits                                                                                          |       | 21                                 |       | — |   | (53 | ) |
| **Increase (decrease) in  liabilities:**                                                          |       |                               |       |   |   |   |   |
| Accounts payable                                                                                  |       | 4,413                              |       | (16,414 | ) | 2,523 |   |
| Accrued expenses                                                                                  |       | 2,557                              |       | (1,418 | ) | (800 | ) |
| Deferred revenue                                                                                  |       | (1,035                             | )          | (2,028 | ) | (240 | ) |
| Net cash provided by (used for) operating  activities                                             |       | (2,006                             | )          | 18,642 |   | (178 | ) |
|                                                                                              |       |                               |       |   |   |   |   |
| **Cash flows provided by (used for)  investing activities:**                                      |       |                               |       |   |   |   |   |
| Capital expenditures                                                                              |       | (1,354                             | )          | (1,058 | ) | (404 | ) |
| Proceeds from sale of fixed asset                                                                 |       | —                             |       | 19 |   | — |   |
| Net cash used for investing activities                                                            |       | (1,354                             | )          | (1,039 | ) | (404 | ) |
| **Cash flows provided by (used for)  financing activities:**                                      |       |                               |       |   |   |   |   |
| Revolving credit line                                                                             |       | 1,983                              |       | (5,924 | ) | 2,898 |   |
| Long term deferred tax assets                                                                     |       | (129                               | )          | 45 |   | (579 | ) |
| Issuance of common stock                                                                          |       | —                             |       | 5 |   | — |   |
| Employees share purchase receivable                                                               |       | (1,086                             | )          | 122 |   | — |   |
| Retirements of common stock from net vesting of  restricted stocks                                |       | —                             |       | (10 | ) | (8 | ) |
| Proceeds from exercise of stock options                                                           |       | 4,772                              |       | 2,095 |   | — |   |
| Retirements of common stock from net exercise of  stock options                                   |       | —                             |       | (2,480 | ) | — |   |
| Tax benefit from stock based compensation                                                         |       | 3,155                              |       | 716 |   | (70 | ) |
| Purchase of treasury stock                                                                        |       | (886                               | )          | (12,524 | ) | (4,994 | ) |
| Net cash provided by (used for) financing  activities                                             |       | 7,809                              |       | (17,955 | ) | (2,753 | ) |
|                                                                                              |       |                               |       |   |   |   |   |
| **Net increase (decrease) in cash**                                                               |       | 4,449                              |       | (352 | ) | (3,335 | ) |
| **Cash, beginning of year**                                                                       |       | 359                                |       | 4,808 |   | 4,456 |   |
| **Cash, end of year**                                                                             |       | $                                  | 4,808      |   | $ | 4,456 |   | $ | 1,121 |   |
|                                                                                              |       |                               |       |   |   |   |   |
| **Supplemental disclosure of cash  flow information:**                                            |       |                               |       |   |   |   |   |
| Interest paid                                                                                     |       | $                                  | 291        |   | $ | 182 |   | $ | 74 |   |
| Income taxes paid                                                                                 |       | $                                  | 502        |   | $ | 9,874 |   | $ | 2,550 |   |
| **Supplemental disclosure of non-cash  investing and****financing  activities:**                  |       |                               |       |   |   |   |   |
| Retirement of property and equipment                                                              |       | $                                  | 293        |   | $ | 9 |   | $ | — |   |
| Retirement of treasury shares                                                                     |       | $                                  | 90         |   | $ | 13,410 |   | $ | 4,994 |   |

 

See accompanying notes to financial statements

 

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**Bidz.com, Inc.**

 

**Notes to financial statements**

 

**(in thousands, except share and per share amounts)**

 

**(1)     Summary ofSignificant Accounting Policies:**

 

*Business and Organization:*

 

Wewere formed in November 1998 as a California corporation and in June 2006,we were re-incorporated as a Delaware corporation with our principal locationof business in Los Angeles, California. We operate a website located at *www.bidz.com*for the purpose of sellingmerchandise, utilizing our unique online sales auction platform and a fixedprice online store at *www.buyz.com*.

 

Wesell our products throughout the United States and in international markets,concentrated mainly in English speaking countries such as Canada, Australia andthe United Kingdom. Revenue generated from the United States accounted forapproximately 77.7%, 76.1% and 68.3% of net revenue for the years ended December 31,2007, 2008, and 2009, respectively.

 

*Reclassification*

 

Certainamounts from prior years have been reclassified to conform to the current year’spresentation.

 

*Recent Developments:*

 

In February 2010, we launched modnique.com, a division that will be focused ononline retailing of designer products, entertainment tickets, travel, and otherconsumer goods through a private sale concept that only sells to invitedmembers. New customers are attracted by having our existing customersparticipate in our refer a friend program. The existing customer will earnstore credits when a friend has registered as a new customer and the firstpurchase has shipped. The store credits will typically be valid for 6 monthsand can be applied towards payments for purchases.

 

*Use of Estimates:*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ fromthose estimates. We have made estimates for return and allowance reserve, inventory reserve, vendor co-op marketingcontributions, deferred tax assets and accrued expenses.

 

*Fair Value of Financial Instruments:*

 

Thecarrying amount of our cash, accounts receivable, other current assets,accounts payable, deferred revenue, bank debt, and accrued expensesapproximates their estimated fair values as a result of the short-termmaturities of those financial instruments.

 

*Cash and Cash Equivalents:*

 

Forpurposes of the statements of cash flows, cash equivalents include all highlyliquid debt instruments with original maturities of three months or less thatdo not secure any corporate obligation. We had no cash equivalents at December 31,2008 or 2009.

 

Ourbank for the revolving credit line maintains a security interest insubstantially all our bank accounts.

 

*Accounts Receivable:*

 

Accountsreceivable consist mainly of amounts due from customer credit card and otherelectronic payments billed but not yet received at period end. We had noallowance for doubtful accounts at December 31, 2008 or 2009.

 

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*Return and Allowance Reserve:*

 

Weestimate potential future product returns and charge-backs related to currentperiod revenue. We analyze historical returns and changes in customer demandand acceptance of our products when evaluating the adequacy of the salesreturns reserve and other allowances in any accounting period. If actualreturns and charge-backs are greater than our estimates, we will recordadditional returns and allowances in addition to our estimates, which willresult in lower net revenue recorded during that period. Reserves for returnsand charge backs are included in accrued expenses.

 

*Concentration of Business and Credit Risk:*

 

Financialinstruments that potentially subject us to significant concentrations of creditrisk consist primarily of cash and receivables. Our cash deposits with our banks could be at risk when the FDIC depositinsurance is not be sufficient to cover any potential loss arising from a bankfailure. We derive our accounts receivable primarily from revenue earned fromcustomers located in the United States. We maintain an allowance for doubtfulaccounts, which was $0 in 2009 and 2008, based upon the expected collectabilityof accounts receivable. We record an allowance if one is necessary. No customeraccounted for more than 10% of revenue or receivables during 2007, 2008, or2009.

 

Wehad a concentration on two merchandise suppliers during 2007, 2008, and 2009,as more fully described in Note 13.

 

*Inventories:*

 

Inventoriesconsist mainly of merchandise purchased for resale and are stated at the lowerof first-in, first-out cost (FIFO) or market. We record in inventories loosediamonds and semi-precious stones that we purchased and delivered tomanufacturers to produce into finished jewelry inventory to resell.

 

We record payments madeto our suppliers for purchases we have yet to receive as prepaid inventoryuntil they are in our possession and satisfactorily examined. Prepaid inventoryincluded in inventories is $36,000 and $1.8 million at December 31, 2008and 2009, respectively.

 

*Inventory Reserve*

 

Theunique nature of our business model where customers set the prices they arewilling to pay may result in items selling below our cost, and we providereserves against our inventory based on the estimated difference between theaverage selling price and the cost of inventory if the average selling price islower than the cost of inventory. We also provide reserves for obsolescence andslow moving inventory.

 

*InventoryCo-op Marketing Contributions*

 

# In the third quarter of2007, we started to bill and collect from our inventory vendors co-op marketingcontributions as an incentive for us to market and sell their merchandise onthe Bidz website.  We account for theco-op marketing contributions that cannot be identified specifically to benefitthe vendors as a reduction in the cost of inventory and cost of sales. Wecannot specifically identify the benefits to each vendor; consequently, co-opmarketing contributions are charged against inventory as a reduction of costsand amortized as a reduction of cost of sales. For the years ended December 31,2007, 2008 and 2009, we have earned $4.8 million, $11.1 million and $7.6million of co-op marketing contributions, respectively, with $4.3 million and$4.3 million, respectively, remaining unamortized as an offset to inventory at December 31,2008 and 2009. Receivable from vendors for co-op marketing contributions, lessallowance for doubtful accounts, is included in other receivable and amountedto $934,000 and $1.3 million at December 31, 2008 and 2009, respectively.

#  

*Property and Equipment:*

 

Propertyand equipment are recorded at cost and depreciated using the straight-linemethod over the estimated useful lives of the related assets as follows:

 

| ** **              | ** ** | **Years** | ** ** |
|-------------------------|------------|-----------|------------|
| Computer software       |       | 3         |       |
| Computer hardware       |       | 3         |       |
| Automobile              |       | 5         |       |
| Furniture and equipment |       | 5         |       |

 

*Intangible Asset:*

 

Ourintangible asset consists of the cost to acquire our domain names, which was$161,000 and $240,000 as of December 31, 2008 and 2009, respectively. Ourdomain names, costing $161,000 have indefinite lives and therefore are notsubject to amortization. We perform an annual evaluation for impairment on theintangible asset. No impairment existed at December 31, 2008 or 2009 andno loss or impairment was recognized during 2007, 2008 and 2009. Intellectualproperties acquired for $80,000 in 2009 is amortized over 15 years and theaccumulated amortization was $0 and $1,000 as of December 31, 2008 and2009, respectively. The amount of 

 

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amortizationper year is $5,000 over each of the next five years.

 

*Long-Lived Assets:*

 

Ourlong-lived assets to be held and used are analyzed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of theassets may not be recoverable. We review property, equipment, and otherlong-lived assets subject to amortization for impairment whenever events orchanges in circumstances indicate that the carrying amount of the assets maynot be recoverable. We measure recoverability by comparing the assets’ carryingamount with future undiscounted net cash flows the assets are expected togenerate.

 

Ifsuch assets are considered to be impaired, we measure the impairment to berecognized by the amount by which the carrying amount of the assets exceeds theprojected discounted future cash flows arising from the assets or their fairvalues, whichever is more determinable.

 

*Revenue Recognition:*

 

Wederive our revenue from four sources: merchandise sales, which includewholesale merchandise sales, shipping revenue, transaction fee revenue, andother revenue. We recognize revenue from all four sources when the followingrevenue recognition criteria are met: (1) persuasive evidence of anarrangement exists; (2) the product has been shipped or the service hasbeen rendered and the customer takes ownership and assumes the risk of loss; (3) theselling price is fixed or determinable; and (4) collection of theresulting receivable is reasonably assured.

 

Foronline sales through our website, we recognize merchandise sales upon shipmentsmade to individual consumers and businesses that are fulfilled from ourwarehouse. We require payment before we ship and the payment is generally madeonline by credit card or other electronic payment methods. We record amountsreceived or billed prior to shipment of goods to customers as deferred revenue.We reduce gross sales by returns, charge-backs from customers, and otherdiscounts redeemed to obtain such sales. For wholesale merchandise sales, werecognize sales when the merchandise is delivered to the customer and creditterms may be offered to such customers.

 

Inthe Statements of Income all amounts billed to customers by us related toshipping and handling are included in “Net revenue” and our shipping costs areincluded in “Cost of revenue.”

 

We include transactionfee revenue in net revenue. The 3% transaction fee is applied to allmerchandise sales, including shipping and handling, but not to wholesalemerchandise sales.

 

Otherrevenue consists primarily of commissions we derive from hosting sales ofCertified Merchant merchandise that is owned by third parties and we recognizeonly the commission portion of the price our customers pay for the purchasedproducts because we are acting as an agent in such transactions.

 

Wepresent sales tax liability on a net basis. Sales taxes are excluded fromrevenue and included as a liability.

 

Outboundshipping revenue from customers are included in merchandise sales and amountedto $22.6 million, $22.3 million and $9.3 million in 2007, 2008, and 2009,respectively.

 

*Cost of Revenue:*

 

Costof revenue includes product costs, inbound and outbound shipping charges,packaging and shipping supplies, insurance on shipments, product repair andservice costs, and credit card and other electronic payment fees, and isrecorded in the same period in which related revenue has been recorded. Thecost of revenue is reduced by co-op marketing contributions recognized from ourvendors.

 

Outboundshipping costs on merchandise sales totaled $9.7 million, $10.0 millionand $6.1 million in 2007, 2008, and 2009, respectively.

 

*Deferred Revenue:*

 

Deferredrevenue liability is recorded for sales transactions where the merchandise hadnot yet been shipped but payment has been received.  Customer deposits of $30,000, related tolayaway sales, which started in the fourth quarter of 2009, are also includedin deferred revenue until full payment is received and the merchandise has beenshipped.

 

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*Income Tax Expense:*

 

Weaccount for income taxes using the asset and liability approach, which requiresthe recognition of taxes payable or refundable for the current year anddeferred tax assets and liabilities for the future tax consequences of eventsthat have been recognized in our financial statements or tax returns. Themeasurement of current and deferred tax assets and liabilities is based onprovisions of enacted tax laws; the effects of future changes in tax laws orrates are not anticipated. If necessary, the measurement of deferred tax assetsis reduced by the amount of any tax benefits that are less likely than not tobe realized based on available evidence.

 

*Stock-Based Compensation:*

 

We recognize in our financial statements the cost resulting from allshare-based payment transactions and all share-based payments to employees,including grants of stock options and restricted stock awards based on theirfair values of the measurement date, and recognized over the vesting period.

 

Compensation expense for the stock-based payment awards grantedsubsequent to December 31, 2005, are based on the grant date fair valueestimated. We have used the Black-Scholes model to estimate the fair value ofoptions. Our assessment of the estimated compensation charges will be affectedby our stock price as well as assumption regarding a number of subjectivevariables and the related tax impact. These variables include, but are notlimited to, our stock price volatility, forfeiture rates and employee stockoption exercise behaviors (or expected term).

 

Weare also required to calculate the additional paid in capital pool (“APIC Pool”)available to absorb tax deficiencies recognized subsequent to adoption, as ifwe had adopted the statement at its effective date of January 1, 1995. Wecalculate our APIC pool using the long form method, which requires that wetrack each award grant on an employee-by-employee basis and grant-by-grantbasis to determine if there is an excess tax benefit or tax deficiency for suchaward. We then compare the fair value expense to the tax deduction received foreach grant and aggregate the benefits and deficiencies to establish andmaintain the APIC Pool.  We group the excess tax benefits from both employeeand nonemployee awards into a single APIC pool.

 

*Internal Use Software:*

 

Weexpense all costs incurred for the development of internal use software thatrelate to the planning and post-implementation phases of the development andcertain maintenance and enhancement costs. We capitalize and amortize directcosts incurred in the application development phase over the software’sestimated useful life of three years. We expense research and development costsand other computer software maintenance costs related to software developmentas incurred.

 

*Basic and Diluted Income per Share:*

 

Wecompute the basic income per common share by dividing net income available tocommon stockholders by the weighted average number of common shares outstandingduring the reporting period. We compute diluted income per common sharesimilarly to basic income per common share, except that we increase thedenominator to include the number of additional common shares that would havebeen outstanding if the potential common shares had been issued and if theadditional common shares were dilutive. At December 31, 2007, 2008, and2009, we had 8,131,300 shares, 6,864,500 shares and 6,779,000 shares,respectively, of common stock equivalents upon the exercise of the employee andnon-employee stock options. These common stock equivalents consisted of8,079,300 employee stock options and 52,000 non-employee stock options as of December 31,2007; and 6,839,500 employee stock options and 25,000 non-employee stockoptions as of December 31, 2008; and 6,779,000 employee stock options asof December 31, 2009. As of December 31, 2007, dilutive common stockequivalents totaled 2,698,013 consisting of 2,682,069 employee stock optionsand 15,944 non-employee stock options. As of December 31, 2008, dilutivecommon stock equivalents totaled 1,271,171 consisting of 1,265,568 employeestock options and 5,602 consisting of non-employee stock options. As of December 31,2009, there were no dilutive common stock equivalents.

 

Thedilutive effect of outstanding stock options is reflected in diluted earningsper share by application of the treasury stock method for the years ended December 31,2007, 2008 and 2009. The following table sets forth the computation of basicand diluted net income per share (in thousands, except share and per sharedata):

 

| ** **                                           | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Basic and diluted net income per share:              |       |       |       |       |       |       |       |
| Numerator:                                           |       |       |       |       |       |       |       |
| Net income                                           |       | $          | 18,126     |       | $          | 14,403     |       | $ | 2,461 |   |
| Denominator:                                         |       |       |       |       |       |       |       |
| Weighted average shares of common stock  outstanding |       | 23,567,995 |       | 23,798,338 |       | 22,517,367 |       |
| Effect of dilutive securities                        |       | 2,698,013  |       | 1,271,171  |       | —     |       |
| Denominator for diluted calculation                  |       | 26,266,008 |       | 25,069,509 |       | 22,517,367 |       |
| Net income per share, basic                          |       | $          | 0.77       |       | $          | 0.61       |       | $ | 0.11 |   |
| Net income per share, diluted                        |       | $          | 0.69       |       | $          | 0.57       |       | $ | 0.11 |   |

 

There was no dilutive effect from outstandingstock options for the year ended December 31, 2009 as all the 6,779,000 stockoptions outstanding at year end were “out of the money” and are anti-dilutive.

 

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*Advertising Expense:*

 

Weexpense the costs of producing advertisements at the time production occurs andwe expense the cost of communicating advertisements in the period during whichthe advertising space or airtime is used. We recognize Internet advertisingexpenses based on the terms of the individual agreements, which are generally (1) duringthe period customers are acquired; (2) based on the number of clicksgenerated during a given period over the term of the contract; or (3) basedon the number of e-mails sent during an e-mail distribution campaign.Advertising expenses totaled $12.6 million, $12.7 million and $9.1 millionduring the years ended December 31, 2007, 2008, and 2009, respectively.

 

*New Accounting Pronouncements:*

 

InJune 2009, the FASB Accounting Standards Codification (Codification) wasissued. The Codification is the source of authoritative U.S. GAAP recognized bythe FASB to be applied by nongovernmental entities. The Codification iseffective for financial statements issued for interim and annual periods endingafter September 15, 2009. The implementation of this standard did not havea material impact on our financial position and results of operations.

 

InApril 2009, the FASB issued a staff position requiring fair valuedisclosures in both interim as well as annual financial statements in order toprovide more timely information about the effects of current market conditionson financial instruments. The guidance is effective for interim and annualperiods ending after June 15, 2009. The implementation of this standarddid not have a material impact on our financial position and results ofoperations.

 

InMay 2009, the FASB issued new guidance on subsequent events. The standardprovides guidance on management’s assessment of subsequent events andincorporates this guidance into accounting literature. The standard iseffective prospectively for interim and annual periods ending after June 15,2009. The implementation of this standard did not have a material impact on ourfinancial position and results of operations. The Company has evaluatedsubsequent events (as described in Note 16 to the audited financial statements).

 

**(2)     Inventories:**

 

Inventoriesconsist of the following at December 31, 2008 and 2009 (in thousands):

 
| ** **                              | ** ** | **2008** | ** ** | **2009** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Fine jewelry, watches and other         |       | $        | 37,485     |     | $          | 40,228 |   |
| Loose diamonds and semi-precious stones |       | 570      |       | 279      |       |
| Prepaid inventory                       |       | 36       |       | 1,784    |       |
| Inventory with manufacturing vendors    |       | 386      |       | 437      |       |
| Product inventories                     |       | 38,477   |       | 42,728   |       |
| Less: inventory reserve                 |       | (820     | )          | (1,767   | )          |
|                                    |       | $        | 37,657     |     | $          | 40,961 |   |

 

Asof December 31, 2008 and 2009, all inventories have been pledged as collateralfor our revolving credit line with LaSalle Bank (Bank of America) and more fully described in Note 5.

 

**(3)     Other Current Assets:**

 

Othercurrent assets consist of the following at December 31, 2008 and 2009 (inthousands):

 
| ** **         | ** ** | **2008** | ** ** | **2009** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| Prepaid expense    |       | $        | 328        |     | $          | 343 |   |
| Prepaid income tax |       | 282      |       | 920      |       |
| Deposits           |       | 79       |       | 2,511    |       |
|               |       | $        | 689        |     | $          | 3,774 |   |

 

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**(4)     Property andEquipment:**

 

Propertyand equipment consists of the following at December 31, 2008 and 2009 (inthousands):

 
| ** **                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |
| Computer hardware and software                  |       | $        | 2,626      |     | $          | 2,946 |   |
| Furniture and equipment                         |       | 517      |       | 521      |       |
| Automobile                                      |       | 30       |       | 30       |       |
|                                            |       | 3,173    |       | 3,497    |       |
| Less: accumulated depreciation and amortization |       | 1,501    |       | 2,295    |       |
|                                            |       | $        | 1,672      |     | $          | 1,202 |   |

 

Propertyand equipment are recorded at cost. Depreciation and amortization expense ofproperty and equipment totaled $498,000, $690,000 and $795,000 for the yearsended December 31, 2007, 2008, and 2009, respectively.

 

Asof December 31, 2008 and 2009, all property and equipment have beenpledged as collateral for our revolving credit line with LaSalle Bank (Bank ofAmerica).

 

**(5)     Revolving CreditLine:**

 

In July 2006, we entered into a revolvingcredit line agreement with LaSalle Bank (Bank of America), to provide workingcapital financing secured by inventories and tangible assets. The agreementallowed for us to initially draw on a line of credit up to $10.0 million, witha provision to increase the limit up to $15.0 million with the future consentof the bank’s loan committee. During the first quarter of 2007 we increased thelimit to $15.0 million and during the first quarter of 2008 we furtherincreased the limit to $25.0 million. However, as of December 31, 2009, our ability to borrow was limited to$17.2 million.

 

All cash receipts from our revenues are restrictedto being deposited into a LaSalle Bank (Bank of America) account, to be appliedto current reported cash disbursements requirements, under a positive paysystem, and then to the credit line outstanding balance. As of December 31,2009, we have an outstanding balance of $2.9 million under the revolving creditline. There is an unused fee of 0.25% on the unused portion of the revolvingcredit line. The term of the four yearrevolving credit line agreement ends in July 2010 and there is noassurance that the credit line will be renewed or extended.

 

Day-to-day drawdown on the credit line is subject tothe prevailing prime rate. The interest is calculated on the averageoutstanding balance and compound monthly. As of December 31, 2009 oureffective interest rate was 3.25%.  Wehave the option to extended term advances, for 30, 60, or 90 days that aresubject to LIBOR rates. The rates will be a certain percentage above the LIBORrates and will vary with the maturity term and amount borrowed. Interest iscalculated over the stated term at an annual rate. As of December 31, 2009we have no advances under LIBOR.

 

Underthe terms and conditions of the revolving credit line agreement, the Company issubject to certain restrictive covenants including the following restrictivefinancial covenants:

 

MinimumTTM EBITDA: Actual Trailing Twelve Month (TTM) EBITDA compliance is measured ona monthly basis, and shall not vary negatively from the Dollar amount forplanned LTM EBITDA, set forth in an agreed upon schedule, for the applicableperiod, and is subject to resetting in Lender’s discretion based upon abusiness plan for subsequent periods acceptable to Lender.

 

CapitalExpenditures: Borrower shall not make capital expenditures in excess of anagreed upon amount for each fiscal year covered by the loan agreement. Allcapital expenditure limits are subject to resetting on an annual basis at theLender’s discretion based upon a business plan for subsequent periodsacceptable to the Lender.

 

MinimumExcess Availability: We are to maintain an Excess Availability of $2.5 millionwith a Maximum Revolver Amount of $25.0 million. This covenant is subject toresetting at the Lender’s discretion based upon a business plan for subsequentperiods acceptable to Lender.

 

There is no notice of non-compliance at December 31,2009.  The consequences of defaulting onour restrictive covenants could include a reduction or withdrawal of therevolving credit line.

 

**(6)     Accounts Payable:**

 

Duringthe years ending December 31, 2008 and 2009 we employ “positive pay”procedures with our financial institution by transmitting check disbursementinformation to the financial institution to allow for our review and approvalof exception transaction 

 

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priorto them being posted to our account.

 

**(7)     Accrued Expenses:**

 

Accruedexpenses consist of the following at December 31, 2008 and 2009 (inthousands):

 

| ** **                              | ** ** | **2008** | ** ** | **2009** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Taxes payable                           |       | 127      |       | 94       |       |
| Accrued payroll and other related costs |       | 1,070    |       | 827      |       |
| Accrued net sales returns               |       | 171      |       | 114      |       |
| Other accrued expenses                  |       | 990      |       | 1,048    |       |
| Accrued marketing expenses              |       | 733      |       | 208      |       |
|                                    |       | $        | 3,091      |     | $          | 2,291 |   |
|                                         |            |          |            |          |            |  |  |

 

**(8)     Commitments:**

 

Thefollowing table presents our contractual obligations at December 31, 2009,over the next five years and thereafter (in thousands):

 
| **Payments by period** | ** ** | **Total  amount** | ** ** | **Less than  1 year** | ** ** | **1 to 3  years** | ** ** | **3 to 5  years** | ** ** | **After 5  years** | ** ** |
|----------------------------------|------------|-------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------|------------|
|                             |       |              |       |                            |       |                        |       |                        |       |                    |       |
| Property lease                   |       | $                 | 3,946      |                            | $          | 1,501                       |       | $                           | 2,445      |                    | $          | — |   | $ | — |   |
| Equipment lease                  |       | 151               |       | 52                              |       | 99                          |       | —                      |       | —                  |       |
|                             |       | $                 | 4,097      |                            | $          | 1,553                       |       | $                           | 2,544      |                    | $          | — |   | $ | — |   |

 

Welease a 50,000 square-foot office and warehouse and a separate 12,000square-foot warehouse space in Culver City, California. The leases expire in June 2012and August 2012, respectively. In March 2009, we extended the leaseon our 50,000 square-foot office and warehouse by 32 months to expire in June 2012.In October 2009, we signed a new lease for a 26,000 square-foot office andwarehouse space in Marina Del Rey, California. The lease begins November 2009 and expires in October 2012. Weare obligated to pay real estate taxes, insurance, and maintenance expenses. Weexpect that, in the normal course of business, the lease will be renewed orreplaced by leases on other properties upon termination. Thus, we anticipatethat future minimum lease commitments will likely be more than the amountsshown for 2009. Rental expenses for operating leases totaled $995,000, $1.2million and $1.2 million for the years ended December 31, 2007, 2008, and2009, respectively.

 

Wehave commitment for operating leases of copy machines used in our office.Executives with employment agreements result in annual salary commitments of$1.2 million and can result in total severance of $1.7 million.

 

**(9)     Stockholders’ Equity:**

 

*Delaware Reincorporation*

 

On June 22, 2006 the Company reincorporated inthe state of Delaware. In connection with our reincorporation in Delaware, weare authorized to issue 100,000,000 shares of common stock, $0.001 par value,and 4,000,000 shares of undesignated preferred stock, $0.001 par value.

 

*Preferred Stock*

 

Ourcertificate of incorporation authorizes our Board of Directors, without anyvote or action by the holders of our common stock, to issue preferred stockfrom time to time in one or more series. Our Board of Directors will beauthorized to determine the number of shares and to fix the designations,powers, preferences, and the relative, participating, optional, or other rightsof any series of preferred stock. Depending upon the terms of preferred stockestablished by our Board of Directors, any or all series of preferred stockcould have preference over the common stock with respect to dividends and otherdistributions and upon our liquidation. If any shares of preferred stock areissued with voting powers, the voting power of the outstanding common stockwould be diluted. No shares of preferred stock are presently outstanding, andwe have no present intention to issue any shares of preferred stock.

 

*Common Stock*

 

Theholders of common stock are entitled to one vote per share on all matters to bevoted upon by stockholders. There will be no cumulative voting. Subject topreferences that may be applicable to any outstanding preferred stock, holdersof common stock will be 

 

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entitledto receive ratably such dividends as may be declared by our Board of Directorsout of funds legally available for that purpose. In the event of theliquidation, dissolution, or winding up of our company, the holders of commonstock will be entitled to share ratably in all assets remaining after paymentof liabilities and the liquidation preferences of any outstanding preferredstock. The common stock has no preemptive or conversion rights, othersubscription rights, or redemption or sinking fund provisions.

 

Nodividends have been declared or paid on our common stock through December 31,2009.

 

InJune 2007, we authorized the stock buyback program for up to $5 million ofour outstanding common stock to be repurchased through the open market atprices deemed appropriate by management. In February 2008, weauthorized an increase in the stock buyback program to $20 million from $5million. In February 2009, we authorized an increase in the stock buybackprogram to $33.5 million from $20.0 million. As of December 31, 2009 wehave repurchased a total of approximately 3.3 million shares for a total ofapproximately $18.4 million. Approximately $15.1 million remain available underthe buyback program to repurchase shares in the open market. The stock buybackwill be at prices deemed appropriate by management over a 24 month period.

 

In2009, no common stock shares were issued from the exercise of stock options.1,454,968 shares held in treasury from our stock repurchase program wereretired. Restricted common stock awards totaling 666,000 shares were issued toemployees. 12,000 shares of restricted common stock were retired on terminationof employment of an employee and 2,593 shares were retired from net vesting ofrestricted common stock to pay for payroll taxes. Restricted common stockawards outstanding and yet to be vested totaled 738,225 shares as of December 31,2009.

 

In2008, common stock shares totaling 442,500 shares were issued from the exerciseof stock options and 249,623 shares were retired in the net exercise of optionsto pay for the exercise price and payroll taxes. 1,853,873 shares held in treasuryfrom our stock repurchase program were retired. 1,250 shares were issued asobligations for service. Restricted common stock awards totaling 24,800 shareswere issued to employees. 2,000 shares of restricted common stock were retiredon termination of employment of an employee and 1,490 shares were retired fromnet vesting of restricted common stock to pay for payroll taxes. Restrictedcommon stock awards outstanding and yet to be vested totaled 117,800 shares asof December 31, 2008.

 

In2007, common stock shares totaling 1,192,700 were issued from the exercise ofstock options and 15,000 shares held in treasury were retired. Common stockshares totaling 18,750 were issued to independent board members. Restrictedcommon stock awards totaling 110,000 shares were issued to independent boardmembers, and 16,000 shares were issued to employees. Restricted common stockawards outstanding and yet to be vested totaled 126,000 shares as of December 31,2007.

 

Advanceswere made to employees in 2007 to purchase shares of our common stock. As of December 31,2009, $964,000 remains outstanding for the advances and 154,000 shares wereheld as collateral. An impairment charge was recorded under general andadministrative expenses in 2008 and 2009 of $256,000 and $400,000,respectively, when the value of our common stock held as collateral for theadvances fell below the amount of the advances. The collectability of theadvance would be dependent on the value of the collateral and we have appliedthe fair value measurement when the shares of the common stock held ascollateral were valued at $308,000 based on the closing price for the yearended December 31, 2009. The advances made to employees are due February 28,2010 and we are considering an extension of time.

 

**(10)         StockCompensation Plans:**

 

Weadopted our 2001 Stock Option Plan, our 2002 Special Stock Option Plan and our2006 Award Plan (collectively, the “Plans”), in January 2001, January 2002,and March 2006, respectively. The Plans provide for the granting of awardsin the form of incentive stock options, nonqualified stock options, stockappreciation rights, shares of restricted common stock, bonus stock in lieu ofobligations, or other stock-based awards to employees, directors, andindependent contractors who provide valuable services to our company.  Thevesting requirements, performance thresholds and other terms and conditions ofoptions granted under the Plans will be determined by our CompensationCommittee and Board of Directors.

 

Outstandingoptions all vest immediately prior to 2006 and have 25% vesting at the end ofeach year over four years for options granted in 2006 and 2007. No options weregranted in 2008 and 2009. Options generally have an expiration period of fiveyears and new common stock shares are issued upon the exercise of stockoptions. At December 31, 2009, 712,083 shares were available for futuregrants under the Plans.

 

Thefollowing is a summary of stock option activity for the year ended December 31,2009:

 

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| **Options**                           | ** ** | **Shares** | ** ** | **Weighted-  average  exercise  price** | ** ** | **Weighted  average  remaining  life of  contract  (years)** | ** ** | **Aggregate  intrinsic  value as of  12/31/09** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Outstanding at January 1, 2009   |       | 6,864,500  |       | $                                       | 6.08       |                                                              |       |                                                      |       |   |
| Granted                               |       | —     |       | —                                  |       |                                                              |       |                                                      |       |
| Exercised                             |       | —     |       | —                                  |       |                                                              |       |                                                      |       |
| Cancelled                             |       | —     |       | —                                  |       |                                                              |       |                                                      |       |
| Expired                               |       | (85,500    | )          | 6.00                                    |       |                                                              |       |                                                      |       |
| Outstanding at December 31, 2009 |       | 6,779,000  |       | $                                       | 6.08       |                                                              | 1.38       |                                                      | $          | — |   |
| Exercisable at December 31, 2009 |       | 6,779,000  |       | $                                       | 6.08       |                                                              | 1.38       |                                                      | $          | — |   |

 

In2009, 85,500 options expired “out of the money.” As of December 31, 2009,all 6,779,000 stock options to purchase shares were fully vested.

 

Thefollowing is a summary of stock option activity for the years ended December 31,2007, 2008, and 2009:

 
| ** **                       | ** ** | **2007**   | ** ** | **2008**                               | ** ** | **2009**   | ** ** |
|----------------------------------|------------|------------|------------|----------------------------------------|------------|------------|------------|
| ** **                       | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** |
| Outstanding at beginning of year |       | 8,353,000  |       | $                                      | 5.64       |       | 8,131,300  |   | $ | 6.20 |   | 6,864,500 |   | $ | 6.08 |   |
| Granted                          |       | 1.000,000  |       | 8.23                                   |       | —     |       | — |   | — |   | — |   |
| Exercised                        |       | (1,192,700 | )          | 4.00                                   |       | (442,500   | )          | 4.74 |   | — |   | — |   |
| Canceled / forfeited             |       | (29,000    | )          | 6.00                                   |       | (824,300   | )          | 8.00 |   | (85,500 | ) | 6.00 |   |
| Outstanding at year-end          |       | 8,131,300  |       | $                                      | 6.20       |       | 6,864,500  |   | $ | 6.08 |   | 6,779,000 |   | $ | 6.08 |   |
| Options exercisable at year-end  |       | 7,045,050  |       | $                                      | 5.92       |       | 6,864,500  |   | $ | 6.08 |   | 6,779,000 |   | $ | 6.08 |   |

 

Theweighted-average grant date fair value of options granted during 2007 was $2.59per share and no options were granted in 2008 and 2009.

 

Thefollowing table summarizes information about stock options outstanding andexercisable at December 31, 2009:

 
| ** **                    | ** ** | ** **                          | ** ** | **Options outstanding and exercisable  as of December 31, 2009** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | ** **                          | ** ** | **Options outstanding**                                                                        | ** ** | **Options exercisable** | ** ** |
| **Range of  exercise prices** | ** ** | **Number  outstanding  12/31/2009** | ** ** | **Weighted  average  remaining contractual**                                                        | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  exercisable  12/31/2009** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                    | ** ** | ** **                          | ** ** | ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $                             | 6.00       |                                | $          | 6.00                                                                                                |       | 6,546,000 |   | 1.35 |   | $ | 6.00 |   | 6,546,000 |   | $ | 6.00 |   |
| $                             | 6.50       |                                | $          | 6.50                                                                                                |       | 105,500 |   | 2.18 |   | $ | 6.50 |   | 105,500 |   | $ | 6.50 |   |
| $                             | 9.90       |                                | $          | 9.90                                                                                                |       | 127,500 |   | 2.45 |   | $ | 9.90 |   | 127,500 |   | $ | 9.90 |   |
| $                             | 6.60       |                                | $          | 9.90                                                                                                |       | 6,779,000 |   | 1.36 |   | $ | 6.08 |   | 6,779,000 |   | $ | 6.08 |   |

 

*Stock Option Compensation*

 

Duringthe years ended December 31, 2007, and 2008, and 2009, respectively, werecognized approximately $488,000, $283,000 and $0, respectively, of employeestock-option compensation. We recognize compensation expense on a straight-linebasis over the requisite service period for each stock option grant. There wereno unamortized stock-option compensation expense as of December 31, 2008and 2009.

 

Optionsgranted in 2007 were valued in accordance with FASB statements and no optionswere granted in 2008 and 2009. The fair value of these options was calculatedusing a Black-Scholes option pricing model using the following assumptions: (1) risk-freeinterest rates of 4.3% to 4.9%, (2) an expected life of four to fiveyears, (3) expected volatility of 33%, (4) expected forfeitures of0%, and (5) a dividend yield of 0%. Because there was no public market forour common stock in 2006 and limited trading history at the time of grant in2007, we used the calculated method to determine volatility. Prior to June 15,2007, we had estimated the expected life to be equal to the option period andfrom June 15, 2007 we had estimated the expected life to be equal to thevesting period.

 

*Restricted Stock Awards*

 

Webegan issuing restricted stock awards in 2007, pursuant to the 2006 AwardPlan. The restricted stock awards were issued as time-based awards, whichvest typically with 25% vesting at the end of each year over four years orearlier if there is an acceleration event. The restricted stock awards areexpensed pro rata over the vesting period based upon the market value of theawards at the time of grant. Stock-based compensation from the issuance ofcommon stock and restricted stock awards totaled $286,000, $358,000 and

 

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$844,000for the years ended December 31, 2007, 2008 and 2009, respectively. Theunamortized stock-based expense for restricted stock awards was $967,000 and$2.6 million as of December 31, 2008 and 2009, respectively.

 

Thefair value of 31,000 restricted shares that vested in 2008 was $220,000, andthe fair value of 33,575 restricted shares that vested in 2009 was $115,000.Restricted common stock awards outstanding and yet to be vested totaled 117,800and 738,225 as of December 31, 2008 and 2009, respectively.

 

Asummary of all restricted stock activity during the years ended December 31,2008 and 2009 follows:

 
| Restricted shares outstanding, January 1,  2008   |   | 126,000 |   |
|--------------------------------------------------------|--------|---------|--------|
| Shares granted                                         |   | 24,800  |   |
| Shares vested                                          |   | (31,000 | )      |
| Shares forfeited                                       |   | (2,000  | )      |
|                                                   |   |    |   |
| Restricted shares outstanding, December 31,  2008 |   | 117,800 |   |
| Shares granted                                         |   | 666,000 |   |
| Shares vested                                          |   | (33,575 | )      |
| Shares forfeited                                       |   | (12,000 | )      |
|                                                   |   |    |   |
| Restricted shares outstanding, December 31,  2009 |   | 738,225 |   |

 

Theweighted-average grant date fair values of restricted stock awards during 2008and 2009 were $8.61 and $4.00 per share, respectively.

 

**(11)         Income TaxExpense:**

 

Incometax expense amounted to $2.5 million, $9.6 million and $1.8 million for theyears ended December 31, 2007, 2008 and 2009, respectively (an effectiverate of 12.3% for 2007, 40.0% for 2008 and 42.4% for 2009). A reconciliation ofthe provision (benefit) for income tax expense with amounts determined byapplying the statutory U.S. federal income tax rate to income before income taxexpense is as follows (in thousands):

 
| ** **                                                              | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed tax benefit at federal statutory rate of  35%                  |       | $        | 7,026      |     | $          | 8,400    |       | $ | 1,496 |   |
| State taxes, net federal tax benefits                                   |       | 347      |       | 1,380    |       | 246      |       |
| Meals and entertainment                                                 |       | 15       |       | 5        |       | 4        |       |
| Change in valuation allowance, net of adjustment  of net operating loss |       | (4,850   | )          | —   |       | —   |       |
| Other                                                                   |       | —   |       | (188     | )          | 68       |       |
| Total income tax provision                                              |       | $        | 2,538      |     | $          | 9,597    |       | $ | 1,814 |   |

 

Theincome tax expense for 2009 consists of the following (in thousands):

 
| ** ** | ** ** | **Federal** | ** ** | **State** | ** ** | **Total** | ** ** |
|------------|------------|-------------|------------|-----------|------------|-----------|------------|
| Current    |       | $           | 1,639      |      | $          | 565       |       | $ | 2,138 |   |
| Deferred   |       | (124        | )          | (145      | )          | (324      | )          |
| Total      |       | $           | 1,515      |      | $          | 420       |       | $ | 1,814 |   |

 

Thedifference in annual effective tax rates arises from the net operating losscarryforwards available to offset the taxable income for the 2007 tax year. Allnet operating losses were utilized and are not available to offset the federaland California taxable income for the years ended December 31, 2008 and2009.

 

Deferredtax assets and liabilities are recognized for future tax consequences betweenthe carrying amounts of assets and liabilities and their respective tax basesusing enacted tax rates in effect for the year in which the differences areexpected to reverse. Significant deferred tax assets and liabilities consist ofthe following (in thousands):

 

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| ** **                             | ** ** | **2008**   | ** ** | **2009**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| **Deferred tax assets:**               | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                   |       |       |       |       |       |
| **Current deferred tax assets:**       |       |       |       |       |       |
| Inventory costs                        |       | $          | 868        |       | $          | 1,038 |   |
| Accrued expenses                       |       | 80         |       | 108        |       |
| Other reserves and allowances          |       | 159        |       | 129        |       |
| Deferred revenue                       |       | 240        |       | 84         |       |
| State taxes                            |       | 603        |       | 41         |       |
| Total current deferred tax assets      |       | 1,950      |       | 1,400      |       |
| **Current deferred tax liability:**    |       | —     |       | —     |       |
| **Net current deferred tax asset**     |       | $          | 1,950      |       | $          | 1,400 |   |
|                                   |       |       |       |       |       |
| **Long term deferred tax assets:**     |       |       |       |       |       |
| Employee stock options                 |       | $          | 244        |       | $          | 659 |   |
| Other (fixed assets)                   |       | 3          |       | 4          |       |
| Total long term deferred tax assets    |       | 247        |       | 663        |       |
| **Long term deferred tax  liability:** |       |       |       |       |       |
| Inventory costs                        |       | (163       | )          | —     |       |
| ** **                             |       |       |       |       |       |
| **Net long term deferred tax  asset**  |       | $          | 84         |       | $          | 663 |   |

 

Thetax benefits from the expense in 2007, 2008 and 2009 for share basedcompensation awards that will result in future tax deduction are included indeferred tax assets. In 2008 and 2009, the actual tax deduction exceeded thecompensation cost recognized by the company for financial reporting purposes.The excess tax benefits increased the company’s additional paid in capital by$3.2 million and $716,000 for the years ended December 31, 2007 and 2008,respectively. In 2009, the actual tax deduction was less than the compensationcost recognized by the company for financial reporting purposes. As a result, ashortfall of $215,000 is created in 2009 and is recognized as additional taxexpense.

 

Inaccordance with FASB statement issued regarding Accounting for Uncertainty inIncome Taxes we recognize the financial statement benefit of a tax positiononly after determining that the relevant tax authority would more likely thannot sustain the position following an audit. For tax positions meeting themore-likely-than-not**threshold, theamount recognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimate settlementwith the relevant tax authority. We applied all tax positions for which thestatute of limitations remained open and our analysis reveals that there is nomaterial effect on our financial statements.

 

Thereare no unrecognized tax benefits that, if recognized, would impact theeffective tax rate. We do not anticipate any significant change in ourpositions in the next twelve months.

 

TheCompany recognizes accrued interest and penalties related to unrecognized taxbenefits in income tax expense. During the year ended December 31, 2009,no interest or penalties were recognized in the income statement or balancesheet by the Company.

 

Weare subject to income taxes in the U.S. federal jurisdiction and California.Tax regulations within each jurisdiction are subject to the interpretation ofthe related tax laws and regulations and require significant judgment to apply.With few exceptions, we are no longer subject to U.S. federal and Californiaexaminations by tax authorities for the years before 2007 after the conclusionof an examination by the Internal Revenue Service for the 2004, 2005 and 2006tax years. We are currently under examination by the Internal Revenue Servicefor the 2007 and 2008 tax years.

 

**(12)       SegmentInformation:**

 

Netrevenue by geographic area is presented based upon the country of destination.No foreign country accounted for 10% or more of net revenue for any of thefiscal years presented. Net revenue by geographic area was as follows for theyears ended December 31, 2007, 2008 and 2009 (in thousands):

 
| ** **    | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| United States |       | $        | 145,412    |     | $          | 157,747  |       | $ | 75,360 |   |
| International |       | 41,719   |       | 49,663   |       | 35,034   |       |
| Total         |       | $        | 187,131    |     | $          | 207,410  |       | $ | 110,394 |   |

 

Long-livedassets include property and equipment and intangible assets that resided in theUnited States during the years ended December 31, 2007, 2008, and 2009.

 

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**(13)         Concentrations:**

 

Purchaseof merchandise from one of our top two vendors which is a related party (seeNote 15), constituted 11.9%, 9.9% and 6.2% of total merchandise purchasedby us in the years ending December 31, 2007, 2008, and 2009, respectively.Purchases of merchandise from our top two vendors amounted to$40.4 million, $18.3 million, and $21.4 million representing 24.0%, 14.6%and 27.7%, respectively, of the total purchases during the years ended December 31,2007, 2008, and 2009, respectively.

 

Outstandingaccounts payable to our top two vendors totaled $1.3 million and $2.9million as of December 31, 2008 and 2009, respectively.

 

**(14)         Contingencies:**

 

Weare subject to various legal proceedings and claims that arise in the ordinarycourse of business.  Although the Company believes it has defenses to theallegations and intends to pursue them vigorously, currently, management doesnot currently have sufficient information to assess the validity of the claimsor the amount of potential damages.  Company management currentlybelieves, however, that resolution of such legal matters will not have amaterial adverse impact on the Company’s financial position, results ofoperations or cash flows.

 

In May and June, 2009, the Company and certain ofits officers were named as defendants in three parallel class actionscomplaints filed in the United States District Court for the Central Districtof California (Ramon Gomez v. Bidz.com, Inc., et al., cv09-3216 (CBM)(C.D. Cal.; filed on May 7, 2009); James Mitchell v. Bidz.com, Inc.,et al., cv09-03671 (CBM) (C.D. Cal.; filed on May 22, 2009); Mark Walczykv. Bidz.com, Inc., et al., cv09-0397 (CBM) (C.D. Cal.; filed on June 3,2009)).  On July 30, 2009, the Courtordered the cases to be consolidated and appointed Roland Pomfret as the leadplaintiff.  The lawsuits purport torepresent the class of shareholders who purchased the Company’s common stockbetween August 13, 2007 and November 27, 2007.  The complaints charge the Company and certainof its officers and directors with violations of §10(b) and §20(a) ofthe Securities Exchange Act of 1934. The complaints allege that we failed todisclose unethical and fraudulent business practices that were alleged in a November 26,2007 report by Citron Research (Stocklemon.com), that we did not have controlsin place to prevent “shill bidding” and that we use unreliable or falseappraisal prices on our merchandise.  Thecourt granted the plaintiffs’ request to appoint Roland Pomfret as leadplaintiff, and a consolidated complaint was filed on October 13,2009.  In addition to the allegations inthe original complaint, the consolidated complaint alleges that the defendantsfailed to correctly account for and disclose in detail its co-op marketingcontributions and minimum gross profit guarantees.  We believe that the lawsuits are meritlessand intend to defend the cases vigorously.

 

In May and July,2009, the Company and certain of its officers and its Board of Directors werenamed as defendants in two shareholder derivative lawsuits filed in theSuperior Court of California, County of Los Angeles, and the United StatesDistrict Court for the Central District of California, respectively (BahramAkhavan v. Bidz.com, Inc. et al. BC414198 (filed May 20, 2009); FarrisHassan v. Bidz.com, Inc., et al. , cv09-04984 (CBM) (C.D. Cal.; filed on July 10,2009)) (a similar complaint was by David Hughes on August 18, 2009).  The Complaint alleges violations of law,including breaches of fiduciary duties, waste of corporate assets, unjustenrichment and violations of California Corporations Code that occurred betweenAugust 2007 and the present and that have caused substantial monetary lossto the Company and other damages, such as to its reputation and goodwill.  On October 25, 2009, plaintiff filed anamended complaint that also includes allegations relating to the Company’sco-op marketing contributions and minimum gross profit guarantees.  We believe that the lawsuits are meritlessand intend to defend the cases vigorously.

 

In May 2009, theCompany received a Civil Investigative Demand for information from the FederalTrade Commission (“FTC”) relating to email marketing practices. We have been cooperating fully with the FTC regarding thismatter, and we do not believe that the investigation will adverselyaffect management, our results of operations, cash flows or our financialposition.

 

On February 10, 2009, the Securities and Exchange Commission (“SEC”)issued a subpoena to produce documents relating to the Company’s inventoryreserve policies, as well as other matters. We have been cooperating fully withthe SEC regarding this matter, our management and certain employees havecomplied with subpoenas for testimony, and we do not believe that the investigation will adverselyaffect management, our results of operations, cash flows or our financialposition.  On October 27,2009, the SEC issued a subpoena to produce documents relating to the Company’sco-op marketing contributions and minimum gross profit guarantees.

 

On or about June 25,2009, the Company was named as a defendant in a patent infringement lawsuitfiled in the United States District Court for the Eastern District of Texas,Tyler Division (Soverain Software LLC v. J.C. Penney Corporation, Inc.,Amway Corp., Avon Products, Inc., Bidz.com, Inc., Etronics, Inc.HSN, Inc., HSN Improvements, LLC, Cornerstone Brands, Inc., BallardDesigns, Inc., Garnet Hill, Inc., Smith & Noble, LLC, TheTerritory Ahead, Inc., QVC, Inc., Shutterfly, Inc., Victoria’sSecret Stores Brand Management, Inc., Victoria’s Secret Direct BrandManagement, LLC, VistaPrint, Ltd., and VistaPrint USA, Inc.cv6:09-CV-274). The Complaint alleges that defendants’ ecommerce sites infringeone or more patents held by the plaintiff. The Plaintiff seeks a judgment that its patents are not invalid andenforceable, a preliminary and permanent injunction against infringement of thepatents, damages (including treble damages) and attorneys fees. We believe thatthe lawsuit is meritless and intend to defend the case vigorously.

 

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On or about September 29,2008, the Company, David Zinberg and Marina Zinberg were named as defendants ina complaint filed in the United States District Court for the Central Districtof California (Marla Tidenberg v. Bidz.com, Inc., et al., cv08 05553(PSG)).  On March 19, 2009,Tidenberg filed a Third Amended Complaint, which names only the Company as adefendant.  The lawsuit alleges, amongother things, that we engaged in unfair business practices by misrepresentingthe value of our merchandise and by “false” bidding. The complaint purports torepresent a class of persons who purchased any merchandise from us. On January 7,2010 the Court denied Marla Tidenberg’s Motion for Class Certification. OnFebruary 26, 2010, Marla Tidenberg accepted our offer to pay her TwentyThousand Dollars in exchange for a dismissal of her case with prejudice.

 

We are, from time to time, a party todisputes arising from normal business activities, including variousemployee-related matters. In the opinion of our management, resolution of thesematters, individually or collectively, will not have a material adverse effectupon our financial condition or future cash flows and operating results.

 

**(15)       RelatedParty Transactions:**

 

Wepurchased approximately 11.9%, 9.9% and 6.2% of our merchandise in 2007, 2008,and 2009, respectively, from LA Jewelers, where one of its managers is astockholder who beneficially owns approximately 5.7% of our outstanding commonstock as of December 31, 2009 (see Note 13). The accounts payablebalances due to LA Jewelers were $1.4 million and $1.5 million as of December 31,2008 and 2009, respectively.

 

LAJewelers participates in our inventory co-op marketing program. For the yearsended December 31, 2007, 2008 and 2009, we earned $522,000, $1.2 millionand $469,000, respectively, from LA Jewelers relating to co-op marketingcontributions and $361,000 and $247,000 was unamortized as of December 31,2008 and 2009, respectively. The amounts of co-op marketing contributions duefrom LA Jewelers were $22,000 and $178,000 as of December 31, 2008 and2009, respectively.

 

InMay, 2007 we entered into an understanding with LA Jewelers whereby they willguarantee that we will earn a certain minimum gross profit margin on theirmerchandise. This agreement provides that in the event of a gross profit marginshortfall we will be compensated for the difference between our actual grossprofit margin and the guaranteed minimum gross profit margin. For the yearsended December 31, 2007, 2008 and 2009, we recognized $427,000, $588,000and $192,000, respectively, under this agreement. As of December 31, 2008and 2009, we have $80,000 and $0, respectively, outstanding under this grossprofit margin guarantee.

 

Duringthe years ended December 31, 2008 and 2009, we recorded $0 and $2.4 million,respectively, in wholesale merchandise sales to a customer that is owned by DaniellaZinberg, the daughter of our Chief Executive Officer, David Zinberg. There wereno accounts receivable due from this customer as of December 31, 2008 and 2009,respectively.

 

MarinaZinberg, who is a Vice President and owns 30.4% of our outstanding shares, isthe sister of and reports to David Zinberg, our Chief Executive Officer. During2009 we paid Ms. Zinberg a salary of $100,000. Ms. Zinberg waspreviously our corporate secretary and treasurer.

 

**(16)         SubsequentEvents:**

 

SeeRecent Developments in Note 1.

 

**Item 15(b)              FinancialStatement Schedule:**

 

**Schedule II — Valuation and QualifyingAccounts**

 

**(inthousands)**

 
| **Description**                                                                         | ** ** | **Balance at the  beginning of  the year** | ** ** | **Charged to  revenue,  cost, or  expenses** | ** ** | **Deductions** | ** ** | **Balance at the  end of the  year** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------|------------|----------------------------------------------------------|------------|
| **Reserve deducted from asset to which it applies:** |       |                                                           |       |                                                   |       |           |       |                                                     |       |
| Year ended December 31, 2008                                        |       |                                                           |       |                                                   |       |           |       |                                                     |       |
| Reserve for inventory                                                                   |       | $                                                              | 1,075      |                                                   | $          | —         |       | $                                                        | (255       | ) | $ | 820 |   |
| Reserve for sales returns                                                               |       | 346                                                            |       | 552                                                    |       | (727           | )          | 171                                                      |       |
| Reserve for charge-backs                                                                |       | 100                                                            |       | —                                                 |       | (46            | )          | 54                                                       |       |
|                                                                                    |       |                                                           |       |                                                   |       |           |       |                                                     |       |
| Year ended December 31, 2009                                                       |       |                                                           |       |                                                   |       |           |       |                                                     |       |
| Reserve for inventory                                                                   |       | $                                                              | 820        |                                                   | $          | 947            |       | $                                                        | —     |   | $ | 1,767 |   |
| Reserve for sales returns                                                               |       | 171                                                            |       | 478                                                    |       | (535           | )          | 114                                                      |       |
| Reserve for charge-backs                                                                |       | 54                                                             |       | —                                                 |       | (32            | )          | 22                                                       |       |

 

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**(c)           Exhibits**

 

The following exhibits are incorporated by referenceor filed herewith

 
| **Exhibit  Number** | ** ** | **Exhibits**                                                                                                                                                                        |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                |
| 2.1                 |       | Agreement  and Plan of Merger, dated as of March 15, 2006, by and between  Bidz.com, Inc., a Delaware corporation, and Bidz.com, Inc., a  California corporation (1) |
| 3.1                 |       | Certificate  of Incorporation of the Registrant (2)                                                                                                                                 |
| 3.2                 |       | Bylaws  of the Registrant (3)                                                                                                                                                       |
| 10.1                |       | 2001  Stock Option Plan(4)                                                                                                                                                          |
| 10.2                |       | 2002  Stock Option Plan(5)                                                                                                                                                          |
| 10.3                |       | 2006  Stock Award Plan (6)                                                                                                                                                          |
| 10.4                |       | Employment  Agreement, dated as of June 6, 2006, between Bidz.com, Inc. and  David Zinberg (7)                                                                            |
| 10.4.1              |       | Employment  Agreement, dated as of November 1, 2002, between Bidz.com, Inc. and  David Zinberg (8)                                                                   |
| 10.5                |       | Employment  Agreement, dated as of June 6, 2006, between Bidz.com, Inc. and  Lawrence Y. Kong (9)                                                                    |
| 10.6                |       | Stock  Vesting Agreement, dated as of June 30, 2001, between  Bidz.com, Inc. and Lawrence Y. Kong (10)                                                                    |
| 10.7                |       | Form of  Indemnification Agreement between Bidz.com, Inc. and each officer and  director (11)                                                                             |
| 10.7.1              |       | Indemnification  Agreement, dated as of November 1, 2002, between Bidz.com, Inc. and  David Zinberg (12)                                                             |
| 10.8                |       | Lease,  between Bidz.com, Inc. and PAS Trust, dated as of April 15, 2003,  and Addendum No. 2, dated as of March 3, 2004(13)                                    |
| 10.9                |       | Client  Service Agreement dated January 2, 2006 between Bidz.com, Inc. and  Administaff Companies II, L.P. (14)                                                           |
| 10.10               |       | Loan  and Security Agreement by Bidz.com, Inc. and LaSalle Retail Finance,  dated July 12, 2006 (15)                                                                      |
| 10.11               |       | Employment  Agreement, dated as of March 1, 2007 between Bidz.com, Inc. and  Leon Kuperman (16)                                                                           |
| 10.12               |       | Employment  Agreement, dated as of February 21, 2007 between Bidz.com, Inc. and  Claudia Liu (17)                                                                         |
| 31.1                |       | Certification  of the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act.                                                                              |
| 31.2                |       | Certification  of the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act.                                                                              |
| 32                  |       | Certification  of the Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act                                                   |

 

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| (1)  |   | Incorporated by reference to Exhibit 2.1 of  Registrant’s Form S-1 (File No. 333-132545).                                                                                                                                                                                                                                                                                                                                                                                    |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Incorporated by reference to Exhibit 3.1 of  Registrant’s Form S-1 (File No. 333-132545).                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)  |   | Incorporated by reference to Exhibit 3.2 of  Registrant’s Form S-1 (File No. 333-132545).                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)  |   | Incorporated by reference to Exhibit 10.1 of  Registrant’s Form 10 (File No. 000-51257).                                                                                                                                                                                                                                                                                                                                                                                     |
| (5)  |   | Incorporated by reference to Exhibit 10.2 of  Registrant’s Form 10 (File No. 000-51257).                                                                                                                                                                                                                                                                                                                                                                                     |
| (6)  |   | Incorporated by reference to Exhibit 10.3 of  Registrant’s Form S-1 (File No. 333-132545).                                                                                                                                                                                                                                                                                                                                                                                   |
| (7)  |   | Incorporated by reference to Exhibit 10.4 of  Registrant’s Form S-1 (File No. 333-132545).                                                                                                                                                                                                                                                                                                                                                                                   |
| (8)  |   | Incorporated by reference to Exhibit 10.3 of  Registrant’s Form 10 (File No. 000-51257).                                                                                                                                                                                                                                                                                                                                                                                     |
| (9)  |   | Incorporated by reference to Exhibit 10.5 of  Registrant’s Form S-1 (File No. 333-132545).                                                                                                                                                                                                                                                                                                                                                                                   |
| (10) |   | Incorporated by reference to Exhibit 10.6 of  Registrant’s Form S-1 (File No. 333-132545).                                                                                                                                                                                                                                                                                                                                                                                   |
| (11) |   | Incorporated by reference to Exhibit 10.7 of  Registrant’s Form S-1 (File No. 333-132545).                                                                                                                                                                                                                                                                                                                                                                                   |
| (12) |   | Incorporated by reference to Exhibit 10.4 of  Registrant’s Form 10 (File No. 000-51257).                                                                                                                                                                                                                                                                                                                                                                                     |
| (13) |   | Incorporated by reference to Exhibit 10.5 of  Registrant’s Form 10 (File No. 000-51257).                                                                                                                                                                                                                                                                                                                                                                                     |
| (14) |   | Incorporated by reference to Exhibit 10.9 of  Registrant’s Form S-1 (File No. 333-132545).                                                                                                                                                                                                                                                                                                                                                                                   |
| (15) |   | Incorporated by reference to Exhibit 10.10 of  Registrant’s Form 10 (File No. 000-51257)                                                                                                                                                                                                                                                                                                                                                                                     |
| (16) |   | Incorporated by reference to Exhibit 10.11 of  Registrant’s Form 10 (File No. 000-51257)                                                                                                                                                                                                                                                                                                                                                                                     |
| (17) |   | Incorporated by reference to Exhibit 10.12 of  Registrant’s Form 10 (File No. 000-51257)                                                                                                                                                                                                                                                                                                                                                                                     |
| (18) |   | The certification attached as Exhibit 32 that  accompanies this Annual Report on Form 10-K is not deemed filed with the  Securities and Exchange Commission and is not to be incorporated by reference  into any filing of Bidz.com, Inc. under the Securities Act of 1933 or  the Securities Exchange Act of 1934, whether made before or after the date of  this Annual Report on Form 10-K, irrespective of any general  incorporation language contained in such filing. |

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or Section 15(d) of theSecurities Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                       | BIDZ.COM, INC. |
|----------------------------|---------------------|
|                       |                |
|                       |                |
|                       | By:                 | /s/ DAVID ZINBERG |
|                       |                |   |
| ** **                 | ** **          | **David Zinberg** |
| ** **                 | ** **          | **Chief Executive Officer** |
|                       |                |   |
| Dated:  March 9, 2010 |                |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**         | ** ** | **Title**                           | ** ** | **Date**           |
|-----------------------|------------|-------------------------------------|------------|--------------------|
|                  |       |                                |       |               |
| /s/  DAVID ZINBERG    |       | Chairman  of the Board and          |       | March 9, 2010 |
| David  Zinberg        |       | Chief  Executive Officer (Principal |       |               |
|                  |       | Executive  Officer)                 |       |               |
|                  |       |                                |       |               |
| /s/  LAWRENCE Y. KONG |       | Chief  Financial Officer and        |       | March 9, 2010 |
| Lawrence  Y. Kong     |       | Director  (Principal Financial and  |       |               |
|                  |       | Accounting  Officer)                |       |               |
|                  |       |                                |       |               |
| /s/  PETER G. HANELT  |       | Director                            |       | March 9, 2010 |
| Peter  G. Hanelt      |       |                                |       |               |
|                  |       |                                |       |               |
| /s/  MAN JIT SINGH    |       | Director                            |       | March 9, 2010 |
| Man  Jit Singh        |       |                                |       |               |
|                  |       |                                |       |               |
| /s/  GARRY ITKIN      |       | Director                            |       | March 9, 2010 |
| Garry  Itkin          |       |                                |       |               |

 

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