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** **

 

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                                                                                                                                            | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                       |
| **For the quarterly period  ended March 31, 2010**                                                                                                                          |
| ** **                                                                                                                                                                       | ** **                                                                                             |
| **o**                                                                                                                                                                            | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                         |
| ** **                                                                                                                                                                       | ** **                                                                                             |
| **For the transition  period            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 | (I.R.S. Employer       |
| incorporation or organization)  | Identification Number) |

 

**3562 Eastham Drive****Culver City, California90232**

(Address, including zip code, of principal executiveoffice)

 

**(310) 280-7373**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for thepast 90 days.     Yes x   No  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).     Yes o   No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer”, “acceleratedfiler”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2of 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 ashell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

 

Number of shares outstanding of Registrant’s commonstock, $0.001 par value, as of April 30, 2010: 21,836,951

 

 

 

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**TABLEOF CONTENTS**

 
| PART I.  FINANCIAL INFORMATION |                                                                                                                     |
|-------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
| Item 1.                        | Financial Statements                                                                                                     | 3 |
|                                | Condensed  Balance Sheets as of December 31, 2009 and March 31, 2010  (unaudited)                              | 3 |
|                                | Condensed  Statements of Income (Operations) for the three month periods ended  March 31, 2009 and 2010 (unaudited) | 4 |
|                                | Condensed  Statements of Cash Flows for the three month periods ended March 31,  2009 and 2010 (unaudited)          | 5 |
|                                | Notes to Financial Statements (unaudited)                                                                                | 6 |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              | 10 |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk                                                              | 15 |
| Item 4.                             | Controls and Procedures                                                                                                  | 16 |
|                                |                                                                                                                     |   |
| PART II.  OTHER INFORMATION    |                                                                                                                     |
| Item 1.                             | Legal Proceedings                                                                                                        | 17 |
| Item 1A                             | Risk Factors                                                                                                             | 18 |
| Item 2.                             | Unregistered  Sales and Purchases of Equity Securities                                                                   | 29 |
| Item  6.                            | Exhibits                                                                                                                 | 30 |
|                                |                                                                                                                     |   |
| SIGNATURES                          |                                                                                                                     |

 

Thisquarterly report includes forward looking statements. All statements other thanstatements of historical facts contained in this report, including statementsregarding our future financial position, business strategy and plans andobjectives of management for future operations, are forward looking statements.The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”“expect” and similar expressions, as they relate to us, are intended toidentify forward looking statements. We have based these forward-lookingstatements largely on our current expectations and projections about futureevents and financial trends that we believe may affect our financial condition,results of operations, business strategy and financial needs. These forwardlooking statements are subject to a number of risks, uncertainties andassumptions discussed throughout this filing.

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

** **

**Bidz.com, Inc.**

 

**Condensed Balance Sheets (Unaudited)**

 

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

 
| ** **                                                                                                                                                                        | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2009**              | ** ** | **2010**           | ** ** |
| ** **                                                                                                                                                                        | ** ** | **(Revised)**         | ** ** | ** **         | ** ** |
| **Assets**                                                                                                                                                                        |       |                  |       |               |       |
| Current assets:                                                                                                                                                                   |       |                  |       |               |       |
| Cash                                                                                                                                                                              |       | $                     | 1,121      |               | $          | 7,783 |   |
| Accounts receivable                                                                                                                                                               |       | 447                   |       | 491                |       |
| Inventories, net of reserves of $1,767 and $1,536 at  December 31, 2009 and March 31, 2010, respectively                                                                |       | 40,961                |       | 31,379             |       |
| Other receivable (includes related party amounts of  $179 and $136 at December 31, 2009 and March 31, 2010,  respectively)                                              |       | 1,454                 |       | 1,337              |       |
| Current deferred tax assets                                                                                                                                                       |       | 1,400                 |       | 1,262              |       |
| Other current assets (Note 11)                                                                                                                                                    |       | 2,960                 |       | 1,161              |       |
| Total current assets (Note 11)                                                                                                                                                    |       | 48,343                |       | 43,413             |       |
| Long term deferred tax assets                                                                                                                                                     |       | 663                   |       | 684                |       |
| Property and equipment, net                                                                                                                                                       |       | 1,202                 |       | 1,059              |       |
| Intangible asset                                                                                                                                                                  |       | 240                   |       | 239                |       |
| Deposits                                                                                                                                                                          |       | 157                   |       | 157                |       |
| Total assets (Note 11)                                                                                                                                                            |       | $                     | 50,605     |               | $          | 45,552 |   |
| ** **                                                                                                                                                                        |       |                  |       |               |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                    |       |                  |       |               |       |
| Current liabilities:                                                                                                                                                              |       |                  |       |               |       |
| Revolving credit line                                                                                                                                                             |       | $                     | 2,898      |               | $          | — |   |
| Accounts payable (includes related party amounts of  $1,513 and $1,027 at December 31, 2009 and March 31, 2010,  respectively)                                          |       | 12,159                |       | 10,060             |       |
| Accrued expenses                                                                                                                                                                  |       | 2,291                 |       | 1,939              |       |
| Deferred revenue                                                                                                                                                                  |       | 632                   |       | 879                |       |
| Total current liabilities                                                                                                                                                         |       | 17,980                |       | 12,878             |       |
|                                                                                                                                                                              |       |                  |       |               |       |
| Commitments and contingencies (Note 10)                                                                                                                                           |       |                  |       |               |       |
|                                                                                                                                                                              |       |                  |       |               |       |
| Stockholders’ equity:                                                                                                                                                        |       |                  |       |               |       |
| Preferred stock: par value $0.001; authorized  4,000,000 shares; none issued and outstanding at December 31, 2009 and  March 31, 2010, respectively                     |       | —                |       | —             |       |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued and outstanding 22,114,257 and 21,900,357 at  December 31, 2009 and March 31, 2010, respectively |       | 22                    |       | 22                 |       |
| Additional paid in capital (Note 11)                                                                                                                                              |       | 19,857                |       | 20,017             |       |
| Accumulated earnings (Note 11)                                                                                                                                                    |       | 12,746                |       | 12,635             |       |
| Total stockholders’ equity (Note 11)                                                                                                                                         |       | 32,625                |       | 32,674             |       |
| ** **                                                                                                                                                                        |       |                  |       |               |       |
| ** **                                                                                                                                                                        |       | $                     | 50,605     |               | $          | 45,552 |   |

 

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**Bidz.com, Inc.**

 

**Condensed Statements of Income(Operations) (Unaudited)**

 

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

* *
| ** **                                                                                                                                             | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **2009**                               | ** ** | **2010** | ** ** |
| ** **                                                                                                                                             | ** ** | **(****Revised****)**                  | ** ** | ** ** | ** ** |
| Net revenue:                                                                                                                                           |       |                                   |       |   |   |
| Merchandise sales                                                                                                                                      | ** ** | **$**                                  | 30,891     | ** ** | **$** | 26,467 | ** ** |
| Wholesale merchandise sales (includes related party  amounts of $206 and $1,197 for the three months ended March 31, 2009 and  2010, respectively |       | 206                                    |       | 1,647 |   |
| Other revenue                                                                                                                                          |       | 80                                     |       | 75 |   |
|                                                                                                                                                   |       | 31,177                                 |       | 28,189 |   |
| Cost of revenue                                                                                                                                        |       | 20,991                                 |       | 21,000 |   |
| Gross Profit                                                                                                                                           |       | 10,186                                 |       | 7,189 |   |
| Operating expenses:                                                                                                                                    |       |                                   |       |   |   |
| General and administrative (Note 11)                                                                                                                   |       | 4,802                                  |       | 5,411 |   |
| Sales and marketing                                                                                                                                    |       | 2,605                                  |       | 1,587 |   |
| Depreciation and amortization                                                                                                                          |       | 180                                    |       | 216 |   |
| Total operating expenses (Note 11)                                                                                                                     |       | 7,587                                  |       | 7,214 |   |
| Income (loss) from operations (Note 11)                                                                                                                |       | 2,599                                  |       | (25 | ) |
| Other income - interest income                                                                                                                         |       | 2                                      |       | — |   |
| Other expense - interest (expense)                                                                                                                     |       | (11                                    | )          | (11 | ) |
| Income (loss) before income tax expense (Note 11)                                                                                                      |       | 2,590                                  |       | (36 | ) |
| Income tax expense (Note 11)                                                                                                                           |       | 1,082                                  |       | 75 |   |
| Net income (loss) (Note 11)                                                                                                                            | ** ** | **$**                                  | 1,508      | ** ** | **$** | (111 | ) |
|                                                                                                                                                   |       |                                   |       |   |   |
| Net income (loss) per share available to common  shareholders - basic                                                                                  | ** ** | **$**                                  | 0.07       | ** ** | **$** | (0.01 | ) |
| Net income (loss) per share available to common  shareholders - diluted                                                                                | ** ** | **$**                                  | 0.07       | ** ** | **$** | (0.01 | ) |
| Weighted average number of shares outstanding -  basic                                                                                                 |       | 22,898,532                             |       | 21,949,359 |   |
| Weighted average number of shares outstanding -  diluted                                                                                               |       | 22,898,532                             |       | 21,949,359 |   |

 

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**Bidz.com, Inc.**

 

**Condensed Statements of Cash Flows (Unaudited)**

 

*(in thousands)*

 
| ** **                                                                                 | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                 | ** ** | **2009**                               | ** ** | **2010** | ** ** |
| ** **                                                                                 | ** ** | **(****Revised****)**                  | ** ** | ** ** | ** ** |
| **Cash flows provided by (used for)  operating activities:**                               |       |                                   |       |   |   |
| Net income (loss) (Note 11)                                                                |       | $                                      | 1,508      |   | $ | (111 | ) |
|                                                                                       |       |                                   |       |   |   |
| **Adjustments to reconcile net  income to net cash****provided by  operating activities:** |       |                                   |       |   |   |
| Depreciation and amortization                                                              |       | 180                                    |       | 216 |   |
| Change in inventory reserve                                                                |       | 530                                    |       | (231 | ) |
| Stock-based compensation (Note 11)                                                         |       | 111                                    |       | 262 |   |
| **Changes in assets and liabilities:**                                                     |       |                                   |       |   |   |
| **(Increase) decrease in assets:**                                                         |       |                                   |       |   |   |
| Accounts receivable (Note 11)                                                              |       | 21                                     |       | (44 | ) |
| Inventories                                                                                |       | (1,820                                 | )          | 9,813 |   |
| Other receivable (Note 11)                                                                 |       | (118                                   | )          | 117 |   |
| Deferred tax assets                                                                        |       | (103                                   | )          | 138 |   |
| Other current assets (Note 11)                                                             |       | 139                                    |       | 1,799 |   |
| **Increase (decrease) in  liabilities:**                                                   |       |                                   |       |   |   |
| Accounts payable                                                                           |       | (743                                   | )          | (2,099 | ) |
| Accrued expenses (Note 11)                                                                 |       | 462                                    |       | (352 | ) |
| Deferred revenue                                                                           |       | 317                                    |       | 247 |   |
| Net cash provided by operating activities                                                  |       | 484                                    |       | 9,755 |   |
|                                                                                       |       |                                   |       |   |   |
| **Cash flows (used for) investing  activities:**                                           |       |                                   |       |   |   |
| Capital expenditures                                                                       |       | (625                                   | )          | (72 | ) |
| Net cash (used for) investing activities                                                   |       | (625                                   | )          | (72 | ) |
| **Cash flows provided by (used for)  financing activities:**                               |       |                                   |       |   |   |
| Revolving credit line                                                                      |       | —                                 |       | (2,898 | ) |
| Long term deferred tax assets, net                                                         |       | 77                                     |       | (21 | ) |
| Tax benefit from stock based compensation                                                  |       | (158                                   | )          | — |   |
| Purchase of treasury stock                                                                 |       | (1,074                                 | )          | (102 | ) |
| Net cash (used for) financing activities                                                   |       | (1,155                                 | )          | (3,021 | ) |
|                                                                                       |       |                                   |       |   |   |
| **Net increase (decrease) in cash**                                                        |       | (1,296                                 | )          | 6,662 |   |
| **Cash, beginning of period**                                                              |       | 4,456                                  |       | 1,121 |   |
| **Cash, end of period**                                                                    |       | $                                      | 3,160      |   | $ | 7,783 |   |
|                                                                                       |       |                                   |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                     |       |                                   |       |   |   |
| Interest paid                                                                              |       | $                                      | 11         |   | $ | 11 |   |
| **Supplemental disclosure of  non-cash investing and****financing  activities:**           |       |                                   |       |   |   |
| Retirement of treasury shares                                                              |       | $                                      | 203        |   | $ | 102 |   |

 

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**BIDZ.COM, INC.**

**NOTES TO FINANCIAL STATEMENTS FORTHE THREE MONTHS ENDED MARCH 31, 2009 AND 2010**

**(UNAUDITED)**

 

**1.****                                     ****Basis of Presentationand Nature of Business Operations**

 

**Basis of Presentation**

 

The accompanying condensed balance sheet as of December 31,2009, as revised for prior period corrections described in Note 11, which hasbeen derived from audited financial statements, and the unaudited financialstatements included herein have been prepared in accordance with theinstructions to Form 10-Q and do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements.  These financialstatements and related notes should be read in conjunction with the Company’saudited financial statements for the fiscal year ended December 31, 2009filed in the Annual Report on Form 10-K by the Company on March 9,2010 with the Securities and Exchange Commission. In the opinion of management,these financial statements reflect all adjustments, which are of a normalrecurring nature and adjustments to prior periods as described in Note 11, whichare necessary to present fairly the financial position of Bidz.com, Inc.as of March 31, 2010 and the results of operations for the three monthperiods ended March 31, 2009 and 2010 and the cash flows for the threemonth periods ended March 31, 2009 and 2010.  The results ofoperations for the three months ended March 31, 2010 are not necessarilyindicative of the results which may be expected for the entire fiscal year.

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Actual results coulddiffer from those estimates. We have made estimates for sales returns andallowance reserve, inventory reserve, inventory vendor marketing contributionreserves, deferred tax assets and liabilities, and accrued expenses.

 

**Nature of Business Operations**

 

Bidz.com, Inc.was founded in November of 1998 as a California corporation with itsprincipal location of business in Los Angeles, California. In June 2006,we reincorporated in Delaware, and with our principle location of business inLos Angeles. We operate websites located at www.bidz.com and www.buyz.com forthe purpose of selling merchandise, utilizing our unique sales auction andfixed price platforms, and www.modnique.com for online retailing of designerproducts, entertainment tickets, travel, and other consumer goods.

 

We sell our products throughout the United States andhave expanded the reach of our customer base to Europe and Asia. Revenuegenerated from the United States accounted for approximately 69.7% and 62.1% ofnet revenue for the three months ended March 31, 2009 and 2010,respectively.

 

**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.

 

On February 26,2010, the plaintiff in the case titled “Marla Tidenberg v. Bidz.com, Inc.”accepted our offer topay her Twenty Thousand Dollars in exchange for a dismissal of her case withprejudice. Earlier, the United States District Court for the Central District ofCalifornia denied the Plaintiff’s Motion for Class Certification and forAppointment of Class Representative and Class Counsel. The lawsuitalleged, among other things, that the Company engaged in unfair businesspractices by misrepresenting the value of its merchandise and by “false” orshill bidding.

 

In a notice dated April 2, 2010, the Federal Trade Commission (“FTC”)decided not to recommend enforcement action against us in response to a Civil Investigative Demand forinformation received in May 2009 from the FTC relating to email marketingpractices.

 

On April 2,2010, we appointed Peter G. Hanelt to the position of Chairman of our Board ofDirectors. David Zinberg will continue to serve on our Board of Directors andremain Chief Executive Officer.

 

On April 2,2010, we terminated our $25 million revolving credit line with Bank of America.

 

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**Recent Accounting Pronouncements**

 

In February 2010,the FASB issued an update on Subsequent Events related to Amendments to CertainRecognition and Disclosure Requirements. SEC filers are required to evaluate subsequent events through the datethe financial statements are issued, and they are no longer required to disclosethe date through which subsequent events have been evaluated. This update iseffective upon issuance.   Implementationof this standard did not have a material impact on our financial position andresults of operations.

 

**2.****            ****Earnings per Common Share**

 

Thebasic earnings per common share is calculated by dividing net income availableto common stockholders less preferred dividends by the weighted average numberof common shares outstanding. Diluted earnings per common share is computedsimilarly to basic earnings per common share, except that the denominator isincreased to include the number of additional common shares that would havebeen outstanding if potential common shares had been issued and if theadditional common shares were not anti-dilutive.

 

Thedilutive effect of outstanding stock options is reflected in diluted earningsper share by application of the treasury stock method including the impact ofpro forma deferred tax benefits for the three month periods ending March 31,2009 and 2010.  The following table sets forth the computation of basicand diluted net income per share.

 

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

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                         | ** ** | **2010** | ** ** |
|                                    |       |                                             |       |   |   |
| Basic and diluted net income per share: |       |                                             |       |   |   |
| Numerator:                              |       |                                             |       |   |   |
| Net income (loss)                       |       | $                                                | 1,508      |   | $ | (111 | ) |
| Denominator:                            |       |                                             |       |   |   |
| Weighted common shares outstanding      |       | 22,898,532                                       |       | 21,949,359 |   |
| Effect of dilutive securities           |       | —                                           |       | — |   |
| Denominator for diluted calculation     |       | 22,898,532                                       |       | 21,949,359 |   |
| Net income (loss) per share, basic      |       | $                                                | 0.07       |   | $ | (0.01 | ) |
| Net income (loss) per share, diluted    |       | $                                                | 0.07       |   | $ | (0.01 | ) |

 

Therewas no dilutive effect from outstanding stock options for the three monthperiod ended March 31, 2009 and 2010 as all the stock options outstandingat period end were “out of the money” and are anti-dilutive.

 

**3**.             **Inventories**

 

Inventories, which arepledged as collateral for our revolving line of credit until April 2,2010, consist of the following *(in thousands)*as of:

 
| ** **                              | ** ** | **December 31, 2009** | ** ** | **March 31, 2010 (unaudited)** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | ** **                      | ** ** | ** **                                    | ** ** |
| Fine jewelry, watches and other         |       | $                               | 40,228     |                                          | $          | 32,350 |   |
| Loose diamonds and semi-precious stones |       | 279                             |       | 289                                           |       |
| Prepaid inventory                       |       | 1,784                           |       | 15                                            |       |
| Inventory with manufacturing vendors    |       | 437                             |       | 261                                           |       |
| Product inventories                     |       | 42,728                          |       | 32,915                                        |       |
| Less: Inventory reserve                 |       | (1,767                          | )          | (1,536                                        | )          |
|                                    |       | $                               | 40,961     |                                          | $          | 31,379 |   |

 

**4.             RevolvingCredit Line**

 

In July 2006, we entered into a revolvingcredit line agreement with LaSalle Bank, wholly owned by Bank of America, toprovide working capital financing secured by inventories and tangible assets.The agreement allowed for us to initially draw on a line of credit up to $10million. During the three month period ended March 31, 2008 wesuccessfully increased the limit to $25 million. The revolving credit lineagreement was set to expire in July of 2010. We terminated the revolvingcredit line on April 2, 2010. As of 

 

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March 31,2010, there was no outstanding balance under the revolving credit line. Underthe terms and conditions of the revolving credit line agreement, the Company issubject to certain restrictive covenants for which it is in compliance at March 31,2010.

 

**5.****            ****StockBased Compensation**

 

We recognize in our financial statements the costresulting from all share-based payment transactions to employees, includinggrants of stock options and restricted stocks based on their fair values. Wehave used the Black-Scholes model to estimate the fair value of options. Ourassessment of the estimated compensation charges will be affected by our stockprice as well as assumption regarding a number of subjective variables and therelated tax impact. These variables include, but are not limited to, our stockprice volatility, forfeiture rates and employee stock option exercise behaviors(or expected term).

 

We arealso 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 a tax benefit or tax deficiency for such award.We then compare the fair value expense to the tax deduction received for eachgrant and aggregate the benefits and deficiencies to establish and maintain theAPIC Pool.  We group the excess tax benefits from both employee andnonemployee awards into a single APIC pool. During the three months ended March 31, 2009 and 2010, werecognized income tax expense of $72,000 and $89,000, respectively for APICshortfalls.

 

**Restricted Shares**

 

The restricted stock awards are expensed pro rataover the vesting period based upon the market value of the awards at the timeof grant. Stock-based compensation from restricted stock awards totaled $81,000and $241,000 for the three months ended March 31, 2009 and 2010,respectively. The unamortized stock-based expense for restricted stock awardswas $2.4 million at March 31, 2010.

 

A summary of all restricted stock activity duringthe three months ended March 31, 2010 is as follows:

 
| Restricted shares outstanding, December 31,  2009 |   | 738,225 |   |
|--------------------------------------------------------|--------|---------|--------|
| Shares granted                                         |   | —  |   |
| Shares vested                                          |   | (27,500 | )      |
| Shares forfeited                                       |   | (10,000 | )      |
| Restricted shares outstanding, March 31, 2010     |   | 700,725 |   |

 

**StockOptions**

 

We adopted our 2001 Stock Option Plan, our 2002Special Stock Option Plan and our 2006 Award Plan (collectively, the ‘‘Plans’’),in January 2001, January 2002, and March 2006, respectively. The2006 Plan provides for the granting of awards in the form of incentive stockoptions, nonqualified stock options, stock appreciation rights, shares ofrestricted common stock, bonus stock in lieu of obligations, or otherstock-based awards to employees, directors, and independent contractors whoprovide valuable services to our company.  The vesting requirements,performance thresholds and other terms and conditions of options granted underthe Plans will be determined by our Compensation Committee and Board ofDirectors.

 

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The following is a summary of stock option activity asof March 31, 2010, and changes during the three months ended March 31,2010.

 
| **Options**                                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price ($)** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value ($)** | ** ** |
|-----------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|
| Outstanding at December 31, 2009         |       | 6,933,000  |       | 6.08                                             |       | 1.38                                                     |       | 0.00                                     |       |
| Granted                                       |       | 154,000    |       | 6.26                                             |       |                                                     |       |                                     |       |
| Exercised                                     |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Forfeited                                     |       | 154,000    |       | 6.26                                             |       |                                                     |       |                                     |       |
| Expired                                       |       | 60,000     |       | 6.00                                             |       |                                                     |       |                                     |       |
| Outstanding at March 31, 2010            |       | 6,873,000  |       | 6.09                                             |       | 1.14                                                     |       | 0.00                                     |       |
| Vested and Exercisable at March 31, 2010 |       | 6,873,000  |       | 6.09                                             |       | 1.14                                                     |       | 0.00                                     |       |

 

Thefollowing table summarizes information about stock options outstanding andexercisable at March 31, 2010.

 
| ** **                              | ** ** | ** ** | ** ** | ** **                         | ** ** | **Options outstanding and exercisable  as of March 31, 2010** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **                         | ** ** | **Options outstanding**                                                                     | ** ** | **Options exercisable** | ** ** |
| **Range of  exercise prices** | ** ** | ** ** | ** ** | **Number  outstanding  3/31/2010** | ** ** | **Weighted  average  remaining  contractual**                                                    | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  exercisable  3/31/2010** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **                         | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $                                       | 6.00       |       | $          | 6.00                               |       | 6,486,000                                                                                        |       | 1.11 |   | $ | 6.00 |   | 6,486,000 |   | $ | 6.00 |   |
| $                                       | 6.26       |       | $          | 6.26                               |       | 154,000                                                                                          |       | 0.92 |   | $ | 6.26 |   | 154,000 |   | $ | 6.26 |   |
| $                                       | 6.50       |       | $          | 6.50                               |       | 105,500                                                                                          |       | 1.77 |   | $ | 6.50 |   | 105,500 |   | $ | 6.50 |   |
| $                                       | 9.90       |       | $          | 9.90                               |       | 127,500                                                                                          |       | 2.21 |   | $ | 9.90 |   | 127,500 |   | $ | 9.90 |   |
| $                                       | 6.00       |       | $          | 9.90                               |       | 6,873,000                                                                                        |       | 1.14 |   | $ | 6.09 |   | 6,873,000 |   | $ | 6.09 |   |

 

Stock-basedcompensation expense from stock options for the three months ended March 31,2009 and 2010 amounted to $30,000 and $21,000, respectively. The unamortizedstock-based compensation expense from stock options as of March 31, 2010is $5,000 and 154,000 stock options were granted in the three months ended March 31,2010 when it was determined that the purchase of stock by employees with anonrecourse loan from us is effectively the same as granting a stock option — (asdescribed in Note 11).

 

**6.****                                     ****Segment Information**

 

Net revenue by geographic area is presented based uponthe country of destination. No foreign country represented 10% or more of netrevenue for three-month periods ended March 31, 2009 and 2010. Net revenueby geographic area was as follows:

 

*(inthousands, except percentage data)*

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** |
| ** **               | ** ** | **2009**                         | ** ** | **2010** | ** ** |
| **Geographic area** | ** ** | **Amount**                       | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States            |       | $                                | 21,723     |   | 69.7 | % | $ | 17,494 |   | 62.1 | % |
| International            |       | 9,454                            |       | 30.3 | % | 10,695 |   | 37.9 | % |
|                     |       |                             |       |   |   |   |   |   |   |
| Total                    |       | $                                | 31,177     |   | 100.0 | % | $ | 28,189 |   | 100.0 | % |

 

**7.****                                     ****Concentrations**

 

Purchasesfrom two vendors amounted to $3.8 million and $2.7 million representing 17.4%and 21.7% of the total purchases during the three months ended March 31,2009 and 2010, respectively. Outstanding accounts payable to the two vendorstotaled $2.9 million and $1.0 million****as of December 31,2009 and March 31, 2010, respectively. Loss of either of thesevendors is not expected to have a significant negative impact on the operationsof the Company.

 

**8.****                                     ****Related PartyTransaction**

 

During the three monthsended March 31, 2009 and 2010, we purchased approximately 3.5% and 13.2%,respectively, of our 

 

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merchandise from LA Jewelers, Inc.,where one of its managers is a stockholder whobeneficially owns approximately 5.7% of our outstanding common stock as of March 31,2010. The accounts payable balances due to LA Jewelers were $1.5 million and$1.0 million as of December 31, 2009 and March 31, 2010,respectively.

 

LAJewelers participates in our inventory co-op marketing program. For the threemonths ended March 31, 2009 and 2010, we earned approximately $181,000 and$185,000, respectively from LA Jewelers relating to co-op marketingcontributions and $181,000 was unamortized as of March 31, 2010. The amountsof co-op marketing contributions due from LA Jewelers were $179,000 and$125,000 as of December 31, 2009 and March 31, 2010, 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 threemonths ended March 31, 2009 and 2010, we recognized $19,000 and $89,000,respectively, under this agreement. As of December 31, 2009 and March 31,2010, we have $0 and $11,000, respectively, outstanding under this gross profitmargin guarantee.

 

Duringthe three months ended March 31, 2009 and 2010, we recorded $206,000 and$1.2 million, respectively, in wholesale merchandise sales to a customer thatis owned by Daniella Zinberg, the daughter of our Chief Executive Officer,David Zinberg. There was no accounts receivable due from this customer as of December 31,2009 and March 31, 2010.

 

**9.****             Income Tax**

 

Werecognize the financial statement benefit of a tax position only afterdetermining that the relevant tax authority would more likely than not sustainthe 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.

 

Duringthe quarter ended March 31, 2010, the Company recorded prior period adjustmentsof $424,000 to beginning retained earnings and $390,000 to additional paid-incapital for uncertain tax positions related to prior periods. Prior periodincome tax liabilities were adjusted for $814,000, and include applicableinterest and penalties of $48,000 and $109,000, respectively. The prior periodadjustment is not material to previously issued financial statements (asdescribed in Note 11).

 

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.

 

**10.          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, management does notcurrently have sufficient information to assess the validity of the claims orthe amount of potential damages.  Company management currently believes,however, that resolution of such legal matters will not have a material adverseimpact on the Company’s financial position, results of operations or cashflows.

 

**11.          Revision of PriorPeriod Amounts**

 

Itwas determined during the preparation of the first quarter of 2010 interimfinancial statements, that the purchase of stock by employees with anonrecourse loan from us is effectively the same as granting new stock options.We had granted one year loans to employees in November 2007 to purchase 154,000shares when they exercised their stock options. These loans were extended for15 months in November 2008, and then another year in February 2010. Stock optionexpenses related to the loan extensions are calculated to be $66,000, $680,000and $(60,000) for years 2007, 2008 and 2009, respectively after considering thetax effect and related penalties and interest.

 

Managementhas evaluated the effect of the prior period expenses and determined that theywere immaterial to each of the reporting periods affected and, therefore, amendmentof previously filed reports was not required. However, if the adjustments to correct the cumulative errors had beenrecorded in the first quarter 2010, we believe the impact would have beensignificant to the first quarter and would impact comparisons to prior periods. In accordance with guidelines issued in SECStaff Accounting Bulletin, we have recorded adjustments in the current year’sbeginning retained earnings account to correct these immaterial prior perioderrors.  We have also revised in thecurrent 10-Q filing, and plan to revise in future filings of our 10-Q and 10-K,the previously reported quarterly financial statements for 2009 in our 10-Q andannual financial statements for 2009 and 2008 in our 10-K for these immaterialamounts.

 

Thefollowing table sets forth the cumulative effect on retained earnings of theerror in stock option expenses in prior periods:

 

*(in thousands)*

 
| **Beginning period retained  earnings at January 1, 2010, as previously reported**      |   | $      | 13,432 |   |
|-----------------------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                                    |   |   |   |
| Less: Correction of an error in stock option expense in 2007 (net of  income tax of $0) |   | (66    | )      |
| Correction of an error in  stock option expense in 2008 (net of income tax of $205)     |   | (680   | )      |
| Correction of an error in  stock option expense in 2009 (net of income tax of $219)     |   | 60     |   |
|                                                                                    |   | (686   | )      |
| **Retained earnings at January 1,  2010, as revised**                                   |   | 12,746 |   |
| Net loss for the three  months ended March 31, 2010                                     |   | (111   | )      |
| **Ending period retained earnings  at March 31, 2010**                                  |   | $      | 12,635 |   |

 

Thefollowing table sets forth the revised prior period balances reported in ourcomparative financial statements:

 
| **(in thousands)**                                                                            | ** ** | **Previously  reported** | ** ** | **Adjustment** | ** ** | **Revised** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------|------------|-------------|------------|
| **Balance sheet items at  December 31, 2009:**                                           | ** ** | ** **               | ** ** | ** **     | ** ** | ** **  | ** ** |
| Other current assets                                                                          |       | $                        | 3,774      |           | $          | (814        | )          | $ | 2,960 |   |
| Total current assets                                                                          |       | 49,157                   |       | (814           | )          | 48,343      |       |
| Total assets                                                                                  |       | 51,419                   |       | (814           | )          | 50,605      |       |
| Additional paid in capital                                                                    |       | 20,293                   |       | (436           | )          | 19,857      |       |
| Employee share purchase receivable                                                            |       | (308                     | )          | 308            |       | —      |       |
| Retained earnings                                                                             |       | 13,432                   |       | (686           | )          | 12,746      |       |
| Total stockholders’ equity                                                               |       | 33,439                   |       | (814           | )          | 32,625      |       |
| Liabilities and stockholders’ equity                                                     |       | 51,419                   |       | (814           | )          | 50,605      |       |
| ** **                                                                                    |       |                     |       |           |       |        |       |
| **Statement of operations items  for the three months ended March 31, 2009:**            |       |                     |       |           |       |        |       |
| General and administrative                                                                    |       | 4,861                    |       | (59            | )          | 4,802       |       |
| Total operating expenses                                                                      |       | 7,646                    |       | (59            | )          | 7,587       |       |
| Income from operations                                                                        |       | 2,540                    |       | 59             |       | 2,599       |       |
| Income before income tax expense                                                              |       | 2,531                    |       | 59             |       | 2,590       |       |
| Income tax expense                                                                            |       | 1,016                    |       | 66             |       | 1,082       |       |
| Net income                                                                                    |       | 1,515                    |       | (7             | )          | 1,508       |       |
|                                                                                          |       |                     |       |           |       |        |       |
| **Statement****of****cash  flow****items****for  the three months ended March 31, 2009** |       |                     |       |           |       |        |       |
| Net income                                                                                    |       | 1,515                    |       | (7             | )          | 1,508       |       |
| Impairment in employees share purchase receivable                                             |       | 89                       |       | (89            | )          | —      |       |
| Stock based compensation                                                                      |       | 81                       |       | 30             |       | 111         |       |
| Accounts receivable                                                                           |       | (89                      | )          | 110            |       | 21          |       |
| Other receivable                                                                              |       | (11                      | )          | (107           | )          | (118        | )          |
| Other current assets                                                                          |       | 421                      |       | (282           | )          | 139         |       |
| Accrued expenses                                                                              |       | 114                      |       | 348            |       | 462         |       |
|                                                                                               |            |                          |            |                |            |             |            |  |  |  |

 

**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion should be read in conjunction withthe financial statements and related notes which appear elsewhere in this form.This discussion contains forward-looking statements. Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of various factors, including various risks and uncertaintiesdiscussed below and throughout this report.*

 

**Overview**

 

We are a leading online retailer of jewelry, featuringa live auction format on Bidz.com. We have established our retail brand in theonline marketplace by offering high-quality merchandise, a unique user-friendlyshopping experience, and the opportunity for buyers to achieve significant costsavings versus traditional retail channels. A key to our success has been ourability to efficiently and cost effectively source closeout and jewelry,watches, accessories and brand name merchandise, and rapidly respond tochanging consumer demands for our merchandise. We offer our products through acontinuous live format, featuring a $1 minimum opening bid, and a unique15-second auction extension period that allows our auctions to continue untilall bids are received. On select auctions we maintain a reserve price that mustbe met before a sale will be consummated. In 2009, we began offering auctionswith a minimum opening bid that is higher than $1. The majority of our auctionsare short-term, often lasting less than one hour, providing immediategratification to our customers and encouraging frequent visits and activeviewing of our website.

 

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 

 

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jewelrybased on revenue and the largest online jewelry auction site based on webtraffic.

 

In addition to ourauction site we have retail sites that offer similar items of merchandise asthose listed for auction, as well as other designer products and consumergoods.  Buyz.com, the fixed price site ofjewelry, provides us access to different types of consumers.  We plan to offer customers the ability todesign their own jewelry including diamond earrings and rings in the nearfuture, and may also sell inventory that is held by our suppliers using a justin time ordering or drop ship model. Modnique.com, the online retail site of designer products and consumergoods, provides a private sale concept that only sells to invited members. Weplan to negotiate favorable deals with designers and manufacturers, includingpurchasing inventory from recognizable brand names at deep discounts to attractcustomers that are fashion forward as well as cost conscious.

 

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, which assuresour customers of the quality of their purchases of our products. We operate ina highly competitive market with low barriers to entry. By selling our ownmerchandise, we provide a buying environment in which we minimize fraudulentactivity and questionable product quality frequently associated with purchasetransactions from third-party sellers. We also provide a 15-day return policyon all merchandise. We believe that many of our customers resell merchandisethat they purchase from our auctions on eBay, at local auctions, and throughother retail channels. Our auctions and fixed price sales are conducted24 hours a day, seven days a week. We also offer 24-hour telephonecustomer support and online live-help as well e-mail customer support.

 

**Critical Accounting Policies**

 

Thepreparation of our financial statements requires us to make certain estimatesand judgments that affect amounts reported and disclosed in our financialstatements and related notes. We base our estimates on historical experience andon other assumptions that we believe to be reasonable under the circumstances.Actual results may differ from these estimates. The following are the criticalaccounting policies that we believe require significant estimation andjudgment.

 

*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.

 

For online sales through our websites, 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.

 

In theStatements of Income (Operations) all amounts billed to customers by us relatedto shipping and handling are included in “Net revenue” and our shipping costsare included 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.

 

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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 purchased productsbecause 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 and referral credits given to customers through our “refer a friend”program.

 

Outboundshipping costs on merchandise sales totaled $1.7 million and $1.5 millionin the three months ended March 31, 2009 and 2010, respectively.

 

*Returns and Allowances Reserve*

 

We estimate potentialfuture product returns and charge-backs related to current period revenue. Weanalyze historical returns, and changes in customer demand and acceptance ofour products when evaluating the adequacy of the sales returns reserve andother allowances in any accounting period. If actual returns are greater thanour estimates, we will record additional returns and allowances in addition toour estimates, which will result in lower net revenue recorded during thatperiod.  Reserves for returns andcharge-backs are included 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.  We provide reserves against our inventorybased on the estimated difference between the average selling price and thecost of inventory. We also provide reserves for obsolescence and slow movinginventory.

 

*Inventory Co-op Marketing Contributions*

 

Webill and collect from our inventory vendors co-op marketing contributions as anincentive for us to market and sell their merchandise on the Bidz website. Weaccount for the co-op marketing contributions that cannot be identifiedspecifically to benefit the vendors as a reduction in the cost of inventorypurchased and cost of sales. We cannot specifically identify the benefits toeach vendor, and consequently, co-op marketing contributions are chargedagainst inventory as a reduction of costs and amortized as a reduction of costof sales. For the three months ended March 31, 2009 and 2010, we haverecognized $2.3 million and $2.0 million of co-op marketing contributions,respectively. Approximately $3.5 million remain unamortized and is included asan offset to inventory at March 31, 2010. Receivable from vendors forco-op marketing contributions, less allowance for doubtful accounts, isincluded in other current assets and amounted to $1.2 million at March 31,2010.

 

*Descriptionof Our Revenue, Costs, and Expenses*

 

Thefollowing table presents our historical results of operations for the periodsindicated as a percentage of net revenue.

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                         | ** ** | **2010** | ** ** |
|                                 |       |                                             |       |   |   |
| Net revenue                          |       | 100.0                                            | %          | 100.0 | % |
| Gross profit                         |       | 32.7                                             |       | 25.5 |   |
| Operating expenses:                  |       |                                             |       |   |   |
| General & administrative    |       | 15.4                                             |       | 19.2 |   |
| Sales & marketing           |       | 8.4                                              |       | 5.6 |   |
| Depreciation & amortization |       | 0.6                                              |       | 0.8 |   |
| Total operating expenses             |       | 24.4                                             |       | 25.6 |   |
| Income (loss) from operations        |       | 8.3                                              |       | (0.1 | ) |
| Interest income                      |       | 0.0                                              |       | 0.0 |   |
| Interest expense                     |       | 0.0                                              |       | 0.0 |   |
| Income tax expense                   |       | 3.5                                              |       | 0.3 |   |
| Net income (loss)                    |       | 4.8                                              | %          | (0.4 | )% |

 

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*Net Revenue*

 

Substantiallyall of our net revenue consists of jewelry, accessories, and consumer productssold via the Internet, net of returns. We also generate net revenue fromwholesale merchandise sales that is not online, shipping and handling, auctiontransaction fee and other revenue.

 

Thefollowing table presents our sources of revenue for the periods indicated as apercentage of net revenue.

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                         | ** ** | **2010** | ** ** |
| ** **                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Merchandise sales            |       | 85.8                                             | %          | 85.5 | % |
| Wholesale merchandise sales  |       | 0.7                                              |       | 5.8 |   |
| Shipping & handling |       | 10.2                                             |       | 5.6 |   |
| Transaction fees             |       | 3.0                                              |       | 2.8 |   |
| Commissions                  |       | 0.3                                              |       | 0.3 |   |
| Total net revenue            |       | 100.0                                            | %          | 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 net of amortized co-op marketingcontributions from vendors, inbound and outbound shipping costs, packaging andshipping supplies, insurance on shipments, product repair and service costs,and credit card and other transaction 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 restricted stock awardsto employees and directors.

 

*Sales and Marketing Expenses*

 

Our marketing expensesconsist primarily of costs associated with paid website search marketing,online banner marketing, e-mail campaigns, affiliate programs and optimizationservices. These marketing programs, which are designed to drive buyers to ourwebsite, are the most important factors in increasing demand for our jewelryproducts and increasing net revenue.

 

**Comparison of Three Months Ended March 31, 2010 to ThreeMonths Ended March 31, 2009**

 

Netloss in the three months ended March 31, 2010 was $111,000, or $0.01 perbasic and diluted share and net income in the three months ended March 31,2009 was $1.5 million, or $0.07 per basic and diluted share. Net incomedecreased by $1.6 million in the three months ended March 31, 2010compared to the three months ended March 31, 2009.

 

*Net Revenue*

 

Netrevenue decreased 9.6% to $28.2 million in the three months ended March 31,2010 from $31.2 million in the three months ended March 31,2009. Wholesale merchandise sales were $1.6 million in the three monthsended March 31, 2010 compared to $206,000 in the three months ended March 31,2009.

 

The continuing economicweakness resulted in a slowdown in our revenue in the first quarter of 2010compared to the first quarter of 2009. There was an overall decrease in onlinedemand for our jewelry and other merchandise as consumers reduced theirdiscretionary spending. If the economy continues to be weak it will cause anegative effect on our revenue. We anticipate that net revenue will be lowerfor the second and third quarters of 2010 compared to the first quarter as thesecond and third quarters are seasonally weak periods for jewelry sales.

 

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*Gross Profit*

 

Grossprofit decreased 29.4% to $7.2 million in the three months ended March 31,2010 from $10.2 million in the three months ended March 31, 2009. Thedecrease in gross profit resulted from the decrease in sales revenue whichdeclined by 9.6% for the three months ended March 31, 2009 compared to theprior year period and the decrease in gross profit margin to 25.5% in the threemonths ended March 31, 2010 from 32.7% in the prior year period. Grossprofit margin in the three months ended March 31, 2010 was affected by ourfree shipping promotion and weaker demand for our jewelry and othermerchandise.

 

*General and Administrative Expenses*

 

Generaland administrative expense increased 12.7% to $5.4 million in the three monthsended March 31, 2010 from $4.8 million in three months ended March 31,2009. The increase in general and administrative expenses was due to higher overalladministrative expenses and expenses to operate modnique.com. General andadministrative expense as a percentage of net revenue increased to 19.2% in thethree months ended March 31, 2010 from 15.4% in the three months ended March 31,2009 as a result of deleveraging from lower revenue and higher general andadministrative expense.

 

*Sales & Marketing Expenses*

 

Salesand marketing expense decreased 39.1% to $1.6 million in the three months endedMarch 31, 2010 from $2.6 million in the three months ended March 31,2009. Sales and marketing expense as a percentage of net revenue decreased to5.6% in the three months ended March 31, 2010 from 8.4% in the threemonths ended March 31, 2009. Sales and marketing expense was reduced tocontrol our operating expenses and also as a result of lower revenue.

 

*Income Tax Expense*

 

Incometax expense decreased to $75,000 in the three months ended March 31, 2010from $1.1 million in the three months ended March 31, 2009, with effectivetax rates of (208.3)% and 41.8%, respectively. Income tax expense in the threemonths ended March 31, 2010 was adversely affected when we recorded areversal in deferred tax benefit from restricted stock awards that vested inthe quarter at a market value that was substantially lower than the grant datemarket value, since there was no APIC pool to offset this shortfall.

 

**Additional Quarterly Data**

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                         | ** ** | **2010** | ** ** |
|                                   |       |                                             |       |   |   |
| Average gross selling  price per order |       | $                                                | 181        |   | $ | 190 |   |
| Average orders per day                 |       | 2,043                                            |       | 1,713 |   |
| Average items sold per day             |       | 6,110                                            |       | 7,018 |   |
| Acquisition cost per new  buyer        |       | $                                                | 51         |   | $ | 39 |   |
| Number of new buyers                   |       | 51,021                                           |       | 40,501 |   |

 

Wholesalemerchandise sales and modnique.com are excluded in computing additionalquarterly data.

 

**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.

 

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Asof March 31, 2010, we had a working capital surplus of $30.5 million andno long-term debt obligations. Net cash provided by operating activities was $9.8million in the three months ended March 31, 2010 compared to $484,000 inthe three months ended March 31, 2009. Cash in the three months ended March 31,2010 was primarily affected by changes in net income, inventories, othercurrent assets and accounts payable and in the three months ended March 31,2009 was primarily affected by changes in net income, inventories and accountspayable. Our inventories and accounts payable generally increase or decrease inline with changes in our inventory strategy. Our inventory strategy isinfluenced by our ability to secure inventory that we believe will improvesales and/or our gross margins.

 

Werecorded net loss of $111,000 in the three months ended March 31, 2010compared to $1.5 million of net income in the three months ended March 31,2009. In the three months ended March 31, 2010, inventories decreased by$9.8 million, other current assets decreased by $1.8 million and accountspayable decreased by $2.1 million all of which resulted in a net increase inour cash position. In the three months ended March 31, 2009, inventoriesincreased by $1.8 million and accounts payable decreased by $743,000.

 

Netcash used in investing activities was $72,000 in the three months ended March 31,2010 compared to $625,000 in the three months ended March 31, 2009. Duringthe three months ended March 31, 2010 and 2009, cash used for capitalexpenditures of $72,000 and $135,000, respectively, related mainly toacquisition of office and computer equipment, and software. In the three monthsended March 31, 2009, we made a payment of $490,000 for intangible asset.

 

In thethree months ended March 31, 2010, net cash of $3.0 million was used infinancing activities when $2.9 million was used to repay our revolving creditline, and $102,000 was used to repurchase our common stock shares. In the threemonths ended March 31, 2009, net cash of $1.2 million was used infinancing activities when $1.1 million was used to repurchase our common stockshares.

 

Webelieve that cash currently on hand and cash flows from operations will besufficient to continue our operations and to pursue our growth strategy for theforeseeable future. Our future capital requirements will depend on manyfactors, including the rate of our revenue growth; the timing and extent ofspending to enhance our website, network infrastructure, and transactionprocessing systems; the extent of our advertising and marketing programs; thelevels of the inventory we carry; and other factors relating to our business.Enhancement of our website, network infrastructure, and transaction processingsystems may require us to spend significantly more than we have in the past.Moreover, to date our spending in these areas has been lower than industryaverages. We may require additional financing in the future in order toexecute our operating plan and we may not be able to obtain such financing. Wecannot predict whether this additional financing will be in the form ofequity, debt, or a combination of debt and equity.

 

**Lease Obligations**

 

Thefollowing table presents our contractual obligations at March 31, 2010,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                   |       | $                 | 3,606      |                            | $          | 1,536                       |       | $                           | 2,070      |                    | $          | — |   | $ | — |   |
| Equipment lease                  |       | 137               |       | 51                              |       | 86                          |       | —                      |       | —                  |       |
|                             |       | $                 | 3,743      |                            | $          | 1,587                       |       | $                           | 2,156      |                    | $          | — |   | $ | — |   |

 

We areobligated for the lease of our office and warehouse space. We leased a 50,000square-foot office and warehouse and a separate 12,000 square-foot warehousespace in Culver City, California. The leases expire in June 2012 and August 2012,respectively. In November 2009, we leased a 26,000 square-foot office andwarehouse space in Marina Del Rey, California. The lease expires in October 2012.

 

**Reclassification**

 

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

 

**ITEM 3 - QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

Marketrisk represents the risk of loss arising from adverse changes in market ratesand foreign exchange rates. We do not believe that a change in market interestrates would have a material effect on our results of operations or financialcondition. Although we derive a portion of our sales outside of the UnitedStates, all of our sales are denominated in U.S. dollars. We have limitedexposure to financial market risks, including changes in interest rates andforeign currency exchange rates.

 

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**ITEM 4 - CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we evaluated the effectiveness of the design andoperation of our disclosure 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 ofManagement on Internal Control over Financial Reporting***

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as defined in Rule 13a-15(f) of the 1934 Act. Our internalcontrol over financial reporting is designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles in the United States. Internal control overfinancial 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.

 

Weassessed the effectiveness of our internal control over financial reporting asof March 31, 2010, using the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control— Integrated Framework. Duringthe first quarter 2010, we continue to have certain control deficiencies thatrepresent material weaknesses identified during the fourth quarter 2009 as aresult, primarily, of the conversion from our internally developed proprietarylegacy operating system to a Microsoft Dynamics AX ERP system. These controldeficiencies related to: (i) maintaining an effective control environmentat the entity level specifically in having adequate processes related to theconversion of the Company’s operating system to the Microsoft AX ERP system andin executing a Company-wide risk assessment program related to the conversionprocess; (ii) maintaining an effective control environment overInformation 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 andreports. As a result of the foregoing, management concluded that theCompany’s internal control over financial reporting as of March 31, 2010was 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 March 31,2010. These procedures included additional analyses and review of the inventoryprocesses and related balances to fairly state inventory and the associatedcost of goods sold in the three month period ended March 31, 2010.Additionally, we performed multiple levels of review within the financialstatement close process.

 

***Changes inInternal Control over Financial Reporting***

 

Other than as described above, there were no changesin our internal control over financial reporting (as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934) during the three month period ended March 31,2010, that our certifying officers concluded could materially affect ourinternal control over financial reporting.

 

To address the material weaknesses described above,management has implemented a remediation program, which has been approved byour Audit Committee.  We implemented theremediation program in the fourth quarter of 2009 and first quarter of 2010,and anticipate that we will continue implementation of the program in thesecond quarter of 2010 and beyond.  Wehired an IT internal controls consultant in the first quarter of 2010 as partof our remediation program.

 

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***Limitations on Controls***

 

Management does not expect that our disclosurecontrols and procedures or our internal control over financial reporting willprevent or detect all error and fraud. Any control system, no matter how welldesigned and operated, is based upon certain assumptions and can provide onlyreasonable, not absolute, assurance that its objectives will be met. Further,no evaluation of controls can provide absolute assurance that misstatements dueto error or fraud will not occur or that all control issues and instances offraud, if any, within the Company have been detected. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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.

 

In May 2009, the Companyreceived a Civil Investigative Demand for information from the Federal TradeCommission (“FTC”) relating to email marketing practices. We have been cooperating fully with the FTC regarding thismatter, and on April 2, 2010, we received notice that the FTC has decidednot to recommend enforcement action against us.

 

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.  On March 20, 2010, the Court took undersubmission the Company’s Motion to Dismiss the case and has not yet rendered adecision.  We believe that the lawsuitsare meritless and 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) (the“State Derivative Action”); Farris Hassan v. Bidz.com, Inc., et al.,cv09-04984 (CBM) (C.D. Cal.; filed on July 10, 2009)) (a similar complaintwas by David Hughes on August 18, 2009) (the “Federal Derivative Action”).  The Complaints allege 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.  Amended complaints in both actions alsoinclude allegations relating to the Company’s co-op marketing contributions andminimum gross profit guarantees.  Webelieve that the lawsuits are meritless and intend to defend the casesvigorously.

 

OnApril 27, 2010, the Court in the Federal Derivative Action granted theCompany’s Motion to Dismiss and ordered the action dismissed with prejudiceunless the plaintiffs file an amended complaint by May 18, 2010.

 

OnFebruary 26, 2010, the Court in the State Derivate Action granted the Company’sMotion to Dismiss the plaintiff’s complaint and allowed the plaintiff leave toamend its complaint.  In response, onApril 9, 2010, counsel to Bahram Akhavan, the plaintiff in the State DerivativeAction, made a demand to inspect certain books and records of the Companypursuant to Section 220 of the Delaware General Corporation Law.  On April 15, 2010, the Company responded toMr. Akhavan’s request, declining to permit inspection of the requesteddocuments on the grounds, among other reasons, that the request lacked a properpurpose under Delaware law.  On May 5,2010, Mr. Akhavan filed an action in the Delaware Court of Chancery to compelthe Company to permit inspection of the requested documents.  The Company intends to respond and defendthis action vigorously.

 

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, The TerritoryAhead, Inc., QVC, Inc., Shutterfly, Inc., Victoria’s SecretStores Brand Management, Inc., Victoria’s Secret Direct Brand Management,LLC, VistaPrint, Ltd., and VistaPrint USA, Inc. cv6:09-CV-274). TheComplaint alleges that defendants’ ecommerce sites infringe one or more patentsheld by the plaintiff.   The Plaintiffseeks a judgment that its patents are not invalid and enforceable, apreliminary and permanent injunction against infringement of the patents,damages (including treble damages) and attorneys fees. We believe that thelawsuit is meritless and intend to defend the case vigorously.

 

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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.

 

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 1.A. 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 Quarterly Report on Form 10-Q, 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 thisQuarterlyy Report on Form 10-Q or when made and we undertake no duty orobligation to update or revise our forward-looking statements, whether as aresult of new information, future events, or otherwise. Although we believethat the expectations, 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 that ourstockholders and prospective investors should consider include, but are notlimited to, the following:*

 

***Adverse domestic and globaleconomic conditions or the perception of said conditions may have adverseeffects on our growth and operating results***

 

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 be weak 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 adverse worldwide economic conditions,and the current uncertainty in the outlook for the global economy makes it morelikely that our actual results will differ materially from expectations.***

 

Global financial markets have beenexperiencing extreme disruptions in recent 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 ourindustry, or in the jewelry market. These and other economic factors have hadand may continue to have a material adverse effect on demand for our jewelryproducts and on our financial condition and operating results.

 

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

 

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***condition.***

 

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

 

·          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

·          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 new product categories in modnique that are not acceptedby consumers, the Bidz.com brand and reputation could be adversely affected,our net sales may fall short of expectations and we may incur substantialexpenses that are not offset by increased net sales. Introduction and expansionof new product lines may also strain our management and operational 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 currenteconomic uncertainties, including with respect to global capital and creditmarkets and overall economic growth, we may find it more difficult or expensiveto secure additional capital or credit to pursue actions we would considerbeneficial to us or our shareholders. We have terminated, on April 2,2010, a revolving line of credit with Bank of America (formerly LaSalle Bank).If we are unable to obtain alternative financing from another lender or lendersin the future, on terms that are acceptable to us, our business, ability tocontinue operations and financial condition could be adversely impacted.

 

***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 or anticipated changes in our operatingresults,

 

·                  our stock is subject to short selling and may causetrading in our common stock to be volatile,

 

·                  our stock is subject to margin calls and may causetrading in our common stock to be volatile,

 

·                  changes in research analysts’ recommendations orestimates of financial performance,

 

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

 

·                  announcements of significant contracts, companydevelopments, commercial relationships, banking credit facilities, capitalcommitments, acquisitions or joint ventures,

 

·                  issuance of additional shares of common stock or othersecurities, and

 

·                  intellectual property 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 1, Legal Proceedings, above.

 

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***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 March 31, 2010, wehave repurchased 3.4 million shares for a total of approximately$18.5 million. Our board of directors authorized the repurchase of up to$33.5 million of our common stock and a total of $15.0 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 actionsuits and derivative suits are often brought against companies followingperiods of volatility in the market price of their securities, such as weexperienced at the end of 2007. Defending against these suits, even ifmeritless, can result in substantial costs to us and could divert the attentionof our management. See Item 1, Legal Proceedings, 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 quarterly reportson Form 10-Q. In addition, the independent registered public accountingfirm auditing the company’s financial statements must attest to and report onour assessment of the effectiveness of the internal controls over financialreporting. While we are consistently working on improvements and conductingrigorous reviews of our internal controls over financial reporting, ourindependent auditors may interpret Section 404 requirements and applyrelated rules and regulations differently. If our independent auditors arenot satisfied with our internal control over financial reporting or with thelevel at which it is documented, operated or reviewed, they may decline toattest to management’s assessment or issue a qualified report. Additionally, ifwe are not able to meet all the requirements of Section 404 in a timelymanner or with adequate compliance, we might be subject to sanctions orinvestigation by regulatory authorities, such as the Securities and ExchangeCommission.

 

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 March 31,2010.  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 March 31, 2010 and through the date of this report. See discussionincluded in Item 4 “Controls and Procedures” above for additional informationregarding our disclosure controls and internal control over financialreporting.

 

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 second 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.

 

***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 brandedmerchandise from third party vendors and are relying on their licensingagreements with the brand owners. In the event that a third party vendormisrepresents its licensing rights, we are vulnerable to complaints or claimsof infringement on intellectual property rights and could be subject to legalproceedings and/or barred from selling the affected merchandise. If the thirdparty vendor does not have the ability to take financial responsibility overthe infringement our results of operations could be adversely affected.

 

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***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 the investigationwill adversely affect management, our results of operations or our financialposition. Until the investigation is concluded, however, it is difficult toassess 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 the satisfactoryavailability, 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 which winningbidders do not complete their purchases could adversely affect our results ofoperations.

 

***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 andadversely affected 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 ourability to increase the popularity of our website, and we may not be able to doso effectively.***

 

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 quantity of high-quality products atattractive prices in a convenient manner. Promoting our website will require usto increase our marketing budget and otherwise increase our financialcommitment to creating and maintaining brand loyalty among users. Brandpromotion activities may not yield increased revenue, and even if they do, anyincreased revenue may not offset the expenses we incur in building our websitepopularity and our brand. If we do attract new users to our website, they maynot conduct transactions on a frequent basis or in sufficient dollar amounts.If we fail to promote and maintain our website or incur substantial expenses inan unsuccessful attempt to promote and maintain our brand, our business wouldbe harmed.

 

***We anticipate expanding ourinternational sales activities, causing our business to become increasinglysusceptible to numerous risks that could affect our profitability.***

 

Inthe three months period ended March 31, 2009 and 2010, 30.3% and 37.9%,respectively, of our net revenue was generated by shipments to customersoutside of the United States. We plan, over time, to expand our reach intointernational markets. We do not, however, currently have any overseasfulfillment, distribution, or server facilities. We cannot be certain that wewill be able to expand our global presence. In addition, there are certainrisks associated with doing business on an international basis, includingregulatory 

 

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requirements,legal uncertainty regarding liability, tariffs, and other trade barriers,longer payment cycles, and potentially adverse tax consequences, any of whichcould adversely affect our business. Although our foreign sales historicallyhave been denominated in U.S. dollars, we also may be subject to increasedrisks relating to foreign currency exchange rate fluctuations to the extent wedecide to denominate our sales in foreign currencies.

 

***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 a result, we do nothave a guaranteed supply of jewelry products at favorable prices. Our inabilityto maintain and expand our jewelry supply relationships or the inability of oursuppliers to continue to supply us with jewelry products at favorable priceswould substantially harm our business and results of 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 17.4% and 21.7% of our total purchases in the threemonth period ended March 31, 2009 and 2010, respectively.

 

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

 

We maybe at risk of loss for the diamonds, precious and semi-precious gems that wehave 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.

 

***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

 

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competitivepressures. Furthermore, attempts have been made in the past to develop andmarket synthetic stones and gems to compete in the market for gemstones andgemstone jewelry. We expect such efforts to continue in the future. If any suchefforts are successful in creating widespread demand for synthetic oralternative gemstone products, demand and price levels for our products coulddecline and our business and results of operations would be substantiallyharmed.

 

***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 thesale of our products could result in substantial tax liabilities for past andfuture sales, discourage customers from purchasing products from us, decreaseour ability to compete with traditional retailers, and otherwise substantiallyharm our business, financial condition, and results of operations.

 

***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 andsubstantially harm 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 

 

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productsfor more 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 fulfillmentperformance, and lower net revenue as well as negative publicity and damage toour reputation. In order to remain competitive, we must continually seek toimprove and 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-locationfacility, 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 secure transmissionof confidential information over public networks. Third parties may have thetechnology or expertise to breach the security of customer transaction data.Our security measures may not prevent security breaches that could result insubstantial harm to our business and results of operations and damage to ourreputation. Currently, a majority of our sales are billed to our customers’credit card accounts directly. Under current credit card practices, we areliable 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 interruptions in ouroperations. Any such compromise of our security could damage our reputation andbrand and expose us to a risk of loss or litigation and possible liability,which would substantially harm our business and results of operations.

 

Inaddition, the Payment Card Industry (PCI) imposes strict customer credit carddata security standards that require us to provide quarterly self assessmentsto ensure that credit card information of our customers are protected. Failureto meet the PCI data security standards could result in substantial finesand/or loss of the right to collect credit card payments. The loss of creditcard activity 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’ 

 

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creditcard information to date, as new discoveries in the field of cryptography andadvances in computer capabilities occur, our security measures may noteffectively prevent others from obtaining improper access to our customerinformation. In addition, third parties may target our customers directly withfraudulent identity theft schemes designed to appear as legitimate e-mails fromus. In March 2006, one such third party attempted to solicit customer informationthrough a tactic, commonly known as “phishing,” whereby an e-mail purporting tobe from us solicited customer information from recipients of the e-mail. Anysuch security breach or fraud perpetrated on our customers could expose us toincreased costs and could harm our business and results of operations.

 

***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 reduce thelevel 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, Californiaand at our warehouse in Marina Del Rey, California. Consequently, ourmerchandise supply is vulnerable to fire, flood, earthquakes, and similarevents that may impact our facility. Any damage to or loss of all or asignificant portion of our inventory could cause significant delays in shipmentof goods to our customers, resulting in negative publicity about and diminishedcustomer confidence in our website. In addition, we may experience theft of ourproducts while they are being held in inventory or during the course of theirshipment to our customers by third-party carriers. We have implemented securitymeasures to prevent such theft and maintain insurance to cover losses resultingfrom theft. Nevertheless, we could incur significant losses from theft, whichwould substantially harm our business and results of operations, if oursecurity measures fail, losses exceed our insurance coverage, or we are notable to maintain insurance at a reasonable cost.

 

***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 

 

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throughsales in a timely 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 withexpenses in a given period, which would substantially harm our business andresults of operations.

 

***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 items listed on our website. Compare pricesare not meant to reflect fair market values or manufacturer suggested retailprices, and in fact, may be higher than prices found in local retail stores. Asa consequence, perceived misrepresentations in item descriptions bydisappointed buyers may occur, resulting in negative publicity about anddiminished customer confidence in our website.

 

***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 an anti-moneylaundering program to guard against both illicit purchase and sales activities.If these risks were to occur, we may face a negative public reaction to ourbrand name resulting in loss of sales.

 

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***We may not be able to maintain our domain name uniqueness.***

 

Our Internet domain name is critical to oursuccess. Under current domain name registration practices, no other entity canobtain an identical domain name, but can obtain a similar name or the identicalname with a different suffix, such as “.net” or “.org,” or with a differentcountry designation, such as “jp” for Japan. We have not registered our domainname with different suffixes nor have we registered our name in any otherjurisdiction. As a result, third parties may use domain names that are similarto our domain name, which may result in confusion to potential customers andlost sales. We are aware that other businesses have registered the name “bidz”with other suffixes and in other 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 include the Federal Trade CommissionAct, the CAN-SPAM Act of 2003, the Children’s Online Privacy Protection Act,the Fair Credit Reporting Act, the Homeland Security Act, and relatedregulations. In May 2009, we received a Civil Investigation Demand forInformation from the Federal Trade Commissioner (“FTC”) relating to emailmarketing practices. We have been cooperating fully with the FTC regarding thismatter, and in a notice dated April 2, 2010, FTC has decided not to recommendenforcement action against us. Several states have proposed legislation thatwould limit 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, obtain consentfrom users for collection and use of personal information, and/or provide userswith the ability to access, correct, and delete personal information stored bycompanies. These regulations and other laws, rules, and regulations enacted inthe future may adversely affect our ability to collect, disseminate, or sharedemographic and personal information about users and our ability to e-mail ortelephone users, which could be costly and adversely affect our marketingefforts**.**

 

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***We may be subject to regulations governing the conduct and liability ofauctioneers, which could affect the way in which we conduct our business orotherwise increase our cost of doing business.***

 

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 withrespect to matters within the scope of FCRA, but remain subject to the otherprovisions of 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 laws andregulations 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 are available. Our failure to qualify as aforeign corporation in a jurisdiction in which we are required to do so couldsubject us to penalties. Any new legislation or regulation, or the applicationof laws or regulations from jurisdictions whose laws do not currently apply toour business could have a material adverse affect on our business.

 

***We depend to a very significantextent on David Zinberg, our Chief Executive Officer.***

 

Ourperformance depends substantially upon David Zinberg, our Chief ExecutiveOfficer, who has extensive experience with the purchase and sale of jewelry. Werely on Mr. Zinberg to make critical operational decisions on a dailybasis, such as product offerings and purchases, and to make key strategicplans. We have an employment agreement with Mr. Zinberg extending through July 2010and renewable annually. The loss of the services of Mr. Zinberg wouldadversely affect our business and operations.

 

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***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 state authorities,but they were not so licensed. In such situations, a number of remedies may beavailable to regulatory authorities and the investors who purchased commonstock in those offerings, including a right of rescission, civil penalties, arestraining order or injunction, and a court order to pay restitution andcosts. We believe, however, that as to any options by investors at this time orin the future, applicable statutes of limitations will mitigate our exposure toany 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 March 31, 2010. Marina Zinberg, our Vice President,who is the sister of David Zinberg, our Chairman and Chief Executive Officer,owns an additional 30.2% of our common stock. As a result, these individuals will have significant influence over ourmanagement and affairs and over all matters requiring stockholder approval,including the election of directors and the approval of significant corporatetransactions, such as a merger or a sale of our company or its assets, for theforeseeable future. This concentrated control will limit the ability of otherstockholders to influence corporate matters. Because of this, we may takeactions that some of our stockholders do not view as beneficial. As a result,the market price of our common stock could be adversely affected becausestockholders may not view favorably the concentration of control in the handsof 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 partyfrom initiating a proxy solicitation or otherwise attempting to obtain controlof our company and may maintain the incumbency of our Board of Directors, asthis structure generally increases the difficulty of, or may delay, replacing amajority of directors. The Delaware bylaws authorize our Board of Directors tofill vacancies or newly created directorships. A majority of the directors thenin office may elect a successor to fill any vacancies or newly createddirectorships.

 

**ITEM 2. UNREGISTERED SALES AND PURCHASES OF EQUITY SECURITIES**

 

Nostock awards were granted during the three months ended March 31, 2010, and154,000 stock options were granted in the three months ended March 31, 2010when it was determined that the purchase of stock by employees with anonrecourse loan from us is effectively the same as granting a stock option (asdescribed in Note 11 to the financial statements).

 

**IssuerPurchases of Equity Securities**

 

Thefollowing table contains information about purchases of our common stock duringthe three months ended March 31, 2010:

 

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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)**               | ** ** |
| January 1 – January 31   |       | —        |       | $           | —     |                          | 3,308,841  |                           | $          | 15,095,825 |   |
| February 1 – February 28 |       | —        |       | —      |       | 3,308,841                     |       | $                              | 15,095,825 |   |
| March 1 – March 31       |       | 50,000        |       | $           | 2.04       |                          | 3,358,841  |                           | $          | 14,993,823 |   |
| Total                                   |       | 50,000        |       |        |       |                          |       |                           |       |

 

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(1)                                  In June 2007, weauthorized the stock buyback program for up to $5 million of our outstandingcommon stock to be repurchased through the open market at prices deemedappropriate by management.  In February 2008, we authorized an increase in thestock buyback program to $20 million from $5 million. In February 2009, weauthorized an increase in the stock buyback program to $33.5 million. The stockbuyback will be at prices deemed appropriate by management over a 24 monthperiod.

 

**ITEM 6. EXHIBITS**

 
| 31.1   | Principal  Executive Officer Certification Pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934 |
|--------|-------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                    |
| 31.2   | Principal  Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934 |
|   |                                                                                                                    |
| 32.1   | Certifications  Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934                             |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this registration statement to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                      |       | BIDZ.COM, INC.                   |
|---------------------------|------------|----------------------------------|
|                      |       |                             |
|                      | By:        | /s/ DAVID ZINBERG                |
|                      |       |                             |
| ** **                | ** ** | **David Zinberg**                |
| ** **                | ** ** | **Chief Executive Officer**      |
|                      |       |                             |
|                      | By:        | /s/ LAWRENCE KONG                |
|                      |       |                             |
| ** **                | ** ** | **Lawrence Kong**                |
| ** **                | ** ** | **Principal Accounting Officer** |
|                      |       |                             |
| Dated:  May 13, 2010 |       |                             |

 

 

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