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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 September 30, 2009**                                                                            |
| ** ** | ** ** | ** **                                                                                                                        |
| **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)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     Yesx   No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).    Yes x   No  o

 

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

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

o  Yes    x  No

 

Numberof shares outstanding of Registrant’s common stock, $0.001 par value, as of October31, 2009: 22,114,786

 

 

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**Table of Contents**

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**TABLEOF CONTENTS**

 
| PART I. FINANCIAL INFORMATION | ** **                                                                                                               |
|-------------------------------|--------------------------------------------------------------------------------------------------------------------------|
| Item 1.                       | Financial Statements                                                                                                     | 3 |
|                          | Condensed  Balance Sheets as of December 31, 2008 and September 30, 2009 (unaudited)                                     | 3 |
|                          | Condensed Statements of Income for the three month and  nine month periods ended September 30, 2008 and 2009 (unaudited) | 4 |
|                          | Condensed Statements of Cash Flows for the nine month  periods ended September 30, 2008 and 2009 (unaudited)             | 5 |
|                          | Notes to  Financial Statements (unaudited)                                                                               | 6 |
| Item 2.                       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                              | 11 |
| Item 3.                       | Quantitative  and Qualitative Disclosures About Market Risk                                                              | 17 |
| Item 4.                       | Controls and Procedures                                                                                                  | 17 |
|                          |                                                                                                                     |   |
| PART  II. OTHER INFORMATION   | 18                                                                                                                       |
| Item 1.                       | Legal Proceedings                                                                                                        | 18 |
| Item  1A                      | Risk Factors                                                                                                             | 19 |
| Item 2.                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             | 30 |
| Item 4.                       | Submission of  Matters to a Vote of Security Holders                                                                     | 30 |
| Item  6.                      | Exhibits                                                                                                                 | 30 |
|                          |                                                                                                                     |   |
| SIGNATURES                    | 31                                                                                                                       |

 

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 intendedto identify 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**

 

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

** **
| ** **                                                                                                                                                                                   | ** ** | **December 31,** | ** **   | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|--------------|------------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2008**              | ** **   | **2009**               | ** ** |
| ** **                                                                                                                                                                                   | ** ** | ** **            | ** **   | **(Unaudited)**        | ** ** |
| **Assets**                                                                                                                                                                                   |       |                  |         |                   |       |
| Current assets:                                                                                                                                                                              |       |                  |         |                   |       |
| Cash                                                                                                                                                                                         |       | $                     | 4,456        |                   | $          | 1,144 |   |
| Accounts receivable                                                                                                                                                                          |       | 591                   |         | 580                    |       |
| Inventories, net of reserves of $820 and $1,870 at  December 31, 2008 and September 30, 2009, respectively                                                                         |       | 37,657                |         | 43,685                 |       |
| Other receivable (includes related party amounts of  $102 and $270 at December 31, 2008 and September 30, 2009,  respectively                                                      |       | 1,041                 |         | 1,628                  |       |
| Current deferred tax assets                                                                                                                                                                  |       | 1,950                 |         | 1,679                  |       |
| Other current assets                                                                                                                                                                         |       | 689                   |         | 1,447                  |       |
| Total current assets                                                                                                                                                                         |       | 46,384                |         | 50,163                 |       |
| Long term deferred tax asset                                                                                                                                                                 |       | 84                    |         | 484                    |       |
| Property and equipment, net                                                                                                                                                                  |       | 1,672                 |         | 1,423                  |       |
| Intangible asset                                                                                                                                                                             |       | 161                   |         | 241                    |       |
| Deposits                                                                                                                                                                                     |       | 104                   |         | 104                    |       |
| Total assets                                                                                                                                                                                 |       | $                     | 48,405       |                   | $          | 52,415 |   |
|                                                                                                                                                                                         |       |                  |         |                   |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                               |       |                  |         |                   |       |
| Current liabilities:                                                                                                                                                                         |       |                  |         |                   |       |
| Revolving credit line                                                                                                                                                                        |       | $                     | —       |                   | $          | 2,535 |   |
| Accounts payable (includes related party amounts of  $1,364 and $2,092 at December 31, 2008 and September 30, 2009,  respectively                                                  |       | 9,636                 |         | 13,680                 |       |
| Accrued expenses                                                                                                                                                                             |       | 3,091                 |         | 2,670                  |       |
| Deferred revenue                                                                                                                                                                             |       | 872                   |         | 855                    |       |
| Total current liabilities                                                                                                                                                                    |       | 13,599                |         | 19,740                 |       |
|                                                                                                                                                                                         |       |                  |         |                   |       |
| 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, 2008 and  September 30, 2009, respectively                            |       | —                |         | —                 |       |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued and outstanding 22,917,918 and 22,116,950 shares  at December 31, 2008 and September 30, 2009, respectively |       | 23                    |         | 22                     |       |
| Additional paid in capital                                                                                                                                                                   |       | 24,520                |         | 20,045                 |       |
| Employees share purchase receivable                                                                                                                                                          |       | (708                  | )            | (536                   | )          |
| Retained earnings                                                                                                                                                                            |       | 10,971                |         | 13,144                 |       |
| Total stockholders’ equity                                                                                                                                                              |       | 34,806                |         | 32,675                 |       |
|                                                                                                                                                                                         |       | $                     |  48,405 |                   | $          | 52,415 |   |

 

The accompanying notesform an integral part of these condensed financial statements.

 

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**Bidz.com, Inc.**

 

**Condensed Statements of Income(Unaudited)**

 

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

 
| ** **                                                                                                                                                                                                                                  | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                  | ** ** | **2008**                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                                                                                                                                                                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Net revenue:                                                                                                                                                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Merchandise sales                                                                                                                                                                                                                           | ** ** | **$**                                      | 38,023     | ** **                                | **$**      | 23,795 | ** ** | **$** | 142,021 | ** ** | **$** | 81,072 | ** ** |
| Wholesale merchandise sales (includes related party  amounts of $0 and $641 for three months ended September 30 2008 and  2009, respectively, and $0 and $1,318 for nine months ended September 30,  2008 and 2009, respectively) |       | 17,247                                     |       | 917                                       |       | 29,875 |   | 1,595 |   |
| Other revenue                                                                                                                                                                                                                               |       | 86                                         |       | 74                                        |       | 375 |   | 240 |   |
|                                                                                                                                                                                                                                        |       | 55,356                                     |       | 24,786                                    |       | 172,271 |   | 82,907 |   |
| Cost of revenue                                                                                                                                                                                                                             |       | 42,062                                     |       | 17,622                                    |       | 125,623 |   | 57,322 |   |
| Gross Profit                                                                                                                                                                                                                                |       | 13,294                                     |       | 7,164                                     |       | 46,648 |   | 25,585 |   |
| Operating expenses:                                                                                                                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| General and administrative                                                                                                                                                                                                                  |       | 5,267                                      |       | 4,644                                     |       | 16,854 |   | 14,252 |   |
| Sales and marketing                                                                                                                                                                                                                         |       | 2,315                                      |       | 2,235                                     |       | 9,645 |   | 6,968 |   |
| Depreciation and amortization                                                                                                                                                                                                               |       | 171                                        |       | 200                                       |       | 505 |   | 573 |   |
| Total operating expenses                                                                                                                                                                                                                    |       | 7,753                                      |       | 7,079                                     |       | 27,004 |   | 21,793 |   |
| Income from operations                                                                                                                                                                                                                      |       | 5,541                                      |       | 85                                        |       | 19,644 |   | 3,792 |   |
| Other income - interest income                                                                                                                                                                                                              |       | 1                                          |       | —                                    |       | 24 |   | 2 |   |
| Other expense - interest (expense)                                                                                                                                                                                                          |       | (84                                        | )          | (18                                       | )          | (175 | ) | (33 | ) |
| Income before income tax expense                                                                                                                                                                                                            |       | 5,458                                      |       | 67                                        |       | 19,493 |   | 3,761 |   |
| Income tax expense                                                                                                                                                                                                                          |       | 2,199                                      |       | 28                                        |       | 8,014 |   | 1,588 |   |
| Net income                                                                                                                                                                                                                                  | ** ** | **$**                                      | 3,259      | ** **                                | **$**      | 39 | ** ** | **$** | 11,479 | ** ** | **$** | 2,173 | ** ** |
|                                                                                                                                                                                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Net income per share available to common  shareholders - basic                                                                                                                                                                              | ** ** | **$**                                      | 0.14       | ** **                                | **$**      | 0.00 | ** ** | **$** | 0.48 | ** ** | **$** | 0.10 | ** ** |
| Net income per share available to common  shareholders - diluted                                                                                                                                                                            | ** ** | **$**                                      | 0.13       | ** **                                | **$**      | 0.00 | ** ** | **$** | 0.45 | ** ** | **$** | 0.10 | ** ** |
| Weighted average number of shares outstanding -  basic                                                                                                                                                                                      |       | 23,523,063                                 |       | 22,206,893                                |       | 23,961,564 |   | 22,653,151 |   |
| Weighted average number of shares outstanding -  diluted                                                                                                                                                                                    |       | 25,213,019                                 |       | 22,206,893                                |       | 25,619,236 |   | 22,653,151 |   |

 

The accompanying notes form an integral part of thesecondensed financial statements.

 

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**Bidz.com, Inc.**

 

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

 

*(in thousands)*

 
| ** **                                                                                 | ** ** | **Nine  Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                                  | ** ** | **2009** | ** ** |
|                                                                                       |       |                                      |       |   |   |
| **Cash flows provided by (used for)  operating activities:**                               |       |                                      |       |   |   |
| Net income                                                                                 |       | $                                         | 11,479     |   | $ | 2,173 |   |
|                                                                                       |       |                                      |       |   |   |
| **Adjustments to reconcile net  income to net cash****provided by  operating activities:** |       |                                      |       |   |   |
| Depreciation and amortization                                                              |       | 505                                       |       | 573 |   |
| Change in inventory reserve                                                                |       | (254                                      | )          | 1,050 |   |
| Impairment in employees share purchase receivable                                          |       | —                                    |       | 172 |   |
| Stock-based compensation                                                                   |       | 796                                       |       | 587 |   |
| **Changes in assets and liabilities:**                                                     |       |                                      |       |   |   |
| **(Increase) decrease in assets:**                                                         |       |                                      |       |   |   |
| Accounts receivable                                                                        |       | 1,243                                     |       | 11 |   |
| Inventories                                                                                |       | 9,391                                     |       | (7,078 | ) |
| Other receivable                                                                           |       | —                                    |       | (587 | ) |
| Current deferred tax assets                                                                |       | —                                    |       | 271 |   |
| Other current assets                                                                       |       | 2,455                                     |       | (758 | ) |
| **Increase (decrease) in  liabilities:**                                                   |       |                                      |       |   |   |
| Accounts payable                                                                           |       | (765                                      | )          | 4,044 |   |
| Accrued expenses                                                                           |       | (2,063                                    | )          | (421 | ) |
| Deferred revenue                                                                           |       | (2,047                                    | )          | (17 | ) |
| Net cash provided by operating activities                                                  |       | 20,740                                    |       | 20 |   |
|                                                                                       |       |                                      |       |   |   |
| **Cash flows used for investing  activities:**                                             |       |                                      |       |   |   |
| Capital expenditures                                                                       |       | (514                                      | )          | (324 | ) |
| Intangible asset                                                                           |       |                                      |       | (80 | ) |
| Disposal of fixed assets                                                                   |       | 19                                        |       | — |   |
| Net cash used for investing activities                                                     |       | (495                                      | )          | (404 | ) |
| **Cash flows provided by (used for)  financing activities:**                               |       |                                      |       |   |   |
| Revolving credit line                                                                      |       | (5,924                                    | )          | 2,535 |   |
| Long term deferred tax asset                                                               |       | —                                    |       | (400 | ) |
| Issuance of common stock                                                                   |       | 5                                         |       | — |   |
| Proceeds from exercise of stock options                                                    |       | 1,915                                     |       | — |   |
| Retirement of common stock from net exercise of  stock options                             |       | (2,480                                    | )          | — |   |
| Tax benefit from stock based compensation                                                  |       | 913                                       |       | (69 | ) |
| Purchase of treasury stock                                                                 |       | (11,151                                   | )          | (4,994 | ) |
| Net cash used for financing activities                                                     |       | (16,722                                   | )          | (2,928 | ) |
|                                                                                       |       |                                      |       |   |   |
| **Net increase (decrease) in cash**                                                        |       | 3,523                                     |       | (3,312 | ) |
| **Cash, beginning of period**                                                              |       | 4,808                                     |       | 4,456 |   |
| **Cash, end of period**                                                                    |       | $                                         | 8,331      |   | $ | 1,144 |   |
|                                                                                       |       |                                      |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                     |       |                                      |       |   |   |
| Interest paid                                                                              |       | $                                         | 175        |   | $ | 33 |   |
| Income taxes paid                                                                          |       | $                                         | 8,769      |   | $ | 2,550 |   |
| **Supplemental disclosure of  non-cash investing and****financing  activities:**           |       |                                      |       |   |   |
| Retirement of treasury shares                                                              |       | $                                         | 12,037     |   | $ | 4,994 |   |

 

The accompanying notes form an integral part of thesecondensed financial statements.

 

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**BIDZ.COM, INC.**

**NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINEMONTHS ENDED SEPTEMBER 30, 2008 AND 2009**

**(UNAUDITED)**

 

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

 

**Basisof Presentation**

 

Theaccompanying condensed balance sheet as of December 31, 2008, 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, 2008filed in the Annual Report on Form 10-K by the Company on February 25,2009 with the Securities and Exchange Commission. In the opinion of management,these financial statements reflect all adjustments which are of a normalrecurring nature and which are necessary to present fairly the financialposition of Bidz.com, Inc. as of September 30, 2009 and the resultsof operations for the three month and nine month periods ended September 30,2008 and 2009 and the cash flows for the nine month periods ended September 30,2008 and 2009.  The results of operations for the three months and ninemonths ended September 30, 2009 are not necessarily indicative of theresults which may be expected for the entire fiscal year.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period. Actual results could differ from thoseestimates. We have made estimates for return and allowance reserve, inventoryreserve, inventory vendor marketing reserves, deferred tax assets, deferred taxliabilities and accrued expenses.

 

**Natureof Business Operations**

 

Bidz.com, Inc. wasfounded in November of 1998 as a California corporation with its principallocation of business in Los Angeles, California. In June 2006, wereincorporated in Delaware, and with our principal location of business in LosAngeles. We operate websites located at www.bidz.com and www.buyz.com for thepurpose of selling merchandise, and utilizing our unique sales auction andfixed price platforms.

 

Wesell our products throughout the United States and have expanded the reach ofour customer base to Europe, the Middle East, Asia and Australia. Revenuegenerated from the United States accounted for approximately 79.3% and 62.2% ofnet revenue for the three months ended September 30, 2008 and 2009,respectively, and 76.9% and 69.8% for the nine months ended September 30,2008 and 2009, respectively.

 

**RecentDevelopments**

 

In October 2009, wesigned a new lease for a 26,000 square-foot office and warehouse space at amonthly rate of approximately $30,000 in Marina Del Rey, California.  The lease begins November 2009 andexpires in October 2012.

 

On October 2, 2009,we migrated from our proprietary enterprise operating system to an ERP systemrunning on a customized Microsoft Dynamics AX (see additional disclosure inITEM 1A Risk Factors).

 

InFebruary 2009, our Board of Directors authorized an increase in the openmarket stock buyback program of our outstanding common stock to $33.5 millionfrom $20 million. The stock buybacks will be at prices deemed appropriate bymanagement over a 24 month period. As of September 30, 2009, we havepurchased a cumulative total of 3.3 million shares for $18.4 million and all3.3 million shares have been retired which reduced our number of sharesoutstanding. It is our policy to retire all shares acquired in the buyback.

 

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**Recent Accounting Pronouncements**

 

In June 2009, theFASB Accounting Standards Codification (Codification) was issued. TheCodification is the source of authoritative U.S. GAAP recognized by the FASB tobe applied by nongovernmental entities. The Codification is effective forfinancial statements issued for interim and annual periods ending after September 15,2009. The implementation of this standard did not have a material impact on ourfinancial position and results of operations.

 

In April 2009, theFASB issued a staff position requiring fair value disclosures in both interimas well as annual financial statements in order to provide more timelyinformation about the effects of current market conditions on financialinstruments. The guidance is effective for interim and annual periods endingafter June 15, 2009. The implementation of this standard did not have a materialimpact on our consolidated financial position and results of operations.

 

In May 2009, theFASB issued new guidance on subsequent events. The standard provides guidanceon management’s assessment of subsequent events and incorporates this guidanceinto accounting literature. The standard is effective prospectively for interimand annual periods ending after June 15, 2009. The implementation of thisstandard did not have a material impact on our financial position and resultsof operations. The Company has evaluated subsequent events.

 

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

 

The basic earnings percommon share is calculated by dividing net income available to commonstockholders less preferred dividends by the weighted average number of commonshares outstanding. Diluted earnings per common share is computed similarly tobasic earnings per common share, except that the denominator is increased toinclude the number of additional common shares that would have been outstandingif potential common shares had been issued and if the additional common shareswere not anti-dilutive.

 

The dilutive effect ofoutstanding stock options is reflected in diluted earnings per share byapplication of the treasury stock method including the impact of pro formadeferred tax benefits for the three month and nine month periods ending September 30,2008 and 2009.  The following table sets forth the computation of basicand diluted net income per share.

 

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

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic and diluted net income per share: |       |                                                 |       |                                                |       |   |   |   |   |
| Numerator:                              |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                              |       | $                                                    | 3,259      |                                                | $          | 39 |   | $ | 11,479 |   | $ | 2,173 |   |
| Denominator:                            |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted common shares outstanding      |       | 23,523,063                                           |       | 22,206,893                                          |       | 23,961,564 |   | 22,653,151 |   |
| Effect of dilutive securities           |       | 1,689,956                                            |       | —                                              |       | 1,657,672 |   | — |   |
| Denominator for diluted calculation     |       | 25,213,019                                           |       | 22,206,893                                          |       | 25,619,236 |   | 22,653,151 |   |
| Net income per share, basic             |       | $                                                    | 0.14       |                                                | $          | 0.00 |   | $ | 0.48 |   | $ | 0.10 |   |
| Net income per share, diluted           |       | $                                                    | 0.13       |                                                | $          | 0.00 |   | $ | 0.45 |   | $ | 0.10 |   |

 

**3**.             **Inventories**

 

Inventories, which are pledged as collateral for ourrevolving line of credit, consist of the following *(inthousands)*:

 
| ** **                                                                                                                                                         | ** ** | **December 31, 2008** | ** ** | **September 30, 2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                         | ** ** | ** **                      | ** ** | **(unaudited)**                  | ** ** |
| ** **                                                                                                                                                         | ** ** | ** **                      | ** ** | ** **                       | ** ** |
| Fine jewelry, watches and other (net of vendor  marketing contributions of $4,313 and $4,469 at December 31, 2008 and  September 30, 2009, respectively) |       | $                               | 37,485     |                             | $          | 43,104 |   |
| Loose diamonds and semi-precious stones                                                                                                                            |       | 570                             |       | 237                              |       |
| Prepaid inventory                                                                                                                                                  |       | 36                              |       | 1,754                            |       |
| Inventory with manufacturing vendors                                                                                                                               |       | 386                             |       | 460                              |       |
| Product inventories                                                                                                                                                |       | 38,477                          |       | 45,555                           |       |
| Less: Inventory reserve                                                                                                                                            |       | (820                            | )          | (1,870                           | )          |
|                                                                                                                                                               |       | $                               | 37,657     |                             | $          | 43,685 |   |

 

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**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, accounts receivableand tangible assets. The agreement allowed for us to initially draw on a lineof credit up to $10 million. During the three month period ended March 31,2008 we successfully increased the limit to $25 million. The revolving creditline agreement expires in July of 2010. As of September 30,2009, there was an outstanding balance of $2.5 million under the revolvingcredit line. Under the terms and conditions of the revolving credit lineagreement, the Company is subject to certain restrictive covenants for whichthere is no notice of non-compliance at September 30, 2009. Theconsequences of defaulting on our restrictive covenants could include areduction or withdrawal of the revolving credit line.

 

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

 

In December 2004,the FASB issued a statement requiring that we recognize in our financialstatements the cost resulting from all share-based payment transactions. Inaddition, in March 2005, the Securities and Exchange Commission (“SEC”)released SEC Staff Accounting Bulletin which provides the SEC staff’s positionregarding the application of the statement issued by FASB and certain SEC rules andregulations, and also provides the staff’s views regarding the valuation ofshare-based payment arrangements for public companies. On January 1, 2006,we adopted these provisions, which eliminates our ability to account forshare-based compensation transactions, as we formerly did, using the intrinsicvalue method as prescribed by APB 25 and generally requires that we recognize inour statements of income all share-based payments to employees, includinggrants of stock options based on their fair values.

 

Weadopted these provisions using the prospective method which requires theapplication of the accounting standard as of January 1, 2006. Ourfinancial statements as of and for the three months and nine months ended September 30,2008 and 2009, respectively, reflect the impact of adoption.

 

UnderFASB statement, stock-based compensation expense recognized during the periodis based on the value of the portion of stock-based payment awards that isultimately expected to vest. Compensation expense for the stock-based paymentawards granted subsequent to December 31, 2005, will be based on the grantdate fair value estimated. As stock-based compensation expense recognized inthe statements of income is based on awards ultimately expected to vest, itwill be reduced for estimated forfeitures. The FASB statement require forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates.

 

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).

 

The FASB statement alsorequire us 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.

 

**RestrictedShares**

 

Therestricted stock awards are expensed pro rata over the vesting period basedupon the market value of the awards at the time of grant. Stock-basedcompensation from restricted stock awards totaled $83,000 and $252,000 for thethree months ended September 30, 2008 and 2009, respectively and $258,000and $587,000 for the nine months ended September 30, 2008 and 2009,respectively. The unamortized stock-based expense for restricted stock awardswas $2.9 million at September 30, 2009.

 

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Asummary of all restricted stock activity during the nine months ended September 30,2009 is as follows:

 
| Restricted shares outstanding, December 31,  2008  |   | 117,800 |   |
|---------------------------------------------------------|--------|---------|--------|
| Shares granted                                          |   | 666,000 |   |
| Shares vested                                           |   | (27,500 | )      |
| Shares forfeited                                        |   | (12,000 | )      |
| Restricted shares outstanding, September 30,  2009 |   | 744,300 |   |

 

**StockOptions**

 

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

 

The following is asummary of stock option activity as of September 30, 2009, and changesduring the nine months ended September 30, 2009.

 
| **Options**                                       | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price ($)** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value ($)** | ** ** |
|---------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|
| Outstanding at December 31, 2008             |       | 6,864,500  |       | 6.08                                             |       | 2.36                                                     |       | —                                   |       |
| Granted                                           |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Exercised                                         |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Forfeited                                         |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Expired                                           |       | 16,000     |       | 6.00                                             |       |                                                     |       |                                     |       |
| Outstanding at September 30, 2009            |       | 6,848,500  |       | 6.08                                             |       | 1.62                                                     |       | —                                   |       |
| Vested and Exercisable at September 30, 2009 |       | 6,848,500  |       | 6.08                                             |       | 1.62                                                     |       | —                                   |       |

 

Thefollowing table summarizes information about stock options outstanding andexercisable at September 30, 2009.

 
| ** **                              | ** ** | ** ** | ** ** | ** **                         | ** ** | **Options outstanding and exercisable  as of September 30, 2009** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **                         | ** ** | **Options outstanding**                                                                         | ** ** | **Options exercisable** | ** ** |
| **Range of  exercise prices** | ** ** | ** ** | ** ** | **Number  outstanding  9/30/2009** | ** ** | **Weighted  average  remaining  contractual**                                                        | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  exercisable  9/30/2009** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **                         | ** ** | ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $                                       | 6.00       |       | $          | 6.00                               |       | 6,615,500                                                                                            |       | 1.59 |   | $ | 6.00 |   | 6,615,500 |   | $ | 6.00 |   |
| $                                       | 6.50       |       | $          | 6.50                               |       | 105,500                                                                                              |       | 2.44 |   | $ | 6.50 |   | 105,500 |   | $ | 6.50 |   |
| $                                       | 9.90       |       | $          | 9.90                               |       | 127,500                                                                                              |       | 2.70 |   | $ | 9.90 |   | 127,500 |   | $ | 9.90 |   |
| $                                       | 6.00       |       | $          | 9.90                               |       | 6,848,500                                                                                            |       | 1.62 |   | $ | 6.08 |   | 6,848,500 |   | $ | 6.08 |   |

 

Thestock-based compensation expense from stock options for the three months ended September 30,2008 and 2009 totaled $180,000 and $0, respectively and for the nine monthsended September 30, 2008 and 2009 totaled $538,000 and $0, respectively.The unamortized stock-based compensation expense from stock options as of September 30,2009 is $0. No stock options were granted in the three months ended September 30,2008 and 2009 and in the nine months ended September 30, 2008 and 2009.

 

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

 

Netrevenue by geographic area is presented based upon the country of destination.No foreign country represented 10% or more of net revenue for three month andnine month periods ended September 30, 2008 and 2009. Net revenue bygeographic area was as follows:

 

*(inthousands, except percentage data)*

* *
| ** **          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **2008**                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
| **Geographic area** | ** ** | **Amount**                                 | ** ** | **Percent**                               | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United  States      |       | $                                          | 43,924     |                                      | 79.3       | % | $ | 15,424 |   | 62.2 | % | $ | 132,415 |   | 76.9 | % | $ | 54,843 |   | 66.2 | % |
| International       |       | 11,432                                     |       | 20.7                                      | %          | 9,362 |   | 37.8 | % | 39,856 |   | 23.1 | % | 28,064 |   | 33.8 | % |
|                |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total               |       | $                                          | 55,356     |                                      | 100.0      | % | $ | 24,786 |   | 100.0 | % | $ | 172,271 |   | 100.0 | % | $ | 82,907 |   | 100.0 | % |

 

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

 

Ourtop two vendors based on purchase volume varies from quarter to quarter.  Purchases from the top two vendors amountedto $9.3 million and $7.8 million representing 28.7% and 37.1% of the totalpurchases during the three months ended September 30, 2008 and 2009,respectively, and $15.5 million and $17.2 million representing 14.2% and 28.0%of the total purchases during the nine months ended September 30, 2008 and2009. Outstanding accounts payable to the top two vendors totaled $1.3 millionand $2.2 million****as of December 31, 2008 and September 30,2009, respectively. Loss of any of these vendors is not expected to have asignificant negative impact on the operations of the Company.

 

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

 

During the three monthsended September 30, 2008 and 2009, we purchased approximately 21.3% and9.3%, respectively, of our merchandise from LA Jewelers, Inc., where oneof its managers is a stockholder who beneficially owns approximately 5.7% ofour outstanding common stock as of September 30, 2009. During the ninemonths ended September 30, 2008 and 2009, we purchased approximately 9.1%and 7.6%, respectively of our merchandise from LA Jewelers, Inc. Theaccounts payable balances due to LA Jewelers were $1.4 million and $2.1 millionas of December 31, 2008 and September 30, 2009, respectively.

 

LAJewelers participates in our inventory co-op marketing program. For the threemonths ended September 30, 2008 and 2009, we earned approximately $164,000and $265,000, respectively from LA Jewelers relating to co-op marketingcontributions and $294,000 was unamortized as of September 30, 2009. Forthe nine months ended September 30, 2008 and 2009, we earned approximately$777,000 and $480,000, respectively. The amounts of co-op marketingcontributions due from LA Jewelers were $22,000 and $270,000 as of December 31,2008 and September 30, 2009, 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 their merchandise.This agreement provides that in the event of a gross profit margin shortfall wewill be compensated for the difference between our actual gross profit marginand the guaranteed minimum gross profit margin. For the three months ended September 30,2008 and 2009, we recognized $146,000 and $20,000, respectively, under thisagreement and for the nine months ended September 30, 2008 and 2009, werecognized $368,000 and $192,000, respectively. As of December 31, 2008and September 30, 2009, we have $80,000 and $0, respectively, outstandingunder this gross profit margin guarantee.

 

Duringthe three months ended September 30, 2008 and 2009, we recorded $0 and$641,000, respectively, and during the nine months ended September 30,2008 and 2009, we recorded $0 and $1.3 million, respectively, in wholesalemerchandise sales to a customer that is owned by Daniella Zinberg, the daughterof our Chief Executive Officer, David Zinberg. There was no accounts receivabledue from this customer as of December 31, 2008 and September 30,2009.

 

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

 

Asrequired by *FASB*, we recognize the financialstatement benefit of a tax position only after determining that the relevanttax authority would more likely than not sustain the position following anaudit. For tax positions meeting the more-likely-than-not**threshold,the amount recognized in the financial statements is the largest benefit thathas a greater than 50 percent likelihood of being realized upon ultimatesettlement with the relevant tax authority. 

 

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 2003.

 

Wehad been under examination by the Internal Revenue Service for the 2004, 2005and 2006 tax years. The examination was concluded as of December 31,2007 and final settlement was approximately $35,000, including interest andpenalties. We are currently under examination for the 2007 tax year.

 

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**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.  Refer to Item 1 of Part II -Legal Proceedings.

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing discussion should be read in conjunction with the financialstatements and related notes which appear elsewhere in this form. Thisdiscussion contains forward-looking statements. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of various factors, including various risks and uncertainties discussedbelow and throughout this report.*

 

**Overview**

 

We area leading online retailer of jewelry, featuring a live auction format. We haveestablished our retail brand in the online marketplace by offering high-qualitymerchandise, a unique user-friendly shopping experience, and the opportunityfor buyers to achieve significant cost savings versus traditional retailchannels. A key to our success has been our ability to efficiently and costeffectively source closeout and regular jewelry merchandise, and rapidlyrespond to changing consumer demands for jewelry, watches and accessories. Weoffer our products through a continuous live format, featuring a $1 minimumopening bid, and a unique 15-second auction extension period that allows ourauctions to continue until all bids are received. On select auctions wemaintain a reserve price that must be met before a sale will be consummated.The majority of our auctions are short-term, often lasting less than one hour,providing immediate gratification to our customers and encouraging frequentvisits and active viewing of our website.

 

Inaddition to our auction site we have a fixed pricing format that offers similarmerchandise as those listed for auction. This online store provides us access to different types of consumers andwe will plan to offer customers the ability to design their own jewelryincluding diamond earrings and rings in the near future.

 

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

 

Wesell 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 daily telephone customersupport and 24-hour online live-help and e-mail customer support.

 

Inline with our growth plans, we completed a major upgrade of our auctionplatform at the end of 2007. The new auction LiveBid 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 the new online retail store. We launched the Spanish, Arabic andGerman versions of our website in 2008.

 

On October 2 2009, we migrated from our proprietary enterpriseoperating system to an ERP system running on a customized Microsoft DynamicsAX. We have encountered unexpected deficiencies in implementing the new system,including a lack of controls to detect errors in account balances. Weanticipate that these deficiencies will likely have a material adverse effecton our operations, results of operations and system of internal controls overfinancial reporting in the fourth quarter of 2009. In addition, the new system willrequire that we design and adopt new internal controls over financialreporting, and any failure by us to implement and test those new controls in atimely manner would likely result in a material weakness in our internalcontrols over financial reporting.

 

**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 experienceand on other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates. The followingare the critical accounting policies that we believe require significantestimation and judgment.

 

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*Revenue Recognition*

 

Wederive our revenue from four sources: merchandise sales, which includewholesale merchandise sales, shipping revenue, transaction fee revenue andother revenue. In accordance with statement issued by FASB, we recognizerevenue from all four sources when the following revenue recognition criteriaare met: (1) persuasive evidence of an arrangement exists; (2) the product hasbeen shipped or the service has been rendered and the customer takes ownershipand assumes the risk of loss; (3) the selling price is fixed or determinable;and (4) collection of the resulting receivable is reasonably assured.

 

Foronline sales through our website, we recognize merchandise sales upon shipmentsmade to consumers that are fulfilled from our warehouse. We require paymentbefore we ship and the payment is generally made online by credit card or otherelectronic payment methods. We record amounts received or billed prior toshipment of goods to customers as deferred revenue. We reduce gross sales byreturns and charge-backs from customers. For wholesale merchandise sales, werecognize sales when the merchandise is delivered to the customer and creditterms may be offered to such customers.

 

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

 

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

 

Wepresent sales tax liability on a net basis. Sales are not grossed up with theattendant taxes and deducted as a separate line item. Other revenue consistsprimarily of commissions we derive from hosting sales of Certified Merchantmerchandise that is owned by third parties and we recognize only the commissionportion of the price our customers pay for the purchased products because weare 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.

 

Outboundshipping costs on merchandise sales totaled $2.3 million and $1.4 millionin the three months ended September 30, 2008 and 2009, respectively and$7.9 million and $4.6 million in the nine months ended September 30, 2008and 2009, 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, and we providereserves against our inventory based on the estimated difference between theaverage selling price and the cost of inventory if the average selling price islower than the cost of inventory. We also provide reserves for obsolescence andslow moving inventory.

 

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*Inventory Co-op Marketing Contributions*

#  

# In the thirdquarter of 2007, we started to bill and collect from our inventory vendorsco-op marketing contributions as an incentive for us to market and sell theirmerchandise on the Bidz website. In accordance with FASB statement issuedregarding Accounting by a Customer (including a Reseller) for Certain ConsiderationReceived from a Vendor, the co-op marketing contributions that cannot beidentified specifically to benefit the vendors are a reduction in cost of salesand will result in an increase in gross profit. We cannot specifically identifythe benefit to each vendor; consequently, co-op marketing contributions arecharged against inventory as a reduction of costs and amortized as a reductionof cost of sales. For the three months ended September 30, 2008 and 2009, wehave recognized $2.3 million and $1.6 million of co-op marketing contributions,respectively, and for the nine months ended September 30, 2008 and 2009, wehave recognized $8.3 million and $5.8 million, respectively. Approximately $4.5million remain unamortized and is included as an offset to inventory atSeptember 30, 2009. Receivable from vendors for co-op marketing contributions,less allowance for doubtful accounts, is included in other current assets andamounted to $934,000 and $1.6 million at December 31, 2008 and September 30,2009, respectively.

#  

*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  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                    | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                 | ** ** | ** **                                  | ** ** | ** **                                 | ** ** | ** ** |   | ** ** |   |
| Net revenue                          |       | 100.0                                       | %          | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| Gross profit                         |       | 24.0                                        |       | 28.9                                       |       | 27.1 |   | 30.9 |   |
| Operating expenses:                  |       |                                        |       |                                       |       |   |   |   |   |
| General & administrative    |       | 9.5                                         |       | 18.8                                       |       | 9.8 |   | 17.2 |   |
| Sales & marketing           |       | 4.2                                         |       | 9.0                                        |       | 5.6 |   | 8.4 |   |
| Depreciation & amortization |       | 0.3                                         |       | 0.8                                        |       | 0.3 |   | 0.7 |   |
| Total operating expenses             |       | 14.0                                        |       | 28.6                                       |       | 15.7 |   | 26.3 |   |
| Income from operations               |       | 10.0                                        |       | 0.3                                        |       | 11.4 |   | 4.6 |   |
| Interest income                      |       | 0.0                                         |       | 0.0                                        |       | 0.0 |   | 0.0 |   |
| Interest expense                     |       | 0.2                                         |       | 0.0                                        |       | 0.1 |   | 0.0 |   |
| Income tax expense                   |       | 4.0                                         |       | 0.1                                        |       | 4.7 |   | 2.0 |   |
| Net income                           |       | 5.8                                         | %          | 0.2                                        | %          | 6.6 | % | 2.6 | % |

 

*Net Revenue*

 

Substantiallyall of our net revenue consists of jewelry sold via the Internet, net ofreturns. We also generate net revenue from wholesale merchandise sales that arenot online, shipping and handling, auction transaction fees and other revenue.

 

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

 
| ** **                   | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                    | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2009** | ** ** |
|                         |       |                                        |       |                                       |       |   |   |   |   |
| Merchandise sales            |       | 57.6                                        | %          | 86.0                                       | %          | 69.3 | % | 85.4 | % |
| Wholesale merchandise sales  |       | 31.1                                        |       | 3.7                                        |       | 17.3 |   | 1.9 |   |
| Shipping & handling |       | 9.0                                         |       | 7.1                                        |       | 10.6 |   | 9.4 |   |
| Transaction fee              |       | 2.1                                         |       | 2.9                                        |       | 2.6 |   | 3.0 |   |
| Other revenue                |       | 0.2                                         |       | 0.3                                        |       | 0.2 |   | 0.3 |   |
|                         |       |                                        |       |                                       |       |   |   |   |   |
| Total net revenue            |       | 100.0                                       | %          | 100.0                                      | %          | 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, amortized co-op marketing contributionsfrom vendors, inbound and outbound shipping costs, packaging and shippingsupplies, insurance on shipments, product repair and service costs, and creditcard and other transaction fees associated with payments.

 

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*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 awardsand stock option grants to employees and directors.

 

*Sales and Marketing Expenses*

 

Our sales and marketingexpenses consist primarily of costs associated with paid website searchmarketing, online banner marketing, e-mail campaigns, affiliate programs andoptimization services. These marketing programs, which are designed to drivebuyers to our website, are the most important factors in increasing demand forour jewelry products and increasing net revenue.

 

**Comparison of Three Months Ended September 30, 2009 toThree Months Ended September 30, 2008**

 

Netincome in the three months ended September 30, 2009 was $39,000, or $0.00per basic and diluted share and net income in the three months ended September 30,2008 was $3.3 million, or $0.14 and $0.13 per basic and diluted share,respectively. Net income decreased by $3.2 million in the three months ended September 30,2009 compared to the three months ended September 30, 2008.

 

*Net Revenue*

 

Netrevenue decreased 55.2% to $24.8 million in the three months ended September 30,2009 from $55.4 million in the three months ended September 30,2008. Merchandise wholesale sales decreased 94.7% to $917,000 in the threemonths ended September 30, 2009 compared to $17.2 million in the threemonths ended September 30, 2008.

 

The continuing economicdecline resulted in a major slowdown in our revenue in the third quarter of2009 compared to the third quarter of 2008. There was an overall decrease inonline demand for our jewelry as consumers reduced their discretionaryspending. If the economy continues to decline it will cause a decline in demandand have a negative effect on our revenue.

 

Ourinventory currently includes a variety of branded merchandise and many athigher prices in preparation for the holiday shopping season in the fourthquarter of 2009. The current abundance of closeouts has allowed us to stock upon merchandise that would offer good value to our customers.

 

*Gross Profit*

 

Grossprofit decreased 46.1% to $7.2 million in the three months ended September 30,2009 from $13.3 million in the three months ended September 30, 2008. Thedecrease in gross profit resulted from the decrease in sales revenue whichdeclined by 55.2% for the three months ended September 30, 2009 comparedto the three months ended September 30, 2008 and offset by the increase ingross profit margin to 28.9% in the three months ended September 30, 2009from 24.0% in the three months ended September 30, 2008. Gross profitmargins benefited from the amortized co-op marketing contributions that reducedour cost of sales by $1.6 million and $2.3 million in the three months ended September 30,2009 and 2008, respectively.

 

*General and Administrative Expenses*

 

Generaland administrative expenses decreased 11.8% to $4.6 million in the three monthsended September 30, 2009 from $5.3 million in three months ended September 30,2008. The decrease in general and administrative expenses was due to ourdecline in revenue and corresponding decreases in payroll and payroll relatedexpenses and administrative expenses. General and administrative expenses as apercentage of net revenue increased to 18.8% in the three months ended September 30,2009 from 9.5% in the three months ended September 30, 2008.

 

Wereversed our impairment charge by $102,000 in the three months ended September 30,2009 on advances made to employees to purchase shares of our common stock whenthe value of our common stock held as collateral for the advances fell belowthe amount of the advances. The 154,000 shares of the common stock held ascollateral were valued based on the closing price at September 30, 2009.

 

*Sales and Marketing Expenses*

 

Salesand marketing expenses decreased 3.4% to $2.2 million in the three months endedSeptember 30, 2009 from $2.3 million in the three months ended September 30,2008. Sales and marketing expenses as a percentage of net revenue increased to9.0% in the three months ended September 30, 2009 from 4.2% in the threemonths ended September 30, 2008.

 

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*Income Tax Expense*

 

Incometax expense decreased to $28,000 in the three months ended September 30,2009 from $2.2 million in the three months ended September 30, 2008 andthe effective tax rates are 41.9% and 40.2%, respectively.

 

**Comparison of Nine Months Ended September 30, 2009 toNine Months Ended September 30, 2008**

 

Net income in the nine months ended September 30,2009 was $2.2 million, or $0.10 per basic and diluted share and net income inthe nine months ended September 30, 2008 was $ 11.5 million or $0.48 and$0.45 per basic and diluted share, respectively. Net income decreased by 81.1%in the nine months ended September 30, 2009 compared to the nine monthsended September 30, 2008.

 

*NetRevenue*

 

Netrevenue decreased 51.9% to $82.9 million in the nine months ended September 30,2009 from $172.2 million in the nine months ended September 30, 2008.Merchandise wholesale sales decreased 94.7% to $1.6 million in the nine monthsended September 30, 2009 compared to $29.9 million in the nine monthsended September 30, 2008.

 

Thecontinuing economic decline resulted in a major slowdown in our revenue in thefirst nine months of 2009 compared to the first nine months of 2008. There wasan overall decrease in online demand for our jewelry as consumers reduced theirdiscretionary spending. If the economy continues to decline it will cause adecline in demand and have a negative effect on our revenue.

 

*Gross Profit*

 

Grossprofit decreased 45.2% to $25.6 million in the nine months ended September 30,2009 from $46.6 million in the nine months ended September 30, 2008.The decrease in gross profit resulted from the decrease in sales revenue whichdeclined by 51.9% for the nine months ended September 30, 2009 compared tothe nine months ended September 30, 2008 and offset by the increase ingross profit margin to 30.9% in the nine months ended September 30, 2009from 27.1% in the nine months ended September 30, 2008. Gross profitmargins benefited from the amortized co-op marketing contributions that reducedour cost of sales by $5.8 million and $8.3 million in the nine months ended September 30,2009 and 2008, respectively.

 

*General and Administrative Expenses*

 

Generaland administrative expenses decreased by 15.4 % to $14.3 million in thenine months ended September 30, 2009 from $16.9 million in the ninemonths ended September 30, 2008. The decrease in general andadministrative expenses was due to our decline in revenue and correspondingdecreases in payroll and payroll related expenses and administrative expenses.General and administrative expenses as a percentage of net revenue increased to17.2% in the nine months ended September 30, 2009 from 9.8% in the ninemonths ended September 30, 2008.

 

Animpairment charge of $172,000 was recorded in the nine months ended September 30,2009 on advances made to employees to purchase shares of our common stock whenthe value of our common stock held as collateral for the advances fell belowthe amount of the advances. The 154,000 shares of the common stock held ascollateral were valued based on the closing price at September 30, 2009.

 

*Sales andMarketing Expenses*

 

Sales and marketingexpenses decreased 27.8 % to $7.0 million in the nine months ended September 30,2009 from $9.6 million in the nine months ended September 30,2008. Sales and marketing expenses as a percentage of net revenueincreased to 8.4% in the nine months ended September 30, 2009 from 5.6% inthe nine months ended September 30, 2008.

 

*Income Tax Expense*

 

Incometax expense decreased to $1.6 million in the nine months ended September 30,2009 from $8.0 million in the nine months ended September 30, 2008 and theeffective tax rate are 42.2% and 41.0%, respectively.

 

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**AdditionalQuarterly Data**

** **
| ** **                       | ** ** | **Quarter Ended** | ** ** |
|----------------------------------|------------|-------------------|------------|
| ** **                       | ** ** | **March  31,**    | ** ** | **June  30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **March  31,** | ** ** | **June  30,** | ** ** | **September 30,** | ** ** |
| ** **                       | ** ** | **2008**          | ** ** | **2008** | ** ** | **2008** | ** ** | **2008** | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** |
|                             |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average  gross order value       |       | $                 | 182        |   | $ | 183 |   | $ | 175 |   | $ | 169 |   | $ | 181 |   | $ | 180 |   | $ | 187 |   |
| Items  per order                 |       | 3.3               |       | 3.3 |   | 3.4 |   | 3.4 |   | 3.0 |   | 3.5 |   | 4.7 |   |
| Price  per item                  |       | $                 | 56         |   | $ | 55 |   | $ | 51 |   | $ | 50 |   | $ | 60 |   | $ | 52 |   | $ | 40 |   |
| Average  orders per day          |       | 3,734             |       | 3,023 |   | 2,453 |   | 2,462 |   | 2,043 |   | 1,712 |   | 1,465 |   |
| Average  items sold per day      |       | 12,186            |       | 10,082 |   | 8,431 |   | 8,287 |   | 6,110 |   | 5,956 |   | 6,899 |   |
| Acquisition  costs per new buyer |       | $                 | 50         |   | $ | 48 |   | $ | 43 |   | $ | 51 |   | $ | 51 |   | $ | 55 |   | $ | 65 |   |
| Number  of new buyers            |       | 83,179            |       | 64,882 |   | 54,072 |   | 59,485 |   | 51,021 |   | 38,577 |   | 34,252 |   |

 

Wholesalemerchandise sales are excluded in computing additional quarterly 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, accountspayable, accrued expenses and deferred revenue. Our business model containsbeneficial working capital characteristics: while we collect cash from sales tocustomers within several business days of the related sale, we typically havelonger payment terms with our suppliers.

 

As of September 30,2009, we had a working capital surplus of $30.4 million and have no long-termdebt obligations. Net cash provided by operating activities was $20,000 in thenine months ended September 30, 2009 compared to $20.7 million in thenine months ended September 30, 2008. Cash in the nine months ended September 30,2009 was primarily affected by changes in net income, inventories and accountspayable, and in the nine months ended September 30, 2008 was primarilyaffected by changes in net income and inventories.

 

Cashflows from operating activities were used to meet our working capitalrequirements. In the nine months ended September 30, 2009, $2.2 millionwas provided by net income, $7.1 million was used to increase inventories and$4.0 million was provided by a decrease in accounts payable. In the nine monthsended September 30, 2008, $11.5 million was provided by net income and$9.4 million was provided by a decrease in inventories. Inventories andaccounts payable is affected by our revenue growth and changes in our inventorystrategy. Our inventory strategy is influenced by our ability to secureinventory that we believe will improve our margins and the current revenuetrend.

 

Netcash used in investing activities was $404,000 in the nine months ended September 30,2009 compared to $495,000 in the nine months ended September 30, 2008.During the nine months ended September 30, 2009 and 2008, cash used forcapital expenditures of $324,000 and $514,000, respectively, related mainly toacquisition of office and computer equipment and software.

 

In thenine months ended September 30, 2009, net cash of $2.9 million was used infinancing activities when $2.5 was provided by our revolving credit line and$5.0 million was used to repurchase our common stock shares. In the nine monthsended September 30, 2008, net cash of $16.7 million was used in financingactivities when $5.9 million was used to repay our revolving credit line and$11.2 million was used to repurchase our common stock shares.

 

Webelieve that cash and cash equivalents currently on hand, cash flows fromoperations and the availability of a $25 million revolving line of credit (seeNote 4) will be sufficient to continue our operations and to pursue our growthstrategy for the foreseeable future. Our future capital requirements willdepend on many factors, including the rate of our revenue growth; the timingand extent of spending to enhance our website, network infrastructure, andtransaction processing systems; the extent of our advertising and marketingprograms; the levels of the inventories we carry; acquisition and relocation toa new corporate office; and other factors relating to our business. Enhancementof our website, network infrastructure, transaction processing systems and anew ERP system will require us to spend significantly more than we have in thepast. Moreover, to date our spending in these areas has been lower thanindustry averages. We anticipate increasing our system expenditures toaccommodate these needs in the future. We may require additional financingin the future in order to execute our operating plan and we may not be able toobtain such financing. We cannot predict whether this additional financing willbe in the form of equity, debt, or a combination of debt and equity.

 

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**Lease Obligations**

 

The following table presents our contractualobligations at September 30, 2009, over the next five years and thereafter (inthousands):

 
| **Payments by period** | ** ** | **Total  amount** | ** ** | **Less than  1 year** | ** ** | **1 to 3  years** | ** ** | **3 to 5  years** | ** ** | **After  5  years** | ** ** |
|------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|---------------------|------------|
| ** **             | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | ** **        | ** ** | ** **          | ** ** |
| Property  lease        |       | $                 | 4,248      |                  | $          | 1,437             |       | $                 | 2,781      |                | $          | 30 |   | $ | — |   |
| Equipment  lease       |       | 165               |       | 53                    |       | 103               |       | 9                 |       | —              |       |
|                   |       | $                 | 4,413      |                  | $          | 1,490             |       | $                 | 2,884      |                | $          | 39 |   | $ | — |   |

 

We areobligated for the lease of our office and warehouse space. We lease 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 March 2009, we extended the lease on our 50,000 square-footoffice and warehouse by 32 months to expire in June 2012.

 

InOctober 2009, we signed a new lease for a 26,000 square-foot office andwarehouse space in Marina Del Rey, California. The lease begins November 2009 and expires in October 2012.  The lease obligation is included in the abovetable.

 

**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.

 

**ITEM 4 - CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934) as of the end of the period 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 our Chief Financial Officer concluded that, asof the date of their evaluation, our disclosure controls and procedures wereeffective. There were no significant changes made in our internal controls orin other factors that could significantly affect internal controls subsequentto the date of their evaluation.

 

***Report ofManagement on Internal Control over Financial Reporting***

 

Managementis responsible for establishing and maintaining adequate internal control over financialreporting, as defined in Rule 13a-15(f) of the 1934 Act. Our internal controlover financial reporting is designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. Internal controls over financial reporting include thosepolicies and procedures that (1) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect our transactions anddispositions of our assets; (2) provide reasonable assurance that ourtransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat our receipts and expenditures are being made only in accordance withappropriate authorizations; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof our assets that could have a material effect on our financial statements.

 

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We assessed theeffectiveness of our internal control over financial reporting as of September 30,2009, using the criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO) in Internal Control — Integrated Framework.Based on this assessment, management has concluded that our internal controlover financial reporting was effective as of September 30, 2009.

 

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

 

There were no changes in ourinternal control over financial reporting (as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934) during the quarter ended September 30,2009, that our certifying officers concluded materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

***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**

 

In May and June, 2009,the Company and certain of its officers were named as defendants in threeparallel class actions complaints filed in the United States District Court forthe Central District of 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 Walczyk v.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 certain of its officers anddirectors with violations of §10(b) and §20(a) of the Securities Exchange Actof 1934. The complaints allege that we failed to disclose unethical andfraudulent business practices that were alleged in a November 26, 2007 reportby Citron Research (Stocklemon.com), that we did not have controls in place toprevent “shill bidding” and that we use unreliable or false appraisal prices onour merchandise.  The court granted theplaintiffs’ request to appoint Roland Pomfret as lead plaintiff, and aconsolidated complaint was filed on October 13, 2009.  In addition to the allegations in theoriginal complaint, the consolidated complaint alleges that the defendantsfailed to correctly account for and disclose in detail its co-op marketingcontributions and minimum gross profit guarantees.  We believe that the lawsuits are meritlessand intend to defend the cases vigorously.

 

In May and July, 2009,the Company and certain of its officers and its Board of Directors were namedas defendants in two shareholder derivative lawsuits filed in the SuperiorCourt of California, County of Los Angeles, and the United States District Courtfor the Central District of California, respectively (Bahram Akhavan v.Bidz.com, Inc. et al. BC414198 (filed May 20, 2009); Farris Hassan v. Bidz.com,Inc., et al. , cv09-04984 (CBM) (C.D. Cal.; filed on July 10, 2009)) (a similarcomplaint was by David Hughes  on August18, 2009).  The Complaint allegesviolations of law, including breaches of fiduciary duties, waste of corporateassets, unjust enrichment and violations of California Corporations Code thatoccurred between August 2007 and the present and that have caused substantialmonetary loss to the Company and other damages, such as to its reputation andgoodwill.  On October 25, 2009, plaintifffiled an amended complaint that also includes allegations relating to theCompany’s co-op marketing contributions and minimum gross profitguarantees.  We believe that the lawsuitsare meritless and intend to defend the cases vigorously.

 

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 fullywith the FTC regarding this matter, and we do not believe thatthe investigation will adversely affect management, our results of operations,cash flows or our financial position.

 

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, 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 subpoenato produce documents relating to the Company’s co-op marketing contributionsand minimum gross profit guarantees.

 

On or about June 25,2009, the Company was named as a defendant in a patent infringement lawsuitfiled in the United States District Court for the Eastern District of Texas,Tyler Division (Soverain Software LLC v. J.C. Penney Corporation, Inc., AmwayCorp., Avon Products, Inc., Bidz.com, Inc., Etronics, Inc. HSN, Inc., HSNImprovements, LLC, Cornerstone Brands, Inc., Ballard Designs, Inc., Garnet Hill,Inc., Smith & Noble, LLC, The Territory Ahead, Inc., QVC, Inc., Shutterfly,Inc., Victoria’s Secret Stores Brand Management, Inc., Victoria’s Secret DirectBrand Management, LLC, VistaPrint, Ltd., and VistaPrint USA, Inc.cv6:09-CV-274).

 

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The Complaint allegesthat defendants’ ecommerce sites infringe one or more patents held by theplaintiff.   The Plaintiff seeks ajudgment that its patents are not invalid and enforceable, a preliminary andpermanent injunction against infringement of the patents, damages (includingtreble damages) and attorneys fees.  Webelieve that the lawsuit is meritless and intend to defend the case vigorously.

 

On or about September 29,2008, the Company, David Zinberg and Marina Zinberg were named as defendants ina complaint filed in the United States District Court for the Central Districtof California (Marla Tidenberg v. Bidz.com, Inc., et al., cv08 05553(PSG)).  On March 19, 2009, Tidenbergfiled 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. We believethat the lawsuit is meritless and intend to defend the case vigorously.

 

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**

 

*We believe the risks and uncertainties described below arethe most significant we face. The occurrence of any of the following riskscould harm our business. In that case, the value of our common stock coulddecline, and you may lose part or all of your investment. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also impair our operations.*

 

***The 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 andmay consequently fare better than those who exclusively offer more expensivemerchandise, jewelry is essentially perceived as a luxury good. If the economycontinues to decline it will cause people to feel less comfortable purchasingdiscretionary goods and would cause a negative effect on our operating results.Our annual and quarterly operating results may vary significantly in the futurebased on economic factors over which we have little or no control. Because wehave little or no control over these factors and/or their magnitude, our operatingresults are difficult to predict. Any substantial adverse change in theeconomic factors could negatively affect our business and results ofoperations.

 

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

 

Global financial markets have beenexperiencing extreme disruptions in recent months, including severelydiminished liquidity and credit availability, declines in consumer confidence,declines in economic growth, increases in unemployment rates, and uncertaintyabout economic 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 in arecession, the demand for jewelry has been and may continue to be adverselyaffected and therefore, demand for our jewelry products and our operatingresults have been and may continue to be adversely affected as well. We cannotpredict the timing, strength or duration of any economic disruption orsubsequent economic recovery, worldwide, in the United States, in our industry,or in the jewelry market. These and other economic factors have had and maycontinue to have a material adverse effect on demand for our jewelry productsand on our financial condition and operating results.

 

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

 

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

 

·          our ability tomanage our sales and marketing efforts;

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

·          our ability tomanage expenses and inventory levels.

 

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

 

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***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,

 

·                  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.

 

***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 public companies toinclude a report that contains an assessment by management on the company’sinternal control over financial reporting in their annual reports on Form 10-K.In addition, the independent registered public accounting firm auditing thecompany’s financial statements must attest to and report on our assessment ofthe effectiveness of the internal controls over financial reporting. While weare consistently working on improvements and conducting rigorous reviews of ourinternal controls over financial reporting, our independent auditors mayinterpret Section 404 requirements and apply related rules and regulationsdifferently. If our independent auditors are not satisfied with our internalcontrol over financial reporting or with the level at which it is documented,operated or reviewed, they may decline to attest to management’s assessment orissue a qualified report. Additionally, if we are not able to meet all therequirements of Section 404 in a timely manner or with adequate compliance, wemight be subject to sanctions or investigation by regulatory authorities, suchas the Securities and Exchange Commission.

 

Futurechanges in our accounting, financial reporting, and regulatory environment maycreate new areas of risk exposure. Failure to modify our existing controlenvironment accordingly may impair our controls over financial reporting andcause our investors to lose confidence in the reliability of our financialreporting, which may adversely affect our stock price.

 

***Implementationof our new ERP system could have an adverse effect on our operations and systemof internal controls***

 

OnOctober 2nd 2009, we migrated from our proprietaryenterprise operating system to an ERP system running on a customized MicrosoftDynamics AX.  We have encounteredunexpected deficiencies in implementing the new system, including a lack ofcontrols to detect errors in account balances. We anticipate that these deficiencies will likely have a  material adverse effect on our operations,results of operations and system of internal controls over financial reportingin the fourth quarter of 2009.  Inaddition, the new system will require that we design and adopt new internalcontrols over financial reporting, and any failure by us to implement and testthose new controls in a timely manner would likely result in a materialweakness in our internal controls over financial reporting.

 

***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 Exchange Commission(“SEC”) issued subpoenas to us to produce documents relating to the Company’sinventory reserve policies, vendor marketing contributions, as well as othermatters. We intend to cooperate fully with the SEC’s formal investigation, andour management will devote the resources required to respond promptly andthoroughly to any request by the SEC for any additional information or documents.Although the investigation is in its preliminary stages, and it is thereforedifficult to predict the time required by senior management to respond to it,we do not presently anticipate that the investigation will adversely affectmanagement, our results of operations or our financial position. Until theinvestigation is concluded, however, it is difficult to assess its impact onus.

 

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

 

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

 

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

 

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

 

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

 

Theacquisition of new customers is a key factor in increasing demand for ourjewelry products and increasing our revenue. We currently attract new customersby driving traffic to our website using a marketing and advertising strategythat includes targeted keyword searches, online banner advertising, targetede-mail advertising, and participation in affiliate programs. We do not maintainlong-term contracts or arrangements with any companies, including any searchengines, Internet portals, or other websites, and we may not successfully enterinto additional relationships or maintain existing ones. In addition, trafficto our website could decline if our online marketing programs become lesseffective or the traffic decreases to the search engines, Internet portals, andwebsites with which we advertise. Our business could be materially 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 would beharmed.

 

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

 

Inthe three month periods ended September 30, 2008 and 2009, 20.7% and 37.8%,respectively, and in the nine month periods ended September 30, 2008 and 2009,23.1% and 33.8%, respectively, of our net revenue was generated by shipments tocustomers outside of the United States. We plan, over time, to expand our reachinto international 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 requirements, legal uncertainty regarding liability, tariffs, andother trade barriers, longer payment cycles, and potentially adverse taxconsequences, any of which could adversely affect our business. Although ourforeign sales historically have been denominated in U.S. dollars, we also maybe subject to increased risks relating to foreign currency exchange ratefluctuations to the extent we decide to denominate our sales in foreigncurrencies.

 

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***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.

 

***Our limited operating history makes it difficult forus to forecast accurately net revenue and appropriately plan our expenses.***

 

Wehave a limited operating history. As a result, it is difficult to forecastaccurately our sales or operating expenses. We base our estimated expenselevels on our operating forecasts and estimates of future sales. Sales and resultsof operations are difficult to forecast because they generally depend on thenumber, dollar volume, and timing of the orders we receive, which areuncertain. Some of our expenses are fixed, making it difficult to adjust ourspending in a timely manner to take into account any unexpected shortfall insales. We may also be unable to adjust spending in a timely manner tocompensate for any unexpected sales shortfall, which could cause our net incomein a given quarter to be lower than expected.

 

***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 are substantiallybelow those of traditional jewelry retailers. We do not have any formal orbinding supply agreements with any of our manufacturers, distributors, or othersuppliers for our supply of jewelry products. As a result, we do not have aguaranteed supply of jewelry products at favorable prices. Our inability tomaintain 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 purchase volume varies from quarter toquarter.  The top two suppliers accountedfor approximately 31.1%, 24.0% and 14.6% of our total purchases in 2006, 2007,and 2008, respectively.  28.7% and 37.1%,in the three month period ended September 30, 2008 and 2009, respectively, and14.2% and 28.0% in the nine month period ended September 30, 2008 and 2009,respectively, were purchased from our top two suppliers.

 

***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 that offer jewelry, including eBay, Blue Nile,Overstock, and uBid. We also encounter competition from national jewelry retailchains, such as Zales, Kay Jewelers, and Finlay Fine Jewelry, and massretailers and other enterprises that sell jewelry, such as Wal-Mart, Target, J.C. Penney, Costco, QVC, and Home Shopping Network. Many of our competitors havegreater brand recognition, longer operating histories, larger customer bases,and significantly greater financial,

 

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marketing,and other resources than we do. Smaller competitors may enter into strategic orcommercial relationships with larger, more established, and well-financedcompanies. Other competitors may enter into exclusive distribution agreementswith our suppliers that deny us access to suppliers’ products. Competitors mayalso devote greater resources to marketing and promotional campaigns and towebsite and systems technology than we do. We may not be able to competesuccessfully against current and future competitors or address increasedcompetitive pressures. Furthermore, attempts have been made in the past todevelop and market synthetic stones and gems to compete in the market for gemstonesand gemstone jewelry. We expect such efforts to continue in the future. If anysuch efforts 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 of jewelry for our net revenue, and demandfor these products could decline.***

 

Luxury products, such as jewelry, arediscretionary purchases for consumers. The volume and dollar amount of suchpurchases may be affected by adverse trends in the general economy and consumerperceptions of those trends, and purchases may significantly decrease duringeconomic downturns. The success of our business depends in part on macroeconomicfactors, such as employment levels, salary levels, tax rates, and creditavailability, all of which affect disposable income and consumer spending. Anyreduction in disposable income or consumer spending may affect us moresignificantly 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 and New York. However, additionalstates or foreign countries may seek to impose sales or other tax obligationson us in the future. A successful assertion by one or more states or foreigncountries that we should be collecting sales or other taxes on the sale of ourproducts could result in substantial tax liabilities for past and future sales,discourage customers from purchasing products from us, decrease our ability tocompete with traditional retailers, and otherwise substantially harm ourbusiness, 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.

 

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

 

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

 

***The satisfactory availability, performance, and reliability of ourwebsite, network infrastructure, and transaction processing systems arecritical to our ability to attract, retain, and service customers.***

 

Any problems with the availability,performance, or reliability of our website, network infrastructure, ortransaction processing systems could result in decreased customer traffic,reduced orders, reduced order fulfillment performance, and lower net revenue aswell as negative publicity and damage to our reputation. In order to remaincompetitive, we must continually seek to improve and expand the functionalityand features of our website, network infrastructure, transaction processingsystems, and delivery and shipping functions to accommodate any substantialincrease in the volume of traffic to and orders from our website. We may not besuccessful in these efforts, and we may not be able to project accurately therate or timing of increases, if any, in the use of or sales from our website,or timely expand or upgrade our website, infrastructure, or systems toaccommodate any such increases. Additionally, we may not be able to remedy anysuch availability, performance, or reliability problems in a timely manner, orat all, because we depend in part on third parties for such availability,performance, and reliability.

 

***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 securetransmission of confidential information over public networks. Third partiesmay have the technology or expertise to breach the security of customertransaction data. Our security measures may not prevent security breaches thatcould result in substantial harm to our business and results of operations anddamage to our reputation. Currently, a majority of our sales are billed to ourcustomers’ credit card accounts directly. Under current credit card practices,we are liable for fraudulent credit card transactions because we do not obtaincardholder signatures. We rely on encryption and authentication technologylicensed from third parties to effect secure transmission of confidentialinformation, including credit card numbers. We do not currently carry insuranceagainst this risk. Advances in computer capabilities, new discoveries in thefield of cryptography, or other developments may result in a compromise orbreach of the technology we use to protect customer transaction data. Inaddition, anyone who is able to circumvent our security measures couldmisappropriate proprietary information or cause 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) impose strict customer credit carddata security standards that require us to provide quarterly self assessmentsto ensure that our customers credit card information is protected. Failure tomeet the PCI data security standards could result in substantial fines and/orloss of the right to collect credit card payments. The loss of credit cardactivity would materially impact operations.

 

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

 

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

 

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

 

Our success depends on the continued growthand maintenance of the Internet. The Internet has experienced, and is likely tocontinue to experience, significant growth in the numbers of users and amountof traffic. If Internet usage continues to grow as anticipated, theinfrastructure may not be able to support the level of usage and itsperformance and reliability may decline. If outages or delays on the Internetincrease, overall Internet usage could grow more slowly or decline. Inaddition, the performance of the Internet may be harmed by increased number ofusers or bandwidth requirements or by viruses, worms, and similar issues. TheInternet has experienced a variety of outages and other delays as a result ofdamage to portions of its infrastructure, and it could face outages and delaysin the future. These outages and delays could reduce the level of Internetusage.

 

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

 

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

 

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

 

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

 

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

 

Ourinventory is stored at our warehouse/office facility in Culver City,California. Consequently, our merchandise supply is vulnerable to fire, flood, earthquakes,and similar events that may impact our facility. Any damage to or loss of allor a significant portion of our inventory could cause significant delays inshipment of goods to our customers, resulting in negative publicity about anddiminished customer confidence in our website. In addition, we may experiencetheft of our products while they are being held in inventory or during thecourse of their shipment to our customers by third-party carriers. We haveimplemented security measures to prevent such theft and maintain insurance tocover losses resulting from theft. Nevertheless, we could incur significantlosses from theft, which would substantially harm our business and results ofoperations, if our security measures fail, losses exceed our insurancecoverage, or we are not able to maintain insurance at a reasonable cost.

 

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

 

Visa,MasterCard, American Express, and Discover Card could increase the interchangefees that they charge for transactions using their cards. Increases ininterchange fees may result in increased operating costs and reduced profitmargin.

 

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

 

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

 

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***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 28.5%, 33.8% and 16.9% of our netrevenue was generated during the fourth quarter of 2006, 2007 and 2008,respectively. Thefourth quarter of 2008 was an exception as we encountered a significantslowdown in sales resulting from the 2008 financial and economic crisis. As we continueto 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 increasing 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 andseveral 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 by disappointedbuyers may occur, resulting in negative publicity about and diminished customerconfidence 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 ananti-money laundering program to guard against both illicit purchase and salesactivities. If these risks were to occur, we may face a negative publicreaction to our brand name resulting in loss of sales.

 

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

 

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

 

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***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 or enforce our ownintellectual property rights adequately, and we may become subject tointellectual property litigation.***

 

Weregard the protection of our trademarks, copyrights, domain name, trade dress,and trade secrets as critical to our success. We rely on a combination ofcommon law as well as trademark, copyright, trade dress, and trade secret lawsto protect our intellectual property rights. We also have entered intoconfidentiality and invention assignment agreements with our employees andrelevant contractors and nondisclosure agreements with relevant parties withwhom we conduct business in order to limit access to and disclosure of ourproprietary information. These contractual arrangements and other steps we havetaken to protect our intellectual property may not prevent misappropriation ofour intellectual property or deter independent development of similarintellectual property by others. We also are pursuing the registration of ourdomain name, trademarks, and service marks in the United States andinternationally. Effective trademark, copyright, patent, trade dress, tradesecret, and domain name protection is very expensive to maintain and mayrequire litigation. We must protect our trademarks, copyrights, patents, anddomain names in an increasing number of jurisdictions, a process that isexpensive and may not be successful in every location.

 

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 and regulationsrelated to privacy and the collection, dissemination, and security of personalinformation 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. Several states have proposed legislation that would limit the use ofpersonal information gathered online or require online services to establishprivacy policies. Moreover, proposed legislation in the United States andexisting laws in foreign countries require companies to establish procedures tonotify users of privacy and security policies, obtain consent from users forcollection and use of personal information, and/or provide users with theability 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 regulationsgoverning the conduct and liability of auctioneers, which could affect the wayin which we conduct our business or otherwise increase our cost of doingbusiness.***

 

Numerousstates and foreign jurisdictions, including California, where our headquartersare located, have regulations regarding how auctions may be conducted and theliability of auctioneers in conducting such auctions. No final legal determinationhas been made whether the California regulations apply to our business, andlittle precedent exists in this area. Several states and some foreignjurisdictions 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 lawsand regulations could cover issues such as user privacy, freedom of expression,pricing, fraud, content and quality of products and services, taxation,advertising, intellectual property rights, and information security.Applicability to the Internet of existing laws governing issues, such as propertyownership, copyrights and other intellectual property issues, taxation, libeland defamation, obscenity, and personal privacy is uncertain. The vast majorityof these laws was adopted prior to the advent of the Internet and relatedtechnologies and, as a result, do not contemplate or address the unique issuesof the Internet and related technologies. Those laws that do reference theInternet, such as the U.S. Digital Millennium Copyright Act and the EuropeanUnion’s Directive on Distance Selling and Electronic Commerce, have onlyrecently begun to be interpreted by the courts and implemented by the EuropeanUnion member states, so their applicability and scope remain uncertain. As ouractivities and the types of goods listed on our website expand, regulatoryagencies may claim that we or our users are subject to licensure in theirjurisdiction, either with respect to our business in general, or in order toallow the sale of certain items, such as real estate, event tickets, boats, andautomobiles.

 

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 Chairman of the Board and Chief Executive Officer.***

 

Ourperformance depends substantially upon David Zinberg, our Chairman of the Boardand Chief Executive Officer, who has extensive experience with the purchase andsale of jewelry. We rely on Mr. Zinberg to make critical operational decisionson a daily basis, such as product offerings and purchases, and to make keystrategic plans. We have an employment agreement with Mr. Zinberg extendingthrough July 2010 and renewable annually. The loss of the services of Mr. Zinbergwould adversely 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 stateauthorities, but they were not so licensed. In such situations, a number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs. We believe, however, that as to any options by investorsat this time or in the future, applicable statutes of limitations will mitigateour exposure to any civil remedies.

 

***We do not intend to pay dividends onour common stock, and, consequently, your only opportunity to achieve a returnon your investment is if 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 37.7% ofour common stock as of September 30, 2009. Marina Zinberg, our Vice President,who is the sister of David Zinberg, our Chairman and Chief Executive Officer,owns an additional 31.0% 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 in Delaware, andthe Delaware certificate of incorporation and the Delaware General CorporationLaw, or DGCL, contain provisions that may have the effect of making moredifficult or delaying attempts by others to obtain control of our company, evenwhen these attempts may be in the best interests of our stockholders. TheDelaware certificate of incorporation also authorizes our Board of Directors,without stockholder approval, to issue one or more series of preferred stock,which could have voting and conversion rights that adversely affect or dilutethe voting power of the holders of common stock. Delaware law also imposesconditions on certain business combination transactions with “interestedstockholders.” The Delaware certificate of incorporation divides our Board ofDirectors into three classes, with one class to stand for election each yearfor a three-year term after the initial election. The classification ofdirectors tends to discourage a third party from initiating a proxysolicitation or otherwise attempting to obtain control of our company and maymaintain the incumbency of our Board of Directors, as this structure generallyincreases the difficulty of, or may delay, replacing a majority of directors.The Delaware bylaws authorize our Board of Directors to fill vacancies or newlycreated directorships. A majority of the directors then in office may elect asuccessor to fill any vacancies or newly created directorships.

 

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**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

OnApril 1, 2009, we issued 666,000 restricted stock awards of our common stock, with 25% vesting atthe end of each year over a four year period, under the 2006 Award Plan to management andkey employees for services rendered to our Company. No stock options weregranted during the nine months ended September 30, 2009.

 
| ** **                      | ** ** | ** **    | ** ** | ** **  | ** ** | **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)**      | ** ** |
| July 1- July 31                 |       | 310,425       |       | $           | 3.35       |                | 3,214,451  |                 | $          | 15,475,000 |   |
| August 1- August 31             |       | 94,390        |       | 4.02        |       | 3,308,841           |       | $                    | 15,096,000 |   |
| September 1 – September 30 |       | —        |       | $           | —     |                | 3,308,841  |                 | $          | 15,096,000 |   |
| Total                           |       | 404,815       |       |        |       |                |       |                 |       |

 

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(1)                                 In June 2007,we authorized 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 the stock buyback program to $20 million from $5million. In February 2009, we authorized an increase in the stock buybackprogram to $33.5 million. The stock buyback will be at prices deemedappropriate by management over a 24 month period.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

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

 

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

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

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

 

**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: November 9, 2009 |       |                             |

 

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