**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                          |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   | **For the  quarterly period ended March 31, 2006**                                                                                                                          |
|       |   |                                                                                                                                                                             |
| **o**      |   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                                                                   |
|       |   | **For the  transition period            to            ** |

 

**Commissionfile number 000-51257**

 

**BIDZ.COM, INC.**

(Exact name of Registrantas specified in its charter)

 

| **California**                                                   | ** ** | **95-4728109**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer Identification Number) |

 

**3562Eastham DriveCulver City, California90232**(Address, including zip code, of principalexecutive office)

 

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

 

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes  o    No  ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes  o    No  ý

 

Numberof shares outstanding of Registrant’s common stock, no par value, as of March 31,2006:

 

**23,312,500**

 

 

----

 

**TABLE OFCONTENTS**

 
| PART I. FINANCIAL  INFORMATION                                                                       |                                                                                                        |   |
|-----------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Financial Statements                                                                         |                                                                                                        |   |
|                                                                                                      | Condensed Balance Sheets as of  December 31, 2005 and March 31, 2006 (unaudited)                  |   | 2 |
|                                                                                                      | Condensed Statements of  Operations for three month periods ended March 31, 2005 and 2006  (unaudited) |   | 3 |
|                                                                                                      | Condensed Statements of Cash  Flows for three month periods ended March 31, 2005and 2006 (unaudited)   |   | 4 |
|                                                                                                      | Notes to Financial Statements (unaudited)                                                                   |   | 5 |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |                                                                                                        | 11     |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  |                                                                                                        | 29     |
| Item 4.  Controls and Procedures                                                                          |                                                                                                        | 29     |
| PART II. OTHER INFORMATION                                                                           |                                                                                                        | 29     |
| Item 1.  Legal Proceedings                                                                                |                                                                                                        | 29     |
| Item 6. Exhibits                                                                                          |                                                                                                        | 30     |
| SIGNATURES                                                                                                |                                                                                                        | 31     |

 

This quarterly report includes forward lookingstatements. All statements other than statements of historical facts containedin this registration statement, including statements regarding our futurefinancial position, business strategy and plans and objectives of managementfor future operations, are forward looking statements. The words “believe,” “may,”“will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similarexpressions, as they relate to us, are intended to identify forward lookingstatements. We have based these forward-looking statements largely on ourcurrent expectations and projections about future events and financial trendsthat we believe may affect our financial condition, results of operations,business strategy and financial needs. These forward looking statements aresubject to a number of risks, uncertainties and assumptions discussed throughoutthis filing.

 

1

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**Bidz.com, Inc.**

**Condensed Balance Sheet**

 

*(In thousands, except share data)*

 
| ** **                                                                                                                                     | ** ** | **December 31, 2005** | ** ** | **March 31, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                     | ** ** | ** **                      | ** ** | **(Unaudited)**              | ** ** |
| **Assets**                                                                                                                                     |       |                            |       |                         |       |
| **Current assets:**                                                                                                                            |       |                            |       |                         |       |
| Cash                                                                                                                                           |       | $                               | 7          |                         | $          | — |   |
| Accounts receivable, net                                                                                                                       |       | 886                             |       | 709                          |       |
| Inventories, net of reserves of $331 and $478 as of December 31,  2005 and March 31, 2006, respectively                              |       | 15,921                          |       | 17,525                       |       |
| Other current assets                                                                                                                           |       | 158                             |       | 261                          |       |
| Total current assets                                                                                                                           |       | 16,972                          |       | 18,495                       |       |
|                                                                                                                                           |       |                            |       |                         |       |
| **Property and equipment, net**                                                                                                                |       | 384                             |       | 457                          |       |
| **Intangible asset**                                                                                                                           |       | 150                             |       | 150                          |       |
| **Deposits and other assets**                                                                                                                  |       | 240                             |       | 493                          |       |
|                                                                                                                                           |       | $                               | 17,746     |                         | $          | 19,595 |   |
|                                                                                                                                           |       |                            |       |                         |       |
| **Liabilities and Stockholders’ Equity**                                                                                                  |       |                            |       |                         |       |
| **Current liabilities:**                                                                                                                       |       |                            |       |                         |       |
| Bank overdraft (includes related party amounts of  $2,184 and $5,422 as of December 31, 2005 and March 31, 2006,  respectively)      |       | $                               | 5,315      |                         | $          | 6,132 |   |
| Accounts payable (includes related party amounts of  $2,712 and $468 as of December 31, 2005 and March 31, 2006,  respectively)      |       | 7,297                           |       | 5,049                        |       |
| Accrued expenses                                                                                                                               |       | 1,774                           |       | 2,098                        |       |
| Deferred revenue                                                                                                                               |       | 1,577                           |       | 1,191                        |       |
| Total current liabilities                                                                                                                      |       | 15,963                          |       | 14,470                       |       |
|                                                                                                                                           |       |                            |       |                         |       |
| **Commitments and contingencies**                                                                                                              |       | —                          |       | —                       |       |
|                                                                                                                                           |       |                            |       |                         |       |
| **Stockholders’ equity:**                                                                                                                 |       |                            |       |                         |       |
| Common Stock; no par value; authorized 50,000,000  shares; issued and outstanding 23,312,500 at December 31, 2005 and 2006,  respectively |       | 28,830                          |       | 28,780                       |       |
| Deferred stock-based compensation                                                                                                              |       | (100                            | )          | —                       |       |
| Accumulated deficit                                                                                                                            |       | (26,947                         | )          | (23,655                      | )          |
| Total stockholders’ equity                                                                                                                |       | 1,783                           |       | 5,125                        |       |
|                                                                                                                                           |       | $                               | 17,746     |                         | $          | 19,595 |   |

 

2

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**Bidz.com, Inc.**

**Condensed Statements of Operations (Unaudited)**

 

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

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **March 31, 2005**     | ** ** | **March 31, 2006** | ** ** |
|                                                             |       |                             |       |   |   |
| **Net revenues:**                                                |       |                             |       |   |   |
| **Merchandise sales and shipping**                               | ** ** | **$**                            | **20,628** | ** ** | **$** | **34,636** | ** ** |
| **Commissions**                                                  |       | 91                               |       | 57 |   |
| **Advertising**                                                  |       | 1                                |       | 1 |   |
|                                                             |       |                             |       |   |   |
|                                                             |       | 20,720                           |       | 34,694 |   |
|                                                             |       |                             |       |   |   |
| **Cost of revenues**                                             |       | 16,975                           |       | 25,516 |   |
|                                                             |       |                             |       |   |   |
| **Gross Profit**                                                 |       | 3,745                            |       | 9,178 |   |
|                                                             |       |                             |       |   |   |
| **Operating expenses:**                                          |       |                             |       |   |   |
| General and administrative                                       |       | 2,589                            |       | 3,352 |   |
| Sales and marketing                                              |       | 875                              |       | 2,407 |   |
| Depreciation and amortization                                    |       | 38                               |       | 54 |   |
|                                                             |       |                             |       |   |   |
| **Total operating expenses**                                     |       | 3,502                            |       | 5,813 |   |
|                                                             |       |                             |       |   |   |
| **Income from operations**                                       |       | 243                              |       | 3,365 |   |
|                                                             |       |                             |       |   |   |
| **Interest Income**                                              |       | —                           |       | 17 |   |
|                                                             |       |                             |       |   |   |
| **Income before income taxes**                                   |       | 243                              |       | 3,382 |   |
|                                                             |       |                             |       |   |   |
| **Income taxes**                                                 |       | —                           |       | 90 |   |
|                                                             |       |                             |       |   |   |
| **Net income**                                                   | ** ** | **$**                            | **243**    | ** ** | **$** | **3,292** | ** ** |
|                                                             |       |                             |       |   |   |
| Net income per share available to common shareholders  - basic   | ** ** | **$**                            | **0.01**   | ** ** | **$** | **0.14** | ** ** |
|                                                             |       |                             |       |   |   |
| Net income per share available to common  shareholders - diluted | ** ** | **$**                            | **0.01**   | ** ** | **$** | **0.14** | ** ** |
|                                                             |       |                             |       |   |   |
| Weighted average number of shares outstanding -  basic           |       | 27,411,137                       |       | 23,312,500 |   |
|                                                             |       |                             |       |   |   |
| Weighted average number of shares outstanding -  diluted         |       | 27,940,695                       |       | 23,826,758 |   |

 

3

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**Bidz.com, Inc.**

**Condensed Statements of CashFlows (Unaudited)**

*(in thousands)*

 
| ** **                                                                                               |   | **Three Months Ended**  |   |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                     |   | **March 31, 2005** |   | **March 31, 2006** |   |
| **Cash flows provided by (used for) operating  activities:**                                             |   |                    |   |   |   |
| Net income                                                                                               |   | $                       | 243    |   | $ | 3,292 |   |
| **Adjustments to reconcile net income (loss) to  net cash provided by (used for) operating activities:** |   |                    |   |   |   |
| Depreciation and amortization                                                                            |   | 38                      |   | 54 |   |
| Change in inventory reserve                                                                              |   | 29                      |   | 147 |   |
| Amortization of deferred stock-based compensation                                                        |   | 50                      |   | 50 |   |
|                                                                                                     |   |                    |   |   |   |
| **Changes in assets and liabilities:**                                                                   |   |                    |   |   |   |
| **(Increase) decrease in assets:**                                                                       |   |                    |   |   |   |
| Accounts receivable                                                                                      |   | (41                     | )      | 177 |   |
| Inventories                                                                                              |   | 1,489                   |   | (1,751 | ) |
| Other current assets                                                                                     |   | (455                    | )      | (103 | ) |
| Deposits and other assets                                                                                |   | —                  |   | (253 | ) |
| **Increase (decrease) in liabilities:**                                                                  |   |                    |   |   |   |
| Accounts payable                                                                                         |   | (736                    | )      | (2,248 | ) |
| Accrued expenses                                                                                         |   | (201                    | )      | 324 |   |
| Deferred revenue                                                                                         |   | 44                      |   | (386 | ) |
| Net cash provided by (used for) operating activities                                                     |   | 460                     |   | (697 | ) |
| **Cash flows (used for) investing activities:**                                                          |   |                    |   |   |   |
| Capital expenditures                                                                                     |   | (49                     | )      | (127 | ) |
| **Cash flows provided by (used for) financing  activities:**                                             |   |                    |   |   |   |
| Increase (decrease) in bank overdraft                                                                    |   | (407                    | )      | 817 |   |
|                                                                                                     |   |                    |   |   |   |
| Net cash provided by (used for) financing activities                                                     |   | (407                    | )      | 817 |   |
|                                                                                                     |   |                    |   |   |   |
| **Net increase (decrease) in cash**                                                                      |   | 4                       |   | (7 | ) |
| **Cash, beginning of period**                                                                            |   | $                       | 5      |   | $ | 7 |   |
| **Cash, end of period**                                                                                  |   | $                       | 9      |   | $ | — |   |
| **Supplemental disclosure of cash flow  information:**                                                   |   |                    |   |   |   |
| Interest paid                                                                                            |   | $                       | — |   | $ | — |   |
| Income taxes paid                                                                                        |   | $                       | — |   | $ | — |   |

 

4

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**BIDZ.COM, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.****                                      Basisof Presentation and Nature of Business Operations**

 

**Basis of Presentation**

The accompanyingunaudited financial statements 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 financial statementsand related notes should be read in conjunction with the Company’s audited financialstatements for the fiscal year ended December 31, 2005 filed in the Form 10-KAnnual Report by the Company on  March 29,2006. In the opinion of management, these financial statements reflect alladjustments which are of a normal recurring nature and which are necessary topresent fairly the financial position of Bidz.com, Inc. as of March 31,2006 and the results of operations for the three month ended March 31,2005 and 2006 and the cash flows for the three month periods ended March 31,2005 and 2006. The results of operations for the three months ended March 31,2006 are not necessarily indicative of the results which may be expectedfor the entire fiscal year.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period. Actual results could differ from those estimates.

 

***Business and Organization:***

 

We were formed in November 1998 as a Californiacorporation with our principal location of business in Los Angeles, California.We operate a website located at *www.bidz.com*for the purpose of selling merchandise, utilizing our unique onlinesales auction platform.

 

We sell our products throughout the United States andhave expanded the reach of our customer base to Europe and Asia in recentyears. Revenue generated from the United States accounted for approximately 81.3%and 82.2% of net revenue for the three months ended March 31, 2005 and2006, respectively.

 

As noted in our financial statements and the relatednotes for the year ended December 31, 2005, the report of our independentregistered public accounting firm stated that our history of significantoperating losses, working capital deficit, lack of additional financing, andnegative cash flows from operations raised substantial doubt about our abilityto continue as a going concern.

 

For the three months period  March 31, 2006, we reported net incomeof $3.3 million and net cash used for operating activities of $697,000 million.As of March 31, 2006, we had current assets of $18.5 million andcurrent liabilities of $14.5 million or working capital of $4.0 million.Available cash was $6.3 million before post-dated checks and was $0 net ofpost-dated checks.

 

During the year ended December 31, 2005, we reportednet income of $2.6 million and net cash provided by operating activitiesof $1.4 million. As of December 31, 2005, we had current assets of$17.0 million and current liabilities of $16.0 million or workingcapital of $1.0 million. Available cash was $2.6 million beforepost-dated checks and was $7,000 net of post-dated checks.

 

5

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***Recent Developments:***

 

On March 15, 2006,our Board of Directors authorized us to file a registration statement with theSEC for an initial public offering of our common stock. In connection with theoffering, we intend to reincorporate in Delaware concurrently with our listingon the Nasdaq National Market. If the offering is consummated under the termspresently anticipated, all of the shares of common stock outstanding as of theeffective date of the reincorporation will automatically convert into the samenumber of shares of common stock in the Delaware Corporation.

 

During March 2006,our Board of Directors adopted and approved our 2006 Stock Award Plan.

 

***Recent Accounting Pronouncements***

 

In December 2004,the FASB issued SFAS No. 123R (Revised 2004), “Share-Based Payment” (“SFAS123R”). This statement addresses the accounting for share-based paymenttransactions in which a company receives employee services in exchange for thecompany’s equity instruments or liabilities that are based on the fair value ofthe company’s equity securities or may be settled by the issuance of thesesecurities. SFAS 123R eliminates the ability to account for share-basedcompensation using APB 25 and generally requires that such transactions beaccounted for using a fair value method. The provisions of this statement areeffective for financial statements issued in the first quarter reporting periodcommencing after December 15, 2005. The stock-based compensation we willrecognize after the adoption of SFAS 123R will be affected by the number andtype of stock-based awards granted in the future and the pricing model andrelated assumptions we decide to use in order to estimate the fair values ofoptions.

 

We will use theBlack-Scholes option pricing model to estimate the value of options under SFAS123R. Because all of our stock options outstanding as of March 31, 2006were fully vested, we do not anticipate any material impact on our results ofoperations by the adoption of SFAS 123R.

 

In March 2005, theSEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), “Share BasedPayment,” which expresses the SEC staff’s position regarding the application ofSFAS 123R and certain SEC rules and regulations and also provides thestaff’s views regarding the valuation of share-based payment arrangements forpublic companies. For the three months ended March 31, 2006, we did notrecord stock-based compensation expense, and accordingly SAB 107 did not haveany effect on our statements of operations.

 

**2.****                                      EarningsPer Share**

 

Inaccordance with SFAS No. 128, “Earnings Per 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 the potential common shares had been issued and if the additional commonshares were not anti-dilutive. As of March 31, 2005 and 2006, the Companyhas approximately 529,558 and 514,258 respectively of dilutive common stockequivalents from stock options, which was included in the calculation ofdiluted earnings per share.

 

Thedilutive effect of outstanding stock options and warrants is reflected indiluted earnings per share by application of the treasury stock method for thethree-month periods ended March 31, 2005 and 2006. The following tablesets forth the computation of basic and diluted net income per share:

 

6

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

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
|                                    |       |                                             |       |   |   |
| Basic and diluted net income per share: |       |                                             |       |   |   |
|                                    |       |                                             |       |   |   |
| Numerator:                              |       |                                             |       |   |   |
| Net income                              |       | $                                                | 243        |   | $ | 3,292 |   |
|                                    |       |                                             |       |   |   |
| Denominator:                            |       |                                             |       |   |   |
|                                    |       |                                             |       |   |   |
| Weighted common shares outstanding      |       |                                             |       |   |   |
|                                    |       | 27,411,137                                       |       | 23,312,500 |   |
|                                    |       |                                             |       |   |   |
| Effect of dilutive securities           |       | 529,558                                          |       | 514,258 |   |
|                                    |       |                                             |       |   |   |
| Denominator for diluted calculation     |       |                                             |       |   |   |
|                                    |       | 27,940,695                                       |       | 23,826,758 |   |
|                                    |       |                                             |       |   |   |
| Net income per share, basic             |       | $                                                | 0.01       |   | $ | 0.14 |   |
|                                    |       |                                             |       |   |   |
| Net income per share, diluted           |       | $                                                | 0.01       |   | $ | 0.14 |   |
|                                         |            |                                                  |            |  |  |  |  |  |  |

 

**3.****                                      StockBased Compensation**

 

Prior to January 1,2006, we measured compensation expense to employees for our stock optionincentive plans using the intrinsic value method prescribed by AccountingPrinciples Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issuedto Employees.” We did not record employee stock based compensation expense inthe Statement of Operations for the three month period ended March 31,2005, as all options granted had an exercise price equal to the market value ofthe underlying common stock on the date of grant. In accordance with Statementof Financial Accounting Standards (“SFAS”) No. 123, “Accounting forStock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure,” which amended, SFAS No. 123, wedisclosed the pro forma net income and net income per share as if the fairvalue based method had been applied in measuring compensation expense. TheFinancial Accounting Standards Board (“FASB”) issued SFAS No. 148 in December 2002to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, SFAS No. 148 expanded the disclosure requirements of SFAS No. 123to require more prominent disclosures in both annual and interim financialstatements regarding the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.

 

The transition provisionsof SFAS No. 148 were effective for fiscal years ended after December 15,2002. The transition provisions did not have an impact on our financialposition or results of operations as we did not elect to adopt the fairvalue-based method of accounting for stock-based employee compensation underSFAS No. 123. The disclosure provisions of SFAS No. 148 wereeffective for financial statements for interim periods beginning after December 15,2002. We  adopted the disclosurerequirements in the first quarter of 2003.

 

In December 2004,the FASB issued SFAS No. 123R, “Share Based payment: An Amendment of FASBStatements No. 123 and 95.” This statement requires that we recognize inour financial statements the cost resulting from all share- based paymenttransactions. In addition, in March 2005 the Securities and ExchangeCommission (“SEC”) released SEC Staff Accounting Bulletin No. 107, “Share-BasedPayment” (“SAB 107”), which provides the SEC staff’s position regarding theapplication of SFAS 123R and certain SEC rules and regulations, and alsoprovides the staff’s views regarding the valuation of share-based paymentarrangements for public companies. On January 1, 2006, we adopted SFAS123R, which eliminates our ability to account for share-based compensationtransactions, as we formerly did, using the intrinsic value method asprescribed by APB 25 and generally requires that we recognize in our statementsof operations all share-based payments to employees, including grants of stockoptions based on their fair values.

 

7

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The Company adopted SFAS123R using the modified prospective method which requires the application ofthe accounting standard as of January 1, 2006. The Company’s financialstatements as of and for the three months ended March 31, 2006 reflect theimpact of adopting SFAS 123R. In accordance with the modified prospectivemethod, the financial statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS 123R.

 

There was no stock-basedcompensation expense recognized during the three months ended March 31,2006, as we did not grant such compensation during the period. Consequently,there is no effect on our statements of operations as a result of adopting SFAS123R. Similarly, there in no effect on our statements of operations as a resultof the SEC staff’s release of SAB 107. Under SFAS 123R stock-based compensationexpense recognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest. Compensationexpense for the stock-based payment awards granted subsequent to December 31,2005, will be based on the grant date fair value estimated in accordance withSFAS 123R. As stock-based compensation expense recognized in the statements ofincome is based on awards ultimately expected to vest, it will be reduced forestimated forfeitures. SFAS 123R requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. In the pro forma information requiredunder SFAS 148 for the periods prior to 2006, we did not account forforfeitures, as all options granted were fully vested at the date of grant andwere not subject to any service period condition.

 

Under SFAS 123R, we willcontinue to use the Black-Scholes model to estimate the fair value of options.Our assessment of the estimated compensation charges will be affected by ourstock price as well as assumption regarding a number of subjective variablesand the related tax impact. These variables include, but are not limited to,our stock price volatility and employee stock option exercise behaviors.

 

At March 31, 2006, the Company has one stock-based employee compensation plan (the 2006 Stock Option Plan replacing the 2002 Stock Option Plan and the 2001 Stock Option Plan). The following table illustrates the effect on net income and income per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:.

 

*(Inthousands, except per share data)*

 
| ** **                             | ** ** | **Three Months  Ended** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **March 31,**           | ** ** |
| ** **                             | ** ** | **2005**                     | ** ** |
| Net Income, as reported                |       | $                            | 243        |   |
| Compensation recognized under APB 25   |       | —                       |       |
| Compensation recognized under SFAS 123 |       | —                       |       |
| Pro-forma net income (loss)            |       | $                            | 243        |   |
|                                   |       |                         |       |
| Net Income (loss) per share:           |       |                         |       |
| Basic - as reported                    |       | $                            | 0.01       |   |
|                                   |       |                         |       |
| Diluted - as reported                  |       | $                            | 0.01       |   |

 

No options were granted during the three months ended March 31, 2005 and 2006.  As of March 31, 2006, total unrecognized future compensation cost related to non-vested deferred stock based compensation was $50,000 which is expected to be recognized as expense over the next three months.

 

**4.****                                      StockOption Plan**

 

We adopted our 2001 StockOption Plan, our 2002 Special Stock Option Plan and our 2006 Award Plan(collectively, the “Plans”), in January 2001, January 2002, and March 2006,respectively. Under the Plans, we may issue incentive stock options to ouremployees and non-qualified stock options to consultants and non-employees. Thevesting requirements, performance thresholds and other terms and conditions ofoptions granted under the Plans will be determined by our CompensationCommittee and Board of Directors.

 

8

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Thefollowing is a summary of stock option activity as of March 31, 2006, andchanges during the three months ended March 31, 2006 is presented below:

 
| **Options**                                       | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Life of  Contract  (years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January 1, 2006               |       | 8,342,000  |       | $                                           | 5.63       |                                                              |       |                            |       |   |
| Granted                                           |       | 0          |       | —                                      |       |                                                              |       |                            |       |
| Exercised                                         |       | 0          |       | —                                      |       |                                                              |       |                            |       |
| Forfeited                                         |       | (35,000    | )          | $                                           | 4.75       |                                                              |       |                            |       |   |
| Expired                                           |       | 0          |       | —                                      |       |                                                              |       |                            |       |
| Outstanding at March 31, 2006                |       | 8,307,000  |       | $                                           | 5.63       |                                                              |       |                            | $          | 3,056,625 |   |
| Vested or expected to vest at March 31, 2006 |       | 8,307,000  |       | $                                           | 5.63       |                                                              | 4.49       |                            | $          | 3,056,625 |   |
| Exercisable at March 31, 2006                |       | 8,307,000  |       | $                                           | 5.63       |                                                              | 4.49       |                            | $          | 3,056,625 |   |

 

We didnot issue any options in the three months ended March 31, 2006, and nooptions vested during this period, as all outstanding options were fullyvested, and no options were exercised. Accordingly, no compensation cost hasbeen charged against income for the three months ended March 31, 2006, andthere was no recognized tax benefit related thereto.

 

**5.****                                     ****Concentrations**

 

**Purchasesfrom our top two vendors, one of which is a related party (see Note 7), amounted,to$6.9 million, and $12.4 million representing 51.0% and 48.8% of the totalpurchases during the three months ended March 31, 2005 and 2006,respectively. Outstanding accounts payable to the two major vendors (net ofamounts of post-dated checks) totaled $1.3 million as of March 31, 2006,respectively. These vendors were holding post-dated checks amounting to $6.5million as of March 31, 2006. Loss of any of these vendors may have anegative impact on the operations of the Company.**

** **

**6.**                                      Segmentand Geographic Information:

** **

Net revenue by geographicarea are presented based upon the country of destination. No other foreigncountry represented 10% or more of net revenue for three-month periods ended March 31,2005 and 2006 . Net revenue by geographic area were as follows:

 

*(Inthousands, except percentage data)*

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31, 2005**     | ** ** | **March 31, 2006**     | ** ** |
| **Geographic area** | ** ** | **Amount**                       | ** ** | **Percent**                      | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States            |       | $                                | 16,853     |                             | 81.3       | % | $ | 28,522 |   | 82.2 | % |
| International            |       | 3,867                            |       | 18.7                             | %          | 6,172 |   | 17.8 | % |
|                     |       |                             |       |                             |       |   |   |   |   |
| Total                    |       | $                                | 20,720     |                             | 100.0      | % | $ | 34,694 |   | 100.0 | % |

** **

**9**

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** **

**7.****                                     ****Related Party Transactions**

 

Wepurchased approximately 45.7%, and 40.0% of our merchandise for the three monthperiods ended March 31, 2005 and 2006 from LA Jewelers, Inc., One ofthe owners of LA Jewelers, Saied Aframian, owns 1,200,000 shares of our commonstock as of March 31, 2006**.**

 

Our Vice-President of Technology is a majorshareholder of Technolect, Inc. which provided technology consultingservices to us in the amount of $12,000 for the three months ended March 31,2006. We own 10% of the common stock of Technolect, Inc. which we acquiredfor nominal consideration at the inception of Technolect, and have otherwisemade no investments in Technolect. As of March 31, 2006, we have a costbasis of $0 in Technolect.

 

**8.****                                     ****Contingencies**

 

We aresubject to various legal proceedings and claims that arise in the ordinarycourse of business. We currently do not believe that resolution of such legalmatters will have a material adverse impact on our financial position, resultsof operations, or cash flows.

 

*Prior Sales of Securities*

 

From our inception untilmid-2003, we raised over $20.5 million in gross equity capital by sellingshares of our common stock to approximately 830 investors at prices rangingfrom $4.00 to $6.00 per share with a weighted average share price of $4.50. Wealso issued shares of common stock to about 30 persons in exchange for servicesand other non-cash consideration valued in excess of $5.5 million and issuedoptions to purchase common stock to approximately 250 individuals at a weightedaverage exercise price of $4.45. To assist us in selling our common stock, wecompensated individuals who were not licensed as broker-dealers under theSecurities Exchange Act of 1934, or under state securities laws. Afterconducting these sales of our securities, we determined that these sales werenot exempt from the registration requirements under the Securities Act of 1933and similar provisions of laws of the states in which our stockholders reside.In addition, our employees who received compensation for selling our commonstock were required to be licensed as broker-dealers with the Securities andExchange Commission, or SEC, and various state authorities, but they were notso licensed. In such situations, a number of remedies may be available toregulatory authorities and the investors who purchased common stock in thoseofferings, including a right of rescission, civil penalties, a restrainingorder or injunction, and a court order to pay restitution and costs.

 

In order to address thecontingent liabilities, we plan to make a rescission offer soon after theeffective date of the planned initial public offering to our stockholders whoare or were residents of Alabama, Arkansas, Alaska, Arizona, California,Colorado, Connecticut, Florida, Georgia, Hawaii, Iowa, Idaho, Illinois,Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Maryland, Maine, Michigan,Minnesota, Missouri, Mississippi, Montana, North Carolina, North Dakota,Nebraska, New Hampshire, New Jersey, New Mexico, Nevada, New York, Ohio,Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah,Virginia, Washington, Washington, DC, West Virginia, Wisconsin and Wyoming. Ifour rescission offer is accepted by all offerees, we could be required to makean aggregate payment to the holders of these shares of up to approximately$20.5 million, in addition to statutory interest of $9.8 million, as of March 31,2006. We may also be liable for the $5.5 million of services rendered andproperty exchanged in consideration for the issuance of common stock, inaddition to interest of approximately $2.5 million through March 31, 2006.In addition, we may be liable for the $1.3 million that we anticipateoffering to non-management optionees as discussed below. To the extent thatstockholders accept our rescission offer and we cannot fund such purchases withother resources, we may utilize a portion of the net proceeds of the plannedinitial public offering. In addition, regulators could impose monetary fines orother sanctions as provided under these laws.

 

Federal securities lawsdo not provide that a rescission offer will terminate a purchaser’s right torescind a sale of stock that was not registered as required or was not otherwiseexempt from such registration requirements. If any or all of the offereesreject the rescission offer, we may continue to be liable under federaland state securities laws for up to an amount equal to the value of all optionsand common stock granted or issued since the date of issuance plus anystatutory interest we may be required to pay.

 

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*Yossi Gatlin v. Bidz.com*

 

We area defendant in a lawsuit brought by Yossi Gatlin in October 2005 for an automobilepurchased from us in March 2002 for $28,000. Gatlin alleges that we didnot provide prior registration so that Gatlin was not able to register thevehicle. Gatlin is claiming his payment of $28,000, the value of the automobilerepresented to be $350,000, and loss of the use of the automobile in the amountof $100,000. We have accrued a liability in the amount of $28,000 for thislawsuit.

 

*Cartier v. Bidz.com*

 

We are a defendant in alawsuit filed by Cartier, and Cartier International, B.V., in the United StatesDistrict Court Southern District of New York in April 2006. The lawsuitalleges that Cartier has proprietary rights, including trade dress, patents,trademarks, copyrights and others, in watch designs known as a Tank, TankFrancaise, Tank Americaine, Panthere and Pasha De Cartier Grille, and TankDevan, and further alleges that we have infringed upon those rights by sellingwatches bearing copies of one or more of the watch designs. We intend to defendthe lawsuit vigorously. We do not believe the outcome of the case will have amaterially adverse effect on our financial position.

 

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

** **

You should read the following discussion and analysisin conjunction with our financial statements and related notes. This discussioncontains forward-looking statements that involve risks, uncertainties, andassumptions. Our actual results may differ materially from thoseanticipated in these forward-looking statements as a result of a variety offactors, including those set forth under “Risk factors” and elsewhere in this filing.

 

**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 efficiently and effectivelyto source closeout merchandise and rapidly respond to changing consumer demandsfor certain jewelry. We offer our products through a continuous live format,featuring “no reserve” auctions, a $1 minimum opening bid and a unique15-second auction extension period that allows our auctions to continue untilall bids are received. The 15-second extension was implemented on April 6,2006 replacing the previous 30-second extension. The majority of our auctionsare short-term, often lasting less than one hour, providing immediategratification to our customers and encouraging frequent visits and activeviewing of our website. Our product inventory includes gold, platinum, andsilver jewelry set with diamonds, rubies, emeralds, sapphires, and otherprecious and semi-precious stones; and watches. Through our website atwww.bidz.com, we averaged daily sales of approximately 7,173 items with anaverage order transaction size of $142 in the three months period ended March 31,2006.

 

Wesell to consumers looking for reliable bargains on jewelry. Because we purchaseand retain all of our jewelry inventory onsite, we can provide our customerswith timely service and delivery of their purchases. In addition, each item isinspected by one of our trained product specialists prior to its placement onour website, which assures our customers of the quality of their purchases ofour products. We provide a trustworthy and secure buying environment with a15-day return policy on all merchandise. We believe that some of our customersare resellers intending to sell our goods in secondary markets, such as oneBay, at local auctions, and through other retail channels. These resellershave the opportunity to purchase products at lower prices than they wouldreceive from manufacturers or other distributors. Our auctions are conducted24 hours a day, seven days a week. We also offer daily telephone customersupport and 24-hour e-mail customer support.

 

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**CriticalAccounting 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. Thefollowing are the critical accounting policies that we believe requiresignificant estimation and judgment.

 

*RevenueRecognition*

 

Wederive our revenue from five sources: merchandise sales, commission revenue,advertising revenue, shipping revenue, and auction transaction fee revenue. Inaccordance with SAB 104, we recognize revenue from all five sources when thefollowing revenue recognition criteria are met: (1) persuasive evidence ofan arrangement exists; (2) the product has been shipped or the service hasbeen rendered and the customer takes ownership and assumes the risk of loss; (3) theselling price is fixed or determinable; and (4) collection of theresulting receivable is reasonably assured.

 

Werecognize merchandise sales upon shipments made to consumers that are fulfilledfrom our warehouse. We generally require online payment by credit card or otherelectronic payment methods at the point of sale. We record amounts received orbilled prior to shipment of goods to customers as deferred revenue. We reducegross sales by returns, chargebacks from customers, and other discountsredeemed to obtain such sales.

 

Wereport shipping and handling fees and costs in accordance with Emerging IssuesTask Force (“EITF”) issue No. 00-10, “Accounting for Shipping and HandlingFees and Costs.” As such, in the Statement of Operations all amounts billed tocustomers by us related to shipping and handling are included in “Net revenue”and our shipping costs are included in “Cost of revenue.”

 

Wederive commissions revenue from sales of Certified Merchant merchandise that isowned by third parties and recognize that revenue when services have beenrendered. For commission revenue, we recognize as revenue only the commissionportion of the price our customers pay for the purchased products because weare acting as an agent in such transactions. Commissions are also reduced bythe impact of returns and other discounts redeemed to obtain such sales.

 

Werecognize advertising revenue, which consists primarily of pop-unders, when theservices are rendered and the advertising revenue is known and collectible.

 

We include auctiontransaction fee revenue in net revenue. The 3% auction transaction fee isapplied to all merchandise sales, including shipping and handling, but not tosales tax or commissions.

 

*InventoryReserve*

 

Werecord reserves against our inventory for estimated obsolescence or damageequal to the difference between the cost of inventory and the estimated marketvalue based upon assumptions about future demand and market conditions. Werecord reserves of 50% of the value of inventory held for more than six monthsand 100% of the value of inventory held for more than one year. If actualmarket conditions are less favorable than those projected by us, specificreserves or additional inventory write-downs may be required.

 

*Returnand Allowance Reserve*

 

Weestimate potential future product returns related to current period revenue. Weanalyze historical returns, current economic trends, and changes in customerdemand and acceptance of our products when evaluating

 

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the adequacy of the salesreturns reserve and other allowances in any accounting period. If actualreturns are greater than our estimates, we will record additional returns andallowances in addition to our estimates, which will result in lower net revenuerecorded during that period.

 

*Stock-BasedCompensation*

 

Prior to January 1,2006, we measured compensation expense to employees for our stock optionincentive plans under the recognition and measurement provisions of AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees,*and related interpretations.Utilizing the intrinsic value method prescribed by APB No. 25, we did notrecord compensation expense when stock options were granted to eligibleparticipants as long as the exercise price was not less than the fair marketvalue of the stock when the option was granted. We did not record employeestock based compensation expense in the Statements of Operations in the threemonth period ended March 31, 2005, as all options granted had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant.

 

We recorded stock-basedcompensation representing the difference between the option exercise price andthe deemed fair value of our common stock on the grant date for financialreporting purposes. We determined the deemed fair value of our common stockbased upon the most recent third-party sale of our common stock known to us.Had different assumptions or criteria been used to determine the deemed fairvalue of our common stock, different amounts of stock-based compensation couldhave been reported.

 

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation,” and SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure,” which amended SFAS No. 123,we disclosed pro forma net income and net income per share as if the fair valuebased method had been applied in measuring compensation expense. The disclosureprovisions of SFAS No. 148 were effective for financial statements forinterim periods beginning after December 15, 2002. We adopted thedisclosure requirements in the first quarter of 2003. This information iscontained in Note 1 to our financial statements. The fair values of options andshares issued pursuant to our option plan at each grant date were estimatedusing the Black-Scholes option pricing model. Because there has been no publicmarket for our common stock, we used the minimum value method in determining thatthe expected volatility of our common stock was zero. The transition provisionsdid not have an impact on our financial position or results of operations as wedid not elect to adopt the fair value-based method of accounting forstock-based employee compensation under SFAS No. 123.

 

On January 1, 2006,we adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”)requiring that share-based payment transactions be recognized in thefinancial statements based on the fair value of the equity or liabilityinstrument issued. We intend to use the Black-Scholes option pricing model toestimate the value of our options in implementing SFAS 123R and will use thecalculated method to determine expected volatility, rather than the minimumvalue method, which we previously used to determine expected volatility. UnderSFAS 123R stock-based compensation expense recognized during the period isbased on the value of the portion of stock-based payment awards that isultimately expected to vest. Accordingly, stock-based compensation expenserecognized in the statements of income will be reduced for estimatedforfeitures. SFAS 123R requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. In the pro forma information required under SFAS148 for the period prior to 2006, we did not account for forfeitures, as alloptions granted were fully vested at the date of grant and were not subject toany service period conditions. We expensed stock-based compensation on the dateof grant, as all options granted prior to January 1, 2006, vestedimmediately. In the future, we anticipate that stock-based compensation willinclude vesting provisions and therefore stock-based compensation expense inthe future will be reduced for estimated forfeitures.

 

We adopted SFAS 123Rusing the modified prospective method which requires the application of theaccounting standard as of January 1, 2006. Under this transition method,we are required to recognize compensation cost beginning January 1, 2006for the portion of outstanding awards for which the requisite service has beenrendered, based on the grant-date fair value of those awards calculated underSFAS 123 for our pro forma disclosures. As of March 31, 2006, all stockoptions outstanding were fully vested, and we did not issue any stock-basedpayment awards in the three months ended March 31, 2006. Therefore, theadoption of SFAS 123R did not affect our results of operations. In accordancewith the modified prospective method, the financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123R.

 

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

 

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

 

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                             | ** ** | **2006** | ** ** |
|                                    |       |                                                 |       |   |   |
| Net Sales                               |       | 100.0                                                | %          | 100.0 | % |
| Gross Profit                            |       | 18.1                                                 | %          | 26.5 | % |
| Operating Expenses:                     |       |                                                 |       |   |   |
| General & Administrative       |       | 12.5                                                 | %          | 9.7 | % |
| Sales & Marketing              |       | 4.2                                                  | %          | 6.9 | % |
| Depreciation & Amortization    |       | 0.2                                                  | %          | 0.2 | % |
| Total Operating Expenses                |       | 16.9                                                 | %          | 16.8 | % |
| Profit from Operations                  |       | 1.2                                                  | %          | 9.7 | % |
| Interest income                         |       | 0.0                                                  | %          | 0.1 | % |
| Income tax expense                      |       | 0.0                                                  | %          | 0.3 | % |
| Net Income                              |       | 1.2                                                  | %          | 9.5 | % |
|                                    |       |                                                 |       |   |   |
| Additional Operating Metrics:           |       |                                                 |       |   |   |
| Average selling price per order (gross) |       | $                                                    | 106        |   | $ | 142 |   |
| Average orders per day                  |       | 2,285                                                |       | 2,901 |   |
| Average items sold per day              |       | 7,923                                                |       | 7,173 |   |
| Acquisition cost per new buyer          |       | $                                                    | 34         |   | $ | 38 |   |
| Number of new buyers                    |       | 25,688                                               |       | 63,618 |   |

 

*Net Revenue*

 

Substantially all of our net revenue consists ofjewelry sold via the Internet, net of returns. We also generate net revenuefrom shipping and handling, auction transaction fee revenue, commissions fromCertified Merchants, and advertising revenue.

 

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

 
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2005**                                             | ** ** | **2006** | ** ** |
| * *                     | * *   | * *                                             | * *   | * * | * * |
| Net Sales                    |       |                                                 |       |   |   |
| Merchandise sales            |       | 90.5                                                 | %          | 85.0 | % |
| Shipping & handling |       | 9.1                                                  | %          | 11.7 | % |
| Transaction fees             |       | 0.0                                                  | %          | 3.1 | % |
| Commissions                  |       | 0.4                                                  | %          | 0.2 | % |
| Advertising                  |       | 0.0                                                  | %          | 0.0 | % |
| Total Net Sales              |       | 100.0                                                | %          | 100.0 | % |

 

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In November 2005, weimplemented a 3% transaction fee on all sales. The transaction fee is appliedto all merchandise sales, including shipping and handling, but not to sales taxor commissions.

 

*GrossProfit*

 

Ourgross profit consists of net revenue less the cost of sales. Our cost of salesconsists of the cost of merchandise sold to customers, inbound and outboundshipping costs, shipping supplies, insurance on shipments, and credit card andother transaction fees associated with payments.

 

*Generaland Administrative Expenses*

 

Ourgeneral and administrative expenses consist primarily of payroll and relatedbenefit costs for our employees. These expenses also include fulfillment,customer service, technology, professional fees, other general corporateexpenses, and stock-based compensation, consisting substantially of stockoption grants and stock grants to employees and consultants. We anticipate thatour compensation expense under SFAS No. 123(R) will increase.

 

*Salesand Marketing Expenses*

 

Our marketing expensesconsist primarily of costs associated with paid website searches, contextualmarketing, e-mail campaigns, and affiliate programs. These marketing programs,which are designed to drive buyers to our website, are the most importantfactor in increasing demand for our jewelry products and increasing netrevenue.

 

**Results of Operations**

 

**Comparison of Three Months Ended March 31, 2005 withThree Months Ended March 31, 2006**

 

*Net Revenue*

 

Net revenue increased 67.4% to $34.7 million inthe three months ended March 31, 2006 from $20.7 million in 2005.This increase in net revenue was due to the increase in both the number oforders and the increase in the average dollar amount per order. The increase inthe number of orders was primarily the result of the 63,618 new buyers weattracted during the three months ended March 31, 2006.

 

*Gross Profit*

 

Gross profit increased 145% to $9.2 million  in the three months ended March 31, 2006from $3.7 million in 2005. Gross profit as a percentage of net revenueincreased to 26.5% in the three months ended March 31, 2006 from 18.1% in2005. The increase in gross profit as a percentage of net revenue resultedprimarily from a combination of our ability to attract additional buyers to ourwebsite, our ability to manage the supply of items being sold, implementationof a 3% auction transaction fee in November 2005, and increased margin onshipping and handling charges. We expect the 3% auction transaction fee willhave a significant impact on the gross margin in 2006 compared with 2005, asthere are no significant additional costs associated with this fee.

 

We anticipate that the gross profit as a percentage ofrevenue will be lower for the second and third quarter periods of 2006 comparedto the three months ended March 31, 2006 as the second and third quartersare seasonally weak periods for jewelry sales.

 

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*General and Administrative Expenses*

 

General and administrative expenses increased 29.5% to$3.4 million in the three months ended March 31, 2006 from $2.6 millionin 2005. The increase in general and administrative expenses in 2006 was dueprimarily to a $640,000 increase in payroll and payroll related expenses.General and administrative expenses as a percentage of net revenue decreased to9.7% in the three months ended March 31, 2006 from 12.5% in 2005. Weintend to continue to enhance our technology and information systems and expectthese expenses to increase in absolute dollars in future periods.

 

*Sales and Marketing Expenses*

 

Sales and marketing expenses increased 175% to $2.4 millionin the three months ended March 31, 2006 from $875,000 in 2005. Thisincrease resulted primarily from an increased marketing campaign and theincreased  cost of online advertising toattract new buyers. Sales and marketing expenses as a percentage of net revenueincreased to 6.9% in the three months ended March 31, 2006 from 4.2% in2005. We expect our sales and marketing expenses to continue to increase inabsolute dollars, as we intend to continue increasing our online marketingcampaign in order to attract new customers.

 

**Liquidity and Capital Resources**

 

Since our formation, we have funded our operationsthrough the sale of equity securities and cash generated from operations. Thesignificant components of our working capital are inventory and liquid assets,such as cash and accounts receivable, reduced by accounts payable and accruedexpenses. The working capital characteristics of our business allow us tocollect cash from sales to customers within several business days of therelated sale, while we typically have extended payment terms with oursuppliers.

 

We had net working capital of $4.0 million at March 31,2006 and had no short- or long-term funded debt obligations as of that date. The“bank overdraft” reflected on our balance sheets results from post-dated checksoutstanding. It is customary for our vendors to accept checks post-dated by 60days as extended payment for purchase of merchandise. We do not maintain a bankoverdraft facility, as the post-dated checks are typically not presented forpayment until the date printed on the check. The post-dating of checks hasallowed us to grow rapidly even with a working capital deficit from 2001 until October 2005.As of March 31, 2006, we had a bank overdraft of $6.1 million. As of March 31,2006, available cash was $6.3 million before post-dated checks and was $0net of post-dated checks.

 

Net cash used inoperating activity increased by $1.2 million from net cash used in operatingactivities of $697,000 during the three months ended March 31, 2006compared with cash provided by operating activities of $460,000 during thethree months ended March 31, 2005. While net income increased by $3.0million to $3.3 million in the three months ended March 31, 2006 from netincome of $243,000 during the three months ended March 31, 2005, the netcash used in operating activities increased, primarily as a result of anincrease in inventory and a decrease in accounts payable, offset partially byan increase in accrued expenses. Inventory increased by $1.8 million in thethree months ended March 31, 2006 compared with a decrease in inventory of$1.5 million in the three months ended March 31, 2005. Accounts payabledecreased by $2.2 million in the three months ended March 31, 2006compared with a decrease in accounts payable of $736,000 in the three monthsended March 31, 2005. Accrued expenses increased $324,000 in the threemonths ended March 31, 2006 compared with a decrease of $201,000 in thethree months ended March 31, 2005. Inventories and accounts payable generallyincrease in line with sales growth and changes in our inventory strategy. Ourinventory strategy is influenced by our ability to secure inventory that webelieve will improve our margins.

 

Net cash used forinvesting activities was $127,000 during the three months ended March 31,2006 compared with net cash used for investing activities of $49,000 during thethree months ended March 31, 2005. During the three months ended March 31,2006, net cash used for investing activities related to capital expendituresfor software and computer equipment and in the three months ended March 31,2005 related to capital expenditures for office and computer equipment.

 

Net cash of $817,000 was provided by financingactivities in the three months ended March 31, 2006 compared to net cashused of $407,000 in 2005. The financing activities were all related to changesin bank overdraft.

 

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We believe that cash andcash equivalents currently on hand, cash flows from operations, and the netproceeds of the planned IPO will be sufficient to continue our operations andto pursue our growth strategy for the foreseeable future. Without the proceedsof our planned IPO, we believe our cash flows from operations will besufficient for us to continue our operations as currently being conducted. Ourfuture capital requirements will depend on many factors, including the rate ofour revenue growth; the timing and extent of spending to enhance our website,network infrastructure, and transaction processing systems; the extent of ouradvertising and marketing programs; the levels of the inventory we carry; andother factors relating to our business. Enhancement of our website, networkinfrastructure, and transaction processing systems will require us to spendsignificantly more than we have in the past. Moreover, to date our spending inthese areas has been lower than industry averages. We anticipate increasing oursystem expenditures to accommodate these needs in the future. We may requireadditional financing in the future in order to execute our operating plan. Wecannot predict whether this additional financing will be in the form ofequity, debt, or a combination of debt or equity. We may not be able toobtain any necessary additional funds on a timely basis, on acceptable terms,or at all.

 

**RISKFACTORS**

 

*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. Additionalrisks and uncertainties not presently known to us or that we currently deemimmaterial may also impair our operations.*

 

***We must continue to generate a high volume of visitortraffic to our website and convert those visitors into buyers.***

 

Our net revenue dependsto a significant extent on the number of customers who visit our website topurchase merchandise and the dollar amount of their purchases. Generatingincreased traffic to our website and converting that traffic into buyersrequires us to achieve effective results from our marketing campaigns; offer awide variety of products that our customers can purchase at favorable prices;maintain a user-friendly shopping experience; ensure the satisfactoryavailability, performance, and reliability of our website, networkinfrastructure, and transaction processing systems; and provide high-qualitycustomer service. Our business will be harmed if we are unable to increase ourcustomer base and the dollar volume of the orders customers place with us.

 

***We do not have a guaranteed supply of jewelry products, andwe have a heavy concentration of inventory purchases from our top fivesuppliers.***

 

The success of ourbusiness depends, in part, on our ability to offer our customers a wide varietyof jewelry that they can purchase at prices that are substantially below thoseof traditional jewelry retailers. We have informal arrangements withmanufacturers, distributors, and others for our supply of jewelry products onfavorable terms and conditions. These arrangements, however, do not include anysupply or price obligations on their part, and we do not have any supplyagreements, long-term or otherwise, with any of our suppliers. As a result, wedo not have a guaranteed supply of jewelry products at favorable prices. Ourinability to maintain and expand our jewelry supply relationships or theinability of our suppliers to continue to supply us with jewelry products atfavorable prices would substantially harm our business and results ofoperations.

 

Inaddition, we have a heavy concentration of inventory purchases from a smallnumber of suppliers. Our top five suppliers accounted for approximately 60.8%and 61.1% of our total purchases in the three months ended March 31, 2005,and 2006, respectively. In the three months ended March 31, 2005 and 2006,we purchased 45.7% and 40.0%, respectively, of our merchandise from Los AngelesJewelers, Inc., a jewelry manufacturer and liquidator.

 

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

 

Any problems with theavailability, performance, or reliability of our website, networkinfrastructure, or transaction processing systems could result in decreasedcustomer traffic, reduced orders, reduced order fulfillment performance, andlower net revenue as well as negative publicity and damage to our reputation.In order to remain competitive, we must continually seek to improve and expandthe functionality and features of our website, network infrastructure,transaction processing systems, and delivery and shipping functions toaccommodate any substantial increase in the volume of traffic to and ordersfrom our website. We may not be successful in these efforts, and we may notbe able to project accurately the rate or timing of increases, if any, in theuse of or sales from our website, or timely expand or upgrade our website,infrastructure, or systems to accommodate any such increases. Additionally, we may notbe able to remedy any such availability, performance, or reliability problemsin a timely manner, or at all, because we depend in part on third partiesfor such availability, performance, and reliability.

 

***We may face increasing costs to acquire new customers.***

 

The acquisition of newcustomers is a key factor in increasing demand for our jewelry products andincreasing our revenue. We currently attract new customers by driving trafficto our website using a marketing and advertising strategy that includestargeted keyword searches, portal and website advertising, participation inaffiliate programs, and direct advertising. We do not maintain long-termcontracts or arrangements with any companies, including any search engines,Internet portals, or other websites, and we may not successfully enterinto additional relationships or maintain existing ones. Recently, we haveexperienced significantly higher rates for keyword search advertising. Weexpect that we will have to pay increasing fees to maintain, expand, or enterinto new relationships with third-party search engines, Internet portals, andwebsites. In addition, traffic to our website could decline if our onlinemarketing programs become less effective or the traffic decreases to the searchengines, Internet portals, and websites with which we advertise. Our businesscould be materially and adversely affected if any substantial number ofcompanies on which we advertise experience financial or operationaldifficulties or experience other corporate developments that adversely affecttheir performance. A failure to maintain or expand existing online advertisingrelationships or to establish additional online advertising relationships thatgenerate a significant amount of traffic from other websites could result indecreased sales or limit the growth of our business.

 

***Competition from online auctioneers and other onlinecompanies with greater brand recognition may adversely affect our*sales.**

 

The market for onlineauctions is rapidly evolving and intensely competitive. We expect competitionto intensify further in the future. Barriers to entry are relatively low, andcurrent and new competitors can launch new websites at a relatively low costusing commercially available software.

 

We currently compete witha number of other companies, and other competitors may appear in thefuture. Our competitors currently include various online auction services andretailers that offer jewelry, including eBay, Odimo, Blue Nile, Overstock, anduBid. We also encounter competition from national jewelry retail chains, suchas Zales, Kay Jewelers, and Finlay Fine Jewelry, and mass retailers and otherenterprises that sell jewelry, such as Wal-Mart, Target, J. C. Penney, Costco,QVC, and Home Shopping Network. Many of our competitors have greater brandrecognition, longer operating histories, larger customer bases, and significantlygreater financial, marketing, and other resources than we do. Smallercompetitors may enter into strategic or commercial relationships withlarger, more established, and well-financed companies. Other competitors may enterinto exclusive distribution agreements with our suppliers that deny us accessto suppliers’ products. Competitors may also devote greater resources tomarketing and promotional campaigns and to website and systems technology thanwe do. We may not be able to compete successfully against current andfuture competitors or address increased competitive pressures.

 

Furthermore, attemptshave been made in the past to develop and market synthetic stones and gems tocompete in the market for gemstones and gemstone jewelry. We expect suchefforts to continue in the future. If any such efforts are successful increating widespread demand for synthetic or alternative gemstone products,demand and price levels for our products could decline and our business andresults of operations would be substantially harmed.

 

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

 

Luxury products, such asjewelry, are discretionary purchases for consumers. The volume and dollaramount of such purchases may be affected by adverse trends in the generaleconomy and consumer perceptions of those trends, and purchases 

 

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may significantly decrease during economicdownturns. 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.

 

Our net revenue andresults of operations depend in part on the demand for jewelry. Consumers’tastes are subject to frequent, significant, and sometimes unpredictablechanges. Should prevailing consumer tastes for jewelry change or the demand forjewelry decrease, the sale of our products could decline and our business andresults of operations would suffer.

 

Furthermore, our abilityto increase our net revenue and enhance our profitability may depend onour ability to expand our product offerings beyond our current offerings. If weoffer new products that are not accepted by customers, our brand and reputationcould be adversely affected, our sales may fall short of expectations, andwe may incur substantial expenses that are not offset by increased sales.

 

***Because we carry all of our jewelry products in inventory,our net revenue and gross margin may decrease if we are unable to predictand plan for changes in consumer demand.***

 

We had $17.5 million ininventory as of March 31, 2006. If our sales increase, we will be requiredto increase our inventory proportionately. Consumer tastes and preferences forjewelry products can change rapidly, thereby exposing us to significantinventory risks. Currently, because the products we sell typically consist ofcloseout merchandise from manufacturers, distributors, and other suppliers, wehave less control over the specific items that we offer for sale than we wouldif we primarily ordered goods for manufacture for us. In addition, it isimportant that we are able to purchase jewelry that we perceive to be indemand. The demand for specific products can change between the time we orderitems and when we sell them. As a result, we may be required to takesignificant inventory markdowns, which could reduce our gross margin, if we donot accurately predict these trends or if we overstock unpopular merchandise.

 

***We rely on suppliers and third-party carriers as part ofour fulfillment process, and these third parties may fail to meet shippingschedules or requirements.***

 

We rely on suppliers todeliver our orders promptly, which we then carry in inventory to ensureavailability and expedited delivery to our customers. We also rely onthird-party carriers to ship our products to our customers. As a result, we aresubject to various risks, including employee strikes and inclement weather,associated with the ability of third-party carriers to provide deliveryservices to meet our shipping needs and those of our suppliers. The failure ofour suppliers and third-party carriers to deliver products to us or ourcustomers in a timely manner or otherwise to serve us or our customersadequately would damage our reputation and brand and substantially harm ourbusiness and results of operations.

 

***Increases in the cost of precious metals and precious andsemi-precious stones would increase the cost of our jewelry products.***

 

The jewelry industry isaffected by fluctuations in the prices of precious metals and precious andsemi-precious stones. The availability and prices of gold, silver, platinum,and other precious metals and precious and semi-precious stones may be  influenced by such factors as cartels,political instability in exporting countries, changes in global demand, andinflation. Shortages of these materials or an increase in their prices couldreduce the quantity of products we have available for sale and our ability tosell our products for more than our cost, causing reduced sales or lowermargins.

 

***Our business and results of operations would be harmed inthe event of any failure of our auction and bidding systems hardware, which islocated at a single third-party co-location facility, or any failure of ourfulfillment and administrative hardware.***

 

Our business depends in part onthe efficient and uninterrupted operation of our computer and communicationshardware. The servers and other hardware necessary to operate our website,including our auction and bidding systems, are located at a single third-partyco-location facility in downtown Los Angeles. We rely on that facility toprovide Internet access with the speed, capacity, and reliability we require.Our servers and other hardware that run our transaction processing, order

 

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fulfillment, and office administration tasks arelocated at our headquarters. Our servers and other hardware are vulnerable todamage or interruption from human error, fire, flood, power loss,telecommunications failure, terrorist attacks, acts of war, break-ins, earthquakes,and similar events. We do not currently have redundant systems in multiplelocations or a formal disaster recovery plan, and our business interruptioninsurance may be insufficient to compensate us for any losses that may occur.In addition, our servers are vulnerable to computer viruses, physical orelectronic break-ins, and similar disruptions, which could lead tointerruptions, delays, loss of critical data, the inability to accept andfulfill customer orders, or the unauthorized disclosure of confidentialcustomer data. System disruptions or failures would also create a large numberof customer questions and complaints that need to be addressed by our customerservice support personnel. The occurrence of any of the foregoing risks couldsubstantially harm our business and results of operations. Our systems arevulnerable to damage or interruption from earthquakes, floods, fires, powerloss, telecommunication failures, terrorist attacks, computer viruses, computerdenial-of-service attacks, and similar events.

 

***We may not be able to increase our capacity or respondto rapid technological changes in a timely manner or without serviceinterruptions, which may harm our business.***

 

We may not be ableto accommodate any substantial growth in traffic or user demand on our website,network infrastructure, and transaction processing systems in a timely manneror without substantial costs. If we are unable to upgrade our existingtechnology, network infrastructure, and transaction processing systems to accommodateany increased sales volume, our potential customers may be dissatisfiedand may purchase merchandise from our competitors. We may also failto provide enough capacity in our customer service and sales support functionsto provide a high level of customer service. A failure to implement new systemsand increase customer service capacity effectively could adversely affect oursales. Enhancement of our website, network infrastructure, and transactionprocessing systems will require us to spend a significantly higher amount thanwe have in the past. Moreover, to date our spending in these areas as apercentage of revenue has been lower than industry averages. We anticipateincreasing our system expenditures to accommodate these needs in the future.

 

We also intend tointroduce additional or enhanced features and services to retain currentcustomers and attract new customers to our website. We may experiencedifficulties that could delay or prevent us from introducing new features andservices. If we introduce a feature or a service that is not favorablyreceived, our current customers may not use our website as frequently andwe may not be successful in attracting new customers. These new featuresor services also may contain errors that are discovered only after theirintroduction, and we may need to modify significantly the design of thesefeatures or services to correct errors.

 

***Our growth will depend on our ability to increase thepopularity of our website, and we may not be able to do so effectively.***

 

We believe thatcontinuing to increase the popularity of our website will be critical toexpanding our business. Promoting and positioning our website will dependlargely on the success of our marketing efforts and our ability to provide avariety and sufficient quantity of high-quality products at attractive pricesin a convenient manner. Promoting our website will require us to increase ourmarketing budget and otherwise increase our financial commitment to creatingand maintaining brand loyalty among users. Brand promotion activities may notyield increased revenue, and even if they do, any increased revenue may notoffset the expenses we incur in building our website popularity and our brand.If we do attract new users to our website, they may not conduct transactionson a frequent basis or in sufficient dollar amounts. If we fail to promote andmaintain our website or incur substantial expenses in an unsuccessful attemptto promote and maintain our brand, our business would be harmed.

 

***We anticipate expanding our international sales activities,causing our business to become increasingly susceptible to numerous risks thatcould affect our profitability.***

 

In the three months endedMarch 31, 2006, 17.8% of our net revenue was generated by shipmentsoutside of the United States. We plan, over time, to expand our reach intointernational markets. We do not, however, currently have any overseasfulfillment, distribution, or server facilities or any website contentlocalized for foreign markets. We cannot be certain that we will be able toexpand our global presence. In addition, there are certain risks associatedwith doing business on an international basis, including regulatoryrequirements, legal uncertainty regarding liability, tariffs, and other tradebarriers, longer payment cycles, and potentially adverse tax consequences, anyof which could adversely affect our business. Although

 

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our foreign sales historically have been denominatedin U.S. dollars, we also may be subject to increased risks relating toforeign currency exchange rate fluctuations to the extent we decide todenominate our sales in foreign currencies.

 

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

 

Our success depends onthe continued growth and maintenance of the Internet. The Internet hasexperienced, and is likely to continue to experience, significant growth in thenumbers of users and amount of traffic. If Internet usage continues to grow asanticipated, the infrastructure may not be able to support the level ofusage and its performance and reliability may decline. If outages ordelays on the Internet increase, overall Internet usage could grow more slowlyor decline. In addition, the performance of the Internet may be harmed byincreased number of users or bandwidth requirements or by viruses, worms, andsimilar issues. The Internet has experienced a variety of outages and otherdelays as a result of damage to portions of its infrastructure, and it couldface outages and delays in the future. These outages and delays could reducethe level of Internet usage.

 

***We depend on the continued growth and acceptance of onlinecommerce, and our business will be substantially impaired if the growth ofonline commerce slows or does not grow as expected.***

 

The business of buyingand selling goods over the Internet is relatively new and dynamic. Our successdepends on the widespread acceptance and use of the Internet as an effectivemedium for commerce by consumers. The acceptance and use of the Internet may notcontinue to expand as expected, and a sufficient broad base of consumersnecessary for its continued growth may not adopt the Internet as a mediumfor commerce.

 

Consumers whohistorically have used traditional means of commerce may have concernsabout privacy, the inability to physically inspect merchandise before buying,delivery time, product damage during shipment, and the costs and  inconvenience involved in returning purchaseditems, which may inhibit their crossover to e-commerce. In order to expandour user base, we must appeal to and acquire consumers who historically haveused traditional means of commerce to purchase goods. If these new customersexecute fewer or lower dollar amounts of orders than our historical users, andwe are unable to gain efficiencies in our operating costs, including the costof acquiring new customers, our business and profits could be adverselyaffected.

 

***Our failure to protect confidential information of ourcustomers and our network against security breaches could damage our reputationand substantially harm our business and results of operations.***

 

A significant barrier toonline commerce and communications is the secure transmission of confidentialinformation over public networks. Third parties may have the technology orexpertise to breach the security of customer transaction data. Our securitymeasures may not prevent security breaches that could result insubstantial harm to our business and results of operations and damage to ourreputation. Currently, a majority of our sales are billed to our customers’credit card accounts directly. Under current credit card practices, we areliable for fraudulent credit card transactions because we do not obtain cardholdersignatures. We rely on encryption and authentication technology licensed fromthird parties to effect secure transmission of confidential information,including credit card numbers. We do not currently carry insurance against thisrisk. Advances in computer capabilities, new discoveries in the field ofcryptography, or other developments may result in a compromise or breachof the technology we use to protect customer transaction data. In addition,anyone who is able to circumvent our security measures could misappropriateproprietary information or cause interruptions in our operations. Any suchcompromise of our security could damage our reputation and brand and expose usto a risk of loss or litigation and possible liability, which would substantiallyharm our business and results of operations.

 

***We are vulnerableto fraudulent activities on our website, including unauthorized use of customerinformation and identity theft by third parties.***

 

Our network securitymeasures to prevent third parties from penetrating our network and improperlyaccessing our customers’ personal information or credit card information may notbe successful. Although we have not experienced any theft of our customers’credit card information to date, as new discoveries in the field ofcryptography and advances in computer

 

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capabilities occur, our security measures may noteffectively prevent others from obtaining improper access to our customerinformation. In addition, third parties may target our customers directlywith fraudulent identity theft schemes designed to appear as legitimate e-mailsfrom us. In March 2006, one such third party attempted to solicit customerinformation through a tactic, commonly known as “phishing,” whereby an e-mailpurporting to be from us solicited customer information from recipients of thee-mail. Any such security breach or fraud perpetrated on our customers couldexpose us to increased costs and could harm our business and results of operations.

 

 ***Increased product returns and the failure to predict productreturns could substantially harm our business and results of operations.***

 

As we expand our businessand product offerings, rates of product return may increase. Anysignificant increase in product returns above our return assumptions andallowances could substantially harm our business and results of operations.

 

***Our inventory is vulnerable to damage or loss caused byfire, flood, earthquakes, and similar events, and we face the risk of theft ofour products from inventory or during shipment.***

 

All of our inventory isstored 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 ofall or 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.

 

***Customer complaints or negative publicity about our customerservice could adversely affect our reputation and, as a result, our businesscould suffer.***

 

Customer complaints ornegative publicity about our customer service could severely diminish consumerconfidence in and the use of our website. Effective customer service requiressignificant personnel expense, and this expense, if not managed properly, couldsignificantly impact our profitability. The failure to manage or train ourcustomer service representatives properly could compromise our ability tohandle customer inquiries and complaints effectively. If we do not handlecustomer inquiries and complaints effectively, we may lose customerconfidence. As a result, our revenue could suffer and our operating margin may decrease.

 

***Increases in credit card processing fees could increase ourcosts.***

 

Visa, MasterCard,American Express, and Discover Card could increase the interchange fees thatthey charge for transactions using their cards. Increases in interchange fees may resultin increased operating costs and reduced profit margin.

 

***Our limited operating history makes it difficult for us toforecast accurately net revenue and appropriately plan our expenses.***

 

We have a limitedoperating history. As a result, it is difficult to forecast accurately oursales or operating expenses. We base our estimated expense levels on ouroperating forecasts and estimates of future sales. Sales and results ofoperations 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.

 

***We incurred lossesfrom operations prior to fiscal 2004 and have accumulated a significantdeficit.***

 

Prior to fiscal year 2004we experienced significant operating losses. At March 31, 2006, we had anaccumulated deficit of $23.7 million and very limited cash resources. We cannotbe certain that the improvements in our operations resulting

 

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since 2004 will continue in the future. See “Management’sdiscussion and analysis of financial condition and results ofoperations—Liquidity and Capital Resources.”

 

***Seasonal fluctuations in our net revenue could cause ourquarterly results to fluctuate and cause our results of operations to be belowexpectations.***

 

Historically, sales inthe jewelry industry are seasonal and have been higher in the fourth quarter ofthe calendar year as a result of higher consumer spending during the December holidayseason. Approximately 26.0%, 29.3%, and 33.9% of our net revenue in 2003, 2004,and 2005, respectively, was generated during the fourth quarter. 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,including higher sales and marketing costs and additional staffing in ourfulfillment and customer support operations. If we were to experience lowerthan expected sales during any future fourth quarter, it would have adisproportionately large impact on our results of operations for that year. Inthe future, our seasonal sales patterns may become more pronounced, may strainour personnel and fulfillment activities, and may cause a shortfall insales compared with expenses in a given period, which would substantially harmour business and results of operations.

 

***Sales growth in prior periods may not be indicative ofour future growth.***

 

Our sales have fluctuatedsignificantly in the past, in part, as a result of varying amounts of funds wehave spent on advertising and inventory levels and may fluctuatesignificantly in the future because of increasing advertising and inventorycosts. These factors may prevent the meaningful use of period-to-periodcomparisons of financial results. For these and other reasons, investors shouldnot rely on past sales growth rates as a prediction of our future sales growth.

 

***We have grown quickly, and our business will suffer if wefail to manage our growth.***

 

We have expanded ouroperations at a rapid pace. This expansion has placed a significant strain onour management, operations, and financial resources. We anticipate addingpersonnel in the future, including managerial, technical, and operationspersonnel. In order to manage any further growth of our operations, we alsowill be required to improve existing and implement new transaction-processing,operational and financial systems, procedures, and controls. If we are unableto manage growth effectively, our business and results of operations will beharmed.

 

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

 

In an effort to provideaccurate descriptions of jewelry posted on our website, we provide appraisalsummaries from third-party gemological laboratories for some of our jewelryitems. All other jewelry and watch descriptions are provided by our full-timeGemological Institute of America, or GIA, trained gemologists and severalexperienced product specialists. Nevertheless, there is a subjective componentinvolved 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 ifour descriptions are accurate, buying a product online may lead todisappointment resulting in returned merchandise. For example, a customer may determinethat a piece does not have the expected look, feel, and overall appearance ofthe merchandise that the buyer envisioned from the website photograph.

 

Additionally, in responseto customer requests and as a courtesy to resellers, we provide “Compare”and/or “Close Now” prices for jewelry items listed on our website. Compare andClose Now prices are not meant to reflect fair market values or manufacturersuggested retail prices, and in fact, may be higher than prices found inlocal retail stores. As a consequence, perceived misrepresentations in itemdescriptions by disappointed buyers may occur, resulting in negativepublicity about and diminished customer confidence in our website.

 

***We may not be able to maintain our domain nameuniqueness.***

 

Our Internet domain nameis critical to our success. Under current domain name registration practices,no other entity can obtain an identical domain name, but can obtain a similarname or the identical name with a different suffix, such as “.net” or

 

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“.org,” or with a different country designation, suchas “jp” for Japan. We have not registered our domain name with differentsuffixes nor have we registered our name in any other jurisdiction. As aresult, third parties may use domain names that are similar to our domainname, which may result in confusion to potential customers and lost sales.We are aware that other businesses have registered the name “bidz” with othersuffixes and in other countries.

 

***We may be unable to protect or enforce our ownintellectual property rights adequately, and we may become subject tointellectual property litigation.***

 

We regard the protectionof our trademarks, copyrights, domain name, trade dress, and trade secrets ascritical to our success. We rely on a combination of trademark, copyright,patent, trade dress, and trade secret laws to protect our intellectual propertyrights. We also have entered into confidentiality and invention assignmentagreements with our employees and contractors and nondisclosure agreements withparties with whom we conduct business in order to limit access to anddisclosure of our proprietary information. These contractual arrangements andother steps we have taken to protect our intellectual property may notprevent misappropriation of our intellectual property or deter independentdevelopment of similar intellectual property by others. We also are pursuingthe registration of our domain name, trademarks, and service marks in theUnited States and internationally. Effective trademark, copyright, patent,trade dress, trade secret, and domain name protection is very expensive to maintainand may require litigation. We must protect our trademarks, copyrights,patents, and domain names in an increasing number of jurisdictions, a processthat is expensive and may not be successful in every location.

 

Third parties may fromtime to time claim that we have infringed their intellectual property relatingto our business model or auction systems. We expect that participants in ourmarket increasingly will be subject to infringement claims as the number ofservices and competitors in our industry segment grows. Any claim like this,whether meritorious or not, could be time-consuming, result in costlylitigation, cause service upgrade delays, or require us to enter into royaltyor license agreements. These royalty or license agreements may not beavailable on acceptable terms or at all. As a result, any such claim could harmour business.

 

***We may be unable to enforce protection of ourintellectual property rights under the laws of other countries.***

 

We anticipate that wewill become increasingly subject to international intellectual property risks,including differing intellectual property laws, which may be insufficientto protect our intellectual property, unique local laws, and lack of applicablelaw or clear precedent.

 

***Various legal rules and regulations related to privacyand the collection, dissemination and security of personal information may adverselyaffect our marketing efforts.***

 

We are subject toincreasing regulation at the federal, state, and international levels relatingto privacy and the use of personal user information designed to protect theprivacy of personally identifiable information as well as to protect againstits misuse. These laws include the Federal Trade Commission Act, the CAN-SPAMAct of 2003, the Children’s Online Privacy Protection Act, the Fair CreditReporting Act, the Homeland Security Act, and related regulations. Severalstates have proposed legislation that would limit the use of personalinformation gathered online or require online services to establish privacypolicies. Moreover, proposed legislation in the United States and existing lawsin foreign countries require companies to establish procedures to notify usersof privacy and security policies, obtain consent from users for collection anduse of personal information, and/or provide users with the ability to access,correct, and delete personal information stored by companies. These regulationsand other laws, rules, and regulations enacted in the future may adverselyaffect our ability to collect, disseminate, or share demographic and personalinformation about users and our ability to e-mail or telephone users, whichcould be costly and adversely affect our marketing efforts**.**

 

***We may be subject to liability for past sales and ourfuture sales may decrease if we are required to collect sales and usetaxes on the products we sell.***

 

In accordance withcurrent industry practice and our interpretation of current law, we do notcurrently collect sales or other taxes with respect to shipments of goods intostates other than California. However, one or more states or foreign countries may seekto impose sales or other tax obligations on us in the future. A successfulassertion by one or more states or foreign countries that we should becollecting sales or other taxes on the sale of our products could result insubstantial tax liabilities for

 

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past and future sales, discourage customers frompurchasing products from us, decrease our ability to compete with traditionalretailers, and otherwise substantially harm our business, financial condition,and results of operations.

 

***We may be subject to regulations governing the conductand liability of auctioneers, which could affect the way in which we conductour business or otherwise increase our cost of doing business.***

 

Numerous states andforeign jurisdictions, including California, where our headquarters is located,have regulations regarding how auctions may be conducted and the liabilityof auctioneers in conducting such auctions. No final legal determination hasbeen made whether the California regulations apply to our business, and littleprecedent exists in this area. Several states and some foreign jurisdictionshave attempted, and may attempt in the future, to impose regulations thatcould affect us or our users, which could harm our business.

 

***We are subject to regulations relating to consumer privacy,which could increase the cost of our doing business, expose us to litigationcosts, increase our service or delivery costs, and otherwise harm our business.***

 

Several states haveproposed, and California, Minnesota, Utah, and Vermont have recently passed,legislation that would limit the uses of personal user information gatheredonline or offline. Many states already have such laws and continually considerstrengthening them, especially against online services. However, the FairCredit Reporting Act, or FCRA, a federal statute enacted in 1970 to protectconsumer privacy, includes a provision preempting conflicting state laws on thesharing of information between corporate affiliates. The preemptive provisionsof FCRA were permanently extended in 2002, thereby ensuring that we are notsubject to the laws of each individual state with respect to matters within thescope of FCRA, but remain subject to the other provisions of FCRA.

 

The Federal TradeCommission also has settled several proceedings against companies regarding themanner in which personal information is collected from users and provided tothird parties. Specific statutes intended to protect user privacy have beenpassed in many foreign jurisdictions. Compliance with these laws, given thetight integration of our systems across different countries and the need tomove data to facilitate transactions among our users, such as payment companiesand shipping companies, is both necessary and difficult. Failure to complycould subject us to lawsuits, fines, criminal penalties, statutory damages,adverse publicity, and other losses that could harm our business. Changes toexisting laws or the passage of new laws intended to address these issues coulddirectly affect the way we do business or could create uncertainty on the useof the Internet. This could reduce demand for our products, increase the costof our doing business, expose us to litigation costs, increase our service ordelivery costs, or otherwise harm our business.

 

***New and existing regulations could harm our business.***

 

We are subject to thesame foreign and domestic laws as other companies conducting both online andoffline business. There are still relatively few laws specifically directedtowards online business. However, due to the increasing popularity and use ofthe Internet and online services, many laws relating to the Internet are beingdebated at all levels of government around the world, and it is possible thatsuch laws and regulations will be adopted. These laws and regulations couldcover 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 theInternet of existing laws governing issues, such as property ownership,copyrights and other intellectual property issues, taxation, libel and defamation,obscenity, and personal privacy is uncertain. The vast majority of these lawswas adopted prior to the advent of the Internet and related technologies and,as a result, do not contemplate or address the unique issues of the Internetand related technologies. Those laws that do reference the Internet, such asthe U.S. Digital Millennium Copyright Act and the European Union’s Directive onDistance Selling and Electronic Commerce, have only recently begun to beinterpreted by the courts and implemented by the European Union member states,so their applicability and scope remain uncertain. As our activities and thetypes of goods listed on our website expand, regulatory agencies may claimthat we or our users are subject to licensure in their jurisdiction, eitherwith respect to our business in general, or in order to allow the sale ofcertain items, such as real estate, event tickets, boats, and automobiles.

 

In addition, because ourproducts are available over the Internet in multiple states and because we sellmerchandise to

 

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consumers residing in multiple states, we could berequired to qualify to do business as a foreign corporation in each state inwhich our products are available. Our failure to qualify as a foreigncorporation in a jurisdiction in which we are required to do so could subjectus to penalties. Any new legislation or regulation, or the application of lawsor regulations from jurisdictions whose laws do not currently apply to ourbusiness could have a material adverse affect on our business.

 

***We depend to a very significant extent on David Zinberg, ourChairman of the Board, President, and Chief Executive Officer.***

 

Our performance dependssubstantially upon David Zinberg, our Chairman of the Board, President, andChief Executive Officer, who has extensive experience with the purchase andsale of jewelry, art, and collectibles through non-traditional channels,including through liquidation. We rely on Mr. Zinberg to make criticaloperational decisions on a daily basis, such as product offerings andpurchases, and to make key strategic plans. We do not currently have key-manlife insurance on any of our executive officers. We have an employmentagreement with Mr. Zinberg extending through 2007. The loss of theservices of Mr. Zinberg would adversely affect our business andoperations.

 

***Holders of common stock issued by us in prior offerings areentitled to rescind their purchases.***

 

From our inception untilmid-2003, we raised over $20.5 million in gross equity capital by sellingshares of our common stock to approximately 830 investors at prices rangingfrom $4.00 to $6.00 per share with a weighted average share price of $4.50. Wealso issued shares of common stock to about 30 persons in exchange for servicesand other non-cash consideration valued in excess of $5.5 million and issuedoptions to purchase common stock to approximately 250 individuals at a weightedaverage exercise price of $4.45. To assist us in selling our common stock, wecompensated individuals who were not licensed as broker-dealers under theSecurities Exchange Act of 1934, or under state securities laws. Afterconducting these sales of our securities, we determined that these sales werenot exempt from the registration requirements under the Securities Act of 1933and similar provisions of laws of the states in which our stockholders reside.In addition, our employees who received compensation for selling our commonstock were required to be licensed as broker-dealers with the Securities andExchange Commission, or SEC, and various state authorities, but they were notso licensed. In such situations, a number of remedies may be available toregulatory authorities and the investors who purchased common stock in thoseofferings, including a right of rescission, civil penalties, a restrainingorder or injunction, and a court order to pay restitution and costs.

 

In order to address thecontingent liabilities, we plan to make a rescission offer soon after theeffective date of the planned initial public offering to our stockholders whoare or were residents of Alabama, Arkansas, Alaska, Arizona, California,Colorado, Connecticut, Florida, Georgia, Hawaii, Iowa, Idaho, Illinois,Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Maryland, Maine, Michigan,Minnesota, Missouri, Mississippi, Montana, North Carolina, North Dakota,Nebraska, New Hampshire, New Jersey, New Mexico, Nevada, New York, Ohio,Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah,Virginia, Washington, Washington, DC, West Virginia, Wisconsin and Wyoming. Ifour rescission offer is accepted by all offerees, we could be required to makean aggregate payment to the holders of these shares of up to approximately$20.5 million, in addition to statutory interest of $9.8 million, as of March 31,2006. We may also be liable for the $5.5 million of services rendered andproperty exchanged in consideration for the issuance of common stock, inaddition to interest of approximately $2.5 million through March 31, 2006.In addition, we may be liable for the $1.3 million that we anticipateoffering to non-management optionees as discussed below. To the extent thatstockholders accept our rescission offer and we cannot fund such purchases withother resources, we may utilize a portion of the net proceeds of the plannedinitial public offering. In addition, regulators could impose monetary fines orother sanctions as provided under these laws.

 

Federal securities lawsdo not provide that a rescission offer will terminate a purchaser’s right torescind a sale of stock that was not registered as required or was nototherwise exempt from such registration requirements. If any or all of theofferees reject the rescission offer, we may continue to be liable underfederal and state securities laws for up to an amount equal to the value of alloptions and common stock granted or issued since the date of issuance plus anystatutory interest we may be required to pay.

 

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

 

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

 

***The concentration of our capital stock ownership with ourfounder and executive officers and directors and their affiliates will limityour ability to influence corporate matters.***

 

Our founder, executiveofficers, and directors will together own approximately 37.6% of our commonstock as of March 31, 2006. As a result, they will have significantinfluence over our management and affairs and over all matters requiringstockholder approval, including the election of directors and the approval ofsignificant corporate transactions, such as a merger or a sale of our companyor its assets, for the foreseeable future. This concentrated control will limitthe ability of other stockholders to influence corporate matters. Because ofthis, we may take actions that some of our stockholders do not view asbeneficial. As a result, the market price of our common stock could beadversely affected because stockholders may not view favorably theconcentration of control in the hands of management.

 

***We will havediscretion over the use of proceeds from the planned IPO and could use thoseproceeds in ways******with which stockholders might not agree.***

 

We will have broaddiscretion with respect to the use of the net proceeds of the planned IPO, andstockholders will be relying on our judgment regarding the application of theseproceeds. Changes in our business and industry may cause us to use the netproceeds in a manner significantly different from our current plans.

 

***Sale of substantial number of shares that are eligible forsale from the planned IPO could adversely affect the price of our common stock.***

 

The market price of ourcommon stock could decline as a result of sales of a large number of shares ofour common stock in the market after the planned IPO or a perception that suchsales may occur. As of March 31, 2006, we had 23,312,500 shares ofcommon stock outstanding. The common stock sold in the planned IPO will befreely tradable, except for any shares that are purchased by our affiliates, asthat term is defined in Rule 144 under the Securities Act of 1933, whichgenerally includes our directors, officers, and certain principal stockholders.Subject to the 180-day lock-up agreement described under “Underwriting,”substantially all of the shares outstanding prior to the planned IPO will befreely tradable without restriction or further registration under thesecurities laws, unless held by an affiliate of our company. Shares held byaffiliates of our company are subject to the resale limitations of Rule 144described below.

 

In general, under Rule 144as currently in effect, any person, or persons whose shares are aggregated forpurposes of Rule 144, who beneficially owns restricted securities withrespect to which at least one year has elapsed since the later of the date theshares were acquired from us, or from an affiliate of ours, is entitled to sellwithin any three-month period a number of shares that does not exceed thegreater of 1% of the then outstanding shares of our common stock and theaverage weekly trading volume in common stock during the four calendar weekspreceding such sale. Sales under Rule 144 also are subject to certainmanner-of-sale provisions and notice requirements and to the availability ofcurrent public information about us.

 

As of March 31,2006, we had outstanding options to purchase 8,307,000 shares of common stock.We plan to register for offer and sale the shares of common stock that arereserved for issuance pursuant to options. Shares covered by such registrationstatements upon the exercise of stock options or warrants generally will beeligible for sale in the public market, except that affiliates will continue tobe subject to volume limitations and other requirements of Rule 144. Theissuance or sale of such shares could depress the market price of our commonstock.

 

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***The market price for our common stock may be volatile,and you may not be able to sell our stock at a favorable price or at all.***

 

Before the planned IPO, there has been no publicmarket for our common stock. An active public market for our common stock may notdevelop or be sustained after the planned IPO. Many factors could cause themarket price of our common stock to rise and fall, including the following:

 

•                  actualor anticipated fluctuations in our operating results;

 

•                  thelevel and quality of any research analyst coverage for our common stock;

 

•                  thefinancial guidance we may provide to the public, any changes in suchguidance, or our failure to meet such guidance;

 

•                  changesin financial estimates by industry or securities analysts or our failure to meetsuch estimates;

 

•                  variousmarket factors or perceived market factors, including rumors, whether or notcorrect, involving us, our customers, our suppliers, or our competitors;

 

•                  fluctuationsin the supply and costs acquiring the jewelry we sell;

 

•                  thecosts incurred in shipping our products to our customers;

 

•                  thegain or loss of significant suppliers;

 

•                  introductionsof new products or new pricing policies by us or by our competitors;

 

•                  recruitmentor departure of key personnel;

 

•                  changesin market valuations or earnings of our competitors;

 

•                  developmentswith respect to intellectual property rights;

 

•                  marketconditions and trends in the online commerce industry and the economy as awhole; and

 

•                  acquisitionsor strategic alliances by us or by our competitors.

 

In addition, stocks ofInternet-related and online commerce companies have experienced significantprice and volume fluctuations that often have been unrelated ordisproportionate to these companies’ operating performance. Public announcementsby us or other such companies concerning, among other things, theirperformance, accounting practices, or legal problems could cause the marketprice of our common stock to decline regardless of our actual operatingperformance.

 

***Our charter documents and Delaware law could make it moredifficult for a third party to acquire us, and discourage a takeover.***

 

We intend toreincorporate in Delaware simultaneously with our planned initial publicoffering, and the Delaware certificate of incorporation and the DelawareGeneral Corporation Law, or DGCL, contain provisions that may have theeffect of making more difficult or delaying attempts by others to obtaincontrol of our company, even when these attempts may be in the bestinterests of our stockholders. The Delaware certificate of incorporation alsoauthorizes our Board of Directors, without stockholder approval, to issue oneor more series of preferred stock, which could have voting and conversionrights that adversely affect or dilute the voting power of the holders ofcommon stock. Delaware law also imposes conditions on certain businesscombination transactions with “interested stockholders.” The Delawarecertificate of incorporation divides our Board of Directors into three classes,with one class to stand for election each year for a three-year term afterthe initial election. The classification of directors tends to discourage athird party from initiating a proxy solicitation or otherwise attempting toobtain control of our company and may maintain the incumbency of our Boardof Directors, as this structure generally increases the difficulty of, or may delay,replacing a majority of directors. The Delaware bylaws authorize our Board ofDirectors to fill vacancies or newly created directorships. A majority of thedirectors then in office may elect a successor to fill any vacancies ornewly created directorships.

 

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***Failure to achieve and maintain effective internal controlsin accordance with Section 404 of the Sarbanes-Oxley Act of 2002 couldhave a material adverse effect on our business and stock price.***

 

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-Kfor the fiscal year ending December 31, 2007 we will be required tofurnish a report on our internal control over financial reporting. In order toachieve compliance with Section 404 of Sarbanes-Oxley within theprescribed period, we will need to engage in a process to document and evaluateour internal control over financial reporting, which will be both costly andchallenging. There is a risk that neither we nor our independent auditors willbe able to conclude at December 31, 2007 that our internal controls overfinancial reporting are effective as required by Section 404 ofSarbanes-Oxley.

 

In addition, during thecourse of our testing, we may identify deficiencies that we may notbe able to remediate in time to meet the deadline imposed by Sarbanes-Oxley forcompliance with the requirements of Section 404. Furthermore, if we failto achieve and maintain the adequacy of our internal controls, as suchstandards are modified, supplemented, or amended from time to time, we may notbe able to ensure that we can conclude on an ongoing basis that we haveeffective internal controls over financial reporting in accordance with Section 404of Sarbanes-Oxley. Effective internal controls, particularly those related torevenue recognition, are necessary for us to produce reliable financial reportsand are important to helping prevent financial fraud. If we cannot providereliable financial reports or prevent fraud, our business and results ofoperations could be harmed, investors could lose confidence in our reportedfinancial information, and the trading price of our stock could dropsignificantly.

 

**ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET RISK**

 

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

 

**ITEM 4 -CONTROLS AND PROCEDURES**

 

TheCompany conducted an internal evaluation of its disclosure, controls, andprocedures as of the end of the period covered by this report under thesupervision and with the participation of management, including David Zinberg,President and Chief Executive Officer (CEO), and Lawrence Kong, Chief FinancialOfficer (CFO). Based upon that evaluation, the CEO and CFO concluded that the Company’s disclosure controls andprocedures were effective to provide reasonable assurance to the officers thatthey have been provided, on a timely basis, all material information necessaryfor them to determine that the Company has disclosed all material informationrequired to be included in the Company’s periodic reports filed with theSecurities and Exchange Commission. Based upon the officers’ evaluation, therewere not any significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.

 

PART II.OTHER INFORMATION

 

ITEM1. LEGAL PROCEEDINGS

 

We aresubject to various legal proceedings and claims that arise in the ordinarycourse of business.

 

*Yossi Gatlin v. Bidz.com*

 

We area defendant in a lawsuit brought by Yossi Gatlin in October 2005 for anautomobile purchased from us in March 2002 for $28,000. Gatlin allegesthat we did not provide prior registration so that Gatlin was not able toregister the vehicle. Gatlin is claiming his payment of $28,000, the value ofthe automobile represented to be $350,000, and loss of the use of theautomobile in the amount of $100,000. We have accrued a liability in the amountof $28,000 for this lawsuit.

 

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*Cartier v. Bidz.com*

 

We are a defendant in alawsuit filed by Cartier, and Cartier International, B.V., in the United StatesDistrict Court Southern District of New York in April 2006. The lawsuitalleges that Cartier has proprietary rights, including trade dress, patents,trademarks, copyrights and others, in watch designs known as a Tank, TankFrancaise, Tank Americaine, Panthere and Pasha De Cartier Grille, and TankDevan, and further alleges that we have infringed upon those rights by sellingwatches bearing copies of one or more of the watch designs. We intend to defendthe lawsuit vigorously. We do not believe the outcome of the case will have amaterially adverse effect on our financial position.

 

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**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this registrationstatement to be signed on its behalf by the undersigned, thereunto dulyauthorized.

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

 

Dated: May 15, 2006

 

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