** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                 |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                             |
| ** ** | ** ** | **For the quarterly period ended  September 30, 2007**                                                                                 |
| ** ** | ** ** | ** **                                                                                                                             |
| **o**      | ** ** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                         |
| ** ** | ** ** | ** **                                                                                                                             |
| ** ** | ** ** | **For the transition  period                 to** |

** **

**Commission file number 000-51257**

 

**BIDZ.COM, INC.**

(Exact name of Registrant as specified in its charter)

 

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

 

**3562 Eastham Drive**

**Culver City, California**

**90232**

(Address, including zip code, of principal executiveoffice)

 

**(310) 280-7373**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for thepast 90 days.     Yes x   No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon accelerated filer. See definition of “accelerated filer and large filer” inRule 12b-2 of the Exchange Act). (Check one):

 
| Large accelerated  filer o |   | Accelerated filer o |   | Non-accelerated  filer x |
|---------------------------------|--------|--------------------------|--------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

o  Yes    x  No

 

Number of sharesoutstanding of Registrant’s common stock, $0.001 par value, as of November 7,2007: 23,844,478

 

 

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**TABLE OF CONTENTS**

** **
| PART I. FINANCIAL INFORMATION | 3                                                                                                                         |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
| Item 1.                       | Financial Statements                                                                                                      | 3 |
|                               | Condensed Balance Sheets as of December  31, 2006 and September 30, 2007 (unaudited)                                      | 3 |
|                               | Condensed Statements of  Income for the three month and nine month periods ended September 30, 2006  and 2007 (unaudited) | 4 |
|                               | Condensed Statements of Cash  Flows for the nine month periods ended September 30, 2006 and 2007  (unaudited)             | 5 |
|                               | Notes to Financial Statements  (unaudited)                                                                                | 6 |
| Item 2.                       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                               | 12 |
| Item 3.                       | Quantitative  and Qualitative Disclosures About Market Risk                                                               | 20 |
| Item 4.                            | Controls and  Procedures                                                                                                  | 20 |
| Item 4T                            | Controls and  Procedures                                                                                                  | 20 |
|                               |                                                                                                                      |   |   |
| PART II. OTHER  INFORMATION   |                                                                                                                      | 21 |
| Item 1.                            | Legal Proceedings                                                                                                         |   | 21 |
| Item 1A                            | Risk Factors                                                                                                              |   | 21 |
| Item 2.                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              |   | 33 |
| Item 6.                            | Exhibits                                                                                                                  |   | 34 |
| SIGNATURES                         |                                                                                                                      | 35 |

 

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

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.****                  FINANCIALSTATEMENTS**

** **

**Bidz.com, Inc.**

 

**Condensed Balance Sheets**

 

*(In thousands, except share data)*

 
| ** **                                                                                                                                                                  | ** ** | **December 31,** | ** ** | **September  30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| ** **                                                                                                                                                                  | ** ** | ** **            | ** ** | **(Unaudited)**    | ** ** |
| **Assets**                                                                                                                                                                  | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current assets:                                                                                                                                                             |       |                  |       |               |       |
| Cash                                                                                                                                                                        |       | $                     | 359        |               | $          | 1,100 |   |
| Accounts receivable, net of reserves of $0  and $100 at December 31, 2006 and September 30, 2007, respectively                                                              |       | 1,930                 |       | 1,994              |       |
| Inventories, net of reserves of $461 and  $794 at December 31, 2006 and September 30, 2007, respectively                                                                    |       | 34,308                |       | 46,273             |       |
| Other current assets                                                                                                                                                        |       | 1,192                 |       | 2,125              |       |
| Total current assets                                                                                                                                                        |       | 37,789                |       | 51,492             |       |
| Property and equipment, net                                                                                                                                                 |       | 478                   |       | 1,293              |       |
| Intangible asset                                                                                                                                                            |       | 150                   |       | 161                |       |
| Deposits                                                                                                                                                                    |       | 125                   |       | 104                |       |
| Total assets                                                                                                                                                                |       | $                     | 38,542     |               | $          | 53,050 |   |
| ** **                                                                                                                                                                  | ** ** | ** **            | ** ** | ** **         | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                               | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current liabilities:                                                                                                                                                        |       |                  |       |               |       |
| Revolving credit line                                                                                                                                                       |       | $                     | 3,941      |               | $          | — |   |
| Accounts payable (includes related party  amounts of $4,331 and $5,285 at December 31, 2006 and September 30, 2007,  respectively)                                          |       | 21,987                |       | 27,614             |       |
| Accrued expenses                                                                                                                                                            |       | 1,952                 |       | 3,031              |       |
| Deferred revenue                                                                                                                                                            |       | 3,935                 |       | 2,183              |       |
| Total current liabilities                                                                                                                                                   |       | 31,815                |       | 32,828             |       |
|                                                                                                                                                                        |       |                  |       |               |       |
| Commitments and contingencies                                                                                                                                               |       |                  |       |               |       |
|                                                                                                                                                                        |       |                  |       |               |       |
| Stockholders’ equity:                                                                                                                                                  |       |                  |       |               |       |
| Preferred stock: par value $0.001;  authorized 4,000,000 shares; none issued and outstanding at December 31, 2006  and September 30, 2007, respectively                     |       | —                |       | —             |       |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued and outstanding 23,233,904 and 23,814,978 at  December 31, 2006 and September 30, 2007, respectively |       | 23                    |       | 24                 |       |
| Additional paid in capital                                                                                                                                                  |       | 28,352                |       | 31,933             |       |
| Shares held in treasury, at cost, 15,000  shares at December 31, 2006 and September 30, 2007                                                                                |       | (90                   | )          | (90                | )          |
| Accumulated deficit                                                                                                                                                         |       | (21,558               | )          | (11,645            | )          |
| Total stockholders’ equity                                                                                                                                             |       | 6,727                 |       | 20,222             |       |
|                                                                                                                                                                        |       | $                     | 38,542     |               | $          | 53,050 |   |

 

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

 

3

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**Bidz.com,Inc.**

 

**Condensed Statements of Income (Unaudited)**

 

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

* *
| ** **                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September  30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                             | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                             |       |                                                 |       |                                                      |       |   |   |   |   |
| Net revenue:                                                     |       |                                                 |       |                                                      |       |   |   |   |   |
| Merchandise sales                                                |       | $                                                    | 27,061     |                                                      | $          | 39,973 |   | $ | 94,132 |   | $ | 123,661 |   |
| Other revenue                                                    |       | —                                               |       | 78                                                        |       | 57 |   | 237 |   |
|                                                             |       | 27,061                                               |       | 40,051                                                    |       | 94,189 |   | 123,898 |   |
| Cost of revenue                                                  |       | 20,399                                               |       | 27,356                                                    |       | 70,660 |   | 89,201 |   |
| Gross Profit                                                     |       | 6,662                                                |       | 12,695                                                    |       | 23,529 |   | 34,697 |   |
| Operating expenses:                                              |       |                                                 |       |                                                      |       |   |   |   |   |
| General and administrative                                       |       | 3,052                                                |       | 4,945                                                     |       | 9,847 |   | 14,774 |   |
| Sales and marketing                                              |       | 2,531                                                |       | 2,406                                                     |       | 7,776 |   | 7,026 |   |
| Public offering costs                                            |       | —                                               |       | —                                                    |       | 1,231 |   | — |   |
| Depreciation and amortization                                    |       | 74                                                   |       | 160                                                       |       | 195 |   | 346 |   |
| Total operating expenses                                         |       | 5,657                                                |       | 7,511                                                     |       | 19,049 |   | 22,146 |   |
| Income from operations                                           |       | 1,005                                                |       | 5,184                                                     |       | 4,480 |   | 12,551 |   |
| Other income - interest income                                   |       | 19                                                   |       | 28                                                        |       | 77 |   | 33 |   |
| Other expense - interest (expense)                               |       | —                                               |       | (1                                                        | )          | — |   | (165 | ) |
| Income before income tax expense                                 |       | 1,024                                                |       | 5,211                                                     |       | 4,557 |   | 12,419 |   |
| Income tax expense                                               |       | 27                                                   |       | 1,648                                                     |       | 121 |   | 2,506 |   |
| Net income                                                       |       | $                                                    | 997        |                                                      | $          | 3,563 |   | $ | 4,436 |   | $ | 9,913 |   |
| Net income per share available to common  shareholders - basic   |       | $                                                    | 0.04       |                                                      | $          | 0.15 |   | $ | 0.19 |   | $ | 0.42 |   |
| Net income per share available to common  shareholders - diluted |       | $                                                    | 0.04       |                                                      | $          | 0.14 |   | $ | 0.19 |   | $ | 0.40 |   |
| Weighted average number of shares  outstanding - basic           |       | 23,310,791                                           |       | 23,593,325                                                |       | 23,311,930 |   | 23,371,838 |   |
| Weighted average number of shares  outstanding - diluted         |       | 23,819,549                                           |       | 26,324,387                                                |       | 23,822,649 |   | 25,031,607 |   |

 

Theaccompanying notes form an integral part of these condensed financialstatements.

 

4

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**Bidz.com, Inc.**

 

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

 

*(In thousands)*

* *
| ** **                                                                                        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2006**                                            | ** ** | **2007** | ** ** |
|                                                                                              |       |                                                |       |   |   |
| **Cash flows provided by (used for) operating  activities:**                                      |       |                                                |       |   |   |
| Net income                                                                                        |       | $                                                   | 4,436      |   | $ | 9,913 |   |
|                                                                                              |       |                                                |       |   |   |
| **Adjustments to reconcile net income to net  cash provided by (used for) operating activities:** |       |                                                |       |   |   |
| Depreciation and amortization                                                                     |       | 195                                                 |       | 346 |   |
| Change in inventory reserve                                                                       |       | 119                                                 |       | 333 |   |
| Amortization of deferred stock-based  compensation                                                |       | 100                                                 |       | — |   |
| Stock-based compensation                                                                          |       | 219                                                 |       | 507 |   |
| **Changes in assets and liabilities:**                                                            |       |                                                |       |   |   |
| **(Increase) decrease in assets:**                                                                |       |                                                |       |   |   |
| Accounts receivable                                                                               |       | 5                                                   |       | (64 | ) |
| Inventories                                                                                       |       | (6,747                                              | )          | (12,298 | ) |
| Other current assets                                                                              |       | (152                                                | )          | (933 | ) |
| Deposits                                                                                          |       | 100                                                 |       | 21 |   |
| **Increase (decrease) in liabilities:**                                                           |       |                                                |       |   |   |
| Post-dated check financing                                                                        |       | (3,409                                              | )          | — |   |
| Accounts payable                                                                                  |       | 5,061                                               |       | 5,627 |   |
| Accrued expenses                                                                                  |       | 3,243                                               |       | 1,079 |   |
| Deferred revenue                                                                                  |       | 64                                                  |       | (1,752 | ) |
| Net cash provided by operating activities                                                         |       | 3,234                                               |       | 2,779 |   |
|                                                                                              |       |                                                |       |   |   |
| **Cash flows (used for) investing activities:**                                                   |       |                                                |       |   |   |
| Capital expenditures                                                                              |       | (315                                                | )          | (1,172 | ) |
| **Cash flows provided by (used for) financing  activities:**                                      |       |                                                |       |   |   |
| Payments on revolving credit line balance                                                         |       | —                                              |       | (3,941 | ) |
| Payments for repurchase of common stock                                                           |       | (690                                                | )          | — |   |
| Proceeds from exercise of stock options                                                           |       | —                                              |       | 1,978 |   |
| Tax benefit from exercise of stock options                                                        |       | —                                              |       | 1,097 |   |
| Net cash used for financing activities                                                            |       | (690                                                | )          | (866 | ) |
|                                                                                              |       |                                                |       |   |   |
| **Net increase in cash**                                                                          |       | 2,229                                               |       | 741 |   |
| **Cash, beginning of period**                                                                     |       | 7                                                   |       | 359 |   |
| **Cash, end of period**                                                                           |       | $                                                   | 2,236      |   | $ | 1,100 |   |
|                                                                                              |       |                                                |       |   |   |
| **Supplemental disclosure of cash flow  information:**                                            |       |                                                |       |   |   |
| ** **                                                                                        |       |                                                |       |   |   |
| Interest paid                                                                                     |       | $                                                   | —     |   | $ | 165 |   |
|                                                                                              |       |                                                |       |   |   |
| Income taxes paid                                                                                 |       | $                                                   | 185        |   | $ | 502 |   |

 

Theaccompanying notes form an integral part of these condensed financialstatements.

 

5

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**BIDZ.COM, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.             Basis of Presentation and Nature ofBusiness Operations**

 

**Basisof Presentation**

 

Theaccompanying unaudited financial statements have been prepared in accordancewith the instructions to Form 10-Q and do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.  Thesefinancial statements and related notes should be read in conjunction with theCompany’s audited financial statements for the fiscal year endedDecember 31, 2006 filed in the form 10-K Annual Report by the Company onMarch 12, 2007. In the opinion of management, these financial statementsreflect all adjustments which are of a normal recurring nature and which arenecessary to present fairly the financial position of Bidz.com, Inc. as ofSeptember 30, 2007 and the results of operations for the three month and ninemonth periods ended September 30, 2006 and 2007 and the cash flows for the ninemonth periods ended September 30, 2006 and 2007.  The results ofoperations for the three months and nine months ended September 30, 2007 arenot necessarily indicative of the results which may be expected for the entirefiscal year.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period. Actual results could differ from those estimates. Wehave made estimates for accounts receivable reserve, return and allowancereserve, inventory reserve, inventory vendor marketing reserves, accruedexpenses, stock price volatility, stock option forfeiture rate, expected stockoption term and utilization of tax net operating loss carryforwards.

 

**Natureof Business Operations**

 

Bidz.com, Inc. wasfounded in November of 1998 as a California corporation with its principallocation of business in Los Angeles, California. We operate a website locatedat www.bidz.com for the purpose of selling merchandise, utilizing our uniquesales auction platform.

 

Wesell our products throughout the United States and have expanded the reach of ourcustomer base to Europe, Asia, Canada, Australia and other Countries. Revenuegenerated from the United States accounted for approximately 76.4% and 75.7% ofnet revenue for the three months ended September 30, 2006 and 2007,respectively and 79.7% and 77.6% of net revenue for the nine months endedSeptember 30, 2006 and 2007, respectively.

 

For the three and ninemonth periods ended September 30, 2007, we reported net income of $3.6million and $9.9 million, respectively and for the nine month period endedSeptember 30, 2007 we reported net cash provided from operating activities of$2.8 million. As of September 30, 2007, we had current assets of $51.5 millionand current liabilities of $32.8 million or working capital of$18.7 million.

 

**RecentDevelopments**

 

Wefiled a registration statement on Form S-8 with the Securities andExchange Commission on June 29, 2007, in connection with the registration underthe Securities Act of 1933, as amended, of 3,400,000 shares of the Company’scommon stock, par value $0.001 per share, issuable pursuant to the Company’s2001 Stock Option Plan, 2002 Special Stock Option Plan and 2006 Stock AwardPlan.

 

On May 1, 2007 our commonstock began trading under the symbol BIDZ on the OTC Bulletin Board and on June6, 2007 we began trading on the NASDAQ Capital Market.

 

6

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***Recent Accounting Pronouncements***

 

In February 2007, theFASB issued Statement No. 159 (“FAS 159”) which expanded FAS No. 157, “*Fair Value Measurements*,” which definesfair value, establishes guidelines for measuring fair value and expandsdisclosures regarding fair value measurements. FAS 159 does not require any newfair value measurements but rather eliminates inconsistencies in guidance foundin various prior accounting pronouncements. FAS 159 is effective for fiscalyears beginning after November 15, 2007. Earlier adoption is permitted,provided the company has not yet issued financial statements, including forinterim periods, for that fiscal year. The Company is currently evaluating theimpact of FAS 159, but does not expect the adoption of FAS 159 to have amaterial impact on our financial statements.

 

In September 2006,the FASB issued Statement SFAS No. 157 (“FAS 157”), “ *Fair Value Measurements*,” which definesfair value, establishes guidelines for measuring fair value and expandsdisclosures regarding fair value measurements. FAS 157 does not require any newfair value measurements but rather eliminates inconsistencies in guidance foundin various prior accounting pronouncements. SFAS 157 is effective for fiscalyears beginning after November 15, 2007.

 

In July 2006, the FASBissued Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes, an interpretation of FAS*109”**(“FIN 48”) which clarifies the accountingfor uncertainty in income taxes recognized in accordance with FAS 109, “*Accounting for Income Taxes.”*FIN 48 is acomprehensive model for how a company should recognize, measure, present, anddisclose in its financial statements uncertain tax positions that the companyhas taken or expects to take on a tax return. If an income tax position exceedsa more likely than not (greater than 50%) probability of success upon taxaudit, the company will recognize an income tax benefit in its financialstatements. Additionally, companies are required to accrue interest and relatedpenalties, if applicable, on all tax exposures consistent with jurisdictionaltax laws. This interpretation is effective as of January 1, 2007.  Theadoption of this statement does not have a material impact on our financialstatements.

 

**2.****             Earnings per CommonShare**

 

In accordance with SFASNo. 128, “Earnings per Share,” the basic earnings per common share iscalculated by dividing net income available to common stockholders lesspreferred dividends by the weighted average number of common sharesoutstanding. Diluted earnings per common share is computed similarly to basicearnings per common share, except that the denominator is increased to includethe number of additional common shares that would have been outstanding if thepotential common shares had been issued and if the additional common shareswere not anti-dilutive.

 

The dilutive effect ofoutstanding stock options and warrants is reflected in diluted earnings pershare by application of the treasury stock method excluding the impact of proforma deferred tax benefits for the three month and nine month periods endedSeptember 30, 2006 and 2007.  The following table sets forth thecomputation of basic and diluted net income per share.

 

7

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

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2006**                         | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                    |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted net income per share: |       |                             |       |                            |       |   |   |   |   |
| Numerator:                              |       |                             |       |                            |       |   |   |   |   |
| Net income                              |       | $                                | 997        |                            | $          | 3,563 |   | $ | 4,436 |   | $ | 9,913 |   |
| Denominator:                            |       |                             |       |                            |       |   |   |   |   |
| Weighted common shares outstanding      |       | 23,310,791                       |       | 23,593,325                      |       | 23,311,930 |   | 23,371,838 |   |
| Effect of dilutive securities           |       | 508,758                          |       | 2,731,062                       |       | 510,719 |   | 1,659,769 |   |
| Denominator for diluted calculation     |       | 23,819,549                       |       | 26,324,387                      |       | 23,822,649 |   | 25,031,607 |   |
| Net income per share, basic             |       | $                                | 0.04       |                            | $          | 0.15 |   | $ | 0.19 |   | $ | 0.42 |   |
| Net income per share, diluted           |       | $                                | 0.04       |                            | $          | 0.14 |   | $ | 0.19 |   | $ | 0.40 |   |

 

**3**.             **Inventories**

** **

Inventories consist of the following *(In thousands)*:

 
| ** **                              | ** ** | **December 31, 2006** | ** ** | **September 30, 2006** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|------------------------|------------|
|                                    |       |                  |       |                   |       |
| Fine jewelry, watches and other         |       | $                     | 29,511     |                   | $          | 35,970 |   |
| Loose diamonds and semi-precious stones |       | 2,133                 |       | 1,458                  |       |
| Prepaid inventory                       |       | 3,125                 |       | 1,141                  |       |
| Inventory with manufacturing vendors    |       | —                |       | 8,498                  |       |
| Product inventories                     |       | 34,769                |       | 47,067                 |       |
| Less: Inventory reserve                 |       | (461                  | )          | (794                   | )          |
|                                    |       | $                     | 34,308     |                   | $          | 46,273 |   |

 

**4.****            ****Revolving Credit Line**

 

In July 2006, we entered into a revolving creditline agreement with LaSalle Bank, ABN AMRO, to provide working capitalfinancing secured by inventories and tangible assets. The agreement allows forus to initially draw on a line of credit up to $10 million, with a provision toincrease the limit up to $15 million with the future consent of the bank’s loancommittee. During the first quarter of 2007 we successfully increased the limitto $15 million. The revolving credit line agreement expires in July 2010. As of September 30, 2007, there was nooutstanding balance under the revolving credit line. The credit line had aremaining availability of $13.5 million after deducting a reserve of $1.5million for minimum required excess availability which is a reserve of the $15million credit line that we cannot utilize. The Company is subject to certainrestrictive covenants for which it was in compliance at September 30, 2007.

 

**5.****             Stock BasedCompensation**

 

InDecember 2004, the FASB issued SFAS No. 123R, “*Share Basedpayment: An Amendment of FASB Statements No. 123 and 95.*” Thisstatement requires that we recognize in our financial statements the costresulting from all share- based payment transactions. In addition, inMarch 2005 the Securities and Exchange Commission (“SEC”) released SECStaff Accounting Bulletin No. 107, “*Share-Based Payment*”(“SAB 107”), which provides the SEC staff’s position regarding the applicationof SFAS 123R and certain SEC rules and regulations, and also provides thestaff’s views regarding the valuation of share-based payment arrangements forpublic companies. On January 1, 2006, we adopted SFAS 123R, whicheliminates our ability to account for share-based compensation transactions, aswe formerly did, using the intrinsic value method as prescribed by APB 25 andgenerally requires that we recognize in our statements of operations allshare-based payments to employees, including grants of stock options based ontheir fair values.

 

TheCompany adopted SFAS 123R using the modified prospective method which requiresthe application of the accounting standard as of January 1, 2006. TheCompany’s financial statements as of and for the three months and nine monthsended September 30, 2006 and 2007, reflect the impact of adopting SFAS 123R.

 

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. Compensation expense for the stock-based paymentawards granted subsequent to December 31, 2005, will be based on the grantdate fair value estimated in accordance with SFAS 123R. As stock-basedcompensation expense recognized in the statements of income is based on awardsultimately expected to vest, it will be reduced for estimated forfeitures. SFAS123R requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.

 

8

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UnderSFAS 123R, we will continue to use the Black-Scholes-Merton model to estimatethe fair value of options. Our assessment of the estimated compensation chargeswill be affected by our stock price as well as assumption regarding a number ofsubjective variables and the related tax impact. These variables include, butare not limited to, our stock price volatility and employee stock optionexercise behaviors (or expected term). The stock-based compensation expensefrom stock options for the three months ended September 30, 2006 and 2007totaled $0 and $181,000, respectively, and for the nine months ended September30, 2006 and 2007 totaled $0 and $308,000, respectively.

 

**StockAward**

 

The stock-based expensefrom stock awards for the three months ended September 30, 2006 and 2007totaled $0 and $76,000, respectively, and for the nine months ended September30, 2006 and 2007 totaled $219,000 and $199,000, respectively.

 

As of September 30, 2007we had 110,000 shares of restricted common stock that were not fully vested.The unamortized stock-based compensation expense from restricted stock awardstotaled $1.0 million as of September 30, 2007.

 

On February 2, 2007, weawarded and issued, as director compensation, a total of 18,750 shares ofcommon stock to our non-employee directors, Man Jit Singh and Peter Hanelt,with stock awards of 8,750 and 10,000 shares, respectively, in lieu of stockoptions. On June 15, 2007, we awarded and issued, as director compensation, atotal of 110,000 restricted shares of common stock with 25% vesting at the endof each year over a four year period to our non-employee directors, PeterHanelt, Man Jit Singh and Garry Itkin, with restricted stock awards of 40,000,35,000 and 35,000 shares, respectively, in lieu of stock options. The fairmarket value of the shares on grant date was used to determine the value of theshare awards.

 

We grant, annually, toeach non-employee director options to purchase 10,000 shares of our commonstock. In lieu of receiving such stock options, non-employee directors mayelect to receive one share of common stock for each option to purchase twoshares of common stock. Non-employee directors also will receive stock options(or restricted stock in lieu thereof) for committee service per year inaddition to the standard non-employee director compensation: options topurchase an additional 5,000 shares of common stock to the Chairman of theAudit Committee, and options to purchase an additional 2,500 shares of commonstock to each member of our Audit Committee (other than the Chairman),Compensation Committee and Corporate Governance and Nominating Committee.

 

**StockOption**

 

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

 

The following is asummary of stock option activity as of September 30, 2007, and changes duringthe nine months ended September 30, 2007.

 

9

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| **Options**                                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December 31, 2006              |       | 8,353,000  |       | $                                       | 5.64       |                                                     | 3.8        |                            | $          | 2,976,750 |   |
| Granted                                       |       | 1,000,000  |       | $                                       | 8.23       |                                                     |       |                            |       |   |
| Exercised                                     |       | (452,324   | )          | $                                       | 4.37       |                                                     |       |                            |       |   |
| Forfeited                                     |       | —     |       | —                                  |       |                                                     |       |                            |       |
| Expired                                       |       | (29,000    | )          | $                                       | 6.00       |                                                     |       |                            |       |   |
| Outstanding at September 30, 2007             |       | 8,871,676  |       | $                                       | 6.00       |                                                     | 3.3        |                            | $          | 66,189,724 |   |
| Vested and Exercisable at September 30,  2007 |       | 7,756,676  |       | $                                       | 5.71       |                                                     | 3.1        |                            | $          | 60,105,824 |   |

 

Thefollowing table summarizes information about stock options outstanding andexercisable at September 30, 2007.

 
| ** **                                  | ** ** | ** **                                    | ** ** | **Options Outstanding and Exercisable  as of September 30, 2007** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                    | ** ** | **Options Exercisable**                                                                         | ** ** | **Options Outstanding** | ** ** |
| **Range of Exercise Prices** | ** ** | **Number  Outstanding  As of  09/30/07** | ** ** | **Weighted  Average  Remaining  Contractual**                                                        | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable  As of  09/30/2007** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $                                           | 3.01       |                                          | $          | 4.00                                                                                                 |       |   | 731,676 |   | 0.21 |   | $ | 3.75 |   | 731,676 |   | $ | 3.75 |   |
| $                                           | 4.01       |                                          | $          | 5.00                                                                                                 |       |   | 396,500 |   | 1.18 |   | $ | 4.50 |   | 396,500 |   | $ | 4.50 |   |
| $                                           | 5.01       |                                          | $          | 6.00                                                                                                 |       |   | 6,743,500 |   | 3.58 |   | $ | 6.00 |   | 6,628,500 |   | $ | 6.00 |   |
| $                                           | 6.01       |                                          | $          | 7.00                                                                                                 |       |   | 490,000 |   | 4.44 |   | $ | 6.50 |   | 0 |   | $ | — |   |
| $                                           | 9.01       |                                          | $          | 10.00                                                                                                |       |   | 510,000 |   | 4.70 |   | $ | 9.90 |   | 0 |   | $ | — |   |
| $                                           | 3.01       |                                          | $          | 10.00                                                                                                |       |   | 8,871,676 |   | 3.30 |   | $ | 6.00 |   | 7,756,676 |   | $ | 5.71 |   |

 

 

The stock-based expensefrom stock options for the three months ended September 30, 2006 and 2007totaled $0 and $181,000, respectively and for the nine months ended September30, 2006 and 2007 totaled $0 and $308,000, respectively.

 

Asof September 30, 2007, stock options to purchase 1,115,000 shares were notfully vested. The unamortized stock-based compensation expense from stockoptions as of September 30, 2007 is $2.5 million.

 

Duringthe nine months ended September 30, 2007, we issued 1,000,000 stock options topurchase shares in our common stock. During the nine months ended September 30,2007, 452,324 options to purchase shares were exercised with total proceeds of$2.0 million. The stock options were granted at prices not less than the fairmarket value of our common stock on the date of grant and have a four yearvesting period with 25% vesting on each subsequent anniversary of the grant date.The stock options expire 5 years from the grant date. We recognize compensationexpense on a straight-line basis over the requisite service period for eachstock option grant.

 

Theweighted-average grant date fair value of options granted during the ninemonths ended September 30, 2007 was $2.59. Options granted during the ninemonths ended September 30, 2007 were valued in accordance with SFAS 123R. Thefair value of these options was calculated using a Black-Scholes Merton optionpricing model using the following assumptions: (1) risk-free interestrates of 4.3-4.9%, (2) an expected term of four to five years,(3) expected volatility of 31-33%, (4) expected forfeitures of 0%, and(5) a dividend yield of 0%. No stock options were granted in the three monthsended September 30, 2007.

 

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

 

Netrevenue by geographic area is presented based upon the country of destination.No foreign country represented 10% or more of net revenue for three month andnine month periods ended September 30, 2006 and 2007. Net revenue by geographicarea was as follows:

 

10

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*(In thousands, except percentage data)*

* *
| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **               | ** ** | **2006**                         | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Geographic Area** | ** ** | **Amount**                       | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States            |       | $                                | 20,687     |                            | 76.4       | % | $ | 30,324 |   | 75.7 | % | $ | 75,041 |   | 79.7 | % | $ | 96,144 |   | 77.6 | % |
| International            |       | 6,374                            |       | 23.6                            | %          | 9,727 |   | 24.3 | % | 19,148 |   | 20.3 | % | 27,755 |   | 22.4 | % |
| Total                    |       | $                                | 27,061     |                            | 100.0      | % | $ | 40,051 |   | 100.0 | % | $ | 94,189 |   | 100.0 | % | $ | 123,899 |   | 100.0 | % |

 

**7.****             Concentrations**

 

Purchasesfrom two vendors amounted to $8.1 million and $7.8 million representing 34.0%and 17.3% of the total purchases during the three months ended September 30,2006 and 2007, respectively, and $29.1 million and $14.6 million representing39.0% and 17.1% of the total purchases during the nine months ended September30, 2006 and 2007, respectively. Outstanding accounts payable to the twovendors totaled $4.5 million and $5.2 million****asof December 31, 2006 and September 30, 2007, respectively.

 

**8.****             Related PartyTransactions**

 

Duringthe three months ended September 30, 2006 and 2007, we purchased approximately29.0% and 11.6%, respectively, of our merchandise from LA Jewelers, Inc.During the nine months ended September 30, 2006 and 2007, we purchasedapproximately 33.0% and 12.2%, respectively. LA Jewelers participates in ourinventory co-op marketing program. For the three months ended September 30, 2007we earned $134,000 from LA Jewelers relating to co-op marketing contributions and$194,000 was unamortized as of September 30, 2007.

 

InMay, 2007 we entered into an understanding with LA Jewelers whereby they will guaranteethat we will earn a certain minimum gross profit margin on their merchandise.This agreement provides that in the event of a gross profit margin shortfall wewill be compensated for the difference between our actual gross profit marginand the guaranteed minimum gross profit margin. As of September 30, 2007,$122,000 was outstanding and accrued under this gross profit margin guarantee. Oneof the owners of LA Jewelers, Saied Aframian, owns 1,228,000 shares of ourcommon stock as of September 30, 2007**.**

 

**9.****            ****Income Tax — FIN 48**

 

Weadopted the provisions of FASB Interpretation 48, *Accountingfor Uncertainty in Income Taxes*, on January 1, 2007. Previously, wehad accounted for tax contingencies in accordance with Statement of FinancialAccounting Standards 5, *Accounting forContingencies*. As required by Interpretation 48, which clarifiesStatement 109, *Accounting for Income Taxes*, werecognize the financial statement benefit of a tax position only afterdetermining that the relevant tax authority would more likely than not sustainthe position following an audit. For tax positions meeting themore-likely-than-not**threshold, theamount recognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimate settlementwith the relevant tax authority. At the adoption date, we appliedInterpretation 48 to all tax positions for which the statute of limitationsremained open. Our preliminary analysis of the implementation of Interpretation48 reveals that there is no material effect on our financial statements.

 

Theamount of unrecognized tax benefits as of January 1, 2007, was $5.9 million(without regard to impact from alternative minimum tax in a future period)which, if ultimately recognized, will reduce our annual effective tax rate.There has been no material changes in unrecognized tax benefits, except forutilization of net operating loss carryforwards applied against net income forthe nine months ended September 30, 2007.

 

Weare subject to income taxes in the U.S. federal jurisdiction and California.Tax regulations within each jurisdiction are subject to the interpretation ofthe related tax laws and regulations and require significant judgment to apply.

 

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Withfew exceptions, we are no longer subject to U.S. federal and Californiaexaminations by tax authorities for the years before 2003.

 

Weare under examination by the Internal Revenue Service for the 2004 and 2005 taxyears. We expect the examination to be concluded and settled in the next 12months. The Company, which has recorded unrecognized tax benefits of $5.9million as of January 1, 2007 related primarily to tax net operating lossdeductions, believes it is reasonably possible that the resolution of theseexaminations could result in minimal or no additional tax due. Accordingly, wehave not accrued interest and penalties at September 30, 2007.

 

**10.          Contingencies**

 

Weare subject to various legal proceedings and claims that arise in the ordinarycourse of business.  Although the Company believes it has defenses to theallegations and intends to pursue them vigorously, management does notcurrently have sufficient information to assess the validity of the claims orthe amount of potential damages.  Company management currently believes,however, that resolution of such legal matters will not have a material adverseimpact on the Company’s financial position, results of operations or cashflows.

 

*Cartierv. 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. The court has yet to set atrial date.

 

*PriorSales 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 issuedapproximately 250 stock option grants to purchase common stock at a weightedaverage exercise price of $4.45. After conducting these sales of oursecurities, we determined that these sales were not exempt from theregistration requirements under the Securities Act of 1933. A number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs.

 

The probability thatstockholders would assert a claim against us and the extent of the ourliability, if any, are contingent on a number of factors, including astockholder’s desire to rescind his or her investment, applicable legalprecedent, and statutes of limitation. Based on current facts known tomanagement at this time, and considering the market price and trading pricerange of our common stock, management does not believe that assertion of anysuch claims in a material amount by the Company’s shareholders is probable. Accordingly,no accruals for either potential amounts payable or reserves have been made atthis time.

 

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

 

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

 

12

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**Overview**

 

We are a leading onlineretailer of jewelry, featuring a live auction format. We have established ourretail brand in the online marketplace by offering high-quality merchandise, aunique user-friendly shopping experience, and the opportunity for buyers toachieve significant cost savings versus traditional retail channels. A key toour success has been our ability to efficiently and effectively source closeoutand regular merchandise, and rapidly respond to changing consumer demands forcertain 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 majority of our auctions are short-term, oftenlasting less than one hour, providing immediate gratification to our customersand encouraging frequent visits and active viewing of our website. Our productinventory includes gold, platinum, and silver jewelry set with diamonds,rubies, emeralds, sapphires, and other precious and semi-precious stones; andwatches.  We believe we are the second largest online retailer of jewelrybased on revenue and the largest online jewelry auction site based on webtraffic.

 

In assessing ourbusiness, we consider operational and non-financial performance metrics, suchas average order value, average orders per day, average items sold per day,acquisition cost per new buyer, and number of new buyers. We averaged dailysales of approximately 8,814 items, or 2,699 orders, with an average ordervalue of $173 in the three month period ended September 30, 2007.

 

We sell to consumers andresellers looking for reliable bargains on jewelry. Because we purchase andretain all of our jewelry inventory onsite, we can provide our customers withtimely 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 our products. Weoperate in a highly competitive market with low barriers to entry. By sellingour own merchandise, we provide a buying environment in which we minimizefraudulent activity and questionable product quality frequently associated withpurchase transactions from third-party sellers. We also provide a 15-day returnpolicy on all merchandise. We believe that many of our customers resellmerchandise that they purchase from our auctions on eBay, at local auctions,and through other retail channels. Our auctions are conducted 24 hours a day,seven days a week. We also offer 24-hour online customer support.

 

We have providedfinancial guidance in our press releases. Our most recent press releaseprovided for expected net revenue of $170 million to $180 million and incomebefore income tax of $14 million to $15 million for the 2007 fiscal year. Overthe next 3-5 years, we expect net revenue to grow annually by 25-30% andpre-tax income margins to reach 10-12%.

 

**CriticalAccounting Policies**

 

The preparation of ourfinancial statements requires us to make certain estimates and judgments thataffect amounts reported and disclosed in our financial statements and relatednotes. We base our estimates on historical experience and on other assumptionsthat we believe to be reasonable under the circumstances. Actual results maydiffer from these estimates. The following are the critical accounting policiesthat we believe require significant estimation and judgment.

 

*RevenueRecognition*

 

We derive our revenuefrom four sources: merchandise sales, shipping revenue, auction transaction feerevenue and other revenue. In accordance with SAB 104, we recognize revenuefrom all four sources when the following revenue recognition criteria are met:(1) persuasive evidence of an arrangement exists; (2) the product hasbeen shipped or the service has been rendered and the customer takes ownershipand assumes the risk of loss; (3) the selling price is fixed ordeterminable; and (4) collection of the resulting receivable is reasonablyassured.

 

We recognize merchandisesales upon shipments made to consumers that are fulfilled from our warehouse.We generally require online payment by credit card or other electronic paymentmethods before we ship.

 

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We record amountsreceived or billed prior to shipment of goods to customers as deferred revenue.We reduce gross sales by returns and chargebacks from customers.

 

We present sales taxliability on a net basis in accordance with Emerging Issues Task Force (“EITF”)Issue No. 06-03.  Sales are not grossed up with the attendant taxes anddeducted as a separate line item. The EITF becomes effective for interim andannual reporting periods beginning after December 15, 2006.

 

We report shipping andhandling fees and costs in accordance with Emerging Issues Task Force (“EITF”)issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs.” Assuch, in the Statement of Operations all amounts billed to customers by usrelated to shipping and handling are included in “Net revenue” and our shippingcosts are included in “Cost of revenue.”

 

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.

 

Other revenue includescommissions and advertising revenue. We derive commission revenue from sales ofCertified Merchant merchandise that is owned by third parties and recognizethat revenue when services have been rendered. For commission revenue, werecognize as revenue only the commission portion of the price our customers payfor the purchased products because we are acting as an agent in suchtransactions. Commissions are also reduced by the impact of returns and otherdiscounts redeemed to obtain such sales. We recognize advertising revenue fromallowing other companies to advertise on our web site when the services arerendered and the advertising revenue is known and collectible.

 

*Returnand Allowance Reserve*

 

We estimate potentialfuture product returns and chargebacks that related to current periodrevenue. We analyze historical returns and changes in customer demand andacceptance of our products when evaluating the adequacy of the sales returnsreserve and other allowances in any accounting period. If actual returns andchargebacks are greater than our estimates, we will record additional returnsand allowances in addition to our estimates, which will result in lower netrevenue recorded during that period.

 

*PrepaidInventory*

 

We record payments madeto our suppliers for purchases we have yet to receive as prepaid inventoryuntil they are in our physical possession and satisfactorily examined. Prepaidinventory is included in inventories is $3.1 million and $1.1 million atDecember 31, 2006 and September 30, 2007, respectively.

 

*InventoryReserve*

 

# **We recordreserves against our inventory equal to the difference between the cost ofinventory and the lower of estimated market value based upon assumptions aboutfuture demand and market conditions. We also record reserves of 100% of thevalue of inventory held for more than one year.**Inventory reserve is $461,000 and $794,000 atDecember 31, 2006 and September 30, 2007, respectively.

# ** **

* Inventory Co-op Marketing Reserve*

 

# **Beginning inthird quarter 2007 we record reserves against our inventory for co-op marketingcontributions from our vendors that have yet to be amortized to cost of sales.The co-op marketing contributions are amortized as a reduction to cost of salesover the estimated inventory turnover period. In accordance with EITF02-16:  Accounting by a Customer (including a Reseller) for CertainConsideration Received from a Vendor, the co-op marketing contributions thatcannot be identified specifically to benefit the vendors are a reduction incost of sales. Unamortized inventory co-op marketing reserve is $0 and $1.5million at December 31, 2006 and September 30, 2007, respectively.**

# ** **

# **14**

# ****

# ** **

# **Receivablefrom vendors for co-op marketing contributions is included in other currentassets and amounted to $0 and $1.2 million at December 31, 2006 and September30, 2007, respectively.**

# ** **

*Stock-BasedCompensation*

 

OnJanuary 1, 2006, we adopted SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’(‘‘SFAS 123R’’) requiring that share-based payment transactions be recognizedin the financial statements based on the fair value of the equity or liabilityinstrument issued. We use the Black-Scholes-Merton option pricing model toestimate the value of our options in implementing SFAS 123R. Under SFAS 123Rstock-based compensation expense recognized during the period is based on thevalue of the portion of stock-based payment awards that is ultimately expected tovest. Accordingly, stock-based compensation expense recognized in thestatements of income will be reduced for estimated forfeitures. SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.

 

*Descriptionof Our Revenue, Costs, and Expenses*

 

The following tablepresents our historical results of operations for the periods indicated as apercentage of net revenue.

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                             | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
|                            |       |                                                 |       |                                                |       |   |   |   |   |
| Net Sales                       |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Gross Profit                    |       | 24.6                                                 |       | 31.7                                                |       | 25.0 |   | 28.0 |   |
| Operating Expenses:             |       |                                                 |       |                                                |       |   |   |   |   |
| General & Administrative    |       | 11.2                                                 |       | 12.4                                                |       | 10.5 |   | 11.9 |   |
| Sales & Marketing           |       | 9.4                                                  |       | 6.0                                                 |       | 8.3 |   | 5.7 |   |
| Public Offering Costs           |       | 0.0                                                  |       | —                                              |       | 1.3 |   | — |   |
| Depreciation & Amortization |       | 0.3                                                  |       | 0.4                                                 |       | 0.2 |   | 0.3 |   |
| Total Operating Expenses        |       | 20.9                                                 |       | 18.8                                                |       | 20.3 |   | 17.9 |   |
| Profit from Operations          |       | 3.7                                                  |       | 12.9                                                |       | 4.7 |   | 10.1 |   |
| Interest income                 |       | 0.1                                                  |       | 0.1                                                 |       | 0.1 |   | 0.0 |   |
| Interest expense                |       | —                                               |       | 0.0                                                 |       | — |   | 0.1 |   |
| Income tax expense              |       | 0.1                                                  |       | 4.1                                                 |       | 0.1 |   | 2.0 |   |
| Net Income                      |       | 3.7                                                  | %          | 8.9                                                 | %          | 4.7 | % | 8.0 | % |

 

*NetRevenue*

 

Substantially all of ournet revenue consists of jewelry sold via the Internet, net of returns. We alsogenerate net revenue from shipping and handling, auction transaction fee, andother revenue.

 

The following tablepresents our sources of revenue for the periods indicated as a percentage ofnet revenue.

 
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                             | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
|                    |       |                                                 |       |                                                |       |   |   |   |   |
| Net Sales               |       |                                                 |       |                                                |       |   |   |   |   |
| Merchandise sales       |       | 84.4                                                 | %          | 84.2                                                | %          | 84.8 | % | 84.7 | % |
| Shipping & handling |       | 12.6                                                 |       | 12.6                                                |       | 12.1 |   | 12.0 |   |
| Transaction fees        |       | 3.0                                                  |       | 3.0                                                 |       | 3.0 |   | 3.1 |   |
| Other revenue           |       | 0.0                                                  |       | 0.2                                                 |       | 0.1 |   | 0.2 |   |
| Total Net Sales         |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |

 

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*GrossProfit*

 

Our gross profit consists of net revenue less the costof sales. Our cost of sales consists of the cost of merchandise sold tocustomers, amortized co-op marketing contributions from vendors, inbound andoutbound shipping costs, packaging and shipping supplies, insurance onshipments, product repair and service costs, and credit card and othertransaction fees associated with payments.

 

*Generaland Administrative Expenses*

 

Our general and administrative expenses consistprimarily of payroll and related benefit costs for our employees. Theseexpenses also include fulfillment, customer service, technology, professional fees,other general corporate expenses, and stock-based compensation, consistingsubstantially of stock option grants and stock awards to employees anddirectors.

 

*Salesand Marketing Expenses*

 

Our marketing expenses consist primarily of costsassociated with paid website search marketing, online banner marketing, e-mailcampaigns, affiliate programs and optimization services. These marketingprograms, which are designed to drive buyers to our website, are importantfactors in increasing demand for our jewelry products and increasing netrevenue.

 

**Comparisonof Three Months Ended September 30, 2006 to Three Months Ended September 30,2007**

 

Net income in the threemonths ended September 30, 2007 was $3.6 million, or $0.15 and $0.14 per basicand diluted share, respectively. In the three months ended September 30, 2006,net income was $997,000 and net income per basic and diluted share was $0.04.Net income increased by $2.6 million or 257% in the three months endedSeptember 30, 2007 compared to the three months ended September 30, 2006. Theincrease in net income was due primarily to the increase in net revenue andhigher gross profit margins.

 

*NetRevenue*

 

Net revenue increased by$13.0 million or 48.0% to $40.1 million in the three months ended September 30,2007 from $27.1 million in the three months ended September 30,2006. This increase in net revenue was due primarily to the growth indemand for our jewelry products and the increase in average order value. Wehave also implemented three initiatives that generated more demand from ourcustomers. In certain circumstances, including satisfaction of our gross profitcriteria and availability of multiple quantities of items, we allow customerswho did not have the winning bid to purchase items at their last bid price, weallow customers to purchase multiple quantities of items and we allow customersviewing the item to purchase the item at the winning bid price.

 

*GrossProfit*

 

Gross profit increased$6.0 million or 90.6% to $12.7 million in the three months ended September 30,2007 from $6.7 million in the three months ended September 30, 2006. Theincrease in gross profit resulted from the increase in sales revenue of 48.0%for the three months ended September 30, 2007 from the three months endedSeptember 30, 2006 and from the higher gross profit margin of 31.7% in threemonths ended September 30, 2007 compared to 24.6% in the three months endedSeptember 30, 2006.

 

Beginning in the threemonths ended September 30, 2007, gross profit margins benefited from the amortizedco-op marketing contributions that reduced our cost of sales by $833,000 or2.1% of net revenue. We expect the co-op marketing contributions to improve ourgross profit margins for the remainder of the fiscal year compared to thecorresponding period of the prior year.

 

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In the three months endedSeptember 30, 2007, there are no free shipping promotions compared to freepromotions offered in the three months ended September 30, 2006. Since we do notanticipate any major free shipping promotions in the foreseeable future, grossprofit margins for the remainder of the fiscal year are expected to be betterthan the corresponding period of the prior year, when we had free shippingpromotions that started from the second quarter of 2006.

 

The three new revenueinitiatives which are based on meeting our gross profit criteria also contributedto a higher gross profit margin in the three months ended September 30, 2007compared to the corresponding prior year period.

 

*Generaland Administrative Expenses*

 

General andadministrative expenses increased by $1.8 million or 62.0% to $4.9 million inthe three months ended September 30, 2007 from $3.1 million in threemonths ended September 30, 2006. The increase in general and administrativeexpenses was due mainly to increases in payroll and payroll related expenses,SOX compliance costs, outsourcing and other administrative expenses. Generaland administrative expenses as a percentage of net revenue increased to 12.4%in the three months ended September 30, 2007 from 11.2% in the three monthsended September 30, 2006.

 

*Sales &Marketing Expenses*

 

Sales and marketingexpenses decreased by $125,000 or 4.9% to $2.4 million in the three monthsended September 30, 2007 from $2.5 million in the three months ended September30, 2006. Our efforts to control the sales and marketing expenses and improvethe effectiveness of our marketing campaigns have been successful in loweringthe costs despite the growth in net revenue. Sales and marketing expenses as apercentage of net revenue decreased to 6.0% in the three months ended September30, 2007 from 9.4% in the three months ended September 30, 2006.

 

**Comparison of Nine Months Ended September 30, 2006 toNine Months Ended September 30, 2007**

 

Net income in the ninemonths ended September 30, 2007 was $9.9 million, or $0.42 and $0.40 per basicand diluted share, respectively. In the nine months ended September 30, 2006,net income was $4.4 million, or $0.19 per basic and diluted share. Net incomeincreased by $5.5 million or 123% in the nine months ended September 30, 2007compared to the nine months ended September 30, 2006. The increase in netincome was due primarily to the increase in net revenue and higher gross profitmargins.

 

*NetRevenue*

 

Netrevenue increased by $29.7 million or 31.5% to $123.9 million in the ninemonths ended September 30, 2007 from $94.2 million in the nine monthsended September 30, 2006. This increase in net revenue was due primarilyto the growth in demand for our jewelry products and the increase in average ordervalue. We have also implemented three initiatives that generated more demandfrom our customers. In certain circumstances, including satisfaction of ourgross profit critieria and availability of multiple quantities of items, weallow customers who did not have the winning bid to purchase items at theirlast bid price, we allow customers to purchase multiple quantities of items andwe allow customers viewing the item to purchase the item at the winning bidprice.

 

*Gross Profit*

 

Grossprofit increased by $11.2 million or 47.5% to $34.7 million in the ninemonths ended September 30, 2007 from $23.5 million in the nine monthsended September 30, 2006. The increase in gross profit resulted from the increasein gross profit as a percentage of net sales to 28.0% for the nine months endedSeptember 30, 2007 compared to 25.0% for the nine months endedSeptember 30, 2006 and from the increase in net revenue which rose by31.5% for the nine months ended September 30, 2007 from the nine monthsended September 30, 2006.

 

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Beginning in the thirdquarter of 2007, gross profit margins benefited from the amortized co-opmarketing contributions that reduced our cost of sales by $833,000 or 0.7% ofnet revenue. We expect the co-op marketing contributions and our three newrevenue initiatives to improve our gross profit margins for the remainder ofthe fiscal year compared to the corresponding period of the prior year.

 

Gross profit margins alsoimproved starting in February 2007 after we stopped free shipping promotions atthe end of January 2007. Since we do not anticipate any major free shippingpromotions in the foreseeable future, gross profit margins for the remainder ofthe fiscal year are expected to be better than the corresponding period of theprior year, when we had free shipping promotions that started in the secondquarter of 2006.

 

*General and Administrative Expenses*

 

General andadministrative expenses increased by $4.9 million or 50.0% to$14.7 million in the nine months ended September 30, 2007 from$9.8 million in the nine months ended September 30, 2006. Theincrease in general and administrative expenses was primarily due to theincrease in payroll and payroll related expenses, outsourcing, SOX compliancecosts, legal fees, IT related expenses and other administrative expenses.General and administrative expenses as a percentage of net revenue increased to11.9% in the nine months ended September 30, 2007 from 10.5% in the nine monthsended September 30, 2006.

 

*Sales & Marketing Expenses*

 

Salesand marketing expenses decreased by $750,000 or 9.6 % to $7.0 million in thenine months ended September 30, 2007 from $7.8 million in the ninemonths ended September 30, 2006.  The decrease in sales and marketingexpenses was attributable to the improved effectiveness of our marketingcampaigns in this period relative to the corresponding period last year. Salesand marketing expenses as a percentage of net revenue decreased to 5.7% in thenine months ended September 30, 2007 from 8.3% in the nine months endedSeptember 30, 2006. We continue to expect our sales and marketing expenses toincrease in absolute dollars in future periods, as we intend to continue increasingour online marketing campaigns in order to attract new customers.

 

*Publicoffering costs*

 

OnJune 29, 2006, we decided to postpone our initial public offering in order toreduce the initial public offering overhang (shares available for sale followingthe initial public offering) by requesting that our shareholders enter into alock-up agreement for a period of 180 days.  Accordingly, in the ninemonths ended September 2006, we expensed $1.2 million, consisting of offeringcosts related to an initial public offering. We have since withdrawn the FormS-1 registration statement for an initial public offering prior to the publictrading of our common stock on May 1, 2007.

 

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** **

**AdditionalQuarterly Data**

 
| ** **                      | ** ** | **Quarter Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
| ** **                      | ** ** | **2006**               | ** ** | **2006** | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** | **2007** | ** ** |
|                            |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Average order value (gross)     |       | $                      | 142        |   | $ | 133 |   | $ | 124 |   | $ | 154 |   | $ | 171 |   | $ | 173 |   |
| Average orders per day          |       | 2,901                  |       | 2,832 |   | 2,587 |   | 3,317 |   | 2,678 |   | 2,699 |   |
| Average items sold per day      |       | 7,173                  |       | 7,730 |   | 7,293 |   | 9,482 |   | 8,678 |   | 8,814 |   |
| Acquisition costs per new buyer |       | $                      | 38         |   | $ | 49 |   | $ | 51 |   | $ | 45 |   | $ | 38 |   | $ | 43 |   |
| Number of new buyers            |       | 63,618                 |       | 57,520 |   | 49,412 |   | 58,056 |   | 53,637 |   | 55,423 |   |

 

**Liquidityand Capital Resources**

 

The significantcomponents of our working capital are inventory and liquid assets such as cashand accounts receivable, reduced by revolving credit line, accounts payable, accruedexpenses and deferred revenue. Our business model contains beneficial workingcapital characteristics: while we collect cash from sales to customers withinseveral business days of the related sale, we typically have extended paymentterms with our suppliers.

 

As of September 30, 2007,we had a working capital surplus of $18.7 million and no long-term debtobligations. Net cash provided by operating activities was $2.8 million in thenine months ended September 30, 2007 compared to net cash provided of $3.2million in the nine months ended September 30, 2006. Cash in the ninemonths ended September 30, 2007 was primarily affected by changes in netincome, inventories, accounts payable and deferred revenue. The net cash in thenine months ended September 30, 2006 was affected mainly by changes in netincome, inventories, post-dated check financing, accounts payable and accruedexpenses.

 

We recorded net income of$9.9 million in the nine months ended September 30, 2007 compared to $4.4million in the nine months ended September 30, 2006. Cash flows from net incomewere used to meet our working capital requirements. In the nine months endedSeptember 30, 2007, inventories increased by $14.1 million, accounts payableincreased by $5.6 million and deferred revenue decreased by $1.8 million. Inthe nine months ended September 30, 2006, inventories increased by $6.7million, post-dated check financing decreased by $3.4 million, accounts payableincreased by $5.1 million and accrued expenses increased by $3.2 million.Inventories and accounts payable are affected by our revenue growth and changesin our inventory strategy. Our inventory strategy is influenced by our abilityto secure inventory that we believe will improve our margins and the currentrevenue trend.

 

Net cash used ininvesting activities was $1.2 million in the nine months ended September 30,2007 compared to $315,000 in the nine months ended September 30, 2006. Duringthe nine months ended September 30, 2006 and 2007, net cash used for investing activitiesrelated mainly to capital expenditures for office and computer equipment andsoftware. We expect capital expenditures in 2007 to be significantly higherthan in 2006 as we upgrade our technology infrastructure. The sources of fundswill be provided from our operating cash flows and a line of credit availablefrom our lender.

 

Net cash of $866,000 and$690,000 were used for financing activities in the nine months ended September30, 2007 and 2006, respectively. The financing activities were primarilyrelated to reducing our revolving credit line by $3.9 million net againstproceeds from exercise of stock options of $2.0 million and tax benefit fromexercise of stock options of $1.1 in the nine months ended September 30, 2007and payments for the repurchase of common stock of $690,000 in the nine monthsended September 30, 2006.

 

We believe that cashcurrently on hand, cash flows from operations and the availability of a $15million revolving line of credit will be sufficient to continue our operationsand to pursue our growth strategy for the foreseeable future.

 

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Our future capitalrequirements will depend on many factors, including the rate of our revenuegrowth; the timing and extent of spending to enhance our website, networkinfrastructure, and transaction processing systems; the extent of ouradvertising and marketing programs; the levels of the inventory we carry; relocationto a new corporate office; and other factors relating to our business.Enhancement of our website, network infrastructure, and transaction processingsystems will require us to spend significantly more than we have in the past.Moreover, to date our spending in these areas has been lower than industryaverages. We anticipate increasing our system expenditures to accommodate theseneeds in the future.

 

**RelatedParty Transactions**

 

Duringthe three months ended September 30, 2006 and 2007, we purchased approximately29.0% and 11.6%, respectively, and during the nine months ended September 30,2006 and 2007, we purchased approximately 33.0% and 12.2%, respectively, of ourmerchandise from LA Jewelers, Inc. LA Jewelers participates in our inventoryco-op marketing program. For the three months ended September 30, 2007 weearned $134,000 from LA Jewelers relating to co-op marketing contributions and$194,000 was unamortized as of September 30, 2007.

 

InMay, 2007 we entered into an understanding with LA Jewelers whereby they willguarantee that we will earn a certain minimum gross profit margin on theirmerchandise. This agreement provides that in the event of a gross profit marginshortfall we will be compensated for the difference between our actual grossprofit margin and the guaranteed minimum gross profit margin. As of September30, 2007, $122,000 was outstanding and accrued under this gross profit marginguarantee. One of the owners of LA Jewelers, Saied Aframian, owns 1,228,000shares of our common stock as of September 30, 2007**.**

 

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

 

Market risk representsthe risk of loss arising from adverse changes in market rates and foreignexchange rates. We do not believe that a change in market interest rates wouldhave a material effect on our results of operations or financial condition.Although we derive a portion of our sales outside of the United States, all ofour sales are denominated in U.S. dollars. We have limited exposure tofinancial market risks, including changes in interest rates and foreigncurrency exchange rates.

 

**ITEM 4.                  CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures***

 

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934) as of the end of the period covered by thisreport.  Disclosure controls and procedures are the controls and otherprocedures that we designed to ensure that we record, process, summarize andreport in a timely manner the information we must disclose in reports that wefile with or submit to the Securities and Exchange Commission.  Based on thisevaluation, our Chief Executive Officer and our Chief Financial Officerconcluded that, as of the date of their evaluation, our disclosure controls andprocedures were effective.  There were no significant changes made in ourinternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of their evaluation.

 

**ITEM 4T.               CONTROLSAND PROCEDURES**

 

Disclosure pursuant tothis Item is applicable to us for the fiscal year ended on December 31,2007  since we are an “accelerated filer,”as those terms are defined in Rule 12b-2 under the Securities Exchange Act of1934,

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1.                  LEGAL PROCEEDINGS**

 

*Cartierv. 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 lawsuit allegesthat 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. The court has yet to set atrial date.

 

**ITEM 1.A.              RISK FACTORS**

 

*Webelieve the risks and uncertainties described below are the most significant weface. The occurrence of any of the following risks could harm our business. Inthat case, the value of our common stock could decline, and you may lose partor all of your investment. Additional risks and uncertainties not presentlyknown to us or that we currently deem immaterial may also impair ouroperations.*

 

***We may be at risk to accurately report financial results or detectfraud if we fail to maintain an effective system of internal controls.***

 

As directed by Section 404of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commissionadopted rules requiring public companies to include a report that contains anassessment by management on the company’s internal control over financialreporting in their annual reports on Form 10-K. In addition, the independentregistered public accounting firm auditing the company’s financial statementsmust attest to and report on our assessment of the effectiveness of theinternal controls over financial reporting. While we are consistently workingon improvements and conducting rigorous reviews of our internal controls overfinancial reporting, our independent auditors may interpret Section 404requirements and apply related rules and regulations differently. If our independentauditors are not satisfied with our internal control over financial reportingor with the level at which it is documented, operated or reviewed, they maydecline to attest to management’s assessment or issue a qualified report.Additionally, if we are not able to meet all the requirements of Section 404 ina timely manner or with adequate compliance, we might be subject to sanctionsor investigation by regulatory authorities, such as the Securities and ExchangeCommission.

 

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

 

***Wehave established a public market for our common stock on the NASDAQ CapitalMarket; trading in our common stock may be illiquid and the market price may bevolatile.***

 

We have established apublic market for our common stock on the NASDAQ Capital Market.  Our common stock may trade in low volumes, which would result in an illiquid market for oursecurities.  If the trading volume of ourcommon stock is low, sales of even small amounts of our common stock may causethe price of our common stock to fluctuate greatly.  If limited trading in our stock continues, itmay be difficult for investors to sell their shares in the public market at anygiven time at prevailing prices. Moreover, sales of a substantial number ofshares in the public market, or the perception that such sales may occur, couldresult in significant downward pressure on the price of our common stock.

 

We have registered foroffer and sale the shares of common stock that are reserved for issuancepursuant to stock options covered by our incentive stock option plans. Sharescovered by such registration statements upon the exercise of stock options orwarrants generally will be eligible for sale in the public market,

 

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except that affiliateswill continue to be subject to volume limitations and other requirements ofRule 144. The issuance or sale of such shares could depress the marketprice of our common stock.

 

Shares held by managementand affiliates of our company are subject to the resale limitations of Rule144. In general, under Rule 144 as currently in effect, any person, orpersons whose shares are aggregated for purposes of Rule 144, who beneficiallyowns restricted securities with respect to which at least one year has elapsedsince the later of the date the shares were acquired from us, or from anaffiliate of ours, is entitled to sell within any three-month period a numberof shares that does not exceed the greater of 1% of the then outstanding sharesof our common stock and the average weekly trading volume in common stockduring the four calendar weeks preceding such sale. Sales under Rule 144also are subject to certain manner-of-sale provisions and notice requirementsand to the availability of current public information about us.

 

***We have given substantial deposits ofinventory to our manufacturing vendors to produce finished jewelry products.***

 

We may be at risk of lossfor the diamonds, precious and semi-precious gems that we have given to ourmanufacturing vendors to produce into finished jewelry products. If thebusinesses of the vendors fail, the diamond inventory is lost or stolen, thevendors do not have adequate insurance coverage or if the vendors fail toproduce and deliver finished jewelry products, we would incur substantiallosses that would have a material impact on our net income and financialposition.

 

***We must continue to generate a high volumeof visitor traffic to our website and convert those visitors into buyers.***

 

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

 

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

 

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

 

***Quarterly financial results may not be consistent and impact our stockprice.***

 

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

 

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

 

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

 

Inaddition, we have a heavy concentration of inventory purchases from a smallnumber of suppliers. Our top two suppliers accounted for approximately 34.0%and 17.3% of our total purchases during the three months ended September 30,2006 and 2007, respectively and approximately 39.0% and 17.1% of our totalpurchases during the nine months ended September 30, 2006 and 2007,respectively.

 

***The satisfactory availability, performance,and reliability of our website, network infrastructure, and transactionprocessing systems are critical to our ability to attract, retain, and servicecustomers.***

 

Anyproblems with the availability, performance, or reliability of our website,network infrastructure, or transaction processing systems could result indecreased customer traffic, reduced orders, reduced order fulfillmentperformance, and lower net revenue as well as negative publicity and damage toour reputation. In order to remain competitive, we must continually seek toimprove and expand the functionality and features of our website, 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 not beable to project accurately the rate or timing of increases, if any, in the useof or sales from our website, or timely expand or upgrade our website,infrastructure, or systems to accommodate any such increases. Additionally, wemay not be able to remedy any such availability, performance, or reliabilityproblems in a timely manner, or at all, because we depend in part on thirdparties for such availability, performance, and reliability.

 

***Our business and results of operationscould be harmed due to the lack of a comprehensive test bed for qualityassurance and software application implementation.***

 

Ourbusiness depends in part on the efficient and uninterrupted operation of ourelectronic data processing systems. We do not employ a comprehensive test bedthat would ensure high quality assurance when implementing changes to ourinternally developed application systems. Any problems with implementingsoftware upgrades without going through a proper test environment could impactour business by decreasing customer traffic, reducing selling prices, reducingorder fulfillment, or lowering net revenue and gross margins, all of whichcould produce negative publicity and damage our reputation. We plan to build afull featured test environment that will support all changes to our productionapplications. We are in the process of evaluating and implementing a test andstaging environment for validating all changes to our production environment.

 

***Our business operations could be disrupteddue to the lack of documentation of our internally developed softwareapplication systems and dependence on key system developers to maintain thesystem.***

 

Ourbusiness depends in part on continuous and uninterrupted online availability toour customers. Our internally developed software application systems are notfully documented and this makes it more difficult to locate and trouble shootproblems that may occur in our systems. Any delays in resolving system problemswill result in longer disruptions to the service available to our customersand/or prevent our employees from performing their functions efficiently. Theinternally developed Auction platform, Billing, Shipping, and Inventory Controlsystems are not fully documented. We are dependent on institutional knowledgeof our key system developers to provide ongoing support and functionalenhancements. If we were to lose the services of these key systems supportpersonnel, operations may suffer from system down time that would take longerthan desirable to correct and return to normal operations.

 

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***We may face increasing costs to acquire newcustomers.***

 

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

 

***Competition from online auctioneers andother online companies with greater brand recognition may adversely affect oursales.***

 

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

 

Wecurrently compete with a number of other companies, and other competitors mayappear in the future. Our competitors currently include various online auctionservices and retailers that offer jewelry, including eBay, Blue Nile,Overstock, and uBid. We also encounter competition from national jewelry retailchains, such as Zales, Kay Jewelers, and Finlay Fine Jewelry, and massretailers and other enterprises that sell jewelry, such as Wal-Mart, Target, J.C. Penney, Costco, QVC, and Home Shopping Network. Many of our competitors havegreater brand recognition, longer operating histories, larger customer bases,and significantly greater financial, marketing, and other resources than we do.Smaller competitors may enter into strategic or commercial relationships withlarger, more established, and well-financed companies. Other competitors mayenter into exclusive distribution agreements with our suppliers that deny usaccess to 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 and futurecompetitors 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 in creatingwidespread demand for synthetic or alternative gemstone products, demand andprice levels for our products could decline and our business and results ofoperations would be substantially harmed.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

***Increases in the cost of precious metalsand precious and semi-precious stones would increase the cost of our jewelryproducts.***

 

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

 

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

 

Ourbusiness depends in part on the efficient and uninterrupted operation of ourcomputer and communications hardware. The servers and other hardware necessaryto operate our website, including our auction and bidding systems, are locatedat a single third-party co-location facility in downtown Los Angeles. We relyon that facility to provide Internet access with the speed, capacity, andreliability we require. Our servers and other hardware that run our transactionprocessing, order fulfillment, and office administration tasks are located atour headquarters. Our servers and other hardware are vulnerable to damage orinterruption from human error, fire, flood, power loss, telecommunicationsfailure, terrorist attacks, acts of war, break-ins, earthquakes, and similarevents. We do not currently have redundant systems in multiple locations or aformal disaster recovery plan, and our business interruption insurance may beinsufficient to compensate us for any losses that may occur. In addition, ourservers are vulnerable to computer viruses, physical or electronic break-ins,and similar disruptions, which could lead to interruptions, delays, loss ofcritical data, the inability to accept and fulfill customer orders, or theunauthorized disclosure of confidential customer data. System disruptions orfailures would also create a 

 

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largenumber of customer questions and complaints that need to be addressed by ourcustomer service support personnel. The occurrence of any of the foregoingrisks could substantially harm our business and results of operations. Oursystems are vulnerable to damage or interruption from earthquakes, floods,fires, power loss, telecommunication failures, terrorist attacks, computerviruses, computer denial-of-service attacks, and similar events.

 

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

 

Wemay not be able to accommodate any substantial growth in traffic or user demandon our website, network infrastructure, and transaction processing systems in atimely manner or without substantial costs. If we are unable to upgrade ourexisting technology, network infrastructure, and transaction processing systemsto accommodate any increased sales volume, our potential customers may bedissatisfied and 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.

 

Wealso intend to introduce additional or enhanced features and services to retaincurrent customers 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 and wemay not be successful in attracting new customers. These new features orservices 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 toincrease the popularity of our website, and we may not be able to do soeffectively.***

 

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

 

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

 

Inthe three months ended September 30, 2006 and 2007, 23.6% and 24.3%,respectively, of our net revenue was generated by shipments to customersoutside of the United States. In the nine months ended September 30, 2006 and2007, it was 20.3% and 22.4%, respectively. We plan, over time, to expand ourreach into international markets. We do not, however, currently have anyoverseas fulfillment, 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 our foreign saleshistorically have been denominated in U.S.

 

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dollars,we also may be subject to increased risks relating to foreign currency exchangerate fluctuations to the extent we decide to denominate our sales in foreigncurrencies.

 

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

 

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

 

***We depend on the continued growth andacceptance of online commerce, and our business will be substantially impairedif the growth of online commerce slows or does not grow as expected.***

 

Thebusiness of buying and selling goods over the Internet is relatively new anddynamic. Our success depends on the widespread acceptance and use of theInternet as an effective medium for commerce by consumers. The acceptance anduse of the Internet may not continue to expand as expected, and a sufficientbroad base of consumers necessary for its continued growth may not adopt theInternet as a medium for commerce. Consumers who historically have usedtraditional means of commerce may have concerns about privacy, the inability tophysically inspect merchandise before buying, delivery time, product damageduring shipment, and the costs and inconvenience involved in returningpurchased items, which may inhibit their crossover to e-commerce. In order toexpand our user base, we must appeal to and acquire consumers who historicallyhave used traditional means of commerce to purchase goods. If these newcustomers execute fewer or lower dollar amounts of orders than our historicalusers, and we are unable to gain efficiencies in our operating costs, includingthe cost of acquiring new customers, our business and profits could beadversely affected.

 

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

 

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

 

***We are vulnerable to fraudulent activitieson our website, including unauthorized use of customer information and identitytheft by third parties****.*

 

Ournetwork security measures to prevent third parties from penetrating our networkand improperly accessing our customers’ personal information or credit cardinformation may not be successful. Although we have not experienced any theftof our customers’ credit card information to date, as new discoveries in thefield of cryptography and advances in computer capabilities occur, our securitymeasures may not

 

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effectivelyprevent others from obtaining improper access to our customer information. Inaddition, third parties may target our customers directly with fraudulentidentity theft schemes designed to appear as legitimate e-mails from us. InMarch 2006, one such third party attempted to solicit customer informationthrough a tactic, commonly known as “phishing,” whereby an e-mail purporting tobe from us solicited customer information from recipients of the e-mail. Anysuch security breach or fraud perpetrated on our customers could expose us toincreased costs and could harm our business and results of operations.

 

***Increased product returns and the failureto predict product returns could substantially harm our business and results ofoperations.***

 

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

 

***Our inventory is vulnerable to damage orloss caused by fire, flood, earthquakes, and similar events, and we face therisk of theft of our products from inventory or during shipment.***

 

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

 

***Customer complaints or negative publicityabout our customer service could adversely affect our reputation and, as aresult, our business could suffer.***

 

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

 

***Increases in credit card processing feescould increase our costs.***

 

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

 

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

 

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

 

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

 

Historically,sales in the jewelry industry are seasonal and have been higher in the fourthquarter of the calendar year as a result of higher consumer spending during theDecember holiday season. Approximately 29.3%, 33.9% and 28.5% of our netrevenue in 2004, 2005 and 2006, respectively, was generated during the fourthquarter. As we continue to grow, we expect to experience more pronouncedseasonal fluctuations in our net revenue and anticipate a disproportionateamount of our revenue will occur in the fourth quarter. In anticipation of anyincreased sales activity during the fourth quarter, we may incur significantadditional expenses, including higher sales and marketing costs and additionalstaffing in our fulfillment and customer support operations. If we were toexperience lower than expected sales during any future fourth quarter, it wouldhave a disproportionately large impact on our results of operations for thatyear. In the future, our seasonal sales patterns may become more pronounced,may strain our personnel and fulfillment activities, and may cause a shortfallin sales compared with expenses in a given period, which would substantiallyharm our business and results of operations.

 

***Sales growth in prior periods may not beindicative of our future growth.***

 

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

 

***We have grown quickly, and our businesswill suffer if we fail to manage our growth.***

 

Wehave expanded our operations at a rapid pace. This expansion has placed asignificant strain on our management, operations, and financial resources. Weanticipate adding personnel in the future, including managerial, technical, andoperations personnel. In order to manage any further growth of our operations, wealso will be required to improve existing and implement newtransaction-processing, operational and financial systems, procedures, andcontrols. If we are unable to manage growth effectively, our business andresults of operations will be harmed.

 

***Descriptions of our jewelry items are notguarantees and may confuse, mislead, or disappoint our customers.***

 

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

 

Additionally,in response to customer requests and as a courtesy to resellers, we provide “Compare”and/or “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 in localretail stores. As a consequence, perceived misrepresentations in itemdescriptions by disappointed buyers may occur, resulting in negative publicityabout and diminished customer confidence in our website.

 

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

 

Therehas been an increase in attention to “conflict” diamonds originating out ofwar-torn regions of Africa. The proceeds from the sale of “conflict” diamondshave been used to fund the ongoing aggression and terrorist activatesthroughout the world. We make every effort to evaluate our vendor sources toensure they are not a dealer in “conflict” diamonds. In addition we haveimplemented an anti-money laundering program to guard against both illicitpurchase and sales activities. If these risks were to occur, we may face anegative public reaction to our brand name resulting in loss of sales.

 

***We may not be able to maintain our domainname uniqueness.***

 

OurInternet domain name is critical to our success. Under current domain nameregistration practices, no other entity can obtain an identical domain name, butcan obtain a similar name or the identical name with a different suffix, suchas “.net” or “.org,” or with a different country designation, such as “jp” forJapan. We have not registered our domain name with different suffixes nor havewe registered our name in any other jurisdiction. As a result, third partiesmay use domain names that are similar to our domain name, which may result inconfusion to potential customers and lost sales. We are aware that otherbusinesses have registered the name “bidz” with other suffixes and in othercountries.

 

***We may be subject to assertions by third parties for infringement ontheir intellectual property rights.***

 

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

 

***We may be unable to protect or enforce our own intellectual propertyrights adequately, and we may become subject to intellectual propertylitigation.***

*** ***

Weregard the protection of our trademarks, copyrights, domain name, trade dress,and trade secrets as critical to our success. We rely on a combination ofcommon law as well as trademark, copyright, trade dress, and trade secret lawsto protect our intellectual property rights. We also have entered intoconfidentiality and invention assignment agreements with our employees andrelevant contractors and nondisclosure agreements with relevant parties withwhom we conduct business in order to limit access to and disclosure of our proprietaryinformation. These contractual arrangements and other steps we have taken toprotect our intellectual property may not prevent misappropriation of ourintellectual property or deter independent development of similar intellectualproperty by others. We also are pursuing the registration of our domain name,trademarks, and service marks in the United States and internationally.Effective trademark, copyright, patent, trade dress, trade secret, and domainname protection is very expensive to maintain and may require litigation. Wemust protect our trademarks, copyrights, patents, and domain names in anincreasing number of jurisdictions, a process that is expensive and may not besuccessful in every location.

 

Thirdparties may from time to time claim that we have infringed their intellectualproperty relating to our business model or auction systems. We expect thatparticipants in our market increasingly will be subject to infringement claimsas the number of services and competitors in our industry segment grows. Anyclaim like this, whether meritorious or not, could be time-consuming, result incostly litigation, cause service upgrade delays, or require us to enter intoroyalty or 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.

 

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

 

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

 

***Various legal rules and regulations relatedto privacy and the collection, dissemination, and security of personalinformation may adversely affect our marketing efforts.***

 

Weare subject to increasing regulation at the federal, state, and internationallevels relating to privacy and the use of personal user information designed toprotect the privacy of personally identifiable information as well as toprotect against its misuse. These laws include the Federal Trade CommissionAct, the CAN-SPAM Act of 2003, the Children’s Online Privacy Protection Act,the Fair Credit Reporting Act, the Homeland Security Act, and relatedregulations. Several states have proposed legislation that would limit the useof personal information gathered online or require online services to establishprivacy policies. Moreover, proposed legislation in the United States andexisting laws in foreign countries require companies to establish procedures tonotify users of privacy and security policies, obtain consent from users forcollection and use of personal information, and/or provide users with theability to access, correct, and delete personal information stored bycompanies. These regulations and other laws, rules, and regulations enacted inthe future may adversely affect our ability to collect, disseminate, or sharedemographic and personal information about users and our ability to e-mail ortelephone users, which could be costly and adversely affect our marketingefforts **.**

 

***We may be subject to a tax liability forpast sales and our future sales may decrease if we are required to collectsales and use taxes on the products we sell.***

 

Inaccordance with current industry practice and our interpretation of currentlaw, we do not currently collect sales or other taxes with respect to shipmentsof goods into states other than California. However, one or more states orforeign countries may seek to impose sales or other tax obligations on us inthe future. A successful assertion by one or more states or foreign countriesthat we should be collecting sales or other taxes on the sale of our productscould result in substantial tax liabilities for past and future sales,discourage customers from purchasing products from us, decrease our ability tocompete with traditional retailers, and otherwise substantially harm ourbusiness, financial condition, and results of operations.

 

***We may be subject to regulations governingthe conduct and liability of auctioneers, which could affect the way in whichwe conduct our business or otherwise increase our cost of doing business.***

 

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

 

***We are subject to regulations relating toconsumer privacy, which could increase the cost of our doing business, exposeus to litigation costs, increase our service or delivery costs, and otherwiseharm our business.***

 

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

 

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TheFederal Trade Commission also has settled several proceedings against companiesregarding the manner in which personal information is collected from users andprovided to third parties. Specific statutes intended to protect user privacyhave been passed in many foreign jurisdictions. Compliance with these laws,given the tight integration of our systems across different countries and the needto move data to facilitate transactions among our users, such as paymentcompanies and shipping companies, is both necessary and difficult. Failure tocomply could subject us to lawsuits, fines, criminal penalties, statutorydamages, adverse publicity, and other losses that could harm our business.Changes to existing laws or the passage of new laws intended to address theseissues could directly affect the way we do business or could create uncertaintyon the use of the Internet. This could reduce demand for our products, increasethe cost of our doing business, expose us to litigation costs, increase ourservice or delivery costs, or otherwise harm our business.

 

***New and existing regulations could harm ourbusiness.***

 

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

 

Inaddition, because our products are available over the Internet in multiplestates and because we sell merchandise to consumers residing in multiplestates, we could be required to qualify to do business as a foreign corporationin each state in which our products are available. Our failure to qualify as aforeign corporation in a jurisdiction in which we are required to do so couldsubject us to penalties. Any new legislation or regulation, or the applicationof laws or regulations from jurisdictions whose laws do not currently apply toour business could have a material adverse affect on our business.

 

***We depend to a very significant extent onDavid Zinberg, our Chairman of the Board, President, and Chief ExecutiveOfficer.***

 

Ourperformance depends substantially upon David Zinberg, our Chairman of theBoard, President, and Chief Executive Officer, who has extensive experiencewith the purchase and sale of jewelry. We rely on Mr. Zinberg to makecritical operational decisions on a daily basis, such as product offerings andpurchases, and to make key strategic plans. We have an employment agreementwith Mr. Zinberg extending through 2009. The loss of the services ofMr. Zinberg would adversely affect our business and operations.

 

***Holders of common stock issued by us inprior offerings are entitled 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 issuedapproximately 250 stock option grants to purchase common stock at a weighted averageexercise price of

 

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$4.45. After conductingthese sales of our securities, we determined that these sales were not exemptfrom the registration requirements under the Securities Act of 1933 and similarprovisions of laws of the states in which our stockholders reside, becausecertain of our employees who solicited investors engaged in a “generalsolicitation” of securities. In addition, these employees received compensationfor selling our common stock and were required to be licensed as broker-dealerswith the Securities and Exchange Commission, or SEC, and various stateauthorities, but they were not so licensed. In such situations, a number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs.

 

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

 

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

 

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

 

Ourfounder, executive officers, and directors together own approximately 34.1% ofour common stock as of September 30, 2007. Marina Zinberg, our Vice President,who is the sister of David Zinberg, our Chairman, President and Chief ExecutiveOfficer, owns an additional 32.3% of our common stock.  As a result, these individuals will havesignificant influence over our management and affairs and over all mattersrequiring stockholder approval, including the election of directors and theapproval of significant corporate transactions, such as a merger or a sale ofour company or its assets, for the foreseeable future. This concentratedcontrol will limit the ability of other stockholders to influence corporate matters.Because of this, we may take actions that some of our stockholders do not viewas beneficial. As a result, the market price of our common stock could beadversely affected because stockholders may not view favorably theconcentration of control in the hands of management.

 

***Our charter documents and Delaware lawcould make it more difficult for a third party to acquire us, and discourage atakeover.***

 

OnJune 22, 2006, we reincorporated in Delaware, and the Delaware certificate ofincorporation and the Delaware General Corporation Law, or DGCL, containprovisions that may have the effect of making more difficult or delayingattempts by others to obtain control of our company, even when these attemptsmay be in the best interests of our stockholders. The Delaware certificate ofincorporation also authorizes our Board of Directors, without stockholderapproval, to issue one or more series of preferred stock, which could havevoting and conversion rights that adversely affect or dilute the voting powerof the holders of common stock. Delaware law also imposes conditions on certainbusiness combination 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 after theinitial election. The classification of directors tends to discourage a thirdparty from initiating a proxy solicitation or otherwise attempting to obtaincontrol of our company and may maintain the incumbency of our Board ofDirectors, as this structure generally increases the difficulty of, or maydelay, replacing a majority of directors. The Delaware bylaws authorize ourBoard of Directors to fill vacancies or newly created directorships. A majorityof the directors then in office may elect a successor to fill any vacancies ornewly created directorships.

 

**ITEM 2.                  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On February 2, 2007, weawarded and issued as director compensation a total of 18,750 shares of commonstock to our non-employee directors, Man Jit Singh and Peter Hanelt, with stockawards of 8,750 and

 

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10,000 shares,respectively, in lieu of stock options. On June 15, 2007, we awarded and issuedas director compensation a total of 110,000 restricted shares of common stockwith 25% vesting at the end of each year over a four year period to ournon-employee directors, Peter Hanelt, Man Jit Singh and Garry Itkin, with restrictedstock awards of 40,000, 35,000 and 35,000 shares, respectively in lieu of stockoptions. These shares were issued in reliance on the exemption fromregistration under Section 4(2) under the Securities Act of 1933. We grantannually to each non-employee director options to purchase 10,000 shares of ourcommon stock. In lieu of receiving such stock options, non-employee directorsmay elect to receive one share of common stock for each option to purchase twoshares of common stock. Non-employee directors also will receive stock options(or restricted stock in lieu thereof) for committee service per year inaddition to the standard non-employee director compensation: options topurchase an additional 5,000 shares of common stock to the Chairman of theAudit Committee, and options to purchase an additional 2,500 shares of commonstock to each member of our Audit Committee (other than the Chairman),Compensation Committee and Corporate Governance and Nominating Committee.

 

The stock-based expensefrom stock awards for the three months ended September 30, 2006 and 2007totaled $0 and $76,000, respectively and for the nine months ended September30, 2006 and 2007 totaled $0 and $199,000, respectively.

 

Duringthe nine months ended September 30, 2007, we issued 1,000,000 stock options topurchase shares in our common stock under our 2006 Award Plan. The stockoptions were granted at prices not less than the fair market value of ourcommon stock on the date of grant and have a four year vesting period with 25%vesting on each subsequent anniversary of the grant date. The stock optionsexpire 5 years from the grant date. These options to purchase common stock wereissued in reliance on the exemption from registration under Section 4(2) underthe Securities Act of 1933.

 

The stock-based expensefrom stock options for the three months ended September 30, 2006 and 2007totaled $0 and $181,000, respectively and for the nine months ended September30, 2006 and 2007 totaled $0 and $308,000, respectively. During the nine monthsended September 30, 2007, 452,324 options to purchase shares were exercisedwith total proceeds of $2.0 million.

 

**ITEM 6. EXHIBITS.**

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

 

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**SIGNATURES**

 

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

 
|                           |       | BIDZ.COM,  INC.                           |       |
|---------------------------|------------|-------------------------------------------|------------|
|                      |       |                                      |       |
|                      | By:        | /s/  DAVID ZINBERG                        |       |
|                      |       |                                      |       |
| ** **                | ** ** | **David Zinberg**                         | ** ** |
| ** **                | ** ** | **President and Chief Executive Officer** | ** ** |
|                      |       |                                      |       |
|                      | By:        | /s/  LAWRENCE KONG                        |       |
|                      |       |                                      |       |
| ** **                | ** ** | **Lawrence Kong**                         | ** ** |
| ** **                | ** ** | **Principal Accounting Officer**          | ** ** |
|                      |       |                                      |       |
| Dated: November 12,  2007 |       |                                      |       |

 

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