Table of Contents

 

 

 

**UNITEDSTATESSECURITIES 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, 2010**

 

| **o** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|-------|--------------------------------------------------------------------------------|

 

**For the transitionperiod          to          **

 

**Commission file number 000-51257**

 

**BIDZ.COM, INC.**

(Exact name of Registrant as specified in its charter)

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

 

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

(Address, including zip code, of principal executive office)

 

**(310) 280-7373**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  oYes  x No

 

Numberof shares outstanding of Registrant’s common stock, $0.001 par value, as of October31, 2010: 19,554,991

 

 

 

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**TABLE OF CONTENTS**

 
| PART I.  FINANCIAL INFORMATION |                                                                                                                                        |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                        | Condensed Financial Statements                                                                                                              | 3 |
|                                | Condensed  Balance Sheets as of December 31, 2009 and September 30, 2010  (unaudited)                                             | 3 |
|                                | Condensed  Statements of Income (Operations) for the three month and nine month periods  ended September 30, 2009 and 2010 (unaudited) | 4 |
|                                | Condensed Statements of Cash  Flows for the nine month periods ended September 30, 2009 and 2010  (unaudited)                          | 5 |
|                                | Notes  to Condensed 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                                                                                 | 18 |
| Item 4.                             | Controls and  Procedures                                                                                                                    | 18 |
|                                |                                                                                                                                        |   |
| PART II.  OTHER INFORMATION    |                                                                                                                                        |
| Item 1.                             | Legal Proceedings                                                                                                                           | 20 |
| Item 1A                             | Risk Factors                                                                                                                                | 22 |
| Item 2.                             | Unregistered  Sales and Purchases of Equity Securities                                                                                      | 34 |
| Item  6.                            | Exhibits                                                                                                                                    | 34 |
|                                |                                                                                                                                        |   |
| SIGNATURES                          |                                                                                                                                        |

 

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

 

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** **

**PART I. FINANCIALINFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**Bidz.com, Inc.**

 

**Condensed Balance Sheets (Unaudited)**

 

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

 
| ** **                                                                                                                                                                            | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2009**              | ** ** | **2010**               | ** ** |
| ** **                                                                                                                                                                            | ** ** | **(Revised)**         | ** ** | ** **             | ** ** |
| **Assets**                                                                                                                                                                            |       |                  |       |                   |       |
| Current assets:                                                                                                                                                                       |       |                  |       |                   |       |
| Cash                                                                                                                                                                                  |       | $                     | 1,121      |                   | $          | 5,473 |   |
| Accounts receivable                                                                                                                                                                   |       | 447                   |       | 1,274                  |       |
| Inventories, net of reserves of $1,767 and $1,648  at December 31, 2009 and September 30, 2010, respectively                                                                |       | 40,961                |       | 32,193                 |       |
| Other receivables (includes related party amounts  of $179 and $393 at December 31, 2009 and September 30, 2010,  respectively)                                             |       | 1,454                 |       | 1,684                  |       |
| Current deferred tax assets                                                                                                                                                           |       | 1,400                 |       | 2,049                  |       |
| Other current assets (Note 11)                                                                                                                                                        |       | 2,960                 |       | 568                    |       |
| Total current assets (Note 11)                                                                                                                                                        |       | 48,343                |       | 43,241                 |       |
| Long term deferred tax assets                                                                                                                                                         |       | 663                   |       | 1,547                  |       |
| Property and equipment, net                                                                                                                                                           |       | 1,202                 |       | 730                    |       |
| Intangible asset                                                                                                                                                                      |       | 240                   |       | 236                    |       |
| Deposits                                                                                                                                                                              |       | 157                   |       | 187                    |       |
| Total assets (Note 11)                                                                                                                                                                |       | $                     | 50,605     |                   | $          | 45,941 |   |
|                                                                                                                                                                                  |       |                  |       |                   |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                        |       |                  |       |                   |       |
| Current liabilities:                                                                                                                                                                  |       |                  |       |                   |       |
| Revolving credit line                                                                                                                                                                 |       | $                     | 2,898      |                   | $          | — |   |
| Accounts payable (includes related party amounts  of $1,513 and $2,584 at December 31, 2009 and September 30, 2010,  respectively)                                          |       | 12,159                |       | 12,871                 |       |
| Accrued expenses                                                                                                                                                                      |       | 2,291                 |       | 1,849                  |       |
| Deferred revenue                                                                                                                                                                      |       | 632                   |       | 1,882                  |       |
| Total current liabilities                                                                                                                                                             |       | 17,980                |       | 16,602                 |       |
|                                                                                                                                                                                  |       |                  |       |                   |       |
| Commitments and contingencies (Note 10)                                                                                                                                               |       | —                |       | —                 |       |
|                                                                                                                                                                                  |       |                  |       |                   |       |
| Stockholders’ equity:                                                                                                                                                            |       |                  |       |                   |       |
| Preferred stock: par value $0.001; authorized  4,000,000 shares; none issued and outstanding at December 31, 2009 and  September 30, 2010, respectively                     |       | —                |       | —                 |       |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued and outstanding 22,114,257 and 19,557,542 at  December 31, 2009 and September 30, 2010, respectively |       | 22                    |       | 20                     |       |
| Additional paid in capital (Note 11)                                                                                                                                                  |       | 19,857                |       | 18,074                 |       |
| Shares held in treasury, at cost; 0 and 78,320  shares at December 31, 2009 and September 30, 2010, respectively                                                            |       | —                |       | (123                   | )          |
| Accumulated earnings (Note 11)                                                                                                                                                        |       | 12,746                |       | 11,368                 |       |
| Total stockholders’ equity (Note 11)                                                                                                                                             |       | 32,625                |       | 29,339                 |       |
|                                                                                                                                                                                  |       |                  |       |                   |       |
| ** **                                                                                                                                                                            |       | $                     | 50,605     |                   | $          | 45,941 |   |

 

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**Bidz.com, Inc.**

 

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

 

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

** **
| ** **                                                                                                                                                                                                                                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                 | ** ** | **2009**                                                 | ** ** | **2010**                                                | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                                                                                                                                                                                                                                 | ** ** | **(Revised)**                                            | ** ** | ** **                                              | ** ** | **(Revised)** | ** ** | ** ** | ** ** |
| Net revenue:                                                                                                                                                                                                                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Merchandise sales                                                                                                                                                                                                                                          | ** ** | **$**                                                    | 23,795     | ** **                                              | **$**      | 20,680 | ** ** | **$** | 81,072 | ** ** | **$** | 70,853 | ** ** |
| Wholesale merchandise sales (includes related  party amounts of $641 and $944 for the three months ended September 30,  2009 and 2010, respectively, and $1,318 and $3,482 for the nine months ended  September 30, 2009 and 2010, respectively) |       | 917                                                      |       | 1,064                                                   |       | 1,595 |   | 4,651 |   |
| Other revenue                                                                                                                                                                                                                                              |       | 74                                                       |       | 72                                                      |       | 240 |   | 224 |   |
|                                                                                                                                                                                                                                                       |       | 24,786                                                   |       | 21,816                                                  |       | 82,907 |   | 75,728 |   |
| Cost of revenue                                                                                                                                                                                                                                            |       | 17,622                                                   |       | 16,211                                                  |       | 57,322 |   | 56,772 |   |
| Gross Profit                                                                                                                                                                                                                                               |       | 7,164                                                    |       | 5,605                                                   |       | 25,585 |   | 18,956 |   |
| Operating expenses:                                                                                                                                                                                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| General and administrative (Note 11)                                                                                                                                                                                                                       |       | 4,776                                                    |       | 4,972                                                   |       | 14,170 |   | 15,809 |   |
| Sales and marketing                                                                                                                                                                                                                                        |       | 2,235                                                    |       | 1,479                                                   |       | 6,968 |   | 4,512 |   |
| Depreciation and amortization                                                                                                                                                                                                                              |       | 200                                                      |       | 151                                                     |       | 573 |   | 540 |   |
| Total operating expenses (Note 11)                                                                                                                                                                                                                         |       | 7,211                                                    |       | 6,602                                                   |       | 21,711 |   | 20,861 |   |
| Income (loss) from operations (Note 11)                                                                                                                                                                                                                    |       | (47                                                      | )          | (997                                                    | )          | 3,874 |   | (1,905 | ) |
| Loss on disposal of property and equipment                                                                                                                                                                                                                 |       | —                                                   |       | (38                                                     | )          | — |   | (38 | ) |
| Other income - interest income                                                                                                                                                                                                                             |       | —                                                   |       | —                                                  |       | 2 |   | — |   |
| Other expense - interest (expense)                                                                                                                                                                                                                         |       | (18                                                      | )          | —                                                  |       | (33 | ) | (11 | ) |
| Income (loss) before income tax expense (benefit)  (Note11)                                                                                                                                                                                                |       | (65                                                      | )          | (1,035                                                  | )          | 3,843 |   | (1,954 | ) |
| Income tax benefit (expense) (Note 11)                                                                                                                                                                                                                     |       | 7                                                        |       | 421                                                     |       | (1,701 | ) | 576 |   |
| Net income (loss) (Note 11)                                                                                                                                                                                                                                | ** ** | **$**                                                    | (58        | **)**                                                   | **$**      | (614 | **)** | **$** | 2,142 | ** ** | **$** | (1,378 | **)** |
|                                                                                                                                                                                                                                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss) per share available to common  shareholders - basic                                                                                                                                                                                      | ** ** | **$**                                                    | (0.00      | **)**                                                   | **$**      | (0.03 | **)** | **$** | 0.09 | ** ** | **$** | (0.06 | **)** |
| Net income (loss) per share available to common  shareholders - diluted                                                                                                                                                                                    | ** ** | **$**                                                    | (0.00      | **)**                                                   | **$**      | (0.03 | **)** | **$** | 0.09 | ** ** | **$** | (0.06 | **)** |
| Weighted average number of shares outstanding -  basic                                                                                                                                                                                                     |       | 22,206,893                                               |       | 20,042,390                                              |       | 22,653,151 |   | 21,270,002 |   |
| Weighted average number of shares outstanding -  diluted                                                                                                                                                                                                   |       | 22,206,893                                               |       | 20,042,390                                              |       | 22,653,151 |   | 21,270,002 |   |

 

 

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**Bidz.com, Inc.**

 

**CondensedStatements of Cash Flows (Unaudited)**

 

*(in thousands)*

 
| ** **                                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2009**                                                | ** ** | **2010** | ** ** |
| ** **                                                                                       | ** ** | **(****Revised****)**                                   | ** ** | ** ** | ** ** |
| **Cash flows provided by (used for)  operating activities:**                                     |       |                                                    |       |   |   |
| Net income (loss) (Note 11)                                                                      |       | $                                                       | 2,142      |   | $ | (1,378 | ) |
|                                                                                             |       |                                                    |       |   |   |
| **Adjustments to reconcile net  income (loss) to net cash****provided by operating activities:** |       |                                                    |       |   |   |
| Depreciation and amortization                                                                    |       | 573                                                     |       | 540 |   |
| Loss on disposal of property and equipment                                                       |       | —                                                  |       | 38 |   |
| Deferred taxes                                                                                   |       | (400                                                    | )          | (884 | ) |
| Stock-based compensation (Note 11)                                                               |       | 677                                                     |       | 771 |   |
| **Changes in assets and  liabilities:**                                                          |       |                                                    |       |   |   |
| **(Increase) decrease in assets:**                                                               |       |                                                    |       |   |   |
| Accounts receivable (Note 11)                                                                    |       | 118                                                     |       | (827 | ) |
| Inventories                                                                                      |       | (6,028                                                  | )          | 8,768 |   |
| Other receivable (Note 11)                                                                       |       | (694                                                    | )          | (230 | ) |
| Current deferred tax assets                                                                      |       | 271                                                     |       | (649 | ) |
| Other current assets (Note 11)                                                                   |       | (326                                                    | )          | 2,392 |   |
| Deposits                                                                                         |       | —                                                  |       | (30 | ) |
| **Increase (decrease) in  liabilities:**                                                         |       |                                                    |       |   |   |
| Accounts payable                                                                                 |       | 4,044                                                   |       | 712 |   |
| Accrued expenses (Note 11)                                                                       |       | (740                                                    | )          | (442 | ) |
| Deferred revenue                                                                                 |       | (17                                                     | )          | 1,250 |   |
| Net cash provided by (used for) operating  activities                                            |       | (380                                                    | )          | 10,031 |   |
|                                                                                             |       |                                                    |       |   |   |
| **Cash flows used for investing activities:**                                                    |       |                                                    |       |   |   |
| Capital expenditures                                                                             |       | (404                                                    | )          | (102 | ) |
| Net cash used for investing activities                                                           |       | (404                                                    | )          | (102 | ) |
|                                                                                             |       |                                                    |       |   |   |
| **Cash flows used for financing  activities:**                                                   |       |                                                    |       |   |   |
| Revolving credit line                                                                            |       | 2,535                                                   |       | (2,898 | ) |
| Repurchase of common stock from net vesting of  restricted shares                                |       | —                                                  |       | (164 | ) |
| Tax benefit from stock based compensation                                                        |       | (69                                                     | )          | — |   |
| Purchase of treasury shares                                                                      |       | (4,994                                                  | )          | (2,515 | ) |
| Net cash used for financing activities                                                           |       | (2,528                                                  | )          | (5,577 | ) |
|                                                                                             |       |                                                    |       |   |   |
| **Net increase (decrease) in cash**                                                              |       | (3,312                                                  | )          | 4,352 |   |
| **Cash, beginning of period**                                                                    |       | 4,456                                                   |       | 1,121 |   |
| **Cash, end of period**                                                                          |       | $                                                       | 1,144      |   | $ | 5,473 |   |
|                                                                                             |       |                                                    |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                           |       |                                                    |       |   |   |
| Interest paid                                                                                    |       | $                                                       | 33         |   | $ | 11 |   |
| Income taxes paid                                                                                |       | $                                                       | 2,550      |   | $ | — |   |
|                                                                                             |       |                                                    |       |   |   |
| **Supplemental disclosure of  non-cash financing activities:**                                   |       |                                                    |       |   |   |
| Retirement of treasury shares                                                                    |       | $                                                       | 4,994      |   | $ | 2,392 |   |
| Retirement of property and equipment                                                             |       | $                                                       | —     |   | $ | 114 |   |

 

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**BIDZ.COM, INC.**

**NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHSAND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2010**

**(UNAUDITED)**

 

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

 

**Basis of Presentation**

 

Theaccompanying condensed balance sheet as of December 31, 2009, as revisedfor prior period corrections described in Note 11, which has been derived fromaudited financial statements, and the unaudited financial statements includedherein have been prepared in accordance with the instructions to Form 10-Qand do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  These financial statements and related notes shouldbe read in conjunction with the Company’s audited financial statements for thefiscal year ended December 31, 2009 filed in the Annual Report onForm 10-K by the Company on March 9, 2010 with the Securities andExchange Commission. In the opinion of management, these financial statementsreflect all adjustments, which are of a normal recurring nature and adjustmentsto prior periods as described in Note 11, which are necessary to present fairlythe financial position of Bidz.com, Inc. as of September 30, 2010 andthe results of operations for the three month and nine month periods ended September 30,2009 and 2010 and the cash flows for the nine month periods ended September 30,2009 and 2010.  The results of operations for the three months and ninemonths ended September 30, 2010 are not necessarily indicative of theresults which may be expected for the entire fiscal year.

 

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

 

**Nature of Business Operations**

 

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

 

Wesell our products throughout the United States and our international customerbase includes Europe, Middle East, and Asia. Revenue generated from the UnitedStates accounted for approximately 62.2% and 56.7% of net revenue for the threemonths ended September 30, 2009 and 2010, respectively, and 66.2% and58.9% for the nine months ended September 30, 2009 and 2010, respectively.

 

**Recent Developments**

 

OnOctober 1, 2010, our independent registered public accounting firm,Stonefield Josephson, Inc. (“Stonefield”), notified us that Stonefield hadcombined its practice with Marcum LLP and began practicing as Marcum LLP.Accordingly, effective October 1, 2010, Stonefield effectively resigned asour independent registered public accounting firm and Marcum LLP became ourindependent registered public accounting firm. This change in our independentregistered public accounting firm was approved by the Audit Committee of ourBoard of Directors.

 

InSeptember 2010, we executed a definitive written licensing agreement withNCR Corporation. In June 2010, we had reached an oral agreement inprincipal with NCR Corporation to enter into an ecommerce patent licenseagreement.

 

InJuly 2010, in a privately negotiated transaction, but part of our sharerepurchase program, we repurchased 2,180,952 shares for $2.3 million fromMarina Zinberg with the approval of the Special Committee composed ofindependent members of our Board of Directors. The shares have subsequentlybeen retired.

 

InJuly 2010, we announced that the Superior Court of California, County ofLos Angeles, dismissed Bahram Akhavan v. Bidz.com, Inc. et al., the State Courtshareholder derivative cases filed against the Company’s Board of Directors.

 

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**Recent Accounting Pronouncements**

 

InFebruary 2010, the FASB issued an update on Subsequent Events related toAmendments to Certain Recognition and Disclosure Requirements.  SEC filers are required to evaluatesubsequent events through the date the financial statements are issued, andthey are no longer required to disclose the date through which subsequentevents have been evaluated. This update is effective upon issuance.   Implementation of this standard did not havea material impact on our financial position and results of operations.

 

**2.             Earnings(loss) per Common Share**

 

Thebasic earnings (loss) per common share is calculated by dividing net income(loss) available to common stockholders less preferred dividends by theweighted average number of common shares outstanding. Diluted earnings (loss)per common share is computed similarly to basic earnings (loss) per commonshare, except that the denominator is increased to include the number ofadditional common shares that would have been outstanding if potential commonshares had been issued and if the additional common shares were notanti-dilutive.

 

Thedilutive effect of outstanding stock options is reflected in diluted earnings(loss) per share by application of the treasury stock method including theimpact of pro forma deferred tax benefits for the three month and nine monthperiods ending September 30, 2009 and 2010.  The following table setsforth the computation of basic and diluted net income (loss) per share(unaudited).

 

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

 
| ** **                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                     | ** ** | **(revised)**                                        | ** ** | ** **                                          | ** ** | **(revised)** | ** ** | ** ** | ** ** |
| Basic and diluted net income (loss) per share: |       |                                                 |       |                                                |       |   |   |   |   |
| Numerator:                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss) (Note 11)                    |       | $                                                    | (58        | )                                                   | $          | (614 | ) | $ | 2,142 |   | $ | (1,378 | ) |
| Denominator:                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted common shares outstanding             |       | 22,206,893                                           |       | 20,042,390                                          |       | 22,653,151 |   | 21,270,002 |   |
| Effect of dilutive securities                  |       | —                                               |       | —                                              |       | — |   | — |   |
| Denominator for diluted calculation            |       | 22,206,893                                           |       | 20,042,390                                          |       | 22,653,151 |   | 21,270,002 |   |
| Net income (loss) per share, basic and diluted |       | $                                                    | (0.00      | )                                                   | $          | (0.03 | ) | $ | 0.09 |   | $ | (0.06 | ) |

 

Therewas no dilutive effect from outstanding stock options for the three month andnine month periods ended September 30, 2009 and 2010 as all the stockoptions outstanding at period end were “out of the money” and areanti-dilutive.

 

**3**.             **Inventories**

 

Inventoriesconsist of the following *(in thousands)*as of:

 
| ** **                              | ** ** | **December 31, 2009** | ** ** | **September  30, 2010 (unaudited)** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | ** **                      | ** ** | ** **                                    | ** ** |
| Fine jewelry, watches and other         |       | $                               | 40,228     |                                          | $          | 32,907 |   |
| Loose diamonds and semi-precious stones |       | 279                             |       | 387                                           |       |
| Prepaid inventory                       |       | 1,784                           |       | 401                                           |       |
| Inventory with manufacturing vendors    |       | 437                             |       | 146                                           |       |
| Product inventories                     |       | 42,728                          |       | 33,841                                        |       |
| Less: Inventory reserve                 |       | (1,767                          | )          | (1,648                                        | )          |
|                                    |       | $                               | 40,961     |                                          | $          | 32,193 |   |

 

**4.             RevolvingCredit Line**

 

In July 2006, we entered into a revolvingcredit line agreement with LaSalle Bank, wholly owned by Bank of America, toprovide working capital financing secured by inventories and tangible assets.The agreement allowed for us to initially draw on a line of credit 

 

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up to $10 million. During the three month periodended March 31, 2008 we increased the limit to $25 million. The revolvingcredit line agreement was set to expire in July of 2010. We terminated therevolving credit line on April 2, 2010.

 

**5.             Stock Based Compensation**

 

Werecognize in our financial statements the cost resulting from all share-basedcompensation transactions to employees, including grants of stock options andaward of restricted stock based on their fair values. We have used theBlack-Scholes model to estimate the fair value of options. Our assessment ofthe estimated compensation charges will be affected by our stock price as wellas assumptions regarding a number of subjective variables and the related taximpact. These variables include, but are not limited to, our stock pricevolatility, forfeiture rates and employee stock option exercise behaviors (orexpected term).

 

Weare also required to calculate the additional paid in capital pool (“APIC Pool”)available to absorb tax deficiencies recognized subsequent to adoption, as ifwe had adopted the statement at its effective date of January 1, 1995. Wecalculate our APIC pool using the long form method, which requires that wetrack each award grant on an employee-by-employee basis and grant-by-grantbasis to determine if there is a tax benefit or tax deficiency for such award. Wethen compare the fair value expense to the tax deduction received for eachgrant and aggregate the benefits and deficiencies to establish and maintain theAPIC Pool.  We group the excess tax benefits from both employee andnonemployee awards into a single APIC pool. During the three months ended September 30, 2009 and 2010, werecognized no income tax expense for APIC shortfalls, and for the nine monthsended September 30, 2009 and 2010, we recognized $72,000 and $218,000,respectively.

 

**Restricted Shares**

 

Therestricted stock awards are expensed pro rata over the vesting period basedupon the fair value of the awards at the time of grant. Stock-basedcompensation from restricted stock awards totaled $252,000 and $254,000 for thethree months ended September 30, 2009 and 2010, respectively and $587,000and $747,000 for the nine months ended September 30, 2009 and 2010,respectively. The unamortized stock-based expense for restricted stock awardswas $1.9 million at September 30, 2010.

 

Asummary of all restricted stock activity during the nine months ended September 30,2010 is as follows (unaudited):

 
| Restricted shares outstanding, December 31,  2009  |   | 738,225  |   |
|---------------------------------------------------------|--------|----------|--------|
| Shares granted                                          |   | —   |   |
| Shares vested                                           |   | (191,500 | )      |
| Shares forfeited                                        |   | (10,000  | )      |
| Restricted shares outstanding, September 30,  2010 |   | 536,725  |   |

 

**StockOptions**

 

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 providesfor the granting of awards in the form of incentive stock options, nonqualifiedstock options, stock appreciation rights, shares of restricted common stock,bonus stock in lieu of obligations, or other stock-based awards to employees,directors, and independent contractors who provide valuable services to ourcompany.  The vesting requirements, performance thresholds and other termsand conditions of options granted under the Plans will be determined by ourCompensation Committee and Board of Directors.

 

Thefollowing is a summary of stock option activity as of September 30, 2010,and changes during the nine months ended September 30, 2010 (unaudited).

 
| **Options**                                       | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price ($)** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value ($)** | ** ** |
|---------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|
| Outstanding at December 31, 2009             |       | 6,933,000  |       | 6.08                                             |       | 1.38                                                     |       | 0.00                                     |       |
| Granted                                           |       | 154,000    |       | 6.26                                             |       |                                                     |       |                                     |       |
| Exercised                                         |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Forfeited                                         |       | 154,000    |       | 6.26                                             |       |                                                     |       |                                     |       |
| Expired                                           |       | 79,000     |       | 6.06                                             |       |                                                     |       |                                     |       |
| Outstanding at September 30, 2010            |       | 6,854,000  |       | 6.09                                             |       | 0.64                                                     |       | 0.00                                     |       |
| Vested and Exercisable at September 30, 2010 |       | 6,854,000  |       | 6.09                                             |       | 0.64                                                     |       | 0.00                                     |       |

 

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Thefollowing table summarizes information about stock options outstanding andexercisable at September 30, 2010 (unaudited).

 
| ** **                              | ** ** | **Options outstanding and exercisable  as of September 30, 2010** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Options outstanding**                                                                         | ** ** | **Options exercisable** | ** ** |
| **Range of  exercise prices** | ** ** | **Number  outstanding**                                                                              | ** ** | **Weighted  average  remaining  contractual** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                              | ** ** | ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $                                       | 6.00       |                                                                                                 | $          | 6.00 |   | 6,477,000 |   | 0.61 |   | $ | 6.00 |   | 6,477,000 |   | $ | 6.00 |   |
| $                                       | 6.26       |                                                                                                 | $          | 6.26 |   | 154,000 |   | 0.42 |   | $ | 6.26 |   | 154,000 |   | $ | 6.26 |   |
| $                                       | 6.50       |                                                                                                 | $          | 6.50 |   | 95,500 |   | 1.44 |   | $ | 6.50 |   | 95,500 |   | $ | 6.50 |   |
| $                                       | 9.90       |                                                                                                 | $          | 9.90 |   | 127,500 |   | 1.70 |   | $ | 9.90 |   | 127,500 |   | $ | 9.90 |   |
| $                                       | 6.00       |                                                                                                 | $          | 9.90 |   | 6,854,000 |   | 0.64 |   | $ | 6.09 |   | 6,854,000 |   | $ | 6.09 |   |

 

Stock-basedcompensation expense from stock options for the three months endedSeptember 30, 2009 and 2010 amounted to $30,000 and $2,000, respectively,and for the nine months ended September 30, 2009 and 2010 amounted to$90,000 and $24,000, respectively. The unamortized stock-based compensationexpense from stock options is $3,000 as of September 30, 2010. 154,000shares of stock options were granted in the nine months endedSeptember 30, 2010 when it was determined that the purchase of stock byemployees with a nonrecourse loan from us is effectively the same as granting astock option — (as described in Note 11).

 

**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, 2009 and 2010. Net revenue bygeographic area was as follows (unaudited):

 

*(inthousands, except percentage data)*

* *
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| **Geographic area** | ** ** | **Amount**                                           | ** ** | **Percent**                                         | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States            |       | $                                                    | 15,424     |                                                | 62.2       | % | $ | 12,359 |   | 56.7 | % | $ | 54,843 |   | 66.2 | % | $ | 44,633 |   | 58.9 | % |
| International            |       | 9,362                                                |       | 37.8                                                | %          | 9,457 |   | 43.3 | % | 28,064 |   | 33.8 | % | 31,095 |   | 41.1 | % |
|                     |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    |       | $                                                    | 24,786     |                                                | 100.0      | % | $ | 21,816 |   | 100.0 | % | $ | 82,907 |   | 100.0 | % | $ | 75,728 |   | 100.0 | % |

 

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

 

Purchasesfrom two vendors, including a related party discussed in Note 8, amounted to$7.8 million and $3.0 million representing 37.1% and 21.3% of the totalpurchases during the three months ended September 30, 2009 and 2010,respectively, and $17.2 million and $11.1 million representing 28.0% and 23.2%of the total purchases during the nine months ended September 30, 2009 and2010, respectively. Outstanding accounts payable to the two vendors totaled$2.9 million and $3.0 million at December 31, 2009 and September 30,2010, respectively. Loss of either of these vendors is not expected tohave a significant negative impact on the financial position, results of operationsand cash flows of the Company.

 

**8.****                                     ****Related Party Transaction**

 

During the three monthsended September 30, 2009 and 2010, we purchased approximately 9.3% and12.8%, respectively, of our merchandise from LA Jewelers, Inc., where oneof its managers is a stockholder who beneficially owns approximately 7.3% ofour outstanding common stock as of September 30, 2010. During the ninemonths ended September 30, 2009 and 2010, we purchased approximately 7.6%and 12.7%, respectively of our merchandise from LA Jewelers, Inc. Theaccounts payable balances due to LA Jewelers Inc. were $1.5 million and $2.6million at December 31, 2009 and September 30, 2010, respectively.

 

LAJewelers Inc. participates in our inventory co-op marketing program. For thethree months ended September 30, 2009 and 2010, we earned approximately$265,000 and $242,000, respectively from LA Jewelers Inc. relating to co-opmarketing contributions and $326,000 was unamortized as of September 30,2010. For the nine months ended September 30, 2009 and 2010, we earnedapproximately $480,000 and $672,000, respectively. The amounts of co-opmarketing contributions due from LA Jewelers Inc. were $178,000 and $389,000 asof December 31, 2009 and September 30, 2010, respectively.

 

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InMay, 2007 we entered into an understanding with LA Jewelers Inc. whereby theywill guarantee that we will earn a certain minimum gross profit margin on theirmerchandise. This agreement provides that in the event of a gross profit marginshortfall we will be compensated for the difference between our actual grossprofit margin and the guaranteed minimum gross profit margin. For the threemonths ended September 30, 2009 and 2010, we recognized $20,000 and$4,000, respectively, under this agreement, and for the nine months endedSeptember 30, 2009 and 2010, we recognized $192,000 and $102,000,respectively. As of December 31, 2009 and September 30, 2010, we have$4,000 outstanding under this gross profit margin guarantee.

 

Duringthe three months ended September 30, 2009 and 2010, we recorded $641,000and $944,000, respectively, and during the nine months ended September 30,2009 and 2010, we recorded $1.3 million and $3.5 million, respectively, inwholesale merchandise sales to a customer that is owned by Daniella Zinberg,the daughter of our Chief Executive Officer, David Zinberg. There was noaccounts receivable due from this customer as of December 31, 2009 andSeptember 30, 2010.

 

**9.             IncomeTax**

 

Werecognize the financial statement benefit of a tax position only afterdetermining that the relevant tax authority would more likely than not sustainthe position following an audit. For tax positions meeting themore-likely-than-not**threshold, theamount recognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimate settlementwith the relevant tax authority.

 

Duringthe nine months ended September 30, 2010, the Company recorded priorperiod adjustments of $424,000 to beginning retained earnings and $390,000 toadditional paid-in capital for changes to tax positions related to priorperiods. Prior period income tax liabilities were adjusted for $814,000, andinclude applicable interest and penalties of $48,000 and $109,000,respectively. The prior period adjustment is not material to previously issuedfinancial statements (as described in Note 11).

 

Weare subject to income taxes in the U.S. federal jurisdiction and California.Tax regulations within each jurisdiction are subject to the interpretation ofthe related tax laws and regulations and require significant judgment to apply.With few exceptions, we are no longer subject to U.S. federal examinations bytax authorities for the years before 2008 after the conclusion of examinationsby the Internal Revenue Service for the 2004, 2005, 2006, and 2007 tax years.As part of the 2007 tax examination, we have submitted revised calculationsrelated to the prior period adjustments (as described in Note 11) and otheruncertain tax positions.  We may be selected for examination by theInternal Revenue Service for the 2008 and 2009 tax years.

 

**10.          Contingencies**

 

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

 

**11.          Revision of Prior Period Amounts**

 

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

 

Managementhas evaluated the effect of the prior period expenses and determined that theywere immaterial to each of the reporting periods affected and, therefore,amendment of previously filed reports was not required.  However, if the adjustments to correct the cumulativeerrors had been recorded in the first quarter of 2010, we believe the impactwould have been significant to the first quarter and would impactcomparisons to prior periods.  Inaccordance with guidelines issued in SEC Staff Accounting Bulletin, we haverecorded adjustments in the current year’s beginning retained earnings accountto correct these immaterial prior period errors.  We have alsorevised in the current Form 10-Q filing, and plan to revise in futurefilings of our Form 10-Q and 10-K, the previously reported quarterlyfinancial statements for 2009 in our Form 10-Q and annual financialstatements for 2009 and 2008 in our Form 10-K for these immaterialamounts, and certain amounts from prior years have been reclassified to conformto the current year’s presentation.

 

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

 

*(inthousands)*

 
| **Beginning period retained  earnings at January 1, 2010, as previously reported** |                                                                                | $      | 13,432 |   |
|-----------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                    |                                                                                |   |   |
| Less:                                                                                   | Correction  of an error in stock option expense in 2007 (net of income tax of $0)   |   | (66    | )      |
|                                                                                    | Correction  of an error in stock option expense in 2008 (net of income tax of $205) |   | (680   | )      |
|                                                                                    | Correction  of an error in stock option expense in 2009 (net of income tax of $219) |   | 60     |   |
|                                                                                    |                                                                                | (686   | )      |
| **Retained earnings at  January 1, 2010, as revised**                              |                                                                                | 12,746 |   |
| Net loss for the nine months ended  September 30, 2010                             |                                                                                | (1,378 | )      |
| **Ending period retained earnings  at September 30, 2010**                         |                                                                                | $      | 11,368 |   |

 

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

 
| **(in thousands)**                                                                    | ** ** | **Previously  reported** | ** ** | **Adjustment** | ** ** | **Revised** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------|------------|-------------|------------|
| **Balance sheet items at  December 31, 2009:**                                        | ** ** | ** **               | ** ** | ** **     | ** ** | ** **  | ** ** |
| Other current assets                                                                       |       | $                        | 3,774      |           | $          | (814        | )          | $ | 2,960 |   |
| Total current assets                                                                       |       | 49,157                   |       | (814           | )          | 48,343      |       |
| Total assets                                                                               |       | 51,419                   |       | (814           | )          | 50,605      |       |
| Additional paid in capital                                                                 |       | 20,293                   |       | (436           | )          | 19,857      |       |
| Employee share purchase receivable                                                         |       | (308                     | )          | 308            |       | —      |       |
| Retained earnings                                                                          |       | 13,432                   |       | (686           | )          | 12,746      |       |
| Total stockholders’ equity                                                            |       | 33,439                   |       | (814           | )          | 32,625      |       |
| Liabilities and stockholders’ equity                                                  |       | 51,419                   |       | (814           | )          | 50,605      |       |
|                                                                                       |       |                     |       |           |       |        |       |
| **Statement of operations items  for the three months ended September 30, 2009:**     |       |                     |       |           |       |        |       |
| General and administrative                                                                 |       | 4,644                    |       | 132            |       | 4,776       |       |
| Total operating expenses                                                                   |       | 7,079                    |       | 132            |       | 7,211       |       |
| Income from operations                                                                     |       | 85                       |       | (132           | )          | (47         | )          |
| Income before income tax expense                                                           |       | 67                       |       | (132           | )          | (65         | )          |
| Income tax expense                                                                         |       | 28                       |       | (35            | )          | (7          | )          |
| Net income                                                                                 |       | 39                       |       | (97            | )          | (58         | )          |
|                                                                                       |       |                     |       |           |       |        |       |
| **Statement of operations items  for the nine months ended September 30, 2009:**      |       |                     |       |           |       |        |       |
| General and administrative                                                                 |       | 14,252                   |       | (82            | )          | 14,170      |       |
| Total operating expenses                                                                   |       | 21,793                   |       | (82            | )          | 21,711      |       |
| Income from operations                                                                     |       | 3,792                    |       | 82             |       | 3,874       |       |
| Income before income tax expense                                                           |       | 3,761                    |       | 82             |       | 3,843       |       |
| Income tax expense                                                                         |       | 1,588                    |       | 113            |       | 1701        |       |
| Net income                                                                                 |       | 2,173                    |       | (31            | )          | 2,142       |       |
|                                                                                       |       |                     |       |           |       |        |       |
| **Statement of cash flow****items****for the nine months ended  September 30, 2009:** |       |                     |       |           |       |        |       |
| Net income                                                                                 |       | 2,173                    |       | (31            | )          | 2,142       |       |
| Impairment in employees share purchase receivable                                          |       | 172                      |       | (172           | )          | —      |       |
| Stock based compensation                                                                   |       | 587                      |       | 90             |       | 677         |       |
| Accounts receivable                                                                        |       | 11                       |       | 107            |       | 118         |       |
| Other receivable                                                                           |       | (587                     | )          | (107           | )          | (694        | )          |
| Other current assets                                                                       |       | (758                     | )          | 432            |       | (326        | )          |
| Accrued expenses                                                                           |       | (421                     | )          | (319           | )          | (740        | )          |
|                                                                                            |            |                          |            |                |            |             |            |  |  |  |

 

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

 

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

 

**Overview**

 

Weare a leading online retailer of jewelry, featuring a live auction format onBidz.com. We have established our retail brand in the online marketplace byoffering high-quality merchandise, a unique user-friendly shopping experience,and the opportunity for buyers to achieve significant cost savings versustraditional retail channels. A key to our success has been our ability toefficiently and cost effectively source closeout jewelry, watches, accessoriesand brand name merchandise, and rapidly respond to changing consumer demandsfor our merchandise. We offer our products through a continuous live format,featuring a $1 minimum opening bid, and a unique 15-second auction extensionperiod that allows our auctions to continue until all bids are received. Onselect auctions we maintain a reserve price that must be met before a sale willbe consummated. In 2009, we began offering auctions with a minimum opening bidthat is higher than $1. The majority of our auctions are short-term, oftenclosing within one day, providing immediate gratification to our customers andencouraging frequent visits and active viewing of our website.

 

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

 

Inaddition to our auction site we have retail sites that offer similar items ofmerchandise as those listed for auction, as well as other designer products andconsumer goods.  Buyz.com, our fixedprice site for jewelry, provides us access to different types ofconsumers.  We plan to offer customersthe ability to design their own jewelry including diamond earrings and rings inthe near future.  Modnique.com, ouronline retail site for designer products and consumer goods, provides a privatesale concept that only sells to invited members. We plan to negotiate favorabledeals with designers and manufacturers, including purchasing inventory fromrecognizable brand names at deep discounts to attract customers that arefashion minded as well as cost conscious. Inventory is often sold that is heldby our suppliers using a just in time ordering and/or drop ship model.

 

Inline with our growth plans, we previously completed a major upgrade of our auctionplatform at the end of 2007. The new auction system supports a broad range ofleading browser software including Microsoft Internet Explorer, FireFox andSafari. The new system includes high availability, faster end-user responsetime and greater scalability among the key features delivered in this release.We have leveraged this new software solution to launch additional site featuresand our new online retail store, Buyz.com. We launched the Spanish and Arabicversions of our website in 2008.

 

In2009, we completed and deployed an implementation of Dynamics AX, a robust ERPsolution from Microsoft. Dynamics AX replaced our proprietary in-house businessmanagement software in the areas of inventory management, order management,customer management, logistics, purchasing, warehouse management andfulfillment.

 

Wesell to consumers looking for reliable bargains on jewelry, watches,accessories and brand name merchandise. Because we purchase and retain most ofour inventory onsite, we can provide our customers with timely service anddelivery of their purchases. In addition, each item is inspected by one of ourtrained product specialists prior to its placement on our website, whichassures our customers of the quality of their purchases of our products. Weoperate in a highly competitive market with low barriers to entry. By sellingmainly our own merchandise, we provide a buying environment in which weminimize fraudulent activity and questionable product quality frequentlyassociated with purchase transactions from third-party sellers. We also providea 15-day return policy on all merchandise. We believe that many of ourcustomers resell merchandise that they purchase from our auctions on eBay, atlocal auctions, and through other retail channels. Our auctions and fixed pricesales are conducted 24 hours a day, seven days a week. We also offer24-hour telephone customer support and online live-help as well e-mail customersupport.

 

**Critical Accounting Policies**

 

Thepreparation of our financial statements requires us to make certain estimatesand judgments that affect amounts reported and disclosed in our financialstatements and related notes. We base our estimates on historical experienceand on other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates. The followingare the critical accounting policies that we believe require significantestimation and judgment.

 

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*Revenue Recognition*

 

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

 

Foronline sales through our websites, we recognize merchandise sales uponshipments made to consumers that are fulfilled from our warehouse. We requirepayment before we ship and the payment is generally made online by credit cardor other electronic payment methods. We record amounts received or billed priorto shipment of goods to customers as deferred revenue. We reduce gross sales byreturns and charge-backs from customers. For wholesale merchandise sales, werecognize sales when the merchandise is delivered to the customer and creditterms may be offered to such customers.

 

Weprovide layaway sales to our retail customers which are payable in monthlyinstallments. The amounts paid and yet to be shipped are recorded as deferredrevenue.

 

Inthe Statements of Income (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.”

 

Weinclude transaction fees revenue in net revenue. The 3% auction transactionfees are applied to merchandise sales on the bidz.com site, including shippingand handling but not to wholesale merchandise sales. The fees do not apply tosales on buyz.com and modnique.com.

 

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

 

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

 

*Cost of Revenue*

 

Costof revenue includes product costs, inbound and outbound shipping charges,packaging and shipping supplies, insurance on shipments, product repair andservice costs, and credit card and other electronic payment fees, and isrecorded in the same period in which related revenue has been recorded. Thecost of revenue is reduced by amortized co-op marketing contributions from ourvendors and referral credits given to customers through our “refer a friend”program.

 

Outboundshipping costs on merchandise sales totaled $1.4 million and $1.3 millionin the three months ended September 30, 2009 and 2010, respectively, and$4.6 million and $4.1 million in the nine months ended September 30, 2009and 2010, respectively.

 

*Returns and Allowances Reserve*

 

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

 

*Inventories*

 

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

 

*Inventory Reserve*

 

Theunique nature of our business model where customers set the prices they arewilling to pay may result in items selling below our cost.  We provide reserves against our inventorybased on the estimated difference between the average selling price and thecost of inventory. We also provide reserves for obsolescence and slow movinginventory.

 

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*Inventory Co-op Marketing Contributions*

 

Webill and collect from our inventory vendors co-op marketing contributions as anincentive for us to market and sell their merchandise on the Bidz website. Weaccount for the co-op marketing contributions that cannot be identifiedspecifically to benefit the vendors as a reduction in the cost of inventorypurchased and cost of sales. We cannot specifically identify the benefits toeach vendor, and consequently, co-op marketing contributions are chargedagainst inventory as a reduction of costs and amortized as a reduction of costof sales. For the three months ended September 30, 2009 and 2010, we haverecognized $1.6 million and $1.6 million of co-op marketing contributions,respectively, and for the nine months ended September 30, 2009 and 2010,we have recognized $5.8 million and $5.3 million, respectively. Approximately$3.3 million remain unamortized and is included as an offset to inventory atSeptember 30, 2010. Receivable from vendors for co-op marketingcontributions, less allowance for doubtful accounts, if any, is included inother receivables and amounted to $1.7 million at September 30, 2010.

 

*Gain(loss) on foreign currency exchange*

 

Asignificant portion of our purchases are international purchases which exposesus to fluctuations in foreign currency exchange rates relative to the U.S.dollar. Our financial results are reported in U.S. dollars. As a result,transactions conducted in foreign currencies must be translated into U.S.dollars for reporting purposes based upon the applicable foreign currency exchangerates, which may result in realized and unrealized gains or losses fromexchange rate fluctuations.  We record a gain or loss on foreign currencyexchange between the time we receive the inventory and when we make foreigncurrency payments to our international suppliers.  Transactions occurring during the period aretranslated at rates in effect at the time of the transaction, and adjustmentsare made at each period end to re-measure unsettled assets and liabilitiesdenominated in foreign currencies at the period-end exchange rates.

 

*Descriptionof Our Revenue, Costs, and Expenses*

 

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

 
| ** **                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                                 | ** ** | **2010**                                                | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                 | ** ** | **(revised)**                                            | ** ** | ** **                                              | ** ** | **(revised)** | ** ** | ** ** | ** ** |
| Net sales                                  |       | 100.0                                                    | %          | 100.0                                                   | %          | 100.0 | % | 100.0 | % |
| Gross profit                               |       | 28.9                                                     |       | 25.7                                                    |       | 30.9 |   | 25.0 |   |
| Operating expenses:                        |       |                                                     |       |                                                    |       |   |   |   |   |
| General & administrative          |       | 19.3                                                     |       | 22.8                                                    |       | 17.1 |   | 20.9 |   |
| Sales & marketing                 |       | 9.0                                                      |       | 6.8                                                     |       | 8.4 |   | 5.9 |   |
| Depreciation & amortization       |       | 0.8                                                      |       | 0.7                                                     |       | 0.7 |   | 0.7 |   |
| Total operating expenses                   |       | 29.1                                                     |       | 30.3                                                    |       | 26.2 |   | 27.5 |   |
| Income (loss) from operations              |       | (0.2                                                     | )          | (4.6                                                    | )          | 4.7 |   | (2.5 | ) |
| Loss on disposal of property and equipment |       | —                                                   |       | (0.2                                                    | )          | — |   | (0.0 | ) |
| Interest expense                           |       | (0.0                                                     | )          | —                                                  |       | (0.0 | ) | (0.0 | ) |
| Income tax benefit (expense)               |       | 0.0                                                      |       | 2.0                                                     |       | (2.1 | ) | 0.7 |   |
| Net income (loss)                          |       | (0.2                                                     | )%         | (2.8                                                    | )%         | 2.6 | % | (1.8 | )% |

 

*Net Revenue*

 

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

 

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

 
| ** **                   | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                                 | ** ** | **2010**                                                | ** ** | **2009** | ** ** | **2010** | ** ** |
|                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Merchandise sales            |       | 86.0                                                     | %          | 81.5                                                    | %          | 85.4 | % | 83.0 | % |
| Wholesale merchandise sales  |       | 3.7                                                      |       | 4.9                                                     |       | 1.9 |   | 6.0 |   |
| Shipping & handling |       | 7.1                                                      |       | 10.4                                                    |       | 9.4 |   | 7.7 |   |
| Transaction fees             |       | 2.9                                                      |       | 2.9                                                     |       | 3.0 |   | 2.8 |   |
| Other revenue                |       | 0.3                                                      |       | 0.3                                                     |       | 0.3 |   | 0.3 |   |
|                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Total net revenue            |       | 100.0                                                    | %          | 100.0                                                   | %          | 100.0 | % | 100.0 | % |

 

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*Gross Profit*

 

Ourgross profit consists of net revenue less the cost of revenue. Our cost ofrevenue consists of the cost of merchandise sold to customers net of amortizedco-op marketing contributions from vendors, inbound and outbound shippingcosts, packaging and shipping supplies, insurance on shipments, product repairand service costs, and credit card and other transaction fees associated withpayments.

 

*General and Administrative Expenses*

 

Ourgeneral and administrative expenses consist primarily of payroll and relatedbenefit costs for our employees. These expenses also include fulfillment,customer service, technology, professional fees, other general corporateexpenses, and stock-based compensation, consisting substantially of restrictedstock awards to employees and directors.

 

*Sales and Marketing Expenses*

 

Ourmarketing expenses consist primarily of costs associated with paid websitesearch marketing, online banner marketing, e-mail campaigns, affiliate programsand optimization services. These marketing programs, which are designed todrive buyers to our website, are the most important factors in increasingdemand for our jewelry products and increasing net revenue.

 

**Comparison of Three Months Ended September 30, 2010 toThree Months Ended September 30, 2009 (Note 11)**

 

Netloss in the three months ended September 30, 2010 was $(614,000), or$(0.03) per basic and diluted share compared to a net loss in the three monthsended September 30, 2009 of $(58,000), or $(0.00) per basic and dilutedshare. Net loss increased by $556,000 in the three months endedSeptember 30, 2010 compared to the three months ended September 30,2009 primarily due to decreases in revenue and gross profit margin.

 

*Net Revenue*

 

Netrevenue decreased 12.0% to $21.8 million in the three months endedSeptember 30, 2010 from $24.8 million in the three months endedSeptember 30, 2009. Wholesale merchandise sales were $1.1 million inthe three months ended September 30, 2010 compared to $917,000 in thethree months ended September 30, 2009.

 

Thecontinuing economic weakness affected our revenue in the third quarter of 2010compared to the third quarter of 2009. There was an overall decrease in onlinedemand for our jewelry and other merchandise as discretionary spending byconsumers remain weak. If the economy and consumer discretionary spendingcontinue to be weak it will cause a negative effect on our revenue andprofitability.

 

*Gross Profit*

 

Grossprofit decreased 21.8% to $5.6 million in the three months endedSeptember 30, 2010 from $7.2 million in the three months endedSeptember 30, 2009. The decrease in gross profit resulted from thedecrease in sales volume which declined by 12.0% for the three months ended September 30,2010 compared to the prior year period and the decrease in gross profit marginto 25.7% in the three months ended September 30, 2010 from 28.9% in theprior year period. Gross profit margin in the three months endedSeptember 30, 2010 was affected by weaker demand for our jewelry and othermerchandise and lower gross profit margin from our wholesale merchandise sales.

 

*General and Administrative Expenses*

 

Generaland administrative expense increased 4.1% to $5.0 million in the three monthsended September 30, 2010 from $4.8 million in three months endedSeptember 30, 2009. The increase in general and administrative expenseswas due to expenses to operate modnique.com. General and administrative expenseas a percentage of net revenue increased to 22.8% in the three months endedSeptember 30, 2010 from 19.3% in the three months ended September 30,2009 as a result of higher general and administrative expense and deleveragingfrom lower revenue.

 

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*Sales & Marketing Expenses*

 

Salesand marketing expense decreased 33.8% to $1.5 million in the three months endedSeptember 30, 2010 from $2.2 million in the three months ended September 30,2009. Sales and marketing expense as a percentage of net revenue decreased to6.8% in the three months ended September 30, 2010 from 9.0% in the threemonths ended September 30, 2009. Sales and marketing expense was reduced tocontrol our operating expenses and also as a result of lower revenue.

 

*Income Tax Expense*

 

Werecorded an income tax benefit of $421,000 in the three months endedSeptember 30, 2010 compared to an income tax benefit of $7,000 in thethree months ended September 30, 2009, with effective tax rates of 40.7%and 10.8%, respectively. The tax benefit in the three months ended September 30,2009 was affected by the tax effect of stock based compensation.

 

**Comparison of Nine Months Ended September 30, 2010 toNine Months Ended September 30, 2009 (Note 11)**

 

Netloss in the nine months ended September 30, 2010 was $1.4 million, or$(0.06) per basic and diluted share compared to a net income in the nine monthsended September 30, 2009 of $2.1 million or $0.09 per basic and diluted share,respectively. Net income decreased by $3.5 million in the nine months endedSeptember 30, 2010 compared to the prior year period primarily due todecreases in revenue and gross profit margin.

 

*Net Revenue*

 

Netrevenue decreased 8.7% to $75.7 million in the nine months endedSeptember 30, 2010 from $82.9 million in the nine months endedSeptember 30, 2009. Merchandise wholesale sales were $4.7 million in thenine months ended September 30, 2010 compared to $1.6 million in the nine monthsended September 30, 2009.

 

Thecontinuing economic weakness affected our revenue in the nine month periodended September, 2010 compared to the nine month period ended September 30,2009. There was an overall decrease in online demand for our jewelry and othermerchandise as discretionary spending by consumers remain weak. If the economyand consumer discretionary spending continue to be weak it will cause anegative effect on our revenue.

 

*Gross Profit*

 

Grossprofit decreased 25.8% to $19.0 million in the nine months endedSeptember 30, 2010 from $25.6 million in the nine months endedSeptember 30, 2009. The decrease in gross profit resulted from thedecrease in sales revenue which declined by 8.7% for the nine months endedSeptember 30, 2010 compared to the prior year period  and the decrease in gross profit margin to25.0% in the nine months ended September 30, 2010 from 30.9% in the prioryear period. Gross profit margin in the nine months ended September 30,2010 was affected by our free shipping promotion in the first half of 2010 andweaker demand for our jewelry and other merchandise.

 

*General and Administrative Expenses*

 

Generaland administrative expenses increased by 11.6% to $15.8 million in thenine months ended September 30, 2010 from $14.2 million in the nine monthsended September 30, 2009. The increase in general and administrativeexpenses was due to expenses to operate modnique.com and higher overalladministrative expenses. General and administrative expenses as a percentage ofnet revenue increased to 20.9% in the nine months ended September 30, 2010from 17.1% in the nine months ended September 30, 2009 as a result ofhigher general and administrative expense and deleveraging from lower revenue.

 

*Sales and Marketing Expenses*

 

Salesand marketing expenses decreased 35.2 % to $4.5 million in the nine monthsended September 30, 2010 from $7.0 million in the nine months endedSeptember 30, 2009. Sales and marketing expenses as a percentage ofnet revenue decreased to 5.9% in the nine months ended September 30, 2010from 8.4% in the nine months ended September 30, 2009. Sales and marketingexpense was reduced to control our operating expenses and also as a result oflower revenue.

 

*Income Tax Expense*

 

Werecorded an income tax benefit of $576,000 in the nine  months ended September 30, 2010 comparedto an income tax expense of $1.7 million in the nine months endedSeptember 30, 2009 and the effective tax rates were 29.5% and 44.3%,respectively. Income tax benefit in the nine months ended September 30,2010 was adversely affected and lower than expected when we recorded a reversalin 

 

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deferred tax benefit from restricted stockawards that vested in the period at a market value that was substantially lowerthan the grant date fair market value, since we had no APIC pool to offset thisshortfall.

 

**Additional Quarterly Data**

 
| ** **                      | ** ** | **Quarter Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
| ** **                      | ** ** | **2009**               | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** | **2010** | ** ** | **2010** | ** ** | **2010** | ** ** |
|                            |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average gross order value       |       | $                      | 181        |   | $ | 180 |   | $ | 187 |   | $ | 189 |   | $ | 190 |   | $ | 198 |   | $ | 190 |   |
| Average orders per day          |       | 2,043                  |       | 1,712 |   | 1,465 |   | 1,564 |   | 1,713 |   | 1,460 |   | 1,312 |   |
| Average items sold per day      |       | 6,110                  |       | 5,956 |   | 6,899 |   | 6,773 |   | 7,018 |   | 5,852 |   | 4,964 |   |
| Acquisition costs per new buyer |       | $                      | 51         |   | $ | 55 |   | $ | 65 |   | $ | 48 |   | $ | 39 |   | $ | 39 |   | $ | 46 |   |
| Number of new buyers            |       | 51,021                 |       | 38,577 |   | 34,252 |   | 45,405 |   | 40,501 |   | 34,264 |   | 29,909 |   |

 

Modnique.comand wholesale merchandise sales and data are excluded in computing additionalquarterly data.

 

**Liquidity and Capital Resources**

 

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

 

Asof September 30, 2010, we had a working capital surplus of $26.6 millionand no long-term debt obligations. Net cash provided by operating activitieswas $10.0 million in the nine months ended September 30, 2010 compared tonet cash used of $380,000 in the nine months ended September 30,2009. Cash in the nine months ended September 30, 2010 was primarilyaffected by changes in our net loss, inventories, other current assets and deferredrevenue and in the nine months ended September 30, 2009 was primarilyaffected by changes in our net income, inventories and accounts payable. Ourinventories and accounts payable generally increase or decrease in line withchanges in our inventory strategy. Our inventory strategy is influenced by ourability to secure inventory that we believe will improve sales and/or our grossprofit margin.

 

Werecorded net loss of $1.4 million in the nine months ended September 30,2010 compared to a net income of $2.1 million in the nine months endedSeptember 30, 2009. In the nine months ended September 30, 2010,inventories decreased by $8.8 million, other current assets decreased by $2.4million and deferred revenue increased by $1.3 million, which resulted in a netincrease in our cash position. In the nine months ended September 30,2009, inventories increased by $6.0 million and accounts payable decreased by$4.0 million.

 

Netcash used in investing activities was $102,000 in the nine months endedSeptember 30, 2010 compared to $404,000 in the nine months endedSeptember 30, 2009. The expenditures related mainly to acquisition ofoffice and computer equipment, and software.

 

Inthe nine months ended September 30, 2010, net cash of $5.6 million wasused in financing activities when $2.9 million was used to repay our revolvingcredit line, $164,000 was used to retire common stock from net vesting ofrestricted shares to pay for payroll taxes, and $2.5 million was used torepurchase shares of our common stock. In the nine months endedSeptember 30, 2009, net cash of $2.5 million was used in financingactivities when $5.0 million was used to repurchase shares of our common stockand $2.5 million in proceeds came from the utilization of our revolving credit line.

 

Webelieve that cash currently on hand and cash flows from operations will besufficient to continue our operations and to pursue our growth strategy for theforeseeable future. Our future capital requirements will depend on manyfactors, including the rate of our revenue growth; the extent of ouradvertising and marketing programs; the levels of the inventory we carry; andother factors relating to our business. Enhancement of our website, networkinfrastructure, and transaction processing systems may require us to spendsignificantly more than we have in the past. Moreover, to date our spending inthese areas has been lower than industry averages. We may requireadditional financing in the future in order to execute our operating plan andwe may not be able to obtain such financing. We cannot predict whether thisadditional financing will be in the form of equity, debt, or a combinationof debt and equity.

 

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**Lease Obligations**

 

Thefollowing table presents our contractual obligations at September 30,2010, over the next five years and thereafter (in thousands):

 
| **Payments by period** | ** ** | **Total  amount** | ** ** | **Less than  1 year** | ** ** | **1 to 3  years** | ** ** | **3 to 5  years** | ** ** | **After 5  years** | ** ** |
|----------------------------------|------------|-------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **        | ** ** | ** **                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Property lease                   |       | $                 | 2,855      |                            | $          | 1,542                       |       | $                           | 1,313      |                    | $          | — |   | $ | — |   |
| Equipment lease                  |       | 112               |       | 52                              |       | 60                          |       | —                      |       | —                  |       |
|                             |       | $                 | 2,967      |                            | $          | 1,594                       |       | $                           | 1,373      |                    | $          | — |   | $ | — |   |

 

Weare obligated for the lease of our office and warehouse space. We leased a50,000 square-foot office and warehouse and a separate 12,000 square-footwarehouse space in Culver City, California. The leases expire in June 2012and August 2012, respectively. In November 2009, we leased a 26,000square-foot office and warehouse space in Marina Del Rey, California.  The lease expires in October 2012.

 

**Commitments**

 

InSeptember 2010, we executed a definitive ecommerce patent licenseagreement with NCR Corporation that commits us to six annual payments of$105,000 ending in September 2015.

 

**Reclassification**

 

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

 

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

 

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

 

**ITEM 4 - CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report.  Disclosure controls and procedures are thecontrols and other procedures that we designed to ensure that we record, process,summarize and report in a timely manner the information we must disclose inreports that we file with or submit to the Securities and ExchangeCommission.  Based on this evaluation, our Chief Executive Officer and ourChief Financial Officer concluded that, as of the date of their evaluation, ourdisclosure controls and procedures were not effective because of the materialweaknesses in our internal control over financial reporting discussed below.Notwithstanding the material weaknesses described below, management hasconcluded that our financial statements for the periods covered by and includedin this report are fairly stated in all material respects in accordance withgenerally accepted accounting principles in the United States for the periods presentedherein.

 

***Report of Management on Internal Controlover Financial Reporting***

 

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

 

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Weassessed the effectiveness of our internal control over financial reporting asof September 30, 2010, using the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control— Integrated Framework. During the third quarter of 2010, we continue to havecertain control deficiencies that represent material weaknesses identifiedduring the fourth quarter 2009 as a result, primarily, of the conversion fromour internally developed proprietary legacy operating system to a MicrosoftDynamics AX ERP system. The control deficiencies existing at September 30,2010 related to: maintaining an effective control environment overInformation Technology (IT) specifically in user security configurations, andsecurity evaluations for the Microsoft AX ERP system. As a result of theforegoing, management concluded that our internal control over financialreporting as of September 30, 2010 has a material weakness in usersecurity configurations.

 

Toensure that our financial statements were fairly stated in accordance withgenerally accepted accounting principles in the United States, we expandedprocedures to be performed in order to prepare the financial statements as ofSeptember 30, 2010. These procedures included additional analyses andreview of the inventory processes and related balances to fairly stateinventory and the associated cost of goods sold in the three month and ninemonth periods ended September 30, 2010. Additionally, we performedmultiple levels of review within the financial statement close process.

 

***Changes in Internal Control over FinancialReporting***

 

Otherthan as described below, there were no changes in our internal control overfinancial reporting (as defined in Rule 13a-15(f) under theSecurities Exchange Act of 1934) during the three month period ended September 30,2010, that our certifying officers concluded could materially affect ourinternal control over financial reporting.

 

Toaddress the material weaknesses described above, management has implemented aremediation program, which has been approved by our Audit Committee.  We implemented the remediation program in thefourth quarter of 2009 through September 30, 2010, and anticipate that wewill continue implementation of the program in the 4th quarter of 2010.  We completed the following changes ininternal control activities in the three months ended September 30, 2010to remediate previously identified internal control weaknesses:

 

Managementhas developed a risk analysis and assessment to address the lack of aCompany-wide risk assessment program related to the conversion process of ouroperating system to the Microsoft AX ERP system.

 

Managementhas completed remediation of its design and monitoring of change controls overour ERP and accounting systems.

 

Managementhas completed implementation of a timely termination process for user access toMicrosoft AX ERP system for former employees.

 

Managementhas strengthened its control over proper review of new vendor set-up andchanges to existing vendors.

 

**Remediationof existing internal control weaknesses:**

 

Managementis in the process of remediation to ensure that we maintain an effectivecontrol environment over Information Technology (IT) specifically in usersecurity configurations, and security evaluations for the Microsoft AX ERPsystem.  Management is implementing avigorous user access review, including a conflicts remediation process, toaddress user security configurations, security evaluations deficiencies, andmanaging user access security controls for all financial systems, particularlyfocusing on the AX ERP system. Controls are being re-designed to ensure thataccess to certain financial applications are adequately restricted to onlyemployees requiring access to complete their job functions.  Exceptions to these access requirements arein remediation.

 

***Limitations on Controls***

 

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

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

Cases dismissed:

 

InJune 2010, the State Derivative Action of Bahram Akhavan vs Bidz.com, Inc.,et al was dismissed. On February 26, 2010, the Superior Court ofCalifornia granted the Company’s Motion to Dismiss the State Derivative Actionwith leave to amend. In response, on April 9, 2010, Mr. Akhavan, theplaintiff in the State Derivative Action, made a demand to inspect certainbooks and records of the Company, which the Company rejected on the grounds,among other reasons, that the request lacked a proper purpose under Delawarelaw. On May 5, 2010, Mr. Akhavan filed an action in the DelawareCourt of Chancery to compel the Company to permit inspection of the requesteddocuments. In June 2010, after the Company filed a Motion to Dismiss theDelaware action, Mr. Akhavan withdrew both the State Court DerivativeAction, as well as the Delaware action, resulting in the dismissal of bothcases.

 

InApril 2010, the Federal Trade Commission (“FTC”) decided not to recommendenforcement action against us. In May 2009, the Company received a CivilInvestigative Demand for information from the FTC relating to email marketingpractices. We have been cooperating fully with the FTC regarding this matter,and on April 2, 2010, we received notice that the FTC has decided not torecommend enforcement action against us.

 

InFebruary 2010, Marla Tidenberg vs Bidz.com, Inc., et al wasdismissed. On or about September 29, 2008, the Company, David Zinberg andMarina Zinberg were named as defendants in a complaint filed in the UnitedStates District Court for the Central District of California (Marla Tidenbergv. Bidz.com, Inc., et al., cv08 05553 (PSG)).  On March 19, 2009, Tidenberg filed aThird Amended Complaint, which names only the Company as a defendant.  The lawsuit alleges, among other things, thatwe engaged in unfair business practices by misrepresenting the value of ourmerchandise and by “false” bidding. The complaint purports to represent a classof persons who purchased any merchandise from us. On January 7, 2010 theCourt denied Marla Tidenberg’s Motion for Class Certification. OnFebruary 26, 2010, Marla Tidenberg accepted our offer to pay her TwentyThousand Dollars in exchange for a dismissal of her case with prejudice.

 

Casespending Motions to Dismiss:

 

InJuly, 2009, the Company and certain of its officers and its Board of Directorswere named as defendants in a shareholder derivative lawsuit filed in the UnitedStates District Court for the Central District of California (Farris Hassan v.Bidz.com, Inc., et al., cv09-04984 (CBM) (C.D. Cal. (filed July 10,2009) (the “Federal Derivative Action”)). The Federal Derivative Action allegesviolations of law, including breaches of fiduciary duties, waste of corporateassets, unjust enrichment and violations of California Corporations Code. An amendedcomplaint also includes allegations relating to the Company’s co-op marketingcontributions and minimum gross profit guarantees.

 

OnApril 27, 2010, the United States District Court granted the Company’sMotion to Dismiss the Federal Derivative Action with leave to amend. Theplaintiff filed an amended complaint, and the Company filed another Motion toDismiss on July 12, 2010. The Court took the Motion under submission, andwe are awaiting the Court’s decision. We believe that the lawsuit is meritless,and, if our Motion to Dismiss is denied, we intend to defend the casevigorously.

 

InMay and June, 2009, the Company and certain of its officers were named asdefendants in three parallel class action complaints filed in the United StatesDistrict Court for the Central District of California (Ramon Gomez v.Bidz.com, Inc., et al., cv09-3216 (CBM) (C.D. Cal.; filed on May 7,2009); James Mitchell v. Bidz.com, Inc., et al., cv09-03671 (CBM) (C.D.Cal.; filed on May 22, 2009); Mark Walczyk v. Bidz.com, Inc., et al.,cv09-0397 (CBM) (C.D. Cal.; filed on June 3, 2009)). On July 30,2009, the Court consolidated the cases. The consolidated complaint chargesviolations of Section 10(b) and Section 20(a) ofthe Securities Exchange Act of 1934 and alleges that the Company failed todisclose unethical and fraudulent business practices, that it did not havecontrols in place to prevent “shill bidding,” that it uses unreliable or falseappraisal prices on its merchandise, and that it failed to correctly accountfor and disclose in detail its co-op marketing contributions and minimum grossprofit guarantees.

 

OnMay 25, 2010, in a 30-page opinion, the Honorable Consuelo B.Marshall of the United States District Court granted the Company’s Motion toDismiss the securities fraud complaint with leave to amend. On June 22,2010, the plaintiff filed its amended complaint. On July 30, 2010, theCompany filed a Motion to Dismiss the amended complaint and on September 8,2010, the Plaintiff filed another amended complaint. On September 27, 2010the Company filed another Motion to Dismiss the amended complaint, which washeard by the Court on November 1, 2010.  The Court took our Motion under submission,and we are awaiting the Court’s ruling. We believe that the lawsuit ismeritless and, if the Court denies our Motion to Dismiss, we intend to defendthe cases vigorously.

 

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OtherCases and matters pending:

 

Onor about June 25, 2009, the Company was named as a defendant in a patentinfringement lawsuit filed in the United States District Court for the EasternDistrict of Texas, Tyler Division (Soverain Software LLC v. J.C. PenneyCorporation, Inc., Amway Corp., Avon Products, Inc.,Bidz.com, Inc., Etronics, Inc. HSN, Inc., HSN Improvements, LLC,Cornerstone Brands, Inc., Ballard Designs, Inc., GarnetHill, Inc., Smith & Noble, LLC, The Territory Ahead, Inc.,QVC, Inc., Shutterfly, Inc., Victoria’s Secret Stores BrandManagement, Inc., Victoria’s Secret Direct Brand Management, LLC,VistaPrint, Ltd., and VistaPrint USA, Inc. cv6:09-CV-274). TheComplaint alleges that defendants’ ecommerce sites infringe one or more patentsheld by the plaintiff.   The Plaintiffseeks a judgment that its patents are not invalid and enforceable, apreliminary and permanent injunction against infringement of the patents,damages (including treble damages) and attorney fees. We believe that thelawsuit is meritless and intend to defend the case vigorously.

 

OnFebruary 10, 2009, the Securities and Exchange Commission (“SEC”) issued asubpoena to produce documents relating to the Company’s inventory reservepolicies, as well as other matters. We have been cooperating fully with the SECregarding this matter, our management and certain employees have complied withsubpoenas for testimony, and we do not believe that the investigation willadversely affect management, our results of operations, cash flows or ourfinancial position.  On October 27,2009, the SEC issued a subpoena to produce documents relating to the Company’sco-op marketing contributions and minimum gross profit guarantees.

 

Weare, from time to time, a party to disputes arising from normal businessactivities, including various employee-related matters. In the opinion of ourmanagement, resolution of these matters, individually or collectively, will nothave a material adverse effect upon our financial condition or future cashflows and operating results.

 

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**ITEM 1.A. RISK FACTORS**

 

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

 

***Adverse domestic and global economic conditions or the perception ofsaid conditions may have adverse effects on our growth and operating results***

 

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

 

***Our business has been and may continue to be significantly impacted byadverse worldwide economic conditions and the current uncertainty in theoutlook for the global economy makes it more likely that our actual resultswill differ materially from expectations.***

 

Globalfinancial markets have been experiencing extreme disruptions in recent years,including severely diminished liquidity and credit availability, declines in consumerconfidence, declines in economic growth, increases in unemployment rates, anduncertainty about economic stability. There can be no assurance that there willnot be further deterioration in financial markets and confidence in economicconditions.  These economic uncertaintiesaffect businesses such as ours in a number of ways, making it difficult toaccurately forecast and plan our future business activities. The currenttightening of credit in financial markets may lead consumers to postpone spending,which may cause our customers to reduce purchases of jewelry. Demand forjewelry is a function of the health of the economies in the United States andaround the world. Since the US economy and other economies around the worldstill face uncertain growth, the demand for jewelry has been and may continueto be adversely affected and therefore, demand for our jewelry products and ouroperating results have been and may continue to be adversely affected as well.We cannot predict the timing, strength or duration of any economic disruptionor subsequent economic growth, worldwide, in the United States, in ourindustry, or in the jewelry market. These and other economic factors have hadand may continue to have a material adverse effect on demand for our jewelryproducts and on our financial condition and operating results.

 

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

 

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

 

·          our ability to manage oursales and marketing efforts;

·          our ability to structure ourorganization to achieve our operating objectives and to meet the needs of ourcustomers; and

·          our ability to manage ourexpenses and inventories.

 

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

 

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***Growth of our business may depend on ourability to successfully introduce and expand new product offerings, includingModnique.***

 

Ourability to significantly increase our net sales and maintain and increase ourprofitability may depend on our ability to successfully introduce and expandnew product lines beyond our current offerings. In February 2010, welaunched modnique.com, a division that will be focused on online retailing ofdesigner products, entertainment tickets, travel, and other consumer goodsthrough a private sale concept that only sells to invited members. If we offernew product categories in Modnique that are not accepted by consumers, the Bidz.combrand and reputation could be adversely affected, our net sales may fall shortof expectations and we may incur substantial expenses that are not offset byincreased net sales. Introduction and expansion of new product lines may alsostrain our management and operational resources.

 

***Our business may be impacted by our abilityto obtain debt financing for our operations and the unavailability of fundingcould adversely affect our business.***

 

Asa result of current economic uncertainties, including with respect to globalcapital and credit markets and overall economic growth, we may find it moredifficult or expensive to secure additional capital or credit to pursue actionswe would consider beneficial to us or our shareholders. We have terminated, on April 2,2010, a revolving line of credit with Bank of America (formerly LaSalle Bank).If we are unable to obtain alternative financing from another lender or lendersin the future, on terms that are acceptable to us, our business, ability tocontinue operations and financial condition could be adversely impacted.

 

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

 

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

 

·                  actual or anticipated changes in ouroperating results,

 

·                  our stock is subject to short selling and maycause trading in our common stock to be volatile,

 

·                  our stock is subject to margin calls and maycause trading in our common stock to be volatile,

 

·                  changes in research analysts’ recommendationsor estimates of financial performance,

 

·                  changes in market valuation of similarcompanies, economic and general market conditions,

 

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

 

·                  issuance of additional shares of common stockor other securities, and

 

·                  intellectual property or litigationdevelopments.

 

Tradingin our common stock may experience significant price and volume fluctuationsand adversely affect the trading price of our common stock. Following periodsof volatility in the market price of a public company’s securities, securitiesclass action litigation has often been instituted against that company. Suchlitigation could result in substantial cost and a diversion of management’sattention and resources. See Item 1, Legal Proceedings, above.

 

***Repurchases of our common stock may notprove to be the best use of our cash resources.***

 

Wehave and plan to continue to repurchase shares of our common stock. Since theinception of our share repurchase program in June 2007, through September 30,2010, we have repurchased 5.6 million shares for a total of approximately$21.0 million. Our board of directors authorized the repurchase of up to$33.5 million of our common stock and a total of $12.5 million remainsavailable for repurchases. These repurchases and any repurchases we may make inthe future may not prove to be at optimal prices and our use of cash for thestock repurchase program may not prove to be the best use of our cash resourcesand may adversely impact our future liquidity.

 

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***We have been and may continue to become thetarget of securities class action suits and derivative suits which could resultin substantial costs and divert management attention and resources.***

 

Securitiesclass action suits and derivative suits are often brought against companiesfollowing periods of volatility in the market price of their securities, suchas we experienced at the end of 2007. Defending against these suits, even ifmeritless, can result in substantial costs to us and could divert the attentionof our management. See Item 1, Legal Proceedings, above.

 

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

 

As directed bySection 404 of the Sarbanes-Oxley Act of 2002, the Securities and ExchangeCommission adopted rules requiring public companies to include a reportthat contains an assessment by management on the company’s internal controlover financial reporting in their quarterly reports on Form 10-Q. Inaddition, the independent registered public accounting firm auditing thecompany’s financial statements must attest to and report on our assessment ofthe effectiveness of the internal controls over financial reporting. While weare consistently working on improvements and conducting rigorous reviews of ourinternal controls over financial reporting, our independent auditors mayinterpret Section 404 requirements and apply related rules andregulations differently. If our independent auditors are not satisfied with ourinternal control over financial reporting or with the level at which it is documented,operated or reviewed, they may decline to attest to management’s assessment orissue a qualified report. Additionally, if we are not able to meet all therequirements of Section 404 in a timely manner or with adequatecompliance, we might be subject to sanctions or investigation by regulatoryauthorities, such as the Securities and Exchange Commission.

 

In conducting itsassessment, our management concluded that there were material weaknesses, asdefined in the Public Company Accounting Oversight Board’s Auditing StandardNo. 5, in our disclosure controls and internal control over financialreporting as of September 30, 2010. We have implemented certain controls to remediate some of the materialweaknesses, and are in the process of implementing additional controls, toremediate the remaining material weaknesses. Management believes these material weaknesses were not fully remediatedas of September 30, 2010 and through the date of this report. Seediscussion included in Item 4 “Controls and Procedures” above for additionalinformation regarding our disclosure controls and internal control overfinancial reporting.

 

We cannot assure you thatsignificant deficiencies or material weaknesses in our disclosure controls andinternal control over financial reporting will not be identified in the futureor that the identified material weaknesses will be remediated by the end of2010.  Also, future changes in ouraccounting, financial reporting, and regulatory environment may create newareas of risk exposure. Failure to modify our existing control environmentaccordingly may impair our controls over financial reporting and cause ourinvestors to lose confidence in the reliability of our financial reporting,which may adversely affect our stock price.

 

***Internal controls over IT could continue to adversely affect our systemof internal controls***

 

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

 

***Our branded inventory may be vulnerable to complaints or claims ofinfringement on intellectual property rights***

 

Wepurchase branded merchandise from third party vendors and are relying on theirlicensing agreements with the brand owners. In the event that a third partyvendor misrepresents its licensing rights, we are vulnerable to complaints orclaims of infringement on intellectual property rights and could be subject tolegal proceedings and/or barred from selling the affected merchandise. If thethird party vendor does not have the ability to take financial responsibilityover the infringement our results of operations could be adversely affected.

 

***We will devote necessary resources to respond promptly and thoroughlyto the SEC investigation.***

 

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

 

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***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.

 

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

 

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

 

***We may face increasing costs 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 successfullyenter into additional relationships or maintain existing ones. In addition,traffic to our website could decline if our online marketing programs becomeless effective or the traffic decreases to the search engines, Internetportals, and websites with which we advertise. Our business could be materiallyand adversely affected if any substantial number of companies on which weadvertise experience financial or operational difficulties or experience othercorporate developments that adversely affect their performance. A failure tomaintain or expand existing online advertising relationships or to establishadditional online advertising relationships that generate a significant amountof traffic from other websites could result in decreased sales or limit thegrowth of our business.

 

***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 period ended September 30, 2009 and 2010, 37.8% and43.3%, respectively, and in the nine month periods ended September 30,2009 and 2010, 33.8% and 41.1%, respectively, of our net revenue was generatedby shipments to customers outside of the United States. We plan, over time, toexpand our reach into international markets. We do not, however, currently haveany overseas fulfillment, distribution, or server facilities. We cannot becertain that we will be able to expand our global presence. In addition, thereare certain risks associated with doing business on an international basis,including regulatory requirements, legal uncertainty regarding liability,tariffs, and other trade barriers, longer payment cycles, and potentiallyadverse tax consequences, any of which could adversely affect our business.Although our foreign sales historically have been denominated in U.S. 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.

 

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

 

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

 

***Quarterly financial results may not be 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.

 

***We do not have a guaranteed supply of jewelryproducts, and we have a concentration of inventory purchases from our top twosuppliers****.*

 

Thesuccess of our business depends, in part, on our ability to offer our customersa wide variety of jewelry that they can purchase at prices that are substantiallybelow those of traditional jewelry retailers. We do not have any formal orbinding supply agreements with any of our manufacturers, distributors, or othersuppliers for our supply of jewelry products. As a result, we do not have aguaranteed supply of jewelry products at favorable prices. Our inability tomaintain and expand our jewelry supply relationships or the inability of oursuppliers to continue to supply us with jewelry products at favorable priceswould substantially harm our business and results of operations.

 

Inaddition, we have a concentration of inventory purchases from a small number ofsuppliers. Our top vendors based on the amount of purchases vary from quarterto quarter.  The top two suppliersaccounted for approximately 37.1% and 21.3% of our total purchases in the threemonth period ended September 30, 2009 and 2010, respectively and in thenine month period ended September 30, 2009 and 2010, 28.0% and 23.2%,respectively, were purchased from our top two suppliers.

 

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

 

Wemay be at risk of loss for the diamonds, precious and semi-precious gems thatwe have given to our manufacturing vendors to produce into finished jewelry products.If the businesses of the vendors fail, the diamond inventory is lost or stolen,the vendors 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.

 

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

 

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***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.

 

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

 

***Because we carry our jewelry products ininventory, 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 manufactured for us. In addition, it is important that we are able topurchase jewelry that we perceive to be in demand. The demand for specificproducts can change between the time we order items and when we sell them. As aresult, we may be required to take significant inventory markdowns, which couldreduce our gross margin, if we do not accurately predict these trends or if weoverstock unpopular merchandise.

 

***We may be subject to a tax liability 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, New York, Rhode Island and NorthCarolina. However, additional states or foreign countries may seek to imposesales or other tax obligations on us in the future. A successful assertion byone or more states or foreign countries that we should be collecting sales orother taxes on the sale of our products could result in substantial taxliabilities for past and future sales, discourage customers from purchasingproducts from us, decrease our ability to compete with traditional retailers,and otherwise substantially harm our business, financial condition, and resultsof operations.

 

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

 

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

 

***Increases in the cost of 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 of thesematerials or an increase in their prices could reduce the quantity of productswe have available for sale and our ability to sell our products for more thanour cost, causing reduced sales or lower margins compared to our historical andexpected sales and margins.

 

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***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, networkinfrastructure, transaction processing systems, and delivery and shippingfunctions to accommodate any substantial increase in the volume of traffic toand orders from our website. We may not be successful in these efforts, and wemay not be able to project accurately the rate or timing of increases, if any,in the use of or sales from our website, or timely expand or upgrade ourwebsite, infrastructure, or systems to accommodate any such increases. Additionally,we may not be able to remedy any such availability, performance, or reliabilityproblems in a timely manner, or at all, because we depend in part on thirdparties for such availability, performance, and reliability. Our website andback-office servers are located at a third-party co-location facility operatedby Savvis Inc. in El Segundo, CA which is vulnerable to fire, earthquakes, andsimilar events.

 

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

 

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

 

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

 

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

 

***We are vulnerable to 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 effectively prevent others from obtaining improper access toour customer information. In addition, third

 

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partiesmay target our customers directly with fraudulent identity theft schemesdesigned to appear as legitimate e-mails from us. In March 2006, one suchthird party attempted to solicit customer information through a tactic,commonly known as “phishing,” whereby an e-mail purporting to be from ussolicited customer information from recipients of the e-mail. Any such securitybreach or fraud perpetrated on our customers could expose us to increased costsand could harm our business and results of operations.

 

***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.***

 

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

 

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

 

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

 

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

 

***We may default on our obligations, if 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 33.8%, 16.9% and 24.9% of our netrevenue was generated during the fourth quarter of 2007, 2008 and 2009,respectively. The fourth quarter of 2008 and 2009 were exceptions. In thefourth quarter of 2008 we encountered a significant slowdown in sales resultingfrom the 2008 financial and economic crisis. The fourth quarter of 2009 wasfurther affected by the migration of our proprietary enterprise operatingsystem to an ERP system running on a customized Microsoft Dynamics AX asunexpected deficiencies in implementing the new system had a material adverseeffect on our results operations. As we continue to recover and grow, we expectto experience more pronounced seasonal fluctuations in our net revenue andanticipate a disproportionate amount of our revenue will occur in the fourthquarter. In anticipation of any increased sales activity during the fourthquarter, we may incur significant additional expenses, including higher salesand marketing costs and additional staffing in our fulfillment and customersupport operations. If we were to experience lower than expected sales duringany future fourth quarter, it would have a disproportionately large impact onour results of operations for that year. In the future, our seasonal salespatterns may become more pronounced, may strain our personnel and fulfillmentactivities, and may cause a shortfall in sales compared with expenses in agiven period, which would substantially harm our business and results ofoperations.

 

***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 varying advertising andinventory costs. These factors may prevent the meaningful use ofperiod-to-period comparisons of financial results. For these and other reasons,investors should not rely on past sales growth rates as a prediction of ourfuture sales growth.

 

***We had grown quickly, and our business willsuffer if we fail to manage our future growth.***

 

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

 

***Descriptions of our jewelry 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 andother experienced product specialists. Nevertheless, there is a subjectivecomponent involved with respect to assessing the clarity, color, and caratcharacteristics of diamonds and other gemstones. In addition, mistakes oromissions of important information in our descriptions may occur. Even if ourdescriptions are accurate, buying a product online may lead to disappointmentresulting in returned merchandise. For example, a customer may determine that apiece does not have the expected look, feel, and overall appearance of themerchandise that the buyer envisioned from the website photograph.

 

Additionally,in response to customer requests and as a courtesy to resellers, we provide “Compare,”and/or “Retail” prices for jewelry items listed on our website. Compare pricesare not meant to reflect fair market values or manufacturer suggested retailprices, and in fact, may be higher than prices found in local retail stores. Asa consequence, perceived misrepresentations in item descriptions bydisappointed buyers may occur, resulting in negative publicity about anddiminished customer confidence in our website.

 

***We may unknowingly be involved in “conflict” diamond purchases 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 ongoing aggression and terrorist activities throughoutthe world. We make every effort to evaluate our vendor sources to ensure theyare not a dealer in “conflict” diamonds. In addition we have implemented ananti-money laundering program to guard against both illicit purchase and salesactivities. If these risks were to occur, we may face a negative publicreaction to our brand name resulting in loss of sales.

 

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***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 to being accused of intellectual property rightsinfringements than if we had purchased our technology off the shelf. We alsomay be at risk for selling items that infringe on other third party trade dressrights, copyright, or patent rights that may cause the offended party to bringan action against us. In either event of alleged infringement, we would facesubstantial litigation cost to defend ourselves and utilization of ourmanagement and personnel resources.

 

***We may be unable to protect or enforce our 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 ourproprietary information. These contractual arrangements and other steps we havetaken to protect our intellectual property may not prevent misappropriation ofour intellectual property or deter independent development of similarintellectual property by others Effective trademark, copyright, patent, tradedress, trade secret, and domain name protection is very expensive to maintainand may require litigation.

 

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.

 

***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 regulationsrelated to privacy and the collection, dissemination, and security of personalinformation may adversely affect our marketing efforts.***

 

Weare subject to increasing regulation at the federal, state, and internationallevels relating to privacy and the use of personal user information designed toprotect the privacy of personally identifiable information as well as toprotect against its misuse. These laws include the Federal Trade CommissionAct, the CAN-SPAM Act of 2003, the Children’s Online Privacy Protection Act,the Fair Credit Reporting Act, the Homeland Security Act, and relatedregulations. In May 2009, we received a Civil Investigation Demand forInformation from the Federal Trade Commissioner (“FTC”) relating to emailmarketing practices. We have been cooperating fully with the FTC regarding thismatter, and in a notice dated April 2, 2010, FTC has decided not torecommend enforcement action against us. Several states have proposedlegislation that would limit the use of personal information gathered online orrequire online services to establish privacy policies. Moreover, proposedlegislation in the United States and existing laws in foreign countries requirecompanies to establish procedures to notify users of privacy and securitypolicies, obtain consent from users for collection and use of personal information,and/or provide users with the ability to access, correct, and delete personalinformation stored by companies. These regulations and other laws, rules, andregulations enacted in the future may adversely affect our ability to collect,disseminate, or share demographic and personal information about users and ourability to e-mail or telephone users, which could be costly and adverselyaffect our marketing efforts**.**

 

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***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 several states such as California, Minnesota, Utah,and Vermont have recently passed, legislation that would limit the uses ofpersonal user information gathered online or offline. Many states already havesuch laws and continually consider strengthening them, especially againstonline services. However, the Fair Credit Reporting Act, or FCRA, a federalstatute enacted in 1970 to protect consumer privacy, includes a provisionpreempting conflicting state laws on the sharing of information betweencorporate affiliates. The preemptive provisions of FCRA were permanentlyextended in 2002, thereby ensuring that we are not subject to the laws of eachindividual state with respect to matters within the scope of FCRA, but remainsubject to the other provisions of FCRA.

 

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

 

***New and existing regulations 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 website expand,regulatory agencies may claim that we or our users are subject to licensure intheir jurisdiction, either with respect to our business in general, or in orderto 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 Chief Executive Officer.***

 

Ourperformance depends substantially upon David Zinberg, our Chief ExecutiveOfficer, who has extensive experience with the purchase and sale of jewelry. Werely on Mr. Zinberg to make critical operational decisions on a dailybasis, such as product offerings

 

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andpurchases, and to make key strategic plans. We have an employment agreementwith Mr. Zinberg extending through July 2011 and renewable annually.The loss of the services of Mr. Zinberg would adversely affect ourbusiness and operations.

 

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

 

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

 

***We do not intend to pay dividends on 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.***

 

Asof September 30, 2010, our founder, executive officers, and directors togetherowned approximately 40.6% of our common stock, and Marina Zinberg, who is thesister of David Zinberg, our Chairman and Chief Executive Officer, owned anadditional 20.9% of our common stock.  Asa result, these individuals will have significant influence over our managementand affairs and over all matters requiring stockholder approval, including theelection of directors and the approval of significant corporate transactions,such as a merger or a sale of our company or its assets, for the foreseeablefuture. This concentrated control will limit the ability of other stockholdersto influence corporate matters. Because of this, we may take actions that someof our stockholders do not view as beneficial. As a result, the market price ofour common stock could be adversely affected because stockholders may not viewfavorably the concentration 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 certificateof incorporation 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.

 

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

 

Nostock awards or stock options were granted during the three months endedSeptember 30, 2010.

 

**IssuerPurchases of Equity Securities**

 

Thefollowing table contains information about purchases of our common stock duringthe three months ended September 30, 2010:

 
| ** **                                | ** ** | ** **    | ** ** | ** **  | ** ** | **Total Number of** | ** ** | **Maximum**                    | ** ** |
|-------------------------------------------|------------|---------------|------------|-------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | ** **    | ** ** | ** **  | ** ** | **Shares**                    | ** ** | **Dollar Value**          | ** ** |
| ** **                                | ** ** | **Total**     | ** ** | **Average** | ** ** | **Purchased as**         | ** ** | **of Shares that**   | ** ** |
| ** **                                | ** ** | **Number**    | ** ** | **Price**   | ** ** | **Part of a**       | ** ** | **May**                        | ** ** |
| ** **                                | ** ** | **of**        | ** ** | **Paid**    | ** ** | **Publicly**                  | ** ** | **yet be Purchased** | ** ** |
| ** **                                | ** ** | **Shares**    | ** ** | **per**     | ** ** | **Announced**                 | ** ** | **Under the**             | ** ** |
| **2010**                                  | ** ** | **Purchased** | ** ** | **Share**   | ** ** | **Program**                   | ** ** | **Program (1)**           | ** ** |
| July 1 – July 31                |       | 2,180,952     |       | $           | 1.05       |                          | 5,559,930  |                           | $          | 12,670,981 |   |
| August 1 – August 31       |       | 30,163        |       | 1.53        |       | 5,590,093                     |       | $                              | 12,624,735 |   |
| September 1 – September 30 |       | 48,157        |       | $           | 1.61       |                          | 5,638,250  |                           | $          | 12,547,274 |   |
| Total                                     |       | 2,259,272     |       |        |       |                          |       |                           |       |

 

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(1)           InJune 2007, we authorized the stock buyback program for up to $5 million ofour outstanding common stock to be repurchased through the open market atprices deemed appropriate by management. In February 2008, we authorized an increase in the stock buybackprogram to $20 million from $5 million. In February 2009, we authorized anincrease in the stock buyback program to $33.5 million. The stock buyback willbe at prices deemed appropriate by management over a 24 month period.

 

**ITEM 6. EXHIBITS**

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

 

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**SIGNATURES**

 

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

 
|                     |       | BIDZ.COM, INC.              |
|--------------------------|------------|----------------------------------|
|                     |       |                             |
|                     | By:        | /s/ DAVID ZINBERG                |
|                     |       |                             |
| ** **               | ** ** | **David Zinberg**                |
| ** **               | ** ** | **Chief Executive Officer**      |
|                     |       |                             |
|                     | By:        | /s/ LAWRENCE KONG                |
|                     |       |                             |
| ** **               | ** ** | **Lawrence Kong**                |
| ** **               | ** ** | **Principal Accounting Officer** |
|                     |       |                             |
| Dated:  November 8, 2010 |       |                             |

 

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