**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **For the quarterly period ended  June 30, 2005**                                                  |

 
| **o**      | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                                                                                                                               |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                   |
| ** ** | ** ** | **For the transition  period                 to                 ** |

 

**Commission file number 000-51257**

 

**BIDZ.COM,INC.**

(Exact name of Registrant as specified in its charter)

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct).        Yes o   No  ý

 

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

 

Number of shares outstanding of Registrant’s commonstock, no par value, as of August 15, 2005:

 

**23,312,500**

 

 

----

 

**TABLE OF CONTENTS**

 
| PART I. FINANCIAL INFORMATION | 2                                                                                                                        |
|------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
| Item 1.                       | Financial Statements                                                                                                     | 2 |
|                               | Condensed Balance Sheets as of  June 30, 2005 (unaudited) and December 31, 2004                                | 2 |
|                               | Condensed Statements of Operations for  three month and six month periods ended June 30, 2005 and 2004  (unaudited) | 3 |
|                               | Condensed Statements of Cash Flows for six  month periods ended June 30, 2005 and 2004 (unaudited)                  | 4 |
|                               | Notes to Financial Statements (unaudited)                                                                                | 5 |
| Item 2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              | 11 |
| Item 3.                       | Quantitative and Qualitative Disclosures About Market Risk                                                               | 23 |
| Item 4.                            | Controls and Procedures                                                                                                  | 23 |
| PART II. OTHER INFORMATION    | 24                                                                                                                       |
| Item 1.                            | Legal  Proceedings                                                                                                       | 24 |
| Item 6.                            | Exhibits                                                                                                                 | 24 |
| SIGNATURES                         | 25                                                                                                                       |

 

This quarterly report includesforward looking statements. All statements other than statements of historicalfacts contained in this registration statement, including statements regardingour future financial position, business strategy and plans and objectives ofmanagement for future operations, are forward looking statements. The words “believe,”“may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” andsimilar expressions, as they relate to us, are intended to identify forwardlooking statements. We have based these forward-looking statements largely onour current expectations and projections about future events and financialtrends that we believe may affect our financial condition, results ofoperations, business strategy and financial needs. These forward lookingstatements are subject to a number of risks, uncertainties and assumptionsdiscussed throughout this filing.

 

1

----

 

**PART I. FINANCIAL INFORMATION**

**ITEM 1.  FINANCIALSTATEMENTS**

 

**Bidz.com, Inc.**

**Condensed Balance Sheets**

 
| ** **                                                                                                                                                                            | ** ** | **(In Thousands except share numbers)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **June 30,**                       | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                            | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)**                         | ** ** | ** ** | ** ** |
| **Assets**                                                                                                                                                                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| **Current assets:**                                                                                                                                                                   |       |                                    |       |   |   |
| Cash                                                                                                                                                                                  |       | $                                       | 10         |   | $ | 5 |   |
| Accounts receivable, net                                                                                                                                                              |       | 462                                     |       | 561 |   |
| Inventories, net of reserves of $238 and  $309 at June 30, 2005 and December 31, 2004 respectively                                                                          |       | 7,096                                   |       | 10,733 |   |
| Other current assets                                                                                                                                                                  |       | 524                                     |       | 107 |   |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| Total current assets                                                                                                                                                                  |       | 8,092                                   |       | 11,406 |   |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| **Property and equipment, net**                                                                                                                                                       |       | 393                                     |       | 344 |   |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| **Intangible asset**                                                                                                                                                                  |       | 150                                     |       | 150 |   |
| **Deposits**                                                                                                                                                                          |       | 590                                     |       | 590 |   |
|                                                                                                                                                                                  |       |                                    |       |   |   |
|                                                                                                                                                                                  |       | $                                       | 9,225      |   | $ | 12,490 |   |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| **Liabilities and Stockholders’ Deficit**                                                                                                                                        |       |                                    |       |   |   |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| **Current liabilities:**                                                                                                                                                              |       |                                    |       |   |   |
| Bank overdraft                                                                                                                                                                        |       | $                                       | 4,780      |   | $ | 6,503 |   |
| Accounts payable                                                                                                                                                                      |       | 3,263                                   |       | 4,903 |   |
| Accrued expenses                                                                                                                                                                      |       | 837                                     |       | 1,105 |   |
| Deferred revenue                                                                                                                                                                      |       | 712                                     |       | 1,059 |   |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| Total current liabilities                                                                                                                                                             |       | 9,592                                   |       | 13,570 |   |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| **Commitments and contingencies**                                                                                                                                                     |       | —                                  |       | — |   |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| **Stockholders’ deficit:**                                                                                                                                                       |       |                                    |       |   |   |
| Common Stock; no par value; authorized 50,000,000  shares; issued and outstanding 23,312,500 and 11,922,500 shares at  June 30, 2005 and December 31, 2004 respectively     |       | 28,814                                  |       | 28,388 |   |
| Class B Common Stock; no par value;  authorized 25,000,000 shares; issued and outstanding 0 and 15,534,689 shares at  June 30, 2005 and December 31, 2004 respectively |       | —                                  |       | 426 |   |
| Deferred stock-based compensation                                                                                                                                                     |       | (200                                    | )          | (300 | ) |
| Accumulated deficit                                                                                                                                                                   |       | (28,981                                 | )          | (29,594 | ) |
|                                                                                                                                                                                  |       |                                    |       |   |   |
| Total stockholders’ deficit                                                                                                                                                      |       | (367                                    | )          | (1,080 | ) |
|                                                                                                                                                                                  |       |                                    |       |   |   |
|                                                                                                                                                                                  |       | $                                       | 9,225      |   | $ | 12,490 |   |

 

The accompanying notes form an integral part of these condensedfinancial statements.

 

2

----

 

**Bidz.com, Inc.**

**Condensed Statements of Operations (Unaudited)**

 
| ** **                                                       | ** ** | **(In Thousands, except per share numbers)** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                       | ** ** | **Three Months Ended**                       | ** ** | **Six Months Ended** | ** ** |
| ** **                                                       | ** ** | **June 30, 2005**                       | ** ** | **June 30, 2004** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Net revenues:**                                                |       |                                         |       |   |   |   |   |   |   |
| **Merchandise sales and shipping**                               |       | $                                            | 17,997     |   | $ | 15,743 |   | $ | 38,625 |   | $ | 30,460 |   |
| **Commissions**                                                  |       | 55                                           |       | 183 |   | 146 |   | 347 |   |
| **Advertising**                                                  |       | 1                                            |       | 10 |   | 2 |   | 27 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
|                                                             |       | 18,053                                       |       | 15,936 |   | 38,773 |   | 30,834 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Cost of revenues**                                             |       | 14,429                                       |       | 13,222 |   | 31,404 |   | 25,136 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Gross Profit**                                                 |       | 3,624                                        |       | 2,714 |   | 7,369 |   | 5,698 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Operating expenses:**                                          |       |                                         |       |   |   |   |   |   |   |
| General and administrative                                       |       | 2,502                                        |       | 2,050 |   | 5,091 |   | 3,990 |   |
| Sales and marketing                                              |       | 714                                          |       | 605 |   | 1,589 |   | 1,102 |   |
| Depreciation and amortization                                    |       | 38                                           |       | 36 |   | 76 |   | 65 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Total operating expenses**                                     |       | 3,254                                        |       | 2,691 |   | 6,756 |   | 5,157 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Income from operations**                                       |       | 370                                          |       | 23 |   | 613 |   | 541 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Other expense - Interest expense**                             |       | —                                       |       | — |   | — |   | — |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Income before income taxes**                                   |       | 370                                          |       | 23 |   | 613 |   | 541 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Income taxes**                                                 |       | —                                       |       | — |   | — |   | — |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| **Net income**                                                   |       | $                                            | 370        |   | $ | 23 |   | $ | 613 |   | $ | 541 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| Net income per share available to common  shareholders - basic   |       | $                                            | 0.02       |   | $ | — |   | $ | 0.02 |   | $ | 0.02 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| Net income per share available to common  shareholders - diluted |       | $                                            | 0.02       |   | $ | — |   | $ | 0.02 |   | $ | 0.02 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| Weighted average number of shares outstanding  - basic           |       | 23,312,500                                   |       | 27,472,290 |   | 25,361,819 |   | 27,475,853 |   |
|                                                             |       |                                         |       |   |   |   |   |   |   |
| Weighted average number of shares outstanding  - diluted         |       | 23,834,780                                   |       | 28,022,737 |   | 25,887,719 |   | 28,031,643 |   |

 

The accompanying notes form an integral part of these condensedfinancial statements.

 

3

----

 

**Bidz.com, Inc.**

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

 
| ** **                                                                                        | ** ** | **(In Thousands)**   | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                        | ** ** | **Six Months Ended** | ** ** |
| ** **                                                                                        | ** ** | **June 30,**    | ** ** | **June 30,** | ** ** |
| ** **                                                                                        | ** ** | **2005**             | ** ** | **2004** | ** ** |
|                                                                                              |       |                 |       |   |   |
| **Cash flows provided by (used for) operating  activities:**                                      |       |                 |       |   |   |
| Net income                                                                                        |       | $                    | 613        |   | $ | 541 |   |
| **Adjustments to reconcile net income to net  cash provided by (used for) operating activities:** |       |                 |       |   |   |
| Depreciation and amortization                                                                     |       | 76                   |       | 65 |   |
| Change in inventory reserve                                                                       |       | (71                  | )          | 62 |   |
| Amortization of deferred stock-based  compensation                                                |       | 100                  |       | 100 |   |
|                                                                                              |       |                 |       |   |   |
| **Changes in assets and liabilities:**                                                            |       |                 |       |   |   |
| **(Increase) decrease in assets:**                                                                |       |                 |       |   |   |
| Accounts receivable                                                                               |       | 99                   |       | 16 |   |
| Inventories                                                                                       |       | 3,708                |       | (1,717 | ) |
| Other current assets                                                                              |       | (417                 | )          | (87 | ) |
|                                                                                              |       |                 |       |   |   |
| **Increase (decrease) in liabilities:**                                                           |       |                 |       |   |   |
| Accounts payable                                                                                  |       | (1,640               | )          | 959 |   |
| Accrued expenses                                                                                  |       | (268                 | )          | (641 | ) |
| Deferred revenue                                                                                  |       | (347                 | )          | (103 | ) |
| Net cash provided by (used for) operating  activities                                             |       | 1,853                |       | (805 | ) |
| **Cash flows (used for) investing activities:**                                                   |       |                 |       |   |   |
| Capital expenditures                                                                              |       | (125                 | )          | — |   |
| **Cash flows provided by (used for) financing  activities:**                                      |       |                 |       |   |   |
| Increase (decrease) in bank overdraft                                                             |       | (1,723               | )          | 901 |   |
| Payments for retirement of common stock                                                           |       | —               |       | (102 | ) |
| Net cash provided by (used for) financing  activities                                             |       | (1,723               | )          | 799 |   |
| **Net increase (decrease) in cash**                                                               |       | 5                    |       | (6 | ) |
| **Cash, beginning of period**                                                                     |       | $                    | 5          |   | 10 |   |
| **Cash, end of period**                                                                           |       | $                    | 10         |   | $ | 4 |   |
| **Supplemental disclosure of cash flow  information:**                                            |       |                 |       |   |   |
| Interest paid                                                                                     |       | $                    | —     |   | $ | — |   |
| Income taxes paid                                                                                 |       | $                    | —     |   | $ | — |   |

 

The accompanying notes form anintegral part of these condensed financial statements.

 

4

----

 

**BIDZ.COM,INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(NUMBERSIN THOUSANDS, EXCEPT FOR PER SHARE NUMBERS)**

**(UNAUDITED)**

 

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

 

**Basis of Presentation**

 

The accompanying unaudited financial statements have been prepared inaccordance with the instructions to Form 10-Q and do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financialstatements.  These financial statementsand related notes should be read in conjunction with the Company’s auditedfinancial statements for the fiscal years ended December 31, 2004, 2003and 2002 filed in Amendmend No. 1 to the Form 10 by the Company on June 30,2005.  In the opinion of management,these financial statements reflect all adjustments which are of a normalrecurring nature and which are necessary to present fairly the financialposition of Bidz.com, Inc. as of June 30, 2005 and the results ofoperations for the three month and six month periods ended June 30, 2005and 2004 and the cash flows for the six month periods ended June 30, 2005and 2004.  The results of operations forthe three months and six months ended June 30, 2005 are not necessarilyindicative of the results which may be expected for the entire fiscal year.

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from those estimates.

 

The accompanying financial statements have been prepared in conformitywith accounting principles generally accepted in the United States of America,which contemplate continuation of the Company as a going concern.  Although the Company has reported net incomeof $771 for the year ended December 31, 2004 and $613 for the year to dateended June 30, 2005, the Company has reported a working capital deficit of$1,500 and accumulated deficit of $28,981 as of June 30, 2005.

 

Management has raised funds through the sale of its stock in privateplacements taking place from inception through the year 2003 that it believeswill be sufficient to provide the Company with the ability to continue inexistence.  The accompanying financialstatements do not include any adjustments relative to the recoverability andclassification of assets carrying amounts or the amount and classification ofliabilities that might result from the outcome of this uncertainty.  Through June 30, 2005, the Company hasnot been able to generate sufficient sales from its operations to cover itscosts and operating expenses. Although the Company has been able to issue itscommon stock through private placements to raise capital in order to fund itsoperations, it is not known whether the Company will be able to continue thispractice, or be able to obtain other types of financing or if its sales willincrease significantly to be able to meet its cash operating expenses. This, inturn, raises substantial doubt about the Company’s ability to continue as agoing concern.  Management anticipatessales to grow as a result of additional products offered to its customers andincrease of its customer base. Management believes that new product offerings and continuing increaseof customers will enable the Company to generate positive operating cash flowsand continue its operations.  However, noassurances can be given as to the success of these plans.  The financial statements do not include anyadjustments that might result from the outcome of these uncertainties.

 

**Nature ofBusiness Operations**

 

Bidz.com, Inc. wasfounded in November of 1998 as a California corporation with its principallocation of business in Los Angeles, California.  Bidz operates and markets an internationalbusiness-to-business (B2B) and business-to-consumer (B2C) website located athttp://www.bidz.com for the express purpose of selling merchandise utilizingits unique and proprietary online sales auction platform.

 

5

----

 

The Company is subjectto risks common to rapidly growing Internet-based companies, including rapidtechnological change, consumer acceptance of the Internet, dependence onprincipal products, new product introductions and other activities ofcompetitors, and a limited operating history in Internet related e-commerceactivities.

 

***Recent Accounting Pronouncements***

 

In December 2004, the FASB issued SFAS No. 123R(Revised 2004), “Share-Based Payment” (“SFAS 123R”). This statement addressesthe accounting for share-based payment transactions in which a company receivesemployee services in exchange for the company’s equity instruments orliabilities that are based on the fair value of the company’s equity securitiesor may be settled by the issuance of these securities. SFAS 123R eliminates theability to account for share-based compensation using APB 25 and generallyrequires that such transactions be accounted for using a fair value method. Theprovisions of this statement are effective for financial statements issued inthe first annual reporting period commencing after June 15, 2005. Therefore,the Company will adopt the provisions of SFAS 123R in its first quarter of2006. The stock-based compensation the Company will recognize after theadoption of SFAS 123R will be affected by the number and type of stock-basedawards granted in the future and the pricing model and related assumptions theCompany decides to use to estimate the fair values of options.

 

The Company is currently evaluating whichpricing model it will use to estimate the value of its options and whichtransition method it will use to implement SFAS 123R. Management has not yetdetermined the impact that the adoption of SFAS No. 123R will have on theCompany’s results of operations.

 

In March 2005, the SEC issued StaffAccounting Bulletin No. 107 (“SAB 107”), “Share Based Payment,” whichexpresses the SEC’s views on the interaction between SFAS No. 123R andcertain SEC rules and regulations. The Company is currently assessing theguidance in SAB 107 as part of its evaluation of the adoption of SFAS No. 123R.

 

In June 2005, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 154,“Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20and FASB Statement No. 3” (SFAS 154). This Statement replaces APB Opinion No. 20,“Accounting Changes,” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements,” and changes the requirements for theaccounting for and reporting of a change in accounting principle. ThisStatement requires retrospective application to financial statements of priorperiods for changes in accounting principles. This Statement is effective January 1,2006. This standard has no impact in the Company’s financial statements.

 

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

 

In accordance with SFAS No. 128, “EarningsPer Share,” the basic earnings per common share is calculated by dividing netincome available to common stockholders less preferred dividends by theweighted average number of common shares outstanding. Diluted earnings percommon share is computed similarly to basic earnings per common share, exceptthat the denominator is increased to include the number of additional commonshares that would have been outstanding if the potential common shares had beenissued and if the additional common shares were not anti-dilutive.   As of June 30, 2005 and 2004, theCompany has approximately 522 and 550 respectively of common stock equivalentsfrom stock options, which was included in the calculation of diluted earningsper share.

 

The dilutive effect of outstanding stockoptions and warrants is reflected in diluted earnings per share by applicationof the treasury stock method for the three-month periods ended June 30,2005 and 2004.  The following table setsforth the computation of basic and diluted net income per share (in thousands,except per share amounts):

 

6

----

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                              | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                              | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                    |       |                   |       |                 |       |   |   |   |   |
| Basic and diluted net income per share: |       |                   |       |                 |       |   |   |   |   |
|                                    |       |                   |       |                 |       |   |   |   |   |
| Numerator:                              |       |                   |       |                 |       |   |   |   |   |
| Net income                              |       | $                      | 370        |                 | $          | 23 |   | $ | 613 |   | $ | 541 |   |
|                                    |       |                   |       |                 |       |   |   |   |   |
| Denominator:                            |       |                   |       |                 |       |   |   |   |   |
|                                    |       |                   |       |                 |       |   |   |   |   |
| Weighted common shares outstanding      |       | 23,312                 |       | 27,472               |       | 25,362 |   | 27,476 |   |
|                                    |       |                   |       |                 |       |   |   |   |   |
| Effect of dilutive securities           |       | 522                    |       | 550                  |       | 526 |   | 556 |   |
|                                    |       |                   |       |                 |       |   |   |   |   |
| Denominator for diluted calculation     |       | 23,834                 |       | 28,022               |       | 25,888 |   | 28,032 |   |
|                                    |       |                   |       |                 |       |   |   |   |   |
| Net income per share, basic             |       | $                      | 0.02       |                 | —     |   | $ | 0.02 |   | $ | 0.02 |   |
|                                    |       |                   |       |                 |       |   |   |   |   |
| Net income per share, diluted           |       | $                      | 0.02       |                 | —     |   | $ | 0.02 |   | $ | 0.02 |   |
|                                         |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

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

 

At June 30, 2005, the Company has two stock-based employee compensation plans (the 2002 Stock Option Plan and the 2001 Stock Option Plan).  The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, except when options granted under those plans had an exercise price less than the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and income per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands, except per share amounts):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                             | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income, as reported                |       | $                      | 370        |                 | $          | 23 |   | $ | 613 |   | $ | 541 |   |
| Compensation recognized under APB 25   |       | —                 |       | —               |       | — |   | — |   |
| Compensation recognized under SFAS 123 |       | 178                    |       | 8,643                |       | 178 |   | 8,643 |   |
| Pro-forma net income (loss)            |       | $                      | 192        |                 | $          | (8,620 | ) | $ | 435 |   | $ | (8,102 | ) |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Net Income (loss) per share:           |       |                   |       |                 |       |   |   |   |   |
| Basic - as reported                    |       | $                      | 0.02       |                 | —     |   | $ | 0.02 |   | $ | 0.02 |   |
| Basic - pro-forma                      |       | $                      | 0.01       |                 | $          | (0.31 | ) | $ | 0.02 |   | $ | (0.29 | ) |
| Diluted - as reported                  |       | $                      | 0.02       |                 | —     |   | $ | 0.02 |   | $ | 0.02 |   |
| Diluted - pro-forma                    |       | $                      | 0.01       |                 | $          | (0.31 | ) | $ | 0.02 |   | $ | (0.29 | ) |

 

7

----

 

The Black-Scholes option pricing formula was used to estimate the fair value of the stock based compensation under SFAS 123. For all the three month and six month periods ended June 30, 2004 and 2005, 4% risk free interest rate, 0% dividend rate, 0% volatility and $6.00 market value per share were assumed.

 

**4.****                                     ****Concentrations**

 

**Purchasesfrom two vendors amounted to $2,682, and $4,095 representing 26% and 49% of thetotal purchases during the three months ended June 30, 2005 and 2004respectively. Purchases from two vendors amounted to $9,597, and $10,229representing 40% and 46% of the total purchases during the six months ended June 30,2005 and 2004 respectively. Outstanding accounts payable to the two majorvendors (net of amounts of post dated checks) totaled $1,050 and $1,822 as of June 30,2005 and December 31, 2004, respectively. Loss of any of these vendors may have a negative impact on theoperations of the Company.**

** **

**TheCompany sold jewelry products of approximately $17,453, and $14,797, whichaccounted for approximately 97%, and 93% of the total revenue, during the threemonths ended June 30, 2005 and 2004, respectively. During the six monthsended June 30, 2005 and 2004, the Company sold jewelry products of approximately$37,628, and $28,568, which accounted for approximately 97%, and 93% of thetotal revenue, respectively. The Company’s ability to continue its operationsis highly depending on the (i) availability of sufficient volume ofjewelry supply; (ii) stable inventory cost, and (iii) continuingconsumer demand of its products.  TheCompany’s failure to anticipate and react to changes of these factors couldadversely affect its results of operations.**

** **

**5.**                                      Segmentand Geographic Information:

** **

Net revenue by geographic area are presented based upon the country ofdestination. No other foreign country represented 10% or more of net revenuefor three-month and six-month periods ended June 30, 2005 and 2004 . Netrevenue by geographic area were as follows (in thousands):

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|------------------------|------------|----------------------|------------|
| ** **    | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **    | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|          |       |                   |       |                 |       |   |   |   |   |
| United States |       | $                      | 14,309     |                 | $          | 13,254 |   | $ | 31,171 |   | $ | 25,645 |   |
| International |       | 3,744                  |       | 2,682                |       | 7,602 |   | 5,189 |   |
|          |       |                   |       |                 |       |   |   |   |   |
| Total         |       | $                      | 18,053     |                 | $          | 15,936 |   | $ | 38,773 |   | $ | 30,834 |   |

** **

**6.****                                     ****Related Party Transactions**

 

Los Angeles Jewelers, Inc.(“LAJewelers”) was one of the first suppliers to extend the Company with a line ofcredit to purchase its inventory in 2001. LA Jewelers has increased its creditextended to the Company from about $500 in 2001 to about $5,000 in 2004.  During the three months ended June 30,2005 and 2004, the Company purchased approximately 19% and 34%, respectively,of the merchandise from this vendor. During the six months

 

8

----

 

endedJune 30, 2005 and 2004, the Company purchased approximately 34% and 29%,respectively. One of the owners of Los Angeles Jewelers owns 1,200,000 sharesof the Company’s common stock as of June 30, 2005.

 

**7.****                                     ****Contingencies**

 

The Company is subjectto various legal proceedings and claims that arise in the ordinary course ofbusiness.  Although the Company believesit has defenses to the allegations and intends to pursue them vigorously, currently,management does not have sufficient information to assess the validity of theclaims or the amount of potential damages. Company management currently believes, however, that resolution of suchlegal matters will not have a material adverse impact on the Company’s financialposition, results of operations or cash flows.

 

Prior Sales of Securities

 

From inception in 1999, and in 2000, 2001, 2002 andmid-2003, the Company raised over $20.5 million in gross equity capitaloffering and selling its Common Stock in the following approximate amounts foreach year: in 1999, 978,070 shares at $4 per share; in 2000, 1,198,191 sharesat $4  per share; in 2001, 580,621 sharesat $4 and $5 per share (or a weighted average price of $4.47 per share); in2002 1,051,924 shares at $5 per share; and in 2003, 753,262 shares at $5 and $6per share (or a weighted average price of $5.26 per share).  The Company sold these shares to about 830investors.  The persons associated withthe Company who solicited these investors were not licensed as broker-dealersin any state or with the U.S. Securities and Exchange Commission (“SEC”).  The Company also issued shares of CommonStock in exchange for services and other non-cash consideration valued inexcess of $5.5 million in the following approximate amounts for each year:  in 1999, 57,500 shares at $4 per share; in2000, 100,000 shares at $4 per share; in 2001, 585,700 shares at $4.09 pershare; in 2002 445,774 shares at $5 per share; in 2003, 18,673 shares at $5.60per share; and in 2004, 28,544 shares at $5 per share.  The Company issued these shares to about 25persons or entities.  The Company alsoissued the options to purchase Common Stock in the following amounts: no optionswere issued from 1999 through 2001; in 2002, options to purchase 1,332,000shares at $3.75 per share; in 2003, options to purchase 485,500 shares at $4.50per share; and in 2004, options to purchase 6,162,000 shares at $6 per share.

 

These offers and sales of Common Stock and options topurchase Common Stock were not registered under the federal and statesecurities laws, but were issued in reliance upon exemptions from suchregistration under Section 4(2) of the Securities Act of 1933, asamended (the “1933 Act”), and Rule 506 of Regulation D promulgatedthereunder.  Similarly, in employingpersons who were not licensed as broker-dealers, the Company relied on certainexemptions from the broker-dealer licensing requirements of the SecuritiesExchange Act of 1934 Act, as amended (the “1934 Act”) and of state securitieslaws. Since conducting these offers and sales of Common Stock and options topurchase Common Stock, the Company determined that it did not comply with theexemptions from registration under the 1933 Act and similar provisions of lawsin each state in which the Company’s investors reside, because certain of theCompany’s employees who solicited investors engaged in a “general solicitation”of securities.  In addition, theseemployees were required to be licensed as broker-dealers with the SEC andvarious states, but they were not so licensed. The Company also determined that because investors did not receiveinformation regarding the Company’s potential liability for these violations offederal and state securities laws, the Common Stock was issued to persons whofailed to receive adequate information under federal and state securitieslaws.  In such situations a number ofremedies may be available to regulatory authorities and the investors whopurchased Common Stock in those offerings, including, without limitation, aright of rescission, civil penalties, seizure of the Company’s assets, arestraining order or injunction, and a court order to pay restitution andcosts.  In the event that rescission byall of the Company’s shareholders were to occur, the Company would be liablefor the $20.5 million it received in exchange for its common stock, in additionto interest of approximately $8.3 million through June 30, 2005.  The Company may also be liable for the $5.5million of services rendered and property exchanged in consideration for theissuance of common stock, in addition to interest on this amount ofapproximately $2.1 million through June 30, 2005.

 

Accordingly, the Company is subject topotential liabilities, including penalties and fines, under the 1933 Act, the1934 Act, the regulations thereunder and applicable state securities laws. Bothfederal and state securities laws also provide remedies to investors for suchviolations, which remedies include rescission, or a right to recover theinvestment plus interest from the date of issuance of the security, and, if theinvestor no longer owns the security, damages equal to the difference betweenthe investment amount plus

 

9

----

 

interest from the date ofissuance and the value or price of the security at the time of its sale.

 

After voluntary reporting these violations to the SEC,the SEC staff advised the Company that it would not undertake an investigationin the matter.  The Company intends toseek financing in order to offer rescission to all of its investors.  However, the Company has not approached statesecurities commissioners in the states in which our investors reside.  Consequently, there is substantialuncertainty concerning what action state regulators may take against theCompany and what effect any such action will have on the Company’s business andits ability to obtain financing.  If theCompany is unable to secure the financing required for a rescission offer, anyassertion by the Company’s shareholders of their legal claims against theCompany will have a material adverse effect on the Company’s liquidity, itsfinancial position, results of operation and cash flows.  Even if financing sources available to uswere willing to accept these risks and willing to finance a rescission offer,there is no assurance that the terms of any such financing would be acceptableto us.  Moreover, even if the Company issuccessful in offering rescission to its shareholders, if, prior to therescission offer, any shareholders who acquired their common stock in theCompany’s offerings sells their common stock for less than the price at whichthey purchased their shares, they will be entitled to recover from the Companydamages equal to the difference between their investment amount plus interestfrom the date of issuance and the value or price of the security at the time ofits sale.  Because these shareholderswill no longer own our common stock, the Company will not be able to extinguishthese damage claims by offering to rescind the shareholder’s purchase of ourCommon Stock.

 

The probability that shareholders wouldassert a claim against the Company and the extent of the Company’s liability,if any, are contingent on a number of factors, including a shareholder’s desireto rescind his or her purchase, applicable legal precedent and statutes oflimitation.  There are presently noclaims by shareholders against the Company in a material amount. Based oninformation presently known to management, management does not believe thatassertion of such claims in any material amount by the Company’s shareholdersis probable. Accordingly, no accruals for either potential amounts payable orreserves have been made at this time. However, there can be no assurance that the Company will be successfulin securing the financing necessary for it to conduct a rescission offer.  An unfavorable outcome in any of thesecontingencies could have a material adverse impact on the Company’s financialposition, results of operations and cash flows.

 

The accompanying financial statements do notinclude any adjustments that might result from the outcome for thisuncertainty.

 

**EndaiWorldwide v. Bidz.com**

** **

The Company is a defendant in a lawsuit brought byEndai Worldwide (“Endai” or “plaintiff”)for past services in the amount of$78.  The plaintiff alleges that theCompany owes approximately $78 unpaid internet advertising fees. The Companyclaims that plaintiff has not performed the services related to such chargesand has counterclaimed for $1,000 in damages for inappropriate use of theCompany’s user base. The litigation has been settled, although documents remainto be finalized. By the terms of the settlement, neither party is to pay anymoney to the other. Accordingly, the Company has not recorded any liability forthis claim in the accompanying financial statements.

 

10

----

 

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

 

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

 

**Comparison of Three Months Ended June 30,2005 to Three Months Ended June 30, 2004**

 

Net income in the threemonths ended June 30, 2005 was $0.370 million, or $0.02 per basic anddiluted share.  In the three months endedJune 30, 2004, net income was $0.023 million and net income per basic anddiluted share was $0.00.  Although netsales revenue increased by 13% in the three months ended June 30, 2005compared to the three months ended June 30, 2004, the net income increasedby 1509% over the same period. The increase in net income was primarily due toincreased sales of higher margin products. Gross profit margin in the second quarter of 2005 was 20% compared to17% in the second quarter of 2004.

 

The following table presentsour historical operating results for the periods indicated as a percentage ofnet revenue:

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                 |       |                                 |       |   |   |
| Net revenue                          |       | 100                                  | %          | 100 | % |
| Gross profit                         |       | 20                                   |       | 17 |   |
| Operating expenses:                  |       |                                 |       |   |   |
| General and administrative           |       | 14                                   |       | 13 |   |
| Sales and marketing                  |       | 4                                    |       | 4 |   |
| Depreciation & Amortization |       | 0                                    |       | 0 |   |
| Total operating expenses             |       | 18                                   |       | 17 |   |
| Income from Operations               |       | 2                                    |       | 0 |   |
| Interest income (expense), net       |       | —                               |       | — |   |
| Net income                           |       | 2                                    | %          | 0 | % |

 

The following describes certain line items set forthin our condensed statements of operations:

 

*Net Revenue.*Substantiallyall of our net revenue consist of jewelry sold via the Internet, net ofallowance, discounts and returns. We also generate net revenue from Shippingand Handling, Commissions from Certified Merchants and Advertising Revenue.

 

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

 
| ** **                   | ** ** | **Quarter Ended June 30,** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| * *                     | * *   | * *                        | * *   | * * | * * |
| Net Sales                    |       |                            |       |   |   |
| Merchandise sales            |       | 91                              | %          | 91 | % |
| Shipping & Handling |       | 9                               |       | 8 |   |
| Commissions                  |       | 0                               |       | 1 |   |
| Advertising                  |       | 0                               |       | 0 |   |
| Total Net Sales              |       | 100                             | %          | 100 | % |

 

11

----

 

Net revenue increased 13% to $18.0 million in thethree months ended June 30, 2005 from $15.9 million in the threemonths ended June 30, 2004.  Thisincrease in net revenue was due primarily to the increase in registered buyersat our website and growth in demand for our jewelry products.  The Company also focused on maintaining agross profit of 20% by offering higher margin products rather than only growingrevenue.

 

The Company expects net revenue to grow by at least20% over the next 12 months based on current sales trend and increased customerdemand for its products. This compares to growth of 37% in net revenue for boththe 2004 and 2003 fiscal years.

 

*Cost ofRevenues***: **Cost of revenues includes product costs,inbound and outbound shipping charges, packaging supplies, product repaircosts, credit card fees and certificate discounts and is recorded in the sameperiod in which related revenues have been recorded.

 

Cost of revenues increased 9% to $14.4 million inthe three months ended June 30, 2005 from $13.2 million in the threemonths ended June 30, 2004.  Cost ofrevenues increased at a slower rate than net revenues due to the improvement ingross profit margins to 20% in the three months ended June 30, 2005compared to 17% in the three months ended June 30, 2004. Cost ofcertificate discounts given to customers were recorded in the three monthsended June 30, 2005 while none were recorded in the three months ended June 30,2004.

 

*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, inbound andoutbound shipping costs, insurance on shipments and transaction fees associatedwith credit card and paypal payments. Our gross profit has fluctuated historically based primarily on ourproduct acquisition costs, product mix and pricing decisions.

 

Gross profit increased 33%to $3.6 million in the three months ended June 30, 2005 from$2.7 million in the three months ended June 30, 2004.  The increase in gross profit in second quarter2005 resulted from the increase in gross profit as a percentage of net salesfrom 17% for the three months ended June 30, 2004 compared to 20% for thethree months ended June 30, 2005 and from the increase in sales revenuewhich rose by 13% from the three months ended June 30, 2004 to the threemonths ended June 30, 2005. The increase in gross profit margin isa result of managing sales volume against demand from buyers to achieve ahigher gross profit margin.

 

The Companyexpects gross profit margins to be in the 20% range over the next 12 months asit continues to actively target its profit margins at 20% through its productselection.

 

*General and Administrative Expenses.*Our general and administrative expenses consist primarily ofpayroll and related benefit costs for our employees. These expenses alsoinclude fulfillment, customer service and technology, as well as professionalfees and other general corporate expenses.

 

General and administrative expenses increased 22% to$2.5 million in the three months ended June 30, 2005 from$2.1 million in three months ended June 30, 2004. The increase ingeneral and administrative expenses was due primarily to a $0.4 millionincrease in payroll and payroll related expenses mainly from the expansion ofstaffing in technology and development.

 

12

----

 

The Companyexpects general and administrative expenses to grow by less than 20% over thenext 12 months as they are expected to grow at a slower rate than net revenue.

 

*Sales & Marketing Expenses.*Our marketing expenses consist primarily of costs associatedwith paid search engines, email campaigns and contextual marketing.

 

Sales and marketing expenses increased 18% to$0.7 million in the three months ended June 30, 2005 from$0.6 million in the three months ended June 30, 2004. Management haskept the expense in line with the 13% growth in net revenue. The expensesconsist primarily of paid website searches, contextual marketing, emailmarketing and affiliate programs.

 

The Companyexpects sales and marketing expenses to grow by about 20% over the next 12months as net revenue is expected to grow by over 20%.

 

**Comparison of Six Months Ended June 30,2005 to Six Months Ended June 30, 2004**

 

Net income in the six monthsended June 30, 2005 was $0.613 million, or $0.02 per basic and dilutedshare.  In the six months ended June 30,2004, net income was $0.541 million and net income per basic and diluted sharewas $0.02.  Net sales increased by 26% inthe six months ended June 30, 2005 compared to the six months ended June 30,2004, and net income increased by 13% over the same period. The increase in netincome resulted primarily from the increase in net revenue of 26% but waspartially offset by the increasing cost of online marketing.

 

The following table presentsour historical operating results for the periods indicated as a percentage ofnet revenue: 

 
| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                 |       |                               |       |   |   |
| Net Sales                            |       | 100                                | %          | 100 | % |
| Gross Profit                         |       | 19                                 |       | 19 |   |
| Operating Expenses:                  |       |                               |       |   |   |
| General & Administrative    |       | 13                                 |       | 13 |   |
| Sales & Marketing           |       | 4                                  |       | 4 |   |
| Depreciation & Amortization |       | 0                                  |       | 0 |   |
| Total Operating Expenses             |       | 17                                 |       | 17 |   |
| Income from Operations               |       | 2                                  |       | 2 |   |
| Interest income (expense), net       |       | —                             |       | — |   |
| Net Income                           |       | 2                                  | %          | 2 | % |

 

*Net Revenue*

 

Net revenue increased 26% to $38.7 million in thesix months ended June 30, 2005 from $30.8 million in the six monthsended June 30, 2004.  This increasein net revenue was due primarily to the increase in registered buyers at ourwebsite and growth in demand for our jewelry products.

 

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

 

13

----

 
| ** **                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| * *                     | * *   | * *                           | * *   | * * | * * |
| Net Sales                    |       |                               |       |   |   |
| Merchandise sales            |       | 91                                 | %          | 90 | % |
| Shipping & Handling |       | 9                                  |       | 9 |   |
| Commissions                  |       | 0                                  |       | 1 |   |
| Advertising                  |       | 0                                  |       | 0 |   |
| Total Net Sales              |       | 100                                | %          | 100 | % |

 

*Cost ofRevenues*

 

Cost of revenues increased 25% to $31.4 millionin the six months ended June 30, 2005 from $25.1 million in the sixmonths ended June 30, 2004.  Cost ofrevenues increased at a rate comparable to the 26% increase in net revenues forthe same period.

 

*Gross Profit*

 

Gross profit increased 29%to $7.4 million in the six months ended June 30, 2005 from $5.7 millionin the six months ended June 30, 2004. The increase in gross profit in the first half of 2005 resulted from theincrease in net revenue of 26% over the corresponding period.

 

*General and Administrative Expenses*

 

General andadministrative expenses increased 28% to $5.1 million in the six monthsended June 30, 2005 from $4.0 million in six months ended June 30,2004. The increase in general and administrative expenses was in line with theincrease in net revenue of 26% over the corresponding period. Payroll andpayroll related expenses increased by $0.8 million and professional feesincreased by $0.1 million.

 

*Sales & Marketing Expenses*

 

Sales and marketing expenses increased 44% to$1.6 million in the six months ended June 30, 2005 from$1.1 million in the six months ended June 30, 2004.  The increase in sales and marketing expenseswas attributable to the higher spending on search engines, email campaigns andcontextual marketing and to the increased cost of such online marketing thisperiod over the corresponding period last year.

 

**Liquidity and Capital Resources**

 

Since inception, we have funded our operations throughthe sale of equity securities and cash generated from operations. Thesignificant components of our working capital are inventory and liquid assetssuch as cash and accounts receivable, reduced by accounts payable and accruedexpenses. Our business model contains beneficial working capitalcharacteristics. While we collect cash from sales to customers within severalbusiness days of the related sale, we typically have extended payment termswith our suppliers.

 

As of June 30, 2005, we had a working capitaldeficit of $1.5 million and have no short or long-term debt obligations.The working capital characteristics of our business model has allowed theCompany to grow rapidly even with a working capital deficit since 2001.

 

Net cash provided by operating activities was$1.9 million in the six months ended June 30, 2005 compared to netcash used of ($0.8) million in the six months ended June 30, 2004.The net cash was affected mainly by changes in net income, inventories and

 

14

----

 

accounts payable .The Company recorded a net income of $0.6 million in the six months ended June 30,2005 compared to $0.5 million in the six months ended June 30, 2004.

 

The increase in cash provided from operatingactivities in the six months ended June 30, 2005 as compared to the sixmonths ended June 30, 2004 was $2.7 million. For the six-month period,cash provided by net income was $0.6 million in 2005 compared to $0.5 millionin 2004 while cash provided by inventories was $3.7 million in 2005 compared tocash used of ($1.7) million in 2004. Cash used in accounts payable was $(1.6)in the six months ended June 30, 2005 compared to cash provided of $1.0million in the six months ended June 30, 2004.

 

The bank overdraft reflected in the Balance Sheets isa result of cash less post dated checks outstanding. It is customary for theCompany’s vendors to accept post dated checks as extended payment for purchasesof merchandise. This has worked well for the Company and no problems have beenencountered by the Company by issuing post dated checks.

 

Net cash used in investing activities was $(0.1)million in the six months ended June 30, 2005 compared to $0 in the threemonths ended June 30, 2004, and such additions were primarily related tocapital expenditures for office equipment, technology system infrastructure andautomobile.

 

Net cash used for financing activities was $(1.7) millionin the six months ended June 30, 2005 compared to net cash provided of$0.8 million in the six months ended June 30, 2004.  This is primarily related to changes in bankoverdraft.  Net cash used to reduce bankoverdraft was $(1.7) million in the six months ended June 30, 2005compared to net cash provided by bank overdraft of $0.9 million in the sixmonths ended June 30, 2004. The Company recorded payments for retirementof common stock of $0.0 million in the six months ended June 30,2005 comparedto $(0.1) million in the six months ended June 30, 2004.

 

Due to the working capital deficit, the Company cannotbe certain that anticipated revenue from operations will be sufficient tosatisfy its ongoing capital requirements. Management’s belief is based on theCompany’s operating plan, which in turn is based on assumptions that may proveto be incorrect.  If the Company’sfinancial resources are insufficient, the Company may require additionalfinancing in order to execute its operating plan and continue as a goingconcern.  The Company cannot predictwhether this additional financing will be in the form of equity, debt, oranother form. The Company may not be able to obtain the necessary additionalcapital on a timely basis, on acceptable terms, or at all.  In any of these events, the Company may beunable to implement its current plans for expansion, repay its debt obligationsas they become due or respond to competitive pressures, any of whichcircumstances would have a material adverse effect on its business, prospects,financial condition and results of operations.

 

There are also substantial uncertainties associatedwith the Company’s violations of federal and state securities laws inconnection with its prior equity offerings. These uncertainties include to what extent the Company’s shareholderswill assert claims against the Company for rescission of their investments inthe Company, the principal cash amount of which exceeded $20.5 million andnon-cash amount of which exceeded $5.5 million with accumulated interest in theamounts of $8.3 million and $2.1 million, respectively, as of June 30,2005 .  The Company intends to addressthese contingent liabilities by seeking financing in order to offer rescissionto all of its investors. Even if financing sources available to us were willingto accept these risks and willing to finance a rescission offer, there is noassurance that the terms of any such financing would be acceptable to us.

 

If the Company is unable to secure the financingrequired for a rescission offer, any assertion by the Company’s shareholders oftheir legal claims against the Company will have a material adverse effect onthe Company’s liquidity, its financial position, results of operation and cashflows.  Even if the Company is successfulin offering rescission to its shareholders, if, prior to the rescission offer,any shareholders who acquired their common stock in the Company’s offeringssells their common stock for less than the price at which they purchased theirshares, they will be entitled to recover from the Company damages equal to thedifference between their investment amount plus interest from the date ofissuance and the value or price of the security at the time of its sale.  Because these shareholders will no longer ownthe Company’s common stock, the Company will not be able to extinguish thesedamage claims by offering to rescind the shareholder’s purchase of their commonstock.

 

15

----

 

The probability that shareholders would assert a claimagainst the Company and the extent of the Company’s liability, if any, arecontingent on a number of factors, including a shareholder’s desire to rescindhis or her purchase, applicable legal precedent and statutes oflimitation.  There are presently noclaims by shareholders against the Company in a material amount. Based oninformation presently known to management, management has no reason to believethat such claims in any material amount will be made by its shareholders,provided that the market price that develops for the Company’s Common Stock isat least equal to the price at which the Company’s investors purchased theirCommon Stock and that the Company is successful in its attempt to make arescission offer to its investors.  Basedon the foregoing, management does not believe that assertion of such claims bythe Company’s shareholders is probable. Accordingly, no accruals for either potential amounts payable orreserves have been made at this time.

 

Should financing sources fail to materialize,management would seek alternate funding sources by requesting additionalcapital from major shareholders and/or the extension of credit fromsuppliers.  Management’s plan is toeventually access the public equity markets and seek asset based lines ofcredit to provide additional working capital for expansion. Management has alsoconsidered private venture capital funds and may sell additional equity, ifrequired.

 

**RISKFACTORS**

 

**RisksRelated to our Equity**

 

***Holders of common stock issued by us in prior offerings are entitled torescind their purchases.***

 

Issuances of securities are subject to federal andstate securities laws.  From 1999 through2004, we offered and sold common stock to investors in various states, raisinggross equity capital of approximately $20.5 million from approximately 830investors, and we issued common stock to various third parties, such asvendors, and issued employee stock options to many of our employees, the valueof which common stock was approximately $5.5 million.  We issued these securities in reliance uponexemptions from the registration requirements of federal and state securitieslaws.  We have determined that oursecurities offerings did not comply with the requirements of the applicableexemptions, because certain of our employees who solicited our investorsengaged in a “general solicitation” of securities.  In addition, those employees were required tobe licensed as broker-dealers with the U.S. Securities and Exchange Commission(“SEC”) and in various states, but they were not so licensed.  Because we did not uncover these violationsuntil after we sold our securities, we did not disclose these violations, northe potential liabilities associated with these violations, to ourinvestors.  Consequently, our securitiesofferings also did not comply with disclosure requirements of applicablesecurities laws. In such situations a number of remedies may be available toregulatory authorities and the investors who purchased common stock in thoseofferings, including, without limitation, a right of rescission, civilpenalties, seizure of our assets, a restraining order or injunction, and acourt order to pay restitution and costs. As a result, the investors and other holders of our common stock areentitled to return their shares to us and assert a legal claim to receive backfrom us the full price they paid, plus interest, which Management presently hasnot been able to reasonably estimate.  Inthe event that a rescission by all of the Company’s shareholders were to occur,the Company would be liable for the $20.5 million it received in exchange forits common stock, in addition to interest of approximately $8.3 million throughJune 30, 2005.  The Company may alsobe liable for the $5.5 million of services rendered and property exchanged inconsideration for the issuance of common stock, in addition to interest ofapproximately $2.1 million through June 30,2005.

 

We have disclosed these violations of federal andstate securities laws to the SEC.  Wealso intend to seek financing in order to offer rescission to all of ourinvestors   However, we have not approached statesecurities commissioners in the states in which our investors reside.  Consequently, there is substantialuncertainty concerning what action state regulators may take against us andwhat effect any such action will have on our business and our ability to obtainfinancing. If we are unable to secure the financing required for a rescissionoffer, any assertion by our shareholders of their legal claims against us willhave a material adverse effect on our financial position and results ofoperation and cash flows.  Even iffinancing sources available to us were willing to accept these risks andwilling to finance a rescission offer, there is no assurance that the terms ofany such financing would be acceptable to us. Moreover, even if we are successful in offering rescission to ourshareholders, if, prior to the rescission offer,  any our shareholders who acquired theircommon stock in these offerings sells their common stock for less than theprice at which they purchased their shares, they will be entitled to recoverfrom us damages equal to the difference

 

16

----

 

betweentheir investment amount plus interest from the date of issuance and the valueor price of the security at the time of its sale.  Because these shareholders will no longer ownour common stock, we will not be able to extinguish these damage claims by offeringto rescind the shareholder’s purchase of our common stock.

 

***There has been no established trading marketfor our common stock.***

 

There has been no established trading market for ourcommon stock.  The lack of an activemarket may impair your ability to sell your shares at the time you wish to sellthem or at a price that you consider reasonable.  The lack of an active market may also reducethe fair market value of your shares.  Aninactive market may also impair our ability to raise capital by selling sharesof capital stock and may impair our ability to acquire other companies ortechnologies by using our shares as consideration.

 

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

 

Our founder, executive officers and directors willtogether own approximately 61.8% of our common stock and 59.1% on a fullydiluted basis.  As a result, they havesignificant influence over our management and affairs and over all mattersrequiring stockholder approval, including the election of directors andsignificant corporate transactions, such as a merger or other sale of ourcompany or its assets, for the foreseeable future.  This concentrated control will limit yourability to influence corporate matters and, as a result, we may take actionsthat some of our stockholders do not view as beneficial.  As a result, the market price of our commonstock could be adversely affected because stockholders may not view favorablythe concentration of control in the hands of management.

 

**Risks Related to our Business**

 

***The Opinion from our Independent Registered Public Accounting FirmContains a Going Concern Qualification.***

 

The report of Stonefield Josephson, Inc., our independent registered public accounting firm, with respect to our financial statements and the related notes for the years ended December 31, 2004  2003 and 2002, indicates that, at the date of their report,  our history of significant operating losses, working capital deficit, total stockholders’ deficit, and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern.  At June 30, 2005, we had an accumulated deficit of ($28,981).  We cannot be certain that revenue from operations will be sufficient to satisfy our ongoing capital requirements.  If our financial resources are insufficient, we may require additional financing in order to execute our operating plan and continue as a going concern.

 

***We may not be able to forecast revenue or earnings accurately due toour limited operating history.***

 

As a result of our limited operating history and theemerging nature of the markets in which we compete, we may not be able toforecast revenue or earnings accurately. We may also be unable to adjust spending in a timely manner tocompensate for any unexpected revenue shortfall.

 

***We do not have a guaranteed supply of excessjewelry.***

 

We have informal arrangements with distributors andmanufacturers for excess jewelry on favorable terms and conditions, but thesearrangements do not include any inventory supply obligations on theirpart.  As a result, we do not have aguaranteed supply of excess jewelry products. Our inability to maintain and expand these and other future excessjewelry supply relationships or the inability of our current and futuresuppliers to maintain arrangements for the supply of products sold to us wouldsubstantially harm our business and results of operations.

 

***Our failure to acquire excess jewelry at competitive prices wouldresult in higher costs and lower net sales and damage our competitive position.***

 

17

----

 

If we are unable to acquire excess jewelry atcompetitive prices, our costs may exceed our forecasts, our gross margins andoperating results may suffer and our competitive position could bedamaged.  The success of our businessmodel depends, in part, on our ability to offer bargain prices to customersthat are below those of traditional jewelry retailers.

 

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

 

The jewelry industry in general is affected byfluctuations in the prices of precious metals and precious and semi-preciousstones.  The availability and prices ofgold, silver and platinum and other precious metals and precious andsemi-precious stones may be influenced by such factors as cartels, politicalinstability in exporting countries, changes in global demand and inflation.  Shortages of these materials or a rise intheir price could result in reduced margins or increased prices causing reducedsales of such products.

 

***We cannot guarantee the quality or authenticity of products offered byour Certified Merchants.***

 

Becausewe offer customers the opportunity to purchase products beyond those in ourinventory through our Certified Merchants Program, we may inadvertentlyfacilitate sales of counterfeit or stolen goods, which could expose us toliability for intellectual property infringement claims and damage ourreputation.

 

***We rely heavily on the sale of fine jewelry for our net sales, anddemand for these products could decline.***

 

Luxury products, such as diamonds and fine jewelry,are discretionary purchases for consumers. The volume and dollar value of such purchases may significantly decreaseduring economic downturns.  The successof our business depends in part on macroeconomic factors such as employmentlevels, salary levels, tax rates and credit availability, all of which affect consumerspending and disposable income.  Anyreduction in consumer spending or disposable income may affect us moresignificantly than companies in other industries.

 

***Because we carry all of our excess jewelryproducts in inventory, if we are unable to accurately predict and plan forchanges in consumer demand, our net sales and gross margins may decrease*****.**

 

Consumer tastes and preferences for jewelry productscan change rapidly, thus exposing us to significant inventory risks.  The demand for specific products can changebetween the time the products are ordered and the date of receipt.  As a result, if we do not accurately predictthese trends or if we overstock unpopular products, we may be required to takesignificant inventory markdowns, which could reduce our net sales and grossmargins.

 

***Competition from online auctioneers and other online companies withgreater brand recognition may adversely affect our sales.***

 

The market for live auctions conducted over theInternet is new, rapidly evolving and intensely competitive, and we expectcompetition to intensify further in the future. Barriers to entry are relatively low, and current and new competitorscan launch new sites at a relatively low cost using commercially-availablesoftware.  We currently or potentiallycompete with a number of other companies. Our direct competitors include various online auction services andretailers that specialize in jewelry, including “ebay.com”, “odimo.com”, “bluenile.com”,“overstock.com” and “ubid.com”.

 

In addition, many of our current and potentialcompetitors have greater brand recognition, longer operating histories, largercustomer bases and significantly greater financial, marketing and otherresources than us.  They may enter intostrategic or commercial relationships with larger, more established andwell-financed companies, or may enter into exclusive distribution agreementswith our suppliers and deny us access to their products.  They may also devote greater resources to marketingand promotional campaigns and devote substantially more resources to theirwebsite and systems technology than us. There are no assurances that we will be able to compete successfullyagainst current and future competitors or address increased competitivepressures.

 

18

----

 

***Our advertising relationships with Internetportals and other websites may fail to create consumer awareness of our websiteand product offerings*****.**

 

Our current marketing and advertising strategyconsists of targeted search advertising, portal and targeted websiteadvertising, participation in affiliate programs, and direct advertising.  We do not maintain long-term contracts orarrangements with Internet portals, and we may not successfully enter intoadditional relationships or renew existing ones beyond their currentterms.  We expect that we will have topay increasing fees to maintain, expand or enter into new relationships of thistype.  In addition, traffic to ourwebsites could decline if our online marketing programs become less effectiveor if the traffic to the website of an Internet portal on which we advertisedecreases.  Our business could bematerially adversely affected if any of our online advertisers experiencefinancial or operational difficulties or if they experience other corporatedevelopments that adversely affect their performance.  A failure to maintain, expand or enter intoInternet portal relationships or to establish additional online advertisingrelationships that generate a significant amount of traffic from other websitescould result in decreased sales or limit the growth of our business.

 

***We are dependent on David Zinberg, our ChiefExecutive Officer and President, and other members of our management team.***

 

Our performance is substantially dependent upon theservices and performance of our Chief Executive Officer David Zinberg, who has extensive experience with the purchaseand sale of jewelry, art and collectibles through non-traditional channels,including through liquidation. We have an employment agreement with Mr. Zinberg,with a term through 2007.  The loss ofthe services of Mr. Zinberg or certain of our management team members forany reason or our inability to attractnew management team members with such expertise could adversely affect ouroperations or otherwise have a material adverse effect on our business.

 

***We rely on suppliers and third-party carriers as part of ourfulfillment process, and these third parties may fail to adequately serve ourcustomers******.***

 

We rely on suppliers to promptly ship our orders,which we then carry in inventory to ensure availability and expedited deliveryto our customers.  We also rely onthird-party carriers to ship products to our customers.  As a result, we are subject to risks,including employee strikes and inclement weather, associated with third-partycarriers’ abilities to provide delivery services to meet our and our suppliers’shipping needs.  Our suppliers’ andthird-party carriers’ failure to deliver products to us or our customers in atimely manner or to otherwise adequately serve our customers would damage ourreputation and brand and substantially harm our business and results ofoperations.

 

***We face the risk of theft of our products from inventory or duringshipment.***

 

We may experience theft of our products while they arebeing held in inventory or during the course of shipment to our customers bythird-party carriers. We have taken steps to prevent such theft and maintaininsurance to cover losses resulting from theft. However, if security measuresfail, losses exceed our insurance coverage or we are not able to maintaininsurance at a reasonable cost, we could incur significant losses from theft,which would substantially harm our business and results of operations.

 

***If the single facility where substantially all of our computer andcommunications hardware is located fails, our business, results of operationsand financial condition would be harmed.***

 

Our ability to successfully receive and fulfill ordersand to provide high quality customer service depends in part on the efficientand uninterrupted operation of our computer and communications systems.Substantially all of the computer hardware necessary to operate our web site islocated at a single leased facility in downtown Los Angeles. Our systems andoperations are vulnerable to damage or interruption from human error, fire,flood, power loss, telecommunications failure, terrorist attacks, acts of war,break-ins, earthquake and similar events. We do not presently have redundant systems in multiple locations or aformal disaster recovery plan, and our business interruption insurance may beinsufficient to compensate us for losses that may occur.**** In addition, our servers are vulnerable tocomputer viruses, physical or electronic break-ins and similar disruptions,which could lead to

 

19

----

 

interruptions,delays, loss of critical data, the inability to accept and fulfill customerorders or the unauthorized disclosure of confidential customer data.  The occurrence of any of the foregoing riskscould substantially harm our business and results of operations.

 

***Our growth will depend on our ability todevelop our brand*****.**

 

We believe that our historical growth has been largelyattributable to word of mouth.  Webelieve that continuing to strengthen our brand will be critical to achievingwidespread acceptance of our services. Promoting and positioning our brand will depend largely on the successof our marketing efforts and our ability to provide high-quality services.  In order to promote our brand, we will needto increase our marketing budget and otherwise increase our financialcommitment to creating and maintaining brand loyalty among users.  Brand promotion activities may not yieldincreased revenue, and even if they do, any increased revenue may not offsetthe expenses we incurred in building our brand. If we do attract new users to our services, they may not conducttransactions over our services on a regular basis.  If we fail to promote and maintain our brandor incur substantial expenses in an unsuccessful attempt to promote andmaintain our brand, our business would be harmed.

 

***Our international sales activities carry certain inherent risks.***

 

There are certain risks associated with doing businesson an international basis, including, among others, regulatory requirements,legal uncertainty regarding liability, tariffs, and other trade barriers,longer payment cycles, and potentially adverse tax consequences, any of whichcould adversely affect our business.  Weare also subject to increased risks relating to foreign currency exchange ratefluctuations.

 

***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 or paid any cash dividends onour common stock and do not intend to pay dividends on our common stock for theforeseeable future.  We intend to investour future earnings, if any, to fund our growth.  Therefore, you likely will not receive anydividends from us on our common stock for the foreseeable future.

 

**Risks Related to Doing Business Online**

 

***Our business is adversely affected byanything that causes our users to spend less time on their computers, includingnational events*****.**

 

Anything that diverts our users from their customarylevel of usage of our website could adversely affect our business.  We would therefore be adversely affected bygeopolitical events such as war, the threat of war, or terrorist activity.

 

***If the Internet infrastructure fails to growor deteriorates, our ability to grow our business will be impaired.***

 

Our success will depend on the continued growth andmaintenance of the Internet infrastructure. This includes maintenance of a reliable network infrastructure with thenecessary speed, data capacity and security for providing reliable Internetservices.  Viruses, worms and similarprograms also harm the performance of the Internet.  The Internet has experienced a variety ofoutages and other delays as a result of damage to portions of itsinfrastructure, and it could face outages and delays in the future.  These outages and delays could reduce thelevel of Internet usage as well as our ability to provide our solutions.

 

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

 

As traffic on our websites grows, we may not be ableto accommodate all of the growth in user demand on our websites and in ourcustomer sales and support center.  If weare unable to upgrade our existing technology or network infrastructure and thesystems used to process customers’ orders and payments to accommodate increased

 

20

----

 

salesvolume, our potential customers may be dissatisfied and may purchasemerchandise from our competitors.  We mayalso fail to provide enough capacity in our customer service and sales supportcenter to answer phones or provide adequate customer service.  A failure to implement new systems andincrease customer service center capacity effectively or within a reasonableperiod of time could adversely affect our sales.

 

We also intend to introduce additional or enhanced featuresand services to retain current customers and attract new customers to ourwebsites.  If we introduce a feature or aservice that is not favorably received, our current customers may not use ourwebsites as frequently and we may not be successful in attracting newcustomers.  We may also experiencedifficulties that could delay or prevent us from introducing new services andfeatures.  These new services or featuresmay contain errors that are discovered only after they are introduced and wemay need to significantly modify the design of these services or features tocorrect.

 

Although our systems have been designed aroundindustry-standard architectures to reduce downtime in the event of outages orcatastrophic occurrences, they remain vulnerable to damage or interruption fromearthquakes, floods, fires, power loss, telecommunication failures, terroristattacks, computer viruses, computer denial-of-service attacks, and similarevents.

 

Our systems are also subject to break-ins, sabotage,intentional acts of vandalism, and potential disruption if the operators ofthese facilities have financial difficulties. Despite any precautions we may take, the occurrence of a naturaldisaster, a decision by any of our third-party hosting providers to close afacility we use without adequate notice for financial or other reasons, orother unanticipated problems at our hosting facilities could result in lengthyinterruptions in our services.  Inaddition, the failure by our hosting facilities to provide our required datacommunications capacity could result in interruptions in our service.  We do not carry business interruptioninsurance sufficient to compensate us for losses that may result frominterruptions in our service as a result of system failures.

 

***Our failure to protect confidential information of our customers andour network against security breaches could damage our reputation andsubstantially harm our business and results of operations****.*

 

A significant barrier to online commerce andcommunications is the secure transmission of confidential information overpublic networks.  Our failure to preventthese security breaches could damage our reputation and substantially harm ourbusiness and results of operations. Currently, a majority of our sales are billed to our customers’ creditcard accounts directly.  Under currentcredit card practices, we are liable for fraudulent credit card transactionsbecause we do not obtain a cardholder’s signature. ** **We rely on encryption andauthentication technology licensed from third parties to effect securetransmission of confidential information, including credit card numbers. We donot currently carry insurance against this risk.** **Advances in computer capabilities,new discoveries in the field of cryptography or other developments may resultin a compromise or breach of the technology used by us to protect customertransaction data.  In addition, anyonewho is able to circumvent our security measures could misappropriateproprietary information or cause interruptions in our operations.  To date, we have experienced minimal lossesfrom credit card fraud, but we face the risk of significant losses from thistype of fraud as our net sales increase. Any such compromise of our security could damage our reputation andbrand and expose us to a risk of loss or litigation and possible liabilitywhich would substantially harm our business and results of operations.

 

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

 

Our Internet domain name is critical to our businesssuccess.  Under current domain nameregistration practices, no one else 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.  As a result, third parties mayuse domain names that are similar to ours, which may result in confusion topotential customers and lost sales.

 

***We may be unable to protect or enforce ourown intellectual property rights adequately*****.**

 

We regard the protection of our trademarks,copyrights, patents, domain names, trade dress and trade secrets as critical toour success.  We aggressively protect ourintellectual property rights by relying on a

 

21

----

 

combinationof trademark, copyright, patent, trade dress and trade secret laws, and throughthe domain name dispute resolution system. We also rely on contractual restrictions to protect our proprietaryrights in products and services.  We haveentered into confidentiality and invention assignment agreements with ouremployees and contractors, and nondisclosure agreements with parties with whomwe conduct business in order to limit access to and disclosure of ourproprietary information.  Thesecontractual arrangements and the other steps we have taken to protect ourintellectual property may not prevent misappropriation of our technology ordeter independent development of similar technologies by others.  We are pursuing the registration of ourdomain names, trademarks, and service marks in the U.S. andinternationally.  Effective trademark,copyright, patent, trade dress, trade secret, and domain name protection isvery expensive to maintain and may require litigation.  We must protect our trademarks, patents, anddomain names in an increasing number of jurisdictions, a process that isexpensive and may not be successful in every location.  We have licensed in the past, and expect tolicense in the future, certain of our proprietary rights, such as trademarks orcopyrighted material, to others.  Theselicensees may take actions that diminish the value of our proprietary rights orharm our reputation.

 

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

 

We are subject to increasing regulation at thefederal, state and international levels relating to privacy and the use ofpersonal user information, designed to protect the privacy of personally identifiableinformation as well as to protect against its misuse.  These laws include the Federal TradeCommission Act, the Children’s Online Privacy Protection Act, the Fair CreditReporting Act and related regulations as well as other legal provisions.  Several states have proposed legislation thatwould limit the use of personal information gathered online or require onlineservices to establish privacy policies. These regulations and other laws, rules and regulations enacted inthe future, may adversely affect our ability to collect and disseminate orshare demographic and personal information from users and our ability to emailor telephone users, which could be costly and adversely affect our marketingefforts**.**

 

***If we are required to collect sales and usetaxes on the products we sell, we may be subject to liability for past salesand our future sales may decrease*****.**

 

In accordance with current industry practice and ourinterpretation of current law, we do not currently collect sales and use taxesor other taxes with respect to shipments of goods into states other thanCalifornia.  However, one or more statesor foreign countries may seek to impose sales or other tax collectionobligations on us in the future.  Asuccessful assertion by one or more states or foreign countries that we shouldbe collecting sales or other taxes on the sale of our products could result insubstantial tax liabilities for past and future sales, discourage customersfrom purchasing products from us, decrease our ability to compete withtraditional retailers or otherwise substantially harm our business, financialcondition and results of operations.

 

***We may be subject to regulations governing the conduct and liability ofauctioneers.***

 

Numerous states and foreign jurisdictions, includingthe State of California, where our headquarter is located, have regulationsregarding how “auctions” may be conducted and the liability of “auctioneers” inconducting such auctions.  No final legaldetermination has been made as to whether the California regulations apply toour business and little precedent exists in this area.  Several states and some foreign jurisdictionshave attempted, and may attempt in the future, to impose such regulations uponus or our users, which could harm our business.

 

***We are subject to regulations relating toconsumer privacy*****.**

 

Several domestic jurisdictions have proposed, andCalifornia, Minnesota, Utah, and Vermont have recently passed, legislation thatwould limit the uses of personal user information gathered online oroffline.  Many jurisdictions already havesuch laws and continuously consider strengthening them, especially againstonline services.  However, the FairCredit Reporting Act, or FCRA, a federal statute enacted in 1970 to protectconsumer privacy, includes a provision preempting conflicting state laws on thesharing of information between corporate affiliates.  The preemptive provisions of FCRA werepermanently extended in 2002, thus ensuring that we are not subject to the lawsof each individual state with respect to matters within the scope of FCRA, butremain subject to the provisions of FCRA.

 

22

----

 

The U.S. Federal Trade Commission also hassettled several proceedings against companies regarding the manner in whichpersonal information is collected from users and provided to thirdparties.  Specific statutes intended toprotect user privacy have been passed in many non-U.S. jurisdictions.  Compliance with these laws, given the tightintegration of our systems across different countries and the need to move datato facilitate transactions amongst our users (e.g., to payment companies,shipping companies, etc.), is both necessary and difficult.  Failure to comply could subject us tolawsuits, fines, criminal penalties, statutory damages, adverse publicity, andother losses that could harm our business. Changes to existing laws or the passage of new laws intended to addressthese issues could directly affect the way we do business or could createuncertainty on the Internet.  This couldreduce demand for our services, increase the cost of doing business as a resultof litigation costs or increased service or delivery costs, or otherwise harmour business.

 

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

 

We are subject to the same foreign and domestic lawsas other companies conducting business on and off the Internet.  Today, there are still relatively few lawsspecifically directed towards online services. However, due to the increasing popularity and use of the Internet andonline services, many laws relating to the Internet are being debated at alllevels of government around the world and it is possible that such laws andregulations 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 existinglaws governing issues such as property ownership, copyrights and otherintellectual property issues, taxation, libel and defamation, obscenity, andpersonal privacy is uncertain.  The vastmajority of these laws were adopted prior to the advent of the Internet andrelated technologies and, as a result, do not contemplate or address the uniqueissues of the Internet and related technologies.  Those laws that do reference the Internet,such as the U.S. Digital Millennium Copyright Act and the European Union’s(E.U.) Directive on Distance Selling and Electronic Commerce have only recentlybegun to be interpreted by the courts and implemented by the E.U. MemberStates, so their applicability and scope remain somewhat uncertain.  As our activities and the types of goodslisted on our site expand, regulatory agencies may claim that we or our usersare subject to licensure in their jurisdiction, either with respect to ourservices in general, or in order to allow the sale of certain items (e.g., realestate, event tickets, boats, automobiles).

 

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

 

Market risk represents the risk of loss arising fromadverse changes in market rates and foreign exchange rates.  We do notbelieve that a change in market interest rates would have a material effect onour results of operations or financial condition.  Although we derive a portion of our salesoutside of the United States, all of our sales are denominated in U.S. Dollars. We have limited exposure to financial market risks, including changes ininterest rates and foreign currency exchange rates.

 

As a result of the risks of rescission discussed inItem 2, we have market risk exposure to the trading price of our commonstock.  See Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations - Risks Related to our Equity - *Holders of common stock issued by us in priorofferings are entitled to rescind their purchases.*

 

**ITEM 4 - CONTROLS AND PROCEDURES**

 

The Company conducted an internal evaluationof its disclosure, controls, and procedures as of the end of the period coveredby this report under the supervision and with the participation of management,including David Zinberg, President and Chief Executive Officer (CEO), andLawrence Kong, Chief Financial Officer (CFO). Based upon that evaluation, theCEO and CFO concluded that the Company’s disclosure controls and procedureswere effective to provide reasonable assurance to the officers that they havebeen provided, on a timely basis, all material information necessary for themto determine that the Company has disclosed all material information requiredto be included in the Company’s periodic reports filed with the Securities andExchange Commission.  Based upon the officers’evaluation, there were not any significant changes in the Company’s internalcontrols or in

 

23

----

 

other factors that couldsignificantly affect these controls subsequent to the date of their evaluation.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGALPROCEEDINGS

 

**EndaiWorldwide v. Bidz.com**

 

The Company is a defendant in a lawsuit brought byEndai Worldwide (“Endai” or “plaintiff”)for past services in the amount of$78.  The plaintiff alleges that theCompany owes approximately $78 unpaid internet advertising fees. The Companyclaims that plaintiff has not performed the services related to such chargesand has counterclaimed for $1 million in damages for inappropriate use of theCompany’s user base. The litigation has been settled, although documents remainto be finalized. By the terms of the settlement, neither party is to pay anymoney to the other.

 

ITEM 6. EXHIBITS.

 

31.1                           PrincipalExecutive Officer Certification Pursuant to Rule 13a-14(a) of theSecurities Exchange Act of 1934

 

31.2                           PrincipalFinancial Officer Certification Pursuant to Rule 13a-14(a) of theSecurities Exchange Act of 1934

 

32.1                           CertificationsPursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934

 

24

----

 

**SIGNATURES**

 

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

 
|                         |       | BIDZ.COM, INC.                            |
|------------------------------|------------|-------------------------------------------|
|                         |       |                                      |
|                         |       |                                      |
|                         | By:        | /s/ DAVID ZINBERG                         |
|                         |       |                                      |
| ** **                   | ** ** | **David Zinberg**                         |
| ** **                   |       | **President and Chief Executive Officer** |
|                         |       |                                      |
|                         | By:        | /s/ LAWRENCE KONG                         |
|                         |       |                                      |
| ** **                   | ** ** | **Lawrence Kong**                         |
| ** **                   |       | **Principal Accounting Officer**          |
|                         |       |                                      |
|                         |       |                                      |
| Dated:  August 18, 2005 |       |                                      |

 

25

----