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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                 |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                             |
| ** ** | ** ** | **For the quarterly period ended  September 30, 2008**                                                                            |
| ** ** | ** ** | ** **                                                                                                                             |
| **o**      | ** ** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                         |
| ** ** | ** ** | ** **                                                                                                                             |
| ** ** | ** ** | **For the transition  period                 to** |

 

**Commission file number 000-51257**

 

**BIDZ.COM, INC.**

(Exact name of Registrant as specified in its charter)

 

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

 

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

(Address, including zip code, of principal executiveoffice)

 

**(310) 280-7373**

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

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

 

o  Yes    x  No

 

Numberof shares outstanding of Registrant’s common stock, $0.001 par value, as of October 31,2008: 23,370,947

 

 

 

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**Table of Contents**

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**TABLE OF CONTENTS**

 
| PART I.  FINANCIAL INFORMATION | 3                                                                                                                              |
|-------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                        | Financial Statements                                                                                                           | 3 |
|                                | Condensed  Balance Sheets as of December 31, 2007 and September 30, 2008  (unaudited)                                | 3 |
|                                | Condensed  Statements of Income for the three month and nine month periods ended September 30,  2007 and 2008 (unaudited) | 4 |
|                                | Condensed  Statements of Cash Flows for the nine month periods ended September 30,  2007 and 2008 (unaudited)             | 5 |
|                                | Notes  to Financial Statements (unaudited)                                                                                     | 6 |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    | 11 |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk                                                                    | 17 |
| Item 4.                             | Controls and Procedures                                                                                                        | 18 |
|                                |                                                                                                                           |   |
| PART II. OTHER INFORMATION     | 18                                                                                                                             |
| Item 1.                             | Legal Proceedings                                                                                                              | 18 |
| Item  1.A.                          | Risk Factors                                                                                                                   | 19 |
| Item 2.                             | Unregistered  Sales and Purchases of Equity Securities                                                                         | 29 |
| Item 4.                             | Submission of  Matters to a Vote of Security Holders                                                                           | 30 |
| Item 5                              | Other Information                                                                                                              | 31 |
| Item  6.                            | Exhibits                                                                                                                       | 31 |
|                                |                                                                                                                           |   |
| SIGNATURES                          | 31                                                                                                                             |

 

Thisquarterly report includes forward looking statements. All statements other thanstatements of historical facts contained in this registration statement,including statements regarding our future financial position, business strategyand plans and objectives of management for future operations, are forwardlooking statements. The words “believe,” “may,” “will,” “estimate,” “continue,”“anticipate,” “intend,” “expect” and similar expressions, as they relate to us,are intended to identify forward looking statements. We have based theseforward-looking statements largely on our current expectations and projectionsabout future events and financial trends that we believe may affect ourfinancial condition, results of operations, business strategy and financialneeds. These forward looking statements are subject to a number of risks,uncertainties and assumptions discussed throughout this filing.

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

** **

**Bidz.com, Inc.**

 

**Condensed Balance Sheets**

 

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

 
| ** **                                                                                                                                                                            | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2007**              | ** ** | **2008**               | ** ** |
| ** **                                                                                                                                                                            | ** ** | ** **            | ** ** | **(Unaudited)**        | ** ** |
| **Assets**                                                                                                                                                                            | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                                       |       |                  |       |                   |       |
| Cash                                                                                                                                                                                  |       | $                     | 4,808      |                   | $          | 8,331 |   |
| Accounts receivable                                                                                                                                                                   |       | 2,275                 |       | 1,032                  |       |
| Inventories, net of reserves of $1,075 and  $821 at December 31, 2007 and September 30, 2008, respectively                                                                  |       | 56,686                |       | 47,549                 |       |
| Other current assets                                                                                                                                                                  |       | 5,958                 |       | 3,503                  |       |
| Total current assets                                                                                                                                                                  |       | 69,727                |       | 60,415                 |       |
| Property and equipment, net                                                                                                                                                           |       | 1,323                 |       | 1,313                  |       |
| Intangible asset                                                                                                                                                                      |       | 161                   |       | 161                    |       |
| Deposits                                                                                                                                                                              |       | 104                   |       | 104                    |       |
| Total assets                                                                                                                                                                          |       | $                     | 71,315     |                   | $          | 61,993 |   |
| ** **                                                                                                                                                                            | ** ** | ** **            | ** ** | ** **             | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                                         | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current liabilities:                                                                                                                                                                  |       |                  |       |                   |       |
| Revolving credit line                                                                                                                                                                 |       | $                     | 5,924      |                   | $          | — |   |
| Accounts payable (includes related party  amounts of $5,050 and $6,904 at December 31, 2007 and September 30,  2008, respectively)                                          |       | 26,400                |       | 25,635                 |       |
| Accrued expenses                                                                                                                                                                      |       | 4,509                 |       | 2,446                  |       |
| Deferred revenue                                                                                                                                                                      |       | 2,900                 |       | 853                    |       |
| Total current liabilities                                                                                                                                                             |       | 39,733                |       | 28,934                 |       |
|                                                                                                                                                                                  |       |                  |       |                   |       |
| Commitments and contingencies (note 10)                                                                                                                                               |       |                  |       |                   |       |
|                                                                                                                                                                                  |       |                  |       |                   |       |
| Stockholders’ equity:                                                                                                                                                            |       |                  |       |                   |       |
| Preferred stock: par value $0.001;  authorized 4,000,000 shares; none issued and outstanding at December 31,  2007 and September 30, 2008, respectively                     |       | —                |       | —                 |       |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued and outstanding 24,556,354 and 23,370,947 at  December 31, 2007 and September 30, 2008, respectively |       | 25                    |       | 23                     |       |
| Additional paid in capital                                                                                                                                                            |       | 35,875                |       | 24,989                 |       |
| Shares held in treasury, at cost; 100,000  and 0 shares at December 31, 2007 and September 30, 2008,  respectively                                                          |       | (886                  | )          | —                 |       |
| Retained earnings (accumulated deficit)                                                                                                                                               |       | (3,432                | )          | 8,047                  |       |
| Total stockholders’ equity                                                                                                                                                       |       | 31,582                |       | 33,059                 |       |
|                                                                                                                                                                                  |       |                  |       |                   |       |
|                                                                                                                                                                                  |       | $                     | 71,315     |                   | $          | 61,993 |   |

 

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

 

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**Bidz.com, Inc.**

 

**Condensed Statements of Income(Unaudited)**

 

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

 
| ** **                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Net revenue:                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Merchandise sales                                                |       | $                                                    | 39,973     |                                                | $          | 55,270 |   | $ | 123,661 |   | $ | 171,896 |   |
| Other revenue                                                    |       | 78                                                   |       | 86                                                  |       | 237 |   | 375 |   |
|                                                             |       | 40,051                                               |       | 55,356                                              |       | 123,898 |   | 172,271 |   |
| Cost of revenue                                                  |       | 27,356                                               |       | 42,062                                              |       | 89,201 |   | 125,623 |   |
| Gross profit                                                     |       | 12,695                                               |       | 13,294                                              |       | 34,697 |   | 46,648 |   |
| Operating expenses:                                              |       |                                                 |       |                                                |       |   |   |   |   |
| General and administrative                                       |       | 4,945                                                |       | 5,267                                               |       | 14,774 |   | 16,854 |   |
| Sales and marketing                                              |       | 2,406                                                |       | 2,315                                               |       | 7,026 |   | 9,645 |   |
| Depreciation and amortization                                    |       | 160                                                  |       | 171                                                 |       | 346 |   | 505 |   |
| Total operating expenses                                         |       | 7,511                                                |       | 7,753                                               |       | 22,146 |   | 27,004 |   |
| Income from operations                                           |       | 5,184                                                |       | 5,541                                               |       | 12,551 |   | 19,644 |   |
| Other income - interest income                                   |       | 28                                                   |       | 1                                                   |       | 33 |   | 24 |   |
| Other expense - interest (expense)                               |       | (1                                                   | )          | (84                                                 | )          | (165 | ) | (175 | ) |
| Income before income tax expense                                 |       | 5,211                                                |       | 5,458                                               |       | 12,419 |   | 19,493 |   |
| Income tax expense                                               |       | 1,648                                                |       | 2,199                                               |       | 2,506 |   | 8,014 |   |
| Net income                                                       |       | $                                                    | 3,563      |                                                | $          | 3,259 |   | $ | 9,913 |   | $ | 11,479 |   |
|                                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Net income per share available to common  shareholders - basic   |       | $                                                    | 0.15       |                                                | $          | 0.14 |   | $ | 0.42 |   | $ | 0.48 |   |
| Net income per share available to common  shareholders - diluted |       | $                                                    | 0.14       |                                                | $          | 0.13 |   | $ | 0.40 |   | $ | 0.45 |   |
| Weighted average number of shares  outstanding - basic           |       | 23,593,325                                           |       | 23,523,063                                          |       | 23,371,838 |   | 23,961,564 |   |
| Weighted average number of shares  outstanding - diluted         |       | 26,324,387                                           |       | 25,213,019                                          |       | 25,031,607 |   | 25,619,236 |   |

 

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

 

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**Bidz.com, Inc.**

 

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

 

*(Inthousands)*

 
| ** **                                                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2007**                                                | ** ** | **2008** | ** ** |
|                                                                                              |       |                                                    |       |   |   |
| **Cash flows provided by (used for) operating  activities:**                                      |       |                                                    |       |   |   |
| Net income                                                                                        |       | $                                                       | 9,913      |   | $ | 11,479 |   |
|                                                                                              |       |                                                    |       |   |   |
| **Adjustments to reconcile net income to net  cash provided by (used for) operating activities:** |       |                                                    |       |   |   |
| Depreciation and amortization                                                                     |       | 346                                                     |       | 505 |   |
| Change in inventory reserve                                                                       |       | 333                                                     |       | (254 | ) |
| Stock-based compensation                                                                          |       | 507                                                     |       | 796 |   |
| **Changes in assets and liabilities:**                                                            |       |                                                    |       |   |   |
| **(Increase) decrease in assets:**                                                                |       |                                                    |       |   |   |
| Accounts receivable                                                                               |       | (64                                                     | )          | 1,243 |   |
| Inventories                                                                                       |       | (12,298                                                 | )          | 9,391 |   |
| Other current assets                                                                              |       | (912                                                    | )          | 2,455 |   |
| **Increase (decrease) in liabilities:**                                                           |       |                                                    |       |   |   |
| Accounts payable                                                                                  |       | 5,627                                                   |       | (765 | ) |
| Accrued expenses                                                                                  |       | 1,079                                                   |       | (2,063 | ) |
| Deferred revenue                                                                                  |       | (1,752                                                  | )          | (2,047 | ) |
| Net cash provided by operating activities                                                         |       | 2,779                                                   |       | 20,740 |   |
|                                                                                              |       |                                                    |       |   |   |
| **Cash flows provided by (used for) investing  activities:**                                      |       |                                                    |       |   |   |
| Capital expenditures                                                                              |       | (1,172                                                  | )          | (514 | ) |
| Disposal of fixed assets                                                                          |       | —                                                  |       | 19 |   |
| Net cash (used for) investing activities                                                          |       | (1,172                                                  | )          | (495 | ) |
| **Cash flows provided by (used for) financing  activities:**                                      |       |                                                    |       |   |   |
| Revolving credit line                                                                             |       | (3,941                                                  | )          | (5,924 | ) |
| Issuance of common stock                                                                          |       | —                                                  |       | 5 |   |
| Repurchase of common stock                                                                        |       | —                                                  |       | (11,151 | ) |
| Proceeds from exercise of stock options                                                           |       | 1,978                                                   |       | 1,915 |   |
| Retirement of common stock from net  exercise of stock options                                    |       | —                                                  |       | (2,480 | ) |
| Tax benefit from exercise of stock options                                                        |       | 1,097                                                   |       | 913 |   |
| Net cash used for financing activities                                                            |       | (866                                                    | )          | (16,722 | ) |
|                                                                                              |       |                                                    |       |   |   |
| **Net increase in cash**                                                                          |       | 741                                                     |       | 3,523 |   |
| **Cash, beginning of period**                                                                     |       | 359                                                     |       | 4,808 |   |
| **Cash, end of period**                                                                           |       | $                                                       | 1,100      |   | $ | 8,331 |   |
|                                                                                              |       |                                                    |       |   |   |
| **Supplemental disclosure of cash flow  information:**                                            |       |                                                    |       |   |   |
| ** **                                                                                        |       |                                                    |       |   |   |
| Interest paid                                                                                     |       | $                                                       | 165        |   | $ | 175 |   |
|                                                                                              |       |                                                    |       |   |   |
| Income taxes paid                                                                                 |       | $                                                       | 502        |   | $ | 8,769 |   |

 

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

 

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**BIDZ.COM, INC.**

**NOTES TOFINANCIAL STATEMENTS FOR THE THREE MONTH AND NINE MONTH PERIODS ENDEDSEPTEMBER 30, 2007 AND 2008**

**(UNAUDITED)**

 

**1.****             Basis of Presentation and Nature of BusinessOperations**

 

**Basis of Presentation**

 

The accompanying condensed balance sheet as of December 31,2007, which has been derived from audited financial statements, and theunaudited financial statements included herein have been prepared in accordancewith the instructions to Form 10-Q and do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.  Thesefinancial statements and related notes should be read in conjunction with theCompany’s audited financial statements for the fiscal year ended December 31,2007 filed in the Annual Report on Form 10-K by the Company on March 12,2008 with the Securities and Exchange Commission. In the opinion of management,these financial statements reflect all adjustments which are of a normalrecurring nature and which are necessary to present fairly the financialposition of Bidz.com, Inc. as of September 30, 2008 and the resultsof operations for the three month and nine month periods ended September 30,2007 and 2008, respectively and the cash flows for the three month and ninemonth periods ended September 30, 2007 and 2008, respectively.  Theresults of operations for the nine months ended September 30, 2008 are notnecessarily indicative of the results which may be expected for the entirefiscal year.

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Actual results coulddiffer from those estimates. We have made estimates for return and allowance reserve, inventoryreserve, inventory vendor marketing reserves, deferred tax assets, accruedexpenses, stock price volatility, stock option forfeiture rate, and expectedstock option term.

 

**Reclassification**

 

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

 

**Nature of Business Operations**

 

Bidz.com, Inc.was founded in November of 1998 as a California corporation with itsprincipal location of business in Los Angeles, California. In June 2006,we reincorporated in Delaware, and with our principle location of business inLos Angeles. We operate websites located at www.bidz.com and www.buyz.com forthe purpose of selling merchandise, utilizing our unique sales auction andfixed price platforms.

 

We sell our products throughout the United States andhave expanded the reach of our customer base to Europe and Asia. Revenuegenerated from the United States accounted for approximately 75.7% and 79.3% ofnet revenue for the three months ended September 30, 2007 and 2008,respectively and 77.6% and 76.9% of net revenue for the nine months ended September 30,2007 and 2008, respectively.

 

**Recent Developments**

 

Starting in the third quarter of 2008 the U. S. and world economieshave been experiencing a downturn in economic growth that is directly impactingconsumer purchasing behavior. The duration and magnitude of this developingeconomic condition is not certain, but indicators point to at least a year ofrecovery efforts ahead. We sell consumer discretionary items and may beimpacted by this economic downturn.

 

In October 2008,we announced the launch of our website translated into Arabic to complement theEnglish and Spanish language versions of our website. In April 2008, weannounced the launch of our online retail store, Buyz.com, which offers jewelryat a fixed price.

 

In February 2008, our Board ofDirectors authorized an increase in the open market stock buyback program ofits outstanding common stock to $20 million from $5 million. The stock buybackwill be at prices deemed appropriate by management over 

 

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a 24 month period. As of September 30, 2008,we have purchased a cumulative total of 1.38 million shares for $12 million,and all 1.38 million shares have been retired which reduced our number ofshares outstanding.

 

**Recent Accounting Pronouncements**

 

In February 2007, the FASBissued Statement No. 159 (“FAS 159”) which expanded FAS No. 157, “*Fair Value Measurements*,” which definesfair value, establishes guidelines for measuring fair value and expandsdisclosures regarding fair value measurements. FAS 159 does not require any newfair value measurements but rather eliminates inconsistencies in guidance foundin various prior accounting pronouncements. FAS 159 is effective for fiscalyears beginning after November 15, 2007. The adoption of FAS 159 did nothave a material impact on our financial statements.In September 2006,the FASB issued Statement SFAS No. 157 (“FAS 157”), “ *Fair Value Measurements*,” which definesfair value, establishes guidelines for measuring fair value and expandsdisclosures regarding fair value measurements. FAS 157 does not require any newfair value measurements but rather eliminates inconsistencies in guidance foundin various prior accounting pronouncements. SFAS 157 is effective for fiscalyears beginning after November 15, 2007. The adoption of FAS 157 and 159did not have a material impact on our financial statements.

 

**2.****             Earnings Per Common Share**

 

Inaccordance with SFAS No. 128, “Earnings Per Share,” the basic earnings percommon share is calculated by dividing net income available to commonstockholders less preferred dividends by the weighted average number of commonshares outstanding. Diluted earnings per common share is computed similarly tobasic earnings per common share, except that the denominator is increased toinclude the number of additional common shares that would have been outstandingif potential common shares had been issued and if the additional common shareswere not anti-dilutive.

 

Thedilutive effect of outstanding stock options is reflected in diluted earningsper share by application of the treasury stock method excluding the impact of pro forma deferredtax benefits for the three month and nine month periods ended September 30,2007 and including the impact of pro forma deferred tax benefits for the threemonth and nine month periods ending September 30, 2008.  Thefollowing table sets forth the computation of basic and diluted net income pershare.

 

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

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic and diluted net income per share: |       |                                                 |       |                                                |       |   |   |   |   |
| Numerator:                              |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                              |       | $                                                    | 3,563      |                                                | $          | 3,259 |   | $ | 9,913 |   | $ | 11,479 |   |
| Denominator:                            |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted common shares outstanding      |       | 23,593,325                                           |       | 23,523,063                                          |       | 23,371,838 |   | 23,961,564 |   |
| Effect of dilutive securities           |       | 2,731,062                                            |       | 1,689,956                                           |       | 1,659,769 |   | 1,657,672 |   |
| Denominator for diluted calculation     |       | 26,324,387                                           |       | 25,213,019                                          |       | 25,031,607 |   | 25,619,236 |   |
| Net income per share, basic             |       | $                                                    | 0.15       |                                                | $          | 0.14 |   | $ | 0.42 |   | $ | 0.48 |   |
| Net income per share, diluted           |       | $                                                    | 0.14       |                                                | $          | 0.13 |   | $ | 0.40 |   | $ | 0.45 |   |

 

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**3**.             **Inventories**

 

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

 
| ** **                              | ** ** | **December 31, 2007** | ** ** | **September 30, 2008  (unaudited)** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|
|                                    |       |                            |       |                                          |       |
| Fine jewelry, watches and other         |       | $                               | 53,054     |                                          | $          | 47,317 |   |
| Loose diamonds and semi-precious stones |       | 4,392                           |       | 439                                           |       |
| Prepaid inventory                       |       | 94                              |       | 73                                            |       |
| Inventory with manufacturing vendors    |       | 221                             |       | 541                                           |       |
| Product inventories                     |       | 57,761                          |       | 48,370                                        |       |
| Less: Inventory reserve                 |       | (1,075                          | )          | (821                                          | )          |
|                                    |       | $                               | 56,686     |                                          | $          | 47,549 |   |

 

**4.             RevolvingCredit Line**

 

In July 2006, we entered into arevolving credit line agreement with LaSalle Bank (Bank of America) to provideworking capital financing secured by inventories and tangible assets. Theagreement allowed for us to initially draw on a line of credit up to $10million. During the first quarter of 2008 we successfully increased the limitto $25 million. The revolving credit line agreement expires in July of2010. As of September 30, 2008, there was no outstandingbalance under the revolving credit line. Under the terms and conditions of therevolving credit line agreement, the Company is subject to certain restrictivecovenants for which it is in compliance at September 30, 2008.

 

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

 

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

 

TheCompany adopted SFAS 123R using the modified prospective method which requiresthe application of the accounting standard as of January 1, 2006. TheCompany’s financial statements as of and for the three months and nine monthsended September 30, 2007 and 2008, respectively, reflect the impact ofadopting SFAS 123R.

 

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

 

UnderSFAS 123R, we will continue to use the Black-Scholes model to estimate the fairvalue of options. Our assessment of the estimated compensation charges will beaffected by our stock price as well as assumption regarding a number ofsubjective variables and the related tax impact. These variables include, butare not limited to, our stock price volatility, forfeiture rates and employeestock option exercise behaviors (or expected term).

 

**StockAwards**

 

We awarded and issued asdirector compensation a total of 18,750 shares of common stock for the ninemonths ended September 30, 2007. Two of our non-employee directors, ManJit Singh and Peter Hanelt, received stock awards of 8,750 and 10,000 shares,respectively. The fair market value of the shares granted was $6.00 per share,which was determined based on a combination of factors that included recentshare transactions between shareholders and an independent valuation of theCompany. No stock awards were granted in the three months ended September 30,2007 and 2008 and in the nine months 

 

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ended September 30,2008. The stock-based expense from stock award grants for the three monthsended September 30, 2007 and 2008 totaled $0 and $0, respectively, and inthe nine months ended September 30, 2007 and 2008 totaled $112,000 and $0,respectively.

 

**RestrictedShares**

 

The restricted stock awards areexpensed pro rata over the vesting period based upon the market value of theawards at the time of grant. Stock-based compensation from restricted stockawards totaled $76,000 and $83,000 for the three months ended September 30,2007 and 2008, respectively, and totaled $87,000 and $258,000 in the ninemonths ended September 30, 2007 and 2008, respectively. The unamortizedstock-based expense for restricted stock awards was $853,000 at September 30,2008.

 

A summary of all restricted stockactivity during the nine months ended September 30, 2008 is as follows:

 
| Restricted shares outstanding,  December 31, 2007  |   | 126,000 |   |
|---------------------------------------------------------|--------|---------|--------|
| Shares granted                                          |   | —  |   |
| Shares vested                                           |   | (27,500 | )      |
| Shares forfeited                                        |   | (2,000  | )      |
| Restricted shares outstanding, September 30,  2008 |   | 96,500  |   |

 

**Stock Options**

 

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

 

The following is asummary of stock option activity as of September 30, 2008, and changesduring the nine months ended September 30, 2008.

 
| **Options**                                        | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price ($)** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value ($)** | ** ** |
|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|
| Outstanding at December 31, 2007              |       | 8,131,300  |       | 6.20                                             |       | 3.3                                                      |       | 22,983,000                               |       |
| Granted                                            |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Exercised                                          |       | (442,500   | )          | 4.74                                             |       |                                                     |       |                                     |       |
| Forfeited                                          |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Expired                                            |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Outstanding at September 30, 2008                  |       | 7,688,800  |       | 6.29                                             |       | 2.7                                                      |       | 18,884,308                               |       |
| Vested and Exercisable at  September 30, 2008 |       | 6,852,550  |       | 6.08                                             |       | 2.6                                                      |       | 17,861,083                               |       |

 

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The following table summarizes information about stock optionsoutstanding and exercisable at September 30, 2008.

 
| ** **               | ** ** | ** ** | ** ** | ** **                   | ** ** | **Options Outstanding and  Exercisable** | ** ** | ** **                   | ** ** | ** **                   | ** ** |
|--------------------------|------------|------------|------------|------------------------------|------------|----------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** ** | ** ** | ** **                   | ** ** | **as of September 30, 2008**   | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| ** **               | ** ** | ** ** | ** ** | ** **                   | ** ** | **Options Outstanding**                       | ** ** | **Options Exercisable** | ** ** |
| ** **               | ** ** | ** ** | ** ** | ** **                   | ** ** | **Weighted**                                       | ** ** | **Weighted**                 | ** ** | ** **                   | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** ** | ** ** | **Number**                   | ** ** | **Average**                                        | ** ** | **Average**                  | ** ** | **Number**                   | ** ** | **Weighted** | ** ** |
| **Range of**        | ** ** | ** ** | ** ** | **Outstanding**              | ** ** | **Remaining**                                      | ** ** | **Exercise**                 | ** ** | **Exercisable**              | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | ** ** | ** ** | **As of 09/30/08** | ** ** | **Contractual Life**                               | ** ** | **Price**                    | ** ** | **As of 09/30/08** | ** ** | **Exercise Price** | ** ** |
| $4.01                    |       | $5.00      |       | 16,800                       |       | 0.18                                               |       | $                            | 4.50       |                         | 16,800     |   | $ | 4.50 |   |
| $5.01                    |       | $6.00      |       | 6,689,000                    |       | 2.59                                               |       | $                            | 6.00       |                         | 6,602,750  |   | $ | 6.00 |   |
| $6.01                    |       | $7.00      |       | 473,000                      |       | 3.44                                               |       | $                            | 6.50       |                         | 105,500    |   | $ | 6.50 |   |
| $9.01                    |       | $10.00     |       | 510,000                      |       | 3.70                                               |       | $                            | 9.90       |                         | 127,500    |   | $ | 9.90 |   |
| $4.01                    |       | $10.00     |       | 7,688,800                    |       | 2.71                                               |       | $                            | 6.29       |                         | 6,852,550  |   | $ | 6.08 |   |

 

The stock-basedcompensation expense from stock options in the three months ended September 30,2007 and 2008 totaled $181,000 and $180,000, respectively and in the ninemonths ended September 30, 2007 and 2008 totaled $308,000 and $538,000,respectively. The unamortized stock-based compensation expense from stockoptions as of September 30, 2008 is $1.8 million.

 

No stock options were granted in the nine months ended September 30,2008 and the weighted-average grant date fair value of options granted duringthe nine months ended September 30, 2007 was $2.59. The fair value ofthese options was calculated using a Black-Scholes option pricing model usingthe following assumptions: (1) risk-free interest rates of 4.3%-4.9%, (2) anexpected life of four to five years, (3) expected volatility of 31%-33%, (4) expectedforfeitures of 0%, and (5) a dividend yield of 0%.

 

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

 

Netrevenue by geographic area is presented based upon the country of destination.No foreign country represented 10% or more of net revenue for three month andnine month periods ended September 30, 2007 and 2008. Net revenue bygeographic area was as follows:

 

*(In thousands, except percentage data)*

 
| ** **     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **Geographic** | ** ** | **2007**                         | ** ** | **2008**                        | ** ** | **2007** | ** ** | **2008** | ** ** |
| **area**       | ** ** | **Amount**                       | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States  |       | $                                | 30,324     |                            | 75.7       | % | $ | 43,924 |   | 79.3 | % | $ | 96,144 |   | 77.6 | % | $ | 132,415 |   | 76.9 | % |
| International  |       | 9,727                            |       | 24.3                            | %          | 11,432 |   | 20.7 | % | 27,754 |   | 22.4 | % | 39,856 |   | 23.1 | % |
| Total          |       | $                                | 40,051     |                            | 100.0      | % | $ | 55,356 |   | 100.0 | % | $ | 123,898 |   | 100.0 | % | $ | 172,271 |   | 100.0 | % |

 

**7.****                                      Concentrations**

 

Purchases from two vendors amounted to $7.8 million and $9.3 millionrepresenting 17.3% and 28.7% of the total purchases during the three monthsended September 30, 2007 and 2008, respectively, and $14.6 millionand $15.5 million representing 17.1% and 14.2% of the total purchases duringthe nine months ended September 30, 2007 and 2008, respectively.Outstanding accounts payable to the two vendors totaled $1.8 million and $9.3****as of December 31, 2007 and September 30, 2008,respectively. Loss of either of these vendors is not expected to have asignificant negative impact on the results of operations and cash flows of theCompany.

 

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

 

During thethree months ended September 30, 2007 and 2008, we purchased approximately11.6% and 21.3%, respectively, of our merchandise from LA Jewelers, Inc., where one of its managers is a stockholderwho beneficially owns 1,228,000 shares of our common stock as of September 30,2008.  Duringthe nine months ended September 30, 2007 and 2008, we purchasedapproximately 12.2% and 9.1%, respectively. In the three months and ninemonths ended September 30, 2008 we earned approximately $164,000 and$777,000, respectively from LA Jewelers relating to co-op marketingcontributions and $222,000 was unamortized as of September 30, 2008. Inthe three months and nine months ended September 30, 2007 we 

 

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earnedapproximately $134,000 and $134,000, respectively in co-op marketingcontributions.

 

In May 2007,we entered into an understanding with LA Jewelers whereby they will guaranteethat we will earn a certain minimum gross profit margin on their merchandise.This agreement provides that in the event of a gross profit margin shortfall wewill be compensated for the difference between our actual gross profit marginand the guaranteed minimum gross profit margin. In the three months and ninemonths ended September 30, 2008, we recognized $146,000 and $368,000,respectively under this agreement and $49,000 was outstanding and accrued at September 30,2008. In the three months and nine months ended September 30, 2007, werecognized $122,000 and $210,000, respectively under this agreement.

 

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

 

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

 

Weare subject to income taxes in the U.S. federal jurisdiction and California.Tax regulations within each jurisdiction are subject to the interpretation ofthe related tax laws and regulations and require significant judgment to apply.With few exceptions, we are no longer subject to U.S. federal and Californiaexaminations by tax authorities for the years before 2003.

 

Wehad been under examination by the Internal Revenue Service for the 2004, 2005and 2006 tax years. Theexamination was concluded as of December 31, 2007 and final settlement wasapproximately $35,000, including interest and penalties.

 

**10.          Contingencies**

 

We are subject to various legal proceedings and claims that arise inthe ordinary course of business.  Although the Company believes it hasdefenses to the allegations and intends to pursue them vigorously, managementdoes not currently have sufficient information to assess the validity of theclaims or the amount of potential damages.  Company management currentlybelieves, however, that resolution of such legal matters will not have a materialadverse impact on the Company’s financial position, results of operations orcash flows.

 

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

 

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

 

**Overview**

 

We are a leading onlineretailer of jewelry, featuring a live auction format. We have established ourretail brand in the online marketplace by offering high-quality merchandise, aunique user-friendly shopping experience, and the opportunity for buyers toachieve significant cost savings versus traditional retail channels. A key toour success has been our ability to efficiently and cost effectively source closeoutand regular jewelry merchandise, and rapidly respond to changing consumerdemands for certain jewelry. We offer our products through a continuous liveformat, featuring a $1 minimum opening bid, and a unique 15-second auctionextension period that allows our auctions to continue until all bids arereceived. On select auctions we maintain a reserve price that must be metbefore a sale will be consummated. The majority of our auctions are short-term,often lasting less than one hour, providing immediate gratification to ourcustomers and encouraging frequent visits and active viewing of our website.

 

In addition to ourauction site we have a fixed pricing format that offers similar merchandise asthose listed for auction.  This onlinestore provides us access to different types of consumers and we will plan tooffer customers the ability to design their 

 

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own jewelry includingdiamond earrings and rings in the near future.

 

Our product inventoryincludes gold, platinum, and silver jewelry set with diamonds, rubies,emeralds, sapphires, and other precious and semi-precious stones; and watches.We believe we are the second largest online retailer of jewelry based onrevenue and the largest online jewelry auction site based on web traffic.

 

We sell to consumerslooking for reliable bargains on jewelry. Because we purchase and retain all ofour jewelry inventory onsite, we can provide our customers with timely serviceand delivery of their purchases. In addition, each item is inspected by one ofour trained product specialists prior to its placement on our website, whichassures our customers of the quality of their purchases of our products. Weoperate in a highly competitive market with low barriers to entry. By sellingour own merchandise, we provide a buying environment in which we minimizefraudulent activity and questionable product quality frequently associated withpurchase transactions from third-party sellers. We also provide a 15-day returnpolicy on all merchandise. We believe that many of our customers resellmerchandise that they purchase from our auctions on eBay, at local auctions,and through other retail channels. Our auctions and fixed price sales areconducted 24 hours a day, seven days a week. We also offer daily telephonecustomer support, 24-hour online live-help and e-mail customer support.

 

In line with our growth plans, we have completed a major upgrade of ourauction platform at the end of 2007. The new auction LiveBid system supports abroad range of leading browser software including Microsoft Internet Explorer,FireFox and Safari. The new system touts high availability, faster end-userresponse time and greater scalability among the key features delivered in thisrelease. We have leveraged this new software solution to launch additional sitefeatures and the new online retail store. We have launched the Spanish versionof our website in the second quarter of 2008, the Arabic version in October 2008and will plan on launching more site features and foreign language versions ofour website in the future.

 

**CriticalAccounting Policies**

 

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

 

*RevenueRecognition*

 

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

 

For sales through ourwebsite, we recognize merchandise sales upon shipments made to consumers thatare fulfilled from our warehouse. We require payment before we ship and thepayment is generally made online by credit card or other electronic payment methods.We record amounts received or billed prior to shipment of goods to customers asdeferred revenue. We reduce gross sales by returns and chargebacks fromcustomers. For wholesale merchandise sales, we recognize sales when themerchandise is delivered to the customer and credit terms may be offered tosuch customers.

 

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

 

We include transactionfee revenue in net revenue. The 3% transaction fee is applied to merchandisesales, including shipping and handling, but not to sales tax or wholesalemerchandise sales.

 

Other revenue consistsprimarily of commissions we derive from hosting sales of Certified Merchantmerchandise that is owned by third parties and we recognize only the commissionportion of the price our customers pay for the purchased products because weare acting as an agent in such transactions.

 

We present sales tax liability on a net basis in accordance with EmergingIssues Task Force (“EITF”) Issue No. 06-03.  Sales are not grossed upwith the attendant taxes and deducted as a separate line item. The EITF becomeseffective for interim and annual reporting periods beginning after December 15,2006.

 

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*Cost of Revenue*

 

Cost of revenue includes product costs, inbound and outbound shippingcharges, packaging and shipping supplies, insurance on shipments, productrepair and service costs, and credit card and other electronic payment fees,and is recorded in the same period in which related revenue has been recorded.The cost of revenue is reduced by amortized co-op marketing contributions fromour vendors.

 

Outbound shipping costs on merchandise sales totaled $2.0 millionand $2.3 million in the three months ended September 30, 2007 and 2008,respectively, and $6.3 million and $7.9 million in the nine months ended September 30,2007 and 2008, respectively.

 

*Returnsand Allowances Reserve*

 

We estimate potentialfuture product returns and chargebacks related to current period revenue. Weanalyze historical returns and changes in customer demand and acceptance of ourproducts when evaluating the adequacy of the sales returns reserve and otherallowances in any accounting period. If actual returns and chargebacks aregreater than our estimates, we will record additional returns and allowances inaddition to our estimates, which will result in lower net revenue recordedduring that period. Reserves for returns and chargebacks are included inaccrued liabilities.

 

*Inventories*

 

Inventories consistmainly of merchandise purchased for resale and are stated at the lower offirst-in, first-out (FIFO) cost or market.

 

*InventoryReserve*

 

The unique nature of our business model where customers set the pricesthey are willing to pay may result in items selling below our cost, and weprovide reserves against our inventory based on the difference between theaverage selling price and the cost of inventory if the average selling price islower than the cost of inventory. We also provide reserves for obsolescence andslow moving inventory.

 

*InventoryCo-op Marketing Contributions*

 

# In the third quarter of2007, we started to bill and collect from our inventory vendors co-op marketingcontributions as an incentive for us to market and sell their merchandise onthe Bidz website. In accordance with EITF 02-16:  Accounting by a Customer(including a Reseller) for Certain Consideration Received from a Vendor, theco-op marketing contributions that cannot be identified specifically to benefitthe vendors are a reduction in cost of sales and will result in an increase ingross profit. We cannot specifically identify the benefits to each vendor,consequently, co-op marketing contributions are charged against inventory as areduction of costs and amortized as a reduction of cost of sales. In the threemonths and nine months ended September 30, 2008, we have recognized $2.3million and $8.3 million, respectively, of co-op marketing contributions.Approximately $3.5 million remain unamortized and is included as an offset toinventory at September 30, 2008. Receivable from vendors for co-opmarketing contributions, less allowance for doubtful accounts, is included inother current assets and amounted to $976,000 at September 30, 2008.

#  

*Stock-BasedCompensation*

 

On January 1,2006, we adopted SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS123R’’) requiring that share-based payment transactions be recognized in thefinancial statements based on the fair value of the equity or liabilityinstrument issued. We use the Black-Scholes option pricing model to estimatethe value of our options in implementing SFAS 123R and the calculated method todetermine expected volatility. Under SFAS 123R stock-based compensation expenserecognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest. Accordingly,stock-based compensation expense recognized in the statements of income will bereduced for estimated forfeitures. SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates.

 

*Descriptionof Our Revenue, Costs, and Expenses*

 

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

 

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** **
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net Sales                            |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Gross Profit                         |       | 31.7                                                 |       | 24.0                                                |       | 28.0 |   | 27.1 |   |
| Operating Expenses:                  |       |                                                 |       |                                                |       |   |   |   |   |
| General & Administrative    |       | 12.4                                                 |       | 9.5                                                 |       | 11.9 |   | 9.8 |   |
| Sales & Marketing           |       | 6.0                                                  |       | 4.2                                                 |       | 5.7 |   | 5.6 |   |
| Depreciation & Amortization |       | 0.4                                                  |       | 0.3                                                 |       | 0.3 |   | 0.3 |   |
| Total Operating Expenses             |       | 18.8                                                 |       | 14.0                                                |       | 17.9 |   | 15.7 |   |
| Profit from Operations               |       | 12.9                                                 |       | 10.0                                                |       | 10.1 |   | 11.4 |   |
| Interest income                      |       | 0.1                                                  |       | 0.0                                                 |       | 0.0 |   | 0.0 |   |
| Interest expense                     |       | 0.0                                                  |       | 0.2                                                 |       | 0.1 |   | 0.1 |   |
| Income tax expense                   |       | 4.1                                                  |       | 4.0                                                 |       | 2.0 |   | 4.7 |   |
| Net Income                           |       | 8.9                                                  | %          | 5.8                                                 | %          | 8.0 | % | 6.6 | % |

 

*NetRevenue*

 

Substantially all of ournet revenue consists of jewelry sold via the Internet, net of returns. We alsogenerate net revenue from wholesale merchandise sales, shipping and handling,transaction fee and other revenue. We have commenced making wholesalemerchandise sales in the first quarter of 2008.

 

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

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
|                         |       |                                                 |       |                                                |       |   |   |   |   |
| Merchandise sales            |       | 84.2                                                 | %          | 57.6                                                | %          | 84.7 | % | 69.3 | % |
| Wholesale merchandise sales  |       | —                                               |       | 31.1                                                |       | — |   | 17.3 |   |
| Shipping & handling |       | 12.6                                                 |       | 9.0                                                 |       | 12.0 |   | 10.6 |   |
| Transaction fee              |       | 3.0                                                  |       | 2.1                                                 |       | 3.1 |   | 2.6 |   |
| Other revenue                |       | 0.2                                                  |       | 0.2                                                 |       | 0.2 |   | 0.2 |   |
| Total net revenue            |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |

 

*GrossProfit*

 

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

 

*Generaland Administrative Expenses*

 

Our general and administrative expenses consist primarilyof payroll and related benefit costs for our employees. These expenses alsoinclude fulfillment, customer service, technology, professional fees, othergeneral corporate expenses, and stock-based compensation, consistingsubstantially of stock option grants and restricted stock awards to employeesand consultants.

 

*Salesand Marketing Expenses*

 

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

 

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**Comparisonof Three Months Ended September 30, 2007 to Three Months Ended September 30,2008**

 

Net income in the threemonths ended September 30, 2008 was $3.3 million, or $0.14 and $0.13 perbasic and diluted share, respectively, and net income in the three months endedSeptember 30, 2007 was $3.6 million, or $0.15 and $0.14 per basic anddiluted share, respectively. Net revenue increased by 38.2% in the three monthsended September 30, 2008 compared to the three months ended September 30,2007 while the net income decreased by 8.5% over the same period. The decreasein net income was due primarily to the increase in revenue and gross profitoffset by a higher operating and income tax expenses.

 

*Net Revenue*

 

Net revenue increased 38.2% to $55.4 million in the three months ended September 30,2008 from $40.1 million in the three months ended September 30,2007. This increase in net revenue was due primarily to the wholesalemerchandise sales in the three months ended September 30, 2008 whichaccounted for $17.2 million in revenue offset by less demand for our jewelryproducts as a result of the rapidly weakening economies worldwide.

 

We expect that significant wholesale activities willbecome a regular part of our ongoing business, particularly in the currenteconomy where we are likely to be presented with opportunities in the wholesalemarket. However, we do not expect wholesale merchandise sales to be significantin the fourth quarter when we have the traditional holiday shopping season.

 

*Gross Profit*

 

Gross profit increased by $599,000 or 4.7% to $13.3 million in thethree months ended September 30, 2008 from $12.7 million in the threemonths ended September 30, 2007. The increase in gross profit resultedfrom the increase in sales revenue which rose by 38.2% for the three monthsended September 30, 2008 compared to the three months ended September 30,2007 offset by the decrease in gross profit margins to 24.0% from 31.7%,primarily due to the significant wholesale merchandise sales that typicallygenerate significantly lower gross profit margin. However, the netoperating margin contribution from wholesale merchandise sales is advantageousbecause operating expenses associated with wholesale transactions are minimal.

 

*General and Administrative Expenses*

 

General and administrative expenses increased $322,000 or 6.5% to $5.3million in the three months ended September 30, 2008 from$4.9 million in three months ended September 30, 2007. The increasein general and administrative expenses was due to our overall growth andincludes increases in payroll and payroll related expenses. General andadministrative expenses as a percentage of net revenue decreased to 9.5% in thethree months ended September 30, 2008 from 12.4% in the three months endedSeptember 30, 2007.

 

*Sales & Marketing Expenses*

 

Sales and marketing expenses decreased by $91,000 or 3.8% to $2.3million in the three months ended September 30, 2008 from $2.4 million inthe three months ended September 30, 2007. The decrease in sales andmarketing expenses were a result of the rapidly weakening economies worldwide.Sales and marketing expenses as a percentage of net revenue decreased to 4.2%in the three months ended September 30, 2008 from 6.0% in the three monthsended September 30, 2007.

 

*Income Tax Expense*

 

Income tax expenseincreased to $2.2 million in the three months ended September 30, 2008from $1.6 million in the three months ended September 30, 2007 and theeffective tax rate increased to 40.2% from 31.6%. During 2007, we utilized allof our loss carryforwards and therefore became fully taxable in 2008.

 

**Comparison of Nine Months Ended September 30,2007 to Nine Months Ended September 30, 2008**

 

Net income in the ninemonths ended September 30, 2008 was $11.5 million and net income per basicand diluted share was $0.48 and $0.45, respectively. In the nine months ended September 30,2007, net income was $9.9 million, or $0.42 and $0.40 per basic and dilutedshare, respectively. Net revenue increased by 39.0% in the nine months ended September 30,2008 compared to the nine months ended September 30, 2007 while the netincome increased by 15.8% over the same period. The increase in net income wasdue primarily to the increase in net revenue and higher gross profit marginsoffset by a higher operating and income tax expense.

 

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*NetRevenue*

 

Net revenue increased by$48.3 million or 39.0% to $172.2 million in the nine months ended September 30,2008 from $123.9 million in the nine months ended September 30, 2007.This increase in net revenue was due primarily to the growth in demand for ourjewelry products and the wholesale merchandise sales in the nine months ended September 30,2008 which accounted for $29.9 million in revenue.

 

*Gross Profit*

 

Gross profit increased by $11.9 million or 34.4% to $46.6 millionin the nine months ended September 30, 2008 from $34.7 million in thenine months ended September 30, 2007. The increase in gross profitresulted from the increase in net revenue of $48.3 million offset by thedecrease in gross profit as a percentage of net sales to 27.1% for the ninemonths ended September 30, 2008 compared to 28.0% for the nine monthsended September 30, 2007. The decrease in gross profit margin is primarilydue to the significant wholesale merchandise sales that typically generatesignificantly lower gross profit margin. However, the net operatingmargin contribution from wholesale merchandise sales is advantageous becauseoperating expenses associated with wholesale transactions are minimal.

 

*General and Administrative Expenses*

 

General and administrativeexpenses increased by $2.1 million or 14.1 % to $16.9 million in the ninemonths ended September 30, 2008 from $14.8 million in the nine monthsended September 30, 2007. The increase in general and administrativeexpenses was primarily due to the increase in payroll and payroll relatedexpenses and administrative expenses. General and administrative expenses as apercentage of net revenue decreased to 9.8% in the nine months ended September 30,2008 from 11.9% in the nine months ended September 30, 2007.

 

*Sales & Marketing Expenses*

 

Salesand marketing expenses increased by $2.6 million or 37.3 % to $9.6 million inthe nine months ended September 30, 2008 from $7.0 million in thenine months ended September 30, 2007. Sales and marketing expenses asa percentage of net revenue decreased to 5.6% in the nine months ended September 30,2008 from 5.7% in the nine months ended September 30, 2007.

 

*IncomeTax Expense*

 

Income tax expenseincreased to $8.0 million in the nine months ended September 30, 2008 from$2.5 million in the nine months ended September 30, 2007 and the effectivetax rate increased to 41.0% from 20.2%. During 2007, we utilized all of ourloss carryforwards and therefore became fully taxable in 2008.

 

**Additional Quarterly Data**

 
| ** **                              | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
| ** **                              | ** ** | **2007**               | ** ** | **2007** | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** | **2008** | ** ** |
|                                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Average selling price per order (gross) |       | $                      | 154        |   | $ | 171 |   | $ | 173 |   | $ | 182 |   | $ | 183 |   | $ | 175 |   |
| Average orders per day                  |       | 3,317                  |       | 2,678 |   | 2,699 |   | 3,734 |   | 3,023 |   | 2,453 |   |
| Average items sold per day              |       | 9,482                  |       | 8,678 |   | 8,814 |   | 12,186 |   | 10,082 |   | 8,431 |   |
| Acquisition costs per new buyer         |       | $                      | 45         |   | $ | 38 |   | $ | 43 |   | $ | 50 |   | $ | 48 |   | $ | 43 |   |
| Number of new buyers                    |       | 58,056                 |       | 53,637 |   | 55,423 |   | 83,179 |   | 64,882 |   | 54,072 |   |

 

Wholesale merchandisesales are excluded in computing additional quarterly data.

 

**Liquidityand Capital Resources**

 

The significantcomponents of our working capital are inventory and liquid assets such as cashand accounts receivable, reduced by revolving credit line, accounts payable,accrued expenses and deferred revenue. Our business model contains 

 

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beneficial workingcapital characteristics: while we collect cash from sales to customers withinseveral business days of the related online payment, we typically have extendedpayment terms with our suppliers.

 

As of September 30,2008, we had a working capital surplus of $31.5 million and have no short orlong-term debt obligations. Net cash provided by operating activities was $20.7million in the nine months ended September 30, 2008 compared to net cashprovided of $2.8 million in the nine months ended September 30, 2007.Cash in the nine months ended September 30, 2008 was primarily affected bychanges in net income and inventories and in the nine months ended September 30,2007 was primarily affected by changes in net income, inventories and accountspayable.

 

We recorded net income of$11.5 million in the nine months ended September 30, 2008 compared to $9.9million in the nine months ended September 30, 2007. Cash flows from netincome were used to meet our working capital requirements. In the nine monthsended September 30, 2008, inventories decreased by $9.4 million. In thenine months ended September 30, 2007, inventories decreased by $12.3million and accounts payable increased by $5.6 million. Inventories andaccounts payable is affected by our revenue growth and changes in our inventorystrategy. Our inventory strategy is influenced by our ability to secureinventory that we believe will improve our margins and the current revenuetrend; and the need to manage our inventory more efficiently.

 

Net cash used ininvesting activities was $495,000 in the nine months ended September 30,2008 compared to $1.2 million in the nine months ended September 30, 2007.During the nine months ended September 30, 2007 and 2008, respectively,net cash used for investing activities related mainly to capital expendituresfor office and computer equipment and software.

 

In the nine months ended September 30,2008, net cash of $16.7 million were used in financing activities when $5.9million was used to repay our revolving credit line and $11.2 million was usedto repurchase our common stock shares. In the nine months ended September 30,2007, $866,000 were used for financing activities when $3.9 million was used torepay our revolving credit line and $3.1 million was provided from exercise ofstock options.

 

We believe that cash andcash equivalents currently on hand, cash flows from operations and theavailability of a $25 million revolving line of credit will be sufficient tocontinue our operations and to pursue our growth strategy for the foreseeablefuture. Our future capital requirements will depend on many factors, includingthe rate of our revenue growth; the timing and extent of spending to enhanceour website, network infrastructure, and transaction processing systems; theextent of our advertising and marketing programs; the levels of the inventorywe carry; acquisition and relocation to a new corporate office; and otherfactors relating to our business. Enhancement of our website, network infrastructure,and transaction processing systems will require us to spend significantly morethan we have in the past. Moreover, to date our spending in these areas hasbeen lower than industry averages. We anticipate increasing our systemexpenditures to accommodate these needs in the future. We may requireadditional financing in the future in order to execute our operating plan andwe may not be able to obtain such financing. We cannot predict whether thisadditional financing will be in the form of equity, debt, or a combinationof debt and equity.

 

**LeaseObligations**

 

The following table presents our contractual obligations at September 30,2008, over the next five years and thereafter (in thousands):

 
| ** **                       | ** ** | **Total**  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **After 5** | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------------|------------|
| **Payments by Period** | ** ** | **Amount** | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Years**        | ** ** |
| Property lease                   |       | $          | 1,739      |       | $          | 291        |       | $          | 987        |       | $          | 173        |       | $                | 173        |   | $ | 115 |   | $ | — |   |
|                                  |            |            |            |            |            |            |            |            |            |            |            |            |            |                  |            |  |  |  |  |  |  |  |

 

We are obligated for thelease of our office and warehouse space. We lease a 50,000 square-foot officeand warehouse and a separate 12,000 square-foot warehouse space in Culver City,California. The leases expire in October 2009 and August 2012,respectively.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKETRISK**

 

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

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

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

 

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report.  Disclosure controls and procedures are thecontrols and other procedures that we designed to ensure that we record,process, summarize and report in a timely manner the information we mustdisclose in reports that we file with or submit to the Securities and ExchangeCommission.  Based on this evaluation, our Chief Executive Officer and ourChief Financial Officer concluded that, as of the date of their evaluation, ourdisclosure controls and procedures were effective.

 

***Report of Managementon Internal Control over Financial Reporting***

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as defined in Rule 13a-15(f) of the 1934 Act. Our internalcontrol over financial reporting is designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. Internal control over financial reporting includethose policies and procedures that (1) pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect ourtransactions and dispositions of our assets; (2) provide reasonableassurance that our transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only inaccordance with appropriate authorizations; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of our assets that could have a material effect on ourfinancial statements.

 

We assessedthe effectiveness of our internal control over financial reporting as of September 30,2008, using the criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO) in Internal Control — IntegratedFramework. Based on this assessment, management has concluded that our internalcontrol over financial reporting was effective as of September 30, 2008.

 

***Changes in InternalControl over Financial Reporting***

 

There were no changes in our internal control over financial reportingduring the quarter ended September 30, 2008, that our certifying officersconcluded materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

***Limitations onControls***

 

Management does not expect that our disclosure controls and proceduresor our internal control over financial reporting will prevent or detect allerror and fraud. Any control system, no matter how well designed and operated,is based upon certain assumptions and can provide only reasonable, notabsolute, assurance that its objectives will be met. Further, no evaluation ofcontrols can provide absolute assurance that misstatements due to error orfraud will not occur or that all control issues and instances of fraud, if any,within the Company have been detected. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

We are from time to timesubject to various other legal proceedings and claims arising in the ordinarycourse of business.  We do not expectthat the outcome in any currently ongoing legal proceedings, individually orcollectively, will have a material adverse effect on the Company’s financialcondition, results of operations, or cash flow.

 

In September 2008, wewere served with an alleged class action lawsuit alleging, among other things,that the company engaged in unfair business practices by misrepresenting thevalue of its merchandise and by “false” bidding.  The complaint purports to represent a classof persons who purchased any merchandise from the company.  The company believes that the lawsuit ismeritless and intends to file a motion to dismiss forthwith.

 

We are a defendant in alawsuit filed by Cartier, and Cartier International, B.V., in the United StatesDistrict Court Southern District of New York in April 2006. The lawsuitalleges that Cartier has proprietary rights, including trade dress, patents, 

 

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trademarks, copyrightsand others, in watch designs known as a Tank, Tank Francaise, Tank Americaine,Panthere and Pasha De Cartier Grille, and Tank Devan, and further alleges thatwe have infringed upon those rights by selling watches bearing copies of one ormore of the watch designs. We entered into a settlement agreement with Cartierin August 2008.

 

**ITEM 1.A. RISK FACTORS**

 

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

 

***Wehave established a public market for our common stock on the NASDAQ CapitalMarket; our stock is subject to short selling and trading in our common stockmay be volatile.***

 

Since November 2007,we have been included by Nasdaq on the Regulation SHO Threshold Security List,which may be indicative of a significant amount of naked shorting in our commonstock.  As defined in Rule 203(c)(6) ofRegulation SHO, a “threshold security” is any equity security of any issuerthat is registered under Section 12 of the Exchange Act, or that isrequired to file reports under Section 15(d) of the Exchange Act(commonly referred to as reporting securities), where, for five consecutivesettlement days: (i) there are aggregate fails to deliver at a registeredclearing agency of 10,000 shares or more per security; the level of fails isequal to at least one-half of one percent of the issuer’s total sharesoutstanding; and the security is included on a list published by aself-regulatory organization (SRO). A security ceases to be a thresholdsecurity if it does not exceed the specified level of fails for five consecutivesettlement days. Short selling and possible market price manipulation of ourcommon stock has a negative effect on the trading price of our common stock andmay cause trading in our common stock to be volatile.

 

***Thetrading price in our common stock may be volatile and you may lose all or partof your investment.***

 

The market price of ourcommon stock has been subject to significant fluctuations and thesefluctuations could continue. Some factors that could affect the market price ofour common stock are as follows:

 

·                  actualor anticipated changes in our operating results,

·                  changesin research analysts recommendations or estimates of financial performance,

·                  changesin market valuation of similar companies, economic and general marketconditions,

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

·                  issuanceof additional shares of common stock or other securities, and

·                  intellectualproperty or litigation developments.

 

Trading in our commonstock may experience significant price and volume fluctuations and adverselyaffect the trading price of our common stock. Following periods of volatilityin the market price of a public company’s securities, securities class actionlitigation has often been instituted against that company. Such litigationcould result in substantial cost and a diversion of management’s attention andresources.

 

**Adecline in general economic conditions or the perception of said conditions mayhave adverse effects on our growth and operations.**

 

The continued success of our business depends on the willingness of ourcustomers to spend in a discretionary manner.  While we do offer lowerpriced merchandise and may consequently fair better than those who exclusivelyoffer more expensive merchandise, jewelry is essentially perceived as a luxurygood. If recent economic events such as the bank failures and credit issuesreported in the media cause people to feel less comfortable purchasing discretionarygoods, it could cause a negative effect on our operating results.

 

***We must continue togenerate a high volume of visitor traffic to our website and convert thosevisitors into buyers.***

 

Our net revenue depends to a significant extent on the number ofcustomers who visit our website to purchase merchandise and the dollar amountof their purchases. Generating increased traffic to our website and convertingthat traffic into buyers requires us to achieve effective results from ourmarketing campaigns; offer a wide variety of products that our customers canpurchase at favorable prices; maintain a user-friendly shopping experience;ensure the satisfactory availability, performance, 

 

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and reliability of our website, network infrastructure, and transactionprocessing systems; and provide high-quality customer service. Our businesswill be harmed if we are unable to increase our customer base and the dollarvolume of the orders customers place with us.

 

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

 

Presently, we do not require new users to our site to provide theiridentification upon registration. Consequently, from time to time we aresubject to “prank” bidders who may win auctions but do not intend to purchaseour merchandise.  Although the Companyre-auctions merchandise not purchased by such bidders, a large number of failedauctions in which winning bidders do not complete their purchases couldadversely affect our results of operations.

 

***We may faceincreasing costs to acquire new customers.***

 

The acquisition of new customers is a key factor in increasing demandfor our jewelry products and increasing our revenue. We currently attract newcustomers by driving traffic to our website using a marketing and advertisingstrategy that includes targeted keyword searches, online banner advertising,targeted e-mail advertising, and participation in affiliate programs. We do notmaintain long-term contracts or arrangements with any companies, including anysearch engines, Internet portals, or other websites, and we may notsuccessfully enter into additional relationships or maintain existing ones. Inaddition, traffic to our website could decline if our online marketing programsbecome less effective or the traffic decreases to the search engines, Internetportals, and websites with which we advertise. Our business could be materiallyand adversely affected if any substantial number of companies on which weadvertise experience financial or operational difficulties or experience othercorporate developments that adversely affect their performance. A failure tomaintain or expand existing online advertising relationships or to establishadditional online advertising relationships that generate a significant amountof traffic from other websites could result in decreased sales or limit thegrowth of our business.

 

***Our growth willdepend on our ability to increase the popularity of our website, and we may notbe able to do so effectively.***

 

We believe that continuing to increase the popularity of our websitewill be critical to expanding our business. Promoting and positioning ourwebsite will depend largely on the success of our marketing efforts and ourability to provide a variety and sufficient quantity of high-quality productsat attractive prices in a convenient manner. Promoting our website will requireus to increase our marketing budget and otherwise increase our financialcommitment to creating and maintaining brand loyalty among users. Brandpromotion activities may not yield increased revenue, and even if they do, anyincreased revenue may not offset the expenses we incur in building our websitepopularity and our brand. If we do attract new users to our website, they maynot conduct transactions on a frequent basis or in sufficient dollar amounts.If we fail to promote and maintain our website or incur substantial expenses inan unsuccessful attempt to promote and maintain our brand, our business wouldbe harmed.

 

***We anticipateexpanding our international sales activities, causing our business to becomeincreasingly susceptible to numerous risks that could affect our profitability.***

 

For the three months ended September 30, 2007 and 2008, 24.3% and20.7%, respectively, of our net revenue was generated by shipments to customersoutside of the United States. We plan, over time, to expand our reach intointernational markets. We do not, however, currently have any overseasfulfillment, distribution, or server facilities. We cannot be certain that wewill be able to expand our global presence. In addition, there are certainrisks associated with doing business on an international basis, includingregulatory requirements, legal uncertainty regarding liability, tariffs, andother trade barriers, longer payment cycles, and potentially adverse taxconsequences, any of which could adversely affect our business. Although ourforeign sales historically have been denominated in U.S. dollars, we also maybe subject to increased risks relating to foreign currency exchange ratefluctuations to the extent we decide to denominate our sales in foreigncurrencies.

 

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

 

Customer complaints or negative publicity about our customer servicecould severely diminish consumer confidence in and the use of our website.Effective customer service requires significant personnel expense, and thisexpense, if not managed properly, could significantly impact our profitability.The failure to manage or train our customer service representatives properlycould compromise our ability to handle customer inquiries and complaintseffectively. If we do not handle customer inquiries and complaints effectively,we may lose customer confidence. As a result, our revenue could suffer and ouroperating margin may decrease.

 

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***Our limited operating history makes itdifficult for us to forecast accurately net revenue and appropriately plan ourexpenses.***

 

We have a limited operating history. As a result, it is difficult toforecast accurately our sales or operating expenses. We base our estimatedexpense levels on our operating forecasts and estimates of future sales. Salesand results of operations are difficult to forecast because they generallydepend on the number, dollar volume, and timing of the orders we receive, whichare uncertain. Some of our expenses are fixed, making it difficult to adjustour spending in a timely manner to take into account any unexpected shortfallin sales. We may also be unable to adjust spending in a timely manner tocompensate for any unexpected sales shortfall, which could cause our net incomein a given quarter to be lower than expected.

 

***Quarterly financial results may not beconsistent and impact our stock price.***

 

There are numerous influences on our quarterly financial results thatextend beyond the normal seasonal trends. Fluctuations that are under ourcontrol include: our ability to influence the timing and quantity of items weplace for auction; our decision to acquire merchandise at favorable prices; ourexpenditures on marketing and our ability to attract customer visits to ourwebsite. Fluctuations that are not under our control that may directly impactour quarterly financial results include: changes in market price for preciousmetals and gems; changes in consumers’ discretionary income and demand for ourproducts; and changes in fashion trends.

 

***We may be at risk to accurately reportfinancial results or detect fraud if we fail to maintain an effective system ofinternal controls.***

 

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

 

Future changes in our accounting, financial reporting, and regulatoryenvironment may create new areas of risk exposure. Failure to modify ourexisting control environment accordingly may impair our controls over financialreporting and cause our investors to lose confidence in the reliability of ourfinancial reporting, which may adversely affect our stock price.

 

***We do not have aguaranteed supply of jewelry products, and we have a concentration of inventorypurchases from our top two suppliers****.*

 

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

 

In addition, we have a concentration of inventory purchases from asmall number of suppliers. Our top two suppliers accounted for approximately42.1%, 31.1% and 24.0 % of our total purchases in 2005, 2006, and 2007,respectively. In the three months ended September 30, 2007 and 2008, ourtop two suppliers accounted for approximately 17.3% and 28.7% of our totalpurchases for the quarters, respectively, and approximately 17.1% and14.2% of the total purchases during the nine months ended September 30,2007 and 2008, respectively

 

***We may givesubstantial deposits of inventory to our manufacturing vendors to producefinished jewelry products.***

 

We may be at risk of lossfor the diamonds, precious and semi-precious gems that we have given to ourmanufacturing vendors to produce into finished jewelry products. If thebusinesses of the vendors fail, the diamond inventory is lost or 

 

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stolen, the vendors donot have adequate insurance coverage or if the vendors fail to produce anddeliver finished jewelry products, we would incur substantial losses that wouldhave a material impact on our net income and financial position.

 

***Competition fromonline auctioneers and other online companies with greater brand recognitionmay adversely affect our sales.***

 

The market for online auctions is rapidly evolving and intenselycompetitive. We expect competition to intensify further in the future. Barriersto entry are relatively low, and current and new competitors can launch newwebsites at relatively low cost using commercially available software.

 

We currently compete with a number of other companies, and othercompetitors may appear in the future. Our competitors currently include variousonline auction services and retailers that offer jewelry, including eBay, BlueNile, Overstock, and uBid. We also encounter competition from national jewelryretail chains, such as Zales, Kay Jewelers, and Finlay Fine Jewelry, and massretailers and other enterprises that sell jewelry, such as Wal-Mart, Target, J.C. Penney, Costco, QVC, and Home Shopping Network. Many of our competitors havegreater brand recognition, longer operating histories, larger customer bases,and significantly greater financial, marketing, and other resources than we do.Smaller competitors may enter into strategic or commercial relationships withlarger, more established, and well-financed companies. Other competitors mayenter into exclusive distribution agreements with our suppliers that deny usaccess to suppliers’ products. Competitors may also devote greater resources tomarketing and promotional campaigns and to website and systems technology thanwe do. We may not be able to compete successfully against current and future competitorsor address increased competitive pressures. Furthermore, attempts have beenmade in the past to develop and market synthetic stones and gems to compete inthe market for gemstones and gemstone jewelry. We expect such efforts tocontinue in the future. If any such efforts are successful in creatingwidespread demand for synthetic or alternative gemstone products, demand andprice levels for our products could decline and our business and results ofoperations would be substantially harmed.

 

***We rely heavily onthe sale of jewelry for our net revenue, and demand for these products coulddecline.***

 

Luxury products, such as jewelry, are discretionary purchases forconsumers. The volume and dollar amount of such purchases may be affected byadverse trends in the general economy and consumer perceptions of those trends,and purchases may significantly decrease during 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 affectdisposable income and consumer spending. Any reduction in disposable income orconsumer spending may affect us more significantly than companies in otherindustries.

 

Our net revenue and results of operations depend in part on the demandfor jewelry. Consumers’ tastes are subject to frequent, significant, andsometimes unpredictable changes. Should prevailing consumer tastes for jewelrychange or the demand for jewelry decrease, the sale of our products could declineand our business and results of operations would suffer.

 

Furthermore, our ability to increase our net revenue and enhance ourprofitability may depend on our ability to expand our product offerings beyondour current offerings. If we offer new products that are not accepted bycustomers, our brand and reputation could be adversely affected, our sales mayfall short of expectations, and we may incur substantial expenses that are notoffset by increased sales.

 

***Because we carry allof our jewelry products in inventory, our net revenue and gross margin maydecrease if we are unable to predict and plan for changes in consumer demand.***

 

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

 

***We may be subject toa tax liability for past sales and our future sales may decrease if we arerequired to collect sales and use taxes on the products we sell.***

 

In accordance with current industry practice and our interpretation ofcurrent law, we do not currently collect sales or other 

 

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taxes with respect to shipments of goods into states other thanCalifornia and New York. However, additional states or foreign countries mayseek to impose sales or other tax obligations on us in the future. A successfulassertion by one or more states or foreign countries that we should becollecting sales or other taxes on the sale of our products could result insubstantial tax liabilities for past and future sales, discourage customersfrom purchasing products from us, decrease our ability to compete withtraditional retailers, and otherwise substantially harm our business, financialcondition, and results of operations.

 

***We rely on suppliersand third-party carriers as part of our fulfillment process, and these thirdparties may fail to meet shipping schedules or requirements****.*

 

We rely on suppliers to deliver our orders promptly, which we thencarry in inventory to ensure availability and expedited delivery to ourcustomers. We also rely on third-party carriers to ship our products to ourcustomers. As a result, we are subject to various risks, including employeestrikes and inclement weather, associated with the ability of third-partycarriers to provide delivery services to meet our shipping needs and those ofour suppliers. The failure of our suppliers and third-party carriers to deliverproducts to us or our customers in a timely manner or otherwise to serve us orour customers adequately would damage our reputation and brand andsubstantially harm our business and results of operations.

 

***Increases in thecost of precious metals and precious and semi-precious stones would increasethe cost of our jewelry products.***

 

The jewelry industry is affected by fluctuations in the prices ofprecious metals and precious and semi-precious stones. The availability andprices of gold, silver, 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 an increase in their prices could reduce thequantity of products we have available for sale and our ability to sell ourproducts for more than our cost, causing reduced sales or lower marginscompared to our historical and expected sales and margins.

 

***The satisfactoryavailability, performance, and reliability of our website, networkinfrastructure, and transaction processing systems are critical to our abilityto attract, retain, and service customers.***

 

Any problems with the availability, performance, or reliability of ourwebsite, network infrastructure, or transaction processing systems could resultin decreased customer traffic, reduced orders, reduced order fulfillmentperformance, and lower net revenue as well as negative publicity and damage toour reputation. In order to remain competitive, we must continually seek toimprove and expand the functionality and features of our website, networkinfrastructure, transaction processing systems, and delivery and shippingfunctions to accommodate any substantial increase in the volume of traffic toand orders from our website. We may not be successful in these efforts, and wemay not be able to project accurately the rate or timing of increases, if any,in the use of or sales from our website, or timely expand or upgrade ourwebsite, infrastructure, or systems to accommodate any such increases.Additionally, we may not be able to remedy any such availability, performance,or reliability problems in a timely manner, or at all, because we depend inpart on third parties for such availability, performance, and reliability.

 

***Our business and resultsof operations would be harmed in the event of any failure of our auction andbidding systems hardware, which is located at a single third-party co-locationfacility, or any failure of our fulfillment and administrative hardware.***

 

Our business depends in part on the efficient and uninterruptedoperation of our computer and communications hardware. The servers and otherhardware necessary to operate our website, including our auction and biddingsystems, are located at a single third-party co-location facility in ElSegundo, CA. We rely on that facility to provide Internet access with thespeed, capacity, and reliability we require. Our servers and other hardwarethat run our transaction processing, order fulfillment, and officeadministration tasks are located at our headquarters. Our servers and otherhardware are vulnerable to damage or interruption from human error, fire,flood, power loss, telecommunications failure, terrorist attacks, acts of war,break-ins, earthquakes, and similar events. We do not currently have redundantsystems in multiple locations or a formal disaster recovery plan, and ourbusiness interruption insurance may be insufficient to compensate us for anylosses that may occur. In addition, our servers are vulnerable to computer viruses,physical or electronic break-ins, and similar disruptions, which could lead tointerruptions, delays, loss of critical data, the inability to accept andfulfill customer orders, or the unauthorized disclosure of confidentialcustomer data. System disruptions or failures would also create a large numberof customer questions and complaints that need to be addressed by our customerservice support personnel. The occurrence of any of the foregoing risks couldsubstantially harm our business and results of operations. Our systems arevulnerable to damage or interruption from earthquakes, floods, fires, powerloss, telecommunication failures, terrorist attacks, computer viruses, 

 

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computer denial-of-service attacks, and similar events.

 

***Our failure toprotect confidential information of our customers and our network againstsecurity breaches could damage our reputation and substantially harm ourbusiness and results of operations.***

 

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

 

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

 

Our network security measures to prevent third parties from penetratingour network and improperly accessing our customers’ personal information orcredit card information may not be successful. Although we have not experiencedany theft of our customers’ credit card information to date, as new discoveriesin the field of cryptography and advances in computer capabilities occur, oursecurity measures may not effectively prevent others from obtaining improperaccess to our customer information. In addition, third parties may target ourcustomers directly with fraudulent identity theft schemes designed to appear aslegitimate e-mails from us. In March 2006, one such third party attemptedto solicit customer information through a tactic, commonly known as “phishing,”whereby an e-mail purporting to be from us solicited customer information fromrecipients of the e-mail. Any such security breach or fraud perpetrated on ourcustomers could expose us to increased costs and could harm our business andresults of operations.

 

***Our ability to growour business will be impaired by delays, interruptions, or failures of theInternet.***

 

Our success depends on the continued growth and maintenance of theInternet. The Internet has experienced, and is likely to continue toexperience, significant growth in the numbers of users and amount of traffic.If Internet usage continues to grow as anticipated, the infrastructure may notbe able to support the level of usage and its performance and reliability maydecline. If outages or delays on the Internet increase, overall Internet usagecould grow more slowly or decline. In addition, the performance of the Internetmay be harmed by increased number of users or bandwidth requirements or byviruses, worms, and similar issues. 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. Theseoutages and delays could reduce the level of Internet usage.

 

***We depend on thecontinued growth and acceptance of online commerce, and our business will besubstantially impaired if the growth of online commerce slows or does not growas expected.***

 

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

 

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

 

As we expand our business and product offerings, rates of productreturn may increase. Any significant increase in product 

 

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returns above our return assumptions and allowances could substantiallyharm our business and results of operations.

 

***Our inventory isvulnerable to damage or loss caused by fire, flood, earthquakes, and similarevents, and we face the risk of theft of our products from inventory or duringshipment.***

 

Our inventory is stored at our warehouse/office facility in CulverCity, California. Consequently, our merchandise supply is vulnerable to fire,flood, earthquakes, and similar events that may impact our facility. Any damageto or loss of all or a significant portion of our inventory could causesignificant delays in shipment of goods to our customers, resulting in negativepublicity about and diminished customer confidence in our website. In addition,we may experience theft of our products while they are being held in inventoryor during the course of their shipment to our customers by third-partycarriers. We have implemented security measures to prevent such theft andmaintain insurance to cover losses resulting from theft. Nevertheless, we couldincur significant losses from theft, which would substantially harm ourbusiness and results of operations, if our security measures fail, lossesexceed our insurance coverage, or we are not able to maintain insurance at areasonable cost.

 

***Increases in creditcard processing fees could increase our costs.***

 

Visa, MasterCard, American Express, and Discover Card could increasethe interchange fees that they charge for transactions using their cards.Increases in interchange fees may result in increased operating costs andreduced profit margin.

 

***We may default onour obligations, if we are unable to generate sufficient cash through sales ina timely manner.***

 

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

 

***Seasonalfluctuations in our net revenue could cause our quarterly results to fluctuateand cause our results of operations to be below expectations.***

 

Historically, sales in the jewelry industry are seasonal and have beenhigher in the fourth quarter of the calendar year as a result of higherconsumer spending during the December holiday season. Approximately 33.9%,28.5% and 33.8% of our net revenue in 2005, 2006 and 2007, respectively, wasgenerated during the fourth quarter. As we continue to grow, we expect toexperience more pronounced seasonal fluctuations in our net revenue andanticipate a disproportionate amount of our revenue will occur in the fourthquarter. In anticipation of any increased sales activity during the fourthquarter, we may incur significant additional expenses, including higher salesand marketing costs and additional staffing in our fulfillment and customer supportoperations. If we were to experience lower than expected sales during anyfuture fourth quarter, it would have a disproportionately large impact on ourresults of operations for that year. In the future, our seasonal sales patternsmay become more pronounced, may strain our personnel and fulfillmentactivities, and may cause a shortfall in sales compared with expenses in agiven period, which would substantially harm our business and results ofoperations.

 

***Sales growth inprior periods may not be indicative of our future growth.***

 

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

 

***We have grownquickly, and our business will suffer if we fail to manage our growth.***

 

We have expanded our operations at a rapid pace. This expansion hasplaced a significant strain on our management, operations, and financialresources. We anticipate adding personnel in the future, including managerial,technical, and operations personnel. In order to manage any further growth ofour operations, we also will be required to improve existing and implement newtransaction-processing, operational and financial systems, procedures, andcontrols. If we are unable to manage growth effectively, our business andresults of operations will be harmed.

 

As we continue to grow we will need to expand our physical office andwarehouse space facilities.  Inconjunction with the 

 

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expiration of our property lease in Culver City, California in October,2009, we have begun seeking alternative real estate options that may require usto relocate our operations.  In managingthis transition, our operations could be interrupted and we could experienceincreased employee turnover, or both.

 

***Descriptions of ourjewelry items are not guarantees and may confuse, mislead, or disappoint ourcustomers.***

 

In an effort to provide accurate descriptions of jewelry posted on ourwebsite, we provide appraisal summaries from third-party gemologicallaboratories for some of our jewelry items. All other jewelry and watchdescriptions are provided by our full-time Gemological Institute of America, orGIA, trained gemologists and several experienced product specialists.Nevertheless, there is a subjective component involved with respect toassessing the clarity, color, and carat characteristics of diamonds and othergemstones. In addition, mistakes or omissions of important information in ourdescriptions may occur. Even if our descriptions are accurate, buying a productonline may lead to disappointment resulting in returned merchandise. Forexample, a customer may determine that a piece does not have the expected look,feel, and overall appearance of the merchandise that the buyer envisioned fromthe website photograph.

 

Additionally, in response to customer requests and as a courtesy toresellers, we provide “Compare,” “Retail” and/or “Close Now” prices for jewelryitems listed on our website. Compare and Close Now prices are not meant toreflect fair market values or manufacturer suggested retail prices, and infact, may be higher than prices found in local retail stores. As a consequence,perceived misrepresentations in item descriptions by disappointed buyers mayoccur, resulting in negative publicity about and diminished customer confidencein our website.

 

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

 

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

 

***We may not be ableto maintain our domain name uniqueness.***

 

Our Internet domain name is critical to our success. Under currentdomain name registration practices, no other entity can obtain an identicaldomain name, but can obtain a similar name or the identical name with adifferent suffix, such as “.net” or “.org,” or with a different countrydesignation, such as “jp” for Japan. We have not registered our domain namewith different suffixes nor have we registered our name in any otherjurisdiction. As a result, third parties may use domain names that are similarto our domain name, which may result in confusion to potential customers andlost sales. We are aware that other businesses have registered the name “bidz”with other suffixes and in other countries.

 

***We may be subject to assertions by third partiesfor infringement on their intellectual property rights.***

 

Third parties may in the future assert that we have infringed on theirintellectual property rights as we self-develop our auction platform, salestransaction system, and inventory control system.  We have a larger exposure of being accused ofintellectual property rights infringements than if we had purchased ourtechnology off the shelf. We also may be at risk for selling items thatinfringe on other third party trade dress rights, copyright, or patent rightsthat may cause the offended party to bring action against us. In either eventof alleged infringement, we would face substantial litigation cost to defendourselves and utilization of our management and personnel resources.

 

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

 

We regard the protection of our trademarks, copyrights, domain name,trade dress, and trade secrets as critical to our success. We rely on acombination of common law as well as trademark, copyright, trade dress, andtrade secret laws to protect our intellectual property rights. We also haveentered into confidentiality and invention assignment agreements with ouremployees and relevant contractors and nondisclosure agreements with relevantparties with whom we conduct business in order to limit access to anddisclosure of our proprietary information. These contractual arrangements andother steps we have taken to protect our intellectual property may not preventmisappropriation of our intellectual property or deter independent developmentof similar intellectual property by others. We also are pursuing theregistration of our domain name, trademarks, and service marks in the UnitedStates and internationally. Effective trademark, copyright, patent, tradedress, trade secret, and domain name protection is very expensive to maintainand may require litigation. We must protect our 

 

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trademarks, copyrights, patents, and domain names in an increasingnumber of jurisdictions, a process that is expensive and may not be successfulin every location.

 

Third parties may from time to time claim that we have infringed theirintellectual property relating to our business model or auction systems. Weexpect that participants in our market increasingly will be subject toinfringement claims as the number of services and competitors in our industrysegment grows. Any claim like this, whether meritorious or not, could betime-consuming, result in costly litigation, cause service upgrade delays, orrequire us to enter into royalty or license agreements. These royalty orlicense agreements may not be available on acceptable terms or at all. As aresult, any such claim could harm our business.

 

***We may be unable toenforce protection of our intellectual property rights under the laws of othercountries.***

 

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

 

***Various legal rules andregulations related to privacy and the collection, dissemination, and securityof personal information may adversely affect our marketing efforts.***

 

We are subject to increasing regulation at the federal, state, andinternational levels relating to privacy and the use of personal userinformation designed to protect the privacy of personally identifiableinformation as well as to protect against its misuse. These laws include theFederal Trade Commission Act, the CAN-SPAM Act of 2003, the Children’s OnlinePrivacy Protection Act, the Fair Credit Reporting Act, the Homeland SecurityAct, and related regulations. Several states have proposed legislation thatwould limit the use of personal information gathered online or require onlineservices to establish privacy policies. Moreover, proposed legislation in theUnited States and existing laws in foreign countries require companies toestablish procedures to notify users of privacy and security policies, obtainconsent from users for collection and use of personal information, and/orprovide users with the ability to access, correct, and delete personalinformation stored by companies. These regulations and other laws, rules, andregulations enacted in the future may adversely affect our ability to collect,disseminate, or share demographic and personal information about users and ourability to e-mail or telephone users, which could be costly and adverselyaffect our marketing efforts**.**

 

***We may be subject toregulations governing the conduct and liability of auctioneers, which couldaffect the way in which we conduct our business or otherwise increase our costof doing business.***

 

Numerous states and foreign jurisdictions, including California, whereour headquarters are located, have regulations regarding how auctions may beconducted and the liability of auctioneers in conducting such auctions. Nofinal legal determination has been made whether the California regulationsapply to our business, and little precedent exists in this area. Several statesand some foreign jurisdictions have attempted, and may attempt in the future,to impose regulations that could affect us or our users, which could harm ourbusiness.

 

***We are subject toregulations relating to consumer privacy, which could increase the cost of ourdoing business, expose us to litigation costs, increase our service or deliverycosts, and otherwise harm our business.***

 

Several states have proposed, and California, Minnesota, Utah, andVermont have recently passed, legislation that would limit the uses of personaluser information gathered online or offline. Many states already have such lawsand continually consider strengthening them, especially against onlineservices. However, the Fair Credit Reporting Act, or FCRA, a federal statuteenacted in 1970 to protect consumer privacy, includes a provision preemptingconflicting state laws on the sharing of information between corporateaffiliates. The preemptive provisions of FCRA were permanently extended in2002, thereby ensuring that we are not subject to the laws of each individualstate with respect to matters within the scope of FCRA, but remain subject tothe other provisions of FCRA.

 

The Federal Trade Commission also has settled several proceedingsagainst companies regarding the manner in which personal information iscollected from users and provided to third parties. Specific statutes intendedto protect user privacy have been passed in many foreign jurisdictions.Compliance with these laws, given the tight integration of our systems acrossdifferent countries and the need to move data to facilitate transactions amongour users, such as payment companies and shipping companies, is both necessaryand difficult. Failure to comply could subject us to lawsuits, fines, criminalpenalties, statutory damages, adverse publicity, and other losses that couldharm our business. Changes to existing laws or the passage of new laws intendedto address these issues could directly affect the way we do business or couldcreate uncertainty on the use of the Internet. This could reduce demand for ourproducts, increase the cost of our doing business, expose us to litigation 

 

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costs, increase our service or delivery costs, or otherwise harm ourbusiness.

 

***New and existingregulations could harm our business.***

 

We are subject to the same foreign and domestic laws as other companiesconducting both online and offline business. There are still relatively fewlaws specifically directed towards online business. However, due to theincreasing popularity and use of the Internet and online services, many lawsrelating to the Internet are being debated at all levels of government aroundthe world, and it is possible that such laws and regulations will be adopted.These laws and regulations could cover issues such as user privacy, freedom ofexpression, pricing, fraud, content and quality of products and services,taxation, advertising, intellectual property rights, and information security.Applicability to the Internet of existing laws governing issues, such asproperty ownership, copyrights and other intellectual property issues,taxation, libel and defamation, obscenity, and personal privacy is uncertain.The vast majority of these laws were adopted prior to the advent of theInternet and related technologies and, as a result, do not contemplate oraddress the unique issues of the Internet and related technologies. Those lawsthat do reference the Internet, such as the U.S. Digital Millennium CopyrightAct and the European Union’s Directive on Distance Selling and ElectronicCommerce, have only recently begun to be interpreted by the courts and implementedby the European Union member states, so their applicability and scope remainuncertain. As our activities and the types of goods listed on our websiteexpand, regulatory agencies may claim that we or our users are subject tolicensure in their jurisdiction, either with respect to our business ingeneral, or in order to allow the sale of certain items, such as real estate,event tickets, boats, and automobiles.

 

In addition, because our products are available over the Internet inmultiple states and because we sell merchandise to consumers residing inmultiple states, we could be required to qualify to do business as a foreigncorporation in each state in which our products are available. Our failure toqualify as a foreign corporation in a jurisdiction in which we are required todo so could subject us to penalties. Any new legislation or regulation, or theapplication of laws or regulations from jurisdictions whose laws do notcurrently apply to our business could have a material adverse affect on our business.

 

***We depend to a verysignificant extent on David Zinberg, our Chairman of the Board, President, andChief Executive Officer.***

 

Our performance depends substantially upon David Zinberg, our Chairmanof the Board, President, and Chief Executive Officer, who has extensiveexperience with the purchase and sale of jewelry. We rely on Mr. Zinbergto make critical operational decisions on a daily basis, such as productofferings and purchases, and to make key strategic plans. We have an employmentagreement with Mr. Zinberg extending through 2009. The loss of theservices of Mr. Zinberg would adversely affect our business andoperations.

 

***Holders of commonstock issued by us in prior offerings may be entitled to rescind theirpurchases.***

 

From our inception untilmid-2003, we raised over $20.5 million in gross equity capital by sellingshares of our common stock to approximately 830 investors at prices rangingfrom $4.00 to $6.00 per share with a weighted average share price of $4.50. Wealso issued shares of common stock to about 30 persons in exchange for servicesand other non-cash consideration valued in excess of $5.5 million and issuedapproximately 250 stock option grants to purchase common stock at a weightedaverage exercise price of $4.45. After conducting these sales of oursecurities, we determined that these sales were not exempt from theregistration requirements under the Securities Act of 1933 and similarprovisions of laws of the states in which our stockholders reside, becausecertain of our employees who solicited investors engaged in a “generalsolicitation” of securities. In addition, these employees received compensationfor selling our common stock and were required to be licensed as broker-dealerswith the Securities and Exchange Commission, or SEC, and various stateauthorities, but they were not so licensed. In such situations, a number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission, civilpenalties, a restraining order or injunction, and a court order to payrestitution and costs.

 

***We do not intend topay dividends on our common stock, and, consequently, your only opportunity toachieve a return on your investment is if the price of our common stockappreciates.***

 

We havenever declared or paid any cash dividends on our common stock and do not intendto pay dividends on our common stock for the foreseeable future. We intend toinvest any future earnings to fund our business. Therefore, stockholders likelywill not receive any dividends on our common stock for the foreseeable future.Investors cannot be certain that they will receive a positive return on theirinvestment when they sell their shares or that they will not lose the entire amountof their investment.

 

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***The concentration ofour capital stock ownership with our founder and executive officers anddirectors and their affiliates will limit your ability to influence corporatematters.***

 

Our founder, executive officers, and directors together ownapproximately 34.5% of our common stock as of September 30, 2008. MarinaZinberg, our Vice President, who is the sister of David Zinberg, our Chairman,President and Chief Executive Officer, owns an additional 31.5% of our commonstock.  As a result, these individualswill have significant influence over our management and affairs and over allmatters requiring stockholder approval, including the election of directors andthe approval of significant corporate transactions, such as a merger or a saleof our company or its assets, for the foreseeable future. This concentratedcontrol will limit the ability of other stockholders to influence corporatematters. Because of this, we may take actions that some of our stockholders donot view as beneficial. As a result, the market price of our common stock couldbe adversely affected because stockholders may not view favorably theconcentration of control in the hands of management.

 

***Our charterdocuments and Delaware law could make it more difficult for a third party toacquire us, and discourage a takeover.***

 

On June 22, 2006, we reincorporated inDelaware, and the Delaware certificate of incorporation and the DelawareGeneral Corporation Law, or DGCL, contain provisions that may have the effectof making more difficult or delaying attempts by others to obtain control ofour company, even when these attempts may be in the best interests of ourstockholders. The Delaware certificate of incorporation also authorizes ourBoard of Directors, without stockholder approval, to issue one or more seriesof preferred stock, which could have voting and conversion rights that adverselyaffect or dilute the voting power of the holders of common stock. Delaware lawalso imposes conditions on certain business combination transactions with “interestedstockholders.” The Delaware certificate of incorporation divides our Board ofDirectors into three classes, with one class to stand for election each yearfor a three-year term after the initial election. The classification ofdirectors tends to discourage a third party from initiating a proxysolicitation or otherwise attempting to obtain control of our company and maymaintain the incumbency of our Board of Directors, as this structure generallyincreases the difficulty of, or may delay, replacing a majority of directors.The Delaware bylaws authorize our Board of Directors to fill vacancies or newlycreated directorships. A majority of the directors then in office may elect asuccessor to fill any vacancies or newly created directorships.

 

**ITEM 2. UNREGISTERED SALES AND PURCHASESOF EQUITY SECURITIES**

 

No stock awards and stock options weregranted during the three months ended September 30, 2008.

 

**Issuer Purchases of Equity Securities**

 

As of September 30, 2008,we have purchased a cumulative total of 1,377,534 shares for $12.0 million. Thefollowing table contains information about purchases of our common stock duringthe three months ended September 30, 2008:

 
| ** **                                 | ** ** | ** **    | ** ** | ** **  | ** ** | **Total Number of** | ** ** | **Maximum**                    | ** ** |
|--------------------------------------------|------------|---------------|------------|-------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | ** **    | ** ** | ** **  | ** ** | **Shares**                    | ** ** | **Dollar Value**          | ** ** |
| ** **                                 | ** ** | **Total**     | ** ** | **Average** | ** ** | **Purchased as**         | ** ** | **of Shares that**   | ** ** |
| ** **                                 | ** ** | **Number**    | ** ** | **Price**   | ** ** | **Part of a**       | ** ** | **May**                        | ** ** |
| ** **                                 | ** ** | **of**        | ** ** | **Paid**    | ** ** | **Publicly**                  | ** ** | **yet be Purchased** | ** ** |
| ** **                                 | ** ** | **Shares**    | ** ** | **per**     | ** ** | **Announced**                 | ** ** | **Under the**             | ** ** |
| **2008**                                   | ** ** | **Purchased** | ** ** | **Share**   | ** ** | **Program**                   | ** ** | **Program (1)**           | ** ** |
| July 1 –  July 31           |       | 100,727       |       | $           | 9.27       |                          | 1,024,024  |                           | $          | 11,215,265 |   |
| August 1  – August 31       |       | 353,510       |       | $           | 9.20       |                          | 1,377,534  |                           | $          | 7,962,657 |   |
| September 1  – September 30 |       | —        |       | $           | —     |                          | 1,377,534  |                           | $          | 7,962,657 |   |
| Total                                      |       | 454,237       |       |        |       |                          |       |                           |       |

 

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

 

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

 

On June 25, 2008, we held our AnnualMeeting of Shareholders.  We solicitedproxies for the Annual Meeting pursuant to Regulation 14A under the SecuritiesExchange Act of 1934, as amended.  Therewas no solicitation in opposition to the two nominees of the Board of Directorslisted in our Proxy Statement, dated June 5, 2008, and both nominees wereelected.

 

The following matters were acted upon by ourshareholders at the Annual Meeting, at which approximately 12,715,726 shares ofcommon stock, or 53.1% of the shares of common stock outstanding and entitledto vote at the Annual Meeting, were present in person or by proxies:

 

1.             Electionof Directors,   The Board of Directorsnominated two persons for election as Class II directors, each to holdoffice for three-year terms.  Eachnominee was an incumbent director, no other person was nominated, and each nomineewas elected.  The votes cast for, orwithheld or abstained with respect to, each nominee were as follows:  Man Jit Singh—12,590,783 for, 124,943withheld, and Lawrence Y. Kong—12,567,580 for, 148,146 withheld.

 

2.             Proposalto Approve Amendment to 2006 Stock Award Plan. The Board of Directors submitted a resolution that the shareholdersapprove an amendment to our 2006 Stock Award Plan to increase by 500,000 sharesof common stock, from 1,000,000 to 1,500,000 shares, the total number of sharesof common stock reserved and available in connection with awards under the 2006Plan.  There were 12,142,763 sharesvoting in favor of, 540,564 shares voting against, the resolution.  The holders of 32,399 shares abstained, andthere were no “broker non-votes.”  Theresolution, having received the affirmative vote of the holders of a majorityof the shares of common stock outstanding and entitled to vote at the AnnualMeeting, was adopted.

 

3.             Ratificationof Appointment of Independent Auditor. The Board of Directors submitted a resolution that the shareholdersratify the action of the Audit Committee in selecting and appointing the firmof Stonefield Josephson, Inc. as the Company’s independent registeredpublic accounting firm for the year ending December 31, 2008.  There were 12,677,921 shares voting in favorof, 13,180 shares voting against the resolution.  The holders of 24,625 shares abstained, andthere were no “broker non-votes.”  Theresolution, having received the affirmative vote of the holders of a majorityof the shares of common stock outstanding and entitled to vote at the AnnualMeeting, was adopted.

 

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**ITEM 5. OTHER INFORMATION.**

 

OnNovember 10, 2008, the Company announced, effective immediately, that LeonKuperman, currently Chief Technology Officer and VP of BusinessDevelopment, has also been named President,and that David Zinberg, who will continue as the Company’s Chairman of theBoard and Chief Executive Officer, would step down as President.

 

Mr. Zinberg stated in the announcement that, “I believe this is the right time to transition from my role as President, and I have the utmost confidence in Leon Kuperman. Leon has demonstrated that he is capable of assuming that role along with his duties as Chief Technology Officer to effectively meet his responsibilities to our employees, customers and shareholders. Leon has done a superb job as Chief Technology Officer and VP of Business Development over the past two years and over the past 6 months has become increasingly involved in our investor relations activities as well. I look forward to maintaining my role as Chief Executive Officer and will focus primarily on purchasing and overseeing our key strategic initiatives. I founded the Company in 1998, and it is one that I deeply cherish and to which I feel strongly committed.”

 

Biographicalinformation concerning Mr. Kuperman, and information concerning his businessexperience and compensation is set forth in the proxy statement dated June 5,2008, for the Company’s 2008 Annual Meeting of Stockholders, and thedescriptions of that information under the headings titled “Executive Officersand Key Employees”, “Summary Compensation Table”, and “Grants of Plan-BasedAwards,” are incorporated herein by reference.

 

**ITEM 6. EXHIBITS**

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

 

 

**SIGNATURES**

 

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

 
|                                |       | BIDZ.COM, INC.                            |
|--------------------------------|------------|-------------------------------------------|
|                           |       |                                      |
|                           | By:        | /s/ DAVID ZINBERG                         |
|                           |       |                                      |
| ** **                     | ** ** | **David Zinberg**                         |
| ** **                     | ** ** | **President and Chief Executive Officer** |
|                           |       |                                      |
|                           | By:        | /s/ LAWRENCE KONG                         |
|                           |       |                                      |
| ** **                     | ** ** | **Lawrence Kong**                         |
| ** **                     | ** ** | **Principal Accounting Officer**          |
|                           |       |                                      |
| Dated:  November 10, 2008 |       |                                      |

 

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