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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 March 31,  2009**                                                                                                                                                                                      |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                   |
| **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 the past 90 days.     Yes x   No  o

 

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

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

 

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 April 30,2009: 23,238,764

 

 

 

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**TABLEOF CONTENTS**

 
| PART I. FINANCIAL  INFORMATION |                                                                                                            |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------|
| Item 1.                        | Financial Statements                                                                                            | 3 |
|                                | Condensed  Balance Sheets as of December 31, 2008 and March 31, 2009  (unaudited)                     | 3 |
|                                | Condensed  Statements of Income for the three month periods ended March 31, 2008  and 2009 (unaudited)     | 4 |
|                                | Condensed  Statements of Cash Flows for the three month periods ended March 31,  2008 and 2009 (unaudited) | 5 |
|                                | Notes to Financial Statements (unaudited)                                                                       | 6 |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                     | 10 |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk                                                     | 16 |
| Item 4.                             | Controls and  Procedures                                                                                        | 16 |
|                                |                                                                                                            |   |
| PART II. OTHER INFORMATION     | 17                                                                                                              |
| Item 1.                             | Legal  Proceedings                                                                                              | 17 |
| Item 1A                             | Risk Factors                                                                                                    | 17 |
| Item 2.                             | Unregistered  Sales and Purchases of Equity Securities                                                          | 29 |
| Item  6.                            | Exhibits                                                                                                        | 30 |
|                                |                                                                                                            |   |
| SIGNATURES                          | 30                                                                                                              |

 

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 share data)*

** **
| ** **                                                                                                                                                                        | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2008**              | ** ** | **2009**           | ** ** |
| ** **                                                                                                                                                                        | ** ** | ** **            | ** ** | **(Unaudited)**    | ** ** |
| **Assets**                                                                                                                                                                        | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current assets:                                                                                                                                                                   |       |                  |       |               |       |
| Cash                                                                                                                                                                              |       | $                     | 4,456      |               | $          | 3,160 |   |
| Accounts receivable                                                                                                                                                               |       | 591                   |       | 677                |       |
| Inventories, net of reserves of $820 and $1,350 at December 31,  2008 and March 31, 2009, respectively                                                                  |       | 37,657                |       | 38,947             |       |
| Other receivable (includes related party amounts of $102 and $127 at  December 31, 2008 and March 31, 2009, respectively)                                               |       | 1,041                 |       | 1,052              |       |
| Current deferred tax assets                                                                                                                                                       |       | 1,950                 |       | 2,053              |       |
| Other current assets                                                                                                                                                              |       | 689                   |       | 758                |       |
| Total current assets                                                                                                                                                              |       | 46,384                |       | 46,647             |       |
| Long term deferred tax asset                                                                                                                                                      |       | 84                    |       | 169                |       |
| Property and equipment, net                                                                                                                                                       |       | 1,672                 |       | 1,627              |       |
| Intangible asset                                                                                                                                                                  |       | 161                   |       | 161                |       |
| Deposits                                                                                                                                                                          |       | 104                   |       | 104                |       |
| Total assets                                                                                                                                                                      |       | $                     | 48,405     |               | $          | 48,708 |   |
| ** **                                                                                                                                                                        | ** ** | ** **            | ** ** | ** **         | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                                     | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current liabilities:                                                                                                                                                              |       |                  |       |               |       |
| Revolving credit line                                                                                                                                                             |       | $                     | —     |               | $          | — |   |
| Accounts payable (includes related party amounts of $1,364 and $442 at  December 31, 2008 and March 31, 2009, respectively)                                             |       | 9,636                 |       | 8,893              |       |
| Accrued expenses                                                                                                                                                                  |       | 3,091                 |       | 3,205              |       |
| Deferred revenue                                                                                                                                                                  |       | 872                   |       | 1,189              |       |
| Total current liabilities                                                                                                                                                         |       | 13,599                |       | 13,287             |       |
|                                                                                                                                                                              |       |                  |       |               |       |
| Long term deferred tax liability                                                                                                                                                  |       | —                |       | 162                |       |
|                                                                                                                                                                              |       |                  |       |               |       |
| 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, 2008 and March 31, 2009,  respectively                     |       | —                |       | —             |       |
| Common stock: par value $0.001; authorized 100,000,000 shares; issued  and outstanding 22,917,918 and 22,839,499 at December 31, 2008 and March 31,  2009, respectively |       | 23                    |       | 23                 |       |
| Additional paid in capital                                                                                                                                                        |       | 24,520                |       | 24,240             |       |
| Shares held in treasury, at cost; 0 and 266,735 shares at  December 31, 2008 and March 31, 2009, respectively                                                           |       | —                |       | (871               | )          |
| Employees share purchase receivable                                                                                                                                               |       | (708                  | )          | (619               | )          |
| Accumulated earnings                                                                                                                                                              |       | 10,971                |       | 12,486             |       |
| Total stockholders’ equity                                                                                                                                                   |       | 34,806                |       | 35,259             |       |
| ** **                                                                                                                                                                        |       |                  |       |               |       |
| ** **                                                                                                                                                                        |       | $                     | 48,405     |               | $          | 48,708 |   |

 

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 March 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                              | ** ** | **2009** | ** ** |
|                                                            |       |                                  |       |   |   |
| Net revenue:                                                    |       |                                  |       |   |   |
| Merchandise sales                                               | ** ** | $                                     | 57,609     |   | $ | 30,891 |   |
| Wholesale merchandise sales                                     |       | 4,202                                 |       | 206 |   |
| Other revenue                                                   |       | 118                                   |       | 80 |   |
|                                                            |       | 61,929                                |       | 31,177 |   |
| Cost of revenue                                                 |       | 43,893                                |       | 20,991 |   |
| Gross profit                                                    |       | 18,036                                |       | 10,186 |   |
| Operating expenses:                                             |       |                                  |       |   |   |
| General and administrative                                      |       | 5,907                                 |       | 4,861 |   |
| Sales and marketing                                             |       | 4,199                                 |       | 2,605 |   |
| Depreciation and amortization                                   |       | 162                                   |       | 180 |   |
| Total operating expenses                                        |       | 10,268                                |       | 7,646 |   |
| Income from operations                                          |       | 7,768                                 |       | 2,540 |   |
| Other income - interest income                                  |       | 13                                    |       | 2 |   |
| Other expense - interest (expense)                              |       | (11                                   | )          | (11 | ) |
| Income before income tax expense                                |       | 7,770                                 |       | 2,531 |   |
| Income tax expense                                              |       | 3,165                                 |       | 1,016 |   |
| Net income                                                      | ** ** | $                                     | 4,605      |   | $ | 1,515 | ** ** |
|                                                            |       |                                  |       |   |   |
| Net income per share available to common shareholders - basic   | ** ** | $                                     | 0.19       |   | $ | 0.07 | ** ** |
| Net income per share available to common shareholders - diluted | ** ** | $                                     | 0.18       |   | $ | 0.07 | ** ** |
| Weighted average number of shares outstanding - basic           |       | 24,538,263                            |       | 22,898,532 |   |
| Weighted average number of shares outstanding - diluted         |       | 25,828,507                            |       | 22,898,532 |   |

 

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

 

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**Bidz.com, Inc.**

 

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

 

*(in thousands)*

* *
| ** **                                                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                              | ** ** | **2009** | ** ** |
|                                                                                   |       |                                  |       |   |   |
| **Cash flows provided by (used  for) operating activities:**                           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net income                                                                             |       | $                                     | 4,605      |   | $ | 1,515 |   |
|                                                                                   |       |                                  |       |   |   |
| **Adjustments to reconcile net income to net cash provided  by operating activities:** | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Depreciation and amortization                                                          |       | 162                                   |       | 180 |   |
| Change in inventory reserve                                                            |       | (156                                  | )          | 530 |   |
| Impairment in employees share purchase receivable                                      |       | —                                |       | 89 |   |
| Stock-based compensation                                                               |       | 267                                   |       | 81 |   |
| **Changes in assets and liabilities:**                                                 | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **(Increase) decrease in assets:**                                                     | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Accounts receivable                                                                    |       | (2,638                                | )          | (86 | ) |
| Inventories                                                                            |       | 22,047                                |       | (1,820 | ) |
| Other receivable                                                                       |       | —                                |       | (11 | ) |
| Current deferred tax assets                                                            |       | —                                |       | (103 | ) |
| Other current assets                                                                   |       | 1,918                                 |       | 421 |   |
| **Increase (decrease) in liabilities:**                                                | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Accounts payable                                                                       |       | (14,390                               | )          | (743 | ) |
| Accrued expenses                                                                       |       | 1,167                                 |       | 114 |   |
| Deferred revenue                                                                       |       | (1,265                                | )          | 317 |   |
| Net cash provided by operating activities                                              |       | 11,717                                |       | 484 |   |
|                                                                                   |       |                                  |       |   |   |
| **Cash flows used for investing  activities:**                                         | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Prepayment for intangible asset                                                        |       | —                                |       | (490 | ) |
| Capital expenditures                                                                   |       | (203                                  | )          | (135 | ) |
| Net cash used for investing activities                                                 |       | (203                                  | )          | (625 | ) |
| **Cash flows provided by (used  for) financing activities:**                           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Long term deferred tax asset                                                           |       | —                                |       | (85 | ) |
| Long term deferred tax liability                                                       |       | —                                |       | 162 |   |
| Revolving credit line                                                                  |       | (5,924                                | )          | — |   |
| Proceeds from exercise of stock options                                                |       | 3                                     |       | — |   |
| Adjustment to tax benefit from stock based compensation                                |       | —                                |       | (158 | ) |
| Purchase of treasury stock                                                             |       | (3,808                                | )          | (1,074 | ) |
| Net cash used for financing activities                                                 |       | (9,729                                | )          | (1,155 | ) |
| ** **                                                                             | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Net increase (decrease) in cash**                                                    |       | 1,785                                 |       | (1,296 | ) |
| **Cash, beginning of period**                                                          |       | 4,808                                 |       | 4,456 |   |
| **Cash, end of period**                                                                |       | $                                     | 6,593      |   | $ | 3,160 |   |
|                                                                                   |       |                                  |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                 | ** ** | ** **                            | ** ** | ** ** | ** ** |
|                                                                                   |       |                                  |       |   |   |
| Interest paid                                                                          |       | $                                     | 11         |   | $ | 11 |   |
|                                                                                   |       |                                  |       |   |   |
| Income taxes paid                                                                      |       | $                                     | 1,332      |   | $ | — |   |
|                                                                                   |       |                                  |       |   |   |
| **Supplemental disclosure of  non-cash investing and financing activities:**           | ** ** | ** **                            | ** ** | ** ** | ** ** |
|                                                                                   |       |                                  |       |   |   |
| Retirement of treasury shares                                                          |       | $                                     | 1,176      |   | $ | 203 |   |

 

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

 

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**BIDZ.COM, INC.**

**NOTES TO FINANCIAL STATEMENTS FORTHE THREE MONTHS ENDED MARCH 31, 2008 AND 2009**

**(UNAUDITED)**

 

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

 

**Basis of Presentation**

 

The accompanying condensed balance sheet as of December 31,2008, 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 31,2008 filed in the Annual Report on Form 10-K by the Company on February 25,2009 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 March 31, 2009 and the results ofoperations for the three month periods ended March 31, 2008 and 2009 andthe cash flows for the three month periods ended March 31, 2008 and2009.  The results of operations for the three months ended March 31,2009 are not necessarily indicative of the results which may be expected forthe entire fiscal 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 and accruedexpenses.

 

**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 76.4% and 69.7% ofnet revenue for the three months ended March 31, 2008 and 2009,respectively.

 

**Recent Developments**

 

In 2009, we plan to implement an ERP system based onMicrosoft Dynamics AX that will fundamentally change and improve our IT,operational and accounting infrastructure.

 

In March 2009, we acquired a $6.0 million lot ofjewelry, intellectual property and tools from the Colibri Group bankruptcyauction. Subsequently in April 2009, we sold all intellectual property andtools acquired in the Colibri Group bankruptcy auction to the Richline Group, aBerkshire Hathaway Company.

 

In March 2009, we have entered into an amendment ofthe lease of our main office and warehouse (i) extending the expirationdate of the lease by thirty-two months to June 30, 2012, and (ii) notincreasing the monthly rent for the duration of the lease.

 

In February 2009, our Board of Directorsauthorized an increase in the open market stock buyback program of itsoutstanding common stock to $33.5 million from $20 million. The stock buybackwill be at prices deemed appropriate by management over a 24 month period. Asof March 31, 2009, we have purchased a cumulative total of 2.2million shares for $14.5 million, and 1.9 million shares have been retiredwhich reduced our number of shares outstanding. The balance of the 267,000shares was retired in April 2009 and it is our policy to retire all sharesacquired in the buyback.

 

**Recent Accounting Pronouncements**

 

In February 2007, the FASB issued Statement No. 159(“FAS 159”) which expanded FAS No. 157, “*FairValue Measurements*,” which defines fair value, establishesguidelines for measuring fair value and expands disclosures regarding fairvalue measurements. FAS 159 does not require any new fair value measurementsbut rather eliminates inconsistencies in 

 

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guidance found in various prior accountingpronouncements. FAS 159 is effective for fiscal years beginning after November 15,2007. The adoption of FAS 159 did not have a material impact on our financialstatements.

 

In September 2006, the FASB issued StatementSFAS No. 157 (“FAS 157”), “*FairValue Measurements*,” which defines fair value, establishesguidelines for measuring fair value and expands disclosures regarding fairvalue measurements. FAS 157 does not require any new fair value measurementsbut rather eliminates inconsistencies in guidance found in various prioraccounting pronouncements. SFAS 157 is effective for fiscal years beginningafter November 15, 2007. The adoption of FAS 159 did not have a materialimpact on our financial statements.

 

**2.****             Earningsper Common Share**

 

Inaccordance with SFAS No. 128, *“Earnings per Share,”*the basic earnings per common share is calculated by dividing net incomeavailable to common stockholders less preferred dividends by the weightedaverage number of common shares outstanding. Diluted earnings per common shareis computed similarly to basic earnings per common share, except that thedenominator is increased to include the number of additional common shares thatwould have been outstanding if potential common shares had been issued and ifthe additional common shares were not anti-dilutive.

 

Thedilutive effect of outstanding stock options is reflected in diluted earningsper share by application of the treasury stock method including the impact ofpro forma deferred tax benefits for the three month periods ending March 31,2008 and 2009.  The following table sets forth the computation of basicand diluted net income per share.

 

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

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                        | ** ** | **2009** | ** ** |
|                                    |       |                                            |       |   |   |
| Basic and diluted net income per share: |       |                                            |       |   |   |
| Numerator:                              |       |                                            |       |   |   |
| Net income                              |       | $                                               | 4,605      |   | $ | 1,515 |   |
| Denominator:                            |       |                                            |       |   |   |
| Weighted common shares outstanding      |       | 24,538,263                                      |       | 22,898,532 |   |
| Effect of dilutive securities           |       | 1,290,244                                       |       | — |   |
| Denominator for diluted calculation     |       | 25,828,507                                      |       | 22,898,532 |   |
| Net income per share, basic             |       | $                                               | 0.19       |   | $ | 0.07 |   |
| Net income per share, diluted           |       | $                                               | 0.18       |   | $ | 0.07 |   |

 

**3**.             **Inventories**

 

Inventories, which arepledged as collateral for our revolving line of credit, consist of thefollowing *(in thousands)*:

 
| ** **                              | ** ** | **December 31, 2008** | ** ** | **March 31, 2009 (unaudited)** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | ** **                      | ** ** | ** **                                    | ** ** |
| Fine jewelry, watches and other         |       | $                               | 37,485     |                                          | $          | 32,938 |   |
| Loose diamonds and semi-precious stones |       | 570                             |       | 849                                           |       |
| Prepaid inventory                       |       | 36                              |       | 6,122                                         |       |
| Inventory with manufacturing vendors    |       | 386                             |       | 388                                           |       |
| Product inventories                     |       | 38,477                          |       | 40,297                                        |       |
| Less: Inventory reserve                 |       | (820                            | )          | (1,350                                        | )          |
|                                    |       | $                               | 37,657     |                                          | $          | 38,947 |   |

 

**4.             RevolvingCredit Line**

 

In July 2006, we entered into a revolvingcredit line agreement with LaSalle Bank, wholly owned by Bank of America, toprovide working capital financing secured by inventories and tangible assets.The agreement allowed for us to initially draw on a line of credit up to $10million. During the three month period ended March 31, 2008 wesuccessfully increased the limit to $25 million. The revolving credit lineagreement expires in July of 2010. As of March 31, 2009,there was no outstanding balance under the revolving credit line. Under theterms and conditions of the revolving credit line agreement, the Company issubject to certain restrictive covenants for which it is in compliance at March 31,2009.

 

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**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 werecognize in our financial statements the cost resulting from all share-basedpayment transactions. In addition, in March 2005 the Securities andExchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107,*“Share-Based Payment” (“SAB 107”),* whichprovides the SEC staff’s position regarding the application of SFAS 123R andcertain SEC rules and regulations, and also provides the staff’s viewsregarding the valuation of share-based payment arrangements for publiccompanies. On January 1, 2006, we adopted SFAS 123R, which eliminates ourability to account for share-based compensation transactions, as we formerlydid, using the intrinsic value method as prescribed by APB 25 and generallyrequires that we recognize in our statements of income all share-based paymentsto employees, including grants of stock options based on their fair values.

 

The Company adopted SFAS 123R using the modifiedprospective method which requires the application of the accounting standard asof January 1, 2006. The Company’s financial statements as of and for thethree months ended March 31, 2008 and 2009, respectively, reflect theimpact of adopting SFAS 123R.

 

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. Compensationexpense for the stock-based payment awards granted subsequent to December 31,2005, will be based on the grant date fair value estimated in accordance withSFAS 123R. As stock-based compensation expense recognized in the statements ofincome is based on awards ultimately expected to vest, it will be reduced forestimated forfeitures. SFAS 123R requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates.

 

Under SFAS 123R, we will continue to use theBlack-Scholes model to estimate the fair value of options. Our assessment ofthe estimated compensation charges will be affected by our stock price as wellas assumption regarding a number of subjective variables and the related taximpact. These variables include, but are not limited to, our stock pricevolatility, forfeiture rates and employee stock option exercise behaviors (orexpected term).

 

**Restricted Shares**

 

The restricted stock awards are expensed pro rataover the vesting period based upon the market value of the awards at the timeof grant. Stock-based compensation from restricted stock awards totaled $88,000and $81,000 for the three months ended March 31, 2008 and 2009,respectively. The unamortized stock-based expense for restricted stock awardswas $768,000 at March 31, 2009.

 

A summary of all restricted stock activity duringthe three months ended March 31, 2009 is as follows:

 
| Restricted shares outstanding, December 31, 2008 |   | 117,800 |   |
|-------------------------------------------------------|--------|---------|--------|
| Shares granted                                        |   | —  |   |
| Shares vested                                         |   | (27,500 | )      |
| Shares forfeited                                      |   | (9,000  | )      |
| Restricted shares outstanding, March 31, 2009    |   | 81,300  |   |

 

**StockOptions**

 

We adopted our 2001 Stock Option Plan, our 2002Special Stock Option Plan and our 2006 Award Plan (collectively, the ‘‘Plans’’),in January 2001, January 2002, and March 2006, respectively. The2006 Plan provides for the granting of awards in the form of incentive stockoptions, nonqualified stock options, stock appreciation rights, shares ofrestricted common stock, bonus stock in lieu of obligations, or otherstock-based awards to employees, directors, and independent contractors whoprovide valuable services to our company.  The vesting requirements,performance thresholds and other terms and conditions of options granted underthe Plans will be determined by our Compensation Committee and Board ofDirectors.

 

Thefollowing is a summary of stock option activity as of March 31, 2009, andchanges during the three months ended March 31, 2009.

 

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| **Options**                                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price ($)** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value ($)** | ** ** |
|-----------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|
| Outstanding at December 31, 2008         |       | 6,864,500  |       | 6.08                                             |       | 2.36                                                     |       | —                                   |       |
| Granted                                       |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Exercised                                     |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Forfeited                                     |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Expired                                       |       | 3,000      |       | 6.00                                             |       |                                                     |       |                                     |       |
| Outstanding at March 31, 2009            |       | 6,861,500  |       | 6.08                                             |       | 2.12                                                     |       | —                                   |       |
| Vested and Exercisable at March 31, 2009 |       | 6,861,500  |       | 6.08                                             |       | 2.12                                                     |       | —                                   |       |

 

Thefollowing table summarizes information about stock options outstanding andexercisable at March 31, 2009.

 
| ** **                              | ** ** | ** ** | ** ** | ** **                         | ** ** | **Options outstanding and exercisable  as of March 31, 2009** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **                         | ** ** | **Options outstanding**                                                                     | ** ** | **Options exercisable** | ** ** |
| **Range of  exercise prices** | ** ** | ** ** | ** ** | **Number  outstanding  3/31/2009** | ** ** | **Weighted  average  remaining  contractual**                                                    | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  exercisable  3/31/2009** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **                         | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $                                       | 5.01       |       | $          | 6.00                               |       | 6,628,500                                                                                        |       | 2.09 |   | $ | 6.00 |   | 6,628,500 |   | $ | 6.00 |   |
| $                                       | 6.01       |       | $          | 7.00                               |       | 105,500                                                                                          |       | 2.94 |   | $ | 6.50 |   | 105,500 |   | $ | 6.50 |   |
| $                                       | 9.01       |       | $          | 10.00                              |       | 127,500                                                                                          |       | 3.21 |   | $ | 9.90 |   | 127,500 |   | $ | 9.90 |   |
| $                                       | 5.01       |       | $          | 10.00                              |       | 6,861,500                                                                                        |       | 2.12 |   | $ | 6.08 |   | 6,861,500 |   | $ | 6.08 |   |

 

Thestock-based compensation expense from stock options for the three months ended March 31,2008 and 2009 totaled $32,000 and $0, respectively. The unamortized stock-basedcompensation expense from stock options as of March 31, 2009 is $0. Nostock options were granted in the three months ended March 31, 2008 and2009.

 

**6.****                                      SegmentInformation**

 

Net revenue by geographic area is presented based uponthe country of destination. No foreign country represented 10% or more of netrevenue for three-month periods ended March 31, 2008 and 2009. Net revenueby geographic area was as follows:

 

*(inthousands, except percentage data)*

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2009** | ** ** |
| **Geographic area** | ** ** | **Amount**                       | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States            |       | $                                | 47,325     |   | 76.4 | % | $ | 21,723 |   | 69.7 | % |
| International            |       | 14,604                           |       | 23.6 | % | 9,454 |   | 30.3 | % |
|                     |       |                             |       |   |   |   |   |   |   |
| Total                    |       | $                                | 61,929     |   | 100.0 | % | $ | 31,177 |   | 100.0 | % |

 

**7.****                                      Concentrations**

 

Purchasesfrom two vendors amounted to $2.5 million and $3.8 million representing 13.2%and 17.4% of the total purchases during the three months ended March 31,2008 and 2009, respectively. Outstanding accounts payable to the two vendorstotaled $1.3 million and $725,000****as of December 31,2008 and March 31, 2009, respectively. Loss of either of thesevendors is not expected to have a significant negative impact on the operationsof the Company.

 

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

 

During the three monthsended March 31, 2008 and 2009, we purchased approximately 3.2% and 3.5%,respectively, of our merchandise from LA Jewelers, Inc., where one of its managers is a stockholder whobeneficially owns approximately 5.2% of our outstanding common stock as of March 31,2009. The accounts payable balances due to LA Jewelers were $1.4 million and$442,000 as of December 31, 2008 and March 31, 2009, respectively.

 

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LAJewelers participates in our inventory co-op marketing program. For the threemonths ended March 31, 2008 and 2009, we earned approximately $482,000 and$181,000, respectively from LA Jewelers relating to co-op marketingcontributions and $124,000 was unamortized as of March 31, 2009. Theamounts of co-op marketing contributions due from LA Jewelers were $22,000 and$28,000 as of December 31, 2008 and March 31, 2009, respectively.

 

InMay, 2007 we entered into an understanding with LA Jewelers whereby they willguarantee that we will earn a certain minimum gross profit margin on theirmerchandise. This agreement provides that in the event of a gross profit marginshortfall we will be compensated for the difference between our actual grossprofit margin and the guaranteed minimum gross profit margin. For the threemonths ended March 31, 2008 and 2009, we recognized $141,000 and $19,000,respectively, under this agreement. As of December 31, 2008 and March 31,2009, we have $80,000 and $99,000, respectively, outstanding under this grossprofit margin guarantee.

 

Duringthe three months ended March 31, 2008 and 2009, we recorded $0 and$206,000, respectively, in wholesale merchandise sales to a customer that isowned by Daniella Zinberg, the daughter of our Chief Executive Officer, DavidZinberg. There was no accounts receivable due from this customer as of December 31,2008 and March 31, 2009.

 

**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. The examination wasconcluded as of December 31, 2007 and final settlement was approximately$35,000, including interest and penalties. We are currently under examinationfor the 2007 tax year.

 

**10.          Contingencies**

 

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

 

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

 

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

 

**Overview**

 

We area leading online retailer of jewelry, featuring a live auction format. We haveestablished our retail brand in the online marketplace by offering high-qualitymerchandise, a unique user-friendly shopping experience, and the opportunityfor buyers to achieve significant cost savings versus traditional retailchannels. A key to our success has been our ability to efficiently and costeffectively source closeout and regular jewelry merchandise, and rapidlyrespond to changing consumer 

 

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demandsfor jewelry, watches and accessories. We offer our products through acontinuous live format, featuring a $1 minimum opening bid, and a unique15-second auction extension period that allows our auctions to continue untilall bids are received. On select auctions we maintain a reserve price that mustbe met before a sale will be consummated. The majority of our auctions areshort-term, often lasting less than one hour, providing immediate gratificationto our customers and encouraging frequent visits and active viewing of ourwebsite.

 

Inaddition to our auction site we have a fixed pricing format that offers similarmerchandise as those listed for auction. This online store provides us access to different types of consumers andwe will plan to offer customers the ability to design their own jewelryincluding diamond earrings and rings in the near future.

 

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

 

Wesell to consumers looking for reliable bargains on jewelry, watches,accessories and brand name merchandise. Because we purchase and retain all ofour inventory onsite, we can provide our customers with timely service and deliveryof their purchases. In addition, each item is inspected by one of our trainedproduct specialists prior to its placement on our website, which assures ourcustomers of the quality of their purchases of our products. We operate in ahighly competitive market with low barriers to entry. By selling our ownmerchandise, we provide a buying environment in which we minimize fraudulentactivity and questionable product quality frequently associated with purchasetransactions from third-party sellers. We also provide a 15-day return policyon all merchandise. We believe that many of our customers resell merchandisethat they purchase from our auctions on eBay, at local auctions, and throughother retail channels. Our auctions and fixed price sales are conducted24 hours a day, seven days a week. We also offer daily telephone customersupport, 24-hour online live-help and e-mail customer support.

 

Inline with our growth plans, we have completed a major upgrade of our auctionplatform at the end of 2007. The new auction LiveBid system supports a broadrange 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, Arabicand German versions of our website in 2008.

 

**Critical Accounting Policies**

 

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

 

*Revenue Recognition*

 

Wederive our revenue from four sources: merchandise sales, which includewholesale merchandise sales, shipping revenue, transaction fee revenue andother revenue. In accordance with SAB 104, we recognize revenue from all foursources when the following revenue recognition criteria are met: (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped or theservice has been rendered and the customer takes ownership and assumes the riskof loss; (3) the selling price is fixed or determinable; and (4) collectionof the resulting receivable is reasonably assured.

 

Foronline sales through our website, we recognize merchandise sales upon shipmentsmade to consumers that are fulfilled from our warehouse. We require paymentbefore we ship and the payment is generally made online by credit card or otherelectronic payment methods. We record amounts received or billed prior toshipment of goods to customers as deferred revenue. We reduce gross sales byreturns and charge-backs from customers. For wholesale merchandise sales, werecognize sales when the merchandise is delivered to the customer and creditterms may be offered to such customers.

 

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

 

Weinclude transaction fee revenue in net revenue. The 3% auction transaction feeis applied to all merchandise sales, including shipping and handling but not towholesale merchandise sales.

 

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Wepresent sales tax liability on a net basis in accordance with Emerging IssuesTask Force (“EITF”) Issue No. 06-03.  Sales are not grossed up withthe attendant taxes and deducted as a separate line item. The EITF becameeffective for interim and annual reporting periods beginning after December 15,2006.

 

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

 

*Cost of Revenue*

 

Costof revenue includes product costs, inbound and outbound shipping charges,packaging and shipping supplies, insurance on shipments, product repair andservice costs, and credit card and other electronic payment fees, and isrecorded in the same period in which related revenue has been recorded. Thecost of revenue is reduced by amortized co-op marketing contributions from ourvendors.

 

Outboundshipping costs on merchandise sales totaled $3.1 million and $1.7 millionin the three months ended March 31, 2008 and 2009, respectively.

 

*Returns and Allowances Reserve*

 

We estimate potentialfuture product returns and charge-backs related to current period revenue. Weanalyze historical returns, and changes in customer demand and acceptance ofour products when evaluating the adequacy of the sales returns reserve andother allowances in any accounting period. If actual returns are greater thanour estimates, we will record additional returns and allowances in addition toour estimates, which will result in lower net revenue recorded during thatperiod.  Reserves for returns andcharge-backs are included in accrued expenses.

* *

*Inventories*

 

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

 

*Inventory Reserve*

 

Theunique nature of our business model where customers set the prices they arewilling to pay may result in items selling below our cost, and we providereserves against our inventory based on the estimated 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.

 

*Inventory Co-op Marketing Contributions*

 

# In the thirdquarter of 2007, we started to bill and collect from our inventory vendors co-opmarketing contributions as an incentive for us to market and sell theirmerchandise on the Bidz website. In accordance with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain ConsiderationReceived from a Vendor, the co-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 benefit 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. For the threemonths ended March 31, 2008 and 2009, we have recognized $3.6 million and$2.3 million of co-op marketing contributions, respectively. Approximately $3.8million remain unamortized and is included as an offset to inventory at March 31,2009. Receivable from vendors for co-op marketing contributions, less allowancefor doubtful accounts, is included in other current assets and amounted to$954,000 at March 31, 2009.

#  

*Descriptionof Our Revenue, Costs, and Expenses*

 

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

 

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| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
|                                 |       |                                             |       |   |   |
| Net revenue                          |       | 100.0                                            | %          | 100.0 | % |
| Gross profit                         |       | 29.1                                             |       | 32.7 |   |
| Operating expenses:                  |       |                                             |       |   |   |
| General & administrative    |       | 9.5                                              |       | 15.6 |   |
| Sales & marketing           |       | 6.8                                              |       | 8.4 |   |
| Depreciation & amortization |       | 0.3                                              |       | 0.6 |   |
| Total operating expenses             |       | 16.6                                             |       | 24.6 |   |
| Income from operations               |       | 12.5                                             |       | 8.1 |   |
| Interest income                      |       | 0.0                                              |       | 0.0 |   |
| Interest expense                     |       | 0.0                                              |       | 0.0 |   |
| Income tax expense                   |       | 5.1                                              |       | 3.3 |   |
| Net income                           |       | 7.4                                              | %          | 4.8 | % |

 

*Net Revenue*

 

Substantiallyall of our net revenue consists of jewelry sold via the Internet, net ofreturns. We also generate net revenue from wholesale merchandise sales that isnot online, shipping and handling, auction transaction fee and other revenue.

 

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

 

| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| ** **                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Merchandise sales            |       | 78.2                                             | %          | 85.8 | % |
| Wholesale merchandise sales  |       | 6.8                                              |       | 0.7 |   |
| Shipping & handling |       | 11.8                                             |       | 10.2 |   |
| Transaction fees             |       | 3.0                                              |       | 3.0 |   |
| Commissions                  |       | 0.2                                              |       | 0.3 |   |
| Total net revenue            |       | 100.0                                            | %          | 100.0 | % |

 

*Gross Profit*

 

Our gross profit consistsof net revenue less the cost of revenue. Our cost of revenue consists of thecost of merchandise sold to customers, amortized co-op marketing contributionsfrom vendors, inbound and outbound shipping costs, packaging and shippingsupplies, insurance on shipments, product repair and service costs, and creditcard and other transaction fees associated with payments.

 

*General and Administrative Expenses*

 

Our general andadministrative expenses consist primarily of payroll and related benefit costsfor our employees. These expenses also include fulfillment, customer service,technology, professional fees, other general corporate expenses, andstock-based compensation, consisting substantially of stock option grants andrestricted stock awards to employees and directors.

 

*Sales and Marketing Expenses*

 

Our marketing expensesconsist primarily of costs associated with paid website search marketing,online banner marketing, e-mail campaigns, affiliate programs and optimizationservices. These marketing programs, which are designed to drive buyers to ourwebsite, are the most important factors in increasing demand for our jewelryproducts and increasing net revenue.

 

**Comparison of Three Months Ended March 31, 2009 to ThreeMonths Ended March 31, 2008**

 

Netincome in the three months ended March 31, 2009 was $1.5 million, or $0.07per basic and diluted share and net income in the three months ended March 31,2008 was $4.6 million, or $0.19 and $0.18 per basic and diluted share,respectively. Net income decreased by 67.1% in the three months ended March 31,2009 compared to the three months ended March 31, 2008.

 

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*NetRevenue*

 

Net revenue decreased49.7% to $31.2 million in the three months ended March 31, 2009 from$61.9 million in the three months ended March 31, 2008. Merchandisewholesale sales were $206,000 in the three months ended March 31, 2009compared to $4.2 million in the three months ended March 31, 2008.

 

The continuing economicdecline resulted in a major slowdown in our revenue in the first quarter of2009 compared to the first quarter of 2008. There was an overall decrease inonline demand for our jewelry as consumers reduced their discretionaryspending. If the economy continues to decline it will cause a decline in demandand have a negative effect on our revenue. We anticipate that net revenue willbe lower for the second and third quarters of 2009 compared to the firstquarter as the second and third quarters are seasonally weak periods forjewelry sales.

 

*GrossProfit*

 

Gross profit decreased43.5% to $10.2 million in the three months ended March 31, 2009 from $18.0million in the three months ended March 31, 2008. The decrease in grossprofit resulted from the decrease in sales revenue which declined by 49.7% forthe three months ended March 31, 2009 compared to the three months ended March 31,2008 and offset by the increase in gross profit margin to 32.7% in the threemonths ended March 31, 2009 from 29.1% in the three months ended March 31,2008. Gross profit margins benefited from the amortized co-op marketingcontributions that reduced our cost of sales by $2.3 million and $3.6 millionin the three months ended March 31, 2009 and 2008, respectively.

 

*Generaland Administrative Expenses*

 

General andadministrative expenses decreased 17.7% to $4.9 million in the three monthsended March 31, 2009 from $5.9 million in three months ended March 31,2008. The decrease in general and administrative expenses was due to ourdecline in revenue and corresponding decreases in payroll and payroll relatedexpenses and administrative expenses. General and administrative expenses as apercentage of net revenue increased to 15.6% in the three months ended March 31,2009 from 9.5% in the three months ended March 31, 2008.

 

An impairment charge of $89,000 was recorded in the three months ended March 31,2009 on advances made to employees to purchase shares of our common stock whenthe value of our common stock held as collateral for the advances fell belowthe amount of the advances. The 154,000 shares of the common stock held ascollateral were valued based on the closing price at March 31, 2009.

 

*Sales &Marketing Expenses*

 

Sales and marketingexpenses decreased 37.9% to $2.6 million in the three months ended March 31,2009 from $4.2 million in the three months ended March 31, 2008. Sales andmarketing expenses as a percentage of net revenue increased to 8.4% in thethree months ended March 31, 2009 from 6.8% in the three months ended March 31,2008.

 

*IncomeTax Expense*

 

Income tax expensedecreased to $1.0 million in the three months ended March 31, 2009 from$3.2 million in the three months ended March 31, 2008 and the effectivetax rates are 40.2% and 40.7%, respectively.

 

**AdditionalQuarterly Data**

 
| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
|                                  |       |                                             |       |   |   |
| Average gross selling price per order |       | $                                                | 182        |   | $ | 181 |   |
| Average orders per day                |       | 3,734                                            |       | 2,043 |   |
| Average items sold per day            |       | 12,186                                           |       | 6,110 |   |
| Acquisition costs per new buyer       |       | $                                                | 50         |   | $ | 51 |   |
| Number of new buyers                  |       | 83,179                                           |       | 51,021 |   |

 

Wholesale merchandisesales are excluded in computing additional quarterly data.

 

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**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 beneficialworking capital characteristics: while we collect cash from sales to customerswithin several business days of the related sale, we typically have extendedpayment terms with our suppliers.

 

As of March 31,2009, we had a working capital surplus of $33.4 million and have no long-termdebt obligations. Net cash provided by operating activities was $484,000 in thethree months ended March 31, 2009 compared to $11.7 million in thethree months ended March 31, 2008. Cash in the three months ended March 31,2009 was primarily affected by changes in net income and inventories and in thethree months ended March 31, 2008 was primarily affected by changes in netincome, accounts receivable, inventories and accounts payable.

 

We recorded net income of$1.5 million in the three months ended March 31, 2009 compared to $4.6million in the three months ended March 31, 2008. Cash flows from netincome were used to meet our working capital requirements. In the three monthsended March 31, 2009, inventories increased by $1.8 million. In the threemonths ended March 31, 2008, accounts receivable increased by $2.6million, inventories decreased by $22.0 million and accounts payable decreasedby $14.4 million. Inventories and accounts payable is affected by our revenuegrowth and changes in our inventory strategy. Our inventory strategy isinfluenced by our ability to secure inventory that we believe will improve ourmargins and the current revenue trend.

 

Net cash used ininvesting activities was $625,000 in the three months ended March 31, 2009compared to $203,000 in the three months ended March 31, 2008. In thethree months ended March 31, 2009, we made a prepayment of $490,000 forintangible asset. During the three months ended March 31, 2009 and 2008,cash used for capital expenditures of $135,000 and $203,000, respectively,related mainly to acquisition of office and computer equipment and software.

 

In the three months endedMarch 31, 2009, net cash of $1.2 million was used in financing activitieswhen $1.1 million was used to repurchase our common stock shares. In the threemonths ended March 31, 2008, net cash of $9.7 million was used infinancing activities when $5.9 million was used to repay our revolving creditfacility and $3.8 million was used to repurchase our common stock shares.

 

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 inventorieswe carry; acquisition and relocation to a new corporate office; and otherfactors relating to our business. Enhancement of our website, networkinfrastructure, transaction processing systems and a new ERP system willrequire us to spend significantly more than we have in the past. Moreover, todate our spending in these areas has been lower than industry averages. Weanticipate increasing our system expenditures to accommodate these needs in thefuture. We may require additional financing in the future in order toexecute our operating plan and we may not be able to obtain such financing. Wecannot predict whether this additional financing will be in the form ofequity, debt, or a combination of debt and equity.

 

**Lease Obligations**

 

Thefollowing table presents our contractual obligations at March 31, 2009,over the next five years and thereafter (in thousands):

 
| **Payments by period** | ** ** | **Total  amount** | ** ** | **Less than  1 year** | ** ** | **1 to 3  years** | ** ** | **3 to 5  years** | ** ** | **After 5  years** | ** ** |
|----------------------------------|------------|-------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **        | ** ** | ** **                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Property lease                   |       | $                 | 3,791      |                            | $          | 1,157                       |       | $                           | 2,313      |                    | $          | 321 |   | $ | — |   |
| Equipment lease                  |       | 193               |       | 56                              |       | 103                         |       | 34                          |       | —                  |       |
|                             |       | $                 | 3,984      |                            | $          | 1,213                       |       | $                           | 2,416      |                    | $          | 355 |   | $ | — |   |

 

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 June 2012 and August 2012,respectively. In March 2009, we extended the lease on our 50,000square-foot office and warehouse by 32 months to expire in June 2012.

 

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**Reclassification**

 

Certain amounts fromprior years have been reclassified to conform to the current year’spresentation.

 

**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.

 

**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. There were no significantchanges made in our internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of theirevaluation.

 

***Report of Management on InternalControl 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 reportinginclude those policies and procedures that (1) pertain to the maintenanceof records 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 assessed theeffectiveness of our internal control over financial reporting as of March 31,2009, 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 March 31, 2009.

 

***Changes in Internal Control overFinancial Reporting***

 

Therewere no changes in our internal control over financial reporting (as defined inRule 13a-15(f) under the Securities Exchange Act of 1934) during thequarter ended March 31, 2009, that our certifying officers concludedmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

***Limitations on Controls***

 

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

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

On February 10, 2009, the Securities and Exchange Commission (“SEC”)issued a subpoena to produce documents relating to the Company’s inventoryreserve policies, as well as other matters. We have been cooperating fully withthe SEC regarding this matter.

 

Onor about January 15, 2009, Landmark Technology, LLC (“Landmark”) filed aFirst Amended Complaint in the civil action titled Landmark Technology, LLC v.Zale Corp, et al. in the U.S. District Court for the Eastern District of Texas.The First Amended Complaint added the Company as a defendant and alleged thatthe Company infringed and is infringing certain patents of Landmark directly,contributory and by inducement. The First Amended Complaint seeks a temporary,preliminary and permanent injunction against infringement of the Landmarkpatents, damages (including a reasonable royalty and lost profits), enhanced orexemplary damages, a finding that the alleged infringement is “willful,”attorneys fees, costs and other relief. In April 2009, we have enteredinto  settlement negotiations.

 

Onor about September 29, 2008, we were served with a lawsuit filed in theU.S. District Court for the Central District of California by Marla Tidenbergagainst Bidz.com, Mr. Zinberg and Marina Zinberg. The lawsuit purports torepresent a class and alleges, among other things, that we engaged in unfairbusiness practices by misrepresenting the value of our merchandise and by “false”bidding. The complaint purports to represent a class of persons whopurchased any merchandise from us. We believe that the lawsuit ismeritless and intend to defend the case vigorously.

 

We are, from time to time, a party to disputes arising from normalbusiness activities, including various employee-related matters. In the opinionof our management, resolution of these matters, individually or collectively,will not have a material adverse effect upon our financial condition or futureoperating results.

 

**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.*

** **

***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,

 

·                  ourstock is subject to short selling and may cause trading in our common stock tobe volatile,

 

·                  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 development.

 

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.

 

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***The adverse domestic and global economic conditions or the perceptionof said conditions may have adverse effects on our growth and operatingresults.***

 

Thecontinued success of our business depends on the willingness of our customersto spend in a discretionary manner.  While we do offer lower pricedmerchandise and may consequently fare better than those who exclusively offermore expensive merchandise, jewelry is essentially perceived as a luxury good.If the economy continues to decline it will cause people to feel lesscomfortable purchasing discretionary goods and would cause a negative effect onour operating results. Our annual and quarterly operating results may varysignificantly in the future based on economic factors over which we have littleor no control. Because we have little or no control over these factors and/ortheir magnitude, our operating results are difficult to predict. Anysubstantial adverse change in the economic factors could negatively affect ourbusiness and results of operations.

 

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

 

Globalfinancial markets have been experiencing extreme disruptions in recent months,including severely diminished liquidity and credit availability, declines inconsumer confidence, declines in economic growth, increases in unemploymentrates, and uncertainty about economic stability. There can be no assurance thatthere will not be further deterioration in financial markets and confidence ineconomic conditions.  These economicuncertainties affect businesses such as ours in a number of ways, making itdifficult to accurately forecast and plan our future business activities. Thecurrent tightening of credit in financial markets may lead consumers topostpone spending, which may cause our customers to reduce purchases ofjewelry. Demand for jewelry is a function of the health of the economies in theUnited States and around the world. Since the US economy and other economiesaround the world are in a recession, the demand for jewelry has been and maycontinue to be adversely affected and therefore, demand for our jewelryproducts and our operating results have been and may continue to be adverselyaffected as well. We cannot predict the timing, strength or duration of anyeconomic disruption or subsequent economic recovery, worldwide, in the UnitedStates, in our industry, or in the jewelry market. These and other economicfactors have had and may continue to have a material adverse effect on demandfor our jewelry products and on our financial condition and operating results.

 

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

 

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

 

·          our ability to manage oursales and marketing efforts;

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

·          our ability to manageexpenses and inventory levels.

 

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

 

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

 

OnFebruary 10, 2009, the Securities and Exchange Commission (“SEC”) issued asubpoena to us to produce documents relating to the Company’s inventory reservepolicies, as well as other matters. We intend to cooperate fully with the SEC’sformal investigation, and our management will devote the resources required torespond promptly and thoroughly to any request by the SEC for any additionalinformation or documents. Although the investigation is in its preliminarystages, and it is therefore difficult to predict the time required by seniormanagement to respond to it, we do not presently anticipate that theinvestigation will adversely affect management, our results of operations orour financial position. Until the investigation is concluded, however, it isdifficult to assess its impact on us.

 

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

 

Ournet revenue depends to a significant extent on the number of customers whovisit our website to purchase merchandise and the dollar amount of theirpurchases. Generating increased traffic to our website and converting thattraffic into buyers requires us to achieve effective results from our marketingcampaigns; offer a wide variety of products that our customers can purchase atfavorable prices; maintain a user-friendly shopping experience; ensure thesatisfactory availability, performance, 

 

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andreliability of our website, network infrastructure, and transaction processingsystems; and provide high-quality customer service. Our business will be harmedif we are unable to increase our customer base and the dollar volume of theorders customers place with us.

 

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

 

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

 

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

 

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

 

***Our growth will depend on our ability toincrease the popularity of our website, and we may not be able to do soeffectively.***

 

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

 

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

 

Inthe three month period ended March 31, 2008 and 2009, 23.6% and 30.3%,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 publicity about our customerservice could adversely affect our reputation and, as a result, our business couldsuffer.***

 

Customercomplaints or negative publicity about our customer service could severelydiminish consumer confidence and the use of our website. Effective customerservice requires significant personnel expense, and this expense, if notmanaged properly, could significantly impact our profitability. The failure tomanage or train our customer service representatives properly could compromiseour ability to handle customer inquiries and complaints effectively. If we donot handle customer 

 

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inquiriesand complaints effectively, we may lose customer confidence. As a result, ourrevenue could suffer and our operating margin may decrease.

 

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

 

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

 

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

 

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

 

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

 

As directed by Section 404of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commissionadopted rules requiring public companies to include a report that containsan assessment by management on the company’s internal control over financialreporting in their annual reports on Form 10-K. In addition, theindependent registered public accounting firm auditing the company’s financialstatements must attest to and report on our assessment of the effectiveness ofthe internal controls over financial reporting. While we are consistentlyworking on improvements and conducting rigorous reviews of our internalcontrols over financial reporting, our independent auditors may interpret Section 404requirements and apply related rules and regulations differently. If ourindependent auditors are not satisfied with our internal control over financialreporting or with the level at which it is documented, operated or reviewed,they may decline to attest to management’s assessment or issue a qualifiedreport. Additionally, if we are not able to meet all the requirements of Section 404in a timely manner or with adequate compliance, we might be subject tosanctions or investigation by regulatory authorities, such as the Securitiesand Exchange Commission.

 

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

 

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

 

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

 

Inaddition, we have a concentration of inventory purchases from a small number ofsuppliers. Our top two suppliers accounted for approximately 31.1%, 24.0% and14.6% of our total purchases in 2006, 2007, and 2008, respectively. In thethree month period ended March 31, 2008 and 2009, 13.2% and 17.4%,respectively, were purchased from our top two suppliers.

 

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

 

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

 

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stolen, the vendors do nothave adequate insurance coverage or if the vendors fail to produce and deliverfinished jewelry products, we would incur substantial losses that would have amaterial impact on our net income and financial position.

 

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

 

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

 

Wecurrently compete with a number of other companies, and other competitors mayappear in the future. Our competitors currently include various online auctionservices and retailers that offer jewelry, including eBay, Blue Nile,Overstock, and uBid. We also encounter competition from national jewelry retailchains, such as Zales, Kay Jewelers, and Finlay Fine Jewelry, and mass retailersand other enterprises that sell jewelry, such as Wal-Mart, Target, J. C.Penney, Costco, QVC, and Home Shopping Network. Many of our competitors havegreater brand recognition, longer operating histories, larger customer bases,and significantly greater financial, marketing, and other resources than we do.Smaller competitors may enter into strategic or commercial relationships withlarger, more established, and well-financed companies. Other competitors mayenter into exclusive distribution agreements with our suppliers that deny usaccess to suppliers’ products. Competitors may also devote greater resources tomarketing and promotional campaigns and to website and systems technology thanwe do. We may not be able to compete successfully against current and futurecompetitors or address increased competitive pressures. Furthermore, attemptshave been made in the past to develop and market synthetic stones and gems tocompete in the market for gemstones and gemstone jewelry. We expect suchefforts to continue in the future. If any such efforts are successful increating widespread demand for synthetic or alternative gemstone products,demand and price levels for our products could decline and our business andresults of operations would be substantially harmed.

 

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

 

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

 

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

 

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

 

***Because we carry all of our jewelryproducts in inventory, our net revenue and gross margin may decrease if we areunable to predict and plan for changes in consumer demand.***

 

Ifour sales increase, we will be required to increase our inventory proportionately.Consumer tastes and preferences for jewelry products can change rapidly,thereby exposing us to significant inventory risks. Currently, because theproducts we sell also consist of closeout merchandise from manufacturers,distributors, and other suppliers, we have less control over the specific itemsthat we offer for sale than we would if we primarily ordered goods manufacturedfor us. In addition, it is important that we are able to purchase jewelry thatwe perceive to be in demand. The demand for specific products can changebetween the time we order items and when we sell them. As a result, we may berequired to take significant inventory markdowns, which could reduce our grossmargin, if we do not accurately predict these trends or if we overstock unpopularmerchandise.

 

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***We may be subject to a tax liability for pastsales and our future sales may decrease if we are required to collect sales anduse 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 taxes with respect toshipments of goods into states other than California and New York. However,additional states or foreign countries may seek to impose sales or other taxobligations on us in the future. A successful assertion by one or more statesor foreign countries that we should be collecting sales or other taxes on thesale of our products could result in substantial tax liabilities for past andfuture sales, discourage customers from purchasing products from us, decreaseour ability to compete with traditional retailers, and otherwise substantiallyharm our business, financial condition, 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 we maynot be able to project accurately the rate or timing of increases, if any, inthe use of or sales from our website, or timely expand or upgrade our website,infrastructure, or systems to accommodate any such increases. Additionally, wemay not be able to remedy any such availability, performance, or reliabilityproblems in a timely manner, or at all, because we depend in part on thirdparties for such availability, performance, and reliability.

 

***Our business andresults of operations would be harmed in the event of any failure of ourauction and bidding systems hardware, which is located at a single third-partyco-location facility, or any failure of our fulfillment and administrativehardware.***

 

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 

 

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addition, our servers are vulnerable to computer viruses, physical orelectronic break-ins, and similar disruptions, which could lead tointerruptions, delays, loss of critical data, the inability to accept andfulfill customer orders, or the unauthorized disclosure of confidentialcustomer data. System disruptions or failures would also create a large numberof customer questions and complaints that need to be addressed by our customerservice support personnel. The occurrence of any of the foregoing risks couldsubstantially harm our business and results of operations. Our systems arevulnerable to damage or interruption from earthquakes, floods, fires, powerloss, telecommunication failures, terrorist attacks, computer viruses, computerdenial-of-service attacks, and similar events.

 

***Our failure toprotect confidential information of our customers and our network againstsecurity breaches could damage our reputation and substantially harm our businessand 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. These outagesand 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 

 

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appeal to and acquire consumers who historically have used traditionalmeans of commerce to purchase goods. If these new customers execute fewer orlower dollar amounts of orders than our historical users, and we are unable togain efficiencies in our operating costs, including the cost of acquiring newcustomers, our business and profits could be adversely affected.

 

***Increased 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 returns above ourreturn assumptions and allowances could substantially harm our business andresults of operations.

 

***Our inventory is vulnerable to damage or losscaused by fire, flood, earthquakes, and similar events, and we face the risk oftheft of our products from inventory or during shipment.***

 

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 28.5%,33.8% and 16.9% of our net revenue was generated during the fourth quarter of2006, 2007 and 2008, respectively. The fourth quarter of 2008 was anexception as we encountered a significant slowdown in sales resulting from the2008 financial and economic crisis. 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 customersupport operations. If we were to experience lower than expected sales duringany future fourth quarter, it would have a disproportionately large impact onour results of operations for that year. In the future, our seasonal salespatterns may become more pronounced, may strain our personnel and fulfillmentactivities, and may cause a shortfall in sales compared with expenses in agiven period, which would substantially harm our business and results ofoperations.

 

***Sales growth 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 increasingadvertising and inventory 

 

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costs. These factors may prevent the meaningful use of period-to-periodcomparisons of financial results. For these and other reasons, investors shouldnot rely on past sales growth rates as a prediction of our future sales growth.

 

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

 

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

 

***Descriptions of 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 to assessingthe clarity, color, and carat characteristics of diamonds and other gemstones.In addition, mistakes or omissions of important information in our descriptionsmay occur. Even if our descriptions are accurate, buying a product online maylead to disappointment resulting in returned merchandise. For example, acustomer may determine that a piece does not have the expected look, feel, andoverall appearance of the merchandise that the buyer envisioned from thewebsite photograph.

 

Additionally, in response to customer requests and as a courtesy toresellers, we provide “Compare,” and/or “Retail” prices for jewelry itemslisted on our website. Compare prices are not meant to reflect fair marketvalues or manufacturer suggested retail prices, and in fact, may be higher thanprices found in local retail stores. As a consequence, perceivedmisrepresentations in item descriptions by disappointed buyers may occur,resulting in negative publicity about and diminished customer confidence in ourwebsite.

 

***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 ongoing aggression and terrorist activitiesthroughout 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 thirdparties for 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 to 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 an action against us. In eitherevent of alleged infringement, we would face substantial litigation cost todefend ourselves 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.***

 

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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 trademarks, copyrights,patents, and domain names in an increasing number of jurisdictions, a processthat is expensive and may not be successful in every location.

 

Third parties may from time totime claim that we have infringed their intellectual property relating to ourbusiness model or auction systems. We expect that participants in our marketincreasingly will be subject to infringement claims as the number of servicesand competitors in our industry segment grows. Any claim like this, whethermeritorious or not, could be time-consuming, result in costly litigation, causeservice upgrade delays, or require us to enter into royalty or licenseagreements. These royalty or license agreements may not be available onacceptable terms or at all. As a result, any such claim could harm ourbusiness.

 

***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 

 

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information between corporate affiliates. The preemptive provisions ofFCRA were permanently extended in 2002, thereby ensuring that we are notsubject to the laws of each individual state with respect to matters within thescope of FCRA, but remain subject to the other provisions of FCRA.

 

The Federal 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 litigationcosts, increase our service or delivery costs, or otherwise harm our business.

 

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

 

We are subject to the sameforeign and domestic laws as other companies conducting both online and offlinebusiness. There are still relatively few laws specifically directed towardsonline business. However, due to the increasing popularity and use of theInternet and online services, many laws relating to the Internet are beingdebated at all levels of government around the world, and it is possible thatsuch laws and regulations will be adopted. These laws and regulations couldcover issues such as user privacy, freedom of expression, pricing, fraud,content and quality of products and services, taxation, advertising,intellectual property rights, and information security. Applicability to theInternet of existing laws governing issues, such as property ownership,copyrights and other intellectual property issues, taxation, libel anddefamation, obscenity, and personal privacy is uncertain. The vast majority ofthese laws was adopted prior to the advent of the Internet and relatedtechnologies and, as a result, do not contemplate or address the unique issuesof the Internet and related technologies. Those laws that do reference theInternet, such as the U.S. Digital Millennium Copyright Act and the EuropeanUnion’s Directive on Distance Selling and Electronic Commerce, have onlyrecently begun to be interpreted by the courts and implemented by the EuropeanUnion member states, so their applicability and scope remain uncertain. As ouractivities and the types of goods listed on our website expand, regulatoryagencies may claim that we or our users are subject to licensure in theirjurisdiction, either with respect to our business in general, or in order toallow the sale of certain items, such as real estate, event tickets, boats, andautomobiles.

 

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 ourbusiness.

 

***We depend to a verysignificant extent on David Zinberg, our Chairman of the Board and ChiefExecutive Officer.***

 

Our performance depends substantially upon David Zinberg, our Chairmanof the Board and Chief Executive Officer, who has extensive experience with thepurchase and sale of jewelry. We rely on Mr. Zinberg to make criticaloperational decisions on a daily basis, such as product offerings andpurchases, and to make key strategic plans. We have an employment agreementwith Mr. Zinberg extending through 2009 and renewable annually. The lossof the services of Mr. Zinberg would adversely affect our business andoperations.

 

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

 

Fromour inception until mid-2003, we raised over $20.5 million in gross equitycapital by selling shares of our common stock to approximately 830 investors atprices ranging from $4.00 to $6.00 per share with a weighted average shareprice of $4.50. We also issued shares of common stock to about 30 persons inexchange for services and other non-cash consideration valued in excess of $5.5million and issued approximately 250 stock option grants to purchase commonstock at a weighted average exercise price of $4.45. After conducting these salesof our securities, 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 

 

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not solicensed. In such situations, a number of remedies may be available toregulatory authorities and the investors who purchased common stock in thoseofferings, including a right of rescission, civil penalties, a restrainingorder or injunction, and a court order to pay restitution and costs. Webelieve, however, that as to any options by investors at this time or in thefuture, applicable statutes of limitations will mitigate our exposure to anycivil remedies.

 

***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 entireamount of their investment.

 

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

 

Our founder, executiveofficers, and directors together own approximately 31.4% of our common stock asof March 31, 2009. Marina Zinberg, our Vice President, who is the sisterof David Zinberg, our Chairman and Chief Executive Officer, owns an additional31.3% of our common stock.  As a result,these individuals will have significant influence over our management andaffairs and over all matters requiring stockholder approval, including theelection of directors and the approval of significant corporate transactions,such as a merger or a sale of our company or its assets, for the foreseeablefuture. This concentrated control will limit the ability of other stockholdersto influence corporate matters. Because of this, we may take actions that someof our stockholders do not view as beneficial. As a result, the market price ofour common stock could be adversely affected because stockholders may not viewfavorably the concentration of control in the hands of management.

 

***Our 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 thatadversely affect or dilute the voting power of the holders of common stock.Delaware law also imposes conditions on certain business combinationtransactions with “interested stockholders.” The Delaware certificate ofincorporation divides our Board of Directors into three classes, with one classto stand for election each year for a three-year term after the initialelection. The classification of directors tends to discourage a third partyfrom initiating a proxy solicitation or otherwise attempting to obtain controlof our company and may maintain the incumbency of our Board of Directors, asthis structure generally increases the difficulty of, or may delay, replacing amajority of directors. The Delaware bylaws authorize our Board of Directors tofill vacancies or newly created directorships. A majority of the directors thenin office may elect a successor to fill any vacancies or newly createddirectorships.

 

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**ITEM 2. UNREGISTERED SALES AND PURCHASES OF EQUITYSECURITIES**

 

No stock awards and stock options were granted during the three monthsended March 31, 2009.

 

**Issuer Purchases of Equity Securities**

 

The following table contains information about purchases of our commonstock during the three months ended March 31, 2009:

 
| ** **                              | ** ** | ** **    | ** ** | ** **  | ** ** | **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**             | ** ** |
| **2009**                                | ** ** | **Purchased** | ** ** | **Share**   | ** ** | **Program**                   | ** ** | **Program (1)**                | ** ** |
| January 1 – January 31   |       | 25,685        |       | $           | 2.92       |                          | 1,879,558  |                           | $          | 6,514,429 |   |
| February 1 – February 29 |       | 43,734        |       | 2.95        |       | 1,923,292                     |       | $                              | 19,885,607 |   |
| March 1 – March 31       |       | 266,735       |       | $           | 3.26       |                          | 2,190,027  |                           | $          | 19,015,141 |   |
| Total                                   |       | 336,154       |       |        |       |                          |       |                           |       |

 

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(1)                                  In June 2007, weauthorized the stock buyback program for up to $5 million of our outstandingcommon stock to be repurchased through the open market at prices deemedappropriate by management.  In February 2008, we authorized anincrease in the stock buyback program to $20 million from $5 million. In February 2009,we authorized an increase in the stock buyback program to $33.5 million. Thestock buyback will be at prices deemed appropriate by management over a 24month period.

 

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**ITEM 6. EXHIBITS**

 
| 10.1   |   | Addendum No. 3  to Standard Industrial/Commercial Multi-Tenant Lease — Net, dated March 26,  2009 (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 1,  2009). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                 |
| 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: May 5,  2009 |       |                                      |

 

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