Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2010**

 

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

 

**For the transitionperiod          to          **

 

**Commission file number 000-51257**

 

**BIDZ.COM, INC.**

(Exact name of Registrant as specified in its charter)

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

 

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

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

 

**(310) 280-7373**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

Numberof shares outstanding of Registrant’s common stock, $0.001 par value, as of August 2,2010: 19,635,862

 

 

 

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**TABLE OF CONTENTS**

 
| PART I. FINANCIAL INFORMATION |                                                                                                                                  |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                       | Condensed Financial  Statements                                                                                                       | 3 |
|                               | Condensed  Balance Sheets as of December 31, 2009 and June 30, 2010  (unaudited)                                            | 3 |
|                               | Condensed  Statements of Income (Operations) for the three month and six month periods  ended June 30, 2009 and 2010 (unaudited) | 4 |
|                               | Condensed  Statements of Cash Flows for the six month periods ended June 30, 2009  and 2010 (unaudited)                          | 5 |
|                               | Notes to  Condensed Financial Statements (unaudited)                                                                                  | 6 |
| Item 2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           | 11 |
| Item 3.                       | Quantitative  and Qualitative Disclosures About Market Risk                                                                           | 17 |
| Item 4.                            | Controls and  Procedures                                                                                                              | 18 |
|                               |                                                                                                                                  |   |
| PART II. OTHER  INFORMATION   |                                                                                                                                  |
| Item 1.                            | Legal Proceedings                                                                                                                     | 20 |
| Item 1A                            | Risk Factors                                                                                                                          | 21 |
| Item 2.                            | Unregistered Sales and Purchases of Equity Securities                                                                                 | 33 |
| Item  6.                           | Exhibits                                                                                                                              | 34 |
|                               |                                                                                                                                  |   |
| SIGNATURES                         |                                                                                                                                  |

 

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

 

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** **

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**Bidz.com, Inc.**

 

**Condensed Balance Sheets (Unaudited)**

 

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

 
| ** **                                                                                                                                                                  | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2009**              | ** ** | **2010**     | ** ** |
| ** **                                                                                                                                                                  | ** ** | **(Revised)**         | ** ** | ** **   | ** ** |
| **Assets**                                                                                                                                                                  |       |                  |       |         |       |
| Current assets:                                                                                                                                                             |       |                  |       |         |       |
| Cash                                                                                                                                                                        |       | $                     | 1,121      |         | $          | 9,711 |   |
| Accounts receivable                                                                                                                                                         |       | 447                   |       | 982          |       |
| Inventories, net of reserves of $1,767 and $1,578  at December 31, 2009 and June 30, 2010, respectively                                                                |       | 40,961                |       | 35,435       |       |
| Other receivable (includes related party amounts  of $179 and $274 at December 31, 2009 and June 30, 2010, respectively)                                               |       | 1,454                 |       | 1,815        |       |
| Current deferred tax assets                                                                                                                                                 |       | 1,400                 |       | 1,790        |       |
| Other current assets (Note 11)                                                                                                                                              |       | 2,960                 |       | 579          |       |
| Total current assets (Note 11)                                                                                                                                              |       | 48,343                |       | 50,312       |       |
| Long term deferred tax assets                                                                                                                                               |       | 663                   |       | 976          |       |
| Property and equipment, net                                                                                                                                                 |       | 1,202                 |       | 918          |       |
| Intangible asset                                                                                                                                                            |       | 240                   |       | 237          |       |
| Deposits                                                                                                                                                                    |       | 157                   |       | 157          |       |
| Total assets (Note 11)                                                                                                                                                      |       | $                     | 50,605     |         | $          | 52,600 |   |
|                                                                                                                                                                        |       |                  |       |         |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                              |       |                  |       |         |       |
| Current liabilities:                                                                                                                                                        |       |                  |       |         |       |
| Revolving credit line                                                                                                                                                       |       | $                     | 2,898      |         | $          | — |   |
| Accounts payable (includes related party amounts  of $1,513 and $2,642 at December 31, 2009 and June 30, 2010,  respectively)                                          |       | 12,159                |       | 16,551       |       |
| Accrued expenses                                                                                                                                                            |       | 2,291                 |       | 2,697        |       |
| Deferred revenue                                                                                                                                                            |       | 632                   |       | 1,242        |       |
| Total current liabilities                                                                                                                                                   |       | 17,980                |       | 20,490       |       |
|                                                                                                                                                                        |       |                  |       |         |       |
| Commitments and contingencies (Note 10)                                                                                                                                     |       |                  |       |         |       |
|                                                                                                                                                                        |       |                  |       |         |       |
| Stockholders’ equity:                                                                                                                                                  |       |                  |       |         |       |
| Preferred stock: par value $0.001; authorized  4,000,000 shares; none issued and outstanding at December 31, 2009 and  June 30, 2010, respectively                     |       | —                |       | —       |       |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued and outstanding 22,114,257 and 21,816,814 at  December 31, 2009 and June 30, 2010, respectively |       | 22                    |       | 22           |       |
| Additional paid in capital (Note 11)                                                                                                                                        |       | 19,857                |       | 20,139       |       |
| Shares held in treasury, at cost; 0 and 20,137  shares at December 31, 2009 and                                                                                             |       |                  |       |         |       |
| June 30, 2010, respectively                                                                                                                                                 |       | —                |       | (33          | )          |
| Accumulated earnings (Note 11)                                                                                                                                              |       | 12,746                |       | 11,982       |       |
| Total stockholders’ equity (Note 11)                                                                                                                                   |       | 32,625                |       | 32,110       |       |
|                                                                                                                                                                        |       |                  |       |         |       |
| ** **                                                                                                                                                                  |       | $                     | 50,605     |         | $          | 52,600 |   |

 

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**Bidz.com, Inc.**

 

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

 

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

** **
| ** **                                                                                                                                                                                                                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                                                                                      | ** ** | **2009**                             | ** ** | **2010**                           | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                                                                                                                                                                                                                      | ** ** | **(Revised)**                        | ** ** | ** **                         | ** ** | **(Revised)** | ** ** | ** ** | ** ** |
| Net revenue:                                                                                                                                                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Merchandise sales                                                                                                                                                                                                                               | ** ** | **$**                                | 26,388     | ** **                         | **$**      | 23,704 | ** ** | **$** | 57,278 | ** ** | **$** | 50,172 | ** ** |
| Wholesale merchandise sales (includes related  party amounts of $471 and $1,341 for the three months ended June 30,  2009 and 2010, respectively, and $677 and $2,538 for the six months ended  June 30, 2009 and 2010, respectively) |       | 471                                  |       | 1,941                              |       | 677 |   | 3,588 |   |
| Other revenue                                                                                                                                                                                                                                   |       | 86                                   |       | 77                                 |       | 166 |   | 151 |   |
|                                                                                                                                                                                                                                            |       | 26,945                               |       | 25,722                             |       | 58,121 |   | 53,911 |   |
| Cost of revenue                                                                                                                                                                                                                                 |       | 18,710                               |       | 19,560                             |       | 39,701 |   | 40,560 |   |
| Gross Profit                                                                                                                                                                                                                                    |       | 8,235                                |       | 6,162                              |       | 18,420 |   | 13,351 |   |
| Operating expenses:                                                                                                                                                                                                                             |       |                                 |       |                               |       |   |   |   |   |
| General and administrative (Note 11)                                                                                                                                                                                                            |       | 4,593                                |       | 5,425                              |       | 9,395 |   | 10,837 |   |
| Sales and marketing                                                                                                                                                                                                                             |       | 2,127                                |       | 1,446                              |       | 4,732 |   | 3,033 |   |
| Depreciation and amortization                                                                                                                                                                                                                   |       | 193                                  |       | 174                                |       | 373 |   | 389 |   |
| Total operating expenses (Note 11)                                                                                                                                                                                                              |       | 6,913                                |       | 7,045                              |       | 14,500 |   | 14,259 |   |
| Income (loss) from operations (Note 11)                                                                                                                                                                                                         |       | 1,322                                |       | (883                               | )          | 3,920 |   | (908 | ) |
| Other income - interest income                                                                                                                                                                                                                  |       | —                               |       | —                             |       | 2 |   | — |   |
| Other expense - interest (expense)                                                                                                                                                                                                              |       | (3                                   | )          | —                             |       | (14 | ) | (11 | ) |
| Income (loss) before income tax expense (benefit) (Note11)                                                                                                                                                                                      |       | 1,319                                |       | (883                               | )          | 3,908 |   | (919 | ) |
| Income tax expense (benefit) (Note 11)                                                                                                                                                                                                          |       | 626                                  |       | (230                               | )          | 1,708 |   | (155 | ) |
| Net income (loss) (Note 11)                                                                                                                                                                                                                     | ** ** | **$**                                | 693        | ** **                         | **$**      | (653 | **)** | **$** | 2,200 | ** ** | **$** | (764 | **)** |
|                                                                                                                                                                                                                                            |       |                                 |       |                               |       |   |   |   |   |
| Net income (loss) per share available to common  shareholders - basic                                                                                                                                                                           | ** ** | **$**                                | 0.03       | ** **                         | **$**      | (0.03 | **)** | **$** | 0.10 | ** ** | **$** | (0.03 | **)** |
| Net income (loss) per share available to common  shareholders - diluted                                                                                                                                                                         | ** ** | **$**                                | 0.03       | ** **                         | **$**      | (0.03 | **)** | **$** | 0.10 | ** ** | **$** | (0.03 | **)** |
| Weighted average number of shares outstanding -  basic                                                                                                                                                                                          |       | 22,936,808                           |       | 21,839,212                         |       | 22,879,979 |   | 21,893,981 |   |
| Weighted average number of shares outstanding -  diluted                                                                                                                                                                                        |       | 22,936,808                           |       | 21,839,212                         |       | 22,879,979 |   | 21,893,981 |   |

 

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**Bidz.com, Inc.**

 

**CondensedStatements of Cash Flows (Unaudited)**

 

*(in thousands)*

 
| ** **                                                                                       | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                       | ** ** | **2009**                      | ** ** | **2010** | ** ** |
| ** **                                                                                       | ** ** | **(****Revised****)**         | ** ** | ** ** | ** ** |
| **Cash flows provided by (used for)  operating activities:**                                     |       |                          |       |   |   |
| Net income (loss) (Note 11)                                                                      |       | $                             | 2,200      |   | $ | (764 | ) |
|                                                                                             |       |                          |       |   |   |
| **Adjustments to reconcile net  income (loss) to net cash****provided by operating activities:** |       |                          |       |   |   |
| Depreciation and amortization                                                                    |       | 373                           |       | 389 |   |
| Change in inventory reserve                                                                      |       | 635                           |       | (189 | ) |
| Stock-based compensation (Note 11)                                                               |       | 395                           |       | 515 |   |
| **Changes in assets and  liabilities:**                                                          |       |                          |       |   |   |
| **(Increase) decrease in assets:**                                                               |       |                          |       |   |   |
| Accounts receivable (Note 11)                                                                    |       | 289                           |       | (535 | ) |
| Inventories                                                                                      |       | (2,894                        | )          | 5,715 |   |
| Other receivable (Note 11)                                                                       |       | (575                          | )          | (361 | ) |
| Current deferred tax assets                                                                      |       | 71                            |       | (390 | ) |
| Other current assets (Note 11)                                                                   |       | (25                           | )          | 2,381 |   |
| **Increase (decrease) in  liabilities:**                                                         |       |                          |       |   |   |
| Accounts payable                                                                                 |       | 1,324                         |       | 4,392 |   |
| Accrued expenses (Note 11)                                                                       |       | (648                          | )          | 406 |   |
| Deferred revenue                                                                                 |       | (79                           | )          | 610 |   |
| Net cash provided by operating activities                                                        |       | 1,066                         |       | 12,169 |   |
|                                                                                             |       |                          |       |   |   |
| **Cash flows used for investing  activities:**                                                   |       |                          |       |   |   |
| Capital expenditures                                                                             |       | (164                          | )          | (102 | ) |
| Net cash used for investing activities                                                           |       | (164                          | )          | (102 | ) |
| ** **                                                                                       |       |                          |       |   |   |
| **Cash flows used for financing  activities:**                                                   |       |                          |       |   |   |
| Revolving credit line                                                                            |       | —                        |       | (2,898 | ) |
| Long term deferred tax assets, net                                                               |       | (179                          | )          | (313 | ) |
| Repurchase of common stock from net vesting of  restricted shares                                |       | —                        |       | (131 | ) |
| Tax benefit from stock based compensation                                                        |       | (70                           | )          | — |   |
| Purchase of treasury shares                                                                      |       | (3,576                        | )          | (135 | ) |
| Net cash used for financing activities                                                           |       | (3,825                        | )          | (3,477 | ) |
|                                                                                             |       |                          |       |   |   |
| **Net increase (decrease) in cash**                                                              |       | (2,923                        | )          | 8,590 |   |
| **Cash, beginning of period**                                                                    |       | 4,456                         |       | 1,121 |   |
| **Cash, end of period**                                                                          |       | $                             | 1,533      |   | $ | 9,711 |   |
|                                                                                             |       |                          |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                           |       |                          |       |   |   |
| Interest paid                                                                                    |       | $                             | 14         |   | $ | 11 |   |
| Income taxes paid                                                                                |       | $                             | 2,000      |   | $ | — |   |
| ** **                                                                                       |       |                          |       |   |   |
| **Supplemental disclosure of  non-cash financing activities:**                                   |       |                          |       |   |   |
| Retirement of treasury shares                                                                    |       | $                             | 2,478      |   | $ | 102 |   |

 

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**BIDZ.COM, INC.**

**NOTES TO CONDENSED FINANCIALSTATEMENTS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2010**

**(UNAUDITED)**

 

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

 

**Basis of Presentation**

 

Theaccompanying condensed balance sheet as of December 31, 2009, as revisedfor prior period corrections described in Note 11, which has been derived fromaudited financial statements, and the unaudited financial statements includedherein have been prepared in accordance with the instructions to Form 10-Qand do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for complete financialstatements.  These financial statements and related notes should be readin conjunction with the Company’s audited financial statements for the fiscalyear ended December 31, 2009 filed in the Annual Report on Form 10-Kby the Company on March 9, 2010 with the Securities and ExchangeCommission. In the opinion of management, these financial statements reflectall adjustments, which are of a normal recurring nature and adjustments toprior periods as described in Note 11, which are necessary to present fairlythe financial position of Bidz.com, Inc. as of June 30, 2010 and theresults of operations for the three month and six month periods ended June 30,2009 and 2010 and the cash flows for the six month periods ended June 30, 2009and 2010.  The results of operations for the three months and six monthsended June 30, 2010 are not necessarily indicative of the results which may beexpected for the entire fiscal year.

 

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

 

**Nature of Business Operations**

 

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

 

Wesell our products throughout the United States and our international customerbase includes Europe, Middle East, and Asia. Revenue generated from the UnitedStates accounted for approximately 65.7% and 57.4% of net revenue for the threemonths ended June 30, 2009 and 2010, respectively, and 67.8% and 59.9% for thesix months ended June 30, 2009 and 2010, respectively.

 

**Recent Developments**

 

InJuly 2010, in a privately negotiated transaction, but part of our sharerepurchase program, we repurchased 2,180,952 shares for $2.3 million fromMarina Zinberg with the approval of the Special Committee composed ofindependent members of our Board of Directors. The shares have subsequentlybeen retired. We have approximately $12.7 million still available foradditional share repurchases in open market transactions, subject to marketconditions, share price and other considerations. Since the inception of our sharerepurchase program in June 2007, we have repurchased 5.6 millionshares for a total of approximately $20.8 million.

 

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

 

InJune 2010, Bidz reached an oral agreement in principal with NCR Corporation toenter into an ecommerce patent license agreement subject to execution of a writtenagreement.  The definitive writtenagreement is being negotiated.

 

InMay 2010, Marina Zinberg, a substantial shareholder and sister of our chiefexecutive officer, David Zinberg, left the employment of our company.

 

**Recent Accounting Pronouncements**

 

InFebruary 2010, the FASB issued an update on Subsequent Events related toAmendments to Certain Recognition and Disclosure Requirements.  SEC filers are required to evaluatesubsequent events through the date the financial statements are issued, and theyare 

 

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nolonger required to disclose the date through which subsequent events have beenevaluated. This update is effective upon issuance.   Implementation of this standard did not havea material impact on our financial position and results of operations.

 

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

 

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

 

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

 

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

 
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
|                                           |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted net income (loss) per share: |       |                                            |       |                                          |       |   |   |   |   |
| Numerator:                                     |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss) (Note 11)                    |       | $                                               | 693        |                                          | $          | (653 | ) | $ | 2,200 |   | $ | (764 | ) |
| Denominator:                                   |       |                                            |       |                                          |       |   |   |   |   |
| Weighted common shares outstanding             |       | 22,936,808                                      |       | 21,839,212                                    |       | 22,879,979 |   | 21,893,981 |   |
| Effect of dilutive securities                  |       | —                                          |       | —                                        |       | — |   | — |   |
| Denominator for diluted calculation            |       | 22,936,808                                      |       | 21,839,212                                    |       | 22,879,979 |   | 21,893,981 |   |
| Net income (loss) per share, basic             |       | $                                               | 0.03       |                                          | $          | (0.03 | ) | $ | 0.10 |   | $ | (0.03 | ) |
| Net income (loss) per share, diluted           |       | $                                               | 0.03       |                                          | $          | (0.03 | ) | $ | 0.10 |   | $ | (0.03 | ) |

 

Therewas no dilutive effect from outstanding stock options for the three month andsix month periods ended June 30, 2009 and 2010 as all the stock optionsoutstanding at period end were “out of the money” and are anti-dilutive.

 

**3**.             **Inventories**

 

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

 
| ** **                              | ** ** | **December 31, 2009** | ** ** | **June 30, 2010 (unaudited)** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | ** **                      | ** ** | ** **                              | ** ** |
| Fine jewelry, watches and other         |       | $                               | 40,228     |                                    | $          | 34,523 |   |
| Loose diamonds and semi-precious stones |       | 279                             |       | 425                                     |       |
| Prepaid inventory                       |       | 1,784                           |       | 1,860                                   |       |
| Inventory with manufacturing vendors    |       | 437                             |       | 205                                     |       |
| Product inventories                     |       | 42,728                          |       | 37,013                                  |       |
| Less: Inventory reserve                 |       | (1,767                          | )          | (1,578                                  | )          |
|                                    |       | $                               | 40,961     |                                    | $          | 35,435 |   |

 

**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 we increasedthe limit to $25 million. The revolving credit line agreement was set to expirein July of 2010. We terminated the revolving credit line on April 2,2010.

 

**5.             Stock Based Compensation**

 

Werecognize in our financial statements the cost resulting from all share-basedpayment transactions to employees, including grants 

 

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ofstock options and restricted stock based on their fair values. We have used theBlack-Scholes model to estimate the fair value of options. Our assessment ofthe estimated compensation charges will be affected by our stock price as wellas assumptions regarding a number of subjective variables and the related taximpact. These variables include, but are not limited to, our stock pricevolatility, forfeiture rates and employee stock option exercise behaviors (orexpected term).

 

Weare also required to calculate the additional paid in capital pool (“APIC Pool”)available to absorb tax deficiencies recognized subsequent to adoption, as ifwe had adopted the statement at its effective date of January 1, 1995. Wecalculate our APIC pool using the long form method, which requires that wetrack each award grant on an employee-by-employee basis and grant-by-grantbasis to determine if there is a tax benefit or tax deficiency for such award.We then compare the fair value expense to the tax deduction received for eachgrant and aggregate the benefits and deficiencies to establish and maintain theAPIC Pool.  We group the excess tax benefits from both employee andnonemployee awards into a single APIC pool. During the three months ended June 30, 2009 and 2010, we recognizedincome tax expense of $0 and $129,000, respectively for APIC shortfalls, andfor the six months ended June 30, 2009 and 2010, we recognized $72,000 and$218,000, respectively.

 

**Restricted Shares**

 

Therestricted stock awards are expensed pro rata over the vesting period basedupon the market value of the awards at the time of grant. Stock-basedcompensation from restricted stock awards totaled $254,000 and $252,000 for thethree months ended June 30, 2009 and 2010, respectively and $335,000 and$493,000 for the six months ended June 30, 2009 and 2010, respectively.The unamortized stock-based expense for restricted stock awards was $2.1million at June 30, 2010.

 

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

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

 

**StockOptions**

 

Weadopted our 2001 Stock Option Plan, our 2002 Special Stock Option Plan and our2006 Award Plan (collectively, the ‘‘Plans’’), in January 2001,January 2002, and March 2006, respectively. The 2006 Plan providesfor the granting of awards in the form of incentive stock options, nonqualifiedstock options, stock appreciation rights, shares of restricted common stock,bonus stock in lieu of obligations, or other stock-based awards to employees,directors, and independent contractors who provide valuable services to ourcompany.  The vesting requirements, performance thresholds and other termsand conditions of options granted under the Plans will be determined by ourCompensation Committee and Board of Directors.

 

Thefollowing is a summary of stock option activity as of June 30, 2010, andchanges during the six months ended June 30, 2010 (unaudited).

 
| **Options**                             | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price ($)** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value ($)** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|
| Outstanding at December 31, 2009   |       | 6,933,000  |       | 6.08                                             |       | 1.38                                                     |       | 0.00                                     |       |
| Granted                                 |       | 154,000    |       | 6.26                                             |       |                                                     |       |                                     |       |
| Exercised                               |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Forfeited                               |       | 154,000    |       | 6.26                                             |       |                                                     |       |                                     |       |
| Expired                                 |       | 79,000     |       | 6.06                                             |       |                                                     |       |                                     |       |
| Outstanding at June 30, 2010            |       | 6,854,000  |       | 6.09                                             |       | 0.89                                                     |       | 0.00                                     |       |
| Vested and Exercisable at June 30, 2010 |       | 6,854,000  |       | 6.09                                             |       | 0.89                                                     |       | 0.00                                     |       |

 

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

 
| ** **                              | ** ** | ** **              | ** ** | **Options outstanding and exercisable  as of June 30, 2010** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | ** **              | ** ** | **Options outstanding**                                                                    | ** ** | **Options exercisable** | ** ** |
| **Range of  exercise prices** | ** ** | **Number  outstanding** | ** ** | **Weighted  average  remaining  contractual**                                                   | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                              | ** ** | ** **              | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $                                       | 6.00       |                    | $          | 6.00                                                                                            |       | 6,477,000 |   | 0.86 |   | $ | 6.00 |   | 6,477,000 |   | $ | 6.00 |   |
| $                                       | 6.26       |                    | $          | 6.26                                                                                            |       | 154,000 |   | 0.67 |   | $ | 6.26 |   | 154,000 |   | $ | 6.26 |   |
| $                                       | 6.50       |                    | $          | 6.50                                                                                            |       | 95,500 |   | 1.69 |   | $ | 6.50 |   | 95,500 |   | $ | 6.50 |   |
| $                                       | 9.90       |                    | $          | 9.90                                                                                            |       | 127,500 |   | 1.96 |   | $ | 9.90 |   | 127,500 |   | $ | 9.90 |   |
| $                                       | 6.00       |                    | $          | 9.90                                                                                            |       | 6,854,000 |   | 0.89 |   | $ | 6.09 |   | 6,854,000 |   | $ | 6.09 |   |

 

Stock-basedcompensation expense from stock options for the three months ended June 30,2009 and 2010 amounted to $30,000 and $1,000, respectively, and for the sixmonths ended June 30, 2010 amounted to $60,000 and $22,000, respectively.The unamortized stock-based compensation expense from stock options as of June 30,2010 is $5,000 and 154,000 stock options were granted in the six months ended June 30,2010 when it was determined that the purchase of stock by employees with anonrecourse loan from us is effectively the same as granting a stock option —(as described in Note 11).

 

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

 

Netrevenue by geographic area is presented based upon the country of destination.No foreign country represented 10% or more of net revenue for three month andsix month periods ended June 30, 2009 and 2010. Net revenue by geographicarea was as follows (unaudited):

 

*(inthousands, except percentage data)*

* *
| ** **          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2009**                              | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| **Geographic area** | ** ** | **Amount**                            | ** ** | **Percent**                         | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States       |       | $                                     | 17,696     |                                | 65.7       | % | $ | 14,759 |   | 57.4 | % | $ | 39,418 |   | 67.8 | % | $ | 32,273 |   | 59.9 | % |
| International       |       | 9,249                                 |       | 34.3                                | %          | 10,963 |   | 42.6 | % | 18,703 |   | 32.2 | % | 21,638 |   | 40.1 | % |
|                |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total               |       | $                                     | 26,945     |                                | 100.0      | % | $ | 25,722 |   | 100.0 | % | $ | 58,121 |   | 100.0 | % | $ | 53,911 |   | 100.0 | % |

 

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

 

Purchasesfrom two vendors, including a related party discussed in Note 8, amounted to$6.3 million and $5.7 million representing 33.7% and 26.6% of the totalpurchases during the three months ended June 30, 2009 and 2010,respectively, and $9.4 million and $8.2 million representing 23.3% and 24.0% ofthe total purchases during the six months ended June 30, 2009 and 2010,respectively. Outstanding accounts payable to the two vendors totaled $2.9million and $5.8 million****atDecember 31, 2009 and June 30, 2010, respectively. Loss ofeither of these vendors is not expected to have a significant negative impacton the financial position, results of operations and cash flows of the Company.

 

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

 

During the three monthsended June 30, 2009 and 2010, we purchased approximately 9.5% and 12.3%,respectively, of our merchandise from LA Jewelers, Inc., where one of itsmanagers is a stockholder who beneficially owns approximately 5.8% of ouroutstanding common stock as of June 30, 2010. During the six months endedJune 30, 2009 and 2010, we purchased approximately 6.7% and 12.6%,respectively of our merchandise from LA Jewelers, Inc. The accountspayable balances due to LA Jewelers Inc. were $1.5 million and $2.6 million atDecember 31, 2009 and June 30, 2010, respectively.

 

LAJewelers Inc. participates in our inventory co-op marketing program. For thethree months ended June 30, 2009 and 2010, we earned approximately $69,000and $274,000, respectively from LA Jewelers Inc. relating to co-op marketingcontributions and $257,000 was unamortized as of June 30, 2010. For thesix months ended June 30, 2009 and 2010, we earned approximately $250,000and $441,000, respectively. The amounts of co-op marketing contributions duefrom LA Jewelers Inc. were $178,000 and $274,000 as of December 31, 2009and June 30, 2010, respectively.

 

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InMay, 2007 we entered into an understanding with LA Jewelers Inc. whereby theywill guarantee that we will earn a certain minimum gross profit margin on theirmerchandise. This agreement provides that in the event of a gross profit marginshortfall we will be compensated for the difference between our actual grossprofit margin and the guaranteed minimum gross profit margin. For the threemonths ended June 30, 2009 and 2010, we recognized $152,000 and $0,respectively, under this agreement, and for the six months ended June 30,2009 and 2010, we recognized $172,000 and $98,000, respectively. As ofDecember 31, 2009 and June 30, 2010, we have $0 outstanding underthis gross profit margin guarantee.

 

Duringthe three months ended June 30, 2009 and 2010, we recorded $471,000 and$1.3 million, respectively, and during the six months ended June 30, 2009and 2010, we recorded $677,000 and $2.5 million, respectively, in wholesalemerchandise sales to a customer that is owned by Daniella Zinberg, the daughterof our Chief Executive Officer, David Zinberg. There was no accounts receivabledue from this customer as of December 31, 2009 and June 30, 2010.

 

**9.             Income Tax**

 

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

 

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

 

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

 

**10.          Contingencies**

 

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

 

**11.          Revision of Prior Period Amounts**

 

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

 

Managementhas evaluated the effect of the prior period expenses and determined that theywere immaterial to each of the reporting periods affected and, therefore,amendment of previously filed reports was not required.  However, if the adjustments to correct thecumulative errors had been recorded in the first quarter of 2010, we believethe impact would have been significant to the first quarter and would impactcomparisons to prior periods.  Inaccordance with guidelines issued in SEC Staff Accounting Bulletin, we haverecorded adjustments in the current year’s beginning retained earnings accountto correct these immaterial prior period errors.  We have also revised in the current Form 10-Qfiling, and plan to revise in future filings of our Form 10-Q and 10-K, thepreviously reported quarterly financial statements for 2009 in our Form 10-Qand annual financial statements for 2009 and 2008 in our Form 10-K forthese immaterial amounts, and certain amounts from prior years have beenreclassified to confirm to the current year’s presentation.

 

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

 

*(inthousands)*

 
| **Beginning period retained  earnings at January 1, 2010, as previously reported** |   | $      | 13,432 |   |
|-----------------------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                                    |   |   |   |
| Less: Correction of an error in stock option  expense in 2007 (net of income tax of $0) |   | (66    | )      |
| Correction of an error in stock option expense in  2008 (net of income tax of $205)     |   | (680   | )      |
| Correction of an error in stock option expense in  2009 (net of income tax of $219)     |   | 60     |   |
|                                                                                    |   | (686   | )      |
| **Retained earnings at  January 1, 2010, as revised**                              |   | 12,746 |   |
| Net loss for the six months ended June 30,  2010                                   |   | (764   | )      |
| **Ending period retained earnings  at June 30, 2010**                              |   | $      | 11,982 |   |

 

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

 
| **(in thousands)**                                                                | ** ** | **Previously  reported** | ** ** | **Adjustment** | ** ** | **Revised** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------|------------|----------------|------------|-------------|------------|
| **Balance sheet items at  December 31, 2009:**                               | ** ** | ** **               | ** ** | ** **     | ** ** | ** **  | ** ** |
| Other current assets                                                              |       | $                        | 3,774      |           | $          | (814        | )          | $ | 2,960 |   |
| Total current assets                                                              |       | 49,157                   |       | (814           | )          | 48,343      |       |
| Total assets                                                                      |       | 51,419                   |       | (814           | )          | 50,605      |       |
| Additional paid in capital                                                        |       | 20,293                   |       | (436           | )          | 19,857      |       |
| Employee share purchase receivable                                                |       | (308                     | )          | 308            |       | —      |       |
| Retained earnings                                                                 |       | 13,432                   |       | (686           | )          | 12,746      |       |
| Total stockholders’ equity                                                   |       | 33,439                   |       | (814           | )          | 32,625      |       |
| Liabilities and stockholders’ equity                                         |       | 51,419                   |       | (814           | )          | 50,605      |       |
|                                                                              |       |                     |       |           |       |        |       |
| **Statement of operations items  for the three months ended June 30, 2009:** |       |                     |       |           |       |        |       |
| General and administrative                                                        |       | 4,748                    |       | (155           | )          | 4,593       |       |
| Total operating expenses                                                          |       | 7,068                    |       | (155           | )          | 6,913       |       |
| Income from operations                                                            |       | 1,167                    |       | 155            |       | 1,322       |       |
| Income before income tax expense                                                  |       | 1,164                    |       | 155            |       | 1,319       |       |
| Income tax expense                                                                |       | 544                      |       | 82             |       | 626         |       |
| Net income                                                                        |       | 620                      |       | 73             |       | 693         |       |
|                                                                              |       |                     |       |           |       |        |       |
| **Statement of operations items  for the six months ended June 30, 2009:**   |       |                     |       |           |       |        |       |
| General and administrative                                                        |       | 9,609                    |       | (214           | )          | 9,395       |       |
| Total operating expenses                                                          |       | 14,714                   |       | (214           | )          | 14,500      |       |
| Income from operations                                                            |       | 3,706                    |       | 214            |       | 3,920       |       |
| Income before income tax expense                                                  |       | 3,694                    |       | 214            |       | 3,908       |       |
| Income tax expense                                                                |       | 1,560                    |       | 148            |       | 1,708       |       |
| Net income                                                                        |       | 2,134                    |       | 66             |       | 2,200       |       |
|                                                                              |       |                     |       |           |       |        |       |
| **Statement of cash flow****items****for the six months ended June 30, 2009:**    |       |                     |       |           |       |        |       |
| Net income                                                                        |       | 2,134                    |       | 66             |       | 2,200       |       |
| Impairment in employees share purchase receivable                                 |       | 274                      |       | (274           | )          | —      |       |
| Stock based compensation                                                          |       | 335                      |       | 60             |       | 395         |       |
| Accounts receivable                                                               |       | 182                      |       | 107            |       | 289         |       |
| Other receivable                                                                  |       | (468                     | )          | (107           | )          | (575        | )          |
| Other current assets                                                              |       | (242                     | )          | 217            |       | (25         | )          |
| Accrued expenses                                                                  |       | (579                     | )          | (69            | )          | (648        | )          |
|                                                                                   |            |                          |            |                |            |             |            |  |  |  |

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL 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.*

 

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**Overview**

 

Weare a leading online retailer of jewelry, featuring a live auction format onBidz.com. We have established our retail brand in the online marketplace by offeringhigh-quality merchandise, a unique user-friendly shopping experience, and theopportunity for buyers to achieve significant cost savings versus traditionalretail channels. A key to our success has been our ability to efficiently andcost effectively source closeout jewelry, watches, accessories and brand namemerchandise, and rapidly respond to changing consumer demands for ourmerchandise. We offer our products through a continuous live format, featuringa $1 minimum opening bid, and a unique 15-second auction extension period thatallows our auctions to continue until all bids are received. On select auctionswe maintain a reserve price that must be met before a sale will be consummated.In 2009, we began offering auctions with a minimum opening bid that is higherthan $1. The majority of our auctions are short-term, often closing within oneday, providing immediate gratification to our customers and encouragingfrequent visits and active viewing of our website.

 

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

 

Inaddition to our auction site we have retail sites that offer similar items ofmerchandise as those listed for auction, as well as other designer products andconsumer goods.  Buyz.com, our fixedprice site for jewelry, provides us access to different types ofconsumers.  We plan to offer customersthe ability to design their own jewelry including diamond earrings and rings inthe near future, and may also sell inventory that is held by our suppliersusing a just in time ordering or drop ship model.  Modnique.com, our online retail site fordesigner products and consumer goods, provides a private sale concept that onlysells to invited members. We plan to negotiate favorable deals with designersand manufacturers, including purchasing inventory from recognizable brand namesat deep discounts to attract customers that are fashion forward as well as costconscious.

 

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

 

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

 

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

 

**Critical Accounting Policies**

 

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

 

*Revenue Recognition*

 

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

 

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

 

Weprovide layaway sales to our retail customers which are payable in up to fivemonthly installments. The amounts paid and yet to be shipped are recorded asdeferred revenue.

 

Inthe Statements of Income (Operations) all amounts billed to customers by usrelated to shipping and handling are included in “Net revenue” and our shippingcosts are included in “Cost of revenue.”

 

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

 

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

 

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

 

*Cost of Revenue*

 

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

 

Outboundshipping costs on merchandise sales totaled $1.5 million and $1.4 millionin the three months ended June 30, 2009 and 2010, respectively, and $3.1million and $2.8 million in the six months ended June 30, 2009 and 2010,respectively.

 

*Returns and Allowances Reserve*

 

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

 

*Inventories*

 

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

 

*Inventory Reserve*

 

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

 

*Inventory Co-op Marketing Contributions*

 

Webill and collect from our inventory vendors co-op marketing contributions as anincentive for us to market and sell their merchandise on the Bidz website. Weaccount for the co-op marketing contributions that cannot be identifiedspecifically to benefit the vendors as a reduction in the cost of inventorypurchased and cost of sales. We cannot specifically identify the benefits toeach vendor, and consequently, co-op marketing contributions are chargedagainst inventory as a reduction of costs and amortized as a reduction of costof sales. For the three months ended June 30, 2009 and 2010, we haverecognized $1.9 million and $1.6 million of co-op marketing contributions,respectively, and for the six months ended June 30, 2009 and 2010, we haverecognized $4.2 million and $3.7 million, respectively. Approximately $3.7million remain unamortized and is included as an offset to inventory at June 30,2010. Receivable from vendors for co-op marketing contributions, less allowancefor doubtful accounts, if any, is included in other receivables and amounted to$1.8 million at June 30, 2010.

 

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*Gain(loss) on foreign currency exchange*

 

Asignificant portion of our purchases are international purchases which exposesus to fluctuations in foreign currency exchange rates relative to the U.S.dollar. Our financial results are reported in U.S. dollars. As a result, transactionsconducted in foreign currencies must be translated into U.S. dollars forreporting purposes based upon the applicable foreign currency exchange rates,which may result in realized and unrealized gains or losses from exchange ratefluctuations.  We record a gain or loss on foreign currency exchangebetween the time we receive the inventory and when we make foreign currencypayments to our international suppliers. Transactions occurring during the period are translated at rates ineffect at the time of the transaction, and adjustments are made at each periodend to remeasure unsettled assets and liabilities denominated in foreigncurrencies at the period-end exchange rates.

 

*Descriptionof Our Revenue, Costs, and Expenses*

 

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

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2009**                             | ** ** | **2010**                           | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                           | ** ** | **(revised)**                        | ** ** | ** **                         | ** ** | **(revised)** | ** ** | ** ** | ** ** |
| Net sales                            |       | 100.0                                | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |
| Gross profit                         |       | 30.6                                 |       | 24.0                               |       | 31.7 |   | 24.8 |   |
| Operating expenses:                  |       |                                 |       |                               |       |   |   |   |   |
| General & administrative    |       | 17.1                                 |       | 21.1                               |       | 16.2 |   | 20.1 |   |
| Sales & marketing           |       | 7.9                                  |       | 5.6                                |       | 8.1 |   | 5.6 |   |
| Depreciation & amortization |       | 0.7                                  |       | 0.7                                |       | 0.7 |   | 0.7 |   |
| Total operating expenses             |       | 25.7                                 |       | 27.4                               |       | 25.0 |   | 26.4 |   |
| Income (loss) from operations        |       | 4.9                                  |       | (3.4                               | )          | 6.7 |   | (1.6 | ) |
| Interest expense                     |       | 0.0                                  |       | 0.0                                |       | 0.0 |   | 0.0 |   |
| Income tax expense                   |       | 2.3                                  |       | (0.9                               | )          | 2.9 |   | (0.3 | ) |
| Net income (loss)                    |       | 2.6                                  | %          | (2.5                               | )%         | 3.8 | % | (1.3 | )% |

 

*Net Revenue*

 

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

 

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

 
| ** **                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **2009**                             | ** ** | **2010**                           | ** ** | **2009** | ** ** | **2010** | ** ** |
|                         |       |                                 |       |                               |       |   |   |   |   |
| Merchandise sales            |       | 84.3                                 | %          | 81.6                               | %          | 85.1 | % | 83.7 | % |
| Wholesale merchandise sales  |       | 1.8                                  |       | 7.5                                |       | 1.2 |   | 6.6 |   |
| Shipping & handling |       | 10.6                                 |       | 7.8                                |       | 10.4 |   | 6.6 |   |
| Transaction fee              |       | 3.0                                  |       | 2.8                                |       | 3.0 |   | 2.8 |   |
| Other revenue                |       | 0.3                                  |       | 0.3                                |       | 0.3 |   | 0.3 |   |
|                         |       |                                 |       |                               |       |   |   |   |   |
| Total net revenue            |       | 100.0                                | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |

 

*Gross Profit*

 

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

 

*General and Administrative Expenses*

 

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

 

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consistingsubstantially of restricted stock awards to employees and directors.

 

*Sales and Marketing Expenses*

 

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

 

**Comparison of Three Months Ended June 30, 2010 to ThreeMonths Ended June 30, 2009 (Note 11)**

 

Netloss in the three months ended June 30, 2010 was $(653,000), or $(0.03)per basic and diluted share compared to a net income in the three months ended June 30,2009 of $693,000, or $0.03 per basic and diluted share. Net income decreased by$1.3 million in the three months ended June 30, 2010 compared to the threemonths ended June 30, 2009 primarily due to decreases in revenue and grossprofit margin.

 

*Net Revenue*

 

Netrevenue decreased 4.5% to $25.7 million in the three months ended June 30,2010 from $26.9 million in the three months ended June 30,2009. Wholesale merchandise sales were $1.9 million in the three monthsended June 30, 2010 compared to $471,000 in the three months ended June 30,2009.

 

Thecontinuing economic weakness affected our revenue in the second quarter of 2010compared to the second quarter of 2009. There was an overall decrease in onlinedemand for our jewelry and other merchandise as consumers reduced theirdiscretionary spending. If the economy continues to be weak it will cause anegative effect on our revenue and profitability.

 

*Gross Profit*

 

Grossprofit decreased 25.2% to $6.2 million in the three months ended June 30,2010 from $8.2 million in the three months ended June 30, 2009. Thedecrease in gross profit resulted from the decrease in sales volume whichdeclined by 4.5% for the three months ended June 30, 2010 compared to theprior year period and the decrease in gross profit margin to 24.0% in the threemonths ended June 30, 2010 from 30.6% in the prior year period. Grossprofit margin in the three months ended June 30, 2010 was affected by ourfree shipping promotion, weaker demand for our jewelry and other merchandise,and lower gross profit margin from our wholesale merchandise sales.

 

Sincethe second quarter of 2010, our free shipping promotion has been reducedsubstantially and we expect the percentage of gross profit margin to improvebeginning in the third quarter of 2010.

 

*General and Administrative Expenses*

 

Generaland administrative expense increased 18.1% to $5.4 million in the three monthsended June 30, 2010 from $4.6 million in three months ended June 30,2009. The increase in general and administrative expenses was due to expensesto operate modnique.com, severance payments made and higher overalladministrative expenses. General and administrative expense as a percentage ofnet revenue increased to 21.1% in the three months ended June 30, 2010from 17.1% in the three months ended June 30, 2009 as a result of highergeneral and administrative expense and deleveraging from lower revenue.

 

*Sales & Marketing Expenses*

 

Salesand marketing expense decreased 32.0% to $1.4 million in the three months endedJune 30, 2010 from $2.1 million in the three months ended June 30,2009. Sales and marketing expense as a percentage of net revenue decreased to5.6% in the three months ended June 30, 2010 from 7.9% in the three monthsended June 30, 2009. Sales and marketing expense was reduced to controlour operating expenses and also as a result of lower revenue.

 

*Income Tax Expense*

 

Werecorded an income tax benefit of $230,000 in the three months ended June 30,2010 from an income tax expense of $626,000 in the three months ended June 30,2009, with effective tax rates of 26.1% and 46.7%, respectively. Income taxbenefit in the three months ended June 30, 2010 was adversely affected andlower than expected when we recorded a reversal in deferred tax benefit from restrictedstock awards that vested in the quarter at a market value that wassubstantially lower than the grant date fair market value, since we had no APICpool to offset this shortfall.

 

**Comparison of Six Months Ended June 30, 2010 to SixMonths Ended June 30, 2009 (Note 11)**

 

Netloss in the six months ended June 30, 2010 was $(764,000), or $(0.03) perbasic and diluted share compared to a net income in the

 

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sixmonths ended June 30, 2009 of $2.2 million or $0.10 per basic and dilutedshare, respectively. Net income decreased by $3.0 million in the six monthsended June 30, 2010 compared to the six months ended June 30, 2009primarily due to decreases in revenue and gross profit margin.

 

*Net Revenue*

 

Netrevenue decreased 7.2% to $53.9 million in the six months endedJune 30, 2010 from $58.1 million in the six months endedJune 30, 2009. Merchandise wholesale sales were $3.6 million in the sixmonths ended June 30, 2010 compared to $677,000 in the six months endedJune 30, 2009.

 

Thecontinuing economic weakness affected our revenue in the first half of 2010compared to the first half of 2009. There was an overall decrease in onlinedemand for our jewelry and other merchandise as consumers reduced theirdiscretionary spending. If the economy continues to be weak it will cause anegative effect on our revenue.

 

*Gross Profit*

 

Grossprofit decreased 27.5% to $13.4 million in the six months endedJune 30, 2010 from $18.4 million in the six months endedJune 30, 2009. The decrease in gross profit resulted from the decrease insales revenue which declined by 7.2% for the six months ended June 30,2009 compared to the prior year period and the decrease in gross profit margin to 24.8% in the six months endedJune 30, 2010 from 31.7% in the prior year period. Gross profit margin inthe six months ended June 30, 2010 was affected by our free shippingpromotion and weaker demand for our jewelry and other merchandise.

 

*General and Administrative Expenses*

 

Generaland administrative expenses increased by 15.3% to $10.8 million in the sixmonths ended June 30, 2010 from $9.4 million in the six months endedJune 30, 2009. The increase in general and administrative expenses was dueto expenses to operate modnique.com and higher overall administrative expenses.General and administrative expenses as a percentage of net revenue increased to20.1% in the six months ended June 30, 2010 from 16.2% in the six monthsended June 30, 2009 as a result of higher general and administrativeexpense and deleveraging from lower revenue.

 

*Sales and Marketing Expenses*

 

Salesand marketing expenses decreased 35.9 % to $3.0 million in the six months endedJune 30, 2010 from $4.7 million in the six months ended June 30,2009. Sales and marketing expenses as a percentage of net revenuedecreased to 5.6% in the six months ended June 30, 2010 from 8.1% in thesix months ended June 30, 2009.

 

*Income Tax Expense*

 

Werecorded an income tax benefit of $155,000 in the six months endedJune 30, 2010 compared to an income tax expense of $1.7 million in the sixmonths ended June 30, 2009 and the effective tax rates were 16.9% and43.7%, respectively. Income tax benefit in the six months ended June 30,2010 was adversely affected and lower than expected when we recorded a reversalin deferred tax benefit from restricted stock awards that vested in the periodat a market value that was substantially lower than the grant date fair marketvalue, since we had no APIC pool to offset this shortfall.

 

**Additional Quarterly Data**

 
| ** **                      | ** ** | **Quarter Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
| ** **                      | ** ** | **2009**               | ** ** | **2009** | ** ** | **2010** | ** ** | **2010** | ** ** |
|                            |       |                   |       |   |   |   |   |   |   |
| Average selling price per order |       | $                      | 181        |   | $ | 180 |   | $ | 190 |   | $ | 198 |   |
| Average orders per day          |       | 2,043                  |       | 1,712 |   | 1,713 |   | 1,460 |   |
| Average items sold per day      |       | 6,110                  |       | 5,956 |   | 7,018 |   | 5,852 |   |
| Acquisition costs per new buyer |       | $                      | 51         |   | $ | 55 |   | $ | 39 |   | $ | 39 |   |
| Number of new buyers            |       | 51,021                 |       | 38,577 |   | 40,501 |   | 34,264 |   |

 

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

 

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**Liquidity and Capital Resources**

 

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

 

Asof June 30, 2010, we had a working capital surplus of $29.8 million and nolong-term debt obligations. Net cash provided by operating activities was $12.2million in the six months ended June 30, 2010 compared to $1.1million in the six months ended June 30, 2009. Cash in the six monthsended June 30, 2010 was primarily affected by changes in our net loss,inventories, other current assets and accounts payable and in the six monthsended June 30, 2009 was primarily affected by changes in our net income,inventories and accounts payable. Our inventories and accounts payablegenerally increase or decrease in line with changes in our inventory strategy.Our inventory strategy is influenced by our ability to secure inventory that webelieve will improve sales and/or our gross profit margin.

 

Werecorded net loss of $(764,000) in the six months ended June 30, 2010compared to a net income of $2.2 million in the six months ended June 30,2009. In the six months ended June 30, 2010, inventories decreased by $5.7million, other current assets decreased by $2.4 million and accounts payableincreased by $4.4 million, which resulted in a net increase in our cashposition. In the six months ended June 30, 2009, inventories increased by$2.9 million and accounts payable decreased by $1.3 million.

 

Netcash used in investing activities was $102,000 in the six months ended June 30,2010 compared to $164,000 in the six months ended June 30, 2009. Theexpenditures related mainly to acquisition of office and computer equipment,and software.

 

Inthe six months ended June 30, 2010, net cash of $3.5 million was used infinancing activities when $2.9 million was used to repay our revolving creditline, $313,000 was used to increase our long term deferred tax assets, $131,000was used to retire common stock from net vesting of restricted shares to payfor payroll taxes, and $135,000 was used to repurchase shares of our commonstock. In the six months ended June 30, 2009, net cash of $3.8 million wasused in financing activities when $3.6 million was used to repurchase shares ofour common stock.

 

Webelieve that cash currently on hand and cash flows from operations will besufficient to continue our operations and to pursue our growth strategy for theforeseeable future. Our future capital requirements will depend on manyfactors, including the rate of our revenue growth; the timing and extent ofspending to enhance our website, network infrastructure, and transactionprocessing systems; the extent of our advertising and marketing programs; thelevels of the inventory we carry; and other factors relating to our business.Enhancement of our website, network infrastructure, and transaction processingsystems may require us to spend significantly more than we have in the past.Moreover, to date our spending in these areas has been lower than industryaverages. We 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 June 30, 2010,over the next five years and thereafter (in thousands):

 
| **Payments by period** | ** ** | **Total  amount** | ** ** | **Less than  1 year** | ** ** | **1 to 3  years** | ** ** | **3 to 5  years** | ** ** | **After 5  years** | ** ** |
|----------------------------------|------------|-------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **        | ** ** | ** **                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Property lease                   |       | $                 | 3,232      |                            | $          | 1,542                       |       | $                           | 1,690      |                    | $          | — |   | $ | — |   |
| Equipment lease                  |       | 125               |       | 52                              |       | 73                          |       | —                      |       | —                  |       |
|                             |       | $                 | 3,357      |                            | $          | 1,594                       |       | $                           | 1,763      |                    | $          | — |   | $ | — |   |

 

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

 

**Reclassification**

 

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

 

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

 

Marketrisk represents the risk of loss arising from adverse changes in market ratesand foreign exchange rates. We do not believe that

 

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achange in market interest rates would have a material effect on our results ofoperations or financial condition. Although we derive a portion of our salesoutside of the United States, all of our sales are denominated in U.S. dollars.We have limited exposure to financial market risks related to changes ininterest rates and foreign currency exchange rates.

 

**ITEM 4 - CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

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

 

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

 

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

 

Weassessed the effectiveness of our internal control over financial reporting asof June 30, 2010, using the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control— Integrated Framework. During the second quarter of 2010, we continue to havecertain control deficiencies that represent material weaknesses identifiedduring the fourth quarter 2009 as a result, primarily, of the conversion fromour internally developed proprietary legacy operating system to a MicrosoftDynamics AX ERP system. The control deficiencies existing at June 30, 2010related to: (i) maintaining an effective control environment at the entitylevel specifically in having adequate processes over such matters as theconversion of the Company’s operating system to the Microsoft AX ERP system andin executing a Company-wide risk assessment program related to the conversionprocess; (ii) maintaining an effective control environment overInformation Technology (IT) specifically in user security configurations, enduser acceptance, design and monitoring of change controls, and securityevaluations for the Microsoft AX ERP system, and (iii) maintaining aneffective control environment over employee termination procedures. As aresult of the foregoing, management concluded that the Company’s internalcontrol over financial reporting as of June 30, 2010 was not effective.

 

Toensure that our financial statements were fairly stated in accordance withgenerally accepted accounting principles in the United States, we expandedprocedures to be performed in order to prepare the financial statements as ofJune 30, 2010. These procedures included additional analyses and review ofthe inventory processes and related balances to fairly state inventory and theassociated cost of goods sold in the three month and six month periods endedJune 30, 2010. Additionally, we performed multiple levels of review withinthe financial statement close process.

 

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

 

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

 

Toaddress the material weaknesses described above, management has implemented aremediation program, which has been approved by our Audit Committee.  We implemented the remediation program in thefourth quarter of 2009 through the first half of 2010, and anticipate that wewill continue implementation of the program in the second half of 2010.  We hired a key employee to serve dualresponsibilities as the Audit-Risk Manager and Compliance Officer in the secondquarter of 2010 as part of our remediation program, and completed the followingchanges in internal 

 

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controlactivities in the three months ended June 30, 2010 to remediate previouslyidentified internal control weaknesses:

 

Managementhas strengthened its control at the entity level, updated policies andprocedures, and trained staff on the required procedural controls overfinancial reporting, with particular focus on the Microsoft Dynamics AX ERP andAccounting systems.

 

Toaddress the lack of effective information technology policies and procedures,management updated all key information technology policies and procedures, andaddressed any concerns about financial reporting risks associated with the ITfunction.

 

Managementhas instituted rigorous verification testing and reviews of regression testingto improve on the preventative and detective quality controls testingenvironment.

 

Managementimplemented a structure of organization and oversight of the IT compliancefunctions, including regular and frequent strategic planning sessionsaddressing critical issues and plans, as well as increasing the internal auditfunction scope.

 

Toaddress the significant difficulties in generating reports related to salesorders (invoicing/fulfillment, refunds) and inventory processing (receiving,verification and adjustments, location ID) from the Microsoft AX ERP system,Management directed the development of the needed reports and training forstaff in their use.

 

Toaddress deficiencies in the Anti-Fraud Program, management and the Governanceand Nominations Committee of the board of directors reviewed and approved theCode of Conduct as meeting current needs, and management has verified currentcontacts for reporting current Code of Conduct issues are posted and availablefor the employees of Bidz.com. Management also instituted a formal codeviolations report procedure, as well as assigning a new Compliance Officer tomanage any reported possible violations. Management has mandated and obtainedsigned acknowledgements for understanding the Code from all employees.

 

Managementhas strengthened its control over invoice and payment processing. Beforepayment is processed, invoices are reviewed and approved.

 

Screeningprocedures, including background checks, are also employed for job applicants;particularly for employees with access to assets susceptible tomisappropriation have been strengthened, and background checks are performedfor all new-hires. When new-hires are considered to be key employees or willhave access to confidential information, Management has put additional effortinto reviewing and approving background check results before the prospectiveemployees’ first day of employment.

 

Managementhas mandated and implemented a procedure requiring review of all employees’timecards, both by employees as well as authorized approver, to ensure thattime records are correct and not over or under stated before payroll isprocessed.

 

Managementis in process for the following remediation against existing internal controlweaknesses:

 

(i) “maintainingan effective control environment at the entity level specifically in havingadequate processes over such matters as the conversion of the Company’soperating system to the Microsoft AX ERP system and in executing a Company-widerisk assessment program related to the conversion process.”

 

·                  To mitigatethis risk, management is developing a risk assessment process which identifiesand addresses the risks inherent in the conversion to the Microsoft AX ERPsystem.

 

(ii) “maintainingan effective control environment over Information Technology (IT) specificallyin user security configurations, end user acceptance, design and monitoring ofchange controls, and security evaluations for the Microsoft AX ERP system,”

 

·                  Management isimplementing a vigorous user access review, including a conflicts remediationprocess, to address user security configurations, security evaluationsdeficiencies, and managing user access security controls for all financialsystems, particularly focusing on the AX ERP system. Controls are beingre-designed to ensure that access to certain 

 

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financialapplications are adequately restricted to only employees requiring access tocomplete their job functions.  Exceptionsto these access requirements are in remediation.

 

·                  Management isin remediation and is mostly complete with one control remaining to addressinadequate design and monitoring of change controls and end user acceptance.

 

(iii) “maintainingan effective control environment over employee termination procedures.”

 

·                  Management isin remediation implementation for timely termination of user access toMicrosoft AX ERP system for former employees.

 

(iv) “andmaintaining an effective control environment over vendor review process.”

 

·                  Management isin remediation implementation for proper review of new vendor set-up and anychanges to existing vendors.

 

***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.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

Cases dismissed:

 

InMay and July, 2009, the Company and certain of its officers and its Boardof Directors were named as defendants in two shareholder derivative lawsuitsfiled in the Superior Court of California, County of Los Angeles, and theUnited States District Court for the Central District of California,respectively (Bahram Akhavan v. Bidz.com, Inc. et al. BC414198 (filed May 20,2009) (the “State Derivative Action”) and Farris Hassan v. Bidz.com, Inc.,et al., cv09-04984 (CBM) (C.D. Cal. (filed July 10, 2009) (the “FederalDerivative Action”)). The State and Federal Derivative actions allegeviolations of law, including breaches of fiduciary duties, waste of corporateassets, unjust enrichment and violations of California Corporations Code.Amended complaints in both actions also include allegations relating to theCompany’s co-op marketing contributions and minimum gross profit guarantees.

 

OnFebruary 26, 2010, the Superior Court of California granted the Company’sMotion to Dismiss the State Derivative Action with leave to amend. In response,on April 9, 2010, Mr. Akhavan, the plaintiff in the State DerivativeAction, made a demand to inspect certain books and records of the Company,which the Company rejected on the grounds, among other reasons, that therequest lacked a proper purpose under Delaware law. On May 5, 2010, Mr. Akhavanfiled an action in the Delaware Court of Chancery to compel the Company topermit inspection of the requested documents. In June 2010, after theCompany filed a Motion to Dismiss the Delaware action, Mr. Akhavanwithdrew both the State Court Derivative Action, as well as the Delawareaction, resulting in the dismissal of both cases.

 

InMay 2009, the Company received a Civil Investigative Demand forinformation from the Federal Trade Commission (“FTC”) relating to emailmarketing practices. We have been cooperating fully with the FTC regarding thismatter, and on April 2, 2010, we received notice that the FTC has decidednot to recommend enforcement action against us.

 

Onor about September 29, 2008, the Company, David Zinberg and Marina Zinbergwere named as defendants in a complaint filed in the United States DistrictCourt for the Central District of California (Marla Tidenberg v.Bidz.com, Inc., et al., cv08 05553 (PSG)). On March 19, 2009, Tidenberg filed a Third Amended Complaint, whichnames only the Company as a defendant. The lawsuit 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 who purchasedany merchandise from us. On January 7, 2010 the Court denied MarlaTidenberg’s Motion for Class Certification. On February 26, 2010,Marla Tidenberg accepted our offer to pay her Twenty Thousand Dollars inexchange for a dismissal of her case with prejudice.

 

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Casespending:

 

OnApril 27, 2010, the United States District Court granted the Company’sMotion to Dismiss the Federal Derivative Action (Farris Hassan v. Bidz.com, Inc, Inc. et al. BC414198 (filed May 20, 2009)  with leave to amend. The plaintiff filed anamended complaint, and, later this month, the Company will file another Motionto Dismiss, which the Company anticipates will be heard by the Court in November 2010.We believe that the lawsuit is meritless and intend to defend the casesvigorously.

 

InMay and June, 2009, the Company and certain of its officers were named asdefendants in three parallel class action complaints filed in the United StatesDistrict Court for the Central District of California (Ramon Gomez v. Bidz.com, Inc.,et al., cv09-3216 (CBM) (C.D. Cal.; filed on May 7, 2009); James Mitchellv. Bidz.com, Inc., et al., cv09-03671 (CBM) (C.D. Cal.; filed on May 22,2009); Mark Walczyk v. Bidz.com, Inc., et al., cv09-0397 (CBM) (C.D. Cal.;filed on June 3, 2009)). On July 30, 2009, the Court consolidated thecases. The consolidated complaint charges violations of Section 10(b) and Section20(a) of the Securities Exchange Act of 1934 and alleges that the Companyfailed to disclose unethical and fraudulent business practices, that it did nothave controls in place to prevent “shill bidding,” that it uses unreliable orfalse appraisal prices on its merchandise, and that it failed to correctlyaccount for and disclose in detail its co-op marketing contributions andminimum gross profit guarantees.

 

OnMay 25, 2010, in a 30-page opinion, the Honorable Consuelo B.Marshall of the United States District Court granted the Company’s Motion toDismiss the securities fraud complaint with leave to amend. On June 22,2010, the plaintiff filed its amended complaint. On July 30, 2010, the Companyfiled a Motion to Dismiss the amended consolidated complaint and the Court willhear the motion on October 4, 2010. We believe that the lawsuit is meritlessand intend to defend the cases vigorously.

 

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

 

OnFebruary 10, 2009, the Securities and Exchange Commission (“SEC”) issued asubpoena to produce documents relating to the Company’s inventory reserve policies,as well as other matters. We have been cooperating fully with the SEC regardingthis matter, our management and certain employees have complied with subpoenasfor testimony, and we do not believe that the investigation will adverselyaffect management, our results of operations, cash flows or our financialposition.  On October 27, 2009, theSEC issued a subpoena to produce documents relating to the Company’s co-opmarketing contributions and minimum gross profit guarantees.

 

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

 

**ITEM 1.A. RISK FACTORS**

 

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

 

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

 

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

 

***Our business has been and may continue to be significantly impacted byadverse worldwide economic condition and the current uncertainty in the outlookfor the global economy makes it more likely that our actual results will differmaterially from expectations.***

 

Globalfinancial markets have been experiencing extreme disruptions in recent years,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 still recovering from a recession, the demand for jewelryhas been and may continue to be adversely affected and therefore, demand forour jewelry products and our operating results have been and may continue to beadversely affected as well. We cannot predict the timing, strength or durationof any economic disruption or subsequent economic recovery, worldwide, in theUnited States, in our industry, or in the jewelry market. These and othereconomic factors have had and may continue to have a material adverse effect ondemand for our jewelry products and on our financial condition and operatingresults.

 

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

 

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

 

·          our ability to manage oursales and marketing efforts;

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

·          our ability to manage ourexpenses and inventories.

 

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

 

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

 

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

 

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

 

Asa result of current economic uncertainties, including with respect to globalcapital and credit markets and overall economic growth, we may find it moredifficult or expensive to secure additional capital or credit to pursue actionswe would consider beneficial to us or our shareholders. We have terminated, onApril 2, 2010, a revolving line of credit with Bank of America (formerlyLaSalle Bank). If we are unable to obtain alternative financing from anotherlender or lenders in the future, on terms that are acceptable to us, ourbusiness, ability to continue operations and financial condition could beadversely impacted.

 

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

 

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

 

·                  actual or anticipated changes in ouroperating results,

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  intellectual property or litigationdevelopments.

 

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

 

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

 

Wehave and plan to continue to repurchase shares of our common stock. Since theinception of our share repurchase program in June 2007, through June 30,2010, we have repurchased 3.4 million shares for a total of approximately$18.5 million. Our board of directors authorized the repurchase of up to$33.5 million of our common stock and a total of $15.0 million remainsavailable for repurchases. These repurchases and any repurchases we may make inthe future may not prove to be at optimal prices and our use of cash for thestock repurchase program may not prove to be the best use of our cash resourcesand may adversely impact our future liquidity.

 

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

 

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

 

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

 

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

 

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In conducting itsassessment, our management concluded that there were material weaknesses, asdefined in the Public Company Accounting Oversight Board’s Auditing StandardNo. 5, in our disclosure controls and internal control over financialreporting as of June 30, 2010.  Wehave implemented certain controls to remediate some of the material weaknesses,and are in the process of implementing additional controls, to remediate theremaining material weaknesses. Management believes these material weaknesses were not fully remediatedas of June 30, 2010 and through the date of this report. See discussionincluded in Item 4 “Controls and Procedures” above for additional informationregarding our disclosure controls and internal control over financialreporting.

 

We cannot assure you thatsignificant deficiencies or material weaknesses in our disclosure controls andinternal control over financial reporting will not be identified in the futureor that the identified material weaknesses will be remediated in the thirdquarter of 2010.  Also, future changes inour accounting, financial reporting, and regulatory environment may create newareas of risk exposure. Failure to modify our existing control environmentaccordingly may impair our controls over financial reporting and cause ourinvestors to lose confidence in the reliability of our financial reporting,which may adversely affect our stock price.

 

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

 

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

 

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

 

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

 

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

 

OnFebruary 10, 2009 and October 27, 2009, the Securities and ExchangeCommission (“SEC”) issued subpoenas to us to produce documents relating to theCompany’s inventory reserve policies, vendor marketing contributions, as wellas other matters. We intend to cooperate fully with the SEC’s formalinvestigation, and our management will devote the resources required to respondpromptly and thoroughly to any request by the SEC for any additionalinformation or documents. Although the investigation is 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, and reliability of our website, networkinfrastructure, and transaction processing systems; and provide high-qualitycustomer service. Our business will be harmed if we are unable to increase ourcustomer base and the dollar volume of the orders customers place with us.

 

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

 

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

 

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

 

Theacquisition of new customers is a key factor in increasing demand for ourjewelry products and increasing our revenue. We currently attract new customersby driving traffic to our website using a marketing and advertising strategythat includes targeted

 

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keywordsearches, online banner advertising, targeted e-mail advertising, andparticipation in affiliate programs. We do not maintain long-term contracts orarrangements with any companies, including any search engines, Internetportals, or other websites, and we may not successfully enter into additionalrelationships or maintain existing ones. In addition, traffic to our websitecould decline if our online marketing programs become less effective or thetraffic decreases to the search engines, Internet portals, and websiteswith which we advertise. Our business could be materially and adverselyaffected if any substantial number of companies on which we advertise experiencefinancial 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 months period ended June 30, 2009 and 2010, 34.3% and 42.6%,respectively, and in the six month periods ended June 30, 2009 and 2010,32.2% and 40.1%, respectively, of our net revenue was generated by shipments tocustomers outside of the United States. We plan, over time, to expand our reachinto international 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 businesscould suffer.***

 

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

 

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

 

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

 

***We do not have a guaranteed supply 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 aresult, we do not have a guaranteed supply of jewelry products at favorableprices. Our inability to maintain and expand our jewelry supply relationshipsor the inability of our suppliers to continue to supply us with jewelryproducts at favorable prices would substantially harm our business and resultsof

 

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operations.

 

Inaddition, we have a concentration of inventory purchases from a small number ofsuppliers. Our top vendors based on the amount of purchases vary from quarterto quarter.  The top two suppliersaccounted for approximately 33.7% and 26.6% of our total purchases in the threemonth period ended June 30, 2009 and 2010, respectively and in the sixmonth period ended June 30, 2009 and 2010, 23.3% and 24.0%, respectively,were purchased from our top two suppliers.

 

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

 

Wemay be at risk of loss for the diamonds, precious and semi-precious gems thatwe have given to our manufacturing vendors to produce into finished jewelryproducts. If the businesses of the vendors fail, the diamond inventory is lostor stolen, the vendors do not have adequate insurance coverage or if thevendors fail to produce and deliver finished jewelry products, we would incursubstantial losses that would have a material impact on our net income andfinancial 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, including eBay, Blue Nile, Overstock, and uBid. We alsoencounter competition from national jewelry retail chains, such as Zales, KayJewelers, and Finlay Fine Jewelry, and mass retailers and other enterprises,such as Wal-Mart, Target, J. C. Penney, Costco, QVC, and Home Shopping Network.Many of our competitors have greater brand recognition, longer operatinghistories, larger customer bases, and significantly greater financial,marketing, and other resources than we do. Smaller competitors may enter intostrategic or commercial relationships with larger, more established, and betterfinanced companies. Other competitors may enter into exclusive distributionagreements with our suppliers that deny us access to suppliers’ products.Competitors may also devote greater resources to marketing and promotionalcampaigns and to website and systems technology than we do. We may not be ableto compete successfully against current and future competitors or addressincreased competitive pressures. Furthermore, attempts have been made in thepast to develop and market synthetic stones and gems to compete in the marketfor gemstones and gemstone jewelry. We expect such efforts to continue in thefuture. If any such efforts are successful in creating widespread demand forsynthetic or alternative gemstone products, demand and price levels for ourproducts could decline and our business and results of operations would besubstantially harmed.

 

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

 

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

 

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

 

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

 

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

 

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

 

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accuratelypredict these trends or if we overstock unpopular merchandise.

 

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

 

Inaccordance with current industry practice and our interpretation of currentlaw, we do not currently collect sales or other taxes with respect to shipmentsof goods into states other than California, New York and Rhode Island. 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 suppliers and third-partycarriers as part of our fulfillment process, and these third parties may failto meet shipping schedules or requirements****.*

 

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

 

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

 

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

 

***The satisfactory availability, performance,and reliability of our website, network infrastructure, and transaction processingsystems are critical to our ability to attract, retain, and service customers.***

 

Anyproblems with the availability, performance, or reliability of our website,network infrastructure, or transaction processing systems could result indecreased customer traffic, reduced orders, reduced order fulfillmentperformance, and lower net revenue as well as negative publicity and damage toour reputation. In order to remain competitive, we must continually seek toimprove and expand the functionality and features of our website, networkinfrastructure, transaction processing systems, and delivery and shippingfunctions to accommodate any substantial increase in the volume of traffic toand orders from our website. We may not be successful in these efforts, and 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 website andback-office servers are located at a third-party co-location facility operatedby Savis Inc. in El Segundo, CA which is vulnerable to fire, earthquakes, andsimilar events.

 

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

 

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

 

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damageor interruption from earthquakes, floods, fires, power loss, telecommunicationfailures, terrorist attacks, computer viruses, computer denial-of-serviceattacks, and similar events.

 

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

 

Asignificant barrier to online commerce and communications is the securetransmission of confidential information over public networks. Third partiesmay have the technology or expertise to breach the security of customertransaction data. Our security measures may not prevent security breaches thatcould result in substantial harm to our business and results of operations anddamage to our reputation. Currently, a majority of our sales are billed to ourcustomers’ credit card accounts directly. Under current credit card practices,we are liable for fraudulent credit card transactions because we do not obtaincardholder signatures. We rely on encryption and authentication technologylicensed from third parties to effect secure transmission of confidentialinformation, including credit card numbers. We do not currently carry insuranceagainst this risk. Advances in computer capabilities, new discoveries in 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.

 

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

 

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

 

Ournetwork security measures to prevent third parties from penetrating our networkand improperly accessing our customers’ personal information or credit cardinformation may not be successful. Although we have not experienced any theftof our customers’ credit card information to date, as new discoveries in the fieldof cryptography and advances in computer capabilities occur, our securitymeasures may not effectively prevent others from obtaining improper access toour customer information. In addition, third parties may target our customersdirectly 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 grow our business will beimpaired by delays, interruptions, or failures of the Internet.***

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Sinceour formation, we have funded our operations through the sale of equity securitiesand cash generated from operations. The working capital characteristics of ourbusiness have allowed us to collect cash from sales to customers within severalbusiness days of the related sale, while we typically have extended paymentterms with our suppliers. We do not, however, have any formal or binding supplyagreements with any of our suppliers, manufacturers, distributors, or othersuppliers or any other formal agreements with them on payment terms.Accordingly, there is a risk that we may default on our obligations if we areunable to generate sufficient cash through sales in a timely manner or throughour credit facility.

 

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

 

Historically,sales in the jewelry industry are seasonal and have been higher in the fourthquarter of the calendar year as a result of higher consumer spending during theDecember holiday season. Approximately 33.8%, 16.9% and 24.9% of our netrevenue was generated during the fourth quarter of 2007, 2008 and 2009,respectively. The fourth quarter of 2008 and 2009 were exceptions as weencountered a significant slowdown in sales resulting from the 2008 financialand economic crisis. The fourth quarter of 2009 was further affected by themigration of our proprietary enterprise operating system to an ERP systemrunning on a customized Microsoft Dynamics AX as unexpected deficiencies inimplementing the new system had a material adverse effect on our resultsoperations. As we continue to recover and grow, we expect to experience morepronounced seasonal fluctuations in our net revenue and anticipate adisproportionate amount of our revenue will occur in the fourth quarter. Inanticipation of any increased sales activity during the fourth quarter, we mayincur significant additional expenses, including higher sales and marketingcosts and additional staffing in our fulfillment and customer supportoperations. If we were to experience lower than expected sales during anyfuture fourth quarter, it would have a disproportionately large impact on ourresults of operations for that year. In the future, our seasonal sales patternsmay become more pronounced, may strain our personnel and fulfillmentactivities, and may cause a shortfall in sales compared with expenses in agiven period, which would substantially harm our business and results ofoperations.

 

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

 

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

 

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

 

Wehad expanded our operations at a rapid pace prior to the 2008 financial andeconomic crisis. This expansion had placed a significant strain on ourmanagement, operations, and financial resources. When the economy and ourbusiness recover, we anticipate adding personnel in the future, includingmanagerial, technical, and operations personnel. In order to manage the futuregrowth of our operations, we also will be required to improve existing andimplement new transaction-processing, operational and financial systems,procedures, and controls. If we are unable to manage growth effectively, ourbusiness and results of operations will be harmed.

 

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

 

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

 

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

 

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

 

Therehas been an increase in attention to “conflict” diamonds originating out ofwar-torn regions of Africa. The proceeds from the sale of “conflict” diamondshave been used to fund ongoing aggression and terrorist activities throughoutthe world. We make every effort to evaluate our vendor sources to ensure theyare not a dealer in “conflict” diamonds. In addition we have implemented ananti-money laundering program to guard against both illicit purchase and salesactivities. If these risks were to occur, we may face a negative public reactionto our brand name resulting in loss of sales.

 

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

 

OurInternet domain name is critical to our success. Under current domain nameregistration practices, no other entity can obtain an identical domain name,but can obtain a similar name or the identical name with a different suffix,such as “.net” or “.org,” or with a different country designation, such as “jp”for Japan. We have not registered our domain name with different suffixes norhave we registered our name in any other jurisdiction. As a result, thirdparties may use domain names that are similar to our domain name, which mayresult in confusion to potential customers and lost sales. We are aware thatother businesses have registered the name “bidz” with other suffixes and inother countries.

 

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

 

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

 

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

 

Weregard the protection of our trademarks, copyrights, domain name, trade dress,and trade secrets as critical to our success. We rely on a combination ofcommon law as well as trademark, copyright, trade dress, and trade secret lawsto protect our intellectual property rights. We also have entered intoconfidentiality and invention assignment agreements with our employees and relevantcontractors and nondisclosure agreements with relevant parties with whom weconduct business in order to limit access to and disclosure of our proprietaryinformation. These contractual arrangements and other steps we have taken toprotect our intellectual property may not prevent misappropriation of ourintellectual property or deter independent development of similar intellectualproperty by others Effective trademark, copyright, patent, trade dress, tradesecret, and domain name protection is very expensive to maintain and mayrequire litigation.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Severalstates have proposed, and California, Minnesota, Utah, and Vermont haverecently passed, legislation that would limit the uses of personal userinformation gathered online or offline. Many states already have such laws andcontinually consider strengthening them, especially against online services.However, the Fair Credit Reporting Act, or FCRA, a federal statute enacted in1970 to protect consumer privacy, includes a provision preempting conflictingstate laws on the sharing of information between corporate affiliates. Thepreemptive provisions of FCRA were permanently extended in 2002, therebyensuring that we are not subject to the laws of each individual state withrespect to matters within the scope of FCRA, but remain subject to the otherprovisions of FCRA.

 

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

 

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

 

Weare subject to the same foreign and domestic laws as other companies conductingboth online and offline business. There are still relatively few lawsspecifically directed towards online business. However, due to the increasingpopularity and use of the Internet and online services, many laws relating tothe Internet are being debated at all levels of government around the world,and it is possible that such laws and regulations will be adopted. These lawsand regulations could cover issues such as user privacy, freedom of expression,pricing, fraud, content and quality of products and services, taxation, advertising,intellectual property rights, and information security. Applicability to 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.

 

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

 

***We depend to a very significant extent onDavid Zinberg, our Chief Executive Officer.***

 

Ourperformance depends substantially upon David Zinberg, our Chief ExecutiveOfficer, who has extensive experience with the purchase and sale of jewelry. Werely on Mr. Zinberg to make critical operational decisions on a dailybasis, such as product offerings and purchases, and to make key strategicplans. We have an employment agreement with Mr. Zinberg extending throughJuly 2011 and renewable annually. The loss of the services of Mr. Zinbergwould adversely affect our business and operations.

 

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

 

Fromour inception until mid-2003, we raised over $20.5 million in gross 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 thesesales of our securities, we determined that these sales were not exempt fromthe registration requirements under the Securities Act of 1933 and similarprovisions of laws of the states in which our stockholders reside, becausecertain of our employees who solicited investors engaged in a “generalsolicitation” of securities. In addition, these employees received compensationfor selling our common stock and were required to be licensed as broker-dealerswith the Securities and Exchange Commission, or SEC, and various stateauthorities, but they were not so licensed. In such situations, a number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs. We believe, however, that as to any options by investorsat this time or in the future, applicable statutes of limitations will mitigateour exposure to any civil remedies.

 

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

 

We have never declared orpaid any cash dividends on our common stock and do not intend to pay dividendson our common stock for

 

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the foreseeable future.We intend to invest any future earnings to fund our business. Therefore,stockholders likely will not receive any dividends on our common stock for theforeseeable future. Investors cannot be certain that they will receive apositive return on their investment when they sell their shares or that theywill not lose the entire amount 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.***

 

Asof June 30, 2010, our founder, executive officers, and directors together ownedapproximately 37.4% of our common stock, and Marina Zinberg, who is the sisterof David Zinberg, our Chairman and Chief Executive Officer, owned an additional29.8% 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 charter documents and Delaware lawcould make it more difficult for a third party to acquire us, and discourage atakeover.***

 

OnJune 22, 2006, we reincorporated in Delaware, and the Delaware certificateof incorporation and the Delaware General Corporation Law, or DGCL, containprovisions that may have the effect of making more difficult or delayingattempts by others to obtain control of our company, even when these attemptsmay be in the best interests of our stockholders. The Delaware certificate ofincorporation also authorizes our Board of Directors, without stockholderapproval, to issue one or more series of preferred stock, which could havevoting and conversion rights that adversely affect or dilute the voting powerof the holders of common stock. Delaware law also imposes conditions on certainbusiness combination transactions with “interested stockholders.” The Delawarecertificate of incorporation divides our Board of Directors into three classes,with one class to stand for election each year for a three-year term after theinitial election. The classification of directors tends to discourage a 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.

 

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

 

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

 

**IssuerPurchases of Equity Securities**

 

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

 
| ** **                        | ** ** | ** **    | ** ** | ** **  | ** ** | **Total Number of** | ** ** | **Maximum**                    | ** ** |
|-----------------------------------|------------|---------------|------------|-------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | ** **    | ** ** | ** **  | ** ** | **Shares**                    | ** ** | **Dollar Value**               | ** ** |
| ** **                        | ** ** | **Total**     | ** ** | **Average** | ** ** | **Purchased as**         | ** ** | **of Shares that**   | ** ** |
| ** **                        | ** ** | **Number**    | ** ** | **Price**   | ** ** | **Part of a**       | ** ** | **May**                        | ** ** |
| ** **                        | ** ** | **of**        | ** ** | **Paid**    | ** ** | **Publicly**                  | ** ** | **yet be Purchased** | ** ** |
| ** **                        | ** ** | **Shares**    | ** ** | **per**     | ** ** | **Announced**                 | ** ** | **Under the**             | ** ** |
| **2010**                          | ** ** | **Purchased** | ** ** | **Share**   | ** ** | **Program**                   | ** ** | **Program (1)**                | ** ** |
| April 1 – April 30 |       | —        |       | $           | —     |                          | 3,358,841  |                           | $          | 14,993,823 |   |
| May 1 – May 31     |       | —        |       | —      |       | 3,358,841                     |       | $                              | 14,993,823 |   |
| June 1 – June 30   |       | 20,137        |       | $           | 1.63       |                          | 3,378,978  |                           | $          | 14,960,981 |   |
| Total                             |       | 20,137        |       |        |       |                          |       |                           |       |

 

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

 

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**ITEM 6. EXHIBITS**

 
| 31.1         | Principal  Executive Officer Certification Pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934 |
|--------------|-------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                    |
| 31.2         | Principal  Financial Officer Certification Pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934 |
|         |                                                                                                                    |
| 32.1         | Certifications  Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934                             |
|         |                                                                                                                    |
| Exhibit 99.1 | Earnings  Release, dated August 9, 2010                                                                                 |

 

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**SIGNATURES**

 

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

 
|                        |       | BIDZ.COM, INC.              |
|-----------------------------|------------|----------------------------------|
|                        |       |                             |
|                        | By:        | /s/ DAVID ZINBERG                |
|                        |       |                             |
| ** **                  | ** ** | **David Zinberg**                |
| ** **                  | ** ** | **Chief Executive Officer**      |
|                        |       |                             |
|                        | By:        | /s/ LAWRENCE KONG                |
|                        |       |                             |
| ** **                  | ** ** | **Lawrence Kong**                |
| ** **                  | ** ** | **Principal Accounting Officer** |
|                        |       |                             |
| Dated:  August 9, 2010 |       |                             |

 

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