**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended September 30,2005**

 

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

 

**For the transition period                to                **

 

**Commissionfile number 000-51257**

 

**BIDZ.COM,INC.**

(Exact name of Registrantas specified in its charter)

 
| **California**                                             |   | **95-4728109**                           |
|------------------------------------------------------------|--------|------------------------------------------|
| (State  or other jurisdiction of                           |   | (I.R.S.  Employer Identification Number) |
| incorporation  or organization)                            |   |                                     |
|                                                       |   |                                     |
| **3562  Eastham Drive**                                    |
| **Culver  City, California**                               |
| **90232**                                                  |
| (Address,  including zip code, of principal                |
| executive  office)                                         |
|                                                       |
| **(310)  280-7373**                                        |
| (Registrant’s  telephone number, including area code) |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.   Yes ý  No  o

 

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

 

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

 

Number of shares outstanding of Registrant’s commonstock, no par value, as of November 10, 2005:

**23,312,500**

 

 

----

 

**TABLE OFCONTENTS**

 
| ** **                                                                                                                    | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I. FINANCIAL INFORMATION                                                                                            | 2        |
| Item 1. Financial Statements                                                                                             | 2        |
| Condensed  Balance Sheets as of September 30, 2005 (unaudited) and December 31,  2004                               | 2        |
| Condensed Statements of Operations for three month and nine month  periods ended September 30, 2005 and 2004 (unaudited) | 3        |
| Condensed Statements of Cash Flows for nine month periods ended September 30,  2005 and 2004 (unaudited)                 | 4        |
| Notes to Financial Statements (unaudited)                                                                                     | 5        |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations                      | 11       |
| Item 3. Quantitative and Qualitative  Disclosure About Market Risk                                                       | 26       |
| Item 4. Controls and Procedures                                                                                               | 26       |
| PART II.  OTHER INFORMATION                                                                                              | 27       |
| Item 1. Legal Proceedings                                                                                                     | 27       |
| Item 6. Exhibits                                                                                                              | 27       |
| SIGNATURES                                                                                                                    | 28       |

 

 

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

 

1

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**Bidz.com, Inc.**

**Condensed Balance Sheets**

 
| ** **                                                                                                                                                                                  | ** ** | **(In Thousands except share  numbers)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **September 30,**                   | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                  | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                  | ** ** | **(Unaudited)**                          | ** ** | ** ** | ** ** |
| **Assets**                                                                                                                                                                                  |       |                                     |       |   |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| **Current  assets:**                                                                                                                                                                        |       |                                     |       |   |   |
| Cash                                                                                                                                                                                        |       | $                                        | 2          |   | $ | 5 |   |
| Accounts  receivable, net                                                                                                                                                                   |       | 502                                      |       | 561 |   |
| Inventories,  net of reserves of $226 and $309 at September 30, 2005 and December 31,  2004 respectively                                                                          |       | 12,945                                   |       | 10,733 |   |
| Other  current assets, including $57 and $0 from a related party at September 30,  2005 and December 31, 2004 respectively                                                        |       | 105                                      |       | 107 |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| Total  current assets                                                                                                                                                                       |       | 13,554                                   |       | 11,406 |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| **Property  and equipment, net**                                                                                                                                                            |       | 308                                      |       | 344 |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| **Intangible  asset**                                                                                                                                                                       |       | 150                                      |       | 150 |   |
| **Deposits**                                                                                                                                                                                |       | 340                                      |       | 590 |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
|                                                                                                                                                                                        |       | $                                        | 14,352     |   | $ | 12,490 |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                              |       |                                     |       |   |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| **Current  liabilities:**                                                                                                                                                                   |       |                                     |       |   |   |
| Bank  overdraft                                                                                                                                                                             |       | $                                        | 7,500      |   | $ | 6,503 |   |
| Accounts  payable                                                                                                                                                                           |       | 4,761                                    |       | 4,903 |   |
| Accrued  expenses                                                                                                                                                                           |       | 1,145                                    |       | 1,105 |   |
| Deferred  revenue                                                                                                                                                                           |       | 1,003                                    |       | 1,059 |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| Total  current liabilities                                                                                                                                                                  |       | 14,409                                   |       | 13,570 |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| **Commitments  and contingencies**                                                                                                                                                          |       | —                                   |       | — |   |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| **Stockholders’  deficit:**                                                                                                                                                            |       |                                     |       |   |   |
| Common  Stock; no par value; authorized 50,000,000 shares; issued and outstanding  23,312,500 and 11,922,500 shares at September 30, 2005 and December 31,  2004 respectively     |       | 28,830                                   |       | 28,388 |   |
| Class B  Common Stock; no par value; authorized 25,000,000 shares; issued and  outstanding 0 and 15,534,689 shares at September 30, 2005 and December 31,  2004 respectively |       | —                                   |       | 426 |   |
| Deferred  stock-based compensation                                                                                                                                                          |       | (150                                     | )          | (300 | ) |
| Accumulated  deficit                                                                                                                                                                        |       | (28,737                                  | )          | (29,594 | ) |
|                                                                                                                                                                                        |       |                                     |       |   |   |
| Total  stockholders’ deficit                                                                                                                                                           |       | (57                                      | )          | (1,080 | ) |
|                                                                                                                                                                                        |       |                                     |       |   |   |
|                                                                                                                                                                                        |       | $                                        | 14,352     |   | $ | 12,490 |   |

 

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

 

2

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**Bidz.com, Inc.**

**Condensed Statements of Operations (Unaudited)**

 
| ** **                                                       | ** ** | **(In Thousands, except per share  numbers)** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                       | ** ** | **Three Months Ended**                        | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                       | ** ** | **September 30, 2005**                   | ** ** | **September 30, 2004** | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Net revenues:**                                                |       |                                          |       |   |   |   |   |   |   |
| **Merchandise  sales and shipping**                              |       | $                                             | 21,058     |   | $ | 15,217 |   | $ | 59,683 |   | $ | 45,677 |   |
| **Commissions**                                                  |       | 40                                            |       | 116 |   | 186 |   | 463 |   |
| **Advertising**                                                  |       | —                                        |       | 8 |   | 2 |   | 35 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
|                                                             |       | 21,098                                        |       | 15,341 |   | 59,871 |   | 46,175 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Cost of revenues**                                             |       | 16,760                                        |       | 12,228 |   | 48,164 |   | 37,364 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Gross Profit**                                                 |       | 4,338                                         |       | 3,113 |   | 11,707 |   | 8,811 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Operating expenses:**                                          |       |                                          |       |   |   |   |   |   |   |
| General and  administrative                                      |       | 2,430                                         |       | 2,214 |   | 7,521 |   | 6,204 |   |
| Sales and  marketing                                             |       | 1,163                                         |       | 645 |   | 2,752 |   | 1,747 |   |
| Pre-IPO  costs                                                   |       | 442                                           |       | — |   | 442 |   | — |   |
| Depreciation  and amortization                                   |       | 40                                            |       | 36 |   | 116 |   | 101 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Total operating expenses**                                     |       | 4,075                                         |       | 2,895 |   | 10,831 |   | 8,052 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Income from operations**                                       |       | 263                                           |       | 218 |   | 876 |   | 759 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Other income - Interest income**                               |       | 8                                             |       | — |   | 8 |   | — |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Income before income taxes**                                   |       | 271                                           |       | 218 |   | 884 |   | 759 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Income taxes**                                                 |       | 27                                            |       | — |   | 27 |   | — |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| **Net income**                                                   |       | $                                             | 244        |   | $ | 218 |   | $ | 857 |   | $ | 759 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| Net income  per share available to common shareholders - basic   |       | $                                             | 0.01       |   | $ | 0.01 |   | $ | 0.03 |   | $ | 0.03 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| Net income  per share available to common shareholders - diluted |       | $                                             | 0.01       |   | $ | 0.01 |   | $ | 0.03 |   | $ | 0.03 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| Weighted  average number of shares outstanding - basic           |       | 23,312,500                                    |       | 27,457,405 |   | 24,678,712 |   | 27,469,703 |   |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| Weighted  average number of shares outstanding - diluted         |       | 23,829,724                                    |       | 28,003,393 |   | 25,201,688 |   | 28,022,071 |   |

 

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

 

3

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**Bidz.com, Inc.**

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

 
| ** **                                                                                         | ** ** | **(In Thousands)**     | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                         | ** ** | **Nine Months Ended**  | ** ** |
| ** **                                                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                                               |       |                   |       |   |   |
| **Cash  flows used for operating activities:**                                                     |       |                   |       |   |   |
| Net income                                                                                         |       | $                      | 857        |   | $ | 759 |   |
| **Adjustments  to reconcile net income to net cash provided by (used for) operating  activities:** |       |                   |       |   |   |
|  Depreciation and amortization                                                                |       | 116                    |       | 101 |   |
|  Change in inventory reserve                                                                  |       | (83                    | )          | 135 |   |
|  Stock based compensation                                                                     |       | 166                    |       | 150 |   |
|                                                                                               |       |                   |       |   |   |
| **Changes  in assets and liabilities:**                                                            |       |                   |       |   |   |
| **(Increase)  decrease in assets:**                                                                |       |                   |       |   |   |
|  Accounts receivable                                                                          |       | 59                     |       | 8 |   |
|  Inventories                                                                                  |       | (2,129                 | )          | (5,129 | ) |
|  Other current assets                                                                         |       | 59                     |       | (147 | ) |
|  Deposits                                                                                     |       | 250                    |       | — |   |
| **Increase  (decrease) in liabilities:**                                                           |       |                   |       |   |   |
|  Accounts payable                                                                             |       | (142                   | )          | 3,797 |   |
|  Accrued expenses                                                                             |       | 40                     |       | (662 | ) |
|  Deferred revenue                                                                             |       | (56                    | )          | 93 |   |
| Net cash  (used for) operating activities                                                          |       | (863                   | )          | (895 | ) |
| **Cash  flows used for investing activity:**                                                       |       |                   |       |   |   |
| Capital  expenditures                                                                              |       | (137                   | )          | (36 | ) |
| **Cash  flows provided by financing activities:**                                                  |       |                   |       |   |   |
| Increase in  bank overdraft                                                                        |       | 997                    |       | 1,052 |   |
| Payments for  retirement of common stock                                                           |       | —                 |       | (124 | ) |
| Net cash  provided by financing activities                                                         |       | 997                    |       | 928 |   |
| **Net decrease  in cash**                                                                          |       | (3                     | )          | (3 | ) |
| **Cash,  beginning of period**                                                                     |       | $                      | 5          |   | 10 |   |
| **Cash,  end of period**                                                                           |       | $                      | 2          |   | $ | 7 |   |
| **Supplemental  disclosure of cash flow information:**                                             |       |                   |       |   |   |
|  Interest paid                                                                                |       | $                      | —     |   | $ | — |   |
|  Income taxes paid                                                                            |       | $                      | 18         |   | $ | — |   |
| **Supplemental  disclosure of non-cash investing and financing activities:**                       |       |                   |       |   |   |
|  Disposal of property and equipment                                                           |       | $                      | 57         |   | $ | — |   |
|  Stock issued for asset purchased                                                             |       | $                      | —     |   | $ | 125 |   |

 

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

 

4

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**BIDZ.COM, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(NUMBERS IN THOUSANDS, EXCEPT FOR PER SHARENUMBERS)**

**(UNAUDITED)**

 

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

 

**Basis of Presentation**

 

The accompanying unaudited financialstatements have been prepared in accordance with the instructions to Form 10-Qand do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  These financialstatements and related notes should be read in conjunction with the Company’saudited financial statements for the fiscal years ended December 31, 2004,2003 and 2002 filed in Amendmend No. 1 to the Form 10 by the Companyon June 30, 2005.  In the opinion ofmanagement, these financial statements reflect all adjustments which are of anormal recurring nature and which are necessary to present fairly the financialposition of Bidz.com, Inc. as of September 30, 2005 and the resultsof operations for the three month and nine month periods ended September 30,2005 and 2004 and the cash flows for the nine month periods ended September 30,2005 and 2004.  The results of operationsfor the three months and nine months ended September 30, 2005 are notnecessarily indicative of the results which may be expected for the entirefiscal year.

 

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

 

The accompanying financial statements have been prepared in conformitywith accounting principles generally accepted in the United States of America,which contemplate continuation of the Company as a going concern.  Although the Company has reported net incomeof $771 for the year ended December 31, 2004 and $857 for the year to dateended September 30, 2005, the Company has reported a working capitaldeficit of $855 and accumulated deficit of $28,737 as of September 30,2005.

 

Management has raised funds through the sale of its stock in privateplacements taking place from inception through the year 2003 that it believeswill be sufficient to provide the Company with the ability to continue inexistence.  The accompanying financialstatements do not include any adjustments relative to the recoverability andclassification of assets carrying amounts or the amount and classification ofliabilities that might result from the outcome of this uncertainty.  Through September 30, 2005, the Companyhas not been able to generate sufficient profits from its operations to coverthe accumulated deficit. Although the Company has been able to issue its commonstock through private placements to raise capital in order to fund itsoperations, it is not known whether the Company will be able to continue thispractice, or be able to obtain other types of financing or if its sales willincrease significantly to be able to meet its cash operating expenses. This, inturn, raises substantial doubt about the Company’s ability to continue as agoing concern.  Management anticipatessales to grow as a result of additional products offered to its customers andincrease of its customer base.  Managementbelieves that new product offerings and continuing increase of customers willenable the Company to generate positive operating cash flows and continue itsoperations.  However, no assurances canbe given as to the success of these plans. The financial statements do not include any adjustments that mightresult from the outcome of these uncertainties.

 

**Nature of Business Operations**

 

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

 

5

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

 

***Recent Accounting Pronouncements***

 

In December 2004, the FASB issued SFAS No. 123R(Revised 2004), “Share-Based Payment” (“SFAS 123R”). This statement addressesthe accounting for share-based payment transactions in which a company receivesemployee services in exchange for the company’s equity instruments orliabilities that are based on the fair value of the company’s equity securitiesor may be settled by the issuance of these securities. SFAS 123R eliminates theability to account for share-based compensation using APB 25 and generallyrequires that such transactions be accounted for using a fair value method. Theprovisions of this statement are effective for financial statements issued inthe first annual reporting period commencing after June 15, 2005.Therefore, the Company will adopt the provisions of SFAS 123R in its firstquarter of 2006. The stock-based compensation the Company will recognize afterthe adoption of SFAS 123R will be affected by the number and type ofstock-based awards granted in the future and the pricing model and relatedassumptions the Company decides to use to estimate the fair values of options.

 

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

 

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

 

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

 

In June 2005,the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-6, *Determining the Amortization Period for Leasehold Improvements*,which requires that leasehold improvements acquired in a business combinationor purchased subsequent to the inception of a lease be amortized over thelesser of the useful life of the assets or a term that includes renewals thatare reasonably assured at the date of the business combination orpurchase.  EITF 05-6 is effective forperiods beginning after July 1, 2005.  Wedo not expect the provisions of this consensus to have a material impact on thefinancial position, results of operations or cash flows.

 

In March 2005,the FASB issued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations” (“FIN 47”). FIN 47 provides guidance relating to theidentification of and financial reporting for legal obligations to perform anassert retirement activity.  TheInterpretation requires recognition of a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated.  FIN47 also defines when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. The provision iseffective no later than the end of fiscal years ending after December 15, 2005.The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006and does not believe the adoption will have a material impact on itsconsolidated financial position or results of operations or cash flows.

 

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

 

In accordancewith SFAS No. 128, “Earnings Per Share,” the basic earnings per commonshare is calculated by dividing net income available to common stockholdersless preferred dividends by the weighted average number of common sharesoutstanding. Diluted earnings per common share is computed similarly to basicearnings per common share, except that the denominator is increased to includethe number of additional common shares that would have been outstanding if thepotential common shares had been issued and if the additional common shareswere not anti-dilutive. As of the three months ended September 30, 2005 and2004, the Company has approximately 517 and 546 respectively of common stockequivalents from stock options, which was included in the calculation ofdiluted earnings per share.

 

The dilutiveeffect of outstanding stock options and warrants is reflected in dilutedearnings per share by application of the treasury stock method for the threemonth and nine month periods ended September 30, 2005 and 2004.  The following table sets forth thecomputation of basic and diluted net income per share (in thousands, except pershare amounts):

 

6

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| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Basic and  diluted net income per share: |       |                                       |       |                                      |       |   |   |   |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Numerator:                               |       |                                       |       |                                      |       |   |   |   |   |
| Net income                               |       | $                                          | 244        |                                      | $          | 218 |   | $ | 857 |   | $ | 759 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Denominator:                             |       |                                       |       |                                      |       |   |   |   |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Weighted  common shares outstanding      |       | 23,313                                     |       | 27,457                                    |       | 24,679 |   | 27,470 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Effect of  dilutive securities           |       | 517                                        |       | 546                                       |       | 523 |   | 552 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Denominator  for diluted calculation     |       | 23,830                                     |       | 28,003                                    |       | 25,202 |   | 28,022 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Net income  per share, basic             |       | $                                          | 0.01       |                                      | $          | 0.01 |   | $ | 0.03 |   | $ | 0.03 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Net income  per share, diluted           |       | $                                          | 0.01       |                                      | $          | 0.01 |   | $ | 0.03 |   | $ | 0.03 |   |
|                                          |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

**3.****             Accountingfor Stock Based Compensation**

 

At September 30, 2005, the Company hastwo stock-based employee compensation plans (the 2002 Stock Option Plan and the2001 Stock Option Plan).  The Companyaccounts for those plans under the recognition and measurement principles ofAPB Opinion No. 25, “Accounting for Stock Issued to Employees”, andrelated Interpretations.  No stock-basedemployee compensation cost is reflected in net income, except when optionsgranted under those plans had an exercise price less than the market value ofthe underlying common stock on the date of grant.  The following table illustrates the effect onnet income and income per share if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, “Accounting for Stock-BasedCompensation”, to stock-based employee compensation (in thousands except pershare amounts):.

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income, as reported                |       | $                                          | 244        |                                      | $          | 218 |   | $ | 857 |   | $ | 759 |   |
| Compensation recognized under APB 25   |       | —                                     |       | —                                    |       | — |   | — |   |
| Compensation recognized under SFAS 123 |       | —                                     |       | —                                    |       | 178 |   | 8,643 |   |
| Pro-forma  net income (loss)           |       | $                                          | 244        |                                      | $          | 218 |   | $ | 679 |   | $ | (7,884 | ) |
|                                   |       |                                       |       |                                      |       |   |   |   |   |
| Net Income per share:                  |       |                                       |       |                                      |       |   |   |   |   |
| Basic - as reported                    |       | $                                          | 0.01       |                                      | $          | 0.01 |   | $ | 0.03 |   | $ | 0.03 |   |
| Basic - pro-forma                      |       | $                                          | 0.01       |                                      | $          | 0.01 |   | $ | 0.03 |   | $ | (0.29 | ) |
| Diluted - as reported                  |       | $                                          | 0.01       |                                      | $          | 0.01 |   | $ | 0.03 |   | $ | 0.03 |   |
| Diluted - pro-forma                    |       | $                                          | 0.01       |                                      | $          | 0.01 |   | $ | 0.03 |   | $ | (0.28 | ) |

 

7

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

 

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

 

**Purchasesfrom two vendors amounted to $8,916, and $6,765 representing 45% and 48% of thetotal purchases during the three months ended September 30, 2005 and 2004respectively. Purchases from two vendors amounted to $18,513, and $16,995representing 42% and 47% of the total purchases during the nine months ended September 30,2005 and 2004 respectively. Outstanding accounts payable to the two majorvendors (net of amounts of post dated checks) totaled $1,276 and $1,822 as of September 30,2005 and December 31, 2004, respectively. Loss of any of these vendors may have a negative impact on theoperations of the Company.**

** **

**TheCompany sold jewelry products of approximately $20,231 and $14,847, whichaccounted for approximately 96%, and 97% of the total revenue, during the threemonths ended September 30, 2005 and 2004, respectively. During the ninemonths ended September 30, 2005 and 2004, the Company sold jewelryproducts of approximately $57,859, and $43,415, which accounted forapproximately 97%, and 94% of the total revenue, respectively. The Company’sability to continue its operations is highly dependent on the (i) availabilityof sufficient volume of jewelry supply; (ii) stable inventory cost, and (iii) continuingconsumer demand of its products.  TheCompany’s failure to anticipate and react to changes of these factors couldadversely affect its results of operations.**

** **

**5.**             Segmentand Geographic Information:

 

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

 
| ** **    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|          |       |                                       |       |                                      |       |   |   |   |   |
| United States |       | $                                          | 16,619     |                                      | $          | 12,483 |   | $ | 47,789 |   | $ | 38,128 |   |
| International |       | 4,479                                      |       | 2,858                                     |       | 12,082 |   | 8,047 |   |
|          |       |                                       |       |                                      |       |   |   |   |   |
| Total         |       | $                                          | 21,098     |                                      | $          | 15,341 |   | $ | 59,871 |   | $ | 46,175 |   |

** **

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

 

Los Angeles Jewelers, Inc.(“LAJewelers”) was one of the first suppliers to extend the Company with a line ofcredit to purchase its inventory in 2001. LA Jewelers has extended credit tothe Company of approximately $8,000 as of September 30, 2005.  During the three months ended September 30,2005 and 2004, the Company purchased approximately 40% and 35%, respectively,of the merchandise from this vendor. During the nine months

 

8

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ended September 30,2005 and 2004, the Company purchased approximately 37% and 32%, respectively.One of the owners of Los Angeles Jewelers owns 1,200,000 shares of the Company’scommon stock as of September 30, 2005.

 

David Zinberg, ChiefExecutive Officer of the Company purchased an automobile from the Company for$57 during the three month period ending September 30, 2005 and as of September 30,2005 the amount of $57 is outstanding from Mr. Zinberg.

 

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

 

The Company is subjectto various legal proceedings and claims that arise in the ordinary course ofbusiness.  Although the Company believesit has defenses to the allegations and intends to pursue them vigorously,currently, management does not have sufficient information to assess thevalidity of the claims or the 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.

 

Prior Sales of Securities

** **

From inception in 1999, and in 2000, 2001, 2002 andmid-2003, the Company raised over $20.5 million in gross equity capitaloffering and selling its Common Stock in the following approximate amounts foreach year: in 1999, 978,070 shares at $4 per share; in 2000, 1,198,191 sharesat $4  per share; in 2001, 580,621 sharesat $4 and $5 per share (or a weighted average price of $4.47 per share); in2002 1,051,924 shares at $5 per share; and in 2003, 753,262 shares at $5 and $6per share (or a weighted average price of $5.26 per share).  The Company sold these shares to about 830investors.  The persons associated withthe Company who solicited these investors were not licensed as broker-dealersin any state or with the U.S. Securities and Exchange Commission (“SEC”).  The Company also issued shares of CommonStock in exchange for services and other non-cash consideration valued inexcess of $5.5 million in the following approximate amounts for each year:  in 1999, 57,500 shares at $4 per share; in2000, 100,000 shares at $4 per share; in 2001, 585,700 shares at $4.09 pershare; in 2002, 445,774 shares at $5 per share; in 2003, 18,673 shares at $5.60per share; and in 2004, 28,544 shares at $5 per share.  The Company issued these shares to about 25persons or entities.  The Company alsoissued the options to purchase Common Stock in the following amounts: nooptions were issued from 1999 through 2001; in 2002, options to purchase1,332,000 shares at $3.75 per share; in 2003, options to purchase 485,500shares at $4.50 per share; in 2004, options to purchase 6,162,000 shares at $6per share; and in 2005, options to purchase 192,000 shares at $6 per share.

 

These offers and sales of Common Stock and options topurchase Common Stock were not registered under the federal and statesecurities laws, but were issued in reliance upon exemptions from suchregistration under Section 4(2) of the Securities Act of 1933, asamended (the “1933 Act”), and Rule 506 of Regulation D promulgatedthereunder.  Similarly, in employingpersons who were not licensed as broker-dealers, the Company relied on certainexemptions from the broker-dealer licensing requirements of the SecuritiesExchange Act of 1934 Act, as amended (the “1934 Act”) and of state securitieslaws. Since conducting these offers and sales of Common Stock and options topurchase Common Stock, the Company determined that it did not comply with theexemptions from registration under the 1933 Act and similar provisions of lawsin each state in which the Company’s investors reside, because certain of theCompany’s employees who solicited investors engaged in a “general solicitation”of securities.  In addition, theseemployees were required to be licensed as broker-dealers with the SEC andvarious states, but they were not so licensed. The Company also determined that because investors did not receiveinformation regarding the Company’s potential liability for these violations offederal and state securities laws, the Common Stock was issued to persons whofailed to receive adequate information under federal and state securitieslaws.  In such situations a number ofremedies may be available to regulatory authorities and the investors whopurchased Common Stock in those offerings, including, without limitation, aright of rescission, civil penalties, seizure of the Company’s assets, arestraining order or injunction, and a court order to pay restitution andcosts.  In the event that rescission byall of the Company’s shareholders were to occur, the Company would be liablefor the $20.5 million it received in exchange for its common stock, in additionto interest of approximately $8.8 million through September 30, 2005.  The Company may also be liable for the $5.5million of services rendered and property exchanged in consideration for theissuance of common stock, in addition to interest on this amount ofapproximately $2.2 million through September 30, 2005.

 

9

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

 

After voluntary reporting these violations to the SEC,the SEC staff advised the Company that it would not undertake an investigationin the matter . The Company intends to seek financing in order to offerrescission to all of its investors. However, the Company has not approached state securities commissionersin the states in which our investors reside. Consequently, there is substantial uncertainty concerning what actionstate regulators may take against the Company and what effect any such actionwill have on the Company’s business and its ability to obtain financing.  If the Company is unable to secure thefinancing required for a rescission offer, any assertion by the Company’sshareholders of their legal claims against the Company will have a materialadverse effect on the Company’s liquidity, its financial position, results ofoperation and cash flows.  Even iffinancing sources available to us were willing to accept these risks andwilling to finance a rescission offer, there is no assurance that the terms ofany such financing would be acceptable to us. Moreover, even if the Company is successful in offering rescission toits shareholders, if, prior to the rescission offer, any shareholders whoacquired their common stock in the Company’s offerings sells their common stockfor less than the price at which they purchased their shares, they will beentitled to recover from the Company damages equal to the difference betweentheir investment amount plus interest from the date of issuance and the valueor price of the security at the time of its sale.  Because these shareholders will no longer ownour common stock, the Company will not be able to extinguish these damageclaims by offering to rescind the shareholder’s purchase of our Common Stock.

 

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

 

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

 

**Endai Worldwide v. Bidz.com**

** **

The Company is a defendant in a lawsuit brought byEndai Worldwide (“Endai” or “plaintiff”)for past services in the amount of$78.  The plaintiff alleges that theCompany owes approximately $78 unpaid internet advertising fees. The Companyclaims that plaintiff has not performed the services related to such chargesand has counterclaimed for $1,000 in damages for inappropriate use of theCompany’s user base. During the quarter ended September 30, 2005, thislitigation has been settled. By the terms of the settlement, neither party isto pay any money to the other. Accordingly, the Company has not recorded anyliability for this claim in the accompanying financial statements.

 

**8.             Subsequent Event**

 

EffectiveNovember 1, 2005, the Company commenced charging a transaction fee of 3% onauction sales payments subject to a minimum fee of $0.50.  This transaction fee will be reported withinrevenues as transaction fee income.

 

 

10

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

**CriticalAccounting Policies**

 

The preparationof our financial statements requires that we make certain estimates andjudgments 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 management judgment.

 

*Revenue Recognition*

 

We deriverevenue from four sources:  merchandisesales, commission revenue from sales of certified merchandise that is owned bythird parties, advertising revenue and shipping revenue.  Revenue from all four sources is recognizedwhen the following revenue 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) theselling price is fixed or determinable; and (4) collection of theresulting receivable is reasonably assured. Merchandise sales are recognized upon shipments made to individualconsumers and businesses that are fulfilled from the Company warehouse.  The Company generally requires online paymentby credit card or other electronic payment methods at the point of sale.  Amounts received or charged to credit cardsand other online payment services (when invoiced), prior to shipment of goodsto customers, are recorded as deferred revenue. Gross sales are reduced by returns, chargebacks from customers and otherdiscounts redeemed to obtain such sales.

 

*Inventory Reserve*

 

Reserve forinventory is estimated based on merchandise that is held longer than 6 monthsand by undergoing a lower of cost or market analysis.

 

*Return and Allowance Accrual*

 

Accruals forreturn and allowance is estimated at September 30, 2005 based on thereturn and allowance that will occur in the subsequent quarter that isattributable to revenues derived in the current quarter. The Company has a 15days return policy for its customers.

 

*Stock-based Compensation*

 

We account forour employee compensation plans under the recognition and measurementprovisions of Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees,*andrelated interpretations. We expense stock-based compensation on the date ofgrant since all options awarded to date vest immediately.

 

In 2006 wewill be adopting the FASB issued SFAS No.123 (revised 2004) , “Share-basedPayment” Statement (123R) requiring that share-based payment transactions berecognized in the financial statements based on the fair value of the equity orliability instrument issued.

 

For employees,we have recorded stock-based compensation representing the difference between theoption exercise price and the deemed fair value of our common stock on thegrant date for financial reporting purposes. We determined the deemed fairvalue of our common stock based upon the private placement share price ineffect at the time of the option grant. Had different assumptions or criteriabeen used to determine the deemed fair value of our

 

11

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common stock,different amounts of stock-based compensation could have been reported.  For consultants, we have recorded stock-basedcompensation estimated using the Black-Scholes option pricing model under thefair value method of SFAS No. 123.

 

Pro formainformation regarding net income (loss) attributable to commonstockholders and net income (loss) per share attributable to commonstockholders is required in order to show our net income (loss) as if wehad accounted for employee stock options under the fair value method of SFAS No. 123,as amended by SFAS No. 148. The fair values of options and shares issuedpursuant to our option plan at each grant date were estimated using theBlack-Scholes option pricing model.

 

**SubsequentEvent**

** **

EffectiveNovember 1, 2005, the Company commenced charging a transaction fee of 3% onauction sales payments subject to a minimum fee of $0.50.  This transaction fee will be reported withinrevenues as transaction fee income.

 

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

 

Net income in the threemonths ended September 30, 2005 was $0.2 million, or $0.01 per basic anddiluted share.  In the three months endedSeptember 30, 2004, net income was $0.2 million and net income per basicand diluted share was $0.01.  Althoughnet sales revenue increased by 38% in the three months ended September 30,2005 compared to the three months ended September 30, 2004, the net incomeincreased by 12% over the same period. The smaller increase in net income wasprimarily due to the 38% increase in net sales revenue offset by operatingexpenses which increased by 41%.  Grossprofit margin in the third quarter of 2005 was 20.6% compared to 20.3% in thethird quarter of 2004.

 

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

 
| ** **                            | ** ** | **Quarter Ended September 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                  |       |                                 |       |   |   |
| Net Sales                             |       | 100                                  | %          | 100 | % |
| Gross Profit                          |       | 21                                   |       | 20 |   |
| Operating  Expenses:                  |       |                                 |       |   |   |
| General &  Administrative    |       | 12                                   |       | 15 |   |
| Sales &  Marketing           |       | 6                                    |       | 4 |   |
| Pre-IPO  Costs                        |       | 2                                    |       | — |   |
| Depreciation &  Amortization |       | 0                                    |       | 0 |   |
| Total  Operating Expenses             |       | 20                                   |       | 19 |   |
| Income from  Operations               |       | 1                                    |       | 1 |   |
| Interest  income (expense), net       |       | 0                                    |       | — |   |
| Income tax                            |       | 0                                    |       | — |   |
| Net Income                            |       | 1                                    | %          | 1 | % |

 

12

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The following describes certain line items set forth inour condensed statements of operations:

 

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

 

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

 
| ** **                    | ** ** | **Quarter Ended September 30,** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| * *                      | * *   | * *                             | * *   | * * | * * |
| Net Sales                     |       |                                 |       |   |   |
| Merchandise  sales            |       | 89                                   | %          | 88 | % |
| Shipping &  Handling |       | 11                                   |       | 11 |   |
| Commissions                   |       | 0                                    |       | 1 |   |
| Advertising                   |       | 0                                    |       | 0 |   |
| Total Net Sales               |       | 100                                  | %          | 100 | % |

 

Net revenue increased 38% to $21.1 million in thethree months ended September 30, 2005 from $15.3 million in the threemonths ended September 30, 2004. This increase in net revenue was due primarily to the increase inregistered buyers at our website and growth in demand for our jewelry products.Significant demand was also generated from the use of gift certificatepromotions offered by the Company. The gift certificates are normally offeredto new customers and provides for a reduction in the payment for merchandise upto the amount of the gift certificate. The Company is focused on a steadyrevenue growth and maintaining a gross profit of about 20% by offering highermargin products.

 

The Company expects net revenue to grow by at least30% over the next 12 months based on current sales trend and increased customerdemand for its products. This compares to growth of 37% in net revenue for boththe 2004 and 2003 fiscal years.

 

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

 

Cost of revenues increased 37% to $16.8 millionin the three months ended September 30, 2005 from $12.2 million inthe three months ended September 30, 2004. Cost of revenues increased at a slower rate than net revenues due to theimprovement in gross profit margins to 20.6% in the three months ended September 30,2005 compared to 20.3% in the three months ended September 30, 2004. Costof certificate discounts given to customers were recorded in the three monthsended September 30, 2005 while none were recorded in the three monthsended September 30, 2004.

 

*Gross Profit.*Ourgross profit consists of net revenue less the cost of revenue. Our cost ofrevenue consists of the cost of merchandise sold to customers, inbound andoutbound shipping costs, insurance on shipments and transaction fees associatedwith credit card and paypal payments. Our gross profit has fluctuated historically based primarily on ourproduct acquisition costs, product mix and pricing decisions.

 

Gross profit increased 39%to $4.3 million in the three months ended September 30, 2005 from$3.1 million in the three months ended September 30, 2004. Theincrease in gross profit in third quarter 2005 resulted mainly from theincrease in net sales revenue which rose by 38% from the three months ended September 30,2004 to the three months ended September 30, 2005.

 

13

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

 

*General and Administrative Expenses.*Our general and administrative expenses consist primarily ofpayroll, related benefit costs for our employees and general office operatingexpenses. These expenses also include fulfillment, customer service andtechnology, as well as professional fees and other general corporate expenses.

 

General and administrative expenses increased 10% to$2.4 million in the three months ended September 30, 2005 from$2.2 million in three months ended September 30, 2004. The increasein general and administrative expenses were due primarily to the$0.2 million increase in payroll and payroll related expenses resultingfrom the expansion of staffing in technology and development.

 

The Company expects general and administrative expenses to grow by lessthan 20% over the next 12 months as they are expected to grow at a slower ratethan net revenue.

 

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

 

Website Searches: The Company recently shifted itsmarketing focus to the utilization of advertisements appearing upon completionof website searches indicating interest in our products. The Company currentlymaintains advertising relationships with, among others, Google (US, UK,Australia, Canada, European Union, South East Asia, Mid East and SouthAmerica), Yahoo Overture (US, UK and Australia), AskJeeves USA, Looksmart USAand MIVA for search engine advertising.  Search engine advertising isprimarily purchased at a pre-negotiated price to be paid each time a potentialcustomer clicks on one of our advertisements.

 

Contextual marketing: The Company utilizes banneradvertisements and product data feeds on websites with high trafficvolumes.  The Company focuses on contextual advertisements that appear onwebsites related to jewelry, fashion, shopping and women’s lifestyle. The Company maintains portal advertisingrelationships with Yahoo (US, UK and Australia), AskJeeves USA, 24/7Realmedia, MSN, WhenU, Claria, Hotbar, BlueLithium and others.  The feestructure for our purchase of banner and contextual advertisements is eitherbased on a set price for each click on our advertisement or on a cost perthousand basis, for which we pay a set fee per thousand contextual or banneradvertisements that appear on the selected websites.

 

Email campaigns: The Company utilizes anelectronic direct marketing program to encourage repeat purchases, customerretention, prospect activation and referral business.  This programincludes permission-based e-mail marketing to visitors who indicate a desire tocontinue to receive product recommendations and promotional discounts. TheCompany’s email direct marketing is purchased for a set fee per thousand emailssent or for a new lead.

 

Affiliate Program. The Company attracts customers byparticipating in affiliate programs. In March 2005, the Company outsourcedits US Affiliate Program to Link Share. In August 2005 the Company engagedCommission Junction and Checkmystats to handle its European and Australianaffiliate programs. In so doing, the Company intends to extend the reach of itswebsites and draw customers from a variety of other websites. By joining theCompany’s affiliate program, website publishers earn volume-based commissionsby directing customers to our websites.

 

Sales and marketing expenses increased 80% to$1.16 million in the three months ended September 30, 2005 from$0.65 million in the three months ended September 30, 2004.Management increased the expenditure in marketing in order to increase theCompany’s revenues. The increased expenditure also reflects the higher cost ofmarketing being charged as overall demand for online marketing increasedsubstantially

 

14

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The Company expects sales and marketing expenses to grow by over 30%over the next 12 months.

 

*Pre-Initial Public Offering Costs.*Ourpre-IPO costs consist of legal expenses incurred in preparation for an initialpublic offering of our common stock.

 

The Company expensed $0.4 million in deferred pre-IPOcosts for the three months ended September 30, 2005 compared to $0 in thecorresponding period in 2004. The pre-IPO costs were incurred in the firstquarter of 2005 when the Company was planning to conduct an IPO.  The Company is presently considering a numberof alternatives, including an IPO, to facilitate the development of a marketfor its common stock, but it does not have any present plan to conduct an IPO.Consequently, the pre-IPO costs were expensed in the three month period ended September 30,2005.

 

**Comparison of Nine Months Ended September 30,2005 to Nine Months Ended September 30, 2004**

 

Net income in the ninemonths ended September 30, 2005 was $0.9 million, or $0.03 per basic anddiluted share.  In the nine months ended September 30,2004, net income was $0.8 million and net income per basic and diluted sharewas $0.03.  Net sales increased by 30% inthe nine months ended September 30, 2005 compared to the nine months endedSeptember 30, 2004, and net income increased by 13% over the same period.The smaller increase in net income resulted primarily from the increase in netrevenue of 30%offset by the 35% increase in operating expenses.

 

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

 
| ** **                            | ** ** | **Nine Months Ended Sep 30,** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                                  |       |                          |       |   |   |
| Net Sales                             |       | 100                           | %          | 100 | % |
| Gross Profit                          |       | 20                            |       | 19 |   |
| Operating Expenses:                   |       |                          |       |   |   |
| General &  Administrative    |       | 13                            |       | 13 |   |
| Sales &  Marketing           |       | 4                             |       | 4 |   |
| Pre-IPO  Costs                        |       | 1                             |       | — |   |
| Depreciation &  Amortization |       | 0                             |       | 0 |   |
| Total Operating Expenses              |       | 18                            |       | 17 |   |
| Income from Operations                |       | 2                             |       | 2 |   |
| Interest income (expense), net        |       | 0                             |       | — |   |
| Income tax                            |       | 0                             |       | — |   |
| Net Income                            |       | 2                             | %          | 2 | % |

 

15

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*Net Revenue*

 

Net revenue increased 30% to $59.9 million in thenine months ended September 30, 2005 from $46.2 million in the ninemonths ended September 30, 2004. This increase in net revenue was due primarily to the increase inregistered buyers at our website and growth in demand for our jewelry products.Significant demand was also generated from the use of gift certificatepromotions offered by the Company. The gift certificates are normally offeredto new customers and provides for a reduction in the payment for merchandise upto the amount of the gift certificate.

 

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

 
| ** **                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| * *                      | * *   | * *                                 | * *   | * * | * * |
| Net Sales                     |       |                                     |       |   |   |
| Merchandise  sales            |       | 90                                       | %          | 90 | % |
| Shipping &  Handling |       | 10                                       | %          | 9 | % |
| Commissions                   |       | 0                                        | %          | 1 | % |
| Advertising                   |       | 0                                        | %          | 0 | % |
| Total Net Sales               |       | 100                                      | %          | 100 | % |

 

*Cost ofRevenues*

 

Cost of revenues increased 29% to $48.2 millionin the nine months ended September 30, 2005 from $37.4 million in thenine months ended September 30, 2004. Cost of revenues increased at a rate comparable to the 30% increase innet revenues for the same period. Cost of certificate discounts given tocustomers were recorded in the nine months ended September 30, 2005 whilenone were recorded in the nine months ended September 30, 2004.

 

*Gross Profit*

 

Gross profit increased 33%to $11.7 million in the nine months ended September 30, 2005 from$8.8 million in the nine months ended September 30, 2004.  The increase in gross profit in the ninemonths ended September 30, of 2005 over 2004 resulted from the increase innet revenue of 30% over the corresponding period and the improvement ingross profit margin from 19% in 2004 to 20% in 2005.

 

*General and Administrative Expenses*

 

General and administrative expenses increased 21% to$7.5 million in the nine months ended September 30, 2005 from$6.2 million in nine months ended September 30, 2004. Payroll andpayroll related expenses increased by $1.0 million and IT related expensesincreased by $0.2.

 

*Sales & Marketing Expenses*

 

Sales and marketing expenses increased 58% to$2.75 million in the nine months ended September 30, 2005 from$1.75 million in the nine months ended September 30, 2004.  The increase in sales and marketing expenseswas attributable to the higher spending on search engines, email campaigns andcontextual marketing and to the increased cost of such online marketing beingcharged this period over the corresponding period last year.

 

*Pre-IPO Cost*s

 

The Company expensed $0.4 million in deferred pre-IPOcosts for the nine months ended September 30, 2005 compared to $0 in thecorresponding period in 2004. The pre-IPO costs were incurred in the firstquarter of 2005 when the Company was planning to conduct an IPO.  The Company is presently considering a numberof alternatives, including an IPO, to facilitate the development of a marketfor its common stock, but it does not have

 

16

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any present plan to conduct an IPO. Consequently, thepre-IPO costs were expensed in the three month period ended September 30,2005.

 

**Liquidity and Capital Resources**

 

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

 

As of September 30, 2005, we had a workingcapital deficit of $0.9 million and have no short or long-term debtobligations. The working capital characteristics of our business model where wecollect cash from sales to customers within several business days of therelated sale and have extended payment terms with our suppliers has allowed theCompany to grow rapidly even with a working capital deficit since 2001.

 

Net cash used for operating activities was($0.9) million in the nine months ended September 30, 2005 comparedto net cash used of ($0.9) million in the nine months ended September 30,2004. The net cash was affected mainly by changes in inventories, accountspayable and accrued expenses. The Company recorded a net income of $0.9 millionin the nine months ended September 30, 2005 compared to $0.8 million inthe nine months ended September 30, 2004.

 

Net cash used for operating activities in the ninemonths ended September 30, 2005 as compared to the nine months ended September 30,2004 did not change significantly. However, there were significant changes inthe components of cash flows. For the nine month period, net cash used forinventories was ($2.1) million in 2005 compared to cash used of ($5.1) millionin 2004. Cash used for accounts payable was $(0.1) million in the nine monthsended September 30, 2005 compared to cash provided of $3.8 million in thenine months ended September 30, 2004. For the nine month period, cashprovided by accrued expenses is $0.04 million compared to cash used of ($0.66)million in 2004.

 

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

 

Net cash used in investing activities was $(0.14)million in the nine months ended September 30, 2005 compared to $(0.04)million in the nine months ended September 30, 2004, and such additionswere primarily related to capital expenditures for office equipment andtechnology system infrastructure.

 

Net cash provided by financing activities was$1.0 million in the nine months ended September 30, 2005 compared tonet cash provided of $0.9 million in the nine months ended September 30,2004. The Company financed purchases by utilizing “post dated checks” with anet change in the facility amount of $1.00 million in the nine months ended September 30,2005 compared $1.05 million in the nine months ended September 30, 2004.The Company recorded cash used for retirement of common stock of $0.0 millionin the nine months ended September 30,2005 compared to $(0.12) million inthe nine months ended September 30, 2004.

 

The following table presents the Company’scontractual obligations as of September 30, 2005, over the next five yearsand thereafter:

 

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Payments byPeriod

(in thousands)

 
| ** **                          | ** ** | ** ** | ** ** | **Less**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------|------------|
| ** **                          | ** ** | **Total**  | ** ** | **Than**   | ** ** | **1-3**    | ** ** | **4-5**    | ** ** | **After 5** | ** ** |
| ** **                          | ** ** | **Amount** | ** ** | **1 Year** | ** ** | **Years**  | ** ** | **Years**  | ** ** | **Years**   | ** ** |
| Employment agreements               |       | 500        |       | 240        |       | 260        |       | —     |       | —      |       |
| Property Lease                      |       | 3,517      |       | 842        |       | 1,755      |       | 920        |       | —      |       |
|                                |       |       |       |       |       |       |       |       |       |        |       |
| Total  Contractual Cash Obligations |       | 4,017      |       | 1,082      |       | 2,015      |       | 920        |       | —      |       |

 

Due to the working capital deficit, the Company cannotbe certain that anticipated revenue from operations will be sufficient tosatisfy its ongoing capital requirements. Management’s belief is based on theCompany’s operating plan, which in turn is based on assumptions that may proveto be incorrect.  If the Company’sfinancial resources are insufficient, the Company may require additionalfinancing in order to execute its operating plan and continue as a going concern.  The Company cannot predict whether thisadditional financing will be in the form of equity, debt, or another form. TheCompany may not be able to obtain the necessary additional capital on a timelybasis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement itscurrent plans for expansion, repay its debt obligations as they become due orrespond to competitive pressures, any of which circumstances would have amaterial adverse effect on its business, prospects, financial condition andresults of operations.

 

There are also substantial uncertainties associatedwith the Company’s violations of federal and state securities laws inconnection with its prior equity offerings. These uncertainties include to what extent the Company’s shareholderswill assert claims against the Company for rescission of their investments inthe Company, the principal cash amount of which exceeded $20.5 million andnon-cash amount of which exceeded $5.5 million with accumulated interest in theamounts of $8.8 million and $2.2 million, respectively, as of September 30,2005 .  The Company may address thesecontingent liabilities by seeking financing in order to offer rescission to allof its investors. Even if financing sources available to us were willing toaccept these risks and willing to finance a rescission offer, there is noassurance that the terms of any such financing would be acceptable to us.

 

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

 

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

 

Should financing sources fail to materialize,management would seek alternate funding sources by requesting additionalcapital from major shareholders and/or the extension of credit fromsuppliers.  Management’s plan is toeventually access the public equity markets and seek asset based lines ofcredit to provide additional

 

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working capital for expansion. Management has alsoconsidered private venture capital funds and may sell additional equity, ifrequired.

 

**RISKFACTORS**

 

**RisksRelated to our Equity**

 

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

 

Issuances of securities are subject to federal andstate securities laws.  From 1999 through2004, we offered and sold common stock to investors in various states, raisinggross equity capital of approximately $20.5 million from approximately 830investors, and we issued common stock to various third parties, such asvendors, and issued employee stock options to many of our employees, the valueof which common stock was approximately $5.5 million.  We issued these securities in reliance uponexemptions from the registration requirements of federal and state securitieslaws.  We have determined that oursecurities offerings did not comply with the requirements of the applicableexemptions, because certain of our employees who solicited our investorsengaged in a “general solicitation” of securities.  In addition, those employees were required tobe licensed as broker-dealers with the U.S. Securities and Exchange Commission(“SEC”) and in various states, but they were not so licensed.  Because we did not uncover these violationsuntil after we sold our securities, we did not disclose these violations, northe potential liabilities associated with these violations, to our investors.  Consequently, our securities offerings alsodid not comply with disclosure requirements of applicable securities laws. Insuch situations a number of remedies may be available to regulatory authoritiesand the investors who purchased common stock in those offerings, including,without limitation, a right of rescission, civil penalties, seizure of ourassets, a restraining order or injunction, and a court order to pay restitutionand costs.  As a result, the investorsand other holders of our common stock are entitled to return their shares to usand assert a legal claim to receive back from us the full price they paid, plusinterest, which Management presently has not been able to reasonablyestimate.  In the event that a rescissionby all of the Company’s shareholders were to occur, the Company would be liablefor the $20.5 million it received in exchange for its common stock, in additionto interest of approximately $8.8 million through September 30, 2005.  The Company may also be liable for the $5.5million of services rendered and property exchanged in consideration for theissuance of common stock, in addition to interest of approximately $2.2 millionthrough September 30,2005.

 

After voluntary reporting these violations to the SEC,the SEC staff advised the Company that it would not undertake an investigationin the matter . We may seek financing in order to offer rescission to all ofour investors However, we have not approached state securities commissioners inthe states in which our investors reside. Consequently, there is substantial uncertainty concerning what actionstate regulators may take against us and what effect any such action will haveon our business and our ability to obtain financing. If we are unable to securethe financing required for a rescission offer, any assertion by ourshareholders of their legal claims against us will have a material adverseeffect on our financial position and results of operation and cash flows.  Even if financing sources available to uswere willing to accept these risks and willing to finance a rescission offer,there is no assurance that the terms of any such financing would be acceptableto us.  Moreover, even if we aresuccessful in offering rescission to our shareholders, if, prior to therescission offer, any our shareholders who acquired their common stock in theseofferings sells their common stock for less than the price at which theypurchased their shares, they will be entitled to recover from us damages equalto the difference between their investment amount plus interest from the dateof issuance and the value or price of the security at the time of itssale.  Because these shareholders will nolonger own our common stock, we will not be able to extinguish these damageclaims by offering to rescind the shareholder’s purchase of our common stock.

 

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

 

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

 

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

 

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

 

**Risks Related to our Business**

 

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

 

The report of Stonefield Josephson, Inc., our independent registered public accounting firm, with respect to our financial statements and the related notes for the years ended December 31, 2004  2003 and 2002, indicates that, at the date of their report, our history of significant operating losses, working capital deficit, total stockholders’ deficit, and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern.  At September 30, 2005, we had an accumulated deficit of ($28,737).  We cannot be certain that revenue from operations will be sufficient to satisfy our ongoing capital requirements.  If our financial resources are insufficient, we may require additional financing in order to execute our operating plan and continue as a going concern.

 

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

 

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

 

***We do not have a guaranteed supply ofjewelry.***

 

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

 

***Our failure to acquire jewelry at competitive prices would result inhigher costs and lower net sales and damage our competitive position.***

 

If we are unable to acquire jewelry at competitiveprices, our costs may exceed our forecasts, our gross margins and operatingresults may suffer and our competitive position could be damaged.  The success of our business model depends, inpart, on our ability to offer bargain prices to customers that are below thoseof traditional jewelry retailers.

 

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

 

The jewelry industry in general is affected byfluctuations in the prices of precious metals and precious and semi-preciousstones.  The availability and prices ofgold, silver and platinum and other precious metals and precious andsemi-precious stones may be influenced by such factors as cartels, politicalinstability in exporting

 

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countries, changes in global demand andinflation.  Shortages of these materialsor a rise in their price could result in reduced margins or increased pricescausing reduced sales of such products.

 

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

 

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

 

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

 

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

 

***Because we carry all of our jewelry productsin inventory, if we are unable to accurately predict and plan for changes inconsumer demand, our net sales and gross margins may decrease*****.**

 

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

 

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

 

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

 

In addition, many of our current and potentialcompetitors have greater brand recognition, longer operating histories, largercustomer bases and significantly greater financial, marketing and otherresources than us.  They may enter into strategicor commercial relationships with larger, more established and well-financedcompanies, or may enter into exclusive distribution agreements with oursuppliers and deny us access to their products. They may also devote greater resources to marketing and promotionalcampaigns and devote substantially more resources to their website and systemstechnology than us.  There are noassurances that we will be able to compete successfully against current andfuture competitors or address increased competitive pressures.

 

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

 

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

 

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relationships that generate a significant amount oftraffic from other websites could result in decreased sales or limit the growthof our business.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We believe that our historical growth has been largelyattributable to word of mouth.  Webelieve that continuing to strengthen our brand will be critical to achievingwidespread acceptance of our services. Promoting and positioning our brand will depend largely on the successof our marketing efforts and our ability to provide high-quality services.  In order to promote our brand, we will needto increase our marketing budget and otherwise increase our financialcommitment to creating and maintaining brand loyalty among users.  Brand promotion activities may not yieldincreased revenue, and even if they do, any increased revenue may not offsetthe expenses

 

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we incurred in building our brand.  If we do attract new users to our services,they may not conduct transactions over our services on a regular basis.  If we fail to promote and maintain our brandor incur substantial expenses in an unsuccessful attempt to promote andmaintain our brand, our business would be harmed.

 

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

 

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

 

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

 

We have never declared or paid any cash dividends onour common stock and do not intend to pay dividends on our common stock for theforeseeable future.  We intend to investour future earnings, if any, to fund our growth.  Therefore, you likely will not receive anydividends from us on our common stock for the foreseeable future.

 

**Risks Related to Doing Business Online**

 

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

 

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

 

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

 

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

 

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

 

As traffic on our websites grows, we may not be ableto accommodate all of the growth in user demand on our websites and in ourcustomer sales and support center.  If weare unable to upgrade our existing technology or network infrastructure and thesystems used to process customers’ orders and payments to accommodate increasedsales volume, our potential customers may be dissatisfied and may purchasemerchandise from our competitors.  We mayalso fail to provide enough capacity in our customer service and sales supportcenter to answer phones or provide adequate customer service.  A failure to implement new systems andincrease customer service center capacity effectively or within a reasonableperiod of time could adversely affect our sales.

 

We also intend to introduce additional or enhancedfeatures and services to retain current customers and attract new customers toour websites.  If we introduce a featureor a service that is not favorably received, our current customers may not useour websites as frequently and we may not be successful in attracting new customers.  We may also experience difficulties thatcould delay or prevent us from introducing new services and features.  These new services or features may containerrors that are discovered only after they are introduced and we may need tosignificantly modify the design of these services or features to correct.

 

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

 

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

 

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

 

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

 

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

 

Our Internet domain name is critical to our businesssuccess.  Under current domain nameregistration practices, no one else can obtain an identical domain name, butcan obtain a similar name, or the identical name with a different suffix, suchas “.net” or “.org”, or with a different country designation such as “jp” for Japan.  As a result, third parties may use domainnames that are similar to ours, which may result in confusion to potentialcustomers and lost sales.

 

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

 

We regard the protection of our trademarks,copyrights, patents, domain names, trade dress and trade secrets as critical toour success.  We aggressively protect ourintellectual property rights by relying on a combination of trademark,copyright, patent, trade dress and trade secret laws, and through the domainname dispute resolution system.  We alsorely on contractual restrictions to protect our proprietary rights in productsand services.  We have entered intoconfidentiality and invention assignment agreements with our employees andcontractors, and nondisclosure agreements with parties with whom we conductbusiness in order to limit access to and disclosure of our proprietaryinformation.  These contractualarrangements and the other steps we have taken to protect our intellectualproperty may not prevent misappropriation of our technology or deterindependent development of similar technologies by others.  We are pursuing the registration of ourdomain names, trademarks, and service marks in the U.S. and internationally.  Effective trademark, copyright, patent, tradedress, trade secret, and domain name protection is very expensive to maintainand may require litigation.  We mustprotect our trademarks, patents, and domain names in an increasing number ofjurisdictions, a process that is expensive and may not be successful in everylocation.  We have licensed in the past,and expect to license in the future, certain of our proprietary rights, such astrademarks or copyrighted material, to others. These licensees may take actions that diminish the value of ourproprietary rights or harm our reputation.

 

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

 

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

 

***If we are required to collect sales and use taxeson the products we sell, we may be subject to liability for past sales and ourfuture sales may decrease*****.**

 

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

 

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

 

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

 

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

 

Several domestic jurisdictions have proposed, andCalifornia, Minnesota, Utah, and Vermont have recently passed, legislation thatwould limit the uses of personal user information gathered online or offline.  Many jurisdictions already have such laws andcontinuously consider strengthening them, especially against onlineservices.  However, the Fair CreditReporting Act, or FCRA, a federal statute enacted in 1970 to protect consumerprivacy, includes a provision preempting conflicting state laws on the sharingof information between corporate affiliates. The preemptive provisions of FCRA were permanently extended in 2002,thus ensuring that we are not subject to the laws of each individual state withrespect to matters within the scope of FCRA, but remain subject to theprovisions of FCRA.

 

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

 

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

 

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

 

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

 

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

 

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

 

**ITEM 4 - CONTROLS AND PROCEDURES**

 

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

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

** **

**EndaiWorldwide v. Bidz.com**

** **

The Company is a defendant in a lawsuit brought by Endai Worldwide (“Endai”or “plaintiff”)for past services in the amount of $0.08 million.  The plaintiff alleges that the Company owesapproximately $0.08 million unpaid internet advertising fees. The Companyclaims that plaintiff has not performed the services related to such chargesand has counterclaimed for $1 million in damages for inappropriate use of theCompany’s user base. The litigation has been settled. By the terms of thesettlement, neither party is to pay any money to the other.

 

ITEM 6.  EXHIBITS.

 

31.1      Principal Executive OfficerCertification Pursuant to Rule 13a-14(a) of the Securities ExchangeAct of 1934

 

31.2      Principal Financial OfficerCertification Pursuant to Rule 13a-14(a) of the Securities ExchangeAct of 1934

 

32.1      Certifications Pursuant to Rule 13a-14(b) ofthe Securities Exchange Act of 1934

 

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**SIGNATURES**

 

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

 
|                          | BIDZ.COM, INC.                   |                                      |
|-------------------------------|----------------------------------|-------------------------------------------|
|                          |                             |                                      |
|                          |                             |                                      |
|                          | By:                              | /s/ DAVID ZINBERG                         |   |
|                          |                             |                                      |   |
| ** **                    | ** **                       | **David Zinberg**                         | ** ** |
| ** **                    | ** **                       | **President and Chief Executive Officer** | ** ** |
|                          |                             |                                      |   |
|                          | By:                              | /s/ LAWRENCE KONG                         |   |
|                          |                             |                                      |
| ** **                    | **Lawrence Kong**                | ** **                                |
| ** **                    | **Principal Accounting Officer** | ** **                                |
| ** **                    | ** **                       |
| ** **                    | ** **                       |
| Dated: November 10, 2005 |                             |

 

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