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** **

 

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**                                |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                              |
| ** ** | ** ** | **For  the quarterly period ended June 30, 2009**                                                                                  |
| ** ** | ** ** | ** **                                                                                                                              |
| **o**      | ** ** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                          |
| ** ** | ** ** | ** **                                                                                                                              |
| ** ** | ** ** | **For  the transition  period                 to** |

 

**Commission file number 000-51257**

 

**BIDZ.COM, INC.**

(Exact name of Registrant as specified in its charter)

 

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

 

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

(Address, including zip code, of principal executiveoffice)

 

**(310) 280-7373**

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).    Yes x   No  o

 

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

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

 

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

 

o  Yes    x  No

 

Numberof shares outstanding of Registrant’s common stock, $0.001 par value, as of July 31,2009: 22,214,340

 

 

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**Table of Contents**

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**TABLE OF CONTENTS**

 
| PART I.  FINANCIAL INFORMATION | ** ** | ** **                                                                                                               |
|-------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|
| Item 1.                        |       | Financial Statements                                                                                                     |   | 3 |
|                                |       | Condensed  Balance Sheets as of December 31, 2008 and June 30, 2009  (unaudited)                               |   | 3 |
|                                |       | Condensed Statements of  Income for the three month and six month periods ended June 30, 2008 and  2009 (unaudited) |   | 4 |
|                                |       | Condensed  Statements of Cash Flows for the six month periods ended June 30, 2008  and 2009 (unaudited)             |   | 5 |
|                                |       | Notes to Financial Statements (unaudited)                                                                                |   | 6 |
| Item 2.                        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |   | 11 |
| Item 3.                        |       | Quantitative  and Qualitative Disclosures About Market Risk                                                              |   | 16 |
| Item 4.                             |       | Controls and  Procedures                                                                                                 |   | 17 |
|                                |       |                                                                                                                     |   |   |
| PART II. OTHER INFORMATION     |       | 17                                                                                                                       |
| Item 1.                             |       | Legal Proceedings                                                                                                        |   | 17 |
| Item 1A                             |       | Risk Factors                                                                                                             |   | 18 |
| Item 2.                             |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             |   | 28 |
| Item 4.                             |       | Submission  of Matters to a Vote of Security Holders                                                                     |   | 29 |
| Item  6.                            |       | Exhibits                                                                                                                 |   | 30 |
|                                |       |                                                                                                                     |   |   |
| SIGNATURES                          |       | 31                                                                                                                       |

 

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

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

** **

**Bidz.com, Inc.**

 

**Condensed Balance Sheets**

 

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

** **
| ** **                                                                                                                                                                                                                | ** ** | **December 31,** | ** **   | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|--------------|-------------------|------------|
| ** **                                                                                                                                                                                                                | ** ** | **2008**              | ** **   | **2009**          | ** ** |
| ** **                                                                                                                                                                                                                | ** ** | ** **            | ** **   | **(Unaudited)**   | ** ** |
| **Assets**                                                                                                                                                                                                                |       |                  |         |              |       |
| Current assets:                                                                                                                                                                                                           |       |                  |         |              |       |
| Cash                                                                                                                                                                                                                      |       | $                     | 4,456        |              | $          | 1,533 |   |
| Accounts receivable                                                                                                                                                                                                       |       | 591                   |         | 409               |       |
| Inventories, net of reserves of $820 and $1,455 at  December 31, 2008 and June 30, 2009, respectively                                                                                                           |       | 37,657                |         | 39,916            |       |
| Other receivable (includes related party amounts of  $102 and $167 at December 31, 2008 and June 30, 2009, respectively)                                                                                        |       | 1,041                 |         | 1,509             |       |
| Current deferred tax assets                                                                                                                                                                                               |       | 1,950                 |         | 1,879             |       |
| Other current assets                                                                                                                                                                                                      |       | 689                   |         | 931               |       |
| Total current assets                                                                                                                                                                                                      |       | 46,384                |         | 46,177            |       |
| Long term deferred tax asset                                                                                                                                                                                              |       | 84                    |         | 263               |       |
| Property and equipment, net                                                                                                                                                                                               |       | 1,672                 |         | 1,463             |       |
| Intangible asset                                                                                                                                                                                                          |       | 161                   |         | 161               |       |
| Deposits                                                                                                                                                                                                                  |       | 104                   |         | 454               |       |
| Total assets                                                                                                                                                                                                              |       | $                     | 48,405       |              | $          | 48,518 |   |
|                                                                                                                                                                                                                      |       |                  |         |              |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                            |       |                  |         |              |       |
| Current liabilities:                                                                                                                                                                                                      |       |                  |         |              |       |
| Revolving credit line                                                                                                                                                                                                     |       | $                     | —       |              | $          | — |   |
| Accounts payable (includes related party amounts of  $1,364 and $1,940 at December 31, 2008 and June 30, 2009,  respectively)                                                                                   |       | 9,636                 |         | 11,310            |       |
| Accrued expenses                                                                                                                                                                                                          |       | 3,091                 |         | 2,512             |       |
| Deferred revenue                                                                                                                                                                                                          |       | 872                   |         | 793               |       |
| Total current liabilities                                                                                                                                                                                                 |       | 13,599                |         | 14,615            |       |
|                                                                                                                                                                                                                      |       |                  |         |              |       |
| Commitments and contingencies (Note 10)                                                                                                                                                                                   |       |                  |         |              |       |
|                                                                                                                                                                                                                      |       |                  |         |              |       |
| Stockholders’ equity:                                                                                                                                                                                                |       |                  |         |              |       |
| Preferred stock: par value $0.001; authorized  4,000,000 shares; none issued and outstanding at December 31, 2008 and  June 30, 2009, respectively                                                              |       | —                |         | —            |       |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued 22,917,918 and 22,879,416 shares and outstanding  22,917,918 and 22,524,765 shares at December 31, 2008 and June 30,  2009, respectively |       | 23                    |         | 23                |       |
| Additional paid in capital                                                                                                                                                                                                |       | 24,520                |         | 22,307            |       |
| Shares held in treasury, at cost; 0 and 354,651  shares at December 31, 2008 and June 30, 2009, respectively                                                                                                    |       | —                |         | (1,098            | )          |
| Employees share purchase receivable                                                                                                                                                                                       |       | (708                  | )            | (434              | )          |
| Accumulated earnings                                                                                                                                                                                                      |       | 10,971                |         | 13,105            |       |
| Total stockholders’ equity                                                                                                                                                                                           |       | 34,806                |         | 33,903            |       |
|                                                                                                                                                                                                                      |       |                  |         |              |       |
|                                                                                                                                                                                                                      |       | $                     |  48,405 |              | $          | 48,518 |   |

 

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

 

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**Bidz.com, Inc.**

 

**Condensed Statements of Income(Unaudited)**

 

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

** **
| ** **                                                                                                                                                                                                                     | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                                                                                                     | ** ** | **2008**                              | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                                                                                                                                                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Net revenue:                                                                                                                                                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Merchandise sales                                                                                                                                                                                                              | ** ** | **$**                                 | 46,389     | ** **                          | **$**      | 26,388 | ** ** | **$** | 103,998 | ** ** | **$** | 57,278 | ** ** |
| Wholesale merchandise sales (includes related party  amounts of $0 and $471 for three months ended June 30 2008 and 2009, respectively,  and $0 and $677 for six months ended June 30, 2008 and 2009,  respectively) |       | 8,426                                 |       | 471                                 |       | 12,628 |   | 677 |   |
| Other revenue                                                                                                                                                                                                                  |       | 171                                   |       | 86                                  |       | 289 |   | 166 |   |
|                                                                                                                                                                                                                           |       | 54,986                                |       | 26,945                              |       | 116,915 |   | 58,121 |   |
| Cost of revenue                                                                                                                                                                                                                |       | 39,668                                |       | 18,710                              |       | 83,561 |   | 39,701 |   |
| Gross Profit                                                                                                                                                                                                                   |       | 15,318                                |       | 8,235                               |       | 33,354 |   | 18,420 |   |
| Operating expenses:                                                                                                                                                                                                            |       |                                  |       |                                |       |   |   |   |   |
| General and administrative                                                                                                                                                                                                     |       | 5,680                                 |       | 4,748                               |       | 11,587 |   | 9,609 |   |
| Sales and marketing                                                                                                                                                                                                            |       | 3,131                                 |       | 2,127                               |       | 7,330 |   | 4,732 |   |
| Depreciation and amortization                                                                                                                                                                                                  |       | 172                                   |       | 193                                 |       | 334 |   | 373 |   |
| Total operating expenses                                                                                                                                                                                                       |       | 8,983                                 |       | 7,068                               |       | 19,251 |   | 14,714 |   |
| Income from operations                                                                                                                                                                                                         |       | 6,335                                 |       | 1,167                               |       | 14,103 |   | 3,706 |   |
| Other income - interest income                                                                                                                                                                                                 |       | 10                                    |       | —                              |       | 23 |   | 2 |   |
| Other expense - interest (expense)                                                                                                                                                                                             |       | (80                                   | )          | (3                                  | )          | (91 | ) | (14 | ) |
| Income before income tax expense                                                                                                                                                                                               |       | 6,265                                 |       | 1,164                               |       | 14,035 |   | 3,694 |   |
| Income tax expense                                                                                                                                                                                                             |       | 2,650                                 |       | 544                                 |       | 5,815 |   | 1,560 |   |
| Net income                                                                                                                                                                                                                     | ** ** | **$**                                 | 3,615      | ** **                          | **$**      | 620 | ** ** | **$** | 8,220 | ** ** | **$** | 2,134 | ** ** |
|                                                                                                                                                                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Net income per share available to common  shareholders - basic                                                                                                                                                                 | ** ** | **$**                                 | 0.15       | ** **                          | **$**      | 0.03 | ** ** | **$** | 0.34 | ** ** | **$** | 0.09 | ** ** |
| Net income per share available to common  shareholders - diluted                                                                                                                                                               | ** ** | **$**                                 | 0.14       | ** **                          | **$**      | 0.03 | ** ** | **$** | 0.32 | ** ** | **$** | 0.09 | ** ** |
| Weighted average number of shares outstanding -  basic                                                                                                                                                                         |       | 23,828,186                            |       | 22,936,808                          |       | 24,183,225 |   | 22,879,979 |   |
| Weighted average number of shares outstanding -  diluted                                                                                                                                                                       |       | 25,739,058                            |       | 22,936,808                          |       | 25,822,351 |   | 22,879,979 |   |
|                                                                                                                                                                                                                                |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

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**Bidz.com, Inc.**

 

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

 

*(in thousands)*

 
| ** **                                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                           | ** ** | **2009** | ** ** |
|                                                                                       |       |                               |       |   |   |
| **Cash flows provided by (used for)  operating activities:**                               |       |                               |       |   |   |
| Net income                                                                                 |       | $                                  | 8,220      |   | $ | 2,134 |   |
|                                                                                       |       |                               |       |   |   |
| **Adjustments to reconcile net  income to net cash****provided by  operating activities:** |       |                               |       |   |   |
| Depreciation and amortization                                                              |       | 334                                |       | 373 |   |
| Change in inventory reserve                                                                |       | (566                               | )          | 635 |   |
| Impairment in employees share purchase receivable                                          |       | —                             |       | 274 |   |
| Stock-based compensation                                                                   |       | 534                                |       | 335 |   |
| **Changes in assets and liabilities:**                                                     |       |                               |       |   |   |
| **(Increase) decrease in assets:**                                                         |       |                               |       |   |   |
| Accounts receivable                                                                        |       | 823                                |       | 182 |   |
| Inventories                                                                                |       | 2,520                              |       | (2,894 | ) |
| Other receivable                                                                           |       | —                             |       | (468 | ) |
| Current deferred tax assets                                                                |       | —                             |       | 71 |   |
| Other current assets                                                                       |       | 1,840                              |       | (242 | ) |
| **Increase (decrease) in  liabilities:**                                                   |       |                               |       |   |   |
| Accounts payable                                                                           |       | (8,038                             | )          | 1,324 |   |
| Accrued expenses                                                                           |       | (1,088                             | )          | (579 | ) |
| Deferred revenue                                                                           |       | (1,237                             | )          | (79 | ) |
| Net cash provided by operating activities                                                  |       | 3,342                              |       | 1,066 |   |
|                                                                                       |       |                               |       |   |   |
| **Cash flows used for investing  activities:**                                             |       |                               |       |   |   |
| Capital expenditures                                                                       |       | (431                               | )          | (164 | ) |
| Disposal of fixed assets                                                                   |       | 19                                 |       | — |   |
| Net cash used for investing activities                                                     |       | (412                               | )          | (164 | ) |
| **Cash flows provided by (used for)  financing activities:**                               |       |                               |       |   |   |
| Long term deferred tax asset                                                               |       | —                             |       | (179 | ) |
| Revolving credit line                                                                      |       | (327                               | )          | — |   |
| Proceeds from exercise of stock options                                                    |       | 130                                |       | — |   |
| Tax benefit from stock based compensation                                                  |       | 42                                 |       | (70 | ) |
| Purchase of treasury stock                                                                 |       | (6,965                             | )          | (3,576 | ) |
| Net cash used for financing activities                                                     |       | (7,120                             | )          | (3,825 | ) |
|                                                                                       |       |                               |       |   |   |
| **Net increase (decrease) in cash**                                                        |       | (4,190                             | )          | (2,923 | ) |
| **Cash, beginning of period**                                                              |       | 4,808                              |       | 4,456 |   |
| **Cash, end of period**                                                                    |       | $                                  | 618        |   | $ | 1,533 |   |
|                                                                                       |       |                               |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                     |       |                               |       |   |   |
|                                                                                       |       |                               |       |   |   |
| Interest paid                                                                              |       | $                                  | 91         |   | $ | 14 |   |
|                                                                                       |       |                               |       |   |   |
| Income taxes paid                                                                          |       | $                                  | 6,472      |   | $ | 2,000 |   |
|                                                                                       |       |                               |       |   |   |
| **Supplemental disclosure of  non-cash investing and****financing  activities:**           |       |                               |       |   |   |
| ** **                                                                                 |       |                               |       |   |   |
| Retirement of treasury  shares                                                             |       | $                                  | 7,349      |   | $ | 2,478 |   |

 

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

 

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**BIDZ.COM, INC.**

**NOTES TO FINANCIAL STATEMENTS FORTHE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2009**

**(UNAUDITED)**

 

**1.****                                     ****Basis of Presentationand Nature of Business Operations**

 

**Basis of Presentation**

 

The accompanying condensed balance sheet as of December 31,2008, which has been derived from audited financial statements, and theunaudited financial statements included herein have been prepared in accordancewith the instructions to Form 10-Q and do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.  Thesefinancial statements and related notes should be read in conjunction with theCompany’s audited financial statements for the fiscal year ended December 31,2008 filed in the Annual Report on Form 10-K by the Company on February 25,2009 with the Securities and Exchange Commission. In the opinion of management,these financial statements reflect all adjustments which are of a normalrecurring nature and which are necessary to present fairly the financialposition of Bidz.com, Inc. as of June 30, 2009 and the results ofoperations for the three month and six month periods ended June 30, 2008and 2009 and the cash flows for the six month periods ended June 30, 2008and 2009.  The results of operations for the three months and six monthsended June 30, 2009 are not necessarily indicative of the results whichmay be expected for the entire fiscal year.

 

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

 

**Nature of Business Operations**

 

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

 

We sell our products throughout the United States andhave expanded the reach of our customer base to Europe, the Middle East, Asiaand Australia. Revenue generated from the United States accounted forapproximately 74.9% and 65.7% of net revenue for the three months ended June 30,2008 and 2009, respectively, and 75.7% and 67.8% for the six months ended June 30,2008 and 2009, respectively.

 

**Recent Developments**

 

In July 2009,we made available to our approved customers Bill Me Later’s flexible financingoption such as no payment for 90 days. Bill Me Later is a convenient and secureway to pay and allows online shoppers to purchase items without the use of acredit card.

 

In 2009, we plan to implement throughout our Company anERP system based on Microsoft Dynamics AX that will fundamentally change andimprove our IT, operational and accounting infrastructure. In the secondquarter of 2009, we succesfully migrated our accounting system to MicrosoftDynamics AX and our other operating areas will transition later in 2009.

 

In February 2009, our Board of Directorsauthorized an increase in the open market stock buyback program of our outstandingcommon stock to $33.5 million from $20 million. The stock buybacks will be atprices deemed appropriate by management over a 24 month period. As of June 30, 2009,we have purchased a cumulative total of 2.9 million shares for $17.0 millionand 2.5 million shares have been retired which reduced our number of sharesoutstanding. The balance of the 355,000 shares was retired in July 2009and it is our policy to retire all shares acquired in the buyback.

 

**Recent Accounting Pronouncements**

 

In June 2009, theFASB issued SFAS 168, “*The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles - a replacement of FASB Statement No 162*.”SFAS 168 established the effective date for use of the FASB codificationfor interim and annual periods ending after September 15, 2009 and accountfor the adoption of the guidance on a 

 

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prospective basis. We donot anticipate the adoption of SFAS 168 will have a material impact on ourfinancial statements. We will update our disclosures for the appropriate FASBcodification references upon adoption, in the third quarter of 2009.

 

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

 

In September 2006, the FASB issued StatementSFAS No. 157 (“FAS 157”), “*FairValue Measurements*,” which defines fair value, establishesguidelines for measuring fair value and expands disclosures regarding fair valuemeasurements. FAS 157 does not require any new fair value measurements butrather eliminates inconsistencies in guidance found in various prior accountingpronouncements. SFAS 157 is effective for fiscal years beginning after November 15,2007. The adoption of FAS 157 did not have a material impact on our financialstatements.

 

**2.****            ****Earnings per Common Share**

 

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

 

Thedilutive effect of outstanding stock options is reflected in diluted earningsper share by application of the treasury stock method including the impact ofpro forma deferred tax benefits for the three month and six month periodsending June 30, 2008 and 2009.  The following table sets forth thecomputation of basic and diluted net income per share.

 

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

 
| ** **                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                    |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted net income per share: |       |                                            |       |                                          |       |   |   |   |   |
| Numerator:                              |       |                                            |       |                                          |       |   |   |   |   |
| Net income                              |       | $                                               | 3,615      |                                          | $          | 620 |   | $ | 8,220 |   | $ | 2,134 |   |
| Denominator:                            |       |                                            |       |                                          |       |   |   |   |   |
| Weighted common shares outstanding      |       | 23,828,186                                      |       | 22,936,808                                    |       | 24,183,225 |   | 22,879,979 |   |
| Effect of dilutive securities           |       | 1,910,872                                       |       | —                                        |       | 1,639,126 |   | — |   |
| Denominator for diluted calculation     |       | 25,739,058                                      |       | 22,936,808                                    |       | 25,822,351 |   | 22,879,979 |   |
| Net income per share, basic             |       | $                                               | 0.15       |                                          | $          | 0.03 |   | $ | 0.34 |   | $ | 0.09 |   |
| Net income per share, diluted           |       | $                                               | 0.14       |                                          | $          | 0.03 |   | $ | 0.32 |   | $ | 0.09 |   |

 

**3**.             **Inventories**

 

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

 
| ** **                                                                                                                                                    | ** ** | **December 31, 2008** | ** ** | **June 30, 2009 (unaudited)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                                                    | ** ** | ** **                      | ** ** | ** **                                   | ** ** |
| Fine jewelry, watches and other (net of vendor  marketing contributions of $4,313 and $4,033 at December 31, 2008 and  June 30, 2009, respectively) |       | $                               | 37,485     |                                         | $          | 37,384 |   |
| Loose diamonds and semi-precious stones                                                                                                                       |       | 570                             |       | 599                                          |       |
| Prepaid inventory                                                                                                                                             |       | 36                              |       | 3,356                                        |       |
| Inventory with manufacturing vendors                                                                                                                          |       | 386                             |       | 32                                           |       |
| Product inventories                                                                                                                                           |       | 38,477                          |       | 41,371                                       |       |
| Less: Inventory reserve                                                                                                                                       |       | (820                            | )          | (1,455                                       | )          |
|                                                                                                                                                          |       | $                               | 37,657     |                                         | $          | 39,916 |   |

 

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**4.             RevolvingCredit Line**

 

In July 2006, we entered into a revolvingcredit line agreement with LaSalle Bank, wholly owned by Bank of America, toprovide working capital financing secured by inventories, accounts receivableand tangible assets. The agreement allowed for us to initially draw on a lineof credit up to $10 million. During the three month period ended March 31,2008 we successfully increased the limit to $25 million. The revolving creditline agreement expires in July of 2010. As of June 30, 2009,there was no outstanding balance under the revolving credit line. Under theterms and conditions of the revolving credit line agreement, the Company issubject to certain restrictive covenants for which it is in compliance at June 30,2009. The consequences of not meeting restrictive covenants could include areduction or withdrawal of the revolving credit line.

 

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

 

In December 2004, the FASB issued SFAS No. 123R,*“Share Based payment: An Amendment of FASBStatements No. 123 and 95.”* This statement requires that werecognize in our financial statements the cost resulting from all share-basedpayment transactions. In addition, in March 2005 the Securities andExchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107,*“Share-Based Payment” (“SAB 107”),* whichprovides the SEC staff’s position regarding the application of SFAS 123R andcertain SEC rules and regulations, and also provides the staff’s viewsregarding the valuation of share-based payment arrangements for publiccompanies. On January 1, 2006, we adopted SFAS 123R, which eliminates ourability to account for share-based compensation transactions, as we formerlydid, using the intrinsic value method as prescribed by APB 25 and generallyrequires that we recognize in our statements of income all share-based paymentsto employees, including grants of stock options based on their fair values.

 

We adopted SFAS 123R using the prospective methodwhich requires the application of the accounting standard as of January 1,2006. Our financial statements as of and for the three months and six monthsended June 30, 2008 and 2009, respectively, reflect the impact of adoptingSFAS 123R.

 

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

 

Under SFAS 123R, we have used the Black-Scholes modelto estimate the fair value of options. Our assessment of the estimatedcompensation charges will be affected by our stock price as well as assumptionregarding a number of subjective variables and the related tax impact. Thesevariables include, but are not limited to, our stock price volatility,forfeiture rates and employee stock option exercise behaviors (or expectedterm).

 

SFAS No. 123(R) requiresus to calculate the additional paid in capital pool (“APIC Pool”) available toabsorb tax deficiencies recognized subsequent to adopting SFAS No. 123(R),as if we had adopted SFAS No. 123 at its effective date of January 1,1995. We calculate our APIC pool using the long form method, which requiresthat we track each award grant on an employee-by-employee basis andgrant-by-grant basis to determine if there is a tax benefit or tax deficiencyfor such award. We then compare the fair value expense to the tax deductionreceived for each grant and aggregate the benefits and deficiencies toestablish and maintain the APIC Pool.  We group the excess tax benefitsfrom both employee and nonemployee awards into a single APIC pool.

 

**Restricted Shares**

 

The restricted stock awards are expensed pro rataover the vesting period based upon the market value of the awards at the timeof grant. Stock-based compensation from restricted stock awards totaled $88,000and $254,000 for the three months ended June 30, 2008 and 2009,respectively and $176,000 and $335,000 for the six months ended June 30,2008 and 2009, respectively. The unamortized stock-based expense for restrictedstock awards was $3.2 million at June 30, 2009.

 

A summary of all restricted stock activity duringthe six months ended June 30, 2009 is as follows:

 
| Restricted shares outstanding, December 31,  2008 |   | 117,800 |   |
|--------------------------------------------------------|--------|---------|--------|
| Shares granted                                         |   | 666,000 |   |
| Shares vested                                          |   | (27,500 | )      |
| Shares forfeited                                       |   | (9,000  | )      |
| Restricted shares outstanding, June 30, 2009      |   | 747,300 |   |

 

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**StockOptions**

 

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

 

The following is a summary of stock option activity asof June 30, 2009, and changes during the six months ended June 30,2009.

 
| **Options**                                  | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price ($)** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value ($)** | ** ** |
|----------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|
| Outstanding at December 31, 2008        |       | 6,864,500  |       | 6.08                                             |       | 2.36                                                     |       | —                                   |       |
| Granted                                      |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Exercised                                    |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Forfeited                                    |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Expired                                      |       | 6,000      |       | 6.00                                             |       |                                                     |       |                                     |       |
| Outstanding at June 30, 2009            |       | 6,858,500  |       | 6.08                                             |       | 1.87                                                     |       | —                                   |       |
| Vested and Exercisable at June 30, 2009 |       | 6,858,500  |       | 6.08                                             |       | 1.87                                                     |       | —                                   |       |

 

Thefollowing table summarizes information about stock options outstanding andexercisable at June 30, 2009.

 
| ** **                              | ** ** | ** **                         | ** ** | **Options outstanding and exercisable  as of June 30, 2009** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | ** **                         | ** ** | **Options outstanding**                                                                    | ** ** | **Options exercisable** | ** ** |
| **Range of  exercise prices** | ** ** | **Number  outstanding  6/30/2009** | ** ** | **Weighted  average  remaining  contractual**                                                   | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  exercisable  6/30/2009** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                              | ** ** | ** **                         | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $                                       | 6.00       |                               | $          | 6.00                                                                                            |       | 6,625,500 |   | 1.84 |   | $ | 6.00 |   | 6,625,500 |   | $ | 6.00 |   |
| $                                       | 6.50       |                               | $          | 6.50                                                                                            |       | 105,500 |   | 2.69 |   | $ | 6.50 |   | 105,500 |   | $ | 6.50 |   |
| $                                       | 9.90       |                               | $          | 9.90                                                                                            |       | 127,500 |   | 2.96 |   | $ | 9.90 |   | 127,500 |   | $ | 9.90 |   |
| $                                       | 6.00       |                               | $          | 9.90                                                                                            |       | 6,858,500 |   | 1.87 |   | $ | 6.08 |   | 6,858,500 |   | $ | 6.08 |   |

 

Thestock-based compensation expense from stock options for the three months ended June 30,2008 and 2009 totaled $179,000 and $0, respectively and for the six monthsended June 30, 2008 and 2009 totaled $358,000 and $0, respectively. Theunamortized stock-based compensation expense from stock options as of June 30,2009 is $0. No stock options were granted in the three months ended June 30,2008 and 2009 and in the six months ended June 30, 2008 and 2009.

 

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

 

Net revenue by geographic area is presented based uponthe country of destination. No foreign country represented 10% or more of netrevenue for three month and six month periods ended June 30, 2008 and2009. Net revenue by geographic area was as follows:

 

*(inthousands, except percentage data)*

* *
| ** **          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2008**                              | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| **Geographic area** | ** ** | **Amount**                            | ** ** | **Percent**                         | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United  States      |       | $                                     | 41,167     |                                | 74.9       | % | $ | 17,695 |   | 65.7 | % | $ | 88,492 |   | 75.7 | % | $ | 39,418 |   | 67.8 | % |
| International       |       | 13,819                                |       | 25.1                                | %          | 9,249 |   | 34.3 | % | 28,423 |   | 24.3 | % | 18,703 |   | 32.2 | % |
|                |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total               |       | $                                     | 54,986     |                                | 100.0      | % | $ | 26,944 |   | 100.0 | % | $ | 116,915 |   | 100.0 | % | $ | 58,121 |   | 100.0 | % |

 

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

 

Purchasesfrom two vendors amounted to $5.4 million and $6.3 million representing 9.4%and 33.7% of the total purchases during the three months ended June 30,2008 and 2009, respectively, and $6.9 million and $9.4 million representing9.0% and 23.3% of the total purchases during the six months ended June 30,2008 and 2009. Outstanding accounts payable to the two vendors totaled $1.3million and $1.9 million****as of December 31,2008 and June 30, 2009, respectively. Loss of either of these vendorsis not expected to have a significant negative impact on the operations of theCompany.

 

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

 

During the three monthsended June 30, 2008 and 2009, we purchased approximately 4.2% and 9.5%,respectively, of our merchandise from LA Jewelers, Inc., where one of its managers is a stockholder whobeneficially owns approximately 5.2% of our outstanding common stock as of June 30,2009. During the six months ended June 30, 2008 and 2009, we purchasedapproximately 3.9% and 6.7%, respectively of our merchandise from LA Jewelers, Inc.The accounts payable balances due to LA Jewelers were $1.4 million and $1.9million as of December 31, 2008 and June 30, 2009, respectively.

 

LAJewelers participates in our inventory co-op marketing program. For the threemonths ended June 30, 2008 and 2009, we earned approximately $131,000 and$69,000, respectively from LA Jewelers relating to co-op marketingcontributions and $60,000 was unamortized as of June 30, 2009. For the sixmonths ended June 30, 2008 and 2009, we earned approximately $613,000 and$250,000, respectively. The amounts of co-op marketing contributions due fromLA Jewelers were $22,000 and $69,000 as of December 31, 2008 and June 30,2009, respectively.

 

InMay, 2007 we entered into an understanding with LA Jewelers whereby they willguarantee that we will earn a certain minimum gross profit margin on theirmerchandise. This agreement provides that in the event of a gross profit marginshortfall we will be compensated for the difference between our actual grossprofit margin and the guaranteed minimum gross profit margin. For the threemonths ended June 30, 2008 and 2009, we recognized $81,000 and $152,000,respectively, under this agreement and for the six months ended June 30,2008 and 2009, we recognized $222,000 and $172,000, respectively. As of December 31,2008 and June 30, 2009, we have $80,000 and $98,000, respectively,outstanding under this gross profit margin guarantee.

 

Duringthe three months ended June 30, 2008 and 2009, we recorded $0 and$471,000, respectively, and during the six months ended June 30, 2008 and2009, we recorded $0 and $677,000, respectively, in wholesale merchandise salesto a customer that is owned by Daniella Zinberg, the daughter of our ChiefExecutive Officer, David Zinberg. There was no accounts receivable due fromthis customer as of December 31, 2008 and June 30, 2009.

 

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

 

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

 

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

 

Wehad been under examination by the Internal Revenue Service for the 2004, 2005and 2006 tax years. The examination wasconcluded as of December 31, 2007 and final settlement was approximately$35,000, including interest and penalties. We are currently under examinationfor the 2007 tax year.

 

**10.          Contingencies**

 

Weare subject to various legal proceedings and claims that arise in the ordinarycourse of business.  Although the Company believes it has defenses to theallegations and intends to pursue them vigorously, management does notcurrently have sufficient information to assess the validity of the claims orthe amount of potential damages.  Company management currently believes,however, that resolution of such legal matters will not have a material adverseimpact on the Company’s financial position, results of operations or cashflows.  Refer to Item 1 of Part II -Legal Proceedings.

 

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

 

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

 

**Overview**

 

We area leading online retailer of jewelry, featuring a live auction format. We haveestablished our retail brand in the online marketplace by offering high-qualitymerchandise, a unique user-friendly shopping experience, and the opportunityfor buyers to achieve significant cost savings versus traditional retailchannels. A key to our success has been our ability to efficiently and costeffectively source closeout and regular jewelry merchandise, and rapidlyrespond to changing consumer demands for jewelry, watches and accessories. Weoffer our products through a continuous live format, featuring a $1 minimumopening bid, and a unique 15-second auction extension period that allows ourauctions to continue until all bids are received. On select auctions wemaintain a reserve price that must be met before a sale will be consummated.The majority of our auctions are short-term, often lasting less than one hour,providing immediate gratification to our customers and encouraging frequentvisits and active viewing of our website.

 

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

 

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

 

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

 

Inline with our growth plans, we completed a major upgrade of our auctionplatform at the end of 2007. The new auction LiveBid system supports a broadrange of leading browser software including Microsoft Internet Explorer,FireFox and Safari. The new system touts high availability, faster end-userresponse time and greater scalability among the key features delivered in thisrelease. We have leveraged this new software solution to launch additional sitefeatures and the new online retail store. We launched the Spanish, Arabic andGerman versions of our website in 2008.

 

**Critical Accounting Policies**

 

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

 

*Revenue Recognition*

 

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

 

Foronline sales through our website, we recognize merchandise sales upon shipmentsmade to consumers that are fulfilled from our warehouse. We require paymentbefore we ship and the payment is generally made online by credit card or otherelectronic payment methods. We record amounts received or billed prior toshipment of goods to customers as deferred revenue. We reduce gross sales by 

 

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returnsand charge-backs from customers. For wholesale merchandise sales, we recognizesales when the merchandise is delivered to the customer and credit terms may beoffered to such customers.

 

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

 

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

 

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

 

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

 

*Cost of Revenue*

 

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

 

Outboundshipping costs on merchandise sales totaled $2.6 million and $1.5 millionin the three months ended June 30, 2008 and 2009, respectively and $5.6million and $3.1 million in the six months ended June 30, 2008 and 2009,respectively.

 

*Returns and Allowances Reserve*

 

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

 

*Inventories*

 

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

 

*Inventory Reserve*

 

Theunique nature of our business model where customers set the prices they arewilling to pay may result in items selling below our cost, and we providereserves against our inventory based on the estimated difference between theaverage selling price and the cost of inventory if the average selling price islower than the cost of inventory. We also provide reserves for obsolescence andslow moving inventory.

 

*Inventory Co-op Marketing Contributions*

 

# In the thirdquarter of 2007, we started to bill and collect from our inventory vendorsco-op marketing contributions as an incentive for us to market and sell theirmerchandise on the Bidz website. In accordance with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain ConsiderationReceived from a Vendor, the co-op marketing contributions that  cannot be identified specifically to benefitthe vendors are a reduction in cost of sales and will result in an increase ingross profit. We cannot specifically identify the benefit to each vendor;consequently, co-op marketing contributions are charged against inventory as areduction of costs and amortized as a reduction of cost of sales. For the threemonths ended June 30, 2008 and 2009, we have recognized $2.8 million and$1.9 million of co-op marketing contributions, respectively, and for the sixmonths ended June 30, 2008 and 2009, we have recognized $6.7 million and$4.2 million, respectively. Approximately $4.0 million remain unamortized andis included as an offset to inventory at June 30, 2009. Receivable fromvendors for co-op marketing contributions, less allowance for doubtfulaccounts, is included in other current assets and amounted to $934,000 and $1.3million at December 31, 2008 and June 30, 2009, respectively.

 

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*Descriptionof Our Revenue, Costs, and Expenses*

 

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

 
| ** **                           | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **2008**                              | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                 | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** |   | ** ** |
| Net sales                            |       | 100.0                                 | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |
| Gross profit                         |       | 27.9                                  |       | 30.6                                |       | 28.5 |   | 31.7 |   |
| Operating expenses:                  |       |                                  |       |                                |       |   |   |   |   |
| General & administrative    |       | 10.3                                  |       | 17.6                                |       | 9.9 |   | 16.5 |   |
| Sales & marketing           |       | 5.7                                   |       | 7.9                                 |       | 6.3 |   | 8.1 |   |
| Depreciation & amortization |       | 0.3                                   |       | 0.7                                 |       | 0.3 |   | 0.7 |   |
| Total operating expenses             |       | 16.3                                  |       | 26.2                                |       | 16.5 |   | 25.3 |   |
| Profit from operations               |       | 11.6                                  |       | 4.3                                 |       | 12.0 |   | 6.4 |   |
| Interest income                      |       | 0.0                                   |       | 0.0                                 |       | 0.0 |   | 0.0 |   |
| Interest expense                     |       | 0.1                                   |       | 0.0                                 |       | 0.1 |   | 0.0 |   |
| Income tax expense                   |       | 4.9                                   |       | 2.0                                 |       | 4.9 |   | 2.7 |   |
| Net income                           |       | 6.6                                   | %          | 2.3                                 | %          | 7.0 | % | 3.7 | % |

 

*Net Revenue*

 

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

 

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

 
| ** **                   | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **2008**                              | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2009** | ** ** |
|                         |       |                                  |       |                                |       |   |   |   |   |
| Merchandise sales            |       | 70.9                                  | %          | 84.3                                | %          | 74.8 | % | 85.1 | % |
| Wholesale merchandise sales  |       | 15.3                                  |       | 1.8                                 |       | 10.8 |   | 1.2 |   |
| Shipping & handling |       | 10.9                                  |       | 10.6                                |       | 11.4 |   | 10.4 |   |
| Transaction fee              |       | 2.6                                   |       | 3.0                                 |       | 2.8 |   | 3.0 |   |
| Other revenue                |       | 0.3                                   |       | 0.3                                 |       | 0.2 |   | 0.3 |   |
|                         |       |                                  |       |                                |       |   |   |   |   |
| Total net revenue            |       | 100.0                                 | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |

 

*Gross Profit*

 

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

 

*General and Administrative Expenses*

 

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

 

*Sales and Marketing Expenses*

 

Our sales and marketingexpenses consist primarily of costs associated with paid website searchmarketing, online banner marketing, e-mail campaigns, affiliate programs andoptimization services. These marketing programs, which are designed to drivebuyers to our website, are the most important factors in increasing demand forour jewelry products and increasing net revenue.

 

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**Comparison of Three Months Ended June 30, 2009 to ThreeMonths Ended June 30, 2008**

 

Netincome in the three months ended June 30, 2009 was $620,000, or $0.03 per basicand diluted share and net income in the three months ended June 30, 2008was $3.6 million, or $0.15 and $0.14 per basic and diluted share, respectively.Net income decreased by 82.9% in the three months ended June 30, 2009compared to the three months ended June 30, 2008.

 

*Net Revenue*

 

Netrevenue decreased 51.0% to $26.9 million in the three months ended June 30,2009 from $55.0 million in the three months ended June 30,2008. Merchandise wholesale sales were $471,000 in the three months ended June 30,2009 compared to $8.4 million in the three months ended June 30, 2008.

 

The continuing economicdecline resulted in a major slowdown in our revenue in the second quarter of2009 compared to the second quarter of 2008. We believe there was an overalldecrease in online demand for our jewelry as consumers reduced theirdiscretionary spending. If the economy continues to decline it will cause adecline in demand and have a negative effect on our revenue. We anticipate thatnet revenue will be lower for the third quarter of 2009 compared to the secondquarter as the third quarter is a seasonally weak period for jewelry sales.

 

Ourinventory currently includes a variety of branded merchandise and many athigher prices in preparation for the holiday shopping season in the fourthquarter of 2009. The current abundance of closeouts has allowed us to stock upon merchandise that would offer good value to our customers.

 

*Gross Profit*

 

Grossprofit decreased 46.2% to $8.2 million in the three months ended June 30,2009 from $15.3 million in the three months ended June 30, 2008. Thedecrease in gross profit resulted from the decrease in sales revenue whichdeclined by 51.0% for the three months ended June 30, 2009 compared to thethree months ended June 30, 2008 and offset by the increase in grossprofit margin to 30.6% in the three months ended June 30, 2009 from 27.9%in the three months ended June 30, 2008. Gross profit margins benefitedfrom the amortized co-op marketing contributions that reduced our cost of salesby $1.9 million and $2.8 million in the three months ended June 30, 2009and 2008, respectively.

 

*General and Administrative Expenses*

 

Generaland administrative expenses decreased 16.4% to $4.7 million in the three monthsended June 30, 2009 from $5.7 million in three months ended June 30,2008. The decrease in general and administrative expenses was due to ourdecline in revenue and corresponding decreases in payroll and payroll relatedexpenses and administrative expenses. General and administrative expenses as apercentage of net revenue increased to 17.6% in the three months ended June 30,2009 from 10.3% in the three months ended June 30, 2008.

 

An impairment charge of $185,000 was recorded in thethree months ended June 30, 2009 on advances made to employees to purchaseshares of our common stock when the value of our common stock held ascollateral for the advances fell below the amount of the advances. The 154,000shares of the common stock held as collateral were valued based on the closingprice at June 30, 2009.

 

*Sales and Marketing Expenses*

 

Salesand marketing expenses decreased 32.1% to $2.1 million in the three monthsended June 30, 2009 from $3.1 million in the three months ended June 30,2008. Sales and marketing expenses as a percentage of net revenue increased to7.9% in the three months ended June 30, 2009 from 5.7% in the three monthsended June 30, 2008.

 

*Income Tax Expense*

 

Incometax expense decreased to $544,000 in the three months ended June 30, 2009from $2.7 million in the three months ended June 30, 2008 and theeffective tax rates are 46.7% and 42.3%, respectively.

 

**Comparison of Six Months Ended June 30, 2008 to SixMonths Ended June 30, 2007**

 

Netincome in the six months ended June 30, 2009 was $2.1 million, or $0.09per basic and diluted share and net income in the six months ended June 30,2008 was $ 8.2 million or $0.34 and $0.32 per basic anddiluted share, respectively. Net income decreased by 74.0% in the six months ended June 30,2009 compared to the six months ended June 30, 2008.

 

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*NetRevenue*

 

Netrevenue decreased 50.3% to $58.1 million in the six months ended June 30,2009 from $116.9 million in the six months ended June 30, 2008.Merchandise wholesale sales were $677,000 in the six months ended June 30,2009 compared to $12.6 million in the three months ended June 30, 2008.

 

Thecontinuing economic decline resulted in a major slowdown in our revenue in thefirst half of 2009 compared to the first half of 2008. We believe there was anoverall decrease in online demand for our jewelry as consumers reduced theirdiscretionary spending. If the economy continues to decline it will cause adecline in demand and have a negative effect on our revenue.

 

*Gross Profit*

 

Grossprofit decreased 44.8% to $18.4 million in the six months ended June 30,2009 from $33.4 million in the six months ended June 30, 2008. Thedecrease in gross profit resulted from the decrease in sales revenue whichdeclined by 50.3% for the six months ended June 30, 2009 compared to thesix months ended June 30, 2008 and offset by the increase in gross profitmargin to 31.7% in the six months ended June 30, 2009 from 28.5% in thesix months ended June 30, 2008. Gross profit margins benefited from theamortized co-op marketing contributions that reduced our cost of sales by $4.2million and $6.7 million in the six months ended June 30, 2009 and 2008,respectively.

 

*General and Administrative Expenses*

 

Generaland administrative expenses decreased by 17.1 % to $9.6 million in the sixmonths ended June 30, 2009 from $11.6 million in the six months endedJune 30, 2008. The decrease in general and administrative expenses was dueto our decline in revenue and corresponding decreases in payroll and payrollrelated expenses and administrative expenses. General and administrativeexpenses as a percentage of net revenue increased to 16.5% in the six monthsended June 30, 2009 from 9.9% in the six months ended June 30, 2008.

 

An impairment charge of $274,000 was recorded in the sixmonths ended June 30, 2009 on advances made to employees to purchaseshares of our common stock when the value of our common stock held ascollateral for the advances fell below the amount of the advances. The 154,000shares of the common stock held as collateral were valued based on the closingprice at June 30, 2009.

 

*Sales andMarketing Expenses*

 

Sales and marketingexpenses decreased 35.4 % to $4.7 million in the six months ended June 30,2009 from $7.3 million in the six months ended June 30,2008. Sales and marketing expenses as a percentage of net revenueincreased to 8.1% in the six months ended June 30, 2009 from 6.3% in thesix months ended June 30, 2008.

 

*Income Tax Expense*

 

Incometax expense decreased to $1.6 million in the six months ended June 30,2009 from $5.8 million in the six months ended June 30, 2008 and theeffective tax rate are 42.2% and 41.4%, respectively.

 

**Additional Quarterly Data**

 
| ** **                              | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
| ** **                              | ** ** | **2008**               | ** ** | **2008** | ** ** | **2009** | ** ** | **2009** | ** ** |
|                                    |       |                   |       |   |   |   |   |   |   |
| Average selling price per order (gross) |       | $                      | 182        |   | $ | 183 |   | $ | 181 |   | $ | 180 |   |
| Average orders per day                  |       | 3,734                  |       | 3,023 |   | 2,043 |   | 1,712 |   |
| Average items sold per day              |       | 12,186                 |       | 10,082 |   | 6,110 |   | 5,956 |   |
| Acquisition costs per new buyer         |       | $                      | 50         |   | $ | 48 |   | $ | 51 |   | $ | 55 |   |
| Number of new buyers                    |       | 83,179                 |       | 64,882 |   | 51,021 |   | 38,577 |   |

 

Wholesalemerchandise sales are excluded in computing additional quarterly data.

 

**Liquidity and Capital Resources**

 

Thesignificant components of our working capital are inventory and liquid assetssuch as cash and accounts receivable, reduced by 

 

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revolvingcredit line, accounts payable, accrued expenses and deferred revenue. Ourbusiness model contains beneficial working capital characteristics: while wecollect cash from sales to customers within several business days of therelated sale, we typically have longer payment terms with our suppliers.

 

As of June 30,2009, we had a working capital surplus of $31.6 million and have no long-termdebt obligations. Net cash provided by operating activities was $1.1 in the sixmonths ended June 30, 2009 compared to $3.3 million in the six monthsended June 30, 2008. Cash in the six months ended June 30, 2009 wasprimarily affected by changes in net income, inventories and accounts payable,and in the six months ended June 30, 2008 was primarily affected bychanges in net income, inventories and accounts payable.

 

Werecorded net income of $2.1 million in the six months ended June 30, 2009compared to $8.2 million in the six months ended June 30, 2008. Cash flowsfrom operating activities were used to meet our working capital requirements.In the six months ended June 30, 2009, inventories increased by $2.9million and accounts payable increased by $1.3 million. In the six months endedJune 30, 2008, inventories decreased by $2.5 million and accounts payabledecreased by $8.0 million. Inventories and accounts payable is affected by ourrevenue growth and changes in our inventory strategy. Our inventory strategy isinfluenced by our ability to secure inventory that we believe will improve ourmargins and the current revenue trend.

 

Netcash used in investing activities was $164,000 in the six months ended June 30,2009 compared to $412,000 in the six months ended June 30, 2008. Duringthe six months ended June 30, 2009 and 2008, cash used for capitalexpenditures of $164,000 and $431,000, respectively, related mainly toacquisition of office and computer equipment and software.

 

In thesix months ended June 30, 2009, net cash of $3.8 million was used infinancing activities when $3.6 million was used to repurchase our common stockshares. In the six months ended June 30, 2008, net cash of $7.1 millionwas used in financing activities when $7.0 million was used to repurchase ourcommon stock shares.

 

Webelieve that cash and cash equivalents currently on hand, cash flows fromoperations and the availability of a $25 million revolving line of credit willbe sufficient to continue our operations and to pursue our growth strategy forthe foreseeable future. Our future capital requirements will depend on manyfactors, including the rate of our revenue growth; the timing and extent ofspending to enhance our website, network infrastructure, and transactionprocessing systems; the extent of our advertising and marketing programs; thelevels of the inventories we carry; acquisition and relocation to a newcorporate office; and other factors relating to our business. Enhancement ofour website, network infrastructure, transaction processing systems and a newERP system will require us to spend significantly more than we have in thepast. Moreover, to date our spending in these areas has been lower thanindustry averages. We anticipate increasing our system expenditures toaccommodate these needs in the future. We may require additional financingin the future in order to execute our operating plan and we may not be able toobtain such financing. We cannot predict whether this additional financing willbe in the form of equity, debt, or a combination of debt and equity.

 

**Lease Obligations**

 

Thefollowing table presents our contractual obligations at June 30, 2009,over the next five years and thereafter (in thousands):

 
| **Payments by period** | ** ** | **Total  amount** | ** ** | **Less than  1 year** | ** ** | **1 to 3  years** | ** ** | **3 to 5  years** | ** ** | **After 5  years** | ** ** |
|----------------------------------|------------|-------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **        | ** ** | ** **                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Property lease                   |       | $                 | 3,515      |                            | $          | 1,162                       |       | $                           | 2,323      |                    | $          | 30 |   | $ | — |   |
| Equipment lease                  |       | 179               |       | 55                              |       | 103                         |       | 21                          |       | —                  |       |
|                             |       | $                 | 3,694      |                            | $          | 1,217                       |       | $                           | 2,426      |                    | $          | 51 |   | $ | — |   |

 

We areobligated for the lease of our office and warehouse space. We lease a 50,000square-foot office and warehouse and a separate 12,000 square-foot warehousespace in Culver City, California. The leases expire in June 2012 and August 2012,respectively. In March 2009, we extended the lease on our 50,000square-foot office and warehouse by 32 months to expire in June 2012.

 

**Reclassification**

 

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

 

**ITEM 3 - QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

Marketrisk represents the risk of loss arising from adverse changes in market ratesand foreign exchange rates. We do not believe that a change in market interestrates would have a material effect on our results of operations or financialcondition. Although we derive a portion of our sales outside of the UnitedStates, all of our sales are denominated in U.S. dollars. We have limitedexposure to 

 

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financialmarket risks, including changes in interest rates and foreign currency exchangerates.

 

**ITEM 4 - CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) as of the end of the period covered bythis report.  Disclosure controls and procedures are the controls andother procedures that we designed to ensure that we record, process, summarizeand report in a timely manner the information we must disclose in reports thatwe file with or submit to the Securities and Exchange Commission.  Basedon this evaluation, our Chief Executive Officer and our Chief Financial Officerconcluded that, as of the date of their evaluation, our disclosure controls andprocedures were effective. There were no significant changes made in our internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of their evaluation.

 

***Report ofManagement on Internal Control over Financial Reporting***

 

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

 

We assessed theeffectiveness of our internal control over financial reporting as of June 30,2009, using the criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO) in Internal Control — IntegratedFramework. Based on this assessment, management has concluded that our internalcontrol over financial reporting was effective as of June 30, 2009.

 

***Changes inInternal Control over Financial Reporting***

 

There were no changes in our internal control overfinancial reporting (as defined in Rule 13a-15(f) under theSecurities Exchange Act of 1934) during the quarter ended June 30, 2009,that our certifying officers concluded materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

***Limitations on Controls***

 

Management does not expect that our disclosurecontrols and procedures or our internal control over financial reporting willprevent or detect all error and fraud. Any control system, no matter how welldesigned and operated, is based upon certain assumptions and can provide onlyreasonable, not absolute, assurance that its objectives will be met. Further,no evaluation of controls can provide absolute assurance that misstatements dueto error or fraud will not occur or that all control issues and instances offraud, if any, within the Company have been detected. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

In May and June,2009, the Company and certain of its officers were named as defendants in threeparallel class actions complaints filed in the United States District Court forthe Central District of California (Ramon Gomez v. Bidz.com, Inc., et al.,cv09-3216 (CBM) (C.D. Cal.; filed on May 7, 2009); James Mitchell v. Bidz.com,Inc., et al., cv09-03671 (CBM) (C.D. Cal.; filed on May 22, 2009); Mark Valczykv. Bidz.com, Inc., et al., cv09-0396 (CBM) (C.D. Cal.; filed on June 3,2009)).  On July 30, 2009, the Courtordered the cases to be consolidated and appointed Roland Pomfret as the leadplaintiff.  The  lawsuits purport to represent the class ofshareholders who purchased the Company’s common stock between August 13, 2007and November 27, 2007.  The complaintscharge the Company and certain of its officers and directors with violations of§10(b) and §20(a) of the Securities Exchange Act of 1934. The complaints allegethat we failed to disclose unethical and fraudulent business practices thatwere alleged in a November 26, 2007 report by Citron Research (Stocklemon.com),that we did not have controls in place to prevent “shill bidding” and that weuse unreliable or false appraisal prices on our merchandise. We believe thatthe lawsuits are meritless and intend to defend the cases vigorously.

 

In May and July, 2009,the Company and certain of its officers and its Board of Directors were namedas defendants in two shareholder derivative lawsuits filed in the SuperiorCourt of California, County of Los Angeles, and the United States DistrictCourt for the Central District of California, respectively (Bahram Akhavan v.Bidz.com, Inc. et al. BC414198 (filed May 20, 2009); Farris Hassan v. Bidz.com,Inc., et al. , cv09-04984 (CBM) (C.D. Cal.; filed on July 10, 2009)).  The Complaint alleges violations of law, 

 

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including breaches of fiduciary duties, waste of corporate assets,unjust enrichment and violations of California Corporations Code that occurredbetween August 2007 and the present and that have caused substantial monetaryloss to the Company and other damages, such as to its reputation and goodwill.We believe that the lawsuits are meritless and intend to defend the casesvigorously.

 

In May 2009, the Companyreceived a Civil Investigative Demand for information from the Federal TradeCommission (“FTC”) relating to email marketing practices. We have been cooperating fully with the FTC regarding thismatter, and we do not believe that the investigation will adverselyaffect management, our results of operations or our financial position.

 

OnFebruary 10, 2009, the Securities and Exchange Commission (“SEC”) issued asubpoena to produce documents relating to the Company’s inventory reservepolicies, as well as other matters. We have been cooperating fully with the SECregarding this matter, and we do not believe that the investigation will adverselyaffect management, our results of operations or our financial position.

 

On or about June 25,2009, the Company was named as a defendant in a patent infringement lawsuitfiled in the United States District Court for the Eastern District of Texas,Tyler Division (Soverain Software LLC v. J.C. Penney Corporation, Inc., AmwayCorp., Avon Products, Inc., Bidz.com, Inc., Etronics, Inc. HSN, Inc., HSNImprovements, LLC, Cornerstone Brands, Inc., Ballard Designs, Inc., GarnetHill, Inc., Smith & Noble, LLC, The Territory Ahead, Inc., QVC, Inc.,Shutterfly, Inc., Victoria’s Secret Stores Brand Management, Inc., Victoria’sSecret Direct Brand Management, LLC, VistaPrint, Ltd., and VistaPrint USA, Inc.cv6:09-CV-274).  The Complaint allegesthat defendants’ ecommerce sites infringe one or more patents held by theplaintiff.   The Plaintiff seeks ajudgment that its patents are not invalid and enforceable, a preliminary andpermanent injunction against infringement of the patents, damages (includingtreble damages) and attorneys fees.  Webelieve that the lawsuit is meritless and intend to defend the case vigorously.

 

On or aboutJanuary 15, 2009, Landmark Technology, LLC (“Landmark”) filed a FirstAmended Complaint in the civil action titled Landmark Technology, LLC v. ZaleCorp, et al. in the U.S. District Court for the Eastern District of Texas. TheFirst Amended Complaint added the Company as a defendant and alleged that theCompany infringed and is infringing certain patents of Landmark directly,contributory and by inducement. The First Amended Complaint seeks a temporary,preliminary and permanent injunction against infringement of the Landmarkpatents, damages (including a reasonable royalty and lost profits), enhanced orexemplary damages, a finding that the alleged infringement is “willful,”attorneys fees, costs and other relief. We have negotiated a settlement and the case was dismissed in June 2009.

 

On or aboutSeptember 29, 2008, the Company, David Zinberg and Marina Zinberg werenamed as defendants in a complaint filed in the United States District Courtfor the Central District of California (Marla Tidenberg v. Bidz.com, Inc., etal., cv08 05553 (PSG)).  On March 19,2009, Tidenberg filed a Third Amended Complaint, which names only the Companyas a defendant.  The lawsuit alleges,among other things, that we engaged in unfair business practices bymisrepresenting the value of our merchandise and by “false” bidding. Thecomplaint purports to represent a class of persons who purchased anymerchandise from us. We believe that the lawsuit is meritless and intendto defend the case vigorously.

 

We are, from time to time, a party todisputes arising from normal business activities, including variousemployee-related matters. In the opinion of our management, resolution of thesematters, individually or collectively, will not have a material adverse effectupon our financial condition or future operating results.

 

**ITEM 1.A. RISK FACTORS**

 

*We believe the risks and uncertainties described below arethe most significant we face. The occurrence of any of the following riskscould harm our business. In that case, the value of our common stock coulddecline, and you may lose part or all of your investment. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also impair our operations.*

 

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

 

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

 

·                  actual or anticipated changes in our operatingresults,

 

·                  our stock is subject to short selling and may causetrading in our common stock to be volatile,

 

·                  changes in research analysts’ recommendations orestimates of financial performance,

 

·                  changes in market valuation of similar companies,economic and general market conditions,

 

·                  announcements of significant contracts, companydevelopments, commercial relationships, banking credit facilities, capitalcommitments, acquisitions or joint ventures,

 

·                  issuance of additional shares of common stock or othersecurities, and

 

·                  intellectual property or litigation developments.

 

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

 

***The adverse domestic and globaleconomic conditions or the perception of said conditions may have adverseeffects on our growth and operating results.***

 

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

 

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

 

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

 

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

 

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

 

·          our ability tomanage our sales and marketing efforts;

·          our ability tostructure our organization to achieve our operating objectives and to meet theneeds of our customers; and

·          our ability tomanage expenses and inventory levels.

 

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

 

***We will devote necessary resources to respondpromptly and thoroughly to the SEC investigation.***

 

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

 

***We must continue to generate a highvolume of visitor traffic to our website and convert those visitors intobuyers.***

 

Ournet revenue depends to a significant extent on the number of customers whovisit our website to purchase merchandise and the dollar amount of their purchases.Generating increased traffic to our website and converting that traffic intobuyers requires us to achieve effective results from our marketing campaigns;offer a wide variety of products that our customers can purchase at favorable 

 

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prices;maintain a user-friendly shopping experience; ensure the satisfactoryavailability, performance, and reliability of our website, networkinfrastructure, and transaction processing systems; and provide high-qualitycustomer service. Our business will be harmed if we are unable to increase ourcustomer base and the dollar volume of the orders customers place with us.

 

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

 

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

 

***We may face increasing costs toacquire new customers.***

 

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

 

***Our growth will depend on ourability to increase the popularity of our website, and we may not be able to doso effectively.***

 

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

 

***We anticipate expanding ourinternational sales activities, causing our business to become increasinglysusceptible to numerous risks that could affect our profitability.***

 

Inthe three month periods ended June 30, 2008 and 2009, 25.1% and 34.3%,respectively, and in the six month periods ended June 30, 2008 and 2009,24.3% and 32.2%, respectively, of our net revenue was generated by shipments tocustomers outside of the United States. We plan, over time, to expand our reachinto international markets. We do not, however, currently have any overseasfulfillment, distribution, or server facilities. We cannot be certain that wewill be able to expand our global presence. In addition, there are certainrisks associated with doing business on an international basis, includingregulatory requirements, legal uncertainty regarding liability, tariffs, andother trade barriers, longer payment cycles, and potentially adverse taxconsequences, any of which could adversely affect our business. Although ourforeign sales historically have been denominated in U.S. dollars, we also maybe subject to increased risks relating to foreign currency exchange ratefluctuations to the extent we decide to denominate our sales in foreigncurrencies.

 

***Customer complaints or negative publicity about ourcustomer service could adversely affect our reputation and, as a result, ourbusiness could suffer.***

 

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

 

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***Our limited operating history makes it difficult forus to forecast accurately net revenue and appropriately plan our expenses.***

 

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

 

***Quarterly financial results may not be consistentand impact our stock price.***

 

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

 

***We may be at risk to accurately report financialresults or detect fraud if we fail to maintain an effective system of internalcontrols.***

 

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

 

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

 

***We do not have a guaranteed supplyof jewelry products, and we have a concentration of inventory purchases fromour top two suppliers****.*

 

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

 

Inaddition, we have a concentration of inventory purchases from a small number ofsuppliers. Our top two suppliers accounted for approximately 31.1%, 24.0% and14.6% of our total purchases in 2006, 2007, and 2008, respectively. In thethree month period ended June 30, 2008 and 2009, 9.4% and 33.7%,respectively, and in the six month period ended June 30, 2008 and 2009,9.0% and 23.3%, respectively, were purchased from our top two suppliers.

 

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

 

We maybe at risk of loss for the diamonds, precious and semi-precious gems that wehave given to our manufacturing vendors to produce into finished jewelryproducts. If the businesses of the vendors fail, the diamond inventory is lostor stolen, the vendors do not have adequate insurance coverage or if thevendors fail to produce and deliver finished jewelry products, we would incursubstantial losses that would have a material impact on our net income andfinancial position.

 

***Competition from online auctioneersand other online companies with greater brand recognition may adversely affectour sales.***

 

Themarket for online auctions is rapidly evolving and intensely competitive. Weexpect competition to intensify further in the future. 

 

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Barriersto entry are relatively low, and current and new competitors can launch newwebsites at relatively low cost using commercially available software.

 

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

 

***We rely heavily on the sale ofjewelry for our net revenue, and demand for these products could decline.***

 

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

 

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

 

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

 

***Because we carry  our jewelry products in inventory, our netrevenue and gross margin may decrease if we are unable to predict and plan forchanges in consumer demand.***

 

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

 

***We may be subject to a tax liability for past sales and our futuresales may decrease if we are required to collect sales and use taxes on theproducts we sell.***

 

Inaccordance with current industry practice and our interpretation of currentlaw, we do not currently collect sales or other taxes with respect to shipmentsof goods into states other than California and New York. However, additionalstates or foreign countries may seek to impose sales or other tax obligationson us in the future. A successful assertion by one or more states or foreigncountries that we should be collecting sales or other taxes on the sale of ourproducts could result in substantial tax liabilities for past and future sales,discourage customers from purchasing products from us, decrease our ability tocompete with traditional retailers, and otherwise substantially harm ourbusiness, financial condition, and results of operations.

 

***We rely on suppliers and third-partycarriers as part of our fulfillment process, and these third parties may failto meet shipping schedules or requirements****.*

 

Werely on suppliers to deliver our orders promptly, which we then carry ininventory to ensure availability and expedited delivery to 

 

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

 

***Increases in the cost of preciousmetals and precious and semi-precious stones would increase the cost of ourjewelry products.***

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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***We are vulnerable to fraudulentactivities on our website, including unauthorized use of customer informationand identity theft by third parties****.*

 

Ournetwork security measures to prevent third parties from penetrating our networkand improperly accessing our customers’ personal information or credit cardinformation may not be successful. Although we have not experienced any theftof our customers’ credit card information to date, as new discoveries in thefield of cryptography and advances in computer capabilities occur, our securitymeasures may not effectively prevent others from obtaining improper access toour customer information. In addition, third parties may target our customersdirectly with fraudulent identity theft schemes designed to appear aslegitimate e-mails from us. In March 2006, one such third party attemptedto solicit customer information through a tactic, commonly known as “phishing,”whereby an e-mail purporting to be from us solicited customer information fromrecipients of the e-mail. Any such security breach or fraud perpetrated on ourcustomers could expose us to increased costs and could harm our business andresults of operations.

 

***Our ability to grow our businesswill be impaired by delays, interruptions, or failures of the Internet.***

 

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

 

***We depend on the continued growthand acceptance of online commerce, and our business will be substantiallyimpaired if the growth of online commerce slows or does not grow as expected.***

 

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

 

***Increased product returns and thefailure to predict product returns could substantially harm our business andresults of operations.***

 

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

 

***Our inventory is vulnerable to damage or loss caused by fire, flood,earthquakes, and similar events, and we face the risk of theft of our productsfrom inventory or during shipment.***

 

Ourinventory is stored at our warehouse/office facility in Culver City,California. Consequently, our merchandise supply is vulnerable to fire, flood,earthquakes, and similar events that may impact our facility. Any damage to orloss of all or a significant portion of our inventory could cause significantdelays in shipment of goods to our customers, resulting in negative publicityabout and diminished customer confidence in our website. In addition, we mayexperience theft of our products while they are being held in inventory orduring the course of their shipment to our customers by third-party carriers.We have implemented security measures to prevent such theft and maintaininsurance to cover losses resulting from theft. Nevertheless, we could incur significantlosses from theft, which would substantially harm our business and results ofoperations, if our security measures fail, losses exceed our insurancecoverage, or we are not able to maintain insurance at a reasonable cost.

 

***Increases in credit card processingfees could increase our costs.***

 

Visa,MasterCard, American Express, and Discover Card could increase the interchangefees that they charge for transactions using their cards. Increases ininterchange fees may result in increased operating costs and reduced profitmargin.

 

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

 

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

 

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

 

Historically,sales in the jewelry industry are seasonal and have been higher in the fourthquarter of the calendar year as a result of higher consumer spending during theDecember holiday season. Approximately 28.5%, 33.8% and 16.9% of our netrevenue was generated during the fourth quarter of 2006, 2007 and 2008,respectively. Thefourth quarter of 2008 was an exception as we encountered a significantslowdown in sales resulting from the 2008 financial and economic crisis. As we continueto grow, we expect to experience more pronounced seasonal fluctuations in ournet revenue and anticipate a disproportionate amount of our revenue will occurin the fourth quarter. In anticipation of any increased sales activity duringthe fourth quarter, we may incur significant additional expenses, includinghigher sales and marketing costs and additional staffing in our fulfillment andcustomer support operations. If we were to experience lower than expected salesduring any future fourth quarter, it would have a disproportionately largeimpact on our results of operations for that year. In the future, our seasonalsales patterns may become more pronounced, may strain our personnel andfulfillment activities, and may cause a shortfall in sales compared withexpenses in a given period, which would substantially harm our business andresults of operations.

 

***Sales growth in prior periods maynot be indicative of our future growth.***

 

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

 

***We had grown quickly, and ourbusiness will suffer if we fail to manage our future growth.***

 

Wehad expanded our operations at a rapid pace prior to the 2008 financial andeconomic crisis. This expansion had placed a significant strain on ourmanagement, operations, and financial resources. When the economy recovers, we anticipateadding personnel in the future, including managerial, technical, and operationspersonnel. In order to manage the future growth of our operations, we also willbe required to improve existing and implement new transaction-processing,operational and financial systems, procedures, and controls. If we are unableto manage growth effectively, our business and results of operations will beharmed.

 

***Descriptions of our jewelry itemsare not guarantees and may confuse, mislead, or disappoint our customers.***

 

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

 

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

 

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

 

Therehas been an increase in attention to “conflict” diamonds originating out ofwar-torn regions of Africa. The proceeds from the sale of “conflict” diamondshave been used to fund ongoing aggression and terrorist activities throughoutthe world. We make every effort to evaluate our vendor sources to ensure theyare not a dealer in “conflict” diamonds. In addition we have implemented ananti-

 

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moneylaundering program to guard against both illicit purchase and sales activities.If these risks were to occur, we may face a negative public reaction to ourbrand name resulting in loss of sales.

 

***We may not be able to maintain ourdomain name uniqueness.***

 

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

 

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

 

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

 

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

 

Weregard the protection of our trademarks, copyrights, domain name, trade dress,and trade secrets as critical to our success. We rely on a combination ofcommon law as well as trademark, copyright, trade dress, and trade secret lawsto protect our intellectual property rights. We also have entered intoconfidentiality and invention assignment agreements with our employees andrelevant contractors and nondisclosure agreements with relevant parties withwhom we conduct business in order to limit access to and disclosure of ourproprietary information. These contractual arrangements and other steps we havetaken to protect our intellectual property may not prevent misappropriation ofour intellectual property or deter independent development of similarintellectual property by others. We also are pursuing the registration of ourdomain name, trademarks, and service marks in the United States andinternationally. Effective trademark, copyright, patent, trade dress, tradesecret, and domain name protection is very expensive to maintain and mayrequire litigation. We must protect our trademarks, copyrights, patents, anddomain names in an increasing number of jurisdictions, a process that isexpensive and may not be successful in every location.

 

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

 

***We may be unable to enforceprotection of our intellectual property rights under the laws of othercountries.***

 

Weanticipate that we will become increasingly subject to international intellectualproperty risks, including differing intellectual property laws, which may beinsufficient to protect our intellectual property, unique local laws, and lackof applicable law or clear precedent.

 

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

 

Weare subject to increasing regulation at the federal, state, and internationallevels relating to privacy and the use of personal user information designed toprotect the privacy of personally identifiable information as well as toprotect against its misuse. These laws include the Federal Trade CommissionAct, the CAN-SPAM Act of 2003, the Children’s Online Privacy Protection Act,the Fair Credit Reporting Act, the Homeland Security Act, and relatedregulations. In May 2009, we received a Civil Investigation Demand forInformation from the Federal Trade Commissioner (“FTC”) relating to emailmarketing practices. We have been cooperating fully with the FTC regarding thismatter. Several states have proposed legislation that would limit the use ofpersonal information gathered online or require online services to establishprivacy policies. Moreover, proposed legislation in the United States andexisting laws in foreign countries require companies to establish procedures tonotify users of privacy and security policies, obtain consent from users forcollection and use of personal information, and/or provide users with theability to access, correct, and delete personal information stored bycompanies. These regulations and other laws, rules, and regulations enacted inthe future may adversely affect our ability to 

 

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collect,disseminate, or share demographic and personal information about users and ourability to e-mail or telephone users, which could be costly and adverselyaffect our marketing efforts**.**

 

***We may be subject to regulationsgoverning the conduct and liability of auctioneers, which could affect the wayin which we conduct our business or otherwise increase our cost of doingbusiness.***

 

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

 

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

 

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

 

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

 

***New and existing regulations couldharm our business.***

 

Weare subject to the same foreign and domestic laws as other companies conductingboth online and offline business. There are still relatively few lawsspecifically directed towards online business. However, due to the increasingpopularity and use of the Internet and online services, many laws relating tothe Internet are being debated at all levels of government around the world,and it is possible that such laws and regulations will be adopted. These lawsand regulations could cover issues such as user privacy, freedom of expression,pricing, fraud, content and quality of products and services, taxation,advertising, intellectual property rights, and information security.Applicability to the Internet of existing laws governing issues, such asproperty ownership, copyrights and other intellectual property issues, taxation,libel and defamation, obscenity, and personal privacy is uncertain. The vastmajority of these laws was 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 referencethe Internet, such as the U.S. Digital Millennium Copyright Act and theEuropean Union’s Directive on Distance Selling and Electronic Commerce, haveonly recently begun to be interpreted by the courts and implemented by theEuropean Union member states, so their applicability and scope remainuncertain. As our activities and the types of goods listed on our websiteexpand, regulatory agencies may claim that we or our users are subject tolicensure in their jurisdiction, either with respect to our business ingeneral, or in order to allow the sale of certain items, such as real estate,event tickets, boats, and automobiles.

 

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

 

***We depend to a very significantextent on David Zinberg, our Chairman of the Board and Chief Executive Officer.***

 

Ourperformance depends substantially upon David Zinberg, our Chairman of the Boardand Chief Executive Officer, who has extensive experience with the purchase andsale of jewelry. We rely on Mr. Zinberg to make critical operationaldecisions on a daily basis, such as product offerings and purchases, and tomake key strategic plans. We have an employment agreement with Mr. Zinberg

 

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extendingthrough July 2010 and renewable annually. The loss of the services of Mr. Zinbergwould adversely affect our business and operations.

 

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

 

Fromour inception until mid-2003, we raised over $20.5 million in gross equitycapital by selling shares of our common stock to approximately 830 investors atprices ranging from $4.00 to $6.00 per share with a weighted average shareprice of $4.50. We also issued shares of common stock to about 30 persons inexchange for services and other non-cash consideration valued in excess of $5.5million and issued approximately 250 stock option grants to purchase commonstock at a weighted average exercise price of $4.45. After conducting thesesales of our securities, we determined that these sales were not exempt fromthe registration requirements under the Securities Act of 1933 and similarprovisions of laws of the states in which our stockholders reside, becausecertain of our employees who solicited investors engaged in a “generalsolicitation” of securities. In addition, these employees received compensationfor selling our common stock and were required to be licensed as broker-dealerswith the Securities and Exchange Commission, or SEC, and various stateauthorities, but they were not so licensed. In such situations, a number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs. We believe, however, that as to any options by investorsat this time or in the future, applicable statutes of limitations will mitigateour exposure to any civil remedies.

 

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

 

We have never declared orpaid any cash dividends on our common stock and do not intend to pay dividendson our common stock for the foreseeable future. We intend to invest any futureearnings to fund our business. Therefore, stockholders likely will not receiveany dividends on our common stock for the foreseeable future. Investors cannotbe certain that they will receive a positive return on their investment whenthey sell their shares or that they will not lose the entire amount of theirinvestment.

 

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

 

Ourfounder, executive officers, and directors together own approximately 36.9% ofour common stock as of June 30, 2009. Marina Zinberg, our Vice President,who is the sister of David Zinberg, our Chairman and Chief Executive Officer,owns an additional 30.6% of our common stock. As a result, these individuals will have significant influence over ourmanagement and affairs and over all matters requiring stockholder approval,including the election of directors and the approval of significant corporatetransactions, such as a merger or a sale of our company or its assets, for theforeseeable future. This concentrated control will limit the ability of otherstockholders to influence corporate matters. Because of this, we may takeactions that some of our stockholders do not view as beneficial. As a result,the market price of our common stock could be adversely affected becausestockholders may not view favorably the concentration of control in the handsof management.

 

***Our charter documents and Delawarelaw could make it more difficult for a third party to acquire us, anddiscourage a takeover.***

 

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

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

OnApril 1, 2009, we issued 666,000 restricted stock awards of ourcommon stock, with 25% vesting at the end of each year over a four year period,under the 2006 Award Plan to management and key employees for servicesrendered to our Company. No stock options were granted during the three monthsended June 30, 2009.

 

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**IssuerPurchases of Equity Securities**

 

Thefollowing table contains information about purchases of our common stock duringthe three months ended June 30, 2009:

 
| ** **                      | ** ** | ** **    | ** ** | ** **  | ** ** | **Total Number of** | ** ** | **Maximum**                    | ** ** |
|---------------------------------|------------|---------------|------------|-------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | ** **    | ** ** | ** **  | ** ** | **Shares**                    | ** ** | **Dollar Value**               | ** ** |
| ** **                      | ** ** | **Total**     | ** ** | **Average** | ** ** | **Purchased as**         | ** ** | **of Shares that**   | ** ** |
| ** **                      | ** ** | **Number**    | ** ** | **Price**   | ** ** | **Part of a**       | ** ** | **May**                        | ** ** |
| ** **                      | ** ** | **of**        | ** ** | **Paid**    | ** ** | **Publicly**                  | ** ** | **yet be Purchased** | ** ** |
| ** **                      | ** ** | **Shares**    | ** ** | **per**     | ** ** | **Announced**                 | ** ** | **Under the**             | ** ** |
| **2009**                        | ** ** | **Purchased** | ** ** | **Share**   | ** ** | **Program**                   | ** ** | **Program (1)**                | ** ** |
| April 1- April 30     |       | 172,182       |       | $           | 4.04       |                          | 2,362,209  |                           | $          | 18,319,000 |   |
| May 1- May 31         |       | 187,166       |       | 3.78        |       | 2,549,375                     |       | $                              | 17,612,000 |   |
| June 1 – June 30 |       | 354,651       |       | $           | 3.10       |                          | 2,904,026  |                           | $          | 16,514,000 |   |
| Total                           |       | 713,999       |       |        |       |                          |       |                           |       |

 

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

 

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

 

We held our annualmeeting of stockholders on May 28, 2009. The following items were voted onby our stockholders:

 
| Election of Class III  member of our Board of Directors for a term expiring in 2012                                                                                             | ** ** | ** ** | ** ** | ** **  | ** ** | ** **             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|------------------------|
|                                                                                                                                                                                 | ** ** | ** ** | ** ** | ** **  | ** ** | ** **             |
| ** **                                                                                                                                                                           | ** ** | ** ** | ** ** | **FOR**     | ** ** | **WITHHELD/  AGAINST** |
| Garry Y. Itkin                                                                                                                                                                       |       |       |       | 18,747,315  |       | 336,057                |
|                                                                                                                                                                                 |       |       |       |        |       |                   |
| ** **                                                                                                                                                                           | ** ** | **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN**            |
| Proposal  to approve the ratification of the appointment of Stonefield Josephson Inc.  as the Company’s independent auditors for the fiscal year ending  December 31, 2009 |       | 19,073,595 |       | 7,141       |       | 2,636                  |

 

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**ITEM 6. EXHIBITS**

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

 

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**SIGNATURES**

 

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

 
|                         |       | BIDZ.COM, INC.                   |
|------------------------------|------------|----------------------------------|
|                         |       |                             |
|                         | By:        | /s/ DAVID ZINBERG                |
|                         |       |                             |
| ** **                   | ** ** | **David Zinberg**                |
| ** **                   | ** ** | **Chief Executive Officer**      |
|                         |       |                             |
|                         | By:        | /s/ LAWRENCE KONG                |
|                         |       |                             |
| ** **                   | ** ** | **Lawrence Kong**                |
| ** **                   | ** ** | **Principal Accounting Officer** |
|                         |       |                             |
| Dated:  August 10, 2009 |       |                             |

 

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