Annual Reports

 
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  • 10-Q (Nov 9, 2012)
  • 10-Q (Aug 10, 2012)
  • 10-Q (May 11, 2012)
  • 10-Q (Nov 14, 2011)
  • 10-Q (Aug 15, 2011)
  • 10-Q (May 11, 2011)

 
8-K

 
Other

Bidz 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-10.10
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1

 

 

UNITED STATES
SECURITIES 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, 2006

 

 

 

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 Identification Number)

incorporation or organization)

 

 

3562 Eastham Drive
Culver City, California
90232

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

(310) 280-7373

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See definition of “accelerated filer and large filer” in Rule 12b-2 of the Exchange Act). (Check one):
Large accelerated filer 
o                                                    Accelerated filer o                                                Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o  Yes    x  No

Number of shares outstanding of Registrant’s common stock, $0.001 par value, as of August 14, 2006:

23,312,500

 




TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

Condensed Balance Sheets as of December 31, 2005 and June 30, 2006 (unaudited)

2

 

Condensed Statements of Operations for three month and six month periods ended June 30, 2005 and 2006 (unaudited)

3

 

Condensed Statements of Cash Flows for six month periods ended June 30, 2005 and 2006 (unaudited)

4

 

Notes to Financial Statements (unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

Item 4.

Controls and Procedures

19

PART II. OTHER INFORMATION

20

Item 1.

Legal Proceedings

20

Item 1A

Risk Factors

20

Item 6.

Exhibits

32

SIGNATURES

33

 

This quarterly report includes forward looking statements. All statements other than statements of historical facts contained in this registration statement, including statements regarding our future financial position, business strategy and plans and objectives 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 to identify forward looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward looking statements are subject to a number of risks, uncertainties and assumptions discussed throughout this filing.

1




PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

Bidz.com, Inc.

Condensed Balance Sheets

 

(In thousands, except share data)

 

 

 

December 31,

 

June 30,

 

 

 

2005

 

2006

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

7

 

$

1

 

 

 

 

 

 

 

Accounts receivable

 

886

 

562

 

 

 

 

 

 

 

Inventories, net of reserves of $331and $442 at December 31, 2005 and June 30, 2006 respectively

 

15,921

 

16,634

 

 

 

 

 

 

 

Other current assets

 

158

 

617

 

 

 

 

 

 

 

Total current assets

 

16,972

 

17,814

 

 

 

 

 

 

 

Property and equipment, net

 

384

 

497

 

 

 

 

 

 

 

Intangible asset

 

150

 

150

 

 

 

 

 

 

 

Deposits

 

240

 

90

 

 

 

 

 

 

 

 

 

$

17,746

 

$

18,551

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Post-dated check financing (includes related party amounts of $2,184 and $2,587 at December 31, 2005 and June 30, 2006 respectively)

 

$

5,315

 

$

4,702

 

 

 

 

 

 

 

Accounts payable (includes related party amounts of $2,712 and $913 at December 31, 2005 and June 30, 2006 respectively)

 

7,297

 

4,669

 

 

 

 

 

 

 

Accrued expenses

 

1,774

 

2,967

 

 

 

 

 

 

 

Deferred revenue

 

1,577

 

891

 

 

 

 

 

 

 

Total current liabilities

 

15,963

 

13,262

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common Stock: no par value; authorized 50,000,000 shares; issued and outstanding 23,312,500 at December 31, 2005 and par value $0.001; authorized 100,000,000 shares; issued and outstanding 23,312,500 at June 30, 2006

 

28,830

 

23

 

 

 

 

 

 

 

Additional Paid in capital

 

 

28,807

 

 

 

 

 

 

 

Deferred stock-based compensation

 

(100

)

 

 

 

 

 

 

 

Accumulated deficit

 

(26,947

)

(23,508

)

 

 

 

 

 

 

Total stockholders equity

 

1,783

 

5,322

 

 

 

 

 

 

 

 

 

$

17,746

 

$

18,551

 

 

The accompanying notes form an integral part of these condensed financial statements.

2




Bidz.com, Inc.

Condensed Statements of Operations (Unaudited)

 

(In thousands, except share and per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2005

 

June 30,
2006

 

June 30,
2005

 

June 30,
2006

 

 

 

 

 

 

 

 

 

 

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales and shipping

 

$

17,997

 

$

32,435

 

$

38,625

 

$

67,071

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

55

 

(2

)

146

 

55

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

1

 

1

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

18,053

 

32,434

 

38,773

 

67,128

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

14,429

 

24,745

 

31,404

 

50,261

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

3,624

 

7,689

 

7,369

 

16,867

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

2,502

 

3,443

 

5,091

 

6,795

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

714

 

2,838

 

1,589

 

5,245

 

 

 

 

 

 

 

 

 

 

 

Public offering costs

 

 

1,231

 

 

1,231

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

38

 

67

 

76

 

121

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

3,254

 

7,579

 

6,756

 

13,392

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

370

 

110

 

613

 

3,475

 

 

 

 

 

 

 

 

 

 

 

Other Income-Interest Income

 

 

41

 

 

58

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

370

 

151

 

613

 

3,533

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

4

 

 

94

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

370

 

$

147

 

$

613

 

$

3,439

 

 

 

 

 

 

 

 

 

 

 

Net income per share available to common shareholders - basic

 

$

0.02

 

$

0.01

 

$

0.02

 

$

0.15

 

 

 

 

 

 

 

 

 

 

 

Net income per share available to common shareholders - diluted

 

$

0.02

 

$

0.01

 

$

0.02

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding - basic

 

23,312,500

 

23,312,500

 

25,361,819

 

23,312,500

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding - diluted

 

23,834,780

 

23,821,700

 

25,887,719

 

23,824,215

 

 

The accompanying notes form an integral part of these condensed financial statements.

3




 

Bidz.com, Inc.

Condensed Statements of Cash Flows (Unaudited)

 

(in thousands)

 

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2005

 

2006

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

613

 

$

3,439

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

76

 

121

 

 

 

 

 

 

 

Change in inventory reserve

 

(71

)

111

 

 

 

 

 

 

 

Amortization of deferred stock-based compensation

 

100

 

100

 

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in assets:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

99

 

324

 

 

 

 

 

 

 

Inventories

 

3,708

 

(824

)

 

 

 

 

 

 

Other current assets

 

(417

)

(459

)

 

 

 

 

 

 

Deposits

 

 

150

 

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

 

 

 

 

Post-dated check financing

 

(1,723

)

(613

)

 

 

 

 

 

 

Accounts payable

 

(1,640

)

(2,628

)

 

 

 

 

 

 

Accrued expenses

 

(268

)

1,193

 

 

 

 

 

 

 

Deferred revenue

 

(347

)

(686

)

 

 

 

 

 

 

Net cash provided by (used for) operating activities

 

130

 

228

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(125

)

(234

)

 

 

 

 

 

 

Net cash (used for) investing activities

 

(125

)

(234

)

Cash flows provided from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided from financing activities

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

5

 

(6

)

 

 

 

 

 

 

Cash, beginning of period

 

5

 

7

 

 

 

 

 

 

 

Cash, end of period

 

$

10

 

$

1

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

 

$

 

 

 

 

 

 

 

Income taxes paid

 

$

 

$

35

 

 

The accompanying notes form an integral part of these condensed financial statements.

4




BIDZ.COM, INC.

NOTES TO FINANCIAL STATEMENTS

(NUMBERS IN THOUSANDS, EXCEPT FOR PER SHARE NUMBERS)

(UNAUDITED)

1.                                      Basis of Presentation and Nature of Business Operations

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  These financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the fiscal year ended December 31, 2005 filed in the form 10-K Annual Report by the Company on March 29, 2006. In the opinion of management, these financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the financial position of Bidz.com, Inc. as of June 30, 2006 and the results of operations for the three month and six month periods ended June 30, 2005 and 2006 and the cash flows for the six month periods ended June 30, 2005 and 2006.  The results of operations for the three months and six months ended June 30, 2006 are not necessarily indicative of the results which may be expected for the entire fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Nature of Business Operations

Bidz.com, Inc. was founded in November of 1998 as a California corporation with its principal location of business in Los Angeles, California. We operate a website located at www.bidz.com for the purpose of selling merchandise, utilizing our unique sales auction platform.  During June 2006, we reincorporated in Delaware.

We sell our products throughout the United States and have expanded the reach of our customer base to Europe and Asia in recent years. Revenue generated from the United States accounted for approximately 79.3% and 79.6% of net revenue for the three months ended June 30, 2005 and 2006, respectively and 80.4% and 81.0% of net revenue for the six months ended June 30, 2005 and June 30, 2006, respectively.

As noted in our financial statements and the related notes for the years ended December 31, 2002, 2003 and 2004, the report of our independent registered public accounting firm stated that our history of significant operating losses, working capital deficit, lack of additional financing, and negative cash flows from operations raised substantial doubt about our ability to continue as a going concern. However, we have been profitable since 2004, and we secured a $10 million revolving line of credit in July 2006.

For the six month period June 30, 2006, we reported net income of $3.4 million and net cash provided from operating activities of $0.2 million. As of June 30, 2006, we had current assets of $ 17.8 million and current liabilities of $13.3 million or working capital of $4.5 million. Available cash was $3.5 million before post-dated checks and was $1,000 net of post-dated checks.

During the year ended December 31, 2005, we reported net income of $2.6 million and net cash provided by operating activities of $1.4 million. As of December 31, 2005, we had current assets of

5




$17.0 million and current liabilities of $16.0 million or working capital of $1.0 million. Available cash was $2.6 million before post-dated checks and was $7,000 net of post-dated checks

Recent Developments

On March 15, 2006, our Board of Directors authorized us to file a registration statement with the SEC for an initial public offering of our common stock. On June 29, 2006, we decided to postpone our initial public offering in order to reduce the initial public offering overhang (shares available for sale following the initial public offering) by requesting that our shareholders enter into a lock-up agreement for a period of 180 days. Accordingly, in June 2006, we expensed $1.2 million, consisting of offering costs related to the planned initial public offering.

On June 22, 2006 the Company reincorporated in the state of Delaware. In connection with our reincorporation in Delaware, we are authorized to issue 100,000,000 shares of common stock, $0.001 par value, and 4,000,000 shares of undesignated preferred stock, $0.001 par value.

Recent Accounting Pronouncements

On June 28, 2006 the Board of the FASB ratified the conclusion reached by the EITF and contained therein in Issue No. 06-03.  The Task Force reached a conclusion that the presentation of taxes on either a gross or net basis is an accounting policy decision that should be disclosed pursuant to Opinion 22.  Currently, the Company presents its sales tax liability on a net basis.  Sales are not grossed up with the attendant taxes deducted as a separate line item. The EITF becomes effective for interim and annual reporting periods beginning after December 15, 2006.  At such time, the Company will disclose this matter in its accounting policies.

In December 2004, the FASB issued SFAS No. 123R (Revised 2004), “Share-Based Payment” (“SFAS 123R”). This statement addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for the company’s equity instruments or liabilities that are based on the fair value of the company’s equity securities or may be settled by the issuance of these securities. SFAS 123R eliminates the ability to account for share-based compensation using APB 25 and generally requires that such transactions be accounted for using a fair value method. The provisions of this statement are effective for financial statements issued in the first quarter reporting period commencing after December 15, 2005. The stock-based compensation we will recognize after the adoption of SFAS 123R will be affected by the number and type of stock-based awards granted in the future and the pricing model and related assumptions we decide to use in order to estimate the fair values of options.

We will use the Black-Scholes option pricing model to estimate the value of options under SFAS 123R. Because all of our stock options outstanding as of June 30, 2006 were fully vested, we do not anticipate any material impact on our results of operations by the adoption of SFAS 123R.

In February of 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140.”  In March of 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140.”  In June of 2006 FASB Interpretation # 48 was issued by the FASB.  The FIN states that if a tax position is taken by a company that does not meet the more-likely-than-not recognition threshold; the benefit of that position is not recognized in the financial statements.  The Interpretation is effective for fiscal years beginning after December 31, 2006.  These pronouncements have no impact on the company’s financial statements.

2.                                      Earnings Per Common Share

In accordance with SFAS No. 128, “Earnings Per Share,” the basic earnings per common share is calculated by dividing net income available to common stockholders less preferred dividends by the weighted average number of common shares outstanding. Diluted earnings per common share is computed

6




similarly to basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were not anti-dilutive.  

The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method for the three month and six month periods ended June 30, 2006 and 2005.  The following table sets forth the computation of basic and diluted net income per share

(in thousands, except share and per share data)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2005

 

2006

 

2005

 

2006

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

370

 

$

147

 

$

613

 

$

3,439

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

23,312,500

 

23,312,500

 

25,361,819

 

23,312,500

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities

 

522,280

 

509,200

 

525,900

 

511,715

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted calculation

 

 

 

 

 

 

 

 

 

 

 

23,834,780

 

23,821,700

 

25,887,719

 

23,824,215

 

 

 

 

 

 

 

 

 

 

 

Net income per share, basic

 

$

0.02

 

$

0.01

 

$

0.02

 

$

0.15

 

 

 

 

 

 

 

 

 

 

 

Net income per share, diluted

 

$

0.02

 

$

0.01

 

$

0.02

 

$

0.14

 

 

3.                                      Stock Based Compensation

Prior to January 1, 2006, we measured compensation expense to employees for our stock option incentive plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” We did not record employee stock based compensation expense in the Statement of Operations for the three month and six month periods ended June 30, 2005, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amended, SFAS No. 123, we disclosed the pro forma net income and net income per share as if the fair value based method had been applied in measuring compensation expense. The Financial Accounting Standards Board (“FASB”) issued SFAS No. 148 in December 2002 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 expanded the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both

7




annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

The transition provisions of SFAS No. 148 were effective for fiscal years ended after December 15, 2002. The transition provisions did not have an impact on our financial position or results of operations as we did not elect to adopt the fair value-based method of accounting for stock-based employee compensation under SFAS No. 123. The disclosure provisions of SFAS No. 148 were effective for financial statements for interim periods beginning after December 15, 2002. We adopted the disclosure requirements in the first quarter of 2003.

In December 2004, the FASB issued SFAS No. 123R, “Share Based payment: An Amendment of FASB Statements No. 123 and 95.” This statement requires that we recognize in our financial statements the cost resulting from all share- based payment transactions. In addition, in March 2005 the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which provides the SEC staff’s position regarding the application of SFAS 123R and certain SEC rules and regulations, and also provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. On January 1, 2006, we adopted SFAS 123R, which eliminates our ability to account for share-based compensation transactions, as we formerly did, using the intrinsic value method as prescribed by APB 25 and generally requires that we recognize in our statements of operations all share-based payments to employees, including grants of stock options based on their fair values.

The Company adopted SFAS 123R using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. The Company’s financial statements as of and for the three months and six months ended June 30, 2006 reflect the impact of adopting SFAS 123R. In accordance with the modified prospective method, the financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.

There was no stock-based compensation expense recognized during the three months and six months ended June 30, 2006, as we did not grant such compensation during the period. Consequently, there is no effect on our statements of operations as a result of adopting SFAS 123R. Similarly, there in no effect on our statements of operations as a result of the SEC staff’s release of SAB 107. Under SFAS 123R stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Compensation expense for the stock-based payment awards granted subsequent to December 31, 2005, will be based on the grant date fair value estimated in accordance with SFAS 123R. As stock-based compensation expense recognized in the statements of income is based on awards ultimately expected to vest, it will be reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under SFAS 148 for the periods prior to 2006, we did not account for forfeitures, as all options granted were fully vested at the date of grant and were not subject to any service period condition.

Under SFAS 123R, we will continue to use the Black-Scholes model to estimate the fair value of options. Our assessment of the estimated compensation charges will be affected by our stock price as well as assumption regarding a number of subjective variables and the related tax impact. These variables include, but are not limited to, our stock price volatility and employee stock option exercise behaviors.

At June 30, 2006, the Company has one stock-based employee compensation plan (the 2006 Stock Option Plan replacing the 2002 Stock Option Plan and the 2001 Stock Option Plan). The following table illustrates the effect on net income and income per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

8




 

(In thousands, except share and per share data)

 

 

Three Months
Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2005

 

2005

 

Net Income, as reported

 

$

370

 

$

613

 

Compensation recognized under APB 25

 

 

 

Compensation recognized under SFAS 123

 

178

 

178

 

Pro-forma net income (loss)

 

$

192

 

$

435

 

 

 

 

 

 

 

Net Income (loss) per share:

 

 

 

 

 

Basic - as reported

 

$

0.02

 

$

0.03

 

Basic - pro-forma

 

$

0.01

 

$

0.02

 

Diluted - as reported

 

$

0.02

 

$

0.03

 

Diluted - pro-forma

 

$

0.01

 

$

0.02

 

 

 

 

 

 

 

Weighted average number of shares outstanding - basic

 

23,312,500

 

25,361,819

 

 

 

 

 

 

 

Weighted average number of shares outstanding - diluted

 

23,834,780

 

25,887,719

 

 

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

4.                                      Stock Option Plan

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

The following is a summary of stock option activity as of June 30, 2006, and changes during the six months ended June 30, 2006 is presented below:

9




 

Options

 

Shares

 

Weighted-
Average
Exercise Price

 

Weighted
Average
Remaining
Life of
Contract

 

Aggregate
Intrinsic
Value

 

Outstanding at January 1, 2006

 

8,342,000

 

$

5.63

 

 

 

 

 

Granted

 

0

 

 

 

 

 

 

Exercised

 

0

 

 

 

 

 

 

Forfeited

 

0

 

 

 

 

 

 

 

Expired

 

(38,000

)

$

5.38

 

 

 

 

 

Outstanding at June 30, 2006

 

8,304,000

 

$

5.63

 

4.24

 

$

3,054,750

 

Vested at June 30, 2006

 

8,304,000

 

$

5.63

 

 

$

3,054,750

 

Exercisable at June 30, 2006

 

8,304,000

 

$

5.63

 

4.24

 

$

3,054,750

 

 

We did not issue any options in the three months and six months ended June 30, 2006, and no options vested during this period, as all outstanding options were fully vested, and no options were exercised.  Accordingly, no compensation cost has been charged against income for the three months and six months ended June 30, 2006, and there was no recognized tax benefit related thereto.

5. Concentrations

Purchases from two vendors amounted to $2.7million, and $6.4 million representing 25.7% and 30.5% of the total purchases during the three months ended June 30, 2005 and 2006 respectively. Purchases from two vendors amounted to $9.6 million, and $18.8 million representing 40.0% and 40.6% of the total purchases during the six months ended June 30, 2005 and 2006 respectively. Outstanding accounts payable to the two major vendors (net of amounts of post dated checks and LAJ deposit) totaled $3.2 million and $567,000 as of December 31, 2005 and June 30, 2006, respectively. These vendors were holding post-dated checks amounting to $2.5 million and $3.2 million as of December 31, 2005 and June 30, 2006, respectively.  Loss of any of these vendors may have a negative impact on the operations of the Company.

6.                                      Segment and Geographic Information:

Net revenue by geographic area presented based upon the country of destination. No other foreign country represented 10% or more of net revenue for three-month and six-month periods ended June 30, and 2006. Net revenue by geographic area was as follows :

(in thousands, except percentage data)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

2005

 

2006

 

2005

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

14,309

 

79.3

%

$

25,834

 

79.6

%

$

31,171

 

80.4

%

$

54,355

 

81.0

%

International

 

3,744

 

20.7

%

6,602

 

20.4

%

7,602

 

19.6

%

12,774

 

19.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

18,053

 

100.0

%

$

32,436

 

100.0

%

$

38,773

 

100.0

%

$

67,129

 

100.0

%

 

7.                                      Related Party Transactions

During the three months ended June 30, 2005 and 2006, the Company purchased approximately 19.3 % and 19.5 %, respectively, of merchandise from LA Jewelers, Inc.  During the six months ended June 30, 2005 and 2006, the Company purchased approximately 34.2% and 30.8 %, respectively. One of the owners of Los Angeles Jewelers owns 1,200,000 shares of the Company’s common stock as of June 30, 2006.

Our Vice-President of Technology is a major shareholder of Technolect, Inc. which provided technology consulting services to us in the amount of $0 for the three months ended June 30, 2006 and $12,000 in the six months ended June 30, 2006. We own 10% of the common stock of Technolect, Inc.

10




which we acquired for nominal consideration at the inception of Technolect, and have otherwise made no investments in Technolect. As of June 30, 2006, we have a cost basis of $0 in Technolect.

8.             Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business.  Although the Company believes it has defenses to the allegations and intends to pursue them vigorously, currently, management does not currently have sufficient information to assess the validity of the claims or the amount of potential damages.  Company management currently believes, however, that resolution of such legal matters will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.

Yossi Gatlin v. Bidz.com

We are a defendant in a lawsuit brought by Yossi Gatlin in October 2005 for an automobile purchased from us in March 2002 for $28,000. Gatlin alleges that we did not provide prior registration so that Gatlin was not able to register the vehicle. Gatlin is claiming his payment of $28,000, the value of the automobile represented to be $350,000, and loss of the use of the automobile in the amount of $100,000. We have accrued a liability in the amount of $28,000 for this lawsuit.

Cartier v. Bidz.com

We are a defendant in a lawsuit filed by Cartier, and Cartier International, B.V., in the United States District Court Southern District of New York in April 2006. The lawsuit alleges that Cartier has proprietary rights, including trade dress, patents, trademarks, copyrights and others, in watch designs known as a Tank, Tank Francaise, Tank Americaine, Panthere and Pasha De Cartier Grille, and Tank Devan, and further alleges that we have infringed upon those rights by selling watches bearing copies of one or more of the watch designs. We intend to defend the lawsuit vigorously. We do not believe the outcome of the case will have a materially adverse effect on our financial position.

Prior Sales of Securities

From our inception until mid-2003, we raised over $20.5 million in gross equity capital by selling shares of our common stock to approximately 830 investors at prices ranging from $4.00 to $6.00 per share with a weighted average share price of $4.50. We also issued shares of common stock to about 30 persons in exchange for services and other non-cash consideration valued in excess of $5.5 million and issued options to purchase common stock to approximately 250 individuals at a weighted average exercise price of $4.45. After conducting these sales of our securities, we determined that these sales were not exempt from the registration requirements under the Securities Act of 1933 and similar provisions of laws of the states in which our stockholders reside, because certain of our employees who solicited investors engaged in a “general solicitation” of securities. In addition, these employees received compensation for selling our common stock and were required to be licensed as broker-dealers with the Securities and Exchange Commission, or SEC, and various state authorities, but they were not so licensed. We also determined that because investors did not receive information regarding our potential liability for these violations of federal and sate securities laws, the common stock was issued to persons who failed to receive adequate information under federal and state securities laws. In such situations, a number of remedies may be available to regulatory authorities and the investors who purchased common stock in those offerings, including a right of rescission, civil penalties, a restraining order or injunction, and a court order to pay restitution and costs.

If we were ordered to rescind all purchases of our common stock by stockholders not affiliated with us, we could be required to make an aggregate payment to the holders of these shares of up to approximately $20.5 million, in addition to statutory interest of $10.3 million, as of June 30, 2006. We may also be liable for the $5.5 million of services rendered and property exchanged in consideration for the

11




issuance of common stock, in addition to interest of approximately $2.6 million through June 30, 2006. In addition, we may be liable for the $1.3 million that we anticipate offering to non-management optionees. In addition, regulators could impose monetary fines or other sanctions as provided under these laws.

The probability that shareholders would assert a claim against the Company and the extent of the Company’s liability, if any, are contingent on a number of factors, including a shareholder’s desire to rescind his or her purchase, applicable legal precedent and statutes of limitation. There are presently no claims by shareholders against the Company in a material amount. Based on information presently known to management, management does not believe that assertion of such claims in any material amount by the Company’s shareholders is probable. Accordingly, no accruals for either potential amounts payable or reserves have been made at this time.  However, there can be no assurance that the Company will be successful in securing the financing necessary for it to conduct a rescission offer.  An unfavorable outcome in any of these contingencies could have a material adverse impact on the Company’s financial position, results of operations and cash flows.

SFAS 5 par 8 provides that an estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: 1) Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements.  It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.  2) The amount of loss can be reasonably estimated.

The accompanying financial statements do not include any adjustments that might result from the outcome for this uncertainty.

9.       Subsequent Event

On July 12, 2006 the Company entered into a Loan and Security Agreement with LaSalle Retail Finance.  The Agreement provides for a $10 million revolving Line of Credit and the term of the agreement is for four years.  The assets of the Company are pledged as collateral and under certain conditions the maximum amount of the line can be increased to $15 million.

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

The following discussion should be read in conjunction with the financial statements and related notes which appear elsewhere in this form. This discussion contains forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including various risks and uncertainties discussed below and throughout this report.

Overview

We are a leading online retailer of jewelry, featuring a live auction format. We have established our retail brand in the online marketplace by offering high-quality merchandise, a unique user-friendly shopping experience, and the opportunity for buyers to achieve significant cost savings versus traditional retail channels. A key to our success has been our ability efficiently and effectively to source closeout merchandise and rapidly respond to changing consumer demands for certain jewelry. We offer our products through a continuous live format, featuring “no reserve” auctions, a $1 minimum opening bid and a unique 15-second auction extension period that allows our auctions to continue until all bids are received.  The majority of our auctions are short-term, often lasting less than one hour, providing immediate gratification to our customers and encouraging frequent visits and active viewing of our website. Our product inventory includes gold, platinum, and silver jewelry set with diamonds, rubies, emeralds, sapphires, and other precious and semi-precious stones; and watches.  We believe we are the second largest online retailer of jewelry based on revenue and the largest online jewelry auction Internet site based on web traffic.

12




In assessing our business, we consider operational and non-financial performance metrics, such as average selling price per order, average orders per day, average items sold per day, acquisition cost per new buyer, and number of new buyers. We averaged daily sales of approximately 7,730 items or 2,832 orders with an average sales transaction amount per order of $133 in the three month period ended June 30, 2006.

We sell to consumers looking for reliable bargains on jewelry. Because we purchase and retain all of our jewelry inventory onsite, we can provide our customers with timely service and delivery of their purchases. In addition, each item is inspected by one of our trained product specialists prior to its placement on our website, which assures our customers of the quality of our products. We operate in a highly competitive market with low barriers to entry. By selling our own merchandise, we provide a buying environment in which we minimize fraudulent activity and questionable product quality frequently associated with purchase transactions from third-party sellers. We also provide a 15-day return policy on all merchandise. We believe that many of our customers resell merchandise that they purchase from our auctions on eBay, at local auctions, and through other retail channels. Our auctions are conducted 24 hours a day, seven days a week. We also offer 24-hour online customer support.

Critical Accounting Policies

The preparation of our financial statements requires us to make certain estimates and judgments that affect amounts reported and disclosed in our financial statements and related notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following are the critical accounting policies that we believe require significant estimation and judgment.

Revenue Recognition

We derive our revenue from five sources: merchandise sales, commission revenue, advertising revenue, shipping revenue, and auction transaction fee revenue. In accordance with SAB 104, we recognize revenue from all five sources when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped or the service has been rendered and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured.

We recognize merchandise sales upon shipments made to consumers that are fulfilled from our warehouse. We generally require online payment by credit card or other electronic payment methods at the point of sale. We record amounts received or billed prior to shipment of goods to customers as deferred revenue. We reduce gross sales by returns and charge backs from customers.

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

We derive commission’s revenue from sales of Certified Merchant merchandise that is owned by third parties and recognize that revenue when services have been rendered. For commission revenue, we recognize as revenue only the commission portion of the price our customers pay for the purchased products because we are acting as an agent in such transactions. Commissions are also reduced by the impact of returns and other discounts redeemed to obtain such sales.

We recognize advertising revenue, which consists primarily of pop-unders, when the services are rendered and the advertising revenue is known and collectible.

We include auction transaction fee revenue in net revenue. The 3% auction transaction fee is applied to all merchandise sales, including shipping and handling, but not to sales tax or commissions.

13




Inventory Reserve

We record reserves against our inventory for lower of cost or market equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Beginning from the three months ended June 30, 2006 we will only record reserves of 100% of the value of inventory held for more than one year and will no longer record reserves for 50% of the value of inventory held for between six months and one year. If the previous method of estimating reserves had been used, the inventory reserves would have been higher by $138,000.

Return and Allowance Reserve

We estimate potential future product returns related to current period revenue. We analyze historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns reserve and other allowances in any accounting period. If actual returns are greater than our estimates, we will record additional returns and allowances in addition to our estimates, which will result in lower net revenue recorded during that period.

Stock-Based Compensation

Prior to January 1, 2006, we measured compensation expense to employees for our stock option incentive plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Utilizing the intrinsic value method prescribed by APB No. 25, we did not record compensation expense when stock options were granted to eligible participants as long as the exercise price was not less than the fair market value of the stock when the option was granted.

We recorded stock-based compensation representing the difference between the option exercise price and the deemed fair value of our common stock on the grant date for financial reporting purposes. We determined the deemed fair value of our common stock based upon the most recent third-party sale of our common stock known to us. Had different assumptions or criteria been used to determine the deemed fair value of our common stock, different amounts of stock-based compensation could have been reported.

In accordance with Statement of Financial Accounting Standards (‘‘SFAS’’) No. 123, ‘‘Accounting for Stock-Based Compensation,’’ and SFAS No. 148, ‘‘Accounting for Stock-Based Compensation-Transition and Disclosure,’’ which amended SFAS No. 123, we disclosed pro forma net income and net income per share as if the fair value based method had been applied in measuring compensation expense. The disclosure provisions of SFAS No. 148 were effective for financial statements for interim periods beginning after December 15, 2002. We adopted the disclosure requirements in the first quarter of 2003. This information is contained in Note 1 to our financial statements. The fair values of options and shares issued pursuant to our option plan at each grant date were estimated using the Black-Scholes option pricing model. Because there has been no public market for our common stock, we used the minimum value method in determining the expected volatility of our common stock was zero. The transition provisions did not have an impact on our financial position or results of operations as we did not elect to adopt the fair value-based method of accounting for stock-based employee compensation under SFAS No. 123.

On January 1, 2006, we adopted SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’) requiring that share-based payment transactions be recognized in the financial statements based on the fair value of the equity or liability instrument issued. We intend to use the Black-Scholes option pricing model to estimate the value of our options in implementing SFAS 123R and will use the calculated method to determine expected volatility, rather than the minimum value method, which we previously used to determine expected volatility. Under SFAS 123R stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Accordingly, stock-based compensation expense recognized in the statements of income will be reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and

14




revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under SFAS 148 for the period prior to 2006, we did not account for forfeitures, as all options granted were fully vested at the date of grant and were not subject to any service period conditions. We expensed stock-based compensation on the date of grant, as all options granted prior to January 1, 2006, vested immediately. In the future, we anticipate that stock-based compensation will include vesting provisions and therefore stock-based compensation expense in the future will be reduced for estimated forfeitures.

We adopted SFAS 123R using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. Under this transition method, we are required to recognize compensation cost beginning January 1, 2006 for the portion of outstanding awards for which the requisite service has been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for our pro forma disclosures. As of June 30, 2006, all stock options outstanding were fully vested, and we did not issue any stock-based payment awards in the three months and six months ended June 30, 2006. Therefore, the adoption of SFAS 123R did not affect our results of operations. In accordance with the modified prospective method, the financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.

  Description of Our Revenue, Costs, and Expenses

The following table presents our historical results of operations for the periods indicated as a percentage of net revenue.

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2005

 

2006

 

2005

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Gross Profit

 

20.1

%

23.7

%

19.0

%

25.1

%

Operating Expenses:

 

 

 

 

 

 

 

 

 

General & Administrative

 

13.9

%

10.6

%

13.1

%

10.1

%

Sales & Marketing

 

4.0

%

8.8

%

4.1

%

7.8

%

Pre-IPO costs

 

 

3.8

%

 

1.8

%

Depreciation & Amortization

 

0.2

%

0.2

%

0.2

%

0.2

%

Total Operating Expenses

 

18.1

%

23.4

%

17.4

%

19.9

%

Profit from Operations

 

2.0

%

0.3

%

1.6

%

5.2

%

Interest income

 

 

0.1

%

 

0.1

%

Income tax expense

 

 

0.0

%

 

0.1

%

Net Income

 

2.0

%

0.4

%

1.6

%

5.2

%

 

Net Revenue

Substantially all of our net revenue consists of jewelry sold via the Internet, net of returns. We also generate net revenue from shipping and handling, transaction fee revenue, commissions from Certified Merchants, and advertising revenue.

The following table presents our sources of revenue for the periods indicated as a percentage of net revenue.

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2005

 

2006

 

2005

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

Merchandise sales

 

90.6

%

84.8

%

90.5

%

84.9

%

Shipping & handling

 

9.1

%

12.1

%

9.1

%

11.9

%

Transaction fees

 

 

3.1

%

 

3.1

%

Commissions

 

0.3

%

0.0

%

0.4

%

0.1

%

Advertising

 

0.0

%

0.0

%

0.0

%

0.0

%

Total Net Sales

 

100.0

%

100.0

%

100.0

%

100.0

%

 

15




In November 2005, we implemented a 3% transaction fee on all sales. The transaction fee is applied to all merchandise sales, including shipping and handling, but not to sales tax or commissions.

Gross Profit

Our gross profit consists of net revenue less the cost of sales. Our cost of sales consists of the cost of merchandise sold to customers, inbound and outbound shipping costs, shipping supplies, insurance on shipments, and credit card and other transaction fees associated with payments.

General and Administrative Expenses

Our general and administrative expenses consist primarily of payroll and related benefit costs for our employees. These expenses also include fulfillment, customer service, technology, professional fees, other general corporate expenses, and stock-based compensation, consisting substantially of stock option grants and stock grants to employees and consultants. We anticipate that our compensation expense under SFAS No. 123(R) will increase in future periods.

Sales and Marketing Expenses

Our marketing expenses consist primarily of costs associated with paid website searches, contextual marketing, e-mail campaigns, affiliate programs and optimization services. These marketing programs, which are designed to drive buyers to our website, are the most important factor in increasing demand for our jewelry products and increasing net revenue.

Public offering costs

These costs consist primarily of regulatory filing fees, accountant fees, legal fees and printing expenses incurred in the planned initial public offering.

Comparison of Three Months Ended June 30, 2005 to Three Months Ended June 30, 2006

Net income in the three months ended June 30, 2006 was $147,000, or $0.01 per basic and diluted share. In the three months ended June 30, 2005, net income was $370,000 and net income per basic and diluted share was $0.02.  Net revenue increased by 79.7 % in the three months ended June 30, 2006 compared to the three months ended June 30, 2005 while the net income decreased by 60.3% over the same period.  The decrease in net income was due to the expensing of pre-IPO costs of $1.2 million offset by increased revenue and improved profit margins.  Gross profit margin in the second quarter of 2006 was 23.7 % compared to 20.1% in the second quarter of 2005.

Net Revenue

Net revenue increased 79.7% to $32.4 million in the three months ended June 30, 2006 from $18.1 million in the three months ended June 30, 2005. This increase in net revenue was due primarily to the increase in registered buyers at our website, growth in demand for our jewelry products and the increase

16




in average dollar amount per order. In the three month period ended June 30, 2006 we stopped charging commissions for Certified Merchants that sell on our website, and we do not expect that this change in policy will materially affect our results of operations. 

Gross Profit

 Gross profit increased 112 % to $ 7.7 million in the three months ended June 30, 2006 from $3.6 million in the three months ended June 30, 2005.  The increase in gross profit resulted from the increase in gross profit as a percentage of net sales to 23.7 % for the three months ended June 30, 2006 compared to 20.1% for the three months ended June 30, 2005 and from the increase in sales revenue which rose by $14.3 million for the three months ended June 30, 2006 from the three months ended June 30, 2005. The implementation of transaction fee charges of 3.0% since November 2005 has improved gross profit performance in the current three month period ended June 30, 2006.

 General and Administrative Expenses

 General and administrative expenses increased 37.6 % to $3.4 million in the three months ended June 30, 2006 from $2.5 million in three months ended June 30, 2005. The increase in general and administrative expenses was due in general to our overall growth and specifically in payroll and payroll related expenses which increased by $0.5 million over the period.

Sales & Marketing Expenses

Sales and marketing expenses increased 297% to $2.8 million in the three months ended June 30, 2006 from $714,000 in the three months ended June 30, 2005. This increase resulted primarily from increased marketing campaigns and the increased cost of online advertising to attract new buyers. Sales and marketing expenses as a percentage of net revenue increased to 8.8% in the three months ended June 30, 2006 from 4.0% in 2005. We expect our sales and marketing expenses to continue to increase in absolute dollars, as we intend to continue increasing our online marketing campaign in order to attract new customers. 

Public offering costs

On June 29, 2006, we decided to postpone our initial public offering in order to reduce the initial public offering overhang (shares available for sale following the initial public offering) by requesting that our shareholders enter into a lock-up agreement for a period of 180 days.  Accordingly, in June 2006, we expensed $1.2 million, consisting of offering costs related to the planned initial public offering.

Comparison of Six Months Ended June 30, 2005 to Six Months Ended June 30, 2006

Net income in the six months ended June 30, 2006 was $3.4 million, or $0.15 per basic and $0.14 per diluted share.  In the six months ended June 30, 2005, net income was $0.6 million and net income per basic and diluted share was $0.02.  Net revenue increased by 73.1 % in the six months ended June 30, 2006 compared to the six months ended June 30, 2005, and net income increased by 461 % over the same period.

Net Revenue

Net revenue increased 73.1 % to $ 67.1 million in the six months ended June 30, 2006 from $38.8 million in the six months ended June 30, 2005 This increase in net revenue was due primarily to the increase in registered buyers at our website, growth in demand for our jewelry products and the increase in average dollar amount per order. In the second quarter of 2006 we stopped charging commissions for Certifed Merchants that sell on our website, and we do not expect this change in policy will materially affect our results of operations. 

17




Gross Profit

Gross profit increased 129% to $16.9 million in the six months ended June 30, 2006 from $7.4 million in the six months ended June 30, 2005 The increase in gross profit resulted from the increase in gross profit as a percentage of net sales to 25.1 % for the six months ended June 30, 2006 compared to 19.0% for the six months ended June 30, 2005 and from the increase in net revenue which rose by $28.3 million for the six months ended June 30, 2005 from the six months ended June 30, 2005. The implementation of transaction fee charges of 3.0% since November 2005 has improved gross profit performance in the current six month period ended June 30, 2006.

General and Administrative Expenses

General and administrative expenses increased 33.5 % to $6.8 million in the six months ended June 30, 2006 from $5.1 million in the six months ended June 30, 2005. The increase in general and administrative expenses was primarily due to the increase in payroll and payroll related expenses which increased by $1.1million.

Sales & Marketing Expenses

Sales and marketing expenses increased 230 % to $5.2 million in the six months ended June 30, 2006 from $1.6 million in the six months ended June 30, 2005.  The increase in sales and marketing expenses was attributable to increased marketing campaigns and to the increased cost of such online marketing this period relative to the corresponding period last year. Sales and marketing expenses as a percentage of net revenue increased to 7.8% in the six months ended June 30, 2006 from 4.1% in 2005. We expect our sales and marketing expenses to continue to increase in absolute dollars, as we intend to continue increasing our online marketing campaign in order to attract new customers. 

Public offering costs

On June 29, 2006, we decided to postpone our initial public offering in order to reduce the initial public offering overhang (shares available for sale following the initial public offering) by requesting that our shareholders enter into a lock-up agreement for a period of 180 days.  Accordingly, in June 2006, we expensed $1.2 million, consisting of offering costs related to an initial public offering.

Additional Quarterly Data

 

Three Months Ended June 30,

 

 

 

2005

 

2006

 

Average sales amount per order (gross)

 

$

106

 

$

133

 

Average orders per day

 

2,381

 

2,832

 

Average items sold per day

 

6,699

 

7,730

 

Acquisition cost per new buyer

 

$

30

 

$

49

 

Number of new buyers

 

22,651

 

57,520

 

 

Liquidity and Capital Resources

Since inception, we have funded our operations through the sale of equity securities and cash generated from operations. The significant components of our working capital are inventory and liquid assets such as cash and accounts receivable, reduced by post-dated check financing, accounts payable, accrued expenses and deferred revenue. Our business model contains beneficial working capital characteristics: while we collect cash from sales to customers within several business days of the related sale, we typically have extended payment terms with our suppliers.

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As of June 30, 2006, we had a working capital surplus of $4.5 million and have no short or long-term debt obligations. The “post-dated check financing” reflected on our balance sheets results from post-dated checks outstanding. It is customary for our vendors to accept checks post-dated by 60 days as extended payment for purchase of merchandise.

Net cash provided by operating activities was $228,000 in the six months ended June 30, 2006 compared to net cash provided of $130,000 in the six months ended June 30, 2005. The net cash in the six months ended June 30, 2006 was affected mainly by changes in net income, inventories, post-dated check financing, accounts payable, accrued expenses and deferred revenue. The net cash in the six months ended June 30, 2005 was affected mainly by changes in net income, inventories, post-dated check financing and accounts payable. We recorded net income of $3.4 million in the six months ended June 30, 2006 compared to $613,000 in the six months ended June 30, 2005. Cash flows from net income were used to meet our working capital requirements. In the six months ended June 30, 2006, inventories increased by $824,000, post-dated check financing decreased by $613,000, accounts payable decreased by $2.6 million, accrued expenses increased by $1.2 million and deferred revenue decreased by $686,000. In the six months ended June 30, 2005, inventories decreased by $3.7 million, post-dated check financing decreased by $1.7 million and accounts payable decreased by $1.6 million. Inventories and accounts payable generally increase in line with sales growth and changes in our inventory strategy. Our inventory strategy is influenced by our ability to secure inventory that we believe will improve our margins.

Net cash used in investing activities was $234,000 in the six months ended June 30, 2006 compared to $125,000 in the six months ended June 30, 2005. During the six months ended June 30, 2006, net cash used for investing activities was related to capital expenditures mainly for computer equipment and in the six months ended June 30, 2005 was related to capital expenditures mainly for office and computer equipment.

We believe that cash and cash equivalents currently on hand, cash flows from operations and the availability of a $10 million revolving line of credit will be sufficient to continue our operations and to pursue our growth strategy for the foreseeable future. Our future capital requirements will depend on many factors, including the rate of our revenue growth; the timing and extent of spending to enhance our website, network infrastructure, and transaction processing systems; the extent of our advertising and marketing programs; the levels of the inventory we carry; and other factors relating to our business. Enhancement of our website, network infrastructure, and transaction processing systems will require us to spend significantly more than we have in the past. Moreover, to date our spending in these areas has been lower than industry averages. We anticipate increasing our system expenditures to accommodate these needs in the future. We may require additional financing in the future in order to execute our operating plan. We cannot predict whether this additional financing will be in the form of equity, debt, or a combination of debt or equity. We may not be able to obtain any necessary additional funds on a timely basis, on acceptable terms, or at all.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates.  We do not believe that a change in market interest rates would have a material effect on our results of operations or financial condition.  Although we derive a portion of our sales outside of the United States, all of our sales are denominated in U.S. Dollars.  We have limited exposure to financial market risks, including changes in interest rates and foreign currency exchange rates.

ITEM 4 - CONTROLS AND PROCEDURES

The Company conducted an internal evaluation of its disclosure, controls, and procedures as of the end of the period covered by this report under the supervision and with the participation of management, including David Zinberg, President and Chief Executive Officer (CEO), and Lawrence Kong, Chief Financial Officer (CFO). Based upon that evaluation, the CEO and CFO concluded that the Company’s

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disclosure controls and procedures were effective to provide reasonable assurance to the officers that they have been provided, on a timely basis, all material information necessary for them to determine that the Company has disclosed all material information required to be included in the Company’s periodic reports filed with the Securities and Exchange Commission.  Based upon the officers’ evaluation, there were not any significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Yossi Gatlin v. Bidz.com

We are a defendant in a lawsuit brought by Yossi Gatlin in October 2005 for an automobile purchased from us in March 2002 for $28,000. Gatlin alleges that we did not provide prior registration so that Gatlin was not able to register the vehicle. Gatlin is claiming his payment of $28,000, the value of the automobile represented to be $350,000, and loss of the use of the automobile in the amount of $100,000. We have accrued a liability in the amount of $28,000 for this lawsuit.

Cartier v. Bidz.com

We are a defendant in a lawsuit filed by Cartier, and Cartier International, B.V., in the United States District Court Southern District of New York in April 2006. The lawsuit alleges that Cartier has proprietary rights, including trade dress, patents, trademarks, copyrights and others, in watch designs known as a Tank, Tank Francaise, Tank Americaine, Panthere and Pasha De Cartier Grille, and Tank Devan, and further alleges that we have infringed upon those rights by selling watches bearing copies of one or more of the watch designs.  We intend to defend the lawsuit vigorously. We do not believe the outcome of the case will have a materially adverse effect on our financial position.

ITEM 1.A. RISK FACTORS

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

Our net revenue depends to a significant extent on the number of customers who visit our website to purchase merchandise and the dollar amount of their purchases. Generating increased traffic to our website and converting that traffic into buyers requires us to achieve effective results from our marketing campaigns; offer a wide variety of products that our customers can purchase at favorable prices; maintain a user-friendly shopping experience; ensure the satisfactory availability, performance, and reliability of our website, network infrastructure, and transaction processing systems; and provide high-quality customer service. Our business will be harmed if we are unable to increase our customer base and the dollar volume of the orders customers place with us.

We do not have a guaranteed supply of jewelry products, and we have a heavy concentration of inventory purchases from our top five suppliers.

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

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In addition, we have a heavy concentration of inventory purchases from a small number of suppliers. Our top five suppliers accounted for approximately 40.1% and 51.1% of our total purchases in the three months ended June 30, 2005, and 2006, respectively. In the three months ended June 30, 2005 and 2006, we purchased 19.3% and 19.5%, respectively, of our merchandise from Los Angeles Jewelers, Inc., a jewelry manufacturer and liquidator.

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

Any problems with the availability, performance, or reliability of our website, network infrastructure, or transaction processing systems could result in decreased customer traffic, reduced orders, reduced order fulfillment performance, and lower net revenue as well as negative publicity and damage to our reputation. In order to remain competitive, we must continually seek to improve and expand the functionality and features of our website, network infrastructure, transaction processing systems, and delivery and shipping functions to accommodate any substantial increase in the volume of traffic to and orders from our website. We may not be successful in these efforts, and we may 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 our website, 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 in part on third parties for such availability, performance, and reliability.

We may face increasing costs to acquire new customers.

The acquisition of new customers is a key factor in increasing demand for our jewelry products and increasing our revenue. We currently attract new customers by driving traffic to our website using a marketing and advertising strategy that includes targeted keyword searches, portal and website advertising, participation in affiliate programs, and direct advertising. We do not maintain long-term contracts or arrangements with any companies, including any search engines, Internet portals, or other websites, and we may not successfully enter into additional relationships or maintain existing ones. Recently, we have experienced significantly higher rates for keyword search advertising. We expect that we will have to pay increasing fees to maintain, expand, or enter into new relationships with third-party search engines, Internet portals, and websites. In addition, traffic to our website could decline if our online marketing programs become less effective or the traffic decreases to the search engines, Internet portals, and websites with which we advertise. Our business could be materially and adversely affected if any substantial number of companies on which we advertise experience financial or operational difficulties or experience other corporate developments that adversely affect their performance. A failure to maintain or expand existing online advertising relationships or to establish additional online advertising relationships that generate a significant amount of traffic from other websites could result in decreased sales or limit the growth of our business.

Competition from online auctioneers and other online companies with greater brand recognition may adversely affect our sales.

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

We currently compete with a number of other companies, and other competitors may appear in the future. Our competitors currently include various online auction services and retailers that offer jewelry, including eBay, Odimo, Blue Nile, Overstock, and uBid. We also encounter competition from national jewelry retail chains, such as Zales, Kay Jewelers, and Finlay Fine Jewelry, and mass retailers and other enterprises that sell jewelry, such as Wal-Mart, Target, J. C. Penney, Costco, QVC, and Home Shopping Network. Many of our competitors have greater brand recognition, longer operating histories, larger customer bases, and significantly greater financial, marketing, and other resources than we do. Smaller competitors may enter

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into strategic or commercial relationships with larger, more established, and well-financed companies. Other competitors may enter into exclusive distribution agreements with our suppliers that deny us access to suppliers’ products. Competitors may also devote greater resources to marketing and promotional campaigns and to website and systems technology than we do. We may not be able to compete successfully against current and future competitors or address increased competitive pressures.

Furthermore, attempts have been made in the past to develop and market synthetic stones and gems to compete in the market for gemstones and gemstone jewelry. We expect such efforts to continue in the future. If any such efforts are successful in creating widespread demand for synthetic or alternative gemstone products, demand and price levels for our products could decline and our business and results of operations would be substantially harmed.

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

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

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

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

Because we carry all of our jewelry products in inventory, our net revenue and gross margin may decrease if we are unable to predict and plan for changes in consumer demand.

We had $16.6 million in inventory as of June 30, 2006. If our sales increase, we will be required to increase our inventory proportionately. Consumer tastes and preferences for jewelry products can change rapidly, thereby exposing us to significant inventory risks. Currently, because the products we sell typically consist of closeout merchandise from manufacturers, distributors, and other suppliers, we have less control over the specific items that we offer for sale than we would if we primarily ordered goods for manufacture for us. In addition, it is important that we are able to purchase jewelry that we perceive to be in demand. The demand for specific products can change between the time we order items and when we sell them. As a result, we may be required to take significant inventory markdowns, which could reduce our gross margin, if we do not accurately predict these trends or if we overstock unpopular merchandise.

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

We rely on suppliers to deliver our orders promptly, which we then carry in inventory to ensure availability and expedited delivery to our customers. We also rely on third-party carriers to ship our products to our customers. As a result, we are subject to various risks, including employee strikes and inclement weather, associated with the ability of third-party carriers to provide delivery services to meet our shipping needs and those of our suppliers. The failure of our suppliers and third-party carriers to deliver products to us or

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our customers in a timely manner or otherwise to serve us or our customers adequately would damage our reputation and brand and substantially harm our business and results of operations.

Increases in the cost of precious metals and precious and semi-precious stones would increase the cost of our jewelry products.

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

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

Our business depends in part on the efficient and uninterrupted operation of our computer and communications hardware. The servers and other hardware necessary to operate our website, including our auction and bidding systems, are located at a single third-party co-location facility in downtown Los Angeles. We rely on that facility to provide Internet access with the speed, capacity, and reliability we require. Our servers and other hardware that run our transaction processing, order fulfillment, and office administration tasks are located at our headquarters. Our servers and other hardware are vulnerable to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquakes, and similar events. We do not currently have redundant systems in multiple locations or a formal disaster recovery plan, and our business interruption insurance may be insufficient to compensate us for any losses that may occur. In addition, our servers are vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, which could lead to interruptions, delays, loss of critical data, the inability to accept and fulfill customer orders, or the unauthorized disclosure of confidential customer data. System disruptions or failures would also create a large number of customer questions and complaints that need to be addressed by our customer service support personnel. The occurrence of any of the foregoing risks could substantially harm our business and results of operations. Our systems are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, and similar events.

We may not be able to increase our capacity or respond to rapid technological changes in a timely manner or without service interruptions, which may harm our business.

We may not be able to accommodate any substantial growth in traffic or user demand on our website, network infrastructure, and transaction processing systems in a timely manner or without substantial costs. If we are unable to upgrade our existing technology, network infrastructure, and transaction processing systems to accommodate any increased sales volume, our potential customers may be dissatisfied and may purchase merchandise from our competitors. We may also fail to provide enough capacity in our customer service and sales support functions to provide a high level of customer service. A failure to implement new systems and increase customer service capacity effectively could adversely affect our sales. Enhancement of our website, network infrastructure, and transaction processing systems will require us to spend a significantly higher amount than we have in the past. Moreover, to date our spending in these areas as a percentage of revenue has been lower than industry averages. We anticipate increasing our system expenditures to accommodate these needs in the future.

We also intend to introduce additional or enhanced features and services to retain current customers and attract new customers to our website. We may experience difficulties that could delay or prevent us from introducing new features and services. If we introduce a feature or a service that is not favorably received,

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our current customers may not use our website as frequently and we may not be successful in attracting new customers. These new features or services also may contain errors that are discovered only after their introduction, and we may need to modify significantly the design of these features or services to correct errors.

Our growth will depend on our ability to increase the popularity of our website, and we may not be able to do so effectively.

We believe that continuing to increase the popularity of our website will be critical to expanding our business. Promoting and positioning our website will depend largely on the success of our marketing efforts and our ability to provide a variety and sufficient quantity of high-quality products at attractive prices in a convenient manner. Promoting our website will require us to increase our marketing budget and otherwise increase our financial commitment to creating and maintaining brand loyalty among users. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our website popularity and our brand. If we do attract new users to our website, they may not conduct transactions on a frequent basis or in sufficient dollar amounts. If we fail to promote and maintain our website or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our business would be harmed.

We anticipate expanding our international sales activities, causing our business to become increasingly susceptible to numerous risks that could affect our profitability.

In 2005, and in the six months ended June 30, 2006, 19.2% and 19.0%, respectively, of our net revenue was generated by shipments to customers outside of the United States. We plan, over time, to expand our reach into international markets. We do not, however, currently have any overseas fulfillment, distribution, or server facilities or any website content localized for foreign markets. We cannot be certain that we will be able to expand our global presence. In addition, there are certain risks associated with doing business on an international basis, including regulatory requirements, legal uncertainty regarding liability, tariffs, and other trade barriers, longer payment cycles, and potentially adverse tax consequences, any of which could adversely affect our business. Although our foreign sales historically have been denominated in U.S. dollars, we also may be subject to increased risks relating to foreign currency exchange rate fluctuations to the extent we decide to denominate our sales in foreign currencies.

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

Our success depends on the continued growth and maintenance of the Internet. The Internet has experienced, and is likely to continue to experience, significant growth in the numbers of users and amount of traffic. If Internet usage continues to grow as anticipated, the infrastructure may not be able to support the level of usage and its performance and reliability may decline. If outages or delays on the Internet increase, overall Internet usage could grow more slowly or decline. In addition, the performance of the Internet may be harmed by increased number of users or bandwidth requirements or by viruses, worms, and similar issues. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage.

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

The business of buying and selling goods over the Internet is relatively new and dynamic. Our success depends on the widespread acceptance and use of the Internet as an effective medium for commerce by consumers. The acceptance and use of the Internet may not continue to expand as expected, and a sufficient broad base of consumers necessary for its continued growth may not adopt the Internet as a medium for commerce.

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Consumers who historically have used traditional means of commerce may have concerns about privacy, the inability to physically inspect merchandise before buying, delivery time, product damage during shipment, and the costs and inconvenience involved in returning purchased items, which may inhibit their crossover to e-commerce. In order to expand our user base, we must appeal to and acquire consumers who historically have used traditional means of commerce to purchase goods. If these new customers execute fewer or lower dollar amounts of orders than our historical users, and we are unable to gain efficiencies in our operating costs, including the cost of acquiring new customers, our business and profits could be adversely affected.

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

A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. Third parties may have the technology or expertise to breach the security of customer transaction data. Our security measures may not prevent security breaches that could result in substantial harm to our business and results of operations and damage to our reputation. Currently, a majority of our sales are billed to our customers’ credit card accounts directly. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain cardholder signatures. We rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information, including credit card numbers. We do not currently carry insurance against this risk. Advances in computer capabilities, new discoveries in the field of cryptography, or other developments may result in a compromise or breach of the technology we use to protect customer transaction data. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. Any such compromise of our security could damage our reputation and brand and expose us to a risk of loss or litigation and possible liability, which would substantially harm our business and results of operations.

We are vulnerable to fraudulent activities on our website, including unauthorized use of customer information and identity theft by third parties.

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

Increased product returns and the failure to predict product returns could substantially harm our business and results of operations.

As we expand our business and product offerings, rates of product return may increase. Any significant increase in product returns above our return assumptions and allowances could substantially harm our business and results of operations.

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 products from inventory or during shipment.

All of our inventory 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 or loss of all or a significant portion of our inventory could cause significant delays

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in shipment of goods to our customers, resulting in negative publicity about and diminished customer confidence in our website. In addition, we may experience theft of our products while they are being held in inventory or during the course of their shipment to our customers by third-party carriers. We have implemented security measures to prevent such theft and maintain insurance to cover losses resulting from theft. Nevertheless, we could incur significant losses from theft, which would substantially harm our business and results of operations, if our security measures fail, losses exceed our insurance coverage, or we are not able to maintain insurance at a reasonable cost.

Customer complaints or negative publicity about our customer service could adversely affect our reputation and, as a result, our business could suffer.

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

Increases in credit card processing fees could increase our costs.

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

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

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

We incurred losses from operations prior to fiscal 2004 and have accumulated a significant deficit.

Prior to fiscal year 2004 we experienced significant operating losses. At June 30, 2006, we had an accumulated deficit of $23.5 million. We cannot be certain that the improvements in our operations resulting since 2004 will continue in the future. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and Capital Resources.”

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

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

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Seasonal fluctuations in our net revenue could cause our quarterly results to fluctuate and cause our results of operations to be below expectations.

Historically, sales in the jewelry industry are seasonal and have been higher in the fourth quarter of the calendar year as a result of higher consumer spending during the December holiday season. Approximately 26.0%, 29.3%, and 33.9% of our net revenue in 2003, 2004, and 2005, respectively, was generated during the fourth quarter. As we continue to grow, we expect to experience more pronounced seasonal fluctuations in our net revenue and anticipate a disproportionate amount of our revenue will occur in the fourth quarter. In anticipation of any increased sales activity during the fourth quarter, we may incur significant additional expenses, including higher sales and marketing costs and additional staffing in our fulfillment and customer support operations. If we were to experience lower than expected sales during any future fourth quarter, it would have a disproportionately large impact on our results of operations for that year. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel and fulfillment activities, and may cause a shortfall in sales compared with expenses in a given period, which would substantially harm our business and results of operations.

Sales growth in prior periods may not be indicative of our future growth.

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

We have grown quickly, and our business will suffer if we fail to manage our growth.

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

Descriptions of our jewelry items are not guarantees and may confuse, mislead, or disappoint our customers.

In an effort to provide accurate descriptions of jewelry posted on our website, we provide appraisal summaries from third-party gemological laboratories for some of our jewelry items. All other jewelry and watch descriptions are provided by our full-time Gemological Institute of America, or GIA, trained gemologists and several experienced product specialists. Nevertheless, there is a subjective component involved with respect to assessing the clarity, color, and carat characteristics of diamonds and other gemstones. In addition, mistakes or omissions of important information in our descriptions may occur. Even if our descriptions are accurate, buying a product online may lead to disappointment resulting in returned merchandise. For example, a customer may determine that a piece does not have the expected look, feel, and overall appearance of the merchandise 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 “Close Now” prices for jewelry items listed on our website. Compare and Close Now prices are not meant to reflect fair market values or manufacturer suggested retail prices, and in fact, may be higher than prices found in local retail stores. As a consequence, perceived misrepresentations in item descriptions by disappointed buyers may occur, resulting in negative publicity about and diminished customer confidence in our website.

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We may not be able to maintain our domain name uniqueness.

Our Internet domain name is critical to our success. Under current domain name registration 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 nor have we registered our name in any other jurisdiction. As a result, third parties may use domain names that are similar to our domain name, which may result in confusion to potential customers and lost sales. We are aware that other businesses have registered the name “bidz” with other suffixes and in other countries.

We may be unable to protect or enforce our own intellectual property rights adequately, and we may become subject to intellectual property litigation.

We regard the protection of our trademarks, copyrights, domain name, trade dress, and trade secrets as critical to our success. We rely on a combination of common law as well as trademark, copyright, trade dress, and trade secret laws to protect our intellectual property rights. We also have entered into confidentiality and invention assignment agreements with our employees and contractors and nondisclosure agreements with parties with whom we conduct business in order to limit access to and disclosure of our proprietary information. These contractual arrangements and other steps we have taken to protect our intellectual property may not prevent misappropriation of our intellectual property or deter independent development of similar intellectual property by others. We also are pursuing the registration of our domain name, trademarks, and service marks in the United States and internationally. Effective trademark, copyright, patent, trade dress, trade secret, and domain name protection is very expensive to maintain and may require litigation. We must protect our trademarks, copyrights, patents, and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful in every location.

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

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

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

Various legal rules and regulations related to privacy and the collection, dissemination, and security of personal information may adversely affect our marketing efforts.

We are subject to increasing regulation at the federal, state, and international levels relating to privacy and the use of personal user information designed to protect the privacy of personally identifiable information as well as to protect against its misuse. These laws include the Federal Trade Commission Act, the CAN-SPAM Act of 2003, the Children’s Online Privacy Protection Act, the Fair Credit Reporting Act, the Homeland Security Act, and related regulations. Several states have proposed legislation that would limit the use of personal information gathered online or require online services to establish privacy policies. Moreover, proposed legislation in the United States and existing laws in foreign countries require companies to establish procedures to notify users of privacy and security policies, obtain consent from users for collection and use of personal information, and/or provide users with the ability to access, correct, and delete personal information stored by companies. These regulations and other laws, rules, and

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regulations enacted in the future may adversely affect our ability to collect, disseminate, or share demographic and personal information about users and our ability to e-mail or telephone users, which could be costly and adversely affect our marketing efforts.

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

In accordance with current industry practice and our interpretation of current law, we do not currently collect sales or other taxes with respect to shipments of goods into states other than California. However, one or more states or foreign countries may seek to impose sales or other tax obligations on us in the future. A successful assertion by one or more states or foreign countries that we should be collecting sales or other taxes on the sale of our products could result in substantial tax liabilities for past and future sales, discourage customers from purchasing products from us, decrease our ability to compete with traditional retailers, and otherwise substantially harm our business, financial condition, and results of operations.

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

Numerous states and foreign jurisdictions, including California, where our headquarters is located, have regulations regarding how auctions may be conducted and the liability of auctioneers in conducting such auctions. No final legal determination has been made whether the California regulations apply to our business, and little precedent exists in this area. Several states and some foreign jurisdictions have attempted, and may attempt in the future, to impose regulations that could affect us or our users, which could harm our business.

We are subject to regulations relating to consumer privacy, which could increase the cost of our doing business, expose us to litigation costs, increase our service or delivery costs, and otherwise harm our business.

Several states have proposed, and California, Minnesota, Utah, and Vermont have recently passed, legislation that would limit the uses of personal user information gathered online or offline. Many states already have such laws and continually consider strengthening them, especially against online services. However, the Fair Credit Reporting Act, or FCRA, a federal statute enacted in 1970 to protect consumer privacy, includes a provision preempting conflicting state laws on the sharing of information between corporate affiliates. The preemptive provisions of FCRA were permanently extended in 2002, thereby ensuring that we are not subject to the laws of each individual state with respect to matters within the scope of FCRA, but remain subject to the other provisions of FCRA.

The Federal Trade Commission also has settled several proceedings against companies regarding the manner in which personal information is collected from users and provided to third parties. Specific statutes intended to protect user privacy have been passed in many foreign jurisdictions. Compliance with these laws, given the tight integration of our systems across different countries and the need to move data to facilitate transactions among our users, such as payment companies and shipping companies, is both necessary and difficult. Failure to comply could subject us to lawsuits, fines, criminal penalties, statutory damages, adverse publicity, and other losses that could harm our business. Changes to existing laws or the passage of new laws intended to address these issues could directly affect the way we do business or could create uncertainty on the use of the Internet. This could reduce demand for our products, increase the cost of our doing business, expose us to litigation costs, increase our service or delivery costs, or otherwise harm our business.

New and existing regulations could harm our business.

We are subject to the same foreign and domestic laws as other companies conducting both online and offline business. There are still relatively few laws specifically directed towards online business. However,

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due to the increasing popularity and use of the Internet and online services, many laws relating to the 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 laws and 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 as property ownership, copyrights and other intellectual property issues, taxation, libel and defamation, obscenity, and personal privacy is uncertain. The vast majority of these laws was adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Those laws that do reference the Internet, such as the U.S. Digital Millennium Copyright Act and the European Union’s Directive on Distance Selling and Electronic Commerce, have only recently begun to be interpreted by the courts and implemented by the European Union member states, so their applicability and scope remain uncertain. As our activities and the types of goods listed on our website expand, regulatory agencies may claim that we or our users are subject to licensure in their jurisdiction, either with respect to our business in general, or in order to allow the sale of certain items, such as real estate, event tickets, boats, and automobiles.

In addition, because our products are available over the Internet in multiple states and because we sell merchandise to consumers residing in multiple states, we could be required to qualify to do business as a foreign corporation in each state in which our products are available. Our failure to qualify as a foreign corporation in a jurisdiction in which we are required to do so could subject us to penalties. Any new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business could have a material adverse affect on our business.

We depend to a very significant extent on David Zinberg, our Chairman of the Board, President, and Chief Executive Officer.

Our performance depends substantially upon David Zinberg, our Chairman of the Board, President, and Chief Executive Officer, who has extensive experience with the purchase and sale of jewelry, art, and collectibles through non-traditional channels, including through liquidation. We rely on Mr. Zinberg to make critical operational decisions on a daily basis, such as product offerings and purchases, and to make key strategic plans. We have an employment agreement with Mr. Zinberg extending through 2009. The loss of the services of Mr. Zinberg would adversely affect our business and operations.

Holders of common stock issued by us in prior offerings are entitled to rescind their purchases.

From our inception until mid-2003, we raised over $20.5 million in gross equity capital by selling shares of our common stock to approximately 830 investors at prices ranging from $4.00 to $6.00 per share with a weighted average share price of $4.50. We also issued shares of common stock to about 30 persons in exchange for services and other non-cash consideration valued in excess of $5.5 million and issued options to purchase common stock to approximately 250 individuals at a weighted average exercise price of $4.45. After conducting these sales of our securities, we determined that these sales were not exempt from the registration requirements under the Securities Act of 1933 and similar provisions of laws of the states in which our stockholders reside, because certain of our employees who solicited investors engaged in “general solicitation” of securities. In addition, these employees received compensation for selling our common stock and were required to be licensed as broker-dealers with the Securities and Exchange Commission, or SEC, and various state authorities, but they were not so licensed. In such situations, a number of remedies may be available to regulatory authorities and the investors who purchased common stock in those offerings, including a right of rescission, civil penalties, a restraining order or injunction, and a court order to pay restitution and costs.

If we were ordered to rescind all purchases of our common stock by stockholders not affiliated with us, we could be required to make an aggregate payment to the holders of these shares of up to approximately $20.5 million, in addition to statutory interest of $10.3 million, as of June 30, 2006. We may also be liable for the $5.5 million of services rendered and property exchanged in consideration for the issuance of common stock, in addition to interest of approximately $2.6 million through June 30, 2006. In addition, we

30




may be liable for the $1.3 million that we will offer to non-management optionees as the optionees did not receive information regarding our potential liability for these violations of federal and state securities laws. In addition, regulators could impose monetary fines or other sanctions as provided under these laws.

Federal securities laws do not provide that a rescission offer will terminate a purchaser’s right to rescind a sale of stock that was not registered as required or was not otherwise exempt from such registration requirements. If any or all of the offerees reject a rescission offer, we may continue to be liable under federal and state securities laws for up to an amount equal to the value of all options and common stock granted or issued since the date of issuance plus any statutory interest we may be required to pay.

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

We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for the foreseeable future. We intend to invest any future earnings to fund our business. Therefore, stockholders likely will not receive any dividends on our common stock for the foreseeable future. Investors cannot be certain that they will receive a positive return on their investment when they sell their shares or that they will not lose the entire amount of their investment.

The concentration of our capital stock ownership with our founder and executive officers and directors and their affiliates will limit your ability to influence corporate matters.

Our founder, executive officers, and directors will together own approximately 37.4% of our common stock as of June 30, 2006. As a result, they will have significant influence over our management and affairs and over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as a merger or a sale of our company or its assets, for the foreseeable future. This concentrated control will limit the ability of other stockholders to influence corporate matters. Because of this, we may take actions that some of our stockholders do not view as beneficial. As a result, the market price of our common stock could be adversely affected because stockholders may not view favorably the concentration of control in the hands of management.

Our charter documents and Delaware law could make it more difficult for a third party to acquire us, and discourage a takeover.

During June 2006, we reincorporated in Delaware, and the Delaware certificate of incorporation and the Delaware General Corporation Law, or DGCL, contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our company, even when these attempts may be in the best interests of our stockholders. The Delaware certificate of incorporation also authorizes our Board of Directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Delaware law also imposes conditions on certain business combination transactions with “interested stockholders.” The Delaware certificate of incorporation divides our Board of Directors into three classes, with one class to stand for election each year for a three-year term after the initial election. The classification of directors tends to discourage a third party from initiating a proxy solicitation or otherwise attempting to obtain control of our company and may maintain the incumbency of our Board of Directors, as this structure generally increases the difficulty of, or may delay, replacing a majority of directors. The Delaware bylaws authorize our Board of Directors to fill vacancies or newly created directorships. A majority of the directors then in office may elect a successor to fill any vacancies or newly created directorships.

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ITEM 6.  EXHIBITS.

4.1

 

Specimen of Common Stock Certificate(1)

 

 

 

10.6

 

2006 Stock Award Plan (2)

 

 

 

10.7

 

Client Service Agreement between Administaff Companies II, L.P. and Bidz.com, Inc., dated January 2, 2006 (3)

 

 

 

10.8

 

Employment Agreement between Bidz.com, Inc. and David Zinberg, dated June 6, 2006 (4)

 

 

 

10.9

 

Employment Agreement between Bidz.com, Inc. and Lawrence Kong, dated June 6, 2006 (5)

 

 

 

10.10

 

Loan and Security Agreement by Bidz.com, Inc. and LaSalle Retail Finance, dated July 12, 2006

 

 

 

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

 

(1)    Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-132545) as filed with the Commission on or about June 14, 2006.

(2)    Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (File No. 333-132545) as filed with the Commission on or about March 17, 2006.

(3)    Incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (File No. 333-132545) as filed with the Commission on or about May 5, 2006.

(4)    Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (File No. 333-132545) as filed with the Commission on or about June 9, 2006.

(5)    Incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (File No. 333-132545) as filed with the Commission on or about June 9, 2006.

 

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SIGNATURES

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

 

 

BIDZ.COM, INC.

 

 

 

 

 

 

 

By:

/s/ DAVID ZINBERG

 

 

 

 

 

David Zinberg

 

 

President and Chief Executive Officer

 

 

 

 

By:

/s/ LAWRENCE KONG

 

 

 

 

 

Lawrence Kong

 

 

Principal Accounting Officer

 

 

 

 

 

 

Dated: August 14, 2006

 

 

 

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