Bidz 10-Q 2008
Washington, D.C. 20549
Commission file number 000-51257
(Exact name of Registrant as specified in its charter)
3562 Eastham Drive
(Address, including zip code, of principal executive office)
(Registrants 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, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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 Registrants common stock, $0.001 par value, as of October 31, 2008: 23,370,947
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.
(In thousands, except share and per share data)
The accompanying notes form an integral part of these condensed financial statements.
(In thousands, except share and per share data)
The accompanying notes form an integral part of these condensed financial statements.
The accompanying notes form an integral part of these condensed financial statements.
1. Basis of Presentation and Nature of Business Operations
Basis of Presentation
The accompanying condensed balance sheet as of December 31, 2007, which has been derived from audited financial statements, and the unaudited financial statements included herein 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 Companys audited financial statements for the fiscal year ended December 31, 2007 filed in the Annual Report on Form 10-K by the Company on March 12, 2008 with the Securities and Exchange Commission. 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 September 30, 2008 and the results of operations for the three month and nine month periods ended September 30, 2007 and 2008, respectively and the cash flows for the three month and nine month periods ended September 30, 2007 and 2008, respectively. The results of operations for the nine months ended September 30, 2008 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. We have made estimates for return and allowance reserve, inventory reserve, inventory vendor marketing reserves, deferred tax assets, accrued expenses, stock price volatility, stock option forfeiture rate, and expected stock option term.
Certain amounts from prior years have been reclassified to conform to the current years presentation.
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. In June 2006, we reincorporated in Delaware, and with our principle location of business in Los Angeles. We operate websites located at www.bidz.com and www.buyz.com for the purpose of selling merchandise, utilizing our unique sales auction and fixed price platforms.
We sell our products throughout the United States and have expanded the reach of our customer base to Europe and Asia. Revenue generated from the United States accounted for approximately 75.7% and 79.3% of net revenue for the three months ended September 30, 2007 and 2008, respectively and 77.6% and 76.9% of net revenue for the nine months ended September 30, 2007 and 2008, respectively.
Starting in the third quarter of 2008 the U. S. and world economies have been experiencing a downturn in economic growth that is directly impacting consumer purchasing behavior. The duration and magnitude of this developing economic condition is not certain, but indicators point to at least a year of recovery efforts ahead. We sell consumer discretionary items and may be impacted by this economic downturn.
In October 2008, we announced the launch of our website translated into Arabic to complement the English and Spanish language versions of our website. In April 2008, we announced the launch of our online retail store, Buyz.com, which offers jewelry at a fixed price.
In February 2008, our Board of Directors authorized an increase in the open market stock buyback program of its outstanding common stock to $20 million from $5 million. The stock buyback will be at prices deemed appropriate by management over
a 24 month period. As of September 30, 2008, we have purchased a cumulative total of 1.38 million shares for $12 million, and all 1.38 million shares have been retired which reduced our number of shares outstanding.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement No. 159 (FAS 159) which expanded FAS No. 157, Fair Value Measurements , which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 159 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. FAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of FAS 159 did not have a material impact on our financial statements. In September 2006, the FASB issued Statement SFAS No. 157 (FAS 157), Fair Value Measurements , which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The adoption of FAS 157 and 159 did not have a material impact on our 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 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 potential common shares had been issued and if the additional common shares were not anti-dilutive.
The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method excluding the impact of pro forma deferred tax benefits for the three month and nine month periods ended September 30, 2007 and including the impact of pro forma deferred tax benefits for the three month and nine month periods ending September 30, 2008. The following table sets forth the computation of basic and diluted net income per share.
(In thousands, except share and per share data)
Inventories, which are pledged as collateral for our revolving line of credit, consist of the following (In thousands):
4. Revolving Credit Line
In July 2006, we entered into a revolving credit line agreement with LaSalle Bank (Bank of America) to provide working capital financing secured by inventories and tangible assets. The agreement allowed for us to initially draw on a line of credit up to $10 million. During the first quarter of 2008 we successfully increased the limit to $25 million. The revolving credit line agreement expires in July of 2010. As of September 30, 2008, there was no outstanding balance under the revolving credit line. Under the terms and conditions of the revolving credit line agreement, the Company is subject to certain restrictive covenants for which it is in compliance at September 30, 2008.
5. Stock Based Compensation
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 staffs position regarding the application of SFAS 123R and certain SEC rules and regulations, and also provides the staffs 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 income 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 Companys financial statements as of and for the three months and nine months ended September 30, 2007 and 2008, respectively, reflect the impact of adopting SFAS 123R.
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.
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, forfeiture rates and employee stock option exercise behaviors (or expected term).
We awarded and issued as director compensation a total of 18,750 shares of common stock for the nine months ended September 30, 2007. Two of our non-employee directors, Man Jit Singh and Peter Hanelt, received stock awards of 8,750 and 10,000 shares, respectively. The fair market value of the shares granted was $6.00 per share, which was determined based on a combination of factors that included recent share transactions between shareholders and an independent valuation of the Company. No stock awards were granted in the three months ended September 30, 2007 and 2008 and in the nine months
ended September 30, 2008. The stock-based expense from stock award grants for the three months ended September 30, 2007 and 2008 totaled $0 and $0, respectively, and in the nine months ended September 30, 2007 and 2008 totaled $112,000 and $0, respectively.
The restricted stock awards are expensed pro rata over the vesting period based upon the market value of the awards at the time of grant. Stock-based compensation from restricted stock awards totaled $76,000 and $83,000 for the three months ended September 30, 2007 and 2008, respectively, and totaled $87,000 and $258,000 in the nine months ended September 30, 2007 and 2008, respectively. The unamortized stock-based expense for restricted stock awards was $853,000 at September 30, 2008.
A summary of all restricted stock activity during the nine months ended September 30, 2008 is as follows:
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 September 30, 2008, and changes during the nine months ended September 30, 2008.
The following table summarizes information about stock options outstanding and exercisable at September 30, 2008.
The stock-based compensation expense from stock options in the three months ended September 30, 2007 and 2008 totaled $181,000 and $180,000, respectively and in the nine months ended September 30, 2007 and 2008 totaled $308,000 and $538,000, respectively. The unamortized stock-based compensation expense from stock options as of September 30, 2008 is $1.8 million.
No stock options were granted in the nine months ended September 30, 2008 and the weighted-average grant date fair value of options granted during the nine months ended September 30, 2007 was $2.59. The fair value of these options was calculated using a Black-Scholes option pricing model using the following assumptions: (1) risk-free interest rates of 4.3%-4.9%, (2) an expected life of four to five years, (3) expected volatility of 31%-33%, (4) expected forfeitures of 0%, and (5) a dividend yield of 0%.
6. Segment Information
Net revenue by geographic area is presented based upon the country of destination. No foreign country represented 10% or more of net revenue for three month and nine month periods ended September 30, 2007 and 2008. Net revenue by geographic area was as follows:
(In thousands, except percentage data)
Purchases from two vendors amounted to $7.8 million and $9.3 million representing 17.3% and 28.7% of the total purchases during the three months ended September 30, 2007 and 2008, respectively, and $14.6 million and $15.5 million representing 17.1% and 14.2% of the total purchases during the nine months ended September 30, 2007 and 2008, respectively. Outstanding accounts payable to the two vendors totaled $1.8 million and $9.3 as of December 31, 2007 and September 30, 2008, respectively. Loss of either of these vendors is not expected to have a significant negative impact on the results of operations and cash flows of the Company.
8. Related Party Transaction
During the three months ended September 30, 2007 and 2008, we purchased approximately 11.6% and 21.3%, respectively, of our merchandise from LA Jewelers, Inc., where one of its managers is a stockholder who beneficially owns 1,228,000 shares of our common stock as of September 30, 2008. During the nine months ended September 30, 2007 and 2008, we purchased approximately 12.2% and 9.1%, respectively. In the three months and nine months ended September 30, 2008 we earned approximately $164,000 and $777,000, respectively from LA Jewelers relating to co-op marketing contributions and $222,000 was unamortized as of September 30, 2008. In the three months and nine months ended September 30, 2007 we
earned approximately $134,000 and $134,000, respectively in co-op marketing contributions.
In May 2007, we entered into an understanding with LA Jewelers whereby they will guarantee that we will earn a certain minimum gross profit margin on their merchandise. This agreement provides that in the event of a gross profit margin shortfall we will be compensated for the difference between our actual gross profit margin and the guaranteed minimum gross profit margin. In the three months and nine months ended September 30, 2008, we recognized $146,000 and $368,000, respectively under this agreement and $49,000 was outstanding and accrued at September 30, 2008. In the three months and nine months ended September 30, 2007, we recognized $122,000 and $210,000, respectively under this agreement.
9. Income Tax FIN 48
We adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. Previously, we had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies. As required by Interpretation 48, which clarifies Statement 109, Accounting for Income Taxes, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, we applied Interpretation 48 to all tax positions for which the statute of limitations remained open. Our preliminary analysis of the implementation of Interpretation 48 reveals that there is no material effect on our financial statements.
We are subject to income taxes in the U.S. federal jurisdiction and California. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal and California examinations by tax authorities for the years before 2003.
We had been under examination by the Internal Revenue Service for the 2004, 2005 and 2006 tax years. The examination was concluded as of December 31, 2007 and final settlement was approximately $35,000, including interest and penalties.
We are 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, 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 Companys financial position, results of operations or cash flows.
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.
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 to efficiently and cost effectively source closeout and regular jewelry merchandise, and rapidly respond to changing consumer demands for certain jewelry. We offer our products through a continuous live format, featuring a $1 minimum opening bid, and a unique 15-second auction extension period that allows our auctions to continue until all bids are received. On select auctions we maintain a reserve price that must be met before a sale will be consummated. The majority of our auctions are short-term, often lasting less than one hour, providing immediate gratification to our customers and encouraging frequent visits and active viewing of our website.
In addition to our auction site we have a fixed pricing format that offers similar merchandise as those listed for auction. This online store provides us access to different types of consumers and we will plan to offer customers the ability to design their
own jewelry including diamond earrings and rings in the near future.
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 site based on web traffic.
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 their purchases 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 and fixed price sales are conducted 24 hours a day, seven days a week. We also offer daily telephone customer support, 24-hour online live-help and e-mail customer support.
In line with our growth plans, we have completed a major upgrade of our auction platform at the end of 2007. The new auction LiveBid system supports a broad range of leading browser software including Microsoft Internet Explorer, FireFox and Safari. The new system touts high availability, faster end-user response time and greater scalability among the key features delivered in this release. We have leveraged this new software solution to launch additional site features and the new online retail store. We have launched the Spanish version of our website in the second quarter of 2008, the Arabic version in October 2008 and will plan on launching more site features and foreign language versions of our website in the future.
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.
We derive our revenue from four sources: merchandise sales, which include wholesale merchandise sales, shipping revenue, transaction fee revenue and other revenue. In accordance with SAB 104, we recognize revenue from all four 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.
For sales through our website, we recognize merchandise sales upon shipments made to consumers that are fulfilled from our warehouse. We require payment before we ship and the payment is generally made online by credit card or other electronic payment methods. We record amounts received or billed prior to shipment of goods to customers as deferred revenue. We reduce gross sales by returns and chargebacks from customers. For wholesale merchandise sales, we recognize sales when the merchandise is delivered to the customer and credit terms may be offered to such 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 Statements of Income 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 include transaction fee revenue in net revenue. The 3% transaction fee is applied to merchandise sales, including shipping and handling, but not to sales tax or wholesale merchandise sales.
Other revenue consists primarily of commissions we derive from hosting sales of Certified Merchant merchandise that is owned by third parties and we recognize only the commission portion of the price our customers pay for the purchased products because we are acting as an agent in such transactions.
We present sales tax liability on a net basis in accordance with Emerging Issues Task Force (EITF) Issue No. 06-03. Sales are not grossed up with the attendant taxes and deducted as a separate line item. The EITF becomes effective for interim and annual reporting periods beginning after December 15, 2006.
Cost of Revenue
Cost of revenue includes product costs, inbound and outbound shipping charges, packaging and shipping supplies, insurance on shipments, product repair and service costs, and credit card and other electronic payment fees, and is recorded in the same period in which related revenue has been recorded. The cost of revenue is reduced by amortized co-op marketing contributions from our vendors.
Outbound shipping costs on merchandise sales totaled $2.0 million and $2.3 million in the three months ended September 30, 2007 and 2008, respectively, and $6.3 million and $7.9 million in the nine months ended September 30, 2007 and 2008, respectively.
Returns and Allowances Reserve
We estimate potential future product returns and chargebacks related to current period revenue. We analyze historical returns 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 and chargebacks 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. Reserves for returns and chargebacks are included in accrued liabilities.
Inventories consist mainly of merchandise purchased for resale and are stated at the lower of first-in, first-out (FIFO) cost or market.
The unique nature of our business model where customers set the prices they are willing to pay may result in items selling below our cost, and we provide reserves against our inventory based on the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory. We also provide reserves for obsolescence and slow moving inventory.
Inventory Co-op Marketing Contributions
In the third quarter of 2007, we started to bill and collect from our inventory vendors co-op marketing contributions as an incentive for us to market and sell their merchandise on the Bidz website. In accordance with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor, the co-op marketing contributions that cannot be identified specifically to benefit the vendors are a reduction in cost of sales and will result in an increase in gross profit. We cannot specifically identify the benefits to each vendor, consequently, co-op marketing contributions are charged against inventory as a reduction of costs and amortized as a reduction of cost of sales. In the three months and nine months ended September 30, 2008, we have recognized $2.3 million and $8.3 million, respectively, of co-op marketing contributions. Approximately $3.5 million remain unamortized and is included as an offset to inventory at September 30, 2008. Receivable from vendors for co-op marketing contributions, less allowance for doubtful accounts, is included in other current assets and amounted to $976,000 at September 30, 2008.
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 use the Black-Scholes option pricing model to estimate the value of our options in implementing SFAS 123R and the calculated method 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 revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
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.
Substantially all of our net revenue consists of jewelry sold via the Internet, net of returns. We also generate net revenue from wholesale merchandise sales, shipping and handling, transaction fee and other revenue. We have commenced making wholesale merchandise sales in the first quarter of 2008.
The following table presents our sources of revenue for the periods indicated as a percentage of net revenue.
Our gross profit consists of net revenue less the cost of revenue. Our cost of revenue consists of the cost of merchandise sold to customers, amortized co-op marketing contributions from vendors, inbound and outbound shipping costs, packaging and shipping supplies, insurance on shipments, product repair and service costs, 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 restricted stock awards to employees and consultants.
Sales and Marketing Expenses
Our marketing expenses consist primarily of costs associated with paid website search marketing, online banner 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 factors in increasing demand for our jewelry products and increasing net revenue.
Comparison of Three Months Ended September 30, 2007 to Three Months Ended September 30, 2008
Net income in the three months ended September 30, 2008 was $3.3 million, or $0.14 and $0.13 per basic and diluted share, respectively, and net income in the three months ended September 30, 2007 was $3.6 million, or $0.15 and $0.14 per basic and diluted share, respectively. Net revenue increased by 38.2% in the three months ended September 30, 2008 compared to the three months ended September 30, 2007 while the net income decreased by 8.5% over the same period. The decrease in net income was due primarily to the increase in revenue and gross profit offset by a higher operating and income tax expenses.
Net revenue increased 38.2% to $55.4 million in the three months ended September 30, 2008 from $40.1 million in the three months ended September 30, 2007. This increase in net revenue was due primarily to the wholesale merchandise sales in the three months ended September 30, 2008 which accounted for $17.2 million in revenue offset by less demand for our jewelry products as a result of the rapidly weakening economies worldwide.
We expect that significant wholesale activities will become a regular part of our ongoing business, particularly in the current economy where we are likely to be presented with opportunities in the wholesale market. However, we do not expect wholesale merchandise sales to be significant in the fourth quarter when we have the traditional holiday shopping season.
Gross profit increased by $599,000 or 4.7% to $13.3 million in the three months ended September 30, 2008 from $12.7 million in the three months ended September 30, 2007. The increase in gross profit resulted from the increase in sales revenue which rose by 38.2% for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 offset by the decrease in gross profit margins to 24.0% from 31.7%, primarily due to the significant wholesale merchandise sales that typically generate significantly lower gross profit margin. However, the net operating margin contribution from wholesale merchandise sales is advantageous because operating expenses associated with wholesale transactions are minimal.
General and Administrative Expenses
General and administrative expenses increased $322,000 or 6.5% to $5.3 million in the three months ended September 30, 2008 from $4.9 million in three months ended September 30, 2007. The increase in general and administrative expenses was due to our overall growth and includes increases in payroll and payroll related expenses. General and administrative expenses as a percentage of net revenue decreased to 9.5% in the three months ended September 30, 2008 from 12.4% in the three months ended September 30, 2007.
Sales & Marketing Expenses
Sales and marketing expenses decreased by $91,000 or 3.8% to $2.3 million in the three months ended September 30, 2008 from $2.4 million in the three months ended September 30, 2007. The decrease in sales and marketing expenses were a result of the rapidly weakening economies worldwide. Sales and marketing expenses as a percentage of net revenue decreased to 4.2% in the three months ended September 30, 2008 from 6.0% in the three months ended September 30, 2007.
Income Tax Expense
Income tax expense increased to $2.2 million in the three months ended September 30, 2008 from $1.6 million in the three months ended September 30, 2007 and the effective tax rate increased to 40.2% from 31.6%. During 2007, we utilized all of our loss carryforwards and therefore became fully taxable in 2008.
Comparison of Nine Months Ended September 30, 2007 to Nine Months Ended September 30, 2008
Net income in the nine months ended September 30, 2008 was $11.5 million and net income per basic and diluted share was $0.48 and $0.45, respectively. In the nine months ended September 30, 2007, net income was $9.9 million, or $0.42 and $0.40 per basic and diluted share, respectively. Net revenue increased by 39.0% in the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 while the net income increased by 15.8% over the same period. The increase in net income was due primarily to the increase in net revenue and higher gross profit margins offset by a higher operating and income tax expense.
Net revenue increased by $48.3 million or 39.0% to $172.2 million in the nine months ended September 30, 2008 from $123.9 million in the nine months ended September 30, 2007. This increase in net revenue was due primarily to the growth in demand for our jewelry products and the wholesale merchandise sales in the nine months ended September 30, 2008 which accounted for $29.9 million in revenue.
Gross profit increased by $11.9 million or 34.4% to $46.6 million in the nine months ended September 30, 2008 from $34.7 million in the nine months ended September 30, 2007. The increase in gross profit resulted from the increase in net revenue of $48.3 million offset by the decrease in gross profit as a percentage of net sales to 27.1% for the nine months ended September 30, 2008 compared to 28.0% for the nine months ended September 30, 2007. The decrease in gross profit margin is primarily due to the significant wholesale merchandise sales that typically generate significantly lower gross profit margin. However, the net operating margin contribution from wholesale merchandise sales is advantageous because operating expenses associated with wholesale transactions are minimal.
General and Administrative Expenses
General and administrative expenses increased by $2.1 million or 14.1 % to $16.9 million in the nine months ended September 30, 2008 from $14.8 million in the nine months ended September 30, 2007. The increase in general and administrative expenses was primarily due to the increase in payroll and payroll related expenses and administrative expenses. General and administrative expenses as a percentage of net revenue decreased to 9.8% in the nine months ended September 30, 2008 from 11.9% in the nine months ended September 30, 2007.
Sales & Marketing Expenses
Sales and marketing expenses increased by $2.6 million or 37.3 % to $9.6 million in the nine months ended September 30, 2008 from $7.0 million in the nine months ended September 30, 2007. Sales and marketing expenses as a percentage of net revenue decreased to 5.6% in the nine months ended September 30, 2008 from 5.7% in the nine months ended September 30, 2007.
Income Tax Expense
Income tax expense increased to $8.0 million in the nine months ended September 30, 2008 from $2.5 million in the nine months ended September 30, 2007 and the effective tax rate increased to 41.0% from 20.2%. During 2007, we utilized all of our loss carryforwards and therefore became fully taxable in 2008.
Additional Quarterly Data
Wholesale merchandise sales are excluded in computing additional quarterly data.
Liquidity and Capital Resources
The significant components of our working capital are inventory and liquid assets such as cash and accounts receivable, reduced by revolving credit line, 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 online payment, we typically have extended payment terms with our suppliers.
As of September 30, 2008, we had a working capital surplus of $31.5 million and have no short or long-term debt obligations. Net cash provided by operating activities was $20.7 million in the nine months ended September 30, 2008 compared to net cash provided of $2.8 million in the nine months ended September 30, 2007. Cash in the nine months ended September 30, 2008 was primarily affected by changes in net income and inventories and in the nine months ended September 30, 2007 was primarily affected by changes in net income, inventories and accounts payable.
We recorded net income of $11.5 million in the nine months ended September 30, 2008 compared to $9.9 million in the nine months ended September 30, 2007. Cash flows from net income were used to meet our working capital requirements. In the nine months ended September 30, 2008, inventories decreased by $9.4 million. In the nine months ended September 30, 2007, inventories decreased by $12.3 million and accounts payable increased by $5.6 million. Inventories and accounts payable is affected by our revenue 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 and the current revenue trend; and the need to manage our inventory more efficiently.
Net cash used in investing activities was $495,000 in the nine months ended September 30, 2008 compared to $1.2 million in the nine months ended September 30, 2007. During the nine months ended September 30, 2007 and 2008, respectively, net cash used for investing activities related mainly to capital expenditures for office and computer equipment and software.
In the nine months ended September 30, 2008, net cash of $16.7 million were used in financing activities when $5.9 million was used to repay our revolving credit line and $11.2 million was used to repurchase our common stock shares. In the nine months ended September 30, 2007, $866,000 were used for financing activities when $3.9 million was used to repay our revolving credit line and $3.1 million was provided from exercise of stock options.
We believe that cash and cash equivalents currently on hand, cash flows from operations and the availability of a $25 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; acquisition and relocation to a new corporate office; 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 and we may not be able to obtain such financing. We cannot predict whether this additional financing will be in the form of equity, debt, or a combination of debt and equity.
The following table presents our contractual obligations at September 30, 2008, over the next five years and thereafter (in thousands):
We are obligated for the lease of our office and warehouse space. We lease a 50,000 square-foot office and warehouse and a separate 12,000 square-foot warehouse space in Culver City, California. The leases expire in October 2009 and August 2012, respectively.
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.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the Securities and Exchange Commission. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the date of their evaluation, our disclosure controls and procedures were effective.
Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting include those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
We assessed the effectiveness of our internal control over financial reporting as of September 30, 2008, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of September 30, 2008.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2008, that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We are from time to time subject to various other legal proceedings and claims arising in the ordinary course of business. We do not expect that the outcome in any currently ongoing legal proceedings, individually or collectively, will have a material adverse effect on the Companys financial condition, results of operations, or cash flow.
In September 2008, we were served with an alleged class action lawsuit alleging, among other things, that the company engaged in unfair business practices by misrepresenting the value of its merchandise and by false bidding. The complaint purports to represent a class of persons who purchased any merchandise from the company. The company believes that the lawsuit is meritless and intends to file a motion to dismiss forthwith.
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 entered into a settlement agreement with Cartier in August 2008.
We believe the risks and uncertainties described below are the most significant we face. The occurrence of any of the following risks could harm our business. In that case, the value of our common stock could decline, and you may lose part or all of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations.
We have established a public market for our common stock on the NASDAQ Capital Market; our stock is subject to short selling and trading in our common stock may be volatile.
Since November 2007, we have been included by Nasdaq on the Regulation SHO Threshold Security List, which may be indicative of a significant amount of naked shorting in our common stock. As defined in Rule 203(c)(6) of Regulation SHO, a threshold security is any equity security of any issuer that is registered under Section 12 of the Exchange Act, or that is required to file reports under Section 15(d) of the Exchange Act (commonly referred to as reporting securities), where, for five consecutive settlement days: (i) there are aggregate fails to deliver at a registered clearing agency of 10,000 shares or more per security; the level of fails is equal to at least one-half of one percent of the issuers total shares outstanding; and the security is included on a list published by a self-regulatory organization (SRO). A security ceases to be a threshold security if it does not exceed the specified level of fails for five consecutive settlement days. Short selling and possible market price manipulation of our common stock has a negative effect on the trading price of our common stock and may cause trading in our common stock to be volatile.
The trading price in our common stock may be volatile and you may lose all or part of your investment.
The market price of our common stock has been subject to significant fluctuations and these fluctuations could continue. Some factors that could affect the market price of our common stock are as follows:
· actual or anticipated changes in our operating results,
· changes in research analysts recommendations or estimates of financial performance,
· changes in market valuation of similar companies, economic and general market conditions,
· announcements of significant contracts, company developments, commercial relationships, banking credit facilities, capital commitments, acquisitions or joint ventures,
· issuance of additional shares of common stock or other securities, and
· intellectual property or litigation developments.
Trading in our common stock may experience significant price and volume fluctuations and adversely affect the trading price of our common stock. Following periods of volatility in the market price of a public companys securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion of managements attention and resources.
A decline in general economic conditions or the perception of said conditions may have adverse effects on our growth and operations.
The continued success of our business depends on the willingness of our customers to spend in a discretionary manner. While we do offer lower priced merchandise and may consequently fair better than those who exclusively offer more expensive merchandise, jewelry is essentially perceived as a luxury good. If recent economic events such as the bank failures and credit issues reported in the media cause people to feel less comfortable purchasing discretionary goods, it could cause a negative effect on our operating results.
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 are subject to prank bidding by persons who are not required to provide their identification.
Presently, we do not require new users to our site to provide their identification upon registration. Consequently, from time to time we are subject to prank bidders who may win auctions but do not intend to purchase our merchandise. Although the Company re-auctions merchandise not purchased by such bidders, a large number of failed auctions in which winning bidders do not complete their purchases could adversely affect our results of operations.
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, online banner advertising, targeted e-mail advertising, and participation in affiliate programs. 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. 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.
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.
For the three months ended September 30, 2007 and 2008, 24.3% and 20.7%, 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. 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.
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.
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.
Quarterly financial results may not be consistent and impact our stock price.
There are numerous influences on our quarterly financial results that extend beyond the normal seasonal trends. Fluctuations that are under our control include: our ability to influence the timing and quantity of items we place for auction; our decision to acquire merchandise at favorable prices; our expenditures on marketing and our ability to attract customer visits to our website. Fluctuations that are not under our control that may directly impact our quarterly financial results include: changes in market price for precious metals and gems; changes in consumers discretionary income and demand for our products; and changes in fashion trends.
We may be at risk to accurately report financial results or detect fraud if we fail to maintain an effective system of internal controls.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report that contains an assessment by management on the companys internal control over financial reporting in their annual reports on Form 10-K. In addition, the independent registered public accounting firm auditing the companys financial statements must attest to and report on our assessment of the effectiveness of the internal controls over financial reporting. While we are consistently working on improvements and conducting rigorous reviews of our internal controls over financial reporting, our independent auditors may interpret Section 404 requirements and apply related rules and regulations differently. If our independent auditors are not satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may decline to attest to managements assessment or issue a qualified report. Additionally, if we are not able to meet all the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission.
Future changes in our accounting, financial reporting, and regulatory environment may create new areas of risk exposure. Failure to modify our existing control environment accordingly may impair our controls over financial reporting and cause our investors to lose confidence in the reliability of our financial reporting, which may adversely affect our stock price.
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.
In addition, we have a concentration of inventory purchases from a small number of suppliers. Our top two suppliers accounted for approximately 42.1%, 31.1% and 24.0 % of our total purchases in 2005, 2006, and 2007, respectively. In the three months ended September 30, 2007 and 2008, our top two suppliers accounted for approximately 17.3% and 28.7% of our total purchases for the quarters, respectively, and approximately 17.1% and 14.2% of the total purchases during the nine months ended September 30, 2007 and 2008, respectively
We may give substantial deposits of inventory to our manufacturing vendors to produce finished jewelry products.
We may be at risk of loss for the diamonds, precious and semi-precious gems that we have given to our manufacturing vendors to produce into finished jewelry products. If the businesses of the vendors fail, the diamond inventory is lost or
stolen, the vendors do not have adequate insurance coverage or if the vendors fail to produce and deliver finished jewelry products, we would incur substantial losses that would have a material impact on our net income and financial position.
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 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, 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 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.
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 also 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 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 and New York. However, additional 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 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 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 compared to our historical and expected sales and margins.
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.
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 El Segundo, CA. 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.
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.
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.
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.
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. 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.
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.
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 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.
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.
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.
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 33.9%, 28.5% and 33.8% of our net revenue in 2005, 2006 and 2007, 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.
As we continue to grow we will need to expand our physical office and warehouse space facilities. In conjunction with the
expiration of our property lease in Culver City, California in October, 2009, we have begun seeking alternative real estate options that may require us to relocate our operations. In managing this transition, our operations could be interrupted and we could experience increased employee turnover, or both.
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, Retail 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.
We may unknowingly be involved in conflict diamond purchases that result in a negative public relationship impact.
There has been an increase in attention to conflict diamonds originating out of war-torn regions of Africa. The proceeds from the sale of conflict diamonds have been used to fund the ongoing aggression and terrorist activates throughout the world. We make every effort to evaluate our vendor sources to ensure they are not a dealer in conflict diamonds. In addition we have implemented an anti-money laundering program to guard against both illicit purchase and sales activities. If these risks were to occur, we may face a negative public reaction to our brand name resulting in loss of sales.
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 subject to assertions by third parties for infringement on their intellectual property rights.
Third parties may in the future assert that we have infringed on their intellectual property rights as we self-develop our auction platform, sales transaction system, and inventory control system. We have a larger exposure of being accused of intellectual property rights infringements than if we had purchased our technology off the shelf. We also may be at risk for selling items that infringe on other third party trade dress rights, copyright, or patent rights that may cause the offended party to bring action against us. In either event of alleged infringement, we would face substantial litigation cost to defend ourselves and utilization of our management and personnel resources.
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 relevant contractors and nondisclosure agreements with relevant 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 Childrens 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 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 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 are 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, 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 were 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 Unions 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. 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 may be 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 approximately 250 stock option grants to purchase common stock 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. 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.
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 together own approximately 34.5% of our common stock as of September 30, 2008. Marina Zinberg, our Vice President, who is the sister of David Zinberg, our Chairman, President and Chief Executive Officer, owns an additional 31.5% of our common stock. As a result, these individuals 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.
On June 22, 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.
No stock awards and stock options were granted during the three months ended September 30, 2008.
Issuer Purchases of Equity Securities
As of September 30, 2008, we have purchased a cumulative total of 1,377,534 shares for $12.0 million. The following table contains information about purchases of our common stock during the three months ended September 30, 2008:
(1) In June 2007, we authorized the stock buyback program for up to $5 million of our outstanding common stock to be repurchased through the open market at prices deemed appropriate by management. In February 2008, we authorized an increase in the stock buyback program to $20 million from $5 million. The stock buyback will be at prices deemed appropriate by management over a 24 month period.
On June 25, 2008, we held our Annual Meeting of Shareholders. We solicited proxies for the Annual Meeting pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the two nominees of the Board of Directors listed in our Proxy Statement, dated June 5, 2008, and both nominees were elected.
The following matters were acted upon by our shareholders at the Annual Meeting, at which approximately 12,715,726 shares of common stock, or 53.1% of the shares of common stock outstanding and entitled to vote at the Annual Meeting, were present in person or by proxies:
1. Election of Directors, The Board of Directors nominated two persons for election as Class II directors, each to hold office for three-year terms. Each nominee was an incumbent director, no other person was nominated, and each nominee was elected. The votes cast for, or withheld or abstained with respect to, each nominee were as follows: Man Jit Singh12,590,783 for, 124,943 withheld, and Lawrence Y. Kong12,567,580 for, 148,146 withheld.
2. Proposal to Approve Amendment to 2006 Stock Award Plan. The Board of Directors submitted a resolution that the shareholders approve an amendment to our 2006 Stock Award Plan to increase by 500,000 shares of common stock, from 1,000,000 to 1,500,000 shares, the total number of shares of common stock reserved and available in connection with awards under the 2006 Plan. There were 12,142,763 shares voting in favor of, 540,564 shares voting against, the resolution. The holders of 32,399 shares abstained, and there were no broker non-votes. The resolution, having received the affirmative vote of the holders of a majority of the shares of common stock outstanding and entitled to vote at the Annual Meeting, was adopted.
3. Ratification of Appointment of Independent Auditor. The Board of Directors submitted a resolution that the shareholders ratify the action of the Audit Committee in selecting and appointing the firm of Stonefield Josephson, Inc. as the Companys independent registered public accounting firm for the year ending December 31, 2008. There were 12,677,921 shares voting in favor of, 13,180 shares voting against the resolution. The holders of 24,625 shares abstained, and there were no broker non-votes. The resolution, having received the affirmative vote of the holders of a majority of the shares of common stock outstanding and entitled to vote at the Annual Meeting, was adopted.
On November 10, 2008, the Company announced, effective immediately, that Leon Kuperman, currently Chief Technology Officer and VP of Business Development, has also been named President, and that David Zinberg, who will continue as the Companys Chairman of the Board and Chief Executive Officer, would step down as President.
Mr. Zinberg stated in the announcement that, I believe this is the right time to transition from my role as President, and I have the utmost confidence in Leon Kuperman. Leon has demonstrated that he is capable of assuming that role along with his duties as Chief Technology Officer to effectively meet his responsibilities to our employees, customers and shareholders. Leon has done a superb job as Chief Technology Officer and VP of Business Development over the past two years and over the past 6 months has become increasingly involved in our investor relations activities as well. I look forward to maintaining my role as Chief Executive Officer and will focus primarily on purchasing and overseeing our key strategic initiatives. I founded the Company in 1998, and it is one that I deeply cherish and to which I feel strongly committed.
Biographical information concerning Mr. Kuperman, and information concerning his business experience and compensation is set forth in the proxy statement dated June 5, 2008, for the Companys 2008 Annual Meeting of Stockholders, and the descriptions of that information under the headings titled Executive Officers and Key Employees, Summary Compensation Table, and Grants of Plan-Based Awards, are incorporated herein by reference.
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.