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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended September 30, 2012

 

o

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

 

For the transition period            to             

 

Commission file number 000-51257

 

BIDZ.COM, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

95-4728109

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

2400 Marine Avenue

Redondo Beach, California

90278

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

 

(310) 280-7373

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  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 the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

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

 

Number of shares outstanding of Registrant’s common stock, $0.001 par value, as of October 31, 2012: 18,299,992

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

2

 

Condensed Consolidated Balance Sheets as of December 31, 2011 and September 30, 2012 (unaudited)

 

2

 

Condensed Consolidated Statements of Operations for the three month and nine month periods ended September 30, 2011 and 2012 (unaudited)

 

3

 

Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2011 and 2012 (unaudited)

 

4

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

5

Item 2.

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

 

11

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

17

Item 4.

Controls and Procedures

 

17

 

 

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

18

Item 1A

Risk Factors

 

19

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

Item 6.

Exhibits

 

32

 

 

 

 

SIGNATURES

 

32

 

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

 

1



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

Bidz.com, Inc.

 

Condensed Consolidated Balance Sheets

 

(in thousands, except share and per share data)

 

 

 

December 31,

 

September  30,

 

 

 

2011 (1)

 

2012

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

1,192

 

$

2,946

 

Accounts receivable (includes related party amounts of $0 and $106 at December 31, 2011 and September 30, 2012, respectively)

 

2,746

 

1,707

 

Inventories, net of reserves of $1,112 and $1,900 at December 31, 2011 and September 30, 2012, respectively

 

29,714

 

21,538

 

Other receivables (includes related party amounts of $186 and $0 at December 31, 2011 and September 30, 2012, respectively)

 

796

 

11

 

Other current assets

 

2,487

 

395

 

Total current assets

 

36,935

 

26,597

 

Property and equipment, net

 

369

 

384

 

Intangible asset, net

 

319

 

310

 

Deposits

 

 

890

 

Total assets

 

$

37,623

 

$

28,181

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable (includes related party amounts of $2,884 and $2,517 at December 31, 2011 and September 30, 2012, respectively)

 

$

11,013

 

$

8,768

 

Accrued expenses

 

2,273

 

2,383

 

Deferred revenue

 

1,457

 

2,386

 

Total current liabilities

 

14,743

 

13,537

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock: par value $0.001; authorized 4,000,000 shares; none issued and outstanding at December 31, 2011 and September 30, 2012, respectively

 

 

 

Common stock: par value $0.001; authorized 100,000,000 shares; issued and outstanding 18,379,045 and 18,299,992 at December 31, 2011 and September 30, 2012, respectively

 

18

 

18

 

Additional paid in capital

 

18,528

 

19,096

 

Accumulated earnings

 

4,334

 

(4,470

)

Total stockholders’ equity

 

22,880

 

14,644

 

 

 

$

37,623

 

$

28,181

 

 


(1)         Derived from audited financial statements.

 

See accompanying notes to these condensed consolidated financial statements.

 

2



Table of Contents

 

Bidz.com, Inc.

 

Condensed Consolidated Statements of Operations (Unaudited)

 

(in thousands, except share and per share data)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net revenue:

 

 

 

 

 

 

 

 

 

Merchandise sales

 

$

18,725

 

$

13,449

 

$

60,152

 

$

44,042

 

Wholesale merchandise sales (includes related party amounts of $ 891 and $1,014 for the three months ended September 30, 2011 and 2012, respectively, and $ 2,867 and $2,659 for the nine months ended September 30, 2011 and 2012, respectively)

 

1,432

 

1,562

 

4,671

 

3,657

 

Other revenue

 

109

 

61

 

379

 

171

 

 

 

20,266

 

15,072

 

65,202

 

47,870

 

Cost of revenue

 

15,507

 

11,819

 

48,943

 

37,126

 

Gross Profit

 

4,759

 

3,253

 

16,259

 

10,744

 

Operating expenses:

 

 

 

 

 

 

 

 

 

General and administrative

 

4,841

 

4,770

 

15,747

 

15,472

 

Sales and marketing

 

2,402

 

861

 

6,260

 

3,843

 

Depreciation and amortization

 

124

 

44

 

375

 

229

 

Total operating expenses

 

7,367

 

5,675

 

22,382

 

19,544

 

Loss from operations and before income tax benefit (expense)

 

(2,608

)

(2,422

)

(6,123

)

(8,800

)

Income tax benefit (expense)

 

1,148

 

1

 

(1,024

)

(4

)

Net Loss

 

$

(1,460

)

$

(2,421

)

$

(7,147

)

$

(8,804

)

 

 

 

 

 

 

 

 

 

 

Net loss per share available to common shareholders — basic and diluted

 

$

(0.08

)

$

(0.13

)

$

(0.37

)

$

(0.48

)

Weighted average number of shares outstanding — basic and diluted

 

19,386,539

 

18,304,926

 

19,441,417

 

18,332,563

 

 

See accompanying notes to these condensed consolidated financial statements.

 

3



Table of Contents

 

Bidz.com, Inc.

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2012

 

Cash flows provided by (used for) operating activities:

 

 

 

 

 

Net loss

 

$

(7,147

)

$

(8,804

)

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation and amortization

 

375

 

229

 

Stock-based compensation

 

575

 

612

 

Deferred taxes

 

3,178

 

 

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in assets:

 

 

 

 

 

Accounts receivable

 

(613

)

1,039

 

Inventories

 

(2,534

)

8,176

 

Other receivables

 

1,204

 

785

 

Other current assets

 

(2,063

)

2,092

 

Deposits

 

 

(890

)

Increase (decrease) in liabilities:

 

 

 

 

 

Accounts payable

 

543

 

(2,245

)

Accrued expenses

 

112

 

110

 

Deferred revenue

 

(498

)

929

 

Net cash provided by (used for) operating activities

 

(6,868

)

2,033

 

 

 

 

 

 

 

Cash flows used for investing activities:

 

 

 

 

 

Capital expenditures

 

(294

)

(235

)

Net cash used for investing activities

 

(294

)

(235

)

 

 

 

 

 

 

Cash flows used for financing activities:

 

 

 

 

 

Repurchase of common stock from net vesting of restricted shares

 

(91

)

(44

)

Tax benefit from stock based compensation

 

(8

)

 

Net cash used for financing activities

 

(99

)

(44

)

 

 

 

 

 

 

Net increase (decrease) in cash

 

(7,261

)

1,754

 

Cash, beginning of period

 

8,074

 

1,192

 

Cash, end of period

 

$

813

 

$

2,946

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Retirement of treasury shares

 

$

212

 

$

 

 

See accompanying notes to these condensed consolidated financial statements.

 

4



Table of Contents

 

BIDZ.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2012 (UNAUDITED)

 

1.                                      Basis of Presentation and Nature of Business Operations

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the unaudited condensed 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 our audited financial statements for the fiscal year ended December 31, 2011 filed in the Annual Report on Form 10-K by us on March 15, 2012 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 condensed consolidated financial position of Bidz.com, Inc. as of September 30, 2012 and the condensed consolidated results of operations for the three month and nine month periods ended September 30, 2011 and 2012 and the condensed consolidated cash flows for the nine month periods ended September 30, 2011 and 2012.  The condensed consolidated results of operations for the three month and nine month periods ended September 30, 2012 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 sales returns and accounts receivable allowance reserve, inventory reserve, inventory vendor marketing contribution reserves, deferred tax assets and liabilities, and accrued expenses.

 

We have evaluated subsequent events from the date of the condensed interim consolidated balance sheet through the date of the filing of this Form 10-Q. During this period, certain material subsequent events were identified relating to the three month and nine month periods ended September 30, 2012. See “Subsequent Events” for disclosure of subsequent events.

 

Reclassification

 

Certain amounts from prior years have been reclassified to conform to the current year’s 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 with our principal 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, and www.modnique.com for online retailing of apparel, beauty, and other fashion merchandise.

 

In April 2011, we incorporated Modnique, Inc. as a Delaware corporation and a wholly owned subsidiary of Bidz.com, Inc. Modnique operates our online retail site for designer products and consumer goods that provides a sales event concept. We negotiate favorable deals with designers and manufacturers, including purchasing inventory from recognizable brand names at deep discounts to attract customers that are fashion minded as well as cost conscious.

 

We sell our products throughout the United States and have expanded the reach of our customer base to Canada, Australia, Europe, Middle East and Asia. Revenue generated from the United States accounted for approximately 52.3% and 47.2% of net revenue for the three months ended September 30, 2011 and 2012, respectively, and 57.1% and 50.8% for the nine months ended September 30, 2011 and 2012, respectively.

 

Going Concern

 

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. However, we have reported net losses for the years ended December 31, 2010 and 2011 and for the nine months ended September 30, 2012 and future uncertainty in our financial performance raises substantial doubt about our ability to continue as a going concern.

 

5



Table of Contents

 

Management is taking steps to reduce expenses to improve our financial performance and we believe that we can generate sufficient operating cash flows to continue our operations. However, no assurances can be given as to the success of our plans. The accompanying condensed consolidated financial statements do not include any adjustments relative to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

 

Subsequent Events

 

On May 17, 2012, we entered into an Agreement and Plan of Merger by and among our Company, Glendon Group, Inc., a Delaware corporation (“Parent “), and Bidz Acquisition Company, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Subsidiary “), pursuant to which the Merger Subsidiary is to merge with and into our Company (the “Merger”), with our Company surviving the Merger as a wholly-owned subsidiary of Parent.

 

Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each share of our Company’s common stock issued and outstanding immediately prior to the effective time (other than shares owned by Parent, our Company or their respective subsidiaries and shares held by dissenting stockholders), automatically would be cancelled and converted into the right to receive $0.78 per share in cash, without interest.  The merger is a “going-private” transaction, and if the merger is completed, we no longer will be a public company and our common stock no longer will be traded.

 

On September 27, 2012, we held our annual meeting of stockholders. At the annual meeting, each proposal presented at the annual meeting was approved by the required vote of our Company’s stockholders, including the adoption of the Merger Agreement, and therefore each condition to Glendon Group’s obligation to close the Merger has been satisfied.

 

While we have requested that Glendon Group and Weston Capital Management LLC and its affiliated fund honor their obligations to fund and close the Merger, as of the date of filing this Form 10-Q Glendon Group has not closed the Merger.

 

We therefore have filed suit in the Delaware Chancery Court requesting expedited proceedings to compel Glendon Group to specifically perform its obligation to close the Merger and to compel Weston Capital Management LLC and its affiliated fund to honor their joint and several equity commitment and guarantee obligations entered into in connection with the Merger Agreement by funding sufficient capital to complete the Merger. See Part II, Item 1 — Legal Proceedings.

 

Notwithstanding the filing of the Delaware lawsuit, we intend to continue to work with Glendon Group and with Weston Capital and its affiliated fund to seek to close the Merger as expeditiously as practicable.

 

Recent Developments

 

On August 1, 2012, we signed a new lease agreement for a 50,000 square-foot office and warehouse in Redondo Beach, California.  The lease which has the personal guarantees of our Chief Executive Officer, David Zinberg and his sister, Marina Zinberg, commences on September 15, 2012 and expires on December 31, 2017. We moved into our new office and warehouse at the end of September 2012.

 

On November 9, 2012, we received notification from The NASDAQ Stock Market (NASDAQ) stating that the NASDAQ Hearings Panel has determined to delist our shares of common stock from The NASDAQ Stock Market, effective at the open of business on Tuesday, November 13, 2012. The delisting of our common stock is a result of our failure to regain compliance with the $1 minimum bid price for our common stock for continued listing, pursuant to NASDAQ’s Listing Rule 5550(a)(2), and the failure to comply with Listing Rules 5605(b)(1) and 5605 (c)(2), which require us to maintain board and audit committee independence.  Our common stock is expected to trade on the OTCQB Marketplace under our current symbol “BIDZ” upon delisting from the NASDAQ Capital Market. The OTCQB Marketplace is a market tier operated by the OTC Market Group Inc. for over-the-counter traded companies. The delisting and transition to the OTCQB Marketplace does not change the Company’s obligations to file periodic and other reports with the SEC under applicable federal securities laws.

 

6



Table of Contents

 

2.                                      Loss per Common Share

 

The basic loss per common share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similarly to basic loss 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.

 

Any dilutive effect of outstanding stock options is reflected in diluted loss per share by application of the treasury stock method including the impact of pro forma deferred tax benefits for the three month and nine month periods ended September 30, 2011 and 2012.  The following table sets forth the computation of basic and diluted net loss per share (unaudited).

 

(in thousands, except share and per share data)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,460

)

$

(2,421

)

$

(7,147

)

$

(8,804

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted common shares outstanding

 

19,386,539

 

18,304,926

 

19,441,417

 

18,332,563

 

Effect of dilutive securities

 

 

 

 

 

Denominator for diluted calculation

 

19,386,539

 

18,304,926

 

19,441,417

 

18,332,563

 

Net loss per share, basic and diluted

 

$

(0.08

)

$

(0.13

)

$

(0.37

)

$

(0.48

)

 

There were no dilutive effects from outstanding stock options for the three month and nine month periods ended September 30, 2011 and 2012.  All the stock options outstanding at period end were “out of the money,” are anti-dilutive and reduce net loss per share. Numbers of outstanding stock options excluded are 280,500 and 0 at September 30, 2011 and 2012, respectively.

 

3.                                      Inventories

 

Inventories consist of the following (in thousands) as of:

 

 

 

 

 

September 30, 2012

 

 

 

December 31 , 2011

 

(unaudited)

 

Fine jewelry, watches, clothing, accessories and other

 

$

29,186

 

$

22,846

 

Loose diamonds and semi-precious stones

 

251

 

101

 

Prepaid inventory

 

854

 

424

 

Inventory with manufacturing vendors

 

535

 

67

 

Product inventories

 

30,826

 

23,438

 

Less: Inventory reserve

 

(1,112

)

(1,900

)

 

 

$

29,714

 

$

21,538

 

 

4.                                      Stock Based Compensation

 

We recognized in our condensed consolidated financial statements the cost resulting from all share-based payment transactions to employees, including grants of stock options and restricted stocks based on their fair values at the measurement date. We have used 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 assumptions 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 are also required to calculate the additional paid in capital pool (“APIC Pool”) available to absorb tax deficiencies recognized subsequent to adoption, as if we had adopted the statement at its effective date of January 1, 1995. We calculate our APIC pool using the long form method, which requires that we track each award grant on an employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for such award. We then compare the fair value expense to the tax deduction received for each grant and aggregate the benefits and deficiencies to establish and maintain the APIC Pool.

 

7



Table of Contents

 

We group the excess tax benefits from both employee and nonemployee awards into a single APIC pool.  During the three month periods ended September 30, 2011 and 2012, we recognized income tax expense of $0 and $49,000, respectively, for APIC shortfalls and for the nine month periods ended September 30, 2011 and 2012, we recognized $264,000 and $282,000, respectively.

 

Restricted Shares

 

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 $177,000 and $143,000 for the three month periods ended September 30, 2011 and 2012, respectively, and $574,000 and $613,000 for the nine month periods ended September 30, 2011 and 2012, respectively. The unamortized stock-based expense for restricted stock awards was $321,000 at September 30, 2012.

 

A summary of all restricted stock activity during the nine month period ended September 30, 2012 is as follows:

 

Restricted shares outstanding, December 31, 2011

 

407,700

 

Shares granted

 

 

Shares vested

 

(220,250

)

Shares forfeited

 

(625

)

Restricted shares outstanding, September 30, 2012

 

186,825

 

 

Stock Options

 

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 Plans provide 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 during the nine month period ended September 30, 2012:

 

Options

 

Shares

 

Weighted-
Average
Exercise
Price ($)

 

Weighted
Average
Remaining
Life of
Contract (years)

 

Aggregate
Intrinsic
Value ($)

 

Outstanding at December 31, 2011

 

223,000

 

8.44

 

0.33

 

0.00

 

Granted

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Expired

 

(223,000

)

8.44

 

 

 

 

 

Outstanding at September 30, 2012

 

 

 

 

 

Vested and Exercisable at September 30, 2012

 

 

 

 

 

 

There are no stock options outstanding and exercisable at September 30, 2012 and there is no unamortized stock-based compensation expense from stock options at September 30, 2012.

 

Stock-based compensation expense from stock options and warrants for the three month periods ended September 30, 2011 and 2012 amounted to $0 and $0, respectively, and for the nine months ended September 30, 2011 and 2012 amounted to $1,000 and $0, respectively.

 

5.                                  Geographic and Segment Information

 

Geographic Information

 

Net revenue by geographic area is presented based upon the country of destination. Canada and Australia are the only foreign countries that accounted for 10% or more of net revenue for any of the periods presented. Net revenue by geographic areas for the three month and nine month periods ended September 30, 2011 and 2012 are as follow:

 

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(in thousands, except percentage data)

 

 

 

Three Months Ended September 30,

 

Nine  Months Ended
September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Geographic area

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

 

United States

 

$

10,598

 

52.3

%

$

7,121

 

47.2

%

$

37,218

 

57.1

%

$

24,333

 

50.8

%

Canada

 

3,386

 

16.7

 

2,857

 

19.0

 

11,468

 

17.6

 

8,236

 

17.2

 

Australia

 

3,672

 

18.1

 

3,218

 

21.4

 

8,461

 

13.0

 

8,912

 

18.6

 

Other International

 

2,610

 

12.9

 

1,876

 

12.4

 

8,055

 

12.3

 

6,389

 

13.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

20,266

 

100.0

%

$

15,072

 

100.0

%

$

65,202

 

100.0

%

$

47,870

 

100.0

%

 

Segment Information

 

We have organized our operations into two segments: Bidz and Modnique. These segments are the primary areas of measurement and decision-making by our management. Bidz mainly features an online auction format that sells jewelry, watches, accessories and brand name merchandise. Modnique features a sales event concept to sell designer products and consumer goods. We rely on an internal management reporting process that provides segment information to the operating income level for purposes of making financial decisions and allocating resources, therefore, certain shared services and expenses are included under Bidz and not allocated proportionally to Modnique. Accounting policies of the segments are the same as those described in the summary of critical accounting policies in Item 2.

 

The following tables present (in thousands) our segment information:

 

Net revenue by segment:

 

 

 

Three Months Ended September 30,

 

Nine  Months Ended September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Bidz

 

$

17,559

 

$

9,212

 

$

58,316

 

$

31,178

 

Modnique

 

2,707

 

5,860

 

6,886

 

16,692

 

Total

 

$

20,266

 

$

15,072

 

$

65,202

 

$

47,870

 

 

Operating loss by segment and the reconciliation to loss before tax:

 

 

 

Three Months Ended September 30,

 

Nine  Months Ended September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Bidz

 

$

(2,001

)

$

(1,974

)

$

(4,975

)

$

(7,099

)

Modnique

 

(607

)

(448

)

(1,148

)

(1,701

)

Total Operating loss before tax

 

$

(2,608

)

$

(2,422

)

$

(6,123

)

$

(8,800

)

 

Assets by segment:

 

 

 

December 31 ,
2011

 

September 30,
2012

 

Bidz

 

$

33,774

 

$

22,305

 

Modnique

 

3,849

 

5,876

 

Total

 

$

37,623

 

$

28,181

 

 

6.                                      Concentrations

 

Purchases from our top two vendors, including related parties disclosed in Note 7, amounted to $3.6 million and $1.3 million representing 25.1% and 17.9% of the total purchases during the three month periods ended September 30, 2011 and 2012, respectively, and $8.1 million and $3.3 million representing 15.6% and 15.1% of the total purchases during the nine month periods ended September 30, 2011 and 2012, respectively. Outstanding accounts payable to the top two vendors totaled $2.9 million and $2.5 million as of December 31, 2011 and September 30, 2012, respectively. The top two vendors for the three and nine month periods ended September 30, 2011 and 2012 are not necessarily the same vendors. Loss of these vendors is not expected to have a significant negative impact on the operations of the Company.

 

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7.                                      Related Party Transaction

 

During the three month periods ended September 30, 2011 and 2012, we purchased approximately $0 and $925,000, or 0% and 12.9%, respectively, of our merchandise from LA Jewelers, Inc., where one of its managers is a stockholder who beneficially owns approximately 8.1% of our outstanding common stock as of September 30, 2012. During the nine month periods ended September 30, 2011 and 2012, we purchased approximately $3.0 million and $1.8 million, or 5.8% and 8.4%, respectively, of our merchandise from LA Jewelers, Inc. The accounts payable balances due to LA Jewelers, Inc. were $2.9 million and $2.5 million as of December 31, 2011 and September 30, 2012, respectively.

 

LA Jewelers participates in our inventory co-op marketing program. For the three month periods ended September 30, 2011 and 2012, we recognized no co-op marketing contributions from LA Jewelers and $45,000 was unamortized as of September 30, 2012. For the nine month periods ended September 30, 2011 and 2012, we recognized approximately $342,000 and $26,000, respectively. The amounts of co-op marketing contributions due from LA Jewelers were $186,000 and $0 as of December 31, 2011 and September 30, 2012, respectively.

 

During the three month periods ended September 30, 2011 and 2012, we recorded $891,000 and $1.0 million, respectively, and during the nine month periods ended September 30, 2011 and 2012, we recorded $2.9 million and $2.7 million, respectively, in wholesale merchandise sales to Vivid Gemz, Inc., a company owned by Daniella Zinberg, the daughter of our Chief Executive Officer, David Zinberg. There was accounts receivable due from this customer of $0 and $104,000 as of December 31, 2011 and September 30, 2012, respectively, which was subsequently collected.  There was $15,000 and $12,000 in store credit due to this customer as of December 31, 2011 and September 30, 2012.

 

During the three month period ended September 30, 2012, we purchased approximately $361,000 or 5.0%, of our merchandise from Mac & Tosh Remarketing Corp, a company owned by Marina Zinberg, who is the sister of our Chief Executive Officer, David Zinberg, and an 18.4% shareholder of the Company and an employee of our subsidiary, Modnique Inc. During the nine month period ended September 30, 2012, we purchased $1.5 million or 6.7%, of our merchandise from Mac & Tosh Remarketing Corp.  No accounts payable balance was due to Mac & Tosh Remarketing Corp as of September 30, 2012.  There was $0 and $2,000 in accounts receivable due from this vendor as of December 31, 2011 and September 30, 2012 for merchandise returned.

 

8.                                      Income Tax

 

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.

 

As a result of cumulative losses in recent years and our current projections, we no longer believe that we will more likely than not be able to utilize our net deferred tax assets in their entirety.  As such, we have recorded a valuation allowance for the amount of our net deferred tax assets.  If the pending merger with Glendon Group, Inc. is consummated, our net operating loss carry-forward may become subject to Section 382 limitations, which limits the amount of net loss carry-forward available for future use.

 

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 examinations by tax authorities for the years before 2008 after the conclusion of examinations by the Internal Revenue Service for the 2004, 2005, 2006, and 2007 tax years. We may still be selected for examination by the Internal Revenue Service for the 2008, 2009 and 2010 tax years.

 

We are subject to various audits and reviews by the states and other regulatory authorities regarding non-income-based taxes.  We were selected by the New York State Department of Taxation and Finance for a sales tax audit for the period from December 1, 2008 to August 31, 2011. The audit was completed on May 7, 2012, and we paid $17,000 in additional sales taxes and interest as the result of the audit assessment.

 

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9.                                      Commitments and contingencies

 

We are obligated under the lease agreements of our offices and warehouse and office equipment, and licensing agreement on certain patents.  The following table presents our contractual obligations as of September 30, 2012 over the next five years and thereafter (in thousands):

 

Payments by period

 

Total
amount

 

Less than
1 year

 

1 to 3
 years

 

3 to 5
years

 

After 5
years

 

Property leases

 

$

 3,009

 

$

 466

 

$

 1,092

 

$

 1,282

 

$

 169

 

Equipment leases

 

9

 

9

 

 

 

 

Patent license

 

420

 

210

 

210

 

 

 

 

 

$

 3,438

 

$

 685

 

$

 1,302

 

$

 1,282

 

$

 169

 

 

On August 1, 2012, we signed a new lease agreement for a 50,000 square-foot office and warehouse in Redondo Beach, California. The lease which has been personally guaranteed by our Chief Executive Officer, David Zinberg and his sister, Marina Zinberg, commenced on September 15, 2012 and expires on December 31, 2017.

 

We previously leased a 50,000 square-foot office and warehouse and a separate 12,000 square-foot warehouse in Culver City, California but those leases expired in September 2012 and August 2012, respectively. In November 2009, we leased a 26,000 square-foot office and warehouse in Marina Del Rey, California and that lease expired in October 2012.  None of the expiring offices and warehouses lease agreements were extended at the end of the lease terms, and we do not anticipate significant expenses on repairing or restoring the condition of the previously leased offices and warehouses.

 

We are subject to various legal proceedings and claims that arise in the ordinary course of business and we currently believe that resolution of such legal matters will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.   See Part II, Item 1 — Legal Proceedings for additional disclosures.

 

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

 

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

 

Overview

 

We are a leading online retailer of jewelry, watches, accessories and other brand name merchandise featuring a live auction format on bidz.com. 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. We believe a key to our success has been our ability to efficiently and cost effectively source closeout jewelry, watches, accessories and brand name merchandise, and respond to changing consumer demands for our merchandise. We offer our products through a continuous live auction 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. In 2009, we started offering auctions with a minimum opening bid that is higher than $1. The majority of our auctions are short-term, often lasting several hours, providing immediate gratification to our customers and encouraging frequent visits and active viewing of our website.

 

Our jewelry products include gold, platinum, and silver jewelry set with diamonds, rubies, emeralds, sapphires, and other precious and semi-precious stones; watches, accessories and brand name merchandise.

 

In addition to our auction site we have online retail sites that offer similar items of merchandise as those listed for auction, as well as other designer products and consumer goods.  Buyz.com, our fixed price site for jewelry, provides us access to different types of consumers.

 

Modnique.com, our online retail site for designer products, clothing and consumer goods, provides a sales event concept. We negotiate favorable deals with designers and manufacturers, including purchasing inventory from recognizable brand names at deep discounts to attract customers that are fashion minded as well as cost conscious. Inventory sold is often held by our suppliers using a just in time ordering model.

 

We sell to consumers looking for reliable bargains on jewelry, watches, accessories, clothing and other brand name merchandise. Because we purchase and retain all of our 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 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 believe that some of our customers purchase from us and resell on eBay and other retail channels. Our auctions and fixed price sales are conducted 24 hours a day, seven days a week. We also offer telephone customer support and online live-help as well e-mail customer support.

 

Critical Accounting Policies

 

The preparation of our condensed consolidated 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.

 

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Table of Contents

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the parent company and its subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.

 

Segment Information

 

We have organized our operations into two segments: Bidz and Modnique. These segments are the primary areas of measurement and decision-making by our management. Bidz mainly features an online auction format that sells jewelry, watches, accessories and brand name merchandise. Modnique features a sales event concept to sell designer products and consumer goods. We rely on an internal management reporting process that provides segment information to the operating income level for purposes of making financial decisions and allocating resources, therefore, certain shared services and expenses are included under Bidz and not allocated proportionally to Modnique.

 

Revenue Recognition

 

We derive our revenue from four sources: merchandise sales, which include wholesale merchandise sales, shipping revenue, transaction fee revenue and other revenue. 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 online 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, charge-backs from customers and other discounts redeemed to obtain such sales. 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 provide layaway sales to our retail customers which are payable in monthly installments. The amounts paid and yet to be shipped are recorded as deferred revenue.

 

In the Condensed Consolidated Statement of Operations all amounts billed to customers by us related to shipping and handling are included in “Net revenue” and our shipping costs are included in “Cost of revenue.”

 

We include transaction fees revenue in net revenue. The 3% auction transaction fees are applied to merchandise sales on the bidz.com site but not to wholesale merchandise sales. The fees do not apply to sales on buyz.com and modnique.com.

 

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. Other revenue also includes advertising revenue we derive from allowing advertisers on our websites.

 

Sales taxes are excluded from revenue and included as a liability.

 

Returns and Allowances Reserve

 

We estimate potential future product returns and charge-backs 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 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 charge-backs are included in accrued expenses.

 

Cost of Revenue

 

Cost of revenue includes product costs, inventory reserves charges, gain or loss on foreign currency exchange when purchasing products from international vendors, 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 and increased by referral credits given to referees through our “refer a friend” program.

 

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Table of Contents

 

Outbound shipping costs on merchandise sales totaled $1.6 million and $1.2 million in the three month periods ended September 30, 2011 and 2012, respectively, and $4.3 million and $3.5 million in the nine months periods ended September 30, 2011 and 2012, respectively.

 

Inventories

 

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

 

Inventory Reserve

 

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.  We provide reserves against our inventory based on the estimated difference between the average selling price and the cost of inventory, which are included in cost of revenue. In addition, reserves are provided on potential loss of value on damaged goods and other not readily sellable items.

 

Inventory Co-op Marketing Contributions

 

We bill and collect from our inventory vendors co-op marketing contributions and account for them as a reduction in the cost of inventory purchased and cost of sales. We cannot specifically identify the benefits to each vendor, and consequently, co-op marketing contributions are charged against inventory as a reduction of costs and amortized as a reduction of cost of sales. For the three month periods ended September 30, 2011 and 2012, we have recognized $896,000 and $354,000 of co-op marketing contributions, respectively, and for the nine month periods ended September 30, 2011 and 2012, we have recognized $3.8 million and $1.7 million, respectively. Approximately $2.8 million and $1.4 million remains unamortized as an offset to inventory as of December 31, 2011 and September 30, 2012, respectively. Receivable from vendors for co-op marketing contributions, less allowance for doubtful accounts, is included in other current assets and amounted to $796,000 and $11,000 as of December 31, 2011 and September 30, 2012, respectively.

 

Stock-Based Compensation

 

We recognize in our condensed consolidated financial statements the cost resulting from all share-based compensation transactions, including grants of stock options and restricted stock awards, based on their fair values on the measurement date, and recognized over the vesting period. We use the Black-Scholes option pricing model to estimate the value of our options. Our assessment of the estimated compensation charges will be affected by our stock price as well as assumptions 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).

 

Description of Our Revenue, Costs, and Expenses

 

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

 

 

 

Three Months Ended September 30,

 

Nine  Months Ended September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Net revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

Gross profit

 

23.5

 

21.6

 

24.9

 

22.4

 

Operating expenses:

 

 

 

 

 

 

 

 

 

General & administrative

 

23.9

 

31.7

 

24.1

 

32.3

 

Sales & marketing

 

11.9

 

5.7

 

9.6

 

8.0

 

Depreciation & amortization

 

0.6

 

0.3

 

0.6

 

0.5

 

Total operating expenses

 

36.4

 

37.7

 

34.3

 

40.8

 

Loss from operations

 

(12.9

)

(16.1

)

(9.4

)

(18.4

)

Income tax benefit (expense)

 

5.7

 

(0.0

)

(1.6

)

(0.0

)

Net loss

 

(7.2

)%

(16.1

)%

(11.0

)%

(18.4

)%

 

Net Revenue

 

Substantially all of our net revenue consists of jewelry, accessories, and consumer products sold via the Internet, net of returns. We also generate net revenue from wholesale merchandise sales that is not online, shipping and handling, auction transaction fees and other revenue.

 

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Table of Contents

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales

 

85.9

%

80.1

%

84.6

%

82.1

%

Wholesale merchandise

 

7.1

 

10.4

 

7.2

 

7.7

 

Shipping & handling

 

4.4

 

7.5

 

5.2

 

8.1

 

Transaction fee

 

2.1

 

1.6

 

2.4

 

1.7

 

Other revenue

 

0.5

 

0.4

 

0.6

 

0.4

 

 

 

 

 

 

 

 

 

 

 

Total net revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

 

Gross Profit

 

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 net of 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 restricted stock awards to employees and directors.

 

Sales and Marketing Expenses

 

Our sales and 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 generating demand for our products and increasing net revenue.

 

Comparison of Three Months Ended September 30, 2012 to Three Months Ended September 30, 2011

 

Net loss in the three months ended September 30, 2012 was $2.4 million or $0.13 per basic and diluted share and in the three months ended September 30, 2011 was $1.5 million or $0.08 per basic and diluted share. Net loss increased by $961,000 in the three months ended September 30, 2012 compared to the prior period due to a decrease in revenue and gross profit and partially offset by a decrease in operating expenses.

 

Net Revenue

 

Net revenue decreased 25.6 % to $15.1 million in the three months ended September 30, 2012 from $20.3 million in the three months ended September 30, 2011. Wholesale merchandise sales increased to $1.6 million in the three months ended September 30, 2012 compared to $1.4 million in the three months ended September 30, 2011.

 

We continue to experience a slowdown in our revenue. The decrease in net revenue was due primarily to weak consumer demand for our jewelry and other discretionary products offset by contributions from our modnique.com website which markets affordable brand name designer products. We expect that demand for our jewelry and other discretionary merchandise will continue to remain weak and cause a negative effect on our revenue and gross profit, as consumers remain cautious with their spending amid slow economic growth.

 

Gross Profit

 

Gross profit decreased 31.6 % to $3.3 million in the three months ended September 30, 2012 from $4.8 million in the three months ended September 30, 2011. The decrease in gross profit resulted mainly from the decrease in sales price on our auction site.  Gross profit margin decreased to 21.6% in the three months ended September 30, 2012 compared to 23.5 % in the prior year period.

 

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Table of Contents

 

General and Administrative Expenses

 

General and administrative expenses were relatively flat at $4.8 million in the three months ended September 30, 2012 compared to   $4.8 million in three months ended September 30, 2011. General and administrative expense as a percentage of net revenue increased to 31.7% in the three months ended September 30, 2012 compared to 23.9% in the three months ended September 30, 2011 mainly on deleveraging from lower revenue in the current period compared to the prior year period.

 

Sales & Marketing Expenses

 

Sales and marketing expense decreased 64.1% to $861,000 in the three months ended September 30, 2012 from $2.4 million in the three months ended September 30, 2011. Sales and marketing expense as a percentage of net revenue decreased to 5.7% in the three months ended September 30, 2012 from 11.9% in the three months ended September 30, 2011. Much of the effort to reduce operating expenses came from the decrease in sales and marketing expense.

 

Income Tax Expense

 

As a result of cumulative losses in recent years and our current projections, we no longer believe that we will more likely than not be able to utilize our net deferred tax assets in their entirety. As such, we have recorded a valuation allowance of $986,000 for the net deferred tax assets in excess of our carryback availability in the three month period ended September 30, 2012, compared to $161,000 in the three month period ended September 30, 2011.

 

Income tax benefit was $1,000 in the three months ended September 30, 2012 compared to $1.1 million in the three months ended September 30, 2011, with effective tax rates of 0% and 44.0%, respectively.

 

Comparison of Nine Months Ended September 30, 2012 to Nine Months Ended September 30, 2011

 

Net loss in the nine months ended September 30, 2012 was $8.8 million, or $0.48 per basic and diluted share compared to $7.1 million or $0.37 per basic and diluted share in the nine months ended September 30, 2011. Net loss increased by $1.7 million in the nine months ended September 30, 2012 compared to the prior year period mainly due to the decrease in revenue and gross profit offset by a decrease in operating expenses.

 

Net Revenue

 

Net revenue decreased 26.6% to $47.9 million in the nine months ended September 30, 2012 from $65.2 million in the nine months ended September 30, 2011. Wholesale merchandise sales were $3.7 million in the nine months ended September 30, 2012 compared to $4.7 million in the nine months ended September 30, 2011.

 

We continue to experience a slowdown in our revenue. The decrease in net revenue was due primarily to weak consumer demand for our jewelry and other discretionary products, offset by contributions from our new website, modnique.com. We expect that demand for our discretionary merchandise will continue to remain weak and cause a negative effect on our revenue and gross profit, as consumers remain cautious with their discretionary spending amid slow economic growth.

 

Gross Profit

 

Gross profit decreased 33.9% to $10.7 million in the nine months ended September 30, 2012 from $16.3 million in the nine months ended September 30, 2011. The decrease in gross profit resulted mainly from the decrease in sales price on our auction site.  Gross profit margin decreased to 22.4% in the nine months ended September 30, 2012 compared to 24.9% in the prior year period.

 

General and Administrative Expenses

 

General and administrative expenses decreased by 1.7% to $15.5 million in the nine months ended September 30, 2012 from $15.7 million in the nine months ended September 30, 2011. General and administrative expenses as a percentage of net revenue increased to 32.3% in the nine months ended September 30, 2012 from 24.1% in the nine months ended September 30, 2011 mainly on deleveraging from lower revenue in the current period compared to the prior year period.

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased 38.6% to $3.8 million in the nine months ended September 30, 2012 from $6.3 million in the nine months ended September 30, 2011. Sales and marketing expenses as a percentage of net revenue decreased to 8.0% in the nine months ended September 30, 2012 from 9.6% in the nine months ended September 30, 2011.

 

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Income Tax Expense

 

As a result of cumulative losses in recent years and our current projections, we no longer believe that we will more likely than not be able to utilize our net deferred tax assets in their entirety. As such, we have recorded a valuation allowance of $3.2 million for the net deferred tax assets in excess of our carryback availability in the nine month period ended September 30, 2012, compared to a valuation allowance of $3.6 million in the nine month period ended September 30, 2011.

 

Income tax expense was $4,000 in the nine months ended September 30, 2012 compared to $1.0 million in the nine months ended September 30, 2011, with effective tax rates of 0% and (16.7%), respectively.

 

Liquidity and Capital Resources

 

The significant components of our working capital are inventory and liquid assets such as cash and accounts receivable, reduced by 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, 2012, we had a working capital surplus of $13.1 million and no debt obligations. Net cash provided by operating activities was $2.0 million in the nine months ended September 30, 2012 compared to net cash used for operating activities of $6.9 million used in the nine months ended September 30, 2011. Cash in the nine months ended September 30, 2012 was primarily affected by changes in net loss, accounts receivable, inventories, other current assets, and accounts payable.  Cash in the nine months ended September 30, 2011 was primarily affected by changes in net loss, deferred taxes, inventories, other receivables and other current assets. Our inventories and accounts payable generally increase or decrease in line with changes in our inventory strategy, which is influenced by our ability to secure inventory that we believe will improve our sales and/or gross margins.

 

We recorded a net loss of $8.8 million in the nine months ended September 30, 2012 compared to $7.1 million in the nine months ended September 30, 2011. In the nine months ended September 30, 2012, accounts receivable decreased by $1.0 million, inventories decreased by $8.2 million, other current assets decreased by $2.1 million, and accounts payable decreased by $2.2 million. In the nine months ended September 30, 2011, deferred taxes decreased by $3.2 million,  inventories increased by $2.5 million, other receivables decreased by $1.2 million and other current assets increased by $2.1 million..

 

Net cash used in investing activities was $235,000 in the nine months ended September 30, 2012 compared to $294,000 in the nine months ended September 30, 2011. In the nine months ended September 30, 2012, cash was used for capital expenditures related mainly to acquisition of office and computer equipment, software and $196,000 was used for leasehold improvements on our new office and warehouse.  In the nine months ended September 30, 2011, cash was used for capital expenditures related mainly to acquisition of office and computer equipment, software and $95,000 was used for acquisition of intangible assets.

 

In the nine months ended September 30, 2012, net cash of $44,000 was used in financing activity to retire common stock from net vesting of restricted shares to pay for employee payroll taxes. In the nine months ended September 30, 2011, net cash of $99,000 was used in financing activity principally to retire common stock from net vesting of restricted shares to pay for employee payroll taxes.

 

We believe that cash currently on hand and cash flows from operations will be sufficient to continue our operations for the foreseeable future. However, no assurance can be given that our cash flows from operations will be sufficient, given our recent losses from operations. Our future capital requirements will depend on many factors, including our revenue; the extent of our advertising and marketing programs; the levels of the inventory we carry; and other factors relating to our business. We may require additional financing in the future in order to execute our operating plan and continue as a going concern, 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.

 

If adequate funds are not available, we may be required to reduce our purchase of inventories, delay payments to our suppliers and delay or terminate expenditures. This could have a material adverse effect on us.  These factors raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

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Contractual Obligations

 

The following table presents our contractual obligations as of September 30, 2012 over the next five years and thereafter (in thousands):

 

Payments by period

 

Total
amount

 

Less than
1 year

 

1 to 3
 years

 

3 to 5
years

 

After 5
years

 

Property leases

 

$

3,009

 

$

466

 

$

1,092

 

$

1,282

 

$

169

 

Equipment leases

 

9

 

9

 

 

 

 

Patent license

 

420

 

210

 

210

 

 

 

 

 

$

3,438

 

$

685

 

$

1,302

 

$

1,282

 

$

169

 

 

We are obligated under the lease agreements of our offices and warehouses and office equipment, and licensing agreement on certain patents. On August 1, 2012, we signed a new lease agreement for a 50,000 square-foot office and warehouse in Redondo Beach, California. The lease which has been personally guaranteed by our Chief Executive Officer, David Zinberg and his sister, Marina Zinberg, commenced on September 15, 2012 and expires on December 31, 2017.

 

We previously leased a 50,000 square-foot office and warehouse and a separate 12,000 square-foot warehouse in Culver City, California but those leases expired in September 2012 and August 2012, respectively. In November 2009, we leased a 26,000 square-foot office and warehouse in Marina Del Rey, California and that lease expired in October 2012.  None of the expiring offices and warehouses lease agreements were extended at the end of the lease terms, and we do not anticipate significant expenses on repairing or restoring the condition of the previously leased offices and warehouses.

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

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

 

ITEM 4 - CONTROLS AND PROCEDURES

 

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 not effective because of the material weaknesses in our internal control over financial reporting discussed below.  Notwithstanding the material weaknesses described below, management has concluded that our financial statements for the periods covered by and included in this report are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States for the periods presented herein.

 

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 in the United States. 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 in the United States, 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.

 

During the three months ended September 30, 2012, we identified control deficiencies that represent material weaknesses in our operations that may impact financial reporting. These control deficiencies resulted primarily from changes in management and a significant reduction in our workforce. These control deficiencies related to: (i) maintaining sufficient staff to adequately perform internal controls tasks and maintain appropriate internal control policies and procedures; (ii) maintaining an effective control environment specifically in ensuring proper segregation of duties to maintain adequate checks and balances, and (iii) maintaining an effective control environment over management oversight specifically in ensuring an internal audit function and internal control policies and procedures are in place and effective.

 

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As a result of the foregoing, management concluded that our internal control over financial reporting as of September 30, 2012 was not effective.

 

Changes in Internal Control over Financial Reporting

 

As described above, there were changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended September 30, 2012, 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, but 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 or will be 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.

 

PART II. OTHER INFORMATION

 

ITEM 1 - LEGAL PROCEEDINGS

 

On November 6, 2012, we filed an action entitled Bidz.com, Inc. v. Glendon Group, Inc. et al. in the Court of Chancery of the State of Delaware, against defendants Glendon Group, Inc., Bidz Acquisition Company, Inc., Weston Capital Management, LLC, and Weston Capital Master Fund III Ltd. On May 17, 2012, we entered into an Agreement and Plan of Merger by and among our Company, Glendon Group, Inc., a Delaware corporation (“Parent”), and Bidz Acquisition Company, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Subsidiary”), pursuant to which the Merger Subsidiary is to merge (the “Merger”) with and into our Company, with our Company surviving the Merger as a wholly-owned subsidiary of Parent. As of the date of this report Glendon Group and Merger Subsidiary have not closed the Merger, despite the satisfaction of all conditions to their respective obligations to close. The suit requests expedited proceedings to compel Glendon Group to specifically perform its obligation to close the Merger and to compel Weston Capital Management LLC and its affiliated fund to honor their joint and several equity commitment and guarantee obligations entered into in connection with the Merger Agreement by funding sufficient capital to complete the Merger. See Note 1 to Notes to Condensed Consolidated Financial Statements — “Subsequent Events”.

 

Valrick Uechi, Individually and on Behalf of All Others Similarly Situated, vs. BIDZ.com, Inc., David Zinberg, Peter G. Hanelt, Garry Y. Itkin, Lawrence Y. Kong, Glendon Group, Inc. and Bidz Acquisition Company, Inc., filed on May 22, 2012 (the “Uechi Action”); and Al Cauchon, Individually and on Behalf of All Others Similarly Situated, vs. BIDZ.com, Inc., David Zinberg, Peter G. Hanelt, Garry Y. Itkin, Lawrence Y. Kong, Glendon Group, Inc. and Bidz Acquisition Company, Inc., filed on May 23, 2012 (the “Cauchon Action,” and together with the Uechi Action, the “California Actions”). Both actions were filed as class actions in the Superior Court of California, County of Los Angeles on behalf of holders of the common stock of the Company and seek to enjoin the acquisition of all publicly owned shares of the Company’s common stock by Glendon Group, Inc. and Bidz Acquisition Company, Inc. for $0.78 per share in cash, or, in the event the proposed transaction is consummated, to recover damages resulting from the individual Defendants’ alleged violations of their fiduciary duties. Plaintiffs in both actions also claim that in facilitating the acquisition of the Company by Glendon Group for grossly inadequate consideration and through a flawed process, each of the Defendants breached and/or aided other Defendants’ breaches of their fiduciary duties of loyalty, good faith and independence, insofar as they engaged in self-dealing and obtained for themselves personal benefits, including personal financial benefits, not shared equally by Plaintiff and the other Company stockholders.  Plaintiff in the Uechi Action filed a First Amended Complaint on July 3, 2012.  On July 10, 2012, Plaintiff in the Uechi Action applied ex parte seeking expedited discovery.  The Members of the Special Committee, Glendon Group and Merger Subsidiary opposed Plaintiff’s ex parte application and simultaneously applied ex parte for an order shortening time on a motion to stay.  On July 10, 2012, the Court denied both ex parte applications, but related and consolidated the California Actions and set a briefing schedule for the motion to stay and the motion for expedited discovery.  Both motions were fully briefed and were heard on Monday, July 30, 2012.  At the hearing, the court denied both Plaintiffs’ Motion for Expedited Discovery and the Defendants’ Motion to Stay, but stated that the matter would remain stayed until the case management conference scheduled for Monday, August 13, 2012. On September 28, 2012, the California Actions were dismissed with prejudice by the Court.

 

Paul Morrison, On Behalf of Himself and All Others Similarly Situated, v. BIDZ.com, Inc., Peter G. Hanelt, Garry Y. Itkin, Lawrence Y. Kong, David Zinberg, Glendon Group, Inc., and Bidz Acquisition Company, Inc., filed on May 23, 2012 (the “Morrison Action”); Gerard Gress, Individually and on Behalf of All Others Similarly Situated, v. BIDZ.com, Inc., David Zinberg, Peter G. Hanelt, Lawrence Y. Kong, Garry Y. Itkin, Bidz Acquisition Company, Inc. and Glendon Group, Inc., filed on June 5, 2012 (the “Gress Action”); and Lucille Soong, On Behalf of Herself and All Others Similarly Situated, v. BIDZ.com, Inc., Peter G. Hanelt, Garry Y. Itkin, Lawrence Y. Kong, David Zinberg, Glendon Group, Inc., and Bidz Acquisition Company, Inc., filed on June 7, 2012 (the “Soong Action,” and together with the Morrison Action and the Gress Action, the “Delaware Actions”). The Delaware Actions were filed as class actions in the Court of Chancery of the State of Delaware on behalf of the public stockholders of the Company against the Company and its Board of Directors to enjoin the proposed transaction, claiming that the merger and related transactions are the product of a flawed, unfair process resulting from the Board’s breach of fiduciary duties. Plaintiffs in the Delaware Actions also allege that the Company and Glendon Group, Inc. and, in the case of the Gress Action, Merger Subsidiary, aided and abetted the individual defendants in their breaches of fiduciary duties. 

 

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On July 5, 012, Delaware counsel for the Special Committee entered an appearance in each of the Delaware Actions.  On July 20, 2012, the Special Committee moved to dismiss each of the Delaware Actions for failure to state a claim upon which relief can be granted and for failure to comply with the demand requirements of Delaware Chancery Court Rule 23.1.  The Special Committee also moved, in the alternative, to strike the class action allegations of the verified complaints in the Delaware Actions. On July 30, 2012, Plaintiffs in the Delaware Actions dismissed each of their actions without prejudice. On June 5, 2012, plaintiffs in the Delaware Actions filed notices of voluntary dismissal with the Delaware Chancery Court and advised the Court they were dismissing the Delaware Actions and intended to participate in the California Actions.

 

In May and June, 2009, the Company and certain of its officers were named as defendants in three parallel class action complaints filed in the United States District Court for the Central District of California (Ramon Gomez v. Bidz.com, Inc., et al., cv09-3216 (CBM) (C.D. Cal.; filed on May 7, 2009); James Mitchell v. Bidz.com, Inc., et al., cv09-03671 (CBM) (C.D. Cal.; filed on May 22, 2009); Mark Walczyk v. Bidz.com, Inc., et al., cv09-0397 (CBM) (C.D. Cal.; filed on June 3, 2009)). On July 30, 2009, the Court consolidated the cases. The consolidated complaint charges violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and alleges that the Company failed to disclose unethical and fraudulent business practices, that it did not have controls in place to prevent “shill bidding,” that it uses unreliable or false appraisal prices on its merchandise, and that it failed to correctly account for and disclose in detail its co-op marketing contributions and minimum gross profit guarantees. On May 25, 2010, in a 30-page opinion, the Honorable Consuelo B. Marshall of the United States District Court granted the Company’s Motion to Dismiss the securities fraud complaint with leave to amend. On June 22, 2010, the plaintiff filed its amended complaint. On July 30, 2010, the Company filed a Motion to Dismiss the amended complaint and on September 8, 2010, the Plaintiff filed another amended complaint. On September 27, 2010, the Company filed another Motion to Dismiss the amended complaint, which was heard by the Court on November 1, 2010.  The Court took our Motion under submission in November 2010, and in February 2011 the Court denied the Motion to Dismiss. In November 2011, we reached an agreement in principle to settle the case and are waiting for the Court to approve and finalize the settlement.

 

We are, from time to time, a party to disputes arising from normal business activities, including various employee-related matters. In the opinion of our management, resolution of these matters, individually or collectively, will not have a material adverse effect upon our financial condition or future cash flows and operating results.

 

ITEM 1A. - RISK FACTORS

 

Our business, financial condition, results of operations, cash flows, and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Quarterly Report on Form 10-Q, as well as other written or oral statements made from time to time by us or by our authorized officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “seeks,” “projects,” “will,” “would,” and similar expressions are intended to identify such forward-looking statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events, or otherwise. Although we believe that the expectations, plans, intentions, and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. The risks, uncertainties, and other factors that our stockholders and prospective investors should consider include, but are not limited to, the following:

 

We have material weaknesses in internal controls in the operations of the company in the third quarter of 2012 resulting from changes in management and a reduction in our workforce.

 

We have material weaknesses in internal controls in the operations of the Company in the third quarter of 2012 that may impact financial reporting. Changes in management and a significant reduction in our workforce in the second quarter of 2012 have changed the operations of the Company and the related internal control processes and procedures. We have insufficient staff to adequately perform internal controls tasks and ensure proper segregation of duties. The resulting failure to maintain adequate checks and balances may result in inaccurate financial reporting, could allow for errors and fraud, and could cause our investors to lose confidence in the reliability of our financial reporting, which may adversely affect our stock price.

 

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A major reduction in our workforce may impair our business

 

We rely on our employees to be attentive to customer service and fulfillment of orders in a timely manner.  A major reduction in our workforce may result in insufficient staff to properly service our customers and fulfill their orders. This may potentially impact our customers’ satisfaction due to delays and interruptions in our operations and impact our sales and business.

 

Our merger will not be successful and our share price may fall if the “going-private” transaction is not funded

 

On May 17, 2012, we entered into an Agreement and Plan of Merger by and among our Company, Glendon Group, Inc., a Delaware corporation (“Parent “), and Bidz Acquisition Company, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Subsidiary “), pursuant to which the Merger Subsidiary is to merge with and into our Company (the “Merger”), with our Company surviving the Merger as a wholly-owned subsidiary of Parent.

 

Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each share of our Company’s common stock issued and outstanding immediately prior to the effective time (other than shares owned by Parent, our Company or their respective subsidiaries and shares held by dissenting stockholders), automatically would be cancelled and converted into the right to receive $0.78 per share in cash, without interest.  The merger is a “going-private” transaction, and if the merger is completed, we no longer would be a public company and our common stock no longer would be traded.

 

On September 27, 2012, we held our annual meeting of stockholders.  At the annual meeting, each proposal presented was approved by the required vote of our Company’s stockholders, including the adoption of the Merger Agreement, and therefore each condition to Glendon Group’s and Merger Subsidiary’s respective obligations to close the Merger have been satisfied.

 

While we have requested that Glendon Group and Weston Capital Management LLC and its affiliated fund honor their obligations to fund and close the Merger, as of the date of filing this Form 10-Q Glendon Group has not closed the Merger.

 

We therefore have filed suit in Delaware requesting expedited proceedings to compel Glendon Group to specifically perform its obligation to close the Merger and to compel Weston Capital Management LLC and its affiliated fund to honor their joint and several equity commitment and guarantee obligations entered into in connection with the Merger Agreement by funding sufficient capital to complete the Merger. See Part II, Item 1 — Legal Proceedings.

 

Notwithstanding the filing of the Delaware lawsuit, we intend to continue to work with Glendon Group and with Weston Capital and its affiliated fund to seek to close the Merger as expeditiously as practicable.

 

However, there can be no assurance that the Merger will close and that the going private transaction will be completed. If the Merger fails to close our share price could fall substantially, and during the period that Glendon Group has been in breach of its obligation to close the Merger, our share price has fallen significantly below the per share merger price.

 

We may be subject to additional legal proceedings relating to our “going-private” transaction

 

We may become subject to additional shareholder lawsuits arising out of the Merger and going private transaction, which could cause us to incur significant expenses and result in damages or losses, which in light of our operating losses and working capital needs, would have a material adverse effect on our business.

 

If we do not become profitable and/or generate positive cash flows from operations and are unable to secure additional financing we are at risk of continuing as a going concern

 

We cannot be certain when anticipated cash flows from operations will be sufficient to satisfy our ongoing operating and capital requirements. Our belief is based on our operating plan, which in turn is based on assumptions that may prove to be incorrect. If our financial resources are insufficient we may require additional financing in order to execute our operating plan and continue as a going concern.  We cannot predict whether this additional financing will be in the form of equity, debt, or another form. We may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all.  In any of these events, we may be unable to implement our current operating plans, repay our liability obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on our business, prospects, financial condition, results of operations and raises substantial doubt about our ability to continue as a going concern.

 

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Our business may depend on our ability to successfully introduce and expand new product offerings, including those on modnique.com

 

Our ability to significantly increase our net sales and return to profitability may depend on our ability to successfully introduce and expand new product lines beyond our current offerings. In February 2010, we launched modnique.com, that is focused on online retailing of designer products through a sale event concept. If we offer a new website such as modnique.com that is not well accepted by consumers, the Bidz.com brand and reputation could be adversely affected, our net sales may fall short of expectations and we may incur substantial expenses that are not offset by increased net sales. Introduction and expansion of new product lines may also strain our management and operational resources.

 

Adverse domestic and global economic conditions or the perception of said conditions may have adverse effects on our operating results.

 

The continued success of our business depends on the willingness of our customers to spend in a discretionary manner. Jewelry is essentially perceived as a luxury good. If the economy is weak, it may cause people to feel less comfortable purchasing discretionary goods and would cause a negative effect on our operating results. Our annual and quarterly operating results may vary significantly in the future based on economic factors and consumer sentiments over which we have little or no control. Because we have little or no control over these factors and/or their magnitude, our operating results are difficult to predict. Any substantial adverse change in economic factors could negatively affect our business and results of operations.

 

Our business has been and may continue to be significantly impacted by worldwide economic conditions and the current uncertainty in the outlook for the global economy makes it more likely that our actual results will differ materially from expectations.

 

Global financial markets have been experiencing extreme disruptions in recent years, including severely diminished liquidity and credit availability, poor consumer confidence, slow economic growth, high unemployment rates, and uncertainty about economic stability. There can be no assurance that there will not be further deterioration in financial markets and confidence in economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The current tight credit and uncertainty in financial markets may lead consumers to postpone spending, which may cause our customers to reduce or delay purchases of our products. Demand for our products is a function of the health of the economies in the United States and around the world. Since the US economy and other economies around the world still face uncertain growth, and there is significant consumer uncertainty, the demand for our products has been and may continue to be adversely affected and therefore, demand for our products and our operating results have been and may continue to be adversely affected as well. We cannot predict the timing, strength or duration of any economic disruption or subsequent economic recovery, worldwide, in the United States, in our industry, or in the retail market. These and other economic factors have had and may continue to have a material adverse effect on demand for our products and on our financial condition and operating results.

 

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

 

Our annual and quarterly operating results may fluctuate based on how well we manage our business to respond to the economy. Some of these factors include but are not limited to the following:

 

·          our ability to manage our sales and marketing efforts;

 

·          our ability to structure our organization to achieve our operating objectives;

 

·           our ability to meet the needs of our customers; and

 

·          our ability to manage expenses and inventory levels.

 

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

 

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

 

Historically, sales in the jewelry industry are seasonal and have been higher in the fourth quarter of the calendar year as a result of higher consumer spending during the December holiday season. 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. Our seasonal sales patterns 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 in prior periods may not be indicative of our future performance.

 

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 varying 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 as a prediction of our future sales.

 

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

 

We have funded our operations through the 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 with respect to payment terms. Accordingly, there is a risk that we may default on our supplier payment obligations if we are unable to generate sufficient cash through sales in a timely manner.

 

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 source and place for auction; our decision or ability 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 prices for precious metals and gems; changes in consumers’ discretionary income, confidence and demand for our products; and changes in fashion trends.

 

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 price and volume 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;

 

·                  our stock is subject to short selling and may cause trading in our common stock to be volatile;

 

·                  our stock is subject to margin calls and may cause trading in our common stock to be volatile;

 

·                  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;

 

·                  continued uncertainty as to whether or when the “going private” merger transaction will close;

 

·                  uncertainty as to the cost or outcome of litigation relating to the pending merger;

 

·                  issuance of additional shares of common stock or other securities; and

 

·                  intellectual property or litigation developments.

 

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Repurchases of our common stock may not prove to be the best use of our cash resources.

 

We have and may continue to repurchase shares of our common stock. Since the inception of our share repurchase program in June 2007, through September 30, 2012, we have repurchased 6.8 million shares for a total of approximately $21.7 million. Our board of directors authorized the repurchase of up to $33.5 million of our common stock and a total of $11.8 million remains available for repurchases. These repurchases and any repurchases we may make in the future may not prove to be at optimal prices and our use of cash for the stock repurchase program may not prove to be the best use of our cash resources and may adversely impact our future liquidity.

 

We have been and may continue to become the target of securities class action suits and derivative suits which could result in substantial costs and divert management attention and resources.

 

Securities class action suits and derivative suits are often brought against companies following periods of volatility in the market price of their securities, such as we experienced at the end of 2007. We also may become subject to litigation relating to the pending merger transaction. Defending against these suits, even if meritless, can result in substantial costs to us and could divert the attention of our management.

 

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 maintain and 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 we re-auction 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 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, participation in affiliate programs, and our refer a friend program. 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 from 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 affect our business.

 

Our business will depend on our ability to maintain 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 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 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.

 

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

 

We have, over time, expanded 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 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.

 

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

 

Our jewelry, watch, accessories, and brand name merchandise descriptions are provided by our full-time Gemological Institute of America certified or trained gemologists and other experienced product specialists. We also provide appraisal summaries from third-party gemological laboratories for some of our jewelry items. 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 discrepancies 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 convenience to resellers, we provide “Compare,” “List” and/or “Retail” prices for merchandise listed on our website. These prices are not meant to reflect fair market values 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 do not have a guaranteed supply of products

 

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

 

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, including eBay, Blue Nile and Overstock. We also encounter competition from national jewelry retail chains, such as Zales, and Kay Jewelers, and mass retailers and other enterprises, such as Wal-Mart, Target, J. C. Penney, Costco, QVC, and Home Shopping Network. Many of our competitors have greater brand recognition, longer 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 better 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.

 

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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 a substantial portion of 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 generate profits 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.

 

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 due to increase in demand or 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.

 

Because we carry our 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 our 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 manufactured for us. In addition, it is important that we are able to purchase merchandise 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 regulatory requirements and our interpretation of current law, we currently collect sales or other taxes with respect to shipments of goods into several states including California, New York, Rhode Island and North Carolina. 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 and third-party carriers as part of our fulfillment process, and these third parties may fail to meet shipping schedules or requirements.

 

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

 

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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 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 website and back-office servers are located at a third-party co-location facility operated by Savvis Inc. in El Segundo, CA which is vulnerable to fire, earthquakes, and similar events.

 

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 required to meet our customer traffic. Our servers and other hardware that run office administration tasks are located at our headquarters. Our servers and other hardware are vulnerable to damage or interruption from human error, fire, flood, significant power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquakes, and similar events. We do not currently have fully 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, reputation, 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.

 

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, FCC regulations, the Children’s Online Privacy Protection Act, CA SB 1389, HIPAA, the Fair Credit Reporting Act, the Homeland Security Act, and related regulations. In May 2009, we received a Civil Investigation Demand for Information from the Federal Trade Commissioner (“FTC”) relating to email marketing practices. We have been cooperating fully with the FTC regarding this matter, and in a notice dated April 2, 2010, FTC has decided not to recommend enforcement action against us. 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 policy, 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.

 

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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 risk 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 our security measures, placing private customer transaction data at risk. Our security measures may not prevent all security breaches which 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 and managed by 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.

 

In addition, the Payment Card Industry (PCI) imposes strict customer credit card data security standards that require us to provide quarterly self assessments to ensure that our customer credit card information is protected. Failure to meet the PCI data security standards could result in substantial fines and/or loss of the right to collect credit card payments. The loss of credit card activity would materially impact operations.

 

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

 

We are susceptible to Distributed Denial of Service (DDOS) attacks from third parties that can impede the performance of our websites by causing slow-downs from massive incoming traffic to our websites and can even lead to shut downs. We were subject to such attacks in 2011 and have subsequently deployed several third party providers for DDOS protection. A sustained successful attack would harm our business and results of operations, however, does not comprise security.

 

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, reputation, and results of operations.

 

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.

 

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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 facilities in Redondo Beach, 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.

 

Our merchant bank processor, Visa, MasterCard, American Express, Discover Card and PayPal could increase the processing and interchange fees that they charge for transactions using their cards or service. Increases in processing and interchange fees may result in increased costs and reduced profit margin.

 

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 ongoing aggression and terrorist activities throughout the world. 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.

 

Our branded inventory may be vulnerable to complaints or claims of infringement on intellectual property rights.

 

We purchase branded merchandise from third party vendors and are relying on their licensing agreements with the brand owners. In the event that a third party vendor misrepresents its licensing rights, we are vulnerable to complaints or claims of infringement on intellectual property rights and could be subject to legal proceedings and/or barred from selling the affected merchandise. If the third party vendor does not have the ability to take financial responsibility over the infringement our results of operations could be adversely affected.

 

We may be subject to assertions by third parties for infringement of their intellectual property rights.

 

Third parties may in the future assert that we have infringed their intellectual property rights as we self-develop our auction platform and other operating systems. We have a larger exposure to 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 an 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 Effective trademark, copyright, patent, trade dress, trade secret, and domain name protection is very expensive to maintain and may require litigation.

 

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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.

 

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. As noted above, we have cooperated with the FTC in an investigation relating to email marketing and received no enforcement action against us. 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 was adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Those laws that do reference the Internet, such as the U.S. Digital Millennium Copyright Act and the European Union’s Directive on Distance Selling and Electronic Commerce, have only recently begun to be interpreted by the courts and implemented by the European Union member states, so their applicability and scope remain uncertain. As our activities and the types of goods listed on our website expand, regulatory agencies may claim that we or our users are subject to licensure in their jurisdiction, either with respect to our business in general, or in order to allow the sale of certain items, such as real estate, event tickets, boats, and automobiles.

 

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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 Chief Executive Officer.

 

Our performance depends substantially upon David Zinberg, our 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 July 2013 and renewable annually. The loss of the services of Mr. Zinberg would adversely affect our business and operations.

 

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 beneficially own approximately 19.8% of our common stock as of September 30, 2012. Marina Zinberg, who is an employee of our subsidiary, Modnique Inc., and the sister of David Zinberg, our Chief Executive Officer, owns an additional 18.4% 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.

 

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.

 

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.

 

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Table of Contents

 

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases of Equity Securities

 

The following table contains information about purchases of our common stock during the three months ended September 30, 2012:

 

 

 

 

 

 

 

Total Number of

 

Maximum

 

 

 

 

 

 

 

Shares

 

Dollar Value

 

 

 

Total

 

Average

 

Purchased as

 

of Shares that

 

 

 

Number

 

Price

 

Part of a

 

May

 

 

 

of

 

Paid

 

Publicly

 

yet be Purchased

 

 

 

Shares

 

per

 

Announced

 

Under the

 

2012

 

Purchased

 

Share

 

Program

 

Program (1)

 

Julyl 1 — July 31

 

 

 

 

 

$

11,837,088

 

August 1 — August 31

 

13,755

(2)

$

0.75

(2)

 

 

$

11,837,088

 

September 1 — September 30

 

 

 

 

 

$

11,837,088

 

Total

 

13,755

 

 

 

 

 

 

 

 


(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. In February 2009, we authorized an increase in the stock buyback program to $33.5 million. As of September 30, 2012 we have repurchased a total of approximately 6.8 million shares for a total of approximately $21.7 million. About $11.8 million remain available under the buyback program to repurchase shares in the open market. The stock buyback will be at prices deemed appropriate by management over a 24 month period.

 

(2)                                 The total number of shares purchased during August 2012 represents shares surrendered to the Company to satisfy tax withholding obligations in connection with vesting of restricted stock issued to employees. The deemed price paid was the closing price of our common stock on the NASDAQ Capital Market on the date that the restricted stock vested. Once repurchased, we immediately retired the shares.

 

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Table of Contents

 

ITEM 6 - EXHIBITS

 

31.1

 

Principal Executive Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

31.2

 

Principal Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

32.1

 

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

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

SIGNATURES

 

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

 

 

 

BIDZ.COM, INC.

 

 

 

 

By:

/s/ DAVID ZINBERG

 

 

 

 

 

David Zinberg

 

 

Chief Executive Officer

 

 

 

 

By:

/s/ LAWRENCE KONG

 

 

 

 

 

Lawrence Kong

 

 

Principal Accounting Officer
Chief Financial Officer

 

 

 

Dated: November 9, 2012

 

 

 

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