To Bidz.com: Thank you for the subpoena and the check, too!

Memo to Bidz.com CEO David Zinberg:

As you can see by the enclosed picture, I gladly accepted a subpoena from Bidz.com to testify in a class action lawsuit alleging consumer fraud by your company.

My research on Bidz.com (NASDAQ: BIDZ) is a freebie for securities regulators to help me try to get into heaven for past crimes at Crazy Eddie, though I doubt I can ever make up for my past evil acts. My blog posts on Bidz.com's inventory disclosures caused the Securities and Exchange Commission to investigate your company.

Therefore, I thank you for the $44 witness check as a small reward for my efforts, since no one else has paid me to research or write about your company. In fact, when a person from my former office told me that your company was trying to serve me with a subpoena and the attached witness check, I quickly took the subway downtown to accept service and your check.

Kindest regards,

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other family members mastermind one of the largest securities frauds uncovered during the 1980s. I pleaded guilty to three felonies.

I have no position in Bidz.com securities, long or short.

Diamonds Are Not Forever For Two Key Bidz.com Insiders

Company buys back stock while two key insiders sell their shares

On July 1, 2009, Bidz.com announced that in its latest quarter ended June 30 (Q2 2009), the company repurchased 714,000 common shares at an average price of $3.50 per share for a total cost of approximately $2.5 million. The press release went on to hype the company's future prospects:

"With the price of our stock continuing to trade below what we believe to be a reasonable valuation, our Board of Directors believe that the continued aggressive repurchase of our Company's shares is an excellent use of capital," said, David Zinberg, the Company's Chairman and Chief Executive Officer. "The combination of our liquidity, profitability and our ability to successfully execute our business strategy gives us confidence that the continued repurchase of our shares will help to deliver long-term shareholder value."

Meanwhile, during that same quarter David Zinberg (Bidz.com CEO) and his sister Marina Zinberg (Bidz.com Vice President) sold a combined amount of 162,417 shares and pocketed gross proceeds of approximately $595,512. David Zinberg sold 30,000 shares at an average price of $3.83 per share for total proceeds of $114,941, while Marina Zinberg sold 132,417 shares at an average price of $3.63 per share for total proceeds of $480,571 (Source: Various SEC Form 4's).

Therefore, while Bidz.com is telling investors that the price of its stock is "continuing to trade below what we believe to be a reasonable valuation," the company's two key insiders are selling their shares. Apparently, David and Marina Zinberg are not voting for their company's long term prospects with their pocketbooks.

All of David Zinberg's and all but the last two of Marina Zinberg's stock sales during Q2 2009 were completed under a 10b5-1 plan that helps executives defend against potential allegations of insider-trading by removing their discretion as to when their stock is sold (Details here and here). However, as I will describe below, David Zinberg continued to de-facto control his discretion in selling Bidz.com stock by first adapting a 10b5-1 plan, terminating it before its expiration, and later selling stock under an apparently new 10b5-1 plan.

David Zinberg goes in and out of 10b5-1 plans and flip flops on salary

On August 15, 2007, Bidz.com announced that David Zinberg adopted a 10b5-1 plan. The company disclosed:

Rule 10b5-1 allows officers and directors of public companies to adopt written pre-arranged stock trading plans when they are not in possession of material, nonpublic information. Once a Rule 10b5-1 trading plan is established, the insider retains no discretion over sales under the plan, and the trades are executed through a broker in accordance with the terms of the plan at later dates without regard to any subsequent material non-public information that the insider may receive.

In addition, Bidz.com disclosed that Zinberg's $290,000 annual salary was, "...voluntarily being reduced to $1 per year and he is not expected to receive any bonus or stock option grants." The plan was due to terminate on July, 31, 2008.

On February 28, 2008, the company reported that Zinberg terminated his 10b5-1 trading plan "effective immediately" or five months before the termination date of July 31, 2008:

...David Zinberg’s Rule 10b5-1 Trading Plan has been terminated effective immediately. This plan was originally implemented in August 2007, after Mr. Zinberg voluntarily reduced his annual salary to $1, with no stock option grants. The Board of Directors has reinstated Mr. Zinberg’s annual salary of $290,000 per annum, as well as his eligibility to earn an annual bonus, effective March 1, 2008. [Emphasis added.]

However, on December 17, 2008, David Zinberg resumed selling his stock "as part of a 10b5-1 plan." I could not find any press release or report filed with the SEC that disclosed when David Zinberg resumed his terminated 10b5-1 plan or started a new plan. In any case, David Zinberg sold more stock under a 10b5-1 plan after the Bidz.com reported the early termination of his original 10b5-1 plan.

According to Bidz.com's recent proxy statement filed with the SEC:

As of August 16, 2007, Mr. Zinberg voluntarily reduced his annual salary to $1 per year. Mr. Zinberg’s annual salary of $290,000 per annum, as well as his eligibility to earn an annual bonus, resumed as of March 1, 2008. Effective April 1, 2009, Mr. Zinberg’s employment agreement was amended to increase his base salary to $500,000 per annum. [Emphasis added.]

Now David Zinberg has his cake and can eat it, too. His salary increased from $1 per year to $500,000 per year and he is still selling stock under a 10b5-1 plan. Both David and Marina Zinberg control over 10 million shares of Bidz.com's 22.8 million outstanding shares and have effective control of the company. In addition, David Zinberg's initial adoption of a 10b5-1 plan, his later termination of such plan, and still later sales of stock under a 10b5-1 plan seems to be an end around to paper over his discretion to sell stock and avoid potential insider trading liability.

Hopefully, the company can provide some clarification on this issue.

Marina Zinberg has a 10b5-1 plan but sells stock outside the plan

Marina Zinberg's last two disclosed stock sales during Q2 2009, on June 26 and June 29, were not sold under a 10b5-1 plan. Therefore, she exercised her own discretion to sell her stock. On June 26, Marina Zinberg sold 4,567 shares at $3 per share for total proceeds of $13,701 and on June 29 she sold 7,850 shares at $2.94 per share and pocketed proceeds totaling $23,079. A few days after Marina sold those shares, Bidz.com issued the press release (above) claiming that the stock was undervalued and "confidence that the continued repurchase of our shares will help to deliver long-term shareholder value."

David and Marina Zinberg sell even more stock during Q3 2009

Just today, new SEC Form 4 filings revealed that both David Zinberg and Marina Zinberg sold even more stock after Q2 2009 pursuant to their 10b5-1 plans. David Zinberg sold another 10,000 shares and pocketed $29,240 in proceeds from July 1 to July 6. While Marina Zinberg sold another 18,900 shares and pocketed $53,537 in proceeds from July 1 to July 6 (Source: David Zinberg Form 4 and Marina Zinberg Form 4).

Should Bidz.com buyback stock with weak fundamentals?

In Q1 2009, Bidz.com reported revenues of $31.2 million compared to $61.9 million during the previous year period or about a 50% decline in revenues. The company also reported net income of $1.5 million compared to $4.6 million during the previous year period or about a 67% decline in net income (Source: 10-Q report).

At the end of Q1 2009, Bidz.com reported a cash balance of a mere $3.16 million. Working capital was reported at $33.4 million. Inventory, which is a key component of working capital, was reported at $38.5 million and it takes Bidz.com over 150 days to turnover its inventory. During Q1 2009, reported inventory loss reserves ballooned from $820k to $1.35 million or from 2.1% of gross inventory at the end of Q4 2008 to 3.3% of gross inventory at the end of Q1 2009, over a 50% increase in relative terms.

Bidz.com has not reported Q2 2009 financial results as of this blog post. The average analyst estimate for Q2 2009 sales growth is minus 45.4% and the average estimate of earnings per share growth is about minus 65%.

Today, Bidz.com common stock closed at $2.71 per share, far below the average price paid by the company to repurchase its shares and below the average selling price of both David and Marina Zinberg's shares during the latest quarter.

It seems like Bidz.com shareholders are getting the raw end of the deal as the company wastes precious resources by buying back stock during this time of economic uncertainty, while David and Marina Zinberg continue to cash out their stockholdings. Those Bidz.com stock buybacks seem to benefit the Zinberg's on the backs of other company shareholders.

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other family members mastermind one of the largest securities frauds uncovered during the 1980s. I pleaded guilty to three felonies.

I do not own any Bidz.com securities, long or short.

Bidz.com Auditors Cited by PCAOB in Five of Thirteen Audits Sampled

Bidz.com (NASDAQ: BIDZ) should seriously consider replacing Stonefield Josephson Inc. as its auditors. According to a March 2007 Public Company Accounting Oversight Board (PCAOB) Inspection Report, Stonefield Josephson, Inc. was cited for significant deficiencies in five of thirteen audits reviewed or about 38.5% of audits sampled. See below:

The scope of the inspection procedures performed included reviews of aspects of the performance of 13 of the Firm's audits of the financial statements of issuers. Those audits and aspects were selected according to the Board's criteria, and the Firm was not allowed an opportunity to limit or influence the selection process. The inspection team identified matters that it considered to be audit deficiencies. Full report here.

The deficiencies identified in five of the audits reviewed included deficiencies of such significance that it appeared to the inspection team that the Firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements.

Unfortunately, the PCAOB report does not identify which company audits failed inspection, even though many people have questioned such a policy. However, failing to "obtain sufficient competent evidential matter to support its opinion," in five of thirteen audits inspected, raises a red flag about the overall quality of Stonefield Josephson's audits.

This blog has written extensively about Bidz.com's inventory accounting disclosures and possible violations of Generally Accepted Accounting Principles in the company's accounting for inventories (details here, here, and here). The SEC started investigating such disclosures after I alerted them.

Bidz.com is besieged by a flurry of lawsuits, seeking class action status, alleging securities fraud by the company and David Zinberg (CEO and President), based on issues raised in reports by short seller Citron Research. In addition, the company is being sued for alleged shill bidding on its web site.

Written by:

Sam E. Antar

Disclosure:
I am a convicted felon and a former CPA. I pleaded guilty to three felonies for my role in the Crazy Eddie fraud as the former criminal CFO of the company.

I do not own any Bidz.com securities long or short.

Bidz.com under Siege from Investigations and Lawsuits

Bidz.com (NASDAQ: BIDZ) which is already under investigation by the Securities and Exchange Commission into its inventory accounting practices and is being sued for alleged shill bidding on its web site, is now facing several class action lawsuits alleging securities fraud and a new investigation by the Federal Trade Commission into its email marketing practices.

Last week, Barrack, Rodos & Bacine and Sarraf Gentile filed a class action lawsuit alleging securities fraud by Bidz.com and David Zinberg (CEO and President), based on issues raised in reports by short seller Citron Research (details of Citron reports here and here):

The complaint alleges that during the Class Period, defendants issued a series of false and misleading statements intended to project the picture of a financially sound and well-operating company, when, in fact, the company was operating with material deficiencies and undisclosed substantial problems that went to the heart of its business model. On November 26, 2007, a Citron Research article identified numerous "red flags" and revealed previously undisclosed material problems with the Company. Two days later Citron issued a second article that provided additional details, revealing, among other things, that the Company engaged improper business tactics in order to artificially raise the auction price of its products. On this news, the Company's stock price dropped from a closing price of $19.94 on Friday, November 23, 2007, to a low of $10.10 on November 28, a loss of nearly 50%. Note: Download lawsuit here.

In a press release, Bidz.com said that it "believes the plaintiffs' claims are entirely without merit and intends to defend the action vigorously." However, the company also disclosed that it "recently received a Civil Investigative Demand for information from the Federal Trade Commission relating to email marketing practices."

In February 2009, the SEC started investigating Bidz.com's inventory accounting practices and disclosures after I alerted them to possible violations of Generally Accepted Accounting Principles in accounting for inventories.

In August 2008, a class action lawsuit was filed against Bidz.com and certain members of its management, alleging that the "defendants have materially misrepresented the goods sold through the Bidz.com web site and are involved in a systematic program of shill bidding."

Advice to Bidz.com founder, CEO, and President David Zinberg

Be careful in selecting legal counsel and monitoring legal costs. Most white collar defense lawyers will defend your company to its last dollar and you to your last dollar.

Insist on detailed itemized billing with full documentation of costs. However, many law firms will even charge you for preparing invoices.

Watch out for document copying charges and pass along costs, such as those costs for sending legal staff home by car service due to overtime work on your account. Expert fees will eat any company alive, too.

Finally, it is a tossup over who is a worse opponent: Motivated government lawyers with almost infinite resources at their disposal or those bloodhound class action lawyers with a profit motive, representing clients screaming for justice.

Written by:

Sam E. Antar (a convicted felon and former CFO of Crazy Eddie)

Disclosure:

I do not own any Bidz.com securities, long or short.

SEC Investigating Bidz.com after Questions Raised in This Blog about Inventory Disclosures

After the market close yesterday, Bidz.com (NASDAQ: BIDZ) disclosed that the Securities and Exchange Commission started a formal investigation of the company's inventory accounting practices and other matters:

The Company was notified recently by the SEC of a formal investigation relating to certain aspects of its inventory accounting practices, as well as other matters. The Company intends to fully cooperate with the SEC regarding this matter. The Company remains confident its inventory accounting is correct and in full accordance with GAAP.

Apparently, the SEC responded to serious questions, first detailed in this blog, about Bidz.com's inventory disclosures and the company's possible violation of GAAP in accounting for inventories. I had contacted the SEC Los Angeles office.

For example, I examined Bidz.com's fiscal year 2007 10-K inventory disclosures. See below:

Inventories:

Inventories consist mainly of merchandise purchased for resale and are stated at the lower of first-in, first-out cost (FIFO) or market. We record reserves against our inventory equal to the difference between the cost of inventory and the average selling price that is lower than cost of inventory that is held for less than one year. In addition, for the years ended December 31, 2006 and 2007 we recorded reserves for obsolete and slow moving inventory of 100% of the value of inventory held for more than one year. If actual market conditions are less favorable than those projected by us, specific reserves or additional inventory write-downs may be taken.

According to Accounting Research Bulletin (ARB) No. 43, inventory must be valued at the lower of cost or market value. Market means the current replacement cost of inventory. If the current replacement cost of inventory is greater than its net realizable value (estimated selling price less cost of completion and disposal), net realizable value is considered market. If the current replacement cost of inventory is less than its net realizable value minus normal profit margins, than net realizable value minus normal profit margins is considered market. Therefore, the upper limit of market is net realizable value and the lower limit of market is net realizable value minus normal profit margins. Lower of cost or market may be applied to each individual inventory item, the total of each major category of inventory, or the aggregate total of inventory.

Inventory held less than one year

As detailed above, Bidz.com disclosed that "We record reserves against our inventory equal to the difference between the cost of inventory and the average selling price that is lower than cost for inventory that is held for less than one year."

The company's inventory disclosure for inventory held less than one year seems to violate GAAP. Bidz.com cannot use the "difference between the cost of inventory and the average selling price" in valuing its inventory. Average selling price is not net realizable value, since it does not deduct the cost of completion and disposal of inventory. Therefore, in this specific case, inventory may be overstated. Even if Bidz.com were to use net realizable value, the company could only use such a measure if the current replacement cost of inventory is greater than its net realizable value.

Inventory held more than one year

Bidz.com disclosed that "In addition, for the years ended December 31, 2006 and 2007 we recorded reserves for obsolete and slow moving inventory of 100% of the value of inventory held for more than one year." Here too, the company's inventory disclosure seems to violate GAAP. The lowest amount that inventory can be valued at is net realizable value (estimated selling price less cost of completion and disposal) minus normal profit margins.

It seems that Bidz.com's method of valuing inventory over one year old is arbitrarily based on the amount of time that the inventory is held, rather than the application of GAAP. Unless such inventory cannot be sold under any and all circumstances, Bidz.com cannot "record reserves of 100% of the cost of inventory held more than one year." Therefore, in this specific case, inventory may be understated.

In a follow-up posts (here and here), I detailed other Bidz.com questionable inventory disclosures from 2005 to 2008.

Meanwhile, Bidz.com founder and CEO David Zinberg is engaging in a retaliatory smear campaign against me for raising questions about Bidz.com's inventory disclosures. He has falsely claimed that I am short selling Bidz.com. I never owned any Bidz.com securities, long or short, and no one pays me to write about Bidz.com.

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure:

I have no position in Bidz.com securities long or short.

Lawsuit Alleges Shill Bidding on Bidz.com Web Site

On August 22, 2008, a class action lawsuit was filed against Bidz.com (NASDAQ: BIDZ) and certain members of its management, alleging that the "defendants have materially misrepresented the goods sold through the Bidz.com web site and are involved in a systematic program of shill bidding."
Although this lawsuit was filed last August, the company still has not yet disclosed it, in various press releases and 8-Ks filed with the Securities and Exchange Commission. The company will probably make the usual claim that the lawsuit is "meritless" and that they will put up a "vigorous defense," blah, blah, blah.

The lawsuit goes on to allege that:

David Zinberg, with the help of Marina Zinberg, built Bidz.com from a series of pawn shops into a major online retailer with hundreds of millions in annual revenue. The Company, however, is rife with corruption: it makes its money by misrepresenting the quality of its merchandise, and then, falsely bidding up these prices itself to trick buyers who would pay more than they would absent this fraud. These fraudulent acts are able to thrive in the corporate environment that the Zinbergs have created, one filled with related party transactions and suspicious accounting. [Emphasis added.]

Allegations of shill bidding on Bidz.com’s web site are not new. A consumer complaint website, Ripoffreport.com, and Citron Research, a Los Angeles website run by short seller Andrew Left, the LA Times, and others have detailed examples of suspected shill bidding on Bidz.com’s web site for over a year.


This blog has raised questions about Bidz.com’s compliance with GAAP in valuing inventories, the company’s history of inconsistent inventory disclosures, and more recent troubling changes in inventory disclosures. In addition, I have been critical of Bidz.com's share repurchase program and the simultaneous sales of stock by insiders, too.

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure: Not long or short Bidz.com.

Are Bidz.com's Stock Buy Backs a Wise Move?

Why are Bidz.com (NASDAQ: BIDZ) insiders selling shares as the company is buying back shares, especially when management has claimed that the company’s shares are undervalued? Legendary investor Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRKA), was once said:

Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price... We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated." [Emphasis added.]

Does Bidz.com’s share repurchase program really build “intrinsic value” or is it a short-term ploy “to pump or support the stock price” as insiders sell their shares?

During the Q2 2008 earnings call, CFO Lawrence Kong claimed:

As of July 31, 2008, we had repurchased a total of approximately 1,024,000 shares in the open market for a total of $8.8 million at an average price of $8.58 per share. We continue to repurchase in the open market under the stock repurchase program and still have approximately $11.2 million for additional share repurchases under our current program. The stock repurchase program reflects our continued confidence in the market opportunity and strategy and what [inaudible] appears to be at the undervaluation of our stock at current levels. We believe our stock to be a strong investment opportunity and a good use of our cash resources. [Emphasis added.]

Lawrence Kong claimed that, “We believe our stock to be a strong investment opportunity…..” Yet, most recently on September 3, 2008, Lawrence Kong sold 53,801 shares and pocketed gross proceeds of $239,764 or about $8.98 per share. Kong and other Bidz.com insiders have unloaded about 480,000 shares so far this year, pocketing gross proceeds in excess of $5.2 million, while the company has been repurchasing its stock (Source: SEC Form 4 Reports).

In some instances, Bidz.com has paid more money per share to buy back its shares, than the price per share received by insiders who sold their shares. For, example, in May and June 2008, Bidz.com repurchased 54,000 shares and paid $501,714 or about $9.29 per share. By comparison, Lawrence Kong recently sold 53,801 shares at an average price of $8.98 per share.

In certain other instances, other insiders have also sold their shares for less money per share than the company, at times, paid to buy back shares on the open market. For example, in February 2008, CEO David Zinberg sold 5,000 shares at $7.50 per share for gross proceeds of $37,500. That same month, Marina Zinberg (Vice President and sister of David Zinberg) sold 15,000 shares at $7.49 per share and received gross proceeds of $112,350. In March 2008, Bidz.com repurchased 433,827 shares at an average price per share of $8.11.

Does Bidz.com management personally hold the same views on the value of company stock as officially espoused by the company?

Examining Share repurchases for the six months ended June 30, 2008

While Lawrence Kong has claimed that Bidz.com’s share repurchase program is a “good use of our cash resources,” during the six-months ended June 30, 2008, the company utilized significant financial resources to repurchase shares of common stock. That resulted in very low cash balances at the end of Q2 2008 and the company had to draw on its line of credit to make certain inventory purchases.

During the first six months of fiscal year 2008, BIDZ.com repurchased 823,297 shares, paying $6.965 million or an average price of $8.46 per share (Source: Q1 2008 10-Q report and Q2 2008 10-Q report). During that same period, reported net income was $8.22 million and net cash provided by operating activities was $3.342 million. Therefore, the company’s expenditures for share repurchases amounted to 85% of reported net income and more than twice the amount of net cash provided by operating activities. At the end of the second quarter, the Bidz.com cash balance dropped $5.975 million to a mere $618,000 from $6.593 million in the previous quarter.

As of June 30, 2008, Bidz.com’s reported net working capital of $31.877 million. However, the company’s working capital comprised almost entirely of inventory totaling $54.732 million, which took on average about 120 days to sell during the six-month period. In a previous blog post, I raised serious questions about Bidz.com’s compliance with GAAP in valuing inventory.

In addition, by June 2008, the company spent a cumulative total of $7.85 million to repurchase 923,297 shares since the beginning of its stock repurchase program in 2007. The stock repurchase program reduced available net working capital by about 20%. With relatively low cash balances totaling $618,000 and most of its working capital tied up in low turnover inventory, Bidz.com had to utilize its line to credit to make certain inventory purchases. As of June 30, 2008, Bidz.com owed $5.6 million under its line of credit.

During the Q2 2008 earnings call, CFO Lawrence Kong claimed:

Our positive cash flow and revolving line of credit provide us with strong liquidity to continue to successfully grow the business. [Emphasis added.]

However, as detailed above, about twice the amount of net cash provided by operating activities was utilized to buy back stock during the first six-months of the fiscal year. During the six-month period ended June 30, 2008, Bidz.com expended $6.965 million or $3.623 million in excess of cash flows of $3.342 million to repurchase its common stock. The end result was a low cash balance of $618,000 and and line of credit balance of $5.6 million. In effect, Bidz.com's share repurchases are being financed in part with short term credit. It is a risky move to use a revolving line of credit to fund stock repurchases and the same time use it to provide funds to operate a business.

Are Bidz.com's share repurchases really a good long term use of shareholder resources at this time? I don't think so.

To be continued….

Written by,

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure: Not long or short Bidz.com securities

Bidz.com: Questionable and Inconsistent Inventory Disclosures

In previous blog posts, I raised questions about Bidz.com’s (NASDAQ: BIDZ) compliance with GAAP in valuing inventories and the company’s history of inconsistent inventory disclosures. In Bidz.com’s latest 10-Q report for Q2 2008, the company has changed its inventory disclosures yet again. See the comparison of Bidz.com's Q2 2008 and Q1 2008 inventory disclosures below:
Bidz.com Q2 2008 10-Q:

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, and we provide reserves against our inventory based on the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory. We also provide reserves for obsolescence and slow moving inventory. [Emphasis added.]

Now, compare Bidz.com’s Q2 2008 inventory disclosure to the company’s inventory disclosure in its Q1 2008 10-Q report:

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, and we provide reserves against our inventory equal to the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory held for one year or less. We provide reserves for obsolescence and slow moving inventory at 100% of the cost of inventory held for more than one year. [Emphasis added.]

In Q2 2008, Bidz.com reported inventory reserves “based on the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory.” In comparison, during Q1 2008 and certain prior periods, Bidz.com reported inventory reserves “equal to the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory held for one year or less.” In addition, in Q2 2008 unlike Q1 2008 and certain prior periods, apparently Bidz.com did not write down the entire cost of inventory “held for more than one year.”

Why did Bidz.com change its inventory disclosures?

Subtle changes in company disclosures are no accident, since management, attorneys, and external auditors usually carefully review such disclosures.

For example, in Q1 2008 and certain prior quarters, Bidz.com wrote down the value of its inventory held less than one year “equal to the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory.” However, as I described in a previous blog post, such inventory disclosures did not seem to comply with GAAP. Average selling price is not the same as net realizable value, since "average selling price" does not deduct the cost of completion and cost of disposal of inventory.

Therefore, in Q1 2008 and certain prior periods, Bidz.com possibly overstated the value of certain inventory held less than one year by the amount of the cost of completion and disposal of such inventory. In addition, according to Accounting Research Bulletin No. 43, BIDZ.com can only use net realizable value to report inventory at the lower of cost or market, if the current replacement cost of inventory is greater than its net realizable value.

As I detailed above, in Q2 2008 Bidz.com changed its calculation of inventory reserves to “reserves against our inventory based on the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory.” By using the language “based on” rather than “equal to” the average selling price, in Q2 2008 unlike Q1 2008 and certain prior periods, Bidz.com now apparently further reduces its inventory value to take into account the costs of completion and disposal when it writes down such inventory to market. However, as detailed above, the company cannot arbitrarily use net realizable value to write down the costs of its inventory to market.

Inventory held more than one year

In Q1 2008 and certain prior periods, BIDZ.com disclosed that “We provide reserves for obsolescence and slow moving inventory at 100% of the cost of inventory held for more than one year.” In Q2 2008, the company did not provide any specific disclosure relating to inventory held more than one year. Instead, in Q2 2008 unlike Q1 2008, Bidz.com apparently provided reserves against its entire inventory “based on the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory.”

Bidz.com’s Q1 2008 and certain prior period inventory disclosures for inventory held for over a year did not appear to comply with GAAP. According to Accounting Research Bulletin No. 43, the lowest amount that inventory can be valued at is net realizable value (estimated selling price less cost of completion and disposal) minus normal profit margins. Therefore, BIDZ.com's method of valuing inventory over a year old seemed arbitrarily based on the age of such inventory, rather than the application of GAAP. Unless such inventory cannot be sold under any circumstances, BIDZ.com cannot "record reserves of 100% of the cost of inventory held more than one year." Therefore, in this specific case, such inventory held for more than a year was possibly understated.

Since Bidz.com apparently no longer writes down the full value of inventory held for more than a year, we need to ask how the company reversed its previous full write downs of such inventory. Did the company sell out all inventory held for more than a year of did they readjust their reserves to a number “based on” the average selling price?

In Q2 2008, inventory total inventory reserves decreased to $509,000 in Q2 2008 from $919,000 in Q1 2008 or about a 45% decrease. In Q2 2008, Inventory reserves as a percentage of gross inventories decreased to 0.9% from 2.6% or about a 65% decrease in relative inventory reserves.

Other developments

A new Barron’s article (subscription required) written by Bill Alpert, details the shady pasts including criminal records of certain partners and associates of Biz.com CEO David Zinberg. Rachael Granby from Seeking Alpha provides further commentary on the Barron's article.

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure: Not long or short Bidz.com.