Is BIDZ.com Reporting Inventory in Compliance with GAAP?

A close study of BIDZ.com's (NASDAQ: BIDZ) inventory disclosures in its recent 10-K report for fiscal year 2007 raises a question if company is in compliance with GAAP in valuing inventories. Let's carefully review BIDZ.com inventory disclosure:

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.

Note: Bold print and italics added by me.

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

In the case of BIDZ.com, as detailed above, the company discloses 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 does not seem to be in compliance with 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

As detailed above, BIDZ.com discloses 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 does not seem to be in compliance with 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.

Securities and Exchange Commission Staff Accounting Bulletin No. 99

According to Securities and Exchange Commission Staff Accounting Bulletin No. 99, a public company cannot make "adjustments to various financial statement items in a manner inconsistent with GAAP." See below:

Facts: A registrant's management intentionally has made adjustments to various financial statement items in a manner inconsistent with GAAP. In each accounting period in which such actions were taken, none of the individual adjustments is by itself material, nor is the aggregate effect on the financial statements taken as a whole material for the period. The registrant's earnings "management" has been effected at the direction or acquiescence of management in the belief that any deviations from GAAP have been immaterial and that accordingly the accounting is permissible.

Question: In the staff's view, may a registrant make intentional immaterial misstatements in its financial statements?

Interpretive Response: No. In certain circumstances, intentional immaterial misstatements are unlawful.

Note: Bold print and italics added by me.

Therefore, BIDZ.com cannot depart from GAAP in its financial reports even if the effect of non-compliance with GAAP is immaterial.

Comments

[LBC]

Several independent auditors have examined BIDZ's inventory over the last few months and OK'ed their valuation. Bank of America nearly doubled BIDZ's credit line based on the value of their inventory -- do you think they just took BIDZ's word for it? You are a convicted felon -- why would we ever take your word over that of BofA or these other independent auditors? You are also quite obviously on the shorts' payroll. They have maxed out on borrowable shares and are getting so desperate that they are throwing the kitchen sink at this stock.

[mehalito]

antar what were you covicted for?

[mehalito]

also reading alot of blogs about eric savitz, i'm curious as to why he would use a convicted felon to talk about bidz.com's accounting practices. and still curious on what antar was covicted of, plus he seems to follow his comments and reports with the same ending that savtz does maybe this maybe that i'm not saying that they are doing something wrong but something smells fishy and something smells foul. you guys need to find fact and not just seems like, smells like, maybe this maybe that

[LBC]

In the 1980’s a New York electronics retailer named Eddie Antar, running a chain of discount electronics stores called, “Crazy Eddie,” perpetrated an enormous swindle. As a recent Fortune Magazine article put it, “The debacle cost investors roughly $145 million and involved just about every kind of accounting fraud then known to man, including receipt skimming, money laundering, and the counting of bogus inventory.” A key player in the swindle was the company’s CFO (and Eddie Antar’s cousin) Sam E. Antar.

[SamEAntar]

My criminal past is no secret. There is a saying, "It takes one to know one." I am quite sure that BIDZ.com will respond to this blog post. However, they should in turn be ready for my reply.

Kindest regards to all,

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

[LBC]

Sam, I think the question we all want you to answer is, "Why now?" It requires just a smidge too much imagination to believe that you all of a sudden just happened to be looking at BIDZ's financials one day and decided to do a little forensic accounting work. Please. Why don't you admit that the shorts paid you to write this up? You seem confident in your analysis and I won't argue with it (although I will argue that it doesn't matter to the stock). But me a man -- admit that you were paid to do this work. These shorts are desperate because the stock is impossible to borrow and the fundamentals of the company are too strong to ignore forever. They will throw everything but the kitchen sink to break this stock -- even dig up Crazy Eddie's cousin.

[SamEAntar]

I am not long or short BIDZ.com and no one pays me to blog write about any company. The reason for my posting about BIDZ.com is because I felt like doing it.

Kindest regards,

Sam E. Antar (mug shot and finger prints on file with the FBI)

[lbilbi]

I find it strange that with all the crime going on on Wall St., that THIS is the company you decide claim you "felt like" blogging about. It just so happens there are a number of people, who happen to be shorting the company, are taking the same approach (desperate slander). If it walks like a duck, and quacks like a duck, ...........you're probably a duck.

[BigCoxy]

Yes the bashers are getting desperate. Sam, there is a poster on the yahoo message boards stating you paid him to bash, and ticked him off so he is turning on you. I have a tendency to give that message board post more credibility than you, especially considering the timing of your article, The shorts wanted more of an impact, yet the resistance is holding at about $7.33 and the last ditch effort of having you and the "Michael Stewart" post will fail in bringing this company down. Longs will be rewarded, BIDZ has been scrutinized to the extreme and they keep passing every test. Also the fact that BIDZ is on the NASDAQ threshold list fort securities being illegally naked shorted give much weight to this. You criminals are doing whatever you can to bring this baby down, because you know if you can't you will be burned.

[no news]

A convicted felony..... WOW.... I can't see why anyone would post this article as news... BIDZ has a company audit them. This is just a joke.... I would guess this is a poorly planned SHORT attack, who better to use, than a convicted felon. Good work:(

[no news]

it would appear the shorts are trying to bring down a solid company. Oh well... I am long and don't care

[Eddo]

If those two items are ultimately proven true, it's much ado about nothing. That's hardly unlawful. All it would take is to make restatement financials. And, as you suggest, the items are insignificant. Amazing how much this junk is being reposted, some even claim it as being the opinions of Barron's.

[SamEAntar]

Re: "Sam, there is a poster on the yahoo message boards stating you paid him to bash, and ticked him off so he is turning on you."

Please have that person send his allegations to:

Los Angeles Regional Office
Randall R. Lee, Regional Director
5670 Wilshire Boulevard, 11th Floor
Los Angeles, CA 90036-3648
[phone]
e-mail: [e-mail]

Please ask that person to tell Randall that Sammy says hello and gives him his regards.

Respectfully,

Sam E. Antar (a criminal mastermind from the 1980s)