CONTENTS
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| | | Forward-Looking Statements | I |
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| Part 1 |
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| Item 1 | | Business | 1 |
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| Item 1A | | Risk Factors | 5 |
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| Item 1B | | Unresolved Staff Comments | 8 |
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| Item 2 | | Properties | 8 |
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| Item 3 | | Legal Proceedings | 8 |
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| Item 4 | | Submission of Matters to a Vote of Security Holders | 8 |
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| Part II |
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| Item 5 | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 8 |
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| Item 6 | | Selected Financial Data | 9 |
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| Item 7 | | Management’s Discussion and Analysis of Financial Conditions and Results of Operation | 10 |
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| Item 7A | | Quantitative and Qualitative Disclosures About Market Risk | 24 |
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| Item 8 | | Financial Statements and Supplementary Data | 24 |
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| Item 9 | | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure | 25 |
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| Item 9A(T) | | Controls and Procedures | 25 |
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| Item 9B | | Other Information | 26 |
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| Part III |
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| Item 10 | | Directors, Executive Officers and Corporate Governance | 26 |
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| Item 11 | | Executive Compensation | 28 |
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| Item 12 | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 28 |
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| Item 13 | | Certain Relationships and Related Transactions and Director Independence | 29 |
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| Item 14 | | Principal Accounting Fees and Services | 30 |
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| Item 15 | | Exhibits, Financial Statement Schedules | 31 |
Forward Looking Statements
The information in this annual report contains forward-looking statements. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially from those events or results included in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks outlined from time to time, in the reports we file with the Securities and Exchange Commission. Some, but not all, of these risks include, among other things:
| · | our inability to obtain the financing we need to continue our operations; |
| · | changes in regulatory requirements that adversely affect our business; |
| · | loss of our key personnel; |
| · | loss of our relationships with suppliers and strategic partners; and |
| · | risks over which we have no control, such as a general downturn in the economy which may adversely affect discretionary spending by consumers. |
We do not intend to update forward-looking statements. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.
PART I
Item 1. Business.
General
Makeup.com Limited was incorporated under the laws of the State of Nevada on July 14, 2003 under the name “Tora Technologies Inc.” On October 18, 2006, the board of directors and holders of a majority of the shares of common stock approved an amendment to our articles of incorporation to change the name of the company to “Makeup.com Limited”. The amendment was effective on November 21, 2006.
On October 20, 2006, pursuant to the terms and conditions of an Asset Purchase Agreement, we acquired 100% ownership of Makeup Incorporated, which was formed under the laws of Nevada on February 12, 2004 (“Makeup”). Also, as part of the Asset Purchase Agreement, we acquired 100% ownership of Online Makeup Inc., which was formed under the laws of British Columbia on September 17, 2004 (“Online”). Our acquisition of Makeup was treated as a reverse acquisition. Through Makeup we own a 100% interest in the following websites and domains, www.makeupinvestor.com, www.makeupkorean.com, www.makeupsurplus.com, www.allmadeupblog.com, www.asamara-boutiques.com, www.asamara-cosmetics.com, www.asamara-makeup.com, www.makeup.com, www.discount.makeup.com, www.boutiquecosmetics.com, www.boutiquecosmetics.ca, www.makeupsurplus.com, and www.surplusmakeup.com. The information included on these websites is not a part of this annual report. In this annual report, when we say “the company”, “we”, “us” or “our”, we are referring to Makeup.com Limited and its subsidiaries, Makeup and Online.
The On-Line Retail Business
The internet’s unique characteristics provide a number of advantages for online retailers. Online retailers are able to display a larger number of products than traditional store-based or catalog sellers usually at a lower cost. In addition, online retailers are able to frequently adjust their featured selections, editorial content and pricing, providing significant merchandising flexibility. Online retailers also benefit from the minimal cost to conduct business on the internet, the ability to reach a large group of customers from a central location, and the potential for low-cost customer interaction. Unlike traditional channels, online retailers do not have the burdensome costs of managing and maintaining a retail store infrastructure or the significant printing and mailing costs of catalogs. Online retailers can also easily obtain demographic and behavioral data about customers, increasing opportunities for direct marketing and personalized services. Because brand loyalty is a primary factor influencing a beauty product purchase, a customer’s presence at the point-of-sale and ability to physically sense the beauty product are not critical to the purchasing decision.
Our Business
From February 12, 2004 to June 2005, we developed our website, sourced beauty products and established our warehouse and corporate operations. In June 2005 we began selling beauty products on our website, www.makeup.com, to customers. Our marketing is currently targeted to customers residing in the United States and all of our revenues are earned from United States customers. We plan to expand our market into other countries, such as Canada, Germany, and the United Kingdom. Our goal is to continually add countries until we achieve sales worldwide. Our business is done only over the internet.
Since we began our business we have taken a number of steps to expand our share of the on-line cosmetics market. During the 2006 fiscal year we began adding classic product lines, such as Lancome and Estee Lauder, as well as boutique product lines such as Becca, Paula Dorf, Borghese and Suki, to the products we offered. We also added a feature called “Live Chat”, which allows our customers to ask questions and get them addressed on-line by customer care personnel. During the 2007 fiscal year we added a number of new features to our website including allowing payment through PayPal and Google Checkout, providing express checkout, tracking purchases by customer so that we can offer quick ordering of favorite products, giving gifts or samples with purchases, providing customers with the opportunity to write product reviews, moving our classic product lines to www.discount.makeup.com and providing an on-line community forum which allows our customers to share information and ask and answer questions of each other. We also relocated our warehouse to Sumner, Washington. This new location provides us with expanded shipping options to fulfill orders more quickly.
We rely on Savvy Office Solutions to source products, negotiate prices and determine product suitability (all of which are subject to the approval of management), respond to customer inquiries and coordinate shipping. Our agreement with Savvy Office Solutions had a term of one year, which has expired. We currently retain Savvy Office Solutions on a month-to-month basis. If we were to lose the services of Savvy Office Solutions, we believe that we would not be able to quickly replace the services they provide because of the time it would take to train a new service provider.
Products and Services
While we currently sell a broad range of makeup products through our website, our goal is to become an online seller of all types of makeup and beauty related products and services. To that end, we are in the process of increasing the selection of products we sell, both by establishing relationships with dropshippers and by adding beauty related products such as perfume, diet and exercise, jewelry, aromatherapy, herbal remedies, lingerie and pharmaceuticals. We also provide services to our customers such as “Live Chat”, an e-mailed newsletter providing information about our products, special offers and beauty tips and a product review page on our website so that customer experiences with the products we sell can be shared. During 2009, we may expand our online and offline product advertising and directory marketing if we determine that these functions will provide benefits to us. Products included on our websites are acquired directly from various suppliers.
Boutique products
We began offering boutique beauty products in 2006. Boutique products include expensive established or emerging brands that may not be as readily available in local drugstores and department stores. We presently have established strong relationships with over 70 boutique brand manufacturers and distributors which enables us to offer a full selection of boutique products, including bath and body, hair care, skin care, makeup and fragrances, for both women and men. Some of our more popular boutique brands include Borghese Inc., BECCA Inc., CARGO Cosmetics Corp., Suki Inc., Paula Dorf Cosmetics Inc., Too Faced Cosmetics, and GoSmile.
During 2007 and 2008, we expanded our product offerings to include organic beauty products and mother and baby products including Purity Cosmetics, Ole Henriksen and Mama Mio.
Close-out products
Since June 2005 we have offered hard-to-find colors or beauty products for both women and men, as well as close-out or over-stock products produced by various manufacturers from the prior seasons, at competitive prices.
Value added services
Our sales have increased during the past two fiscal years partially due to the development of value-added services and customer loyalty programs. Our value added services and loyalty programs include: expanded product and brand review sections; a sampling program to provide customers with the opportunity to experience new brands by including limited edition gifts with customer purchases; customized account profiles allowing on-line shoppers to review order history, shipping and purchase information; customer wish list; interactive beauty advice available through “Live Chat”; an expanded FAQ site; and exclusive loyalty discounts to members. We believe that all of these services make for a better on-line shopping experience.
As part of our continuing efforts to improve our websites, on August 13, 2007 we signed a one year agreement with LifeTips, Inc. Under the terms of the contract LifeTips agreed to provide content for our website and to design and deliver certain customized software for a fully functional tips and advice center for our websites. The customized software was not delivered. Instead, on February 17, 2009 we entered into an agreement with LifeTips pursuant to which we agreed to accept certain designated services, to be delivered on various dates between February 17, 2009 and February 17, 2010, in exchange for an offset against payments made over the past two years for the software development. Additionally, under the terms of the settlement agreement, we are not required to pay consulting invoices and accrued expenses totaling $37,658.
Advertising
Our current advertising campaigns consist primarily of online advertising including affiliate marketing programs, e-mail campaigns and cross-promotional offers with online websites in the beauty and fashion industry. We also advertise our products through gift with purchase offers, free product sampling and seasonal gift bag offers. These programs are designed to induce new customer orders, increase average order sizes and turn inventory more quickly.
In 2008, we began to generate advertising revenues through the implementation of sponsor content, such as banner advertising on the makeup blog section of our websites. Our advertisers are made up of companies carrying makeup and beauty related products. We intend to expand the use of sponsor content to the new beauty tips and beauty articles section during 2009.
Distribution of Products and Services
Our products and services are described in detail on our website. The products are offered through a simple “point and click” interface within a transaction secure website accepting the usual modes of secure credit card payments, PayPal and Google Checkout. Products can also be ordered using our toll-free telephone number, which is staffed Monday through Friday from 8:30 a.m. to 5:00 p.m. Pacific time. We generally ship orders within two to four business days and orders generally arrive at their destinations within six to 10 business days. We offer free standard shipping on orders over $60 and next day or two day shipping for an extra cost. We also offer a “no hassle” return policy for up to 30 days for a refund, and up to 60 days for an in-store credit.
Market
Our products and services are targeted to consumers, both male and female, who purchase beauty and personal care products. Our current advertising and e-mail marketing campaigns, which are coordinated and based on our customer lists and by marketing arrangements, have been primarily aimed at the United States market. At the present time only customers with a valid US address are able to place an order on our web site. In the future we expect to expand our sales and marketing to other countries.
Principal Suppliers
We obtain the products we sell from several different suppliers. While we are not dependent on any single supplier for the products that we sell, during the year ended December 31, 2008, purchases from one supplier totaled approximately $73,000 or 11% of our net sales. Although we frequently monitor and manage this risk, loss of this vendor could have a material adverse effect on our business. In 2008, we began to establish relationships with dropshippers in order to increase the number of products we offer. We continue to perform market research to gain a better understanding of trends. This research enables us to determine the optimum quantity and best mix of products to inventory.
Technology and Intellectual Property
On November 30, 2007 we filed an application with the U.S. Patent and Trademark Office for registration of the service mark “makeup.com” on the principal register. Our application is still pending. Our url registration, www.makeup.com, is in good standing until February 13, 2012.
We rely on common law copyright protection to protect the design of our website and the various pages on it.
Other than the foregoing, we are not party to any license or franchise agreements, concessions, royalty agreements or labor contracts arising from any patents or trademarks.
Competition
We compete with several online businesses that sell beauty and personal care products. Many of these competitors have greater brand recognition, longer operating histories, larger customer bases and significantly greater financial, marketing and other resources than we have. Many of our competitors sell more than makeup and beauty products, offering a wide array of other products and services.
Our principal competitors are www.beauty.com, a division of www.drugstore.com, www.sephora.com, www.strawberrynet.com, and www.cosmeticmall.com. We also compete with smaller “niche” operators such as:
| | ● | www.cosmetictimes.com |
| | ● | www.fragrancenet.com |
| | ● | www.glossbeautybar.com |
| | ● | www.origins.com |
While we believe that our url (www.makeup.com) may give us a slight advantage over some competitors (for example, if the word “makeup” is typed into the Google search box, our website is the first listed in the search results), we do not represent a significant competitive presence in the marketplace. We cannot assure you that we will be able to compete successfully against our competitors or successfully address competitive pressures.
Government Controls and Regulations
Currently, management believes Makeup.com and its subsidiaries are in compliance with all business and operations licenses that are typically applicable to most commercial ventures. However, there can be no assurance that existing or new laws or regulations that may be adopted in various jurisdictions in the future will not impose additional fees and taxes on Makeup.com and its business operations. Management is not aware of any such revisions to existing laws and regulations nor new laws or regulations that could have a negative impact on Makeup.com’s business and add additional costs to Makeup.com’s business operations.
The growth and development of the market for internet commerce may prompt calls for more stringent consumer protection laws, such as laws against identity theft, which may impose additional burdens on companies conducting business over the internet, laws against unsolicited advertising and laws allowing telecommunications companies to impose access fees on internet service providers. While none of the current laws governing internet commerce has imposed significant burdens on us to date, in the future our business, results of operations and financial condition could be materially and adversely affected by the adoption or modification of laws or regulations relating to the internet, or the application of existing laws to the internet.
Number of Total Employees and Number of Full Time Employees
Other than our management, we do not have any employees. All accounting, legal, customer service, marketing, web design, IT and administrative functions are contracted out.
Item 1A. Risk Factors
You should consider each of the following risk factors and the other information in this annual report, including our consolidated financial statements and related footnotes, in evaluating our business. The risks and uncertainties described below are not the only ones that impact on our business. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business and operations. The occurrence of any of the following risks could cause a material adverse affect on our business and financial results and on the price of our common stock.
We have been in our current business only since October 2006. Our limited operating history makes evaluation of our business difficult.
We have been in our current business only since October 2006 and have limited historical financial data upon which to base planned operating expenses or to accurately forecast our future operating results. We have a limited operating history which makes it difficult to evaluate our performance. You must consider our prospects in light of the risks, expenses and difficulties we face as an early stage company with a limited operating history. These risks include uncertainty as to whether we will be able to:
| · | increase revenues from sales of our products; |
| · | respond effectively to competitive pressures; |
| · | protect our intellectual property rights, particularly our url; |
| · | continue to develop and upgrade our technology, to make shopping on our website easier; and |
| · | continue to have returning customers. |
We incurred net losses for our past three fiscal years. We may never be profitable.
We incurred net losses of $1,195,894, $1,470,145 and $1,084,298 for the fiscal years ended December 31, 2008, 2007 and 2006, respectively. As we continue to try to expand our business, we are likely to continue to incur losses. We cannot predict when, or if, we will be profitable in the future. Even if we achieve profitability in the future, we may not be able to sustain it.
We may be unable to continue as a going concern.
Our independent auditor has noted in its report concerning our financial statements as of December 31, 2008 that we have incurred losses and have an accumulated deficit, which raises substantial doubt about our ability to continue as a going concern. In the event we are not able to continue operations our securities will become worthless. See the auditors’ report on our consolidated financial statements on page F-2 of this report.
We try to include a mix of products on our website that will be attractive to consumers. If we fail to manage our inventory effectively, our results of operations could be adversely affected.
Our customers have many websites or stores to choose from when they want to purchase makeup and personal care items. If we cannot deliver products quickly and reliably, customers will purchase from a competitor. We must stock enough inventory to fill orders promptly, which increases our financing requirements and the risk of inventory obsolescence. Changing fashion or personal tastes may force us to rapidly introduce new products. This, too, could leave us with obsolete inventory. If we do not manage our inventory successfully, it could have a material adverse effect on our results of operations.
We must raise additional financing in order to continue our operations. However, our history of losses may make it impossible to raise additional money. If we cannot raise money as we need it we may be required to significantly curtail, or even to cease, our operations.
Because we do not yet generate enough revenue from sales of our products to support our operations, we must raise capital from sales of our securities or we must borrow funds to continue our business. We expect to incur operating losses in the future as we try to expand our business by increasing the number of product lines that we offer and expanding our market beyond the borders of the United States. Our history of losses and accumulated deficit of approximately $5 million through December 31, 2008 may make it more difficult to raise equity or debt financing. If we are unable to raise the money as we need it, we may be required to significantly curtail, or even to cease, our operations.
We rely on the services provided to us by Savvy Office Solutions. If we were to lose the services of Savvy Office Solutions, it could have a material adverse effect on our business and results of operations until a replacement service was trained.
We rely on Savvy Office Solutions to source products, negotiate prices and determine product suitability (all of which are subject to the approval of management), respond to customer inquiries and coordinate shipping. These services are provided to us on a month-to-month basis. If we were to lose the services of Savvy Office Solutions, we believe that we would not be able to quickly replace these services because of the time involved for training. Until we trained a replacement service, the loss of these services could have a material adverse effect on our business and results of operations.
We have never paid cash dividends and we do not expect to pay dividends in the foreseeable future.
We have never paid cash dividends on our shares of common stock and we have no plans to do so in the foreseeable future. We intend to retain earnings, if any, to develop and expand our business operations.
We may be subject to legal proceedings involving our intellectual property. Proceedings of this nature could be costly to defend and could adversely affect our business.
We may be subject to claims of alleged infringement of the trademarks or other intellectual property rights of third parties. These types of claims could increase our costs of doing business because we would incur legal expenses in defending them, we could be subject to adverse judgments or settlements or we may be required to change our business practices. Alternatively, we may be required to enforce our trademark or common law copyrights. Any litigation, regardless of outcome or merit, could result in substantial costs and would divert management’s attention from our business, which would materially harm our business.
Our success depends, in part, on the quality and safety of the products we sell to our customers. If these products are defective or unsafe, our reputation, business and results of operations could be adversely affected.
Our success depends, in part, on the quality and safety of the products that we sell. If the products are defective or unsafe, or if they otherwise fail to meet our customers’ standards, our reputation, business and results of operations could be adversely affected. We do not carry product liability insurance to protect against these risks.
A disruption or interruption in the supply chain may adversely affect our business.
We sell products on our website that are supplied by various third party and boutique suppliers. A significant disruption or interruption in the supply chain, for example, as a result of a natural disaster, could have a material adverse effect on our business. In that case, the products may be late in being shipped or, if they cannot be shipped, we may not be able to find other suppliers of the products or we may find other suppliers of the products who will charge us a premium for providing the products. During the year ended December 31, 2008, purchases from one supplier totaled approximately $73,000 or 11% of net sales. Loss of this supplier could have a material adverse effect on us.
During the fiscal year ended December 31, 2008 we earned $683,185 in revenue but we still are not profitable. We may not be able to achieve profitability.
While we earned revenues of $683,185 during the fiscal year ended December 31, 2008, an increase of $176,998 over the revenues we earned during the fiscal year ended December 31, 2007, we have not yet achieved profitability. If our revenues fail to exceed our costs, we will continue to experience negative cash flow and net losses. If our customer base does not grow, it will be difficult for us to increase our revenues. Failure to reduce losses or to increase revenues could mean that we would never be profitable.
We may experience losses due to foreign exchange translations as a result of the volatility of the value of the US dollar.
We hold a significant portion of our cash reserves in US dollars and a portion of our expenses are due in Canadian dollars. Due to foreign exchange rate fluctuations, the value of the Canadian dollar expenses can result in both translation gains and losses in US dollars. If there was to be a significant decline in the US dollar versus the Canadian dollar, our Canadian dollar expenses would increase. We have not entered into derivative instruments to offset the impact of foreign exchange fluctuations. Such foreign exchange fluctuations could result in losses, which would have an adverse effect on our results of operations.
We may not be able to successfully compete with other on-line retailers of beauty and personal care products.
There are several established e-commerce companies that provide products and services similar to ours. We expect competition in this market to increase significantly as new companies enter the market and current competitors expand their online products and services. We do not represent a significant presence in our industry. Please see the discussion titled “Competition” in Item 1 of this report.
Our business has been developed assuming that laws and regulations that apply to internet communications and e-commerce will remain minimal. Changes in government regulation and industry standards may adversely affect our business and operating results.
We have developed our business assuming that the current state of the laws and regulations that apply to internet communications, e-commerce and advertising will remain minimal. At this time, complying with these laws and regulations is not burdensome. However, as time exposes various problems created by internet communications and e-commerce, laws and regulations may become more prevalent. These regulations may address issues such as user privacy, pricing, intellectual property ownership and infringement, taxation, and quality of products and services. This legislation could hinder growth in the use of the internet generally and decrease the acceptance of the internet as a communications, commercial and advertising medium. Changes in current regulations or the addition of new regulations could affect the costs of communicating on the internet and adversely affect the demand for our products or otherwise harm our business, results of operations and financial condition.
A breach of the security of online transactions will have a negative impact on our business.
The secure transmission of confidential information over public telecommunications facilities is a significant barrier to electronic commerce and communications on the internet. Many factors may cause security systems to be breached. We take steps to ensure the safety of our customers’ personal information that is housed in, and that moves through, our systems, including the use of encryption technology. If we were to experience a breach in our security system, our business and results of operations could be materially and adversely affected. There can be no assurance that our security measures will prevent security breaches.
Item 1B. Unresolved Staff Comments.
As a smaller reporting company we are not required to provide this information.
Item 2. Properties.
Our corporate offices are located at 3416 Via Lido, Suite. F, Newport Beach, California, 92663-3976. We share this office space with other businesses and commenced paying a monthly rental of $500 on March 1, 2008. We do not have a rental contract and our rental payments are made on a month to month basis.
On March 7, 2007, we moved our warehouse and fulfillment facilities to an independent warehouse in Sumner, Washington. We hold this facility under a lease with Pacific Distribution Services, L.L.C. The lease has a term of one year that is automatically renewed for successive one year terms unless it is amended or terminated. We pay rent of $3,400 per month.
Item 3. Legal Proceedings.
In December 2008 we filed an action in the Superior Court of Washington for Kitsap County. The action was titled Makeup Incorporated, A Nevada corporation, plaintiff vs. Melissa Carlsen (d/b/a Catwalk Cosmetics) and Does 1 – 10, defendants. We filed the action to recover money we paid for name brand boutique cosmetics that we determined, upon receipt, were counterfeit. The action was settled on December 29, 2008 when the defendants paid us the sum of $85,274.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
Our common stock is quoted on the OTC Bulletin Board under the symbol “MKUP”. The table below gives the high and low bid information for each fiscal quarter for the last two fiscal years. The bid information was obtained from the Pink Sheets LLC and the OTCBB and reflects inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The information below takes into consideration the 1-for-20 reverse stock split that we effected on August 4, 2008.
| | High | | Low |
| Fiscal Year Ended December 31, 2008 | | | |
| First Quarter | $0.90 | | $0.40 |
| Second Quarter | $0.60 | | $0.40 |
| Third Quarter | $0.60 | | $0.10 |
| Fourth Quarter | $0.90 | | $0.50 |
| | | | |
| Fiscal Year Ended December 31, 2007 | | | |
| First Quarter | $15.60 | | $6.40 |
| Second Quarter | $14.40 | | $2.40 |
| Third Quarter | $4.40 | | $1.80 |
| Fourth Quarter | $6.20 | | $0.40 |
Holders of Record
As of March 27, 2009, there were approximately 16 record holders of our common stock. This does not include an indeterminate number of shareholders whose shares are held by brokers in street name.
Dividends
We have never declared any cash dividends on our common stock and we do not anticipate declaring a cash dividend in the foreseeable future.
Recent Sales of Unregistered Securities
Not applicable.
Securities Authorized for Issuance under Equity Compensation Plans
Not applicable.
Item 6. Selected Financial Data.
As a smaller reporting company we are not required to provide this information.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Makeup.com Limited, our operations and our present business environment. This MD&A is provided as a supplement to and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained in Item 8. Financial Statements and Supplementary Data of this report. This overview summarizes the MD&A, which includes the following sections:
| · | Our Business – a general description of our business and the goals, plans, challenges and objectives of our business. |
| · | Operations Review – an analysis of our consolidated results of operations for the two years presented in our consolidated financial statements. |
| · | Liquidity and Capital Resources – an analysis of cash flows and other trends, events or uncertainties that may impact the results of operations or liquidity. |
| · | Critical Accounting Policies and Judgments – a discussion of accounting policies that require critical judgments and estimates. |
When we use the words “we”, “us” or “our” in this report, we are referring to Makeup.com Limited and its subsidiaries, which we sometimes refer to in this report as “Makeup” and “Online”.
Our Business
We were incorporated on July 14, 2003 in the state of Nevada as Tora Technologies Inc. and are based in Newport Beach, California. We are in the business of selling beauty and beauty related products on our websites, www.makeup.com and www.discount.makeup.com, to customers residing in the United States.
Our sales are directly related to traffic to our websites and the ability to convert such traffic to sales. During 2008, we were successful in increasing traffic through a variety of advertising and promotional programs. As a result, sales increased by 35% during 2008 as compared to 2007.
We have developed a solid base of loyal customers; 18% and 19% of our customers were repeat customers during the years ended December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, our paid conversion rates were 3.44% and 2.77%, respectively. At December 31, 2008 and 2007, our conversion rates for all traffic and sales on our websites were 0.88% and 1.08%, respectively. Our promotional plans and programs which include free and discounted shipping charges for large orders, product discounts of up to 20%, free gifts with purchases, free samples with purchases and customer coupons and credits are designed to increase sales. During the year ended December 31, 2008 we were not only able to increase sales but we also increased the size of the average sales order from $57.08 for the year ended December 31, 2007 to $65.78 for the year ended December 31, 2008.
During 2008 and continuing into 2009, we began to take steps to increase profitability. To that end, we are managing our inventory better. Our goal is to find the optimum quantity and best mix of products to inventory so that we can increase our inventory turnover and reduce write-offs due to slow moving and obsolete inventory. Ultimately, we plan to inventory only products that turn over at least five times per year. We are also in the process of increasing the selection of products we sell, both by establishing relationships with dropshippers and by adding beauty related products such as perfume, diet and exercise, jewelry, aromatherapy, herbal remedies, lingerie and pharmaceuticals. Finally, we are establishing relationships with other web based sellers such as Amazon.com, whereby we will act as dropshippers for them.
Because the online beauty industry is extremely competitive, in order to gain market share we must also keep our website innovative and efficient. In order to accomplish this, we plan to continue to invest in several areas of technology and website content, including web services expansion, enhanced editorial beauty content, search engine optimization, merchandising selection, technology infrastructure and improvements to our website navigation process.
Finally, advertising is an important component to our plan to increase sales. Our online marketing programs include pay-per-click and cost-per-acquisition adverting with Google, Yahoo/Overture, Yahoo Paid Inclusion, MSN, and MSN Shopping. Interactive marketing campaigns are planned for social networking sites such as Facebook. We plan to continue our affiliate programs with companies such as Commission Junction. We also plan to explore cross-promotional advertising opportunities with online websites in the beauty and fashion industry.
We believe that the implementation of our plan to manage inventory, the addition of the dropshipper relationships and the increase in products offered, combined with the continued innovations to our website and optimization of our advertising efforts will ultimately yield a significant increase in sales at a reasonable cost.
In addition to the foregoing, on a day-to-day basis, the means by which we intend to achieve better exposure and increases to our customer base and sales include:
| (a) | Including samples in each order to provide customers with an opportunity to try new products, |
| (b) | Continually updating, modifying and improving our website layout and design to allow for new marketing techniques, improved navigation, and additional product offerings, |
| (c) | Rewarding new customers and top purchasing customers with special offers, incentives, percentage discounts and/or free shipping, |
| (d) | Enhancing the presentation and packaging of orders, |
| (e) | Working with new and existing vendors to update and enhance their brand pages with brand background, articles, press, product information, and makeup tips and tricks, |
| (f) | Continually monitoring our customers’ demands and changing tastes in our quest to meet our customers’ beauty regimen expectations, |
| (g) | Expanding our makeup and beauty related blog section, |
| (h) | Using Google Adsense to gain revenue through clicks on the ads shown on these pages, |
| (i) | Continuing to offer customers the opportunity to create and save items on their ‘wish list’ (gift registry), |
| (j) | Optimizing our marketing and branding efforts through paid and unpaid mediums including pay per click advertising, e-mail marketing, radio, natural search and by hosting or participating in sweepstakes, and |
| (k) | Working with and sourcing out additional content providers, whereby the content providers direct additional traffic to our websites as well as provide communication to our customers about beauty products. We have formed a relationship with at least one content provider and we intend to continue to form such relationships in an effort to further expand our affiliate program. |
Operations Review
Our operating results for the years ended December 31, 2008 and 2007 and the changes between those years are summarized as follows:
| | | For the Years Ended December 31, | | | Changes Between the Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2008 and 2007 | |
| | | | | | | | | | | | | |
| Sales | | $ | 683,185 | | | $ | 506,187 | | | $ | 176,998 | |
| Cost of sales | | | (440,217 | ) | | | (393,813 | ) | | | (46,404 | ) |
| | | | | | | | | | | | | |
| Gross profit | | | 242,968 | | | | 112,374 | | | | 130,594 | |
| Selling, general and administrative | | | (1,252,003 | ) | | | (1,244,887 | ) | | | (7,116 | ) |
| Interest expense | | | (188,014 | ) | | | (210,668 | ) | | | 22,654 | |
| Forgiveness of debt | | | 1,155 | | | | - | | | | 1,155 | |
| Gain (loss) from discontinued operations | | | - | | | | (126,964 | ) | | | 126,964 | |
| | | | | | | | | | | | | |
| Net loss | | $ | (1,195,894 | ) | | $ | (1,470,145 | ) | | $ | 274,251 | |
Revenues
Our sales increased by $176,998 or 35% from $506,187 for the year ended December 31, 2007 to $683,185 for the year ended December 31, 2008. Our revenues were from sales made on our websites. The products offered on our websites include merchandise we have purchased for resale from vendors and from third party distributors (dropshippers). The increase in our sales was primarily due to more effective promotional programs, additional product selection, navigational improvements to the website and better product branding
Due to the economic downturn in the United States we are in the process of implementing several new programs which we believe will result in increased sales and improved conversion ratios over the next year. Our new programs include only inventorying products that turn five or more times per year, offering a broader range of makeup products and product lines through the use of dropshippers, conducting multi-variant testing to further improve site navigation and conversion rates, increasing our exposure through amazon.com and adding complimentary product lines such as diet, exercise, aromatherapy, herbal remedies, jewelry, perfume, pharmaceutical, and lingerie.
In addition to our new programs, we expect programs we presently have in place such as search engine optimization which is designed to increase traffic to our website, web related advertising, customer purchasing incentives, informative beauty tips and bi-monthly customer newsletters to contribute to a steady increase in our revenues over the next year. We cannot guarantee that our plans to expand our business will be successful or that the economic crisis that has resulted in less discretionary spending by consumers will not adversely affect our revenues
Cost of Goods Sold
Our cost of goods sold increased by $46,404 or 12% from $393,813 for the year ended December 31, 2007 to $440,217 for the year ended December 31, 2008. The increase in cost of goods sold was primarily due to an increase in our sales. This increase was partially offset by higher margins on our sales and a significant reduction in slow moving and obsolete inventory write-offs during the year.
Over the next year we expect our cost of sales to increase not only because we expect our sales to increase but because we expect our cost of sales to increase as a percentage of sales as we increase our product lines through establishing relationships with dropshippers whose products offer smaller profit margins.
Gross Profit
Our gross profit increased by $130,594 or 116% from $112,374 for the year ended December 31, 2007 to $242,968 for the year ended December 31, 2008. The increase in gross profit was primarily due to reducing slow moving and obsolete inventory write-offs, obtaining higher margins on our sales, reducing our promotional discounts and increasing our sales.
Assuming that the economic crisis in the United States does not have a significant adverse affect on our sales, over the next year we expect our gross profit to increase. However we expect our gross profit as a percentage of sales to decline as we increase our reliance on dropshippers because our margin is smaller on the products we purchase from dropshippers.
Selling, General and Administrative Expenses
Our operating expenses increased by $7,116 or 1% from $1,244,887 for the year ended December 31, 2007 to $1,252,003 for the year ended December 31, 2008. This increase was primarily due to approximate increases in the following categories: $71,000 in administrative expenses associated with accounting services and regulatory compliance; $29,000 in professional fees associated with regulatory compliance; $12,000 in bank charges and interest due to an increase in credit card fees associated with the increase in our sales; and $37,000 in warehouse rent, handling fees and warehousing expenses because our warehousing rent and expenses for first quarter of 2007 were reclassified to discontinued operations when we closed our warehouse and moved our inventory to an independent fulfillment warehouse. These increases were primarily offset by decreases in the following categories of approximately; $39,000 in depreciation because the majority of our fixed assets are now fully depreciated; $26,000 in advertising and promotion due to the removal of ineffective online advertising programs; $70,000 in consulting fees due to a reduction in computer consulting and $12,000 in travel due to travel costs associated with moving the warehouse in the prior year.
Due to the economic downturn in the United States we are looking at ways to cut our costs over the next year, however if our sales increase as expected then the increase in our warehousing costs and bank credit card fees will likely offset any reductions we are able to make to any of our other operating costs.
Interest Expense
During the years ended December 31, 2008 and 2007 we recorded interest expense of $188,014 and $210,668 respectively. The decrease of $22,654 in interest expense was primarily due to the conversion of $3,236,490 in convertible notes payable including accrued interest of $202,368 into 7,491,875 shares of our common stock on May 5, 2008, offset by interest expense on the convertible notes payable prior to conversion and notes payable issued subsequent to conversion.
Loss from Discontinued Operations
Until March 2007 our subsidiary, Online, was in the business of warehousing and managing our inventory. In March 2007, we moved our inventory to an independent fulfillment warehouse in the United States and Online’s business operations ceased. As a result we reclassified Online’s net loss of $126,964 for the year ended December 31, 2007 to net loss from discontinued operations.
Liquidity and Capital Resources
Going Concern
The notes to our consolidated financial statements at December 31, 2008 disclose our uncertain ability to continue as a going concern. From the date of inception, February 12, 2004, until June 2005 we were developing our websites, makeup.com, and discount.makeup.com, sourcing beauty products, establishing our warehouse and undertaking our corporate operations. During the first quarter of 2005, we began selling our beauty products on our makeup.com website and in 2007 we began selling makeup on our discount.makeup.com website. Since launching our websites, we have focused on increasing traffic to them, increasing our product lines and generating sales. We have accumulated a deficit of approximately $5.0 million to date and will require additional financing to support our operations until such time as we achieve positive cash flows from operations. These factors raise substantial doubt about our ability to continue as a going concern. Our ability to achieve and maintain profitability and positive cash flow is dependent upon increasing traffic to our websites, increasing our sales, increasing our product lines, globally expanding our sales market and controlling operating costs. Based upon current plans, we expect to incur operating losses in future periods. We plan to mitigate these operating losses through increasing traffic to our websites, increasing sales, increasing our product lines and globally expanding our market, although there is no assurance that we can accomplish these goals. We plan to obtain sufficient working capital through additional debt or equity financing, private loans and product sales, although there is no assurance that we will be successful in obtaining enough working capital to support our operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
At December 31, 2008 we had a cash balance of $48,629, a working capital deficit of $2,108,976 and negative cash flows from operations of $888,743. During the year ended December 31, 2008, we primarily funded our operations through sales and the issuance of convertible notes payable. We believe that our cash as of the date of this filing is inadequate to satisfy our working capital needs for the next year. We anticipate funding our working capital needs for the next twelve months through product sales, debt or equity financing or private loans. Although the foregoing actions are expected to cover our anticipated cash needs for working capital and capital expenditures for at least the next twelve months, no assurance can be given that we will be able to raise sufficient cash to meet our cash requirements.
The following table summarizes our sources and uses of cash for the years ended:
| | | December 31, | |
| Sources and Uses of Cash | | 2008 | | | 2007 | |
| Net cash used in operating activities | | $ | (888,743 | ) | | $ | (1,081,717 | ) |
| Net cash used in investing activities | | | (5,840) | | | | (12,323 | ) |
| Net cash provided by financing activities | | | 887,952 | | | | 1,090,569 | |
| Effects of foreign currency exchange | | | 12,817 | | | | (16,697 | ) |
| Net increase (decrease) in cash | | $ | 6,186 | | | $ | (20,168 | ) |
Net Cash Used In Operating Activities
Net cash used in operating activities during the year ended December 31, 2008 was $888,743. We used cash of $1,195,894 to cover our net loss. We also used cash when our accounts receivable increased by $1,100 due to an increase in amounts receivable from credit card companies; our prepaid expenses and deposits increased by $24,963 primarily due to an increase in prepaid advertising; we reduced our accrued liabilities, accrued advertising fees, accrued consulting and accrued professional fees by $619, $4,291, $15,000 and $17,086 respectively; amounts due to related parties decreased by $431 and our deferred assets decreased by $2,652 due to our warehouse lease. These uses of cash were funded through a net decrease in inventory of $17,521; a net increase in accounts payable of $135,769; an increase in interest on our convertible notes payable of $93,036; an increase in interest on our convertible notes payable to related parties of $68,396 and on our note payable to a related party of $26,667; and depreciation in the amount of $31,904.
Net cash used in operating activities during the year ended December 31, 2007 was $1,081,717. During the year we spent an additional $20,680 on inventory, paid $5,098 in accrued liabilities, used $1,244,887 to cover our general and administrative costs and used $126,946 on general and administrative costs that we reclassified to discontinued operations when we closed down Online’s warehouse. These uses of cash were funded through a gross profit of $112,374, collection of accounts receivable of $11,878, utilization of $8,331 in prepaid expenses and deposits, increases of $66,703 in accounts payable, $5,197 in accrued advertising fees, $15,000 in accrued consulting fees, $15,548 in accrued professional fees, $26,666 in interest accrued on the note payable to a related party, $141,691 in interest accrued on our convertible notes payable, $33,947 in interest accrued on our convertible notes payable to related parties, $5,766 due to a director for expenses he paid on our behalf and $2,652 in deferred assets due to our new warehouse lease. We also expensed depreciation in the amount of $72,831 and had a loss on disposal of fixed assets of $7,996 due to closing our warehouse in Canada.
Net Cash from Investing Activities
During the year ended December 31, 2008, we spent $5,840 on the acquisition of fixed assets.
During the year ended December 31, 2007 we spent $13,644 on the acquisition of fixed assets and received $1,321 in proceeds from of the disposition of fixed assets.
Currently we do not have any large investment expenditures planned.
Net Cash Provided By Financing Activities
During the year ended December 31, 2008, we received cash of $317,962 on the issuance of convertible notes payable, received cash of $570,000 from the issuance of convertible notes payable to related parties and experienced a decline in of $10 in our advances payable due to foreign exchange fluctuations.
During the year ended December 31, 2007, we received $304,138 in cash advances from private investors, issued convertible notes payable in exchange for $786,432 in cash and acquired the domain name www.makeupinvestor.com for the nominal amount of $1. The cash advances from private investors, along with advances received in the prior periods, were reclassified to convertible notes payable during the year.
Debt Conversion
On May 5, 2008, we converted $3,236,490 in convertible notes, including accrued interest of $202,368 into 7,491,875 (post reverse stock split) restricted shares of our common stock at a price of $0.4320 per share (post reverse stock split). The price per share of $0.4320 was calculated at a discount of 20% of the market price for our stock on May 5, 2008. The issuance of these additional shares resulted in dilution to our existing shareholders.
Challenges and Risks
Many of the larger and more popular brands we offer are also offered through the websites of the manufacturers. Consumers may be more likely to look for a brand on the manufacturer’s website rather than to search generically for “makeup” or “beauty products”. This will likely have an effect on our sales of those products. Finally, please see the discussion titled "Other Trends, Events or Uncertainties that may Impact Results of Operations or Liquidity" for a discussion of the possible effects of the economic crisis in the United States on our operations and revenues.
Other Trends, Events or Uncertainties that may Impact Results of Operations or Liquidity
We sell products that are purchased with discretionary income. Due to the downturn in the U.S. economy, consumers may have less discretionary income to spend on non-essential items. The economic downturn may also make it harder for us to raise capital if we need it. Therefore, in the future, the economic downturn may have a material adverse effect on our ability to raise operating capital as well as on our revenues and results of operations. Other than as discussed in this annual report, we know of no other trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.
Income Taxes
Income tax expense has not been recognized for the years ended December 31, 2008 and 2007 and no taxes were payable at December 31, 2008 or 2007, because we have incurred losses since our inception. Online, our subsidiary is subject to federal and provincial taxes in Canada and Makeup.com and Makeup are subject to United States federal taxes.
The components of our net operating losses for the years ended December 31, 2008 and 2007 were:
| | | 2008 | | | 2007 | |
| | | | | | | | | |
| United States of America | | $ | (1,029,933 | ) | | $ | (1,403,292 | ) |
| Canada | | | (184,703 | ) | | | 55,205 | |
| | | | | | | | | |
| | | $ | (1,214,636 | ) | | $ | (1,348,087 | ) |
As of December 31, 2008 and 2007 we had the following deferred tax assets that primarily relate to net operating losses. A 100% valuation allowance has been established; as we believe it is more likely than not that the deferred tax assets will not be realized.
| | | 2008 | | | 2007 | |
| | | | | | | | | |
| Federal loss carryforwards | | $ | 1,453,019 | | | $ | 1,102,841 | |
| Foreign loss carryforwards | | | 156,342 | | | | 98,160 | |
| | | | | | | | | |
| | | | 1,609,361 | | | | 1,201,001 | |
| Less: valuation allowance | | | (1,609,361 | ) | | | (1,201,001 | ) |
| | | | | | | | | |
| | | $ | - | | | $ | - | |
Our valuation allowance increased during 2008 and 2007 by $408,360 and $458,293, respectively.
We had the following net operating loss carryforwards (NOL’s) at December 31:
| | | 2008 | | | 2007 | |
| | | | | | | |
| United States of America | | $ | 4,383,198 | | | $ | 3,353,265 | |
| Canada | | | 443,255 | | | | 258,553 | |
| | | | | | | | | |
| | | $ | 4,826,453 | | | $ | 3,611,818 | |
The federal and Canadian NOL’s expire through December 31, 2028. We are a Nevada corporation and we are not subject to state taxes.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our consolidated financial condition, changes in consolidated financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors. We do not have any non-consolidated, special-purpose entities.
Contingencies and Commitments
Settlement
During the year ended December 31, 2008 we initiated a legal action against a supplier for breach of contract and fraud arising out of the sale of counterfeit cosmetics. The legal action was settled by payment to us of approximately $85,000 plus costs.
Contractual Obligations
Our only contractual obligation and commitment is a one year lease commitment with our warehouse in Sumner, Washington. This lease was entered into on March 1, 2007, is renewable automatically on a yearly basis and requires payment of a minimum storage fee of $3,400 per month.
Critical Accounting Policies and Judgments
An appreciation of our critical accounting judgments is necessary to understand our financial results. These policies may require that we make difficult and subjective judgments regarding uncertainties, and as a result, such estimates may significantly impact our financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. Other than our accounting for our allowance for doubtful accounts, accruals for accounting, auditing and legal expenses, obsolete inventory, product returns, shipping, and the useful lives and impairment of intangible and long-lived assets, our critical accounting policies do not involve the choice between alternative methods of accounting. We have applied our critical accounting judgments consistently.
Reclassifications
Certain prior period amounts in our consolidated financial statements have been reclassified to conform to the current period’s presentation. These reclassifications had no effect on the consolidated results of operations or financial position for any period presented.
On the December 31, 2008 balance sheet we reclassified $5,723 in accounts payable to due to related parties, $105,399 in convertible notes payable were reclassified to convertible notes payable to related parties and $23,991 in accrued liabilities were reclassified to accrued advertising fees and accrued consulting fees.
Accounts Receivable
Receivables represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. An allowance for doubtful accounts is based on an assessment of the collectability of all past due accounts. At December 31, 2008, our allowance for doubtful accounts was $2,259.
Inventories
Inventories are stated at the lower of cost or market under the first-in, first-out method. During the year ended December 31, 2008 we wrote-off $11,959 in obsolete inventory and we have a reserve of $20,000 for slow moving or obsolete inventory.
We have arrangements with certain drop shippers whereby we do not purchase or pay for merchandise until the merchandise is ultimately sold and shipped to our customer.
Long-lived Assets Including Intangible Assets
We review fixed assets and intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We have made no material adjustments to our long-lived assets at December 31, 2008. In accordance with the Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142), we classify our intangible assets as intangible assets with an indefinite life not subject to amortization. We test our intangible assets for impairment at least annually or more frequently if events or changes in circumstances indicate that this asset may be impaired. Our intangible assets are the domain names Makeup.com, Makeupinvestor.com, Makeupkorean.com, Makeupsurplus.com, Surplusmakeup.com, Boutiquecosmetics.com, Allmadeupblog.com, Asamara-boutiques.com, Asamara-cosmetics.com, and Asamara-makeup.com. We determined the fair value of these assets by obtaining third party appraisals on an annual basis. At December 31, 2008 we had $333,334 in intangible assets which we believe are recorded at fair value and that no impairment currently exists.
Financial Instruments
Foreign Exchange Risk
We are subject to foreign exchange risk for sales and purchases denominated in foreign currencies. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the United States dollar. We do not believe that we have any material risk due to foreign currency exchange.
Fair Value of Financial Instruments
Our financial instruments include cash, accounts receivable, accounts payable, accrued liabilities, accrued advertising, accrued consulting and accrued professional fees, convertible notes payable and advances payable. The fair value of these financial instruments approximates their carrying values due to their short maturities.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and trade accounts receivable and payable.
At December 31, 2008 we had approximately $48,000 in cash that was not insured. This cash is on deposit with a major chartered Canadian bank. As part of our cash management process, we perform periodic evaluations of the relative credit standing of this financial institution. We have not experienced any losses in cash balances and do not believe we are exposed to any significant credit risk on our cash.
Receivables arising from sales to customers are generally not significant individually and are not collateralized. We continually monitor the financial condition of our customers to reduce the risk of loss. None of our end-user customers account for more than 10% of net revenues. Substantially all of our customers remit payment for their purchases through credit cards. At December 31, 2008 we had $3,170 in trade accounts receivable from major credit card companies.
During the year ended December 31, 2008, purchases from one supplier totaled approximately $73,000 or 11% of net sales. While we frequently monitor and manage this risk, loss of this supplier could have a material adverse effect on us.
Revenue Recognition
We recognize revenue when goods are shipped to the customer and upon transfer of title and risk of loss of the related products to the customer. Revenue is recorded net of allowances for customer sales incentives and rebates. The allowances are accrued concurrently with the recognition of revenue and are determined based primarily upon customer arrangements and historical data. We account for these incentives in accordance with EITF No. 01-09 (EITF 01-09), Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products, which affirms that the payment of consideration by a vendor to a customer should not be recognized as an asset of the vendor and further affirms that they should be accounted for as a reduction of revenues.
We account for customer incentives for free products and services in accordance with EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which affirms that items to be delivered at a future date should be deferred and recorded as a current liability.
Product returns are estimated in accordance with SFAS No. 48 (SFAS 48), Revenue Recognition when Right of Return Exists. The Company also ensures that the following other criteria in SFAS 48 have been met prior to recognition of revenue:
(a) the price is fixed or determinable;
(b) the customer is obligated to pay and there are no contingencies surrounding the obligation or the payment;
(c) the customer’s obligation would not change in the event of theft or damage to the product;
(d) the customer has economic substance;
(e) the amount of returns can be reasonably estimated; and
(f) we do not have significant obligations for future performance in order to bring about resale of the product by the customer.
We have inventory risk, therefore we do not act as an agent and recognize revenues on a “gross” basis, in accordance with EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.
We also offer coupons for replacement orders and discount programs. Discounts and coupons for “free products” are only redeemable on purchases made or on products offered on our website. Discounts are included as a reduction in sales whereas coupons for “free products” are classified as “cost of sales” in our consolidated statements of operations.
At December 31, 2008 we allowed for $329 in product returns.
Amounts billed to a customer on a sales transaction related to shipping are classified as revenue.
Cost of Sales
Cost of sales includes freight-in, the actual cost of merchandise sold, cost of shipping billed to customers, inventory shrinkage, obsolete inventory write-offs, and warehouse inventory receiving costs.
Shipping costs in excess of those billed to customers and handling costs are included in our selling, general and administrative costs. During the year ended December 31, 2008 excess shipping costs were $56,041 and handling costs were $51,577.
Advertising
Advertising costs consist primarily of online advertising including affiliate marketing programs, e-mail campaigns and other initiatives. We pay commissions to participants in our affiliate marketing program when their customer referrals result in product sales.
Advertising expenses also consist of public relations expenditures to third parties and to a lesser extent, traditional advertising such as advertisements in magazines.
We include some inventory items in our free gift bags. The cost of these items is charged to advertising and promotion expense at the time the gift bags are committed as promotional items. During the year ended December 31, 2008 $5,691, in free gift bags were expensed to advertising and promotion.
Advertising and other promotional costs are expensed as incurred to selling, general and administrative expenses on our consolidated statements of operations and amounted to approximately $195,000 for the year ended December 31, 2008.
Recent Accounting Standards and Pronouncements
In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. We are required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year end statement of financial position is effective for fiscal years ending after December 15, 2008, or December 31, 2008 for us. The adoption of SFAS 158 did not have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS 159 permits measurement of certain financial assets and financial liabilities at fair value. If the fair value option is elected, the unrealized gains and losses are reported in earnings at each reporting date. Generally, the fair value option may be elected on an instrument-by-instrument basis, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. SFAS 159 was effective for us on January 1, 2008. The adoption of SFAS 159 did not have a material impact on our consolidated financial statements as we did not elect the fair value option for any of our financial assets or liabilities.
In June 2007, the EITF of the FASB reached a consensus on Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (EITF 07-3). EITF 07-3 requires that non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2007 and earlier application is not permitted. This consensus is to be applied prospectively for new contracts entered into on or after the effective date. EITF 07-03 was effective for us on January 1, 2008. The pronouncement did not have a material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which replaces SFAS 141, Business Combinations, which requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This statement was effective for us on January 1, 2009. We expect SFAS 141(R) will have an impact on our accounting for future business combinations once adopted, but the effect is dependent upon the acquisitions that are made in the future.
In December 2007, the EITF of the FASB reached a consensus on Issue No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1). The EITF concluded on the definition of a collaborative arrangement and that revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF 99-19 and other accounting literature. Based on the nature of the arrangement, payments to or from collaborators would be evaluated and the terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature would be presented. Companies are also required to disclose the nature and purpose of collaborative arrangements along with the accounting policies and the classification and amounts of significant financial-statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure under EITF 07-1 applies to the entire collaborative agreement. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. EITF 07-1 was effective for us on January 1, 2009. We do not expect adoption of EITF 07-1 to have a significant impact on our consolidated financial statements.
In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160), which amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment. The statement also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This statement applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. This statement was effective for us on January 1, 2009. We do not expect adoption of SFAS 160 to have a significant impact on our consolidated financial statements.
On January 1, 2008, the Company adopted SFAS No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 relates to financial assets and financial liabilities. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. Also in February 2008, the FASB issued FSP No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which states that SFAS No. 13, Accounting for Leases, (SFAS 13) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13 are excluded from the provisions of SFAS 157, except for assets and liabilities related to leases assumed in a business combination that are required to be measured at fair value under SFAS No. 141, Business Combinations, (SFAS 141) or SFAS No. 141 (revised 2007), Business Combinations, (SFAS 141(R)).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of SFAS 157, as it relates to financial assets and financial liabilities, had no impact on our financial statements.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in GAAP for the definition of fair value, except for the fair value of leased property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions that are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS 157 are described below:
| | • | | Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| | • | | Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| | • | | Level 3 - Inputs that are both significant to the fair value measurement and unobservable. |
In March 2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (SFAS 133). This statement is intended to improve financial reporting of derivative instruments and hedging activities by requiring enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The provisions of SFAS 161 are effective for fiscal years beginning after November 15, 2008. This statement was effective for us on January 1, 2009. Early adoption of this provision is prohibited. We do not expect this statement to have a material impact on our consolidated financial statements.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. This FSP is effective prospectively for intangible assets acquired or renewed after January 1, 2009. We do not expect FSP 142-3 to have a material impact on our accounting for future acquisitions of intangible assets.
In May, 2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement was effective for us on November 15, 2008 and did not have a material impact on our consolidated financial statements.
On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1 (FSP APB 14-1), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FSP APB 14-1 was effective for us on January 1, 2009. The adoption of FSP APB 14-1 is not expected to have a material impact on our consolidated results of operations or consolidated financial position.
On June 16, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 (FSP No. EITF 03-6-1), Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance is effective for fiscal years beginning after December 15, 2008. FSP EITF 03-6-1 was effective for us on January 1, 2009. Adoption of FSP EITF 03-6-1 is not expected to have a material impact on our consolidated results of operations or consolidated financial position.
In June 2008, the FASB issued EITF Issue 07-5 (EITF 07-5), Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock. EITF No. 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 Accounting for Derivatives and Hedging Activities, specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. EITF 07-5 was effective for us on January 1, 2009. Adoption of EITF 07-5 is not expected to have a material impact on our consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (FSP 03-6-1). FSP 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method described in SFAS No. 128, Earnings Per Share. This FSP was effective for us on January 1, 2009 and requires all prior-period earnings per share data that is presented to be adjusted retrospectively. We do not expect FSP 03-6-1 to have a material impact on our earnings per share calculations.
In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. As it relates to our financial assets and liabilities recognized or disclosed at fair value in our consolidated financial statements on a recurring basis (at least annually), the adoption of FSP 157-3 did not have a material impact on our consolidated financial statements.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) About Transfers of Financial Assets and Interest in Variable Interest Entities (FSP 140-4). FSP 140-4 requires additional disclosure about transfers of financial assets and an enterprise’s involvement with variable interest entities. FSP 140-4 was effective for the first reporting period ending after December 15, 2008. The adoption of FSP 140-4 did not have a material impact on our consolidated financial statements.
In December 2008, the FASB issued FASB Staff Position (FSP) No.132 (R)-1, Employers’ Disclosures about Pensions and Other Postretirement Benefits (FSP 132R-1). FSP 132R-1 requires enhanced disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans. The enhanced disclosures required by this FSP are intended to provide users of financial statements with a greater understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. This FSP is effective for us for the year ending December 31, 2009 and is not expected to have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company we are not required to provide this information.
Item 8. Financial Statements and Supplementary Data
| | Page |
| | |
| Report of Independent Registered Public Accounting Firm | F-1 |
| | |
| Consolidated Balance Sheets | F-2 |
| | |
| Consolidated Statements of Operations | F-3 |
| | |
| Consolidated Statement of Stockholders’ Deficit and Comprehensive Loss | F-4 |
| | |
| Consolidated Statements of Cash Flows | F-5 |
| | |
| Notes to Consolidated Financial Statements | F-6 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Makeup.com Limited
We have audited the accompanying consolidated balance sheets of Makeup.com Limited, as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ deficit and comprehensive loss, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Makeup.com Limited as of December 31, 2008 and 2007, and the results of its consolidated operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3, the Company has incurred recurring operating losses and has an accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Mendoza Berger & Company, LLP
/s/ Mendoza Berger & Company, LLP
Irvine, California
March 31, 2009
MAKEUP.COM LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
| | | 2008 | | | 2007 | |
| | | | | | | |
| ASSETS |
| | | | | | | |
| Current assets: | | | | | | |
| Cash | | $ | 48,629 | | | $ | 42,443 | |
| Accounts receivable, net of $2,588 and $250 in allowances | | | 3,603 | | | | 2,503 | |
| Inventory, net | | | 323,375 | | | | 340,896 | |
| Prepaid expenses and deposits | | | 47,254 | | | | 22,291 | |
| | | | | | | | | |
| Total current assets | | | 422,861 | | | | 408,133 | |
| | | | | | | | | |
| Fixed assets, net of $159,734 and $127,830 accumulated depreciation | | | 19,992 | | | | 46,056 | |
| Deposit | | | 70,000 | | | | 70,000 | |
| Intangible assets | | | 333,334 | | | | 333,334 | |
| | | | | | | | | |
| Total assets | | $ | 846,187 | | | $ | 857,523 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 433,618 | | | $ | 297,849 | |
| Accrued liabilities | | | 5,101 | | | | 5,720 | |
| Accrued advertising fees | | | 4,700 | | | | 8,991 | |
| Accrued consulting fees | | | - | | | | 15,000 | |
| Accrued professional fees | | | 62,033 | | | | 79,119 | |
| Convertible notes payable | | | 280,808 | | | | 3,106,301 | |
| Convertible notes payable to related parties | | | 1,337,304 | | | | 698,907 | |
| Note payable to related party | | | 386,240 | | | | 359,573 | |
| Advances payable | | | 6,891 | | | | 6,901 | |
| Due to related parties | | | 15,142 | | | | 15,573 | |
| Deferred assets | | | - | | | | 2,652 | |
| | | | | | | | | |
| Total current liabilities | | | 2,531,837 | | | | 4,596,586 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders' deficit: | | | | | | | | |
| Common stock $0.001 par value, 200,000,000 authorized; 9,733,442 and 2,241,567 | | | | | | | | |
issued and outstanding at December 31, 2008 and 2007, respectively | | | 9,733 | | | | 2,242 | |
| Additional paid in capital | | | 3,271,588 | | | | 42,589 | |
| Accumulated deficit | | | (4,953,074 | ) | | | (3,757,180 | ) |
| Accumulated other comprehensive loss | | | (13,897 | ) | | | (26,714 | ) |
| | | | | | | | | |
| Total stockholders' deficit | | | (1,685,650 | ) | | | (3,739,063 | ) |
| | | | | | | | | |
| Total liabilities and stockholders' deficit | | $ | 846,187 | | | $ | 857,523 | |
The accompanying notes are an integral part of these consolidated financial statements
MAKEUP.COM LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| | 2008 | | | 2007 | |
| | | | | | | |
| Sales | | $ | 683,185 | | | $ | 506,187 | |
| | | | | | | | | |
| Cost of goods sold | | | 440,217 | | | | 393,813 | |
| | | | | | | | | |
| Gross profit | | | 242,968 | | | | 112,374 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| | | | | | | | | |
| Selling, general and administrative | | | 1,252,003 | | | | 1,244,887 | |
| | | | | | | | | |
| Loss from operations | | | (1,009,035 | ) | | | (1,132,513 | ) |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
| Interest expense | | | (188,014 | ) | | | (210,668 | ) |
| Forgiveness of debt | | | 1,155 | | | | - | |
| | | | | | | | | |
| Loss from continuing operations | | | (1,195,894 | ) | | | (1,343,181 | ) |
| | | | | | | | | |
| Loss from discontinued operations | | | - | | | | (126,964 | ) |
| | | | | | | | | |
| Net loss | | $ | (1,195,894 | ) | | $ | (1,470,145 | ) |
| | | | | | | | | |
| | | | | | | | | |
Net loss per share - basic and diluted: | | | | | | | | |
| | | | | | | | | |
| Continuing operations | | $ | (0.17 | ) | | $ | (0.60 | ) |
| Discontinued operations | | | - | | | | (0.06 | ) |
| | | | | | | | | |
| Net loss per share | | $ | (0.17 | ) | | $ | (0.66 | ) |
| | | | | | | | | |
| Weighted average number of shares outstanding - basic and diluted | | | 7,154,275 | | | | 2,241,567 | |
The accompanying notes are an integral part of these consolidated financial statements
MAKEUP.COM LIMITED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2008 and 2007
| | | | | | | | | | | | Accumulated | | | | |
| | | Common Stock Issued | | | Additional | | | | | | Other | | | | |
| | | Number of | | | | | | Paid-in | | | Accumulated | | | Comprehensive | | | | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Income (Loss) | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2007 | | | 2,241,567 | | | $ | 2,242 | | | $ | 42,589 | | | $ | (2,287,035 | ) | | $ | (10,017 | ) | | $ | (2,252,221 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss for the year | | | - | | | | - | | | | - | | | | (1,470,145 | ) | | | - | | | | (1,470,145 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency exchange loss | | | - | | | | - | | | | - | | | | - | | | | (16,697 | ) | | | (16,697 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,486,842 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2007 | | | 2,241,567 | | | | 2,242 | | | | 42,589 | | | | (3,757,180 | ) | | | (26,714 | ) | | | (3,739,063 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for debt | | | 7,491,875 | | | | 7,491 | | | | 3,228,999 | | | | - | | | | - | | | | 3,236,490 | |
| | | | | | | | | | | | | | | | | | | | | | | | (502,573 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss for the year | | | - | | | | - | | | | - | | | | (1,195,894 | ) | | | - | | | | (1,195,894 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency exchange gain | | | - | | | | - | | | | - | | | | - | | | | 12,817 | | | | 12,817 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | | | | | (1,183,077 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | | 9,733,442 | | | $ | 9,733 | | | $ | 3,271,588 | | | $ | (4,953,074 | ) | | $ | (13,897 | ) | | $ | (1,685,650 | ) |
On July 18, 2008, the shareholders approved a 1 for 20 share reverse stock split of their issued and outstanding common stock. All share amounts have been retroactively adjusted for all periods presented.
The accompanying notes are an integral part of these consolidated financial statements
MAKEUP.COM LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 and 2007
| | | 2008 | | | 2007 | |
| | | | | | | |
| Cash flows (used in) provided by operating activities: | | | | | | |
| Net loss | | $ | (1,195,894 | ) | | $ | (1,470,145 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
| Depreciation | | | 31,904 | | | | 72,831 | |
| Loss on disposal of fixed assets | | | - | | | | 7,996 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (1,100 | ) | | | 11,878 | |
| Inventory | | | 17,521 | | | | (20,680 | ) |
| Prepaid expenses and deposits | | | (24,963 | ) | | | 8,331 | |
| Accounts payable | | | 135,769 | | | | 66,703 | |
| Accrued liabilities | | | (619 | ) | | | (5,098 | ) |
| Accrued advertising fees | | | (4,291 | ) | | | 5,197 | |
| Accrued consulting fees | | | (15,000 | ) | | | 15,000 | |
| Accrued professional fees | | | (17,086 | ) | | | 15,548 | |
| Interest on convertible notes payable | | | 93,036 | | | | 141,691 | |
| Interest on convertible notes payable to related parties | | | 68,396 | | | | 33,947 | |
| Interest on note payable to related party | | | 26,667 | | | | 26,666 | |
| Due to related parties | | | (431 | ) | | | 5,766 | |
| Deferred assets | | | (2,652 | ) | | | 2,652 | |
| | | | | | | | | |
| Net cash used in operating activities | | | (888,743 | ) | | | (1,081,717 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Proceeds on disposal of fixed assets | | | - | | | | 1,321 | |
| Acquisition of fixed assets | | | (5,840 | ) | | | (13,644 | ) |
| | | | | | | | | |
| Net cash used in investing activities | | | (5,840 | ) | | | (12,323 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Acquisition of domain name | | | - | | | | (1 | ) |
| Increase in convertible notes payable | | | 317,962 | | | | 786,432 | |
| Increase in convertible notes payable to related parties | | | 570,000 | | | | - | |
| Decrease (increase) in advances payable | | | (10 | ) | | | 304,138 | |
| | | | | | | | | |
| Net cash provided by financing activities | | | 887,952 | | | | 1,090,569 | |
| | | | | | | | | |
| Effects of foreign currency exchange | | | 12,817 | | | | (16,697 | ) |
| | | | | | | | | |
| Net increase (decrease) in cash | | | 6,186 | | | | (20,168 | ) |
| | | | | | | | | |
| Cash, beginning of the period | | | 42,443 | | | | 62,611 | |
| | | | | | | | | |
| Cash, end of the period | | $ | 48,629 | | | | 42,443 | |
| | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
| Cash paid during the period: | | | | | | | | |
| Taxes | | $ | - | | | $ | - | |
| Interest | | $ | - | | | $ | - | |
| | | | | | | | | |
| Non-cash changes in assets and liabilities | | | | | | | | |
| Advances payable converted to convertible notes payable | | $ | - | | | $ | 2,743,138 | |
| Advance payable to related party converted to note payable | | $ | - | | | $ | 100,000 | |
| Account receivable offset against interest payable | | $ | - | | | $ | 6,271 | |
| Conversion of convertible notes payable into common stock of the Company | | $ | 3,034,122 | | | $ | - | |
| Conversion of interest on convertible notes payable into common stock of the Company | | $ | 202,368 | | | $ | - | |
The accompanying notes are an integral part of these consolidated financial statements
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Makeup.com Limited (Makeup.com) was incorporated on July 14, 2003 in the state of Nevada as Tora Technologies Inc. and is based in Newport Beach, California. The Company’s principal business was marketing custom embroidery products and services through the internet until July 6, 2006, when the Company cancelled their Service Contract and discontinued the business. On October 20, 2006, Makeup.com acquired Makeup Incorporated (Makeup), a Nevada company incorporated on February 12, 2004. Makeup is in the business of selling beauty products such as makeup and perfume on the Makeup.com website. Makeup’s wholly owned subsidiary Online Makeup Inc. (Online) was incorporated under the laws of the Province of British Columbia in Canada on September 17, 2004. Online was in the business of warehousing and managing Makeup’s inventory until March 2007 when Makeup moved their inventory to an independent fulfillment warehouse in the United States. Since March 2007, Online has been inactive.
The acquisition of Makeup by Makeup.com was treated as a reverse acquisition whereby Makeup was treated as the acquirer and Makeup.com as the acquiree because of a change of control in the controlling shareholder of Makeup.com and Makeup being the larger corporation. As a result of the reverse merger Makeup.com’s operations have been included in the Company’s consolidated financial statements from October 20, 2006 (date of acquisition). In these notes, the terms “Company”, “we”, “us” or “our” mean Makeup.com.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current period’s presentation. These reclassifications had no effect on the consolidated results of operations or financial position for any period presented.
Principles of Consolidation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
These consolidated financial statements include the financial statements of Makeup.com and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated from the consolidated financial results.
Cash and Cash Equivalents
For purposes of the balance sheet and statement of cash flows, the Company considers all amounts on deposit with financial institutions and highly liquid investments with maturities of 90 days or less to be cash equivalents. At December 31, 2008 and 2007, the Company did not have any cash equivalents.
Accounts Receivable
Receivables represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. An allowance for doubtful accounts is based on an assessment of the collectability of all past due accounts. At December 31, 2008 and 2007, our allowance for doubtful accounts was $2,259 and $0, respectively.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Estimates
The preparation of the consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company’s consolidated financial statements are based on a number of estimates, including accruals for estimated accounting, auditing and legal expenses, estimates for obsolete inventory, product returns, shipping, warehouse handling costs, and the estimated useful lives and impairment of intangible and long-lived assets.
Inventories
Inventories are stated at the lower of cost or market under the first-in, first-out method. At December 31, 2008 and 2007our reserves for slow moving or obsolete inventory were $20,000 and $10,000 respectively. During the years ended December 31, 2008 and 2007, we wrote-off $11,959 and $34,203 (including reserves) respectively, to obsolete inventory.
We have arrangements with certain drop shippers whereby we do not purchase or pay for merchandise until the merchandise is ultimately sold and shipped to our customer.
Prepaid Marketing
Makeup.com recognizes up front advance payments for marketing fees in prepaid expenses. Prepaid marketing expenses consist of amounts paid to strategic marketing partners for future marketing services. These prepayments are expensed as marketing services are performed. The recoverability of these fees is subject to regular review by management.
Long Term Deposit
The Company was required to post a deposit with their online credit card payment processor to cover any fraudulent or refundable transactions to a maximum of $70,000. This deposit is not refundable until the Company ceases to use the services of this payment processor. At December 31, 2008 and 2007, the Company had $70,000 on deposit with this online credit card payment processor.
Depreciation on Fixed Assets
Fixed assets consist of computer hardware and computer software and are stated at cost and depreciated or amortized, net of salvage value, using the straight-line method over the estimated useful lives of the assets.
Capitalized Software Development Costs
The Company complies with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 98-1 (SOP 98-1), Accounting for Cost of Computer Software Developed or Obtained for Internal Use, and Emerging Issues Task Force (EITF) Issue 00-2, Accounting for Website Development Costs. In accordance with SOP 98-1, software development costs incurred as part of an approved project plan that result in additional functionality to internal use software are capitalized and amortized on a straight-line basis over the estimated useful life of the software, which is one to five years.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Technology and Content
The majority of the Company’s technology and content services are provided by independent consultants. Technology and content costs that consist principally of application development, category expansion, editorial content, buying, merchandising selection and systems support as well as costs associated with the computer, storage and telecommunications infrastructure are expensed as incurred and are generally recorded as either computer or consulting expenses.
Technology and content costs that relate to the development of internal use software and website development, including software used to upgrade and enhance our websites and processes supporting our business, are capitalized.
Long-lived Assets Including Intangible Assets
We review fixed assets and intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We have made no material adjustments to our long-lived assets at December 31, 2008 and 2007. In accordance with the Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142), we classify our intangible assets as intangible assets with an indefinite life not subject to amortization. We test our intangible assets for impairment at least annually or more frequently if events or changes in circumstances indicate that this asset may be impaired. Our intangible assets are the domain names Makeup.com, Makeupinvestor.com, Makeupkorean.com, Makeupsurplus.com, Surplusmakeup.com, Boutiquecosmetics.com, Allmadeupblog.com, Asamara-boutiques.com, Asamara-cosmetics.com, and Asamara-makeup.com. We determined the fair value of these assets by obtaining third party appraisals on an annual basis. At December 31, 2008 and 2007 the Company had $333,334 in intangible assets which management believe are recorded at fair value and that no impairment currently exists.
Foreign Currency Translation and Transaction
The functional currency for Makeup.com’s foreign subsidiary is the Canadian Dollar. Makeup.com translates assets and liabilities to US dollars using period-end exchange rates, fixed assets using historical exchange rates, and translates revenues and expenses using average exchange rates during the period. Exchange gains and losses arising from translation of foreign entity financial statements are included as a component of other comprehensive loss.
Transactions denominated in currencies other than the functional currency of the legal entity are re-measured to the functional currency of the legal entity at the period-end exchange rates. Any associated transactional currency re-measurement gains and losses are recognized in current operations.
Comprehensive Loss
Comprehensive loss reflects changes in equity that results from transactions and economic events from non-owner sources. The Company had $13,897 and $26,714 in accumulated other comprehensive losses for the years ended December 31, 2008 and 2007, respectively, from its foreign currency translation. As a result, total comprehensive losses for the years ended December 31, 2008 and 2007 were $1,183,077 and $1,486,842, respectively.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments
Foreign Exchange Risk
The Company is subject to foreign exchange risk for sales and purchases denominated in foreign currencies. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the United States dollar. The Company does not believe that it has any material risk due to foreign currency exchange.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable, accrued liabilities, accrued advertising, consulting and professional fees, convertible notes payable and advances payable. The fair value of these financial instruments approximate their carrying values due to their short maturities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable and payable.
At December 31, 2008 and December 31, 2007 the Company had approximately $48,000 and $42,000, respectively in cash that was not insured. This cash is on deposit with a major chartered Canadian bank. As part of its cash management process, the Company performs periodic evaluations of the relative credit standing of this financial institution. The Company has not experienced any losses in cash balances and does not believe it is exposed to any significant credit risk on its cash.
Receivables arising from sales to customers are generally not significant individually and are not collateralized. Management continually monitors the financial condition of its customers to reduce the risk of loss. None of the Company’s end-user customers account for more than 10% of net revenues. Substantially all customers remit payment for their purchases through credit cards. At December 31, 2008 and December 31, 2007, the Company had $3,170 and $1,898, respectively in trade accounts receivable from major credit card companies.
During the year ended December 31, 2008, purchases from one supplier totaled approximately $73,000 or 11% of net sales. While we frequently monitor and manage this risk, loss of this supplier could have a material adverse effect on us. During the year ended December 31, 2007, all of the Company’s purchases from suppliers were less than 10% of net sales.
Research and Development Costs
Research and development costs are expensed as incurred. The Company did not incur any significant research and development costs during the years ended December 31, 2008 and 2007.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
We recognize revenue when goods are shipped to the customer and upon transfer of title and risk of loss of the related products to the customer. Revenue is recorded net of allowances for customer sales incentives and rebates. The allowances are accrued concurrently with the recognition of revenue and are determined based primarily upon customer arrangements and historical data. We account for these incentives in accordance with EITF No. 01-09 (EITF 01-09), Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products, which affirms that the payment of consideration by a vendor to a customer should not be recognized as an asset of the vendor and further affirms that they should be accounted for as a reduction of revenues.
We account for customer incentives for free product and services in accordance with EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which affirms that items to be delivered at a future date should be deferred and recorded as a current liability.
Product returns are estimated in accordance with SFAS No. 48 (SFAS 48), Revenue Recognition when Right of Return Exists. The Company also ensures that the following other criteria in SFAS 48 have been met prior to recognition of revenue:
| (a) | the price is fixed or determinable; |
| (b) | the customer is obligated to pay and there are no contingencies surrounding the obligation or the payment; |
| (c) | the customer’s obligation would not change in the event of theft or damage to the product; |
| (d) | the customer has economic substance; |
| (e) | the amount of returns can be reasonably estimated; and |
| (f) | we do not have significant obligations for future performance in order to bring about resale of the product by the customer. |
We have inventory risk, therefore we do not act as an agent and recognize revenues on a “gross” basis, in accordance with EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.
We also offer coupons for replacement orders and discount programs. Discounts and coupons for “free products” are only redeemable on purchases made or on products offered on our website. Discounts are included as a reduction in sales whereas coupons for “free products” are classified as “cost of sales” in our consolidated statements of operations.
At December 31, 2008 and 2007 we allowed for $329 and $250 respectively, in product returns.
Amounts billed to a customer in a sale transaction related to shipping are classified as revenue.
Cost of Sales
Cost of sales includes freight-in, the actual cost of merchandise sold, cost of shipping billed to customers, inventory shrinkage, obsolete inventory write-offs, and warehouse inventory receiving costs.
Shipping costs in excess of those billed to customers and handling costs are included in our selling, general and administrative costs. During the years ended December 31, 2008 and 2007 excess shipping costs were $56,041 and $50,978 respectively and handling costs were $51,577 and $43,450 respectively.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
Advertising costs consist primarily of online advertising including affiliate marketing program e-mail campaigns and other initiatives. We pay commissions to participants in our affiliate marketing program when their customer referrals result in product sales.
Advertising expenses also consist of public relations expenditures to third parties and to a lesser extent, traditional advertising such as advertisements in magazines.
We include some inventory items in our free gift bags. The cost of these items is charged to advertising and promotion expense at the time the gift bags are committed as promotional items. During the years ended December 31, 2008 and 2007 $5,691 and $17,973, respectively, in free gift bags were expensed to advertising and promotion.
Advertising and other promotional costs are expensed as incurred to selling, general and administrative expenses on our consolidated statements of operations and amounted to approximately $195,000 and $220,000 for the years ended December 31, 2008 and 2007, respectively.
Income Taxes
Income tax expense is based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Basic and Diluted Net (Loss) Per Common Share (“EPS”)
Basic net (loss) per share is computed by dividing the net (loss) attributable to the common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted net income per common share includes the potential dilution that could occur upon exercise of the options and warrants to acquire common stock computed using the treasury stock method which assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company with the proceeds from the exercise of the options and warrants (which were assumed to have been made at the average market price of the common shares during the reporting period).
Potential common shares are excluded from the diluted loss per share computation in net loss periods as their inclusion would have been anti-dilutive.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Discontinued Operations
SFAS No. 146 (SFAS 146) Accounting for Costs Associated with Exit or Disposal Activities requires that costs associated with exit or disposal activities be recognized when the costs are incurred, rather than at the date of commitment of an exit or disposal plan. Under SFAS 146, a liability related to an exit or disposal activity is not recognized, or measured initially at fair value, until such liability has actually been incurred.
During March 2007, the Company moved its inventory to an independent fulfillment warehouse in the United States. As a result Online, ceased to be in the business of warehousing Makeup’s inventory and its net operating losses have been recorded in loss from discontinued operations in our consolidated financial statements. For the years ended December 31, 2008 and 2007, we recorded losses from discontinued operations of $0 and $126,964, respectively.
Stock-Based Compensation
The Company accounts for Stock-Based Compensation in accordance with the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), which requires recording expense for stock compensation based on a fair value based method.
The Company uses the “modified prospective method” which requires the Company to recognize compensation costs for all stock-based payments granted, modified or settled in financial statements.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. The Company is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year end statement of financial position is effective for fiscal years ending after December 15, 2008, or December 31, 2008 for the Company. The adoption of SFAS 158 did not have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS 159 permits measurement of certain financial assets and financial liabilities at fair value. If the fair value option is elected, the unrealized gains and losses are reported in earnings at each reporting date. Generally, the fair value option may be elected on an instrument-by-instrument basis, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. SFAS 159 was effective for the Company on January 1, 2008. The adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial statements as the Company did not elect the fair value option for any of its financial assets or liabilities.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
In June 2007, the EITF of the FASB reached a consensus on Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (EITF 07-3). EITF 07-3 requires that non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2007 and earlier application is not permitted. This consensus is to be applied prospectively for new contracts entered into on or after the effective date. EITF 07-03 was effective for the Company on January 1, 2008. The pronouncement did not have a material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which replaces SFAS 141, Business Combinations, requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This statement will be effective for us on January 1, 2009. We expect SFAS 141(R) will have an impact on our accounting for future business combinations once adopted, but the effect is dependent upon the acquisitions that are made in the future.
In December 2007, the EITF of the FASB reached a consensus on Issue No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1). The EITF concluded on the definition of a collaborative arrangement and that revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF 99-19 and other accounting literature. Based on the nature of the arrangement, payments to or from collaborators would be evaluated and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature would be presented. Companies are also required to disclose the nature and purpose of collaborative arrangements along with the accounting policies and the classification and amounts of significant financial-statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure under EITF 07-1 applies to the entire collaborative agreement. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. EITF 07-1 will be effective for the Company on January 1, 2009. We do not expect Adoption of EITF 07-1 to have a significant impact on our consolidated financial statements.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160), which amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment. The Statement also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This Statement applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. This statement is effective for us on January 1, 2009. We do not expect adoption of SFAS 160 to have a significant impact on our consolidated financial statements.
On January 1, 2008, the Company adopted SFAS No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 relates to financial assets and financial liabilities. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. Also in February 2008, the FASB issued FSP No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which states that SFAS No. 13, Accounting for Leases, (SFAS 13) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13 are excluded from the provisions of SFAS 157, except for assets and liabilities related to leases assumed in a business combination that are required to be measured at fair value under SFAS No. 141, Business Combinations, (SFAS 141) or SFAS No. 141 (revised 2007), Business Combinations, (SFAS 141(R)).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of SFAS 157, as it relates to financial assets and financial liabilities, had no impact on the Company’s financial statements.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in GAAP for the definition of fair value, except for the fair value of leased property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions, about market participant assumptions, that are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS 157 are described below:
| | • | | Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| | • | | Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| | • | | Level 3 - Inputs that are both significant to the fair value measurement and unobservable. |
In March 2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (SFAS 133). This statement is intended to improve financial reporting of derivative instruments and hedging activities by requiring enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The provisions of SFAS 161 are effective for fiscal years beginning after November 15, 2008. This statement is effective for us on January 1, 2009. Early adoption of this provision is prohibited. We do not expect this statement to have a material impact on our consolidated financial statement.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. This FSP is effective prospectively for intangible assets acquired or renewed after January 1, 2009. We do not expect FSP 142-3 to have a material impact on our accounting for future acquisitions of intangible assets.
In May, 2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement was effective for us on November 15, 2008 and did not have a material impact on our consolidated financial statements.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1 (FSP APB 14-1), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FSP APB 14-1 will be effective for the Company on January 1, 2009. The adoption of FSP APB 14-1 is not expected to have a material impact on our consolidated results of operations or consolidated financial position.
On June 16, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 (FSP No. EITF 03-6-1), Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. FSP EITF 03-6-1 is effective for the Company on January 1, 2009. Adoption of FSP EITF 03-6-1 is not expected to have a material impact on our consolidated results of operations or consolidated financial position.
In June 2008, the FASB issued EITF Issue 07-5 (EITF 07-5), Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock. EITF No. 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 Accounting for Derivatives and Hedging Activities, specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. EITF 07-5 is effective for us on January 1, 2009. Adoption of EITF 07-5 is not expected to have a material impact on our consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (FSP 03-6-1). FSP 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method described in SFAS No. 128, Earnings Per Share. This FSP is effective for us on January 1, 2009 and requires all prior-period earnings per share data that is presented to be adjusted retrospectively. We do not expect FSP 03-6-1 to have a material impact on our earnings per share calculations.
In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. As it relates to our financial assets and liabilities recognized or disclosed at fair value in our consolidated financial statements on a recurring basis (at least annually), the adoption of FSP 157-3 did not have a material impact on our consolidated financial statements.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) About Transfers of Financial Assets and Interest in Variable Interest Entities (FSP 140-4). FSP 140-4 requires additional disclosure about transfers of financial assets and an enterprise’s involvement with variable interest entities. FSP 140-4 was effective for the first reporting period ending after December 15, 2008. The adoption of FSP 140-4 did not have a material impact on our consolidated financial statements.
In December 2008, the FASB issued FASB Staff Position (FSP) No.132 (R)-1, Employers’ Disclosures about Pensions and Other Postretirement Benefits (FSP 132R-1). FSP 132R-1 requires enhanced disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans. The enhanced disclosures required by this FSP are intended to provide users of financial statements with a greater understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. This FSP is effective for us for the year ending December 31, 2009 and is not expected to have a material impact on our consolidated financial statements.
3. GOING CONCERN
From the date of inception, February 12, 2004 until June 2005, we were developing our websites, makeup.com, and discount.makeup.com sourcing beauty products, establishing our warehouse and corporate operations. During the first quarter of 2005, we began selling our beauty products on our websites and subsequent to launching our websites have been focused on increasing traffic to our websites, increasing our product lines and generating sales. We have accumulated a deficit of approximately $5.0 million to date and will require additional financing to support our operations until such time as we achieve positive cash flows from operations. These factors raise substantial doubt about our ability to continue as a going concern. Our ability to achieve and maintain profitability and positive cash flow is dependent upon increasing traffic to our websites, increasing our sales, increasing our product lines, globally expanding our sales market and controlling operating costs. Based upon current plans, we expect to incur operating losses in future periods. We plan to mitigate these operating losses through increasing traffic to our websites, increasing sales, increasing our product lines and globally expanding our market. We plan to obtain sufficient working capital through additional debt or equity financing, private loans and product sales. There is no assurance that we will be able to increase traffic to our websites, increase sales, increase product lines, globally expand our market or obtain working capital through additional debt or equity financing, private loans or product sales in the future. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
4. BALANCE SHEET DETAIL
| Inventories | | December 31, 2008 | | | December 31, 2007 | |
| | | | | | | |
| Goods for resale | | $ | 333,510 | | | $ | 334,608 | |
| Promotional inventory | | | 9,865 | | | | 15,555 | |
| Goods in transit | | | - | | | | 733 | |
| Less: Reserve for slow moving or obsolete inventory | | | (20,000) | | | | (10,000) | |
| | | | | | | | | |
| | | $ | 323,375 | | | $ | 340,896 | |
| Prepaid expenses and deposits | | December 31, 2008 | | | December 31, 2007 | |
| | | | | | | | | |
| Other prepaid deposits | | $ | 4,698 | | | $ | 1,852 | |
| Prepaid marketing | | | 42,556 | | | | 20,439 | |
| | | | | | | | | |
| | | $ | 47,254 | | | $ | 22,291 | |
| Fixed assets | | December 31, 2008 | | | December 31, 2007 | |
| | | | | | | | | |
| Computer equipment and software | | $ | 179,726 | | | $ | 173,886 | |
| | | | | | | | | |
| Less: accumulated depreciation | | | (159,734 | ) | | | (127,830 | ) |
| | | | | | | | | |
| | | $ | 19,992 | | | $ | 46,056 | |
During the year ended December 31, 2007, the Company recorded a loss on disposition of fixed assets of $7,996 due to closing Online’s warehouse in Canada and terminating the lease.
5. CONVERTIBLE NOTES PAYABLE
At December 31, 2008 and 2007, the Company had convertible notes payable totaling $280,808 and $3,106,301 respectively, including accrued interest of $32,358 and $141,691 respectively. The convertible notes are payable on demand, are unsecured, bear interest at 7% and are convertible into restricted shares of the Company’s common stock at the discretion of the lender at a conversion price of the lesser of (1) $0.50 per share and (2) a 20% discount to the closing market price of the Company’s common stock. (Note 8)
On May 5, 2008 the Company converted $3,236,490 in convertible notes payable, including $202,368 in accrued interest, into 7,491,875 (post reverse stock split) shares of the Company’s common stock. (Note 10)
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
6. CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES
| | | December 31, 2008 | | | December 31, 2007 | |
| Convertible notes payable to a major shareholder | | $ | 370,000 | | | $ | - | |
| Convertible note payable to a major shareholder | | | 30,000 | | | | - | |
| Convertible notes payable to a company controlled by a relative of a major shareholder | | | 629,960 | | | | 564,960 | |
| Convertible notes payable to a company controlled by a major shareholder | | | 105,000 | | | | - | |
| Convertible note payable to a company controlled by a major shareholder | | | 100,000 | | | | 100,000 | |
| Accrued interest on convertible notes payable to related parties | | | 102,344 | | | | 33,947 | |
| | | $ | 1,337,304 | | | $ | 698,907 | |
All of the above convertible notes payable to related parties are payable on demand, unsecured, bear interest at 7% and are convertible into restricted shares of the Company’s common stock at the discretion of the Company at a conversion price of the lesser of (1) $0.50 per share and (2) a 20% discount to the closing market price of the Company’s common stock.
7. NOTE PAYABLE DUE TO RELATED PARTY
At December 31, 2008 and 2007, the Company had a note payable in the amount of $333,333. This note is payable on demand, is unsecured and bears interest at 8% (payable monthly). At December 31, 2008 and 2007, $52,907 and $26,240, respectively, in interest had been accrued on this note.
8. ADVANCES PAYABLE
At December 31, 2008 and 2007, the Company had advances payable totaling $6,891 and $6,901, respectively, from third parties. These advances are non-interest bearing, have no fixed terms of repayment and are unsecured. During year ended December 31, 2007, the Company reclassified $2,843,138 of advances payable through the issuance of convertible notes payable. (Note 5)
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
9. DUE TO RELATED PARTIES
| Due to Related Parties | | December 31, 2008 | | | December 31, 2007 | |
| | | | | | | | | |
| Expense reimbursement due to a director (a) | | $ | 9,850 | | | $ | 9,850 | |
| Expenses reimbursement due to a director (b) | | | 129 | | | | - | |
| Expenses reimbursement due to a major shareholder of the Company | | | 5,163 | | | | 5,723 | |
| | | $ | 15,142 | | | $ | 15,573 | |
(a) At December 31, 2008 and 2007 the Company had paid or accrued $5,705 and $18,077 respectively, in travel and advertising expenses to this director.
(b) At December 31, 2008 and 2007, the Company had paid or accrued $1,380 and $1,773, respectively in telephone and advertising expenses to this director.
10. COMMON STOCK
On July 18, 2008 the Company’s shareholders approved a 1 for 20 share reverse stock split of their issued and outstanding common stock. All common stock amounts have been retroactively adjusted for all periods presented.
On May 5, 2008, the Company issued 7,491,875 (post reverse stock split) shares of common stock at $0.4320 per share on the conversion of $3,236,490 in convertible debt. The shares were issued at a discount of 20% to the closing market price of the Company’s common stock on May 5, 2008, which was the date the borrower and lender agreed on the conversion. (Note 5)
11. SEGMENT INFORMATION
Makeup.com operates in a single business segment, the sale of beauty products in the United States.
12. INCOME TAXES
Income tax expense has not been recognized for the years ended December 31, 2008 and 2007 and no taxes were payable at December 31, 2008 or 2007, because the Company has incurred losses since its inception. Online, the Company’s subsidiary is subject to federal and provincial taxes in Canada and Makeup.com and Makeup are subject to United States federal taxes.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
The components of the Company’s net operating losses for the years ended December 31, 2008 and 2007 were:
| | | 2008 | | | 2007 | |
| | | | | | | | | |
| United States of America | | $ | (1,029,933 | ) | | $ | (1,403,292 | ) |
| Canada | | | (184,703 | ) | | | 55,205 | |
| | | | | | | | | |
| | | $ | (1,214,636 | ) | | $ | (1,348,087 | ) |
12. INCOME TAXES (Continued)
As of December 31, 2008 and 2007 the Company had the following deferred tax assets that primarily relate to net operating losses. A 100% valuation allowance has been established; as management believes it is more likely than not that the deferred tax assets will not be realized.
| | | 2008 | | | 2007 | |
| | | | | | | | | |
| Federal loss carryforwards | | $ | 1,453,019 | | | $ | 1,102,841 | |
| Foreign loss carryforwards | | | 156,342 | | | | 98,160 | |
| | | | | | | | | |
| | | | 1,609,361 | | | | 1,201,001 | |
| Less: valuation allowance | | | (1,609,361 | ) | | | (1,201,001 | ) |
| | | | | | | | | |
| | | $ | - | | | $ | - | |
The Company’s valuation allowance increased during 2008 and 2007 by $408,360 and $458,293, respectively.
The Company had the following net operating loss carryforwards (“NOL’s”) at December 31:
| | | 2008 | | | 2007 | |
| | | | | | | |
| United States of America | | $ | 4,383,198 | | | $ | 3,353,265 | |
| Canada | | | 443,255 | | | | 258,553 | |
| | | | | | | | | |
| | | $ | 4,826,453 | | | $ | 3,611,818 | |
The federal and Canadian NOL’s expire through December 31, 2028. The Company is a Nevada corporation and is not subject to state taxes.
MAKEUP.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
13. COMMITMENT
Lease Commitment
At June 30, 2007, the Company terminated its long term lease agreement for warehouse space in Canada. The Company was released of its legal liabilities under this agreement through payment of a $14,952 early termination fee.
On March 1, 2007, the Company entered into an agreement with an independent warehouse in the United States whereby the warehouse will store, receive, relieve and ship inventory on behalf of the Company. The agreement is for one year commencing March 1, 2007, renewable automatically on a yearly basis and requires a minimum storage fee of $3,400 per month. In accordance with the agreement shipping and receiving services are charged on a per item basis.
On March 1, 2008, the agreement was renewed for one year. At December 31, 2008, the minimum future lease payments under our warehouse operating lease are as follows:
| For the year ended December 31, | | Amount | |
| 2009 | | $ | 6,400 | |
14. SETTLEMENT
During the year ended December 31, 2008 the Company initiated and received settlement in full for of a lawsuit of approximately $85,274 plus costs against a supplier for breach of contract and fraud arising out of the sale of counterfeit cosmetics to the Company.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A(T). Controls and Procedures.
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Internal Control over Financial Reporting
Our Chief Executive Officer and our Chief Financial Officer are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, 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 and includes those policies and procedures that:
| · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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.
Our Chief Executive Officer and our Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework
Based on our assessment, our Chief Executive Officer and our Chief Financial Officer believe that, as of December 31, 2008, our internal control over financial reporting is effective based on those criteria.
This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the fourth quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers, Promoters and Corporate Governance
Each of our directors holds office until the next annual meeting of the stockholders, his successor has been elected and qualified, or the director resigns.
Following is information regarding our directors and executive officers.
| Name of Directors and Officers | Makeup.com Limited | Makeup Incorporated | Online Makeup Inc. |
| Robert E. Rook | Director CEO and President | Director CEO and President | n/a |
| | | | |
| Munjit Johal | Director CFO, Treasurer, and Corporate Secretary | Director CFO, Treasurer and Corporate Secretary | Director President Corporate Secretary |
Robert E. Rook, age 57
Mr. Rook was appointed as a director and as our Chief Executive Officer and President on October 20, 2006. Since 1998, Mr. Rook has been a financial consultant in west Texas and southern California. Prior to that Mr. Rook was the Executive Vice President and Senior Lender of Norwest Bank in El Paso, Texas from 1980 to 1997. Mr. Rook has also owned and operated several companies during his career. Mr. Rook has a Bachelor‘s degree in Finance from West Texas A & M University.
Munjit Johal, age 53
Mr. Johal was appointed as a director and as our Chief Financial Officer on October 20, 2006. Mr. Johal has broad experience in accounting, finance and management in the public sector. Since September 2002, Mr. Johal has been the Chief Financial Officer of Secured Diversified Investment, Ltd. From 1990 to 1995, Mr. Johal served as the Executive Vice President for Pacific Heritage Bank in Torrance, California. Mr. Johal earned his MBA degree from the University of San Francisco in 1980. He received his BS degree in History from the University of California, Los Angeles in 1978.
Both Mr. Rook and Mr. Johal devote their services, as needed, to our operations.
There are no family relationships among Mr. Rook and Mr. Johal. Furthermore,
| | (1) | With the exception of the proceeding disclosed below, no bankruptcy petition has been filed by or against any business of which any director was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time. |
| | (2) | No director has been convicted in a criminal proceeding and is not subject to a pending criminal proceeding (excluding traffic violations and other minor offences). |
| | (3) | No director has been subject to any order, judgement, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities. |
| | (4) | No director has been found by a court of competent jurisdiction (in a civil action), the Securities Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, that has not been reversed, suspended, or vacated. |
On June 26, 2008, the largest creditor of Secured Diversified Investments, Ltd. (“SDI”) filed and served on SDI an involuntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The petition was filed in the United States Bankruptcy Court for the District of Nevada as Case No. 08-16332. At the time the petition was filed, Mr. Johal was the sole executive officer and sole director of SDI. By order entered on January 27, 2009, the Bankruptcy Court confirmed SDI’s Plan of Reorganization. On February 10, 2009, pursuant to the terms of the Plan of Reorganization, SDI entered into a Share Exchange Agreement with Galaxy Gaming, Inc., a privately held Nevada Corporation (“Galaxy”). In connection with the closing of the Share Exchange Agreement, SDI obtained 100% of the issued and outstanding shares of Galaxy, and Galaxy became SDI’s wholly-owned subsidiary. Also pursuant to the terms of the Plan of Reorganization, all of SDI’s outstanding debt obligations (other than administrative expenses related to the Chapter 11 case) were discharged in exchange for SDI’s issuance of new common stock on a pro rata basis to its creditors.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers, directors and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership with the Securities and Exchange Commission. To our knowledge, based solely upon review of the copies of such reports received or written representations from the reporting persons, we believe that during our 2008 fiscal year our directors and executive officers complied with all Section 16(a) filing requirements with the exception of Munjit Johal, who during 2008 gifted 22,000 post reverse split shares of common stock to each of his two children. Mr. Johal failed to file a Form 5 reporting this transaction.
Code of Ethics
We have adopted a code of ethics that applies to all of our executive officers and employees, including our Chief Executive Officer and our Chief Financial Officer. Our code of ethics is posted on our website and may be accessed at the url: www.makeupinvestor.com/pdf/MAKU-Code%20of%20Ethics.pdf.
Nomination Procedure for Directors
We do not have a standing nominating committee; recommendations for candidates to stand for election as directors are made by the board of directors. We have not adopted a policy that permits shareholders to recommend candidates for election as directors or a process for shareholders to send communications to the board of directors. There have been no material changes to this procedure since our last annual report on Form 10-KSB was filed.
Audit Committee Financial Expert
The board of directors has determined that Mr. Munjit Johal has the necessary attributes to be an audit committee financial expert. However, Mr. Johal is not independent, as he is our Chief Financial Officer.
Item 11. Executive Compensation.
Neither of our executive officers was paid compensation during the 2007 and 2008 fiscal years.
Since our inception, no stock options, stock appreciation rights, or long-term incentive plans have been granted, exercised or repriced.
Currently, there are no arrangements between us and any of our directors or between any of our subsidiaries and any of their directors whereby directors are compensated for any services provided as directors.
There are no employment agreements between us or our subsidiaries and any named executive officer, and there are no employment agreements or other compensating plans or arrangements with regard to any named executive officer which provide for specific compensation in the event of resignation, retirement, other termination of employment, from a change of control or from a change in a named executive officer’s responsibilities following a change in control.
Item 12. Security Ownership of Certain Beneficial Holders and Management.
The following tables set forth certain information regarding beneficial ownership of our securities as of March 27, 2009 by (i) each person who is known by us to own beneficially more than 5% of the outstanding shares of each class of our voting securities, (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group.
Beneficial ownership is determined under the rules of the Securities and Exchange Commission. The number of shares shown as beneficially owned in the tables below are calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934. Under Rule 13d-3(d)(1), shares not outstanding that are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all of the shares of common stock. For purposes of these tables, beneficial ownership is based on 9,733,442 shares of common stock issued and outstanding as of March 27, 2009.
Security Ownership of Certain Beneficial Owners (more than 5%)
Management is currently not aware of any beneficial owners with a security ownership of more than 5%, with the exception of the following beneficial owners.
(1) Title of Class | (2) Name and Address of Beneficial Owner | (3) Amount and Nature of Beneficial Owner | (4) Percent of Class |
| Common Stock | Richard N. Jeffs 49 Pont Street London, UK SW1X0BD | 8,269,451 (1) | 71.4% |
| Common Stock | Manhattan Assets Corp. 132 Via Havre Newport Beach, California 92663 | 667,163 (2) | 7% |
| Common Stock | Pilenga Limited c/o Portcullis TrustNet (BVI) Limited TrustNet Chambers P.O. Box 3444 Road Town, Tortola British Virgin Islands | 799,524 (2) | 8% |
| Common Stock | Undershot Overseas Ltd. c/o Portcullis TrustNet (BVI) Limited TrustNet Chambers P.O. Box 3444 Road Town, Tortola British Virgin Islands | 861,003 (3) | 9% |
(1) Of the shares attributed to Mr. Jeffs, 5,626,976 shares are owned by him, 861,003 shares are owned by Undershot Overseas Limited, an entity controlled by Mr. Jeffs and 167,314 shares are owned by Mr. Jeffs’ spouse, Susan Jeffs. Mr. Jeffs disclaims ownership of the shares owned by Susan Jeffs and they have not been included in calculating his percentage ownership. Also included are 1,295,011 shares which could be acquired by Mr. Jeffs upon the conversion of convertible promissory notes and 319,147 shares which could be acquired by Wet Coast Management, an entity controlled by Mr. Jeffs. The amount of principal and accrued interest through March 27, 2009 owed to Mr. Jeffs was $466,204 and the amount of principal and accrued interest through March 27, 2009 owed to Wet Coast Management was $114,893. The conversion rate used for this calculation was $0.36, which is a 20% discount to the closing price on March 27, 2009, as required by the convertible promissory notes.
(2) The information included has been obtained from a list of record shareholders provided to us by our stock transfer agent. We have not independently verified the information with the shareholders, who may beneficially own additional shares of common stock.
(3) Please see footnote (1) above.
Security Ownership of Management
The address of our directors and executive officers is c/o Makeup.com Ltd., 3416 Via Lido, Suite F, Newport Beach, California 92663-3976.
(1) Title of Class | (2) Name and Address of Beneficial Owner | (3) Amount and Nature of Beneficial Owner | (4) Percent of Class |
| Common Stock | Robert E. Rook | 65,958 | 0.68% |
| Common Stock | Munjit Johal | 25,000(1) | 0% |
| | Directors and Executive Officers (as a group) | 65,958 | 0.68% |
*Less than 1%.
(1) These shares were gifted by Mr. Johal to his daughter, who is a member of his household. Mr. Johal disclaims ownership of these shares.
Change in Control
We are not aware of any arrangement that may result in a change in control.
Item 13. Certain Relationships and Related Transactions.
While our common stock is not traded on any exchange, we have used Rule 4200(a)(15) of the NASDAQ Marketplace Rules to determine if any of our directors are “independent.” Using the definition of “independent” as set forth in Rule 4200(a)(15), we have determined that neither of our directors qualifies as an independent director.
Transactions with Related Persons
Since January 1, 2007, no director, executive officer, or holder of more than 5% of our common stock, or any immediate family of such director, executive officer, or security holder has had any direct or indirect material interest in any transaction or currently proposed transaction, in which we were or are to be a participant, that exceeded the lesser of (1) $120,000 or (2) 1% of the average of our total assets at year-end for the last three completed fiscal years, except for the following:
Reimbursement of Expenses
At December 31, 2007, Makeup.com was indebted to Robert E. Rook, the current president and Chief Executive Officer, in the amount of $9,850 for advertising expenses that Mr. Rook paid on behalf of Makeup.com during the past fiscal year. Makeup.com is not being charged interest for this outstanding amount.
Indebtedness to Richard N. Jeffs
On May 20, 2008 we issued to Mr. Richard N. Jeffs and entities controlled by Mr. Jeffs a total of 6,692,351 post-split (133,847,016 pre-split) shares of our common stock, or approximately 68.8% of the common stock outstanding on that date, in payment of loans having a total principal amount of $2,714,202 and accrued interest of $176,894. The loans were made to us by Mr. Jeffs or by entities controlled by Mr. Jeffs from time to time during the 2007 and 2008 fiscal years. Mr. Jeffs and entities controlled by him continue to loan us funds for our operations. As of March 27, 2009 we owed Mr. Jeffs a total of $450,000 in principal and $16,204 in interest and we owed an entity controlled by Mr. Jeffs a total of $100,000 in principal and $14,893 in interest. The interest on these loans is calculated and compounded monthly at the rate of 7%.
Item 14. Principal Accounting Fees and Services
(1) Audit Fees and Related Fees
The aggregate fees billed and accrued for each of the last two fiscal years for professional services rendered by our principal accountant for the audit of our annual consolidated financial statements and for the review of our financial statements or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years was:
2008 - $106,623 - Mendoza Berger & Company, L.L.P.
2007 - $72,828 – Mendoza Berger & Company, L.L.P.
(2) Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported in the preceding paragraph:
2008 - $3,000 - Mendoza Berger & Company, L.L.P.
2007 - $750– Mendoza Berger & Company, L.L.P.
(3) Tax Fees
The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning was:
2008 - $2,695 - Mendoza Berger & Company, L.L.P.
2008 - $1,179 – Dale, Matheson, Carr-Hilton, LaBonte, L.L.P.
2007 - $8,241 – Mendoza Berger & Company, L.L.P.
2007 - $606 – Dale, Matheson, Carr-Hilton, LaBonte, L.L.P.
(4) All Other Fees
The aggregate fees billed in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraphs (1), (2) and (3) was:
2008 - $0 - - Mendoza Berger & Company, L.L.P.
2007 - $0 – Mendoza Berger & Company, L.L.P
Item 15. Exhibits.
(a) Index to and Description of Exhibits.
| Exhibit | Description |
| 3.1 | Articles of Incorporation of Tora Technologies Inc. (1) |
| 3.2 | By-Laws of Tora Technologies Inc. (1) |
| 3.3 | Certificate of Amendment of Makeup.com Limited (2) |
| 4.1 | Instrument Defining the Rights of Security Holders (1) |
| 10.1 | Contract for Services dated as of August 31, 2007 between Savvy Office Solutions and Makeup, Incorporated (3) |
| 10.2 | Agreement between LifeTips and Makeup.com Limited (3) |
| 10.3 | Amendment dated October 12, 2007 to Agreement between LifeTips and Makeup.com Limited (4) |
| 10.4 | Form of Loan Agreement, Guarantee and Convertible Promissory Note* |
| 10.5 | Lease dated February 15, 2007 between Makeup Incorporated and Pacific Distribution Services, L.L.C.* |
| 10.6 | Amended Agreement between LifeTips and Makeup.com Limited dated February 17, 2009 * |
| 21 | Subsidiaries of the registrant* |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| 32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
*Filed herewith.
(1) Filed as an exhibit to the registrant’s Form SB-2 registration statement filed with the Securities and Exchange Commission on March 5, 2004 and incorporated herein by reference.
(2) Filed as an exhibit to the registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2006 and incorporated herein by reference.
(3) Filed as an exhibit to the registrant’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 14, 2007 and incorporated herein by reference.
(4) Filed as an exhibit to the registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission on March 31, 2008.
(5) Filed as an exhibit to the registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission on March 29, 2006 and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | MAKEUP.COM LIMITED | |
| | | | |
| March 31, 2009 | By: | /s/ Robert E. Rook | |
| | | Robert E. Rook Director and Chief Executive Officer | |
| March 31, 2009 | By: | /s/ Munjit Johal | |
| | | Munjit Johal Director and Chief Financial Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
| /s/ Robert E. Rook | | President, Principal Executive Officer, | | |
| Robert E. Rook | | and member of the Board of Directors | | |
| | | | | |
| /s/ Munjit Johal | | Principal Financial Officer | | |
| Munjit Johal | | member of the Board of Directors | | |
