UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2007
( ) Transition report pursuant of Section 13 or 15(d) of the Securities
Exchange Act of 1939 for the transition period _______ to _______
COMMISSION FILE NUMBER 000-25973
TRAVELSTAR, INC.
(formerly known as Joystar, Inc.)
(Exact name of registrant as specified in its charter)
California 68-0406331
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
95 Argonaut St. Aliso Viejo, CA 92656, Telephone (949) 837-8101
--------------------------------------------------------------------------------
(Address of Principal Executive Offices, including Registrant's zip code
and telephone number)
--------------------------------------------------------------------------------
Former address
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of the registrant's common stock as of September 30, 2007:
49,127,149 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Balance Sheets 3
(b) Statements of Operations 4
(c) Statement of Stockholders' Equity (deficit) 5
(d) Statements of Cash Flows 6
(e) Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 17
Item 3. Controls and Procedures 24
PART II. OTHER INFORMATION 25
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults On Senior Securities 25
Item 4. Submission of Items to a Vote 25
Item 5. Other Information 25
Item 6. 25
(a) Exhibits
(b) Reports on Form 8K
SIGNATURES AND CERTIFICATES 26
2
TRAVELSTAR, INC. (formerly known as Joystar, Inc.)
Balance Sheet (unaudited) September 30,
2007
------------
ASSETS
Current assets
Cash and cash equivalents $ 997,582
Accounts receivable 3,385,710
Prepaid expenses 54,256
------------
Total current assets 4,437,548
Property and equipment, net 366,488
Intangible assets, net of amortization 44,093
Other assets 18,970
------------
Total assets $ 4,867,099
------------
LILIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,427,673
Deferred merchant bookings 309,968
Accrued salaries 61,454
Accrued expenses 128,865
Accrued liabilities 314,999
Loans from shareholders 375
------------
Total current liabilities 3,243,334
------------
Commitments --
Stockholders' equity
Preferred stock, no par value, 10,000,000 shares authorized; none issued --
Common stock, no par value, 200,000,000 shares authorized; 49,127,149 shares issued and
outstanding at September 30, 2007 19,207,263
Stock issued for deferred compensation --
Stock subscribed not issued, 356,000 shares at September 30, 2007 313,501
Accumulated (deficit) (17,897,000)
------------
Total stockholders' equity (deficit) 1,623,764
------------
Total liabilities and stockholders' equity $ 4,867,098
============
The accompanying notes are an integral part of these financial statements
3
TRAVELSTAR, INC. (formerly known as Joystar, Inc.)
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the nine For the three
For the nine months ended For the three Months ended
months ended September 30, 2006 months ended September 30, 2006
September 30, 2007 (restated) September 30, 2007 (restated)
------------ ------------ ------------ ------------
Revenue $ 6,799,992 $ 6,850,791 $ 2,076,693 $ 2,114,540
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 5,743,406 4,208,591 1,702,695 1,308,643
General and administrative 2,317,259 2,965,856 771,967 800,477
Technology and content 297,099 135,556 141,963 52,633
------------ ------------ ------------ ------------
Total operating expenses 8,357,764 7,310,003 2,616,625 2,161,753
------------ ------------ ------------ ------------
Operating income/(loss) (1,557,772) (459,212) (539,932) (47,213)
Interest income/(expense) 47,268 -- 12,569 --
Gain/(Loss) on fair value of Warrants and stock
purchase rights 3,457,265 (3,302,671) (1,610,061)
Other income/(loss) (583) (583)
------------ ------------ ------------ ------------
Net Other income/(expense) 3,504,950 (3,302,671) 11,986 (1,610,061)
------------ ------------ ------------ ------------
Income/(Loss) before income taxes 1,947,178 (3,761,883) (527,946) (1,657,274)
Income tax provision 1,282 -- 1,282
------------ ------------ ------------ ------------
Net income (loss) $ 1,947,178 (3,763,165) (527,946) (1,658,556)
============ ============ ============ ============
Net Income/(Loss) per share
Basic $ 0.04 $ (0.09) $ (0.01) $ (0.04)
Diluted $ 0.04 $ -- $ -- $ --
============ ============ ============ ============
Weighted average number of common shares-
Basic 49,004,804 40,971,493 49,111,116 43,502,474
Diluted 49,426,952 40,971,493 49,111,116 43,502,474
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
4
TRAVELSTAR, INC. (formerly known as Joystar, Inc.)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Nine months ended September 30, 2007 (unaudited) (restated)
COMMON STOCK
Stock issued Stock Total
For Subscribed Stockholders'
Number of Deferred not Accumulated Equity
Shares Amount Compensation Issued (Deficit) (Deficit)
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 2006
(revised) 48,772,430 $ 14,071,360 $ (122,500) $ 313,501 $(19,844,078) $ (5,581,718)
Deferred Compensation Earned -- -- 122,500 -- -- 122,500
Stock Issued for Cash 220 200 -- -- -- 200
Stock Issued for Services 354,499 243,294 -- -- -- 243,294
Share based compensation -- 57,590 -- -- -- 57,590
Reclassification of Accrued
Liability -- 4,834,720 -- -- 4,834,720
Net Income 1,947,178 1,947,178
------------ ------------ ------------ ------------ ------------ ------------
Balance September 30, 2007
(Unaudited) 49,127,149 $ 19,207,164 $ -- $ 313,501 $(17,897,000) $ 1,623,764
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
TRAVELSTAR, INC. (formerly known as Joystar, Inc.)
STATEMENTS OF CASH FLOW (unaudited)
For the nine months ended
-------------------------
September 30, September 30, 2006
2007 (restated)
----------- -----------
Cash flows from operating activities:
Net Income/ (loss) $ 1,947,178 $(3,763,165)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 86,173 41,667
Share based compensation 57,590 181,865
Stock issued for services 243,294 622,970
Stock issued for deferred compensation 122,500
Changes in assets and liabilities
Decrease in prepaid expenses 22,500 (23,155)
Increase in receivables (684,457) (3,239,627)
Increase in accounts payable 684,349 1,082,152
Increase in deferred merchant bookings 309,968 --
Increase in accrued salaries/rent and payroll taxes (412,799) 637,799
Increase/(Decrease) in accrued liability relating to warrants and other stock
purchase rights (3,446,653) 3,302,671
----------- -----------
Net cash provided (used) by operations (1,070,357) (1,156,823)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (179,192) (82,083)
----------- -----------
Net cash used by investing activities (179,192) (82,083)
Cash flows from financing activities:
Loans from shareholders -- --
Issuance of common stock for cash 200 2,295,056
Stock subscribed but not issued -- --
----------- -----------
Net cash provided by financing activities 200 2,295,056
----------- -----------
Increase(Decrease) in cash and cash equivalents (1,249,349) 1,056,150
Cash and cash equivalents at the beginning of the period 2,246,928 218,948
----------- -----------
Cash and cash equivalents at the end of the period $ 997,579 $ 1,275,098
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of stock for services $ 243,294 $ 622,970
Shares issued for deferred compensation $ 122,501 $ --
Subscribed shares issued $ -- $ 720,000
Share based compensation $ 57,590 $ 181,865
Shares issued for accrued prior year compensation $ 127,000
The accompanying notes are an integral part of these financial statements
6
JOYSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006 (UNAUDITED)
NOTE 1 -- ORGANIZATION
DESCRIPTION OF BUSINESS
Travelstar, Inc., (a California corporation), (formerly known as Joystar, Inc.)
specializes in selling complex travel products including cruises, vacation
packages and group travel through its national sales force of independent travel
agents and independent travel agencies in the United States. These travel
products and services are offered both online and offline through a diversified
portfolio of brands including: Travelstar-branded travel websites, private label
websites, and VacationCompare.com. We refer to Travelstar, Inc. and its brands
collectively as "Travelstar," the "Company," "us," "we" and "our" in these
financial statements.
All adjustments (consisting only of normal recurring adjustments) have been made
which, in the opinion of management, are necessary for a fair presentation.
Results of operations for the nine months ended September 30, 2007 and 2006 are
not necessarily indicative of the results that may be expected for any future
period. The balance sheet at December 31, 2006 was derived from audited
financial statements.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America, have been omitted. These financial statements
should be read in conjunction with the audited financial statements and notes
for the year ended December 31, 2006.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
We use estimates and assumptions in the preparation of our financial statements
in accordance with accounting principles generally accepted in the United States
("GAAP"). Our estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
date of our financial statements. These estimates and assumptions also affect
the reported amount of net income during any period. Our actual financial
results could differ significantly from these estimates. Our significant
estimates underlying our financial statements include revenue recognition,
accounting for merchant payables, recoverability of long-lived and intangible
assets and goodwill, income taxes, and stock-based compensation.
7
REVENUE RECOGNITION
We offer travel products and services through two business models: the travel
agency model and the host agency model.
Under the travel agency model, we act as the agent in the transaction, passing
reservations booked by the traveler to the relevant travel provider. We receive
commissions or ticketing fees from the travel supplier and/or traveler. We
record revenue based principally on Staff Accounting Bulletin ("SAB") No. 104
"Revenue Recognition." We recognize revenue when it is earned and realizable
based on the following criteria: persuasive evidence of an arrangement exists,
services have been rendered, the price is fixed or determinable and
collectibility is reasonably assured.
The prevailing accounting guidance with respect to the presentation of revenue
on a gross versus a net basis is contained in Emerging Issues Task Force No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent ("EITF
99-19")." The consensus of this literature is that the presentation of revenue
as "the gross amount billed to a customer because it has earned revenue from the
sale of goods or services or the net amount retained (that is, the amount billed
to a customer less the amount paid to a supplier) because it has earned a
commission or fee" is a matter of judgment that depends on the relevant facts
and circumstances. If the conclusion drawn is that we perform as an agent or a
broker without assuming the risks and rewards of ownership of goods, revenue
should be reported on a net basis.
In making an evaluation of this issue, some of the factors that should be
considered are: whether we are the primary obligor in the arrangement (strong
indicator); whether we have general inventory risk (before customer order is
placed or upon customer return) (strong indicator); and whether we have latitude
in establishing price. EITF 99-19 clearly indicates that the evaluations of
these factors, which at times can be contradictory, are subject to significant
judgment and subjectivity.
Our travel agency revenue comes from cruise transactions, vacation package
transactions, airline ticket transactions, hotel transactions as well as car
rental reservations. We record travel agency revenue on a net basis when the
traveler books the transaction, as we have no significant post-delivery
obligations. We record an allowance for cancellations and on this revenue based
on historical experience. Under our host agency model, we offer technology,
marketing, and support services to a growing network of independent travel
agencies.
We recognize agency revenues on hotel, cruise and car rental reservations at the
earlier of notification of the amount of the commission from a commission
clearinghouse or a supplier or on receipt of the commissions from an individual
supplier. The Company receives overrides from certain travel suppliers in the
form of commissions as well as co-op marketing earnings based on the Company's
gross travel bookings with the supplier, recognized each period based upon the
Company's actual attainment of predetermined target sales levels. As of January
2007 the Company has changed its revenue recognition policy such that the
Company only recognizes override revenues either upon receipt of funds or
confirmation of its entitlement from the travel supplier.
Our merchant revenues are derived from transactions where we are the merchant of
record and determine the price. We have agreements with suppliers for blocks of
inventory that we sell and these sales generate the majority of our total
merchant revenues. We do not have purchase obligations for unsold inventory.
Recognition of merchant revenue occurs on the date the traveler uses the
inventory, such as the date of airline departure or hotel stay.
The Company generates membership service revenues derived from the operation of
the host-agency model in which the Company provides support services to travel
agents. These revenues include fee-based month-to-month non-obligatory payments,
set-up fees and ongoing membership dues for members in renewal periods paid
annually.
During the nine month period ended September 30, 2006 the Company recognized
override revenues, based on its evaluation of the actual attainment of various
supplier production goals, as of the end of each interim period. While the
Company believes that its recognition of override revenue was accurate, this
policy required the Company to track and measure a large number of complex
agreements.
8
Commencing in January 2007 the Company chose to modify this policy to only
recognize override revenue that had either actually been received or for which
the Company was notified by a supplier that the override had been earned, and
that payment was forthcoming.
The Company does not believe that the change in policy would have resulted in a
material difference in the revenue amounts recognized for the years ended
December 31, 2005 and 2006.
Accounting estimates are an integral part of the financial statements prepared
by management and are based on management's current judgments. Those judgments
are normally based on knowledge and experience about past and current events and
on assumptions about future events. Commission revenue for reservations is paid
to the Company by the travel suppliers, typically upon completion of the travel
associated with the reservation. Because the average time lag between booking
date and commission payment date is approximately nine months, the company
recognizes a reserve against revenues for bookings that may not produce a
collectible commission due to possible cancellations or other factors. For the
nine months ended September 30, 2007 the company recognized a reserve equal to
15% of the gross commissions generated. The reserve for the nine months ended
September 30, 2007 was reduced to 15% from the level of 25% that was used for
the year ended December 31, 2006. Management believes that this reduction in the
reserve percentage was appropriate due to its implementation of improved
internal processes for capturing data used to record revenues. The improved
process consists of a more detailed review of reservations bookings made by its
travel agents. As part of this review the Company is better able to eliminate or
correct errors in the raw data, thereby reducing the percentage reserve
requirements that were previously applied.
The Company will be monitoring receivables and adjusting the reserve levels on a
regular basis, as required. Our host agency revenue includes the set-up, monthly
and annual renewal fees we receive from our travel agency partners and are
recorded in the period we receive them.
SEASONALITY
We generally experience seasonal fluctuations in the demand for our travel
products and services. For example, leisure travel bookings are generally the
highest in the first quarter and gradually decline over the subsequent three
quarters. The first quarter is highest due to "Wave Season", when an estimated
70% of the yearly cruise line inventory is booked. There is a gradual drop off
in the second and third quarters as travelers plan and book their spring, summer
and winter vacations. In the fourth quarter, the number of leisure bookings
decreases significantly. We have been able to offset the quarterly decline in
bookings and revenue typical to the industry through the aggressive growth of
our travel agent network.
OTHER
We record revenue from all other sources either upon delivery or when we provide
the service.
CASH AND CASH EQUIVALENTS
Our cash and cash equivalents include cash and liquid financial instruments with
original maturities of 90 days or less when purchased.
9
PROPERTY AND EQUIPMENT
We record property and equipment at cost, net of accumulated depreciation and
amortization. We also capitalize certain costs incurred related to the
development of internal use software in accordance with Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and EITF No. 00-02, "Accounting for Website Development Costs."
We capitalize costs incurred during the application development stage related to
the development of internal-use software. We expense costs incurred related to
the planning and post-implementation phases of development as incurred.
We compute depreciation using the straight-line method over the estimated useful
lives of the assets, which range from three to five years for computer equipment
and capitalized software development, and three to seven years for furniture and
other equipment. We amortize leasehold improvement using the straight-line
method, over the shorter of the estimated useful life of the improvement or the
remaining term of the lease.
INTANGIBLE ASSET
The Company acquired a client list for $55,125 in order to promote sales. The
Company believes that the client list has a minimal useful life of five years
and is amortizing it over that time. If it should lose value prior to the five
years the Company will write it off earlier. The amortization for the nine
months ended September 30, 2007 and September 30, 2006 was $6,423 and $3,680
respectively.
Management reviews, on an annual basis, the carrying value of its intangible
asset in order to determine whether impairment has occurred. Impairment is based
on several factors including the Company's projection of future discounted
operating cash flows. If an impairment of the carrying value were to be
indicated by this review, the Company would perform the second step of the
impairment test in order to determine the amount of impairment, if any. There
was no impairment charge during the nine months ended September 30, 2007 and
September 30, 2006.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," we record income
taxes under the liability method. Deferred tax assets and liabilities reflect
the expected future tax consequences of temporary differences between the
carrying amounts of assets and liabilities for book and tax purposes. We
determine deferred income taxes based on the differences in accounting methods
and timing between financial statement and income tax reporting. Accordingly, we
determine the deferred tax asset or liability for each temporary difference
based on the tax rates that we expect will be in effect when we realize the
underlying items of income and expense. We consider many factors when assessing
the likelihood of future realization of our deferred tax assets, including our
recent earnings experience by jurisdiction, expectations of future taxable
income, and the carryforward periods available to us for tax reporting purposes,
as well as other relevant factors. We may establish a valuation allowance to
reduce deferred tax assets to the amount we expect to realize. Due to inherent
complexities arising from the nature of our businesses, future changes in income
tax law, tax sharing agreements or variances between our actual and anticipated
operating results, we make certain judgments and estimates. Therefore, actual
income taxes could vary from these estimates.
10
ADVERTISING EXPENSE
We incur advertising expense consisting of offline costs, including print
advertising, and online advertising expense to promote our brands. We expense
the production costs associated with advertisements in the period in which the
advertisement first takes place. We expense the costs of communicating the
advertisement as incurred each time that the advertisement is shown.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R, Share-Based Payment. Prior to January 1, 2006, the Company
accounted for share-based payments under the recognition and measurement
provisions of APB Opinion NO. 25, Accounting for Stock Issued to Employees, and
related Interpretations, as permitted by FASB Statement No. 123, Accounting for
Stock Based Compensation. In accordance with APB 25, no compensation cost was
required to be recognized for options granted that had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The Company adopted FAS 123R using the modified prospective transition method.
Under this method, compensation cost recognized in the year ended December 31,
2006 includes: a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of FAS 123, and b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of FAS 123R.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 "Earnings Per Share" which requires the Company to present basic and
diluted earnings per share, for all periods presented. The computation of loss
per common share (basic and diluted) is based on the weighted average number of
shares actually outstanding during the period. Diluted earnings per share give
effect to all potential dilutive common shares outstanding during the period of
computation. The computation of diluted earnings per share does not assume
conversion, exercise or contingent exercise of securities that would have an
anti-dilutive effect on earnings.
The following table reconciles basic earnings per share and diluted earnings per
share and the related weighted average number of shares outstanding for the
three and nine months ended September 30, 2007:
DISCLOSURE FOR RECONCILIATION
OF BASIC AND DILUTED
EARNINGS PER SHARE
For the Three Months Ended September 30, 2007
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
---------- ---------- ---------
Net income/(loss) $ (527,947) -- --
BASIC EPS
Income available to common stockholders $ (527,947) 49,111,116 $ (0.01)
Options -- 0 --
Warrants
---------- ---------- ---------
DILUTED EPS
Income available to common
stockholders + assumed conversions $ (527,947) 49,111,116 $ (0.01)
========== ========== =========
For the Nine months Ended September 30, 2007
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
---------- ---------- ---------
Net income $1,947,178
BASIC EPS
Income available to common stockholders $1,947,178 49,004,804 $ 0.04
Options --
Warrants 422,148
---------- ---------- ---------
DILUTED EPS
Income available to common
stockholders + assumed conversions $1,947,178 49,426,952 $ 0.04
========== ========== =========
11
Stock warrants to purchase 11,850,144 shares of common stock at exercise prices
ranging from $0.50 to $1.00 per share were outstanding during the three and nine
months ended September 30, 2007 but were not included in the computation of
diluted EPS because the warrants' exercise price was greater than the market
price of the common shares as of September 30, 2007. The warrants were still
outstanding on September 30, 2007 and expire in 2011.
ACCRUED LIABILITY RELATED TO WARRANTS AND STOCK PURCHASE RIGHTS
The Company accounts for freestanding derivative financial instruments
potentially settled in its own common stock under Emerging Issues Task Force
("EITF") Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." As the Company
potentially did not have, prior to June 21, 2007, sufficient authorized shares
available to settle its open stock-based contracts, the initial fair value of
the applicable contracts (consisting primarily of non-employee stock warrants
and rights to purchase common stock- (see Note 5) has been classified as
"accrued liability related to warrants and stock purchase rights" on the
accompanying balance sheet and measured subsequently at fair value (based on a
Black-Scholes computation), with gains and losses included in the statement of
operations. The accrued liability had a balance of $8,281,373 at December 31,
2006.
On June 21, 2007 the Company's Articles of Incorporation were amended to
increase the number of authorized shares to 210 million, consisting of 10
million shares of Preferred Stock and 200 million shares of Common Stock. As of
this amendment the Company has sufficient authorized shares available to settle
its open stock-based contracts. As a result the Company revalued the accrued
liability related to warrants and stock purchase rights to reflect the closing
price of $0.78 for the Company's common stock as of June 21, 2007. The Company
recorded a gain of $3,457,265 for the nine months ended September 30, 2007. In
addition as of June 21, 2007 the Company reclassified the remaining liability of
$4,834,720 as Common Stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and various current
liabilities. The estimated fair value of these instruments approximates their
carrying value.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has reviewed recent accounting pronouncements that have been adopted
and have concluded that they will not have any material impact on its financial
statements.
CERTAIN RISKS AND CONCENTRATIONS
Our business is subject to certain risks and concentrations including dependence
on relationships with our travel agent partners and travel suppliers, dependence
on third party technology providers, exposure to risks associated with online
commerce security and credit card fraud. We are highly dependent on our
relationships with major cruise lines and packaged vacation companies. We also
depend on global distribution system partners and third party service providers
for certain fulfillment services.
Financial instruments, which potentially subject us to concentration of credit
risk, consist primarily of cash and cash equivalents. We maintain some cash and
cash equivalents balances with financial institutions that are in excess of
Federal Deposit Insurance Corporation insurance limits.
12
3. GOING CONCERN
The accompanying financial statements, which have been prepared in conformity
with accounting principles generally accepted in the United States of America,
contemplates the continuation of the Company as a going concern. The Company has
sustained significant losses and has used capital raised through the issuance of
stock and debt to fund activities. Continuation of the Company as a going
concern is contingent upon establishing and achieving profitable operations.
Such operations will require management to secure additional financing for the
Company in the form of debt or equity.
Management believes that actions currently being taken to revise the Company's
funding requirements will allow the Company to continue. However, there is no
assurance that the necessary funds will be realized by securing debt or through
stock offerings.
4. RESTATEMENT OF FINANCIAL STATEMENTS
In connection with the preparation of the December 31, 2006 audit of the
Company's financial statements and letters of comment received from the
Securities and Exchange Commission, we determined that there were errors in the
accounting treatment and reported amounts in our previously filed financial
statements. As a result, we determined to restate our financial statements for
the nine months ended September 30, 2006.
In connection with the restatement, we are designing internal procedures and
controls for purposes of the preparation and certification of our financial
statements going forward. In this process, we identified certain errors in
accounting determinations and judgments, which have been reflected in the
restated financial statements.
These restated financial statements include adjustments related to the
following:
Cash and Accrued expenses: During the year ended December 31, 2006, the Company
issued cash disbursements totaling $144,068. These cash disbursements were
reconciling items for an extended period of time and management determined that
the disbursements should have been voided and reissued. Accordingly, the
balances for cash and accrued expenses have been increased by $144,068 at
September 30, 2006. The above adjustment did not affect previously reported cash
balances as of December 31, 2005.
Accrued liability related to warrants and stock purchase rights and Loss on fair
value of warrants and stock purchase rights: During 2006, the Company had issued
more shares of its common stock and other common stock equivalents including
warrants and stock options which exceeded the authorized shares of common stock
that the Company could issue. Accordingly, $1,610,061 and $3,302,671 of accrued
liability expense for the loss on fair value of warrants and stock purchase
rights was recognized as of and for the three and nine months ended September
30, 2006. The September 30, 2006, financial statements, reflect these
adjustments. The above adjustment did not affect previously reported cash
balances as of December 31, 2005.
On June 21, 2007 the Company's Articles of Incorporation were amended to
increase the number of authorized shares to 210 million, consisting of 10
million shares of Preferred Stock and 200 million shares of Common Stock. As of
this amendment the Company has sufficient authorized shares available to settle
its open stock-based contracts. Originally the Company accounted for this
transaction as a Gain on the fair value of warrants and stock purchase rights
and recorded gains of $6,858,989 and 8,281,373 for the three and nine months
ended September 30, 2007. The Company has now determined that in compliance with
EITF 00-19 the correct accounting was to revalue the liability as of June 21,
2007. As a result the Company revalued the accrued liability related to warrants
and stock purchase rights to reflect the closing price of $0.78 for the
Company's common stock as of June 21, 2007. The Company recorded a gain of
$3,457,265 for the nine months ended September 30, 2007. In addition as of June
21, 2007 the Company reclassified the remaining liability of $4,834,720 as
Common Stock.
General & Administrative Expenses: During the three and nine months ended
September 30, 2006, the Company recognized an additional $1.011 and $181,865 in
compensation expense for the issuance of stock options to employees.
13
The following financial statement line items were corrected for the three and
nine months ended September 30, 2006 and 2007.
Nine months ended September 30, 2006
As originally
presented Restated
--------- --------
Loss on fair value of warrants 0 $(3,302,671)
And stock purchase rights
Loss before income taxes $ (277,347) $(3,761,883)
Net Loss $ (278,629) $(3,763,165)
Net Loss per Share
Basic $ (0.01) $ (0.09)
Three months ended September 30, 2006
As originally
presented Restated
--------- --------
Loss on fair value of warrants 0 $(1,610,061)
And stock purchase rights
Income/(loss) before income taxes $ (46,202) $(1,657,274)
Net Income/(loss) $ (47,484) $(1,658,556)
Net Income/(loss) per Share
Basic $ (0.00) $ (0.04)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30,
2007
---------
Office furniture/computers $ 331,614
Booking engine software 67,265
Web sites 130,262
---------
529,141
Less: accumulated depreciation (162,653)
---------
$ 366,488
=========
6. CAPITAL STOCK COMMON STOCK
During the three months ended September 30, 2007, the Company issued 30,000
common shares for services for a total of $21,000. During the nine months ended
September 30, 2007, the Company issued 354,999 common shares for services for a
total of $243,294.
At September 30, 2007 the Company has 12,435,859 warrants outstanding to
purchase shares of common stock at exercise prices ranging from $0.35 to $1.00.
The warrants have lives of one to five years remaining.
On June 21, 2007, we filed a certificate of amendment to our Articles of
Incorporation. The amendment changed the name of the Company from "Joystar,
Inc." to "Travelstar, Inc." The amendment also increased our authorized capital
from 50,000,000 shares of common stock and 10,000,000 shares of preferred stock
to 200,000,000 shares of common stock and 10,000,000 shares of preferred stock.
The amendment was approved by our Board of Directors and by written consent of
the holders of a majority of our common stock.
7. STOCK OPTIONS
The Board of Directors has approved in April, 2003 a Company stock option plan,
which was amended by the Company in July, 2003. All the shares (480,000 shares)
under 2002 Equity and Stock Option Plan were issued in June, 2003. In July,
2003, the Company approved 2003 Equity Compensation Plan which provides for the
grant to directors, officers, employees and consultants of the Company of stock
based awards and options to purchase up to an aggregate of 2,500,000 shares of
Common Stock. On August 16, 2006 the plan was amended to provide for grants of
options stock based awards up to an aggregate of 3,500,000 shares of Common
Stock.
14
The purchase price of the common stock subject to each Incentive Stock Option
shall not be less than the fair market value (as determined in the 2003 Plan),
or in the case of the grant of an Incentive Stock Option to a principal
stockholder, not less than 110% of fair market value of such common stock at the
time such option is granted. The purchase price of the common stock subject to
each Nonstatutory Stock Option shall be determined at the time such option is
granted, but in no case less than 100% of the fair market value of such shares
of common stock at the time such option is granted. The options expire after 10
years from the date of grant and 5 years from the date of grant for a
ten-percent shareholder, as defined. The options are excercisable over a period
as determined by the Board of Directors and are subject to restrictions on
transfer, repurchase and right of first refusal.
On December 13, 2005, the Company authorized for two of its officers to receive
1,500,000 shares of common stock. The shares were valued at $330,000 or $0.22
per share. The shares are considered subscribed and not issued at September 30,
2007. The Company charged $330,000 to compensation expense during the year ended
December 31, 2005.
The following table summarizes activity for all stock options for the nine
months ended September 30, 2007:
2007
---------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- ---------
Outstanding, beginning of period 4,137,600 $ 0.53
Granted 794,000 1.26
Exercised -- --
Forfeited and expired (261,000) (0.50)
---------- ---------
Outstanding, end of period 4,670,600 $ 0.55
========== =========
Options exercisable, end of period 943,000 $ 0.53
Weighted average fair value of options granted
during the year $ 0.11
========== =========
The fair value of the stock options granted during the nine months ended
September 30, 2007 was approximately $90,000 or $0.11 per stock option, and was
determined using the Black Scholes option pricing model. The factors used for
the nine months ended September 30, 2007, were the option exercise price of
$0.50 to $1.50 per share, a 5 year life of the options, volatility measure of
47.5%, a dividend rate of 0% and a risk free interest rate of 4.54% for 2007.
The following table summarizes information about stock options outstanding at
September 30, 2007, with exercise prices equal to the fair market value on the
date of grant with no restrictions on exercisability after vesting:
15
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
---------------------------------------------------------------------------------------------------------
$0.50 to $1.50 4,670,600 4.00 $ 0.53 943,000 $ 0.53
=========================================================================================================
As of September 30, 2007, there was approximately $567,000 in unrecognized
compensation cost related to unvested stock options. The amount of unrecognized
compensation cost will be recognized over its weighted average life of
approximately four years.
8. Subsequent Events
On September 17, 2007 the Company's 2003 Equity Compensation Plan was amended to
provide for grants of options stock based awards up to an aggregate of 5,000,000
shares of common stock.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our condensed
financial statements and notes to those statements. The discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those expressed or implied in these
forward-looking statements as a result of various factors, including those set
forth at the end of this section under "Factors That May Impact Our Results of
Operations".
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this prospectus contains
forward-looking statements. The presentation of aspect of our future found
herein is subject to a number of risks and uncertainties that could cause actual
results to differ materially from those reflected in such statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. Without limiting
the generality of the foregoing, words such as "may", "will", "expect",
"believe", "anticipate", "intend", or "could" or the negative variations thereof
or comparable terminology are intended to identify forward-looking statements.
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause our actual results to be materially different from
any future results expressed or implied by us in those statements. Important
facts that could prevent us from achieving any stated goals include, but are not
limited to, the following:
(a) volatility or decline of the our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital to continue or expand its business, inability to raise
additional capital or financing to implement our business plans;
(e) failure to commercialize our technology or to make sales;
(f) rapid and significant changes in markets;
(g) litigation with or legal claims and allegations by outside parties
(h) insufficient revenues to cover operating costs.
There is no assurance that we will be profitable, and we may not be able to
successfully develop, manage or market our products and services. We may not be
able to attract or retain qualified executives and technology personnel and our
products and services may become obsolete. Government regulation may hinder our
business. Additional dilution in outstanding stock ownership may be incurred due
to the issuance of more shares, warrants and stock options, or the exercise of
warrants and stock options, and other risks inherent in our businesses.
OVERVIEW
Travelstar, Inc. sells complex leisure travel products through our virtual
network of travel agents, company branded and private label websites. We empower
travel entrepreneurs and leisure travelers with the tools and information they
need to efficiently research, plan, and book travel. The effect of having such a
massive and growing network of independent and home-based travel retailers all
booking under the Travelstar Agency umbrella is significantly increasing our
sales and revenue, and building strong brand recognition.
We refer to Travelstar, Inc. and its brands collectively as "Travelstar," the
"Company," "us," "we" and "our" in this management's discussion and analysis of
financial condition and results of operations. For additional information about
our brands, see the disclosure set forth in Part I, Item 1, Business, under the
caption "Management Overview."
17
Tens of thousands of travel agents who are closing their storefront agencies and
moving to a home-based operation are creating a value migration in the rapidly
emerging host travel agency model. Because of our strong value proposition, we
have been very successful in attracting profession travel agents and at the same
time, eroding our competitors' market share. Since going to market with our
hosting programs in August 2004, Travelstar has signed up over5,000 travel
agents making it one of the fastest growing and largest leisure travel network
in the industry.
Throughout 2006, Travelstar's commission levels with our preferred suppliers
increased substantially. With the acquisition of the Miami Cruise Center, the
enhanced commission levels that Travelstar offers travel agents are some of the
highest in the industry.
TRENDS
The travel industry and particularly the travel agency business model, has
experienced significant change in this decade. The advent of the Internet and
online travel agencies has forever changed the way travel products are
distributed. Travel agents were forced to retool their business models which
included the elimination of high costs associated with operating a store fronts
and identifying markets where their knowledge and service would ensure they
remained relevant in the eyes of travelers.
Today, similar to the way real estate agents, mortgage bankers, stock brokers
and insurance agents have been able to effectively telecommute, tens of
thousands of experienced travel sellers operate their businesses virtually.
According to a recent report issued by Credit Suisse/First Boston, there are
currently 25,000 professional, home-based agents. This number is expected to
grow to approximately 50,000 agents by 2010.
In the United States, Telecommuting has been growing at 15% a year since 1990.
It is believed that approximately 80% of Fortune 1000 companies are likely to
employ telecommuters within this decade.
Factors that will continue to affect the future of telecommuting worldwide
include the availability of bandwidth and fast Internet connections in a given
country; social methodologies for balancing work control and work freedom; the
perceived values and economies in telecommuting; and the opportunities and need
for working collaboratively across large distances, including globally.
According to the Direct Sales Association, the number of Americans operating a
home-based business has grown from 8.5 million in 1996 to 14.1 million in 2005.
The baby-boomer population is estimated at over 70 million domestically and 450
million worldwide. This group is expected to spend both their discretionary time
and income on travel related products and services.
STRATEGY
We intend to aggressively innovate on behalf of travel agents including building
a scalable, service -oriented technology platform which will extend across our
consumer brands. We expect this to increase the income opportunity+ for our
travel network as we will be providing them consumer leads and also drive
profitability for the company as we will create travel bookings at a lower
commission payout than our existing host travel agent programs.
We also intend to continue innovating on behalf of our preferred supplier
partners. As an example, we launched Starbase, a customer relationship
management system for our agents to better manage their businesses. Starbase
streamlines the interaction and booking process between our agents, customers
and suppliers. Through this "direct connect" technology, our agents can complete
the booking process with some of our cruise lines and vacation suppliers easier
and in a more cost effective for our suppliers. It also automatically notifies
Travelstar's internal accounting of bookings and cancellations and provides
agents with real time commission tracking. In the absence of this direct connect
technology, these processes are completed manually via a proprietary extranet.
Currently, cruise vacations represent over two-thirds of our travel products
sold. Although we expect continued significant increase in our cruise business,
our goal is to grow our land-based vacation packages and tours to represent 75%
of total gross bookings.
Our preferred supplier development team is negotiating with major vacation
suppliers to increase our commissions to the levels we have attained with our
major cruise suppliers. We believe this will attract high producing vacation
agents to our network and drive sales and product mix.
18
SEASONALITY
We generally experience seasonal fluctuations in the demand for our travel
products and services. For example, leisure travel bookings are generally the
highest in the first quarter and gradually decline over the subsequent three
quarters. The first quarter is highest due to wave season, when an estimated 70%
of the yearly cruise line inventory is booked. There is a gradual drop off in
the second and third quarters as travelers plan and book their spring, summer
and winter vacations. In the fourth quarter, the number of leisure bookings
decreases significantly. We have been able to offset the quarterly decline in
bookings and revenue typical to the industry through the aggressive growth of
our travel agent network.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
To understand our financial position and results of operations, it is important
to understand our critical accounting policies and estimates and the extent to
which we use judgment and estimates in applying those policies. We prepared our
financial statements and accompanying notes in accordance with generally
accepted accounting principles in the United States. Preparation of the
financial statements and accompanying notes requires that we make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the financial
statements and revenue and expenses during the periods reported.
Accounting estimates are an integral part of the financial statements prepared
by management are based on management's current judgments. These judgments are
normally based on knowledge and experience about past and current events and on
assumptions about future events. Actual results may differ from our estimates
under different assumptions or conditions.
There are certain critical estimates that we believe require significant
judgment in the preparation of our financial statements. We consider an
accounting estimate to be critical if:
o It requires us to make assumption because information was not available at the
time or it included matters that were highly uncertain at the time we were
making the estimate, and
o Changes in the estimate or different estimates that we could have selected may
have had a material impact on our financial condition or results of operations.
Commission revenue for reservations is paid to the Company by travel suppliers,
typically upon completion of the travel associated with the reservation. Because
the average time lag between booking date and commission payment date is
approximately nine months, the Company recognizes a reserve against revenues for
bookings that may not produce a collectible commission due to possible
cancellations or other factors. For the year ended December 31, 2006, the
Company recognized a reserve equal to 25% of the gross commissions earned. The
Company will be monitoring receivables and adjusting the reserve levels on a
regular basis, as required.
For more information on each of these policies, see Note 2 -- Significant
Accounting Policies, in the notes to financial statements. We discuss
information about the nature and rationale for our critical accounting estimates
below.
STOCK-BASED COMPENSATION
We record stock-based compensation expense net of estimated forfeitures. In
determining the estimated forfeiture rates for stock-based awards, we
periodically conduct an assessment of the actual number of equity awards that
have been forfeited to date as well as those expected to be forfeited in the
future. We consider many factors when estimating expected forfeitures, including
the type of award, the employee class and historical experience. The estimate of
stock awards that will ultimately be forfeited requires significant judgment and
to the extent that actual results or updated estimates differ from our current
estimates, such amounts will be recorded as a cumulative adjustment in the
period such estimates are revised.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2 -- Significant
Accounting Policies, in the notes to financial statements.
19
OPERATING METRICS
Gross travel bookings represent the total dollar value of transactions booked
for both agency and merchant transactions, recorded at the time of booking
reflecting the total price due for travel, including taxes, fees and other
charges, and are generally not reduced for cancellations and refunds. The term
"gross travel bookings" is a "non-GAAP financial measure", as such term is
defined by the Securities and Exchange Commission, and may differ from non-GAAP
financial measures used by other companies. The measure of "gross travel
bookings" is in no way derived from the financial statements. Revenue recorded
in the Company's financial statements represents a percentage of commissions or
ticketing fees paid by travel suppliers on travel bookings, membership services
revenue and override commissions from travel suppliers. The Company believes
that the measure "gross travel bookings" is useful for investors to evaluate the
Company's future ongoing performance because they enable a more meaningful
comparison of the activity levels of the Company's travel agent network with its
historical results from prior periods.
RESULTS OF OPERATIONS
Please refer to the financial statements, which are a part of this report, for
further information regarding the results of operations of the Company.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2006
GROSS TRAVEL BOOKINGS
Gross travel bookings for the three months ended September 30, 2007 increased to
$24.6 million compared to $16.2 million for the three months ended September 30,
2006..
REVENUE
Revenues for the three months ended September 30, 2007 were $2,076,963 compared
to $2,114,540 for the three months ended September 30, 2006. While gross travel
bookings increased, this was offset by the fact that the Company took a reserve
against revenues of 15% in the three months ended September 30, 2007, while no
reserve was taken in the three months ended September 30, 2006. As of January
2007 the Company has changed its revenue recognition policy such that the
Company only recognizes override revenues either upon receipt of funds or
confirmation of entitlement from the travel supplier. As a result, during the
three months ended September 30, 2007 the Company recognized $21,820 in override
revenue, compared with $181,007 during the three months ended September 30,
2006. See the discussion of reserves in Note 2 to the Financial Statements.
SELLING AND MARKETING
Selling and marketing expenses relate to direct advertising and distribution
expense, including traffic generation from Internet, search engines, private
label and affiliate programs. The remainder of the expense relates to personnel
costs, including staffing in our Agent Support Services and Preferred Supplier
Relations to enhance supplier commission levels. Marketing and sales expenses
for the three months ended September 30, 2007 were $1,702,965 compared to
$1,308,643 for the three months ended September 30, 2006. The increase of
$394,052 was primarily due to the increased payments to our travel agents as a
result of their increased sales levels. Selling and marketing expenses relate to
travel agent commissions, direct advertising and distribution expense, including
traffic generation from Internet, search engines, private label and affiliate
programs.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses for the three months ended September 30,
2007 decreased to $771,967 from $800,477 for three months ended September 30,
2006. The decrease was primarily due to reductions in employee compensation,
professional fees, telephone and travel expenses. We expect absolute amounts
spent on corporate personnel and professional service to increase over time as
we develop new business units requiring additional headcount and continue
incurring incremental costs associated with being a public company.
20
TECHNOLOGY AND CONTENT
Technology and content expense includes product development expenses such as
payroll and related expenses and depreciation of technology infrastructure,
travel agent intranets, travel agent website, and consumer and social networking
site development costs. In 2006, moved our software development to an
India-based operation with our own employees. We employ web developers and
designers in Kuala Lumpur, Pakistan, India and Spain. We also began outsourcing
the development of certain large scale projects to China including the
development of our consumer travel comparison marketplace, VacationCompare.com
and our group travel social networking site, Travelstar.com.
Technology and content expenses for the three months ended September 30, 2007
were $141,963 compared to $52,633 for the three months ended September 30, 2006.
Given the increasing complexity of our business, geographic expansion, increased
supplier integration, service-oriented architecture improvements and other
initiatives, we expect absolute amounts spent in technology and content to
increase over time. The Company recently hired a Chief Technology Officer.
ACCRUED LIABILITY RELATED TO WARRANTS AND STOCK PURCHASE RIGHTS
The Company accounts for freestanding derivative financial instruments
potentially settled in its own common stock under Emerging Issues Task Force
("EITF") Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." As the Company
potentially did not have, prior to June 21, 2007, sufficient authorized shares
available to settle its open stock-based contracts, the initial fair value of
the applicable contracts (consisting primarily of non-employee stock warrants
and rights to purchase common stock- (see Note 5) has been classified as
"accrued liability related to warrants and stock purchase rights" on the
accompanying balance sheet and measured subsequently at fair value (based on a
Black-Scholes computation), with gains and losses included in the statement of
operations. The accrued liability had a balance of $8,281,373 at December 31,
2006.
On June 21, 2007 the Company's Articles of Incorporation were amended to
increase the number of authorized shares to 210 million, consisting of 10
million shares of Preferred Stock and 200 million shares of Common Stock. As of
this amendment the Company has sufficient authorized shares available to settle
its open stock-based contracts. As a result the Company revalued the accrued
liability related to warrants and stock purchase rights to reflect the closing
price of $0.78 for the Company's common stock as of June 21, 2007. The Company
recorded a gain of $3,457,265 for the nine months ended September 30, 2007. In
addition as of June 21, 2007 the Company reclassified the remaining liability of
$4,834,720 as Common Stock.
Net other income for the three months ended September 30, 2007 was $11,985
compared to a loss of $(1,610,061) in the three months ended September 30,
2006..
PROFITABILITY/LOSS
Net loss for the three months ended September 30, 2007 was $(527,947)compared to
a net loss of $(1,658,556) for the three months ended September 30, 2006.
NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2006 GROSS TRAVEL BOOKINGS
Gross travel bookings for the nine months ended September 30, 2007 increased to
$70.2 million compared to $49.3 million for the nine months ended September 30,
2006.
REVENUE
Revenues for the nine months ended September 30, 2007 were $6,799,992 compared
to $6,850,791 for the nine months ended September 30, 2006. While gross travel
bookings increased, this was offset by the fact that the Company took a reserve
against revenues of 15% in the nine months ended September 30, 2007, while no
reserve was taken in the nine months ended September 30, 2006.
See the discussion of reserves in Note 2 to the Financial Statements.
21
SELLING AND MARKETING
Selling and marketing expenses relate to direct advertising and distribution
expense, including traffic generation from Internet, search engines, private
label and affiliate programs. The remainder of the expense relates to personnel
costs, including staffing in our Agent Support Services and Preferred Supplier
Relations to enhance supplier commission levels.
Marketing and sales expenses for the nine months ended September 30, 2007 were
$5,743,406 compared to $4,208,591 for the nine months ended September 30, 2006.
The increase was primarily due to the increased payments to our travel agents as
a result of their increased sales levels. Selling and marketing expenses relate
to travel agent commissions, direct advertising and distribution expense,
including traffic generation from Internet, search engines, private label and
affiliate programs.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses for the nine months ended September 30, 2007
decreased to $2,317,259 from $2.965,856 for nine months ended September 30,
2006. The decrease was primarily due to reductions in employee compensation,
professional fees, telephone and travel expenses. We expect absolute amounts
spent on corporate personnel and professional service to increase over time as
we develop new business units requiring additional headcount and continue
incurring incremental costs associated with being a public company.
TECHNOLOGY AND CONTENT
Technology and content expense includes product development expenses such as
payroll and related expenses and depreciation of technology infrastructure,
travel agent intranets, travel agent website, and consumer and social networking
site development costs. In 2006, we moved our software development to an
India-based operation with our own employees. We currently employ web developers
and designers in Kuala Lumpur, Pakistan, India and Spain. We also began
outsourcing the development of certain large scale projects to India, including
the development of our consumer travel comparison marketplace,
VacationCompare.com and our group travel social networking site, Travelstar.com.
Technology and content expenses for the nine months ended September 30, 2007
were $297,099. Given the increasing complexity of our business, geographic
expansion, increased supplier integration, service-oriented architecture
improvements and other initiatives, we expect absolute amounts spent in
technology and content to increase over time. The Company recently hired a Chief
Technology Officer.
ACCRUED LIABILITY RELATED TO WARRANTS AND STOCK PURCHASE RIGHTS
The Company accounts for freestanding derivative financial instruments
potentially settled in its own common stock under Emerging Issues Task Force
("EITF") Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." As the Company
potentially did not have, prior to June 21, 2007, sufficient authorized shares
available to settle its open stock-based contracts, the initial fair value of
the applicable contracts (consisting primarily of non-employee stock warrants
and rights to purchase common stock- (see Note 5) has been classified as
"accrued liability related to warrants and stock purchase rights" on the
accompanying balance sheet and measured subsequently at fair value (based on a
Black-Scholes computation), with gains and losses included in the statement of
operations. The accrued liability had a balance of $8,281,373 at December 31,
2006.
22
On June 21, 2007 the Company's Articles of Incorporation were amended to
increase the number of authorized shares to 210 million, consisting of 10
million shares of Preferred Stock and 200 million shares of Common Stock. As of
this amendment the Company has sufficient authorized shares available to settle
its open stock-based contracts. As a result the Company revalued the accrued
liability related to warrants and stock purchase rights to reflect the closing
price of $0.78 for the Company's common stock as of June 21, 2007. The Company
recorded a gain of $3,457,265 for the nine months ended September 30, 2007
compared with losses of $3,302,671 for the nine months ended September 30, 2006.
In addition as of June 21, 2007 the Company reclassified the remaining liability
of $4,834,720 as Common Stock.
Net other income for the nine months ended September 30, 2007 was $3,504,950
compared to an expense of $(3,302,671) in the nine months ended September 30,
2006. This change was primarily due to a reduction in the Accrued Liability
Related to Warrants and Stock Purchase Rights.
PROFITABILITY/LOSS
Net income for the nine months ended September 30, 2007 was $1,947,178 compared
to a net loss of $(3,763,165) for the nine months ended September 30, 2006.
The increase in net income was due to the reduction in the provision of the
accrued liability of related to warrants and stock purchase rights in the nine
months ended September 30, 2007. The Company's operating loss for the nine
months ended September 30, 2007 was $(1,557,772) compared to an operating loss
of $(459,212) for the nine months ended September 30, 2006.
Our business continues to be dominated by complex leisure travel. Commission
revenue for these types of bookings is paid to the company by travel suppliers,
typically upon completion of the travel. Because the average time lag between
booking travel and receiving the commission is approximately nine months, we
determined it prudent to recognize a reserve against revenues for the
possibility of cancellations or other factors. Therefore, we recognized a
reserve equal to 15% of the gross commissions generated for the nine months
ended September 30, 2007. The Company will be monitoring receivables and
adjusting the reserve levels on a regular basis, as required.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance at September 30, 2007 was $977,582 as compared to
$2,246,929 at December 31, 2006. The principal reason for the decline in cash
was the Company's operating loss during the nine months ended September 30,
2007, of $1,557,772. The Company has funded certain expenses by issuing shares
for compensation and services. During the nine months ended September 30, 2007
the Company issued $243,294 in shares for services. Typically there is
approximately a six to nine month lag between when the Company's travel agents
make a sale and when the commission on this sale is paid by the supplier. This
results in an increase in Accounts Receivable as the Company's sales grow.
During the nine months ended September 30, 2007 Accounts Receivable increased by
$684,457 as a result of the growth of the Company's sales. Offsetting this
increased use of cash, the Company's Accounts Payable to its travel agents and
other vendors increased by $684,349. During the nine months ended September 30,
2006 the Company invested $179,192 in Property, Plant and Equipment, primarily
consisting of computer equipment and the capitalization of certain software
development associated with new internet sites that the Company was preparing to
launch. This compares with $82,083 invested in Property, Plant and Equipment
during the nine months ended September 30, 2006.
23
Item 3. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) have concluded, based on
their evaluation as of September 30, 2007, that the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
whether or not disclosure is required.
During the quarter ended September 30, 2007, there were no changes in our
internal controls over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds NONE
Item 3. Defaults on Senior Securities NONE
Item 4. Submission of Items to a Vote NONE
Item 5. Other Information NONE
Item 6.
(a) Exhibits
--------
The following Exhibits are incorporated herein by reference or are filed
with this report as indicated below.
Exhibit No. Description
----------- -----------
* Exhibit 10.1 Subscription Agreement
* Exhibit 10.2 Warrant Agreement
* Exhibit 10.3 Escrow Agreement
* Exhibit 10.4 Standstill Agreement
* Exhibit 10.5 Agreement for the purchase and sale of assets between
Vacation and Cruise Resources, Inc. and Travelstar,
Inc. dated August 11, 2005.
* Exhibit 10.6 Employment Agreement with William M. Alverson.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act
b) Reports on 8K during the quarter: None
* Previously filed with the Securities and Exchange Commission.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TRAVELSTAR, INC.
Date:November 20, 2007
By: /s/ William Alverson
---------------------------------
Chief Executive Officer
By: /s/ Jerry Galant
---------------------------------
Chief Financial Officer
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