As filed with the Securities and Exchange Commission on August 18, 2005
Registration Number __________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
JOYSTAR, INC.
(Name of Small Business Issuer in its Charter)
California 4700 68-0406331
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer)
incorporation or organization) Classification Code Number) Identification No.
95 Argonaut Street, First Floor
Aliso Viejo
California 92656
(949) 837-8101
(Address and telephone number of principal executive offices)
William Alverson
Executive Officer
Joystar, Inc.
95 Argonaut Street, First Floor
Aliso Viejo
California 92656
(949) 837-8101
(Name, address and telephone number of agent for service)
Copies to:
Richard A. Friedman, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor
New York, New York 10018
Tel: (212) 930-9700
Fax: (212) 930-9725
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
_______________________________
Proposed Maximum
Title of Each Class of Offering Price Per Share Proposed Maximum Amount of Registration
Securities to be Registered Amount To Be Registered (1) Aggregate Offering Price Fee
---------------------------- ------------------------- ------------------------- ------------------------- -------------------------
---------------------------- ------------------------- ------------------------- ------------------------- -------------------------
Common Stock, no par 4,710,742 $ 0.47 $ 2,214,048.74 $ 260.60
value(2)
---------------------------- ------------------------- ------------------------- ------------------------- -------------------------
Common Stock, no par 2,667,694 $ 0.47 $ 1,253,816.18 $ 147.57
value(3)
---------------------------- ------------------------- ------------------------- ------------------------- -------------------------
Total 7,378,436 $ 3,467,864.92 $ 408.17
---------------------------- ------------------------- ------------------------- ------------------------- -------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended. The average of the
high and low price per share of the Registrant's Common Stock on the Over the
Counter Bulletin Board as of August 15, 2005 was $0.47 per share.
(2) Represents shares issuable upon conversion of secured convertible promissory
notes.
(3) Represents shares issuable upon exercise of warrants.
The registrant hereby amends this registration statement on such date or date(s)
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the commission acting pursuant to said Section
8(a) may determine.
The information in this prospectus is not complete and may be changed. The
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
Subject to Completion, Dated August 18, 2005
JOYSTAR, INC.
7,378,436 Shares of Common Stock
This prospectus relates to the resale by the selling stockholders of
up to 7,378,436 shares of our common stock. The selling stockholders may sell
common stock from time to time in the principal market on which the stock is
traded at the prevailing market price or in negotiated transactions.
The selling shareholders named in this prospectus are offering to sell up
to 7,378,436 shares of common stock including up to 4,710,742 shares of common
stock of Joystar, Inc. and warrants to purchase up to 2,667,694 shares that were
previously issued by us to the selling shareholders in private transactions. We
will receive proceeds from the exercise of our common stock purchase warrants.
Our common stock currently trades on the Over the Counter Bulletin
Board ("OTC Bulletin Board") under the symbol "JYSR.OB."
On August 15, 2005, the last reported sale price for our common stock
on the OTC Bulletin Board was $ 0.47 per share.
The securities offered in this prospectus involve a high degree of
risk. See "Risk Factors" beginning on page 3 of this prospectus to read about
factors you should consider before buying shares of our common stock.
No underwriter or person has been engaged to facilitate the sale of
shares of common stock in this offering.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Joystar, Inc. with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
The date of this Prospectus is ________, 2005
TABLE OF CONTENTS
Page
Prospectus Summary............................. ...................... 1
Risk Factors.......................................................... 3
Forward Looking Statements............................................ 4
Use of Proceeds....................................................... 5
Management's Discussion and Analysis or Plan of Operation............. 6
Business.............................................................. 8
Description of Property............................................... 12
Legal Proceedings..................................................... 12
Directors and Executive Officers...................................... 13
Executive Compensation................................................ 14
Market for Common Equity and Related
Stockholder Matters................................................... 16
Security Ownership of Certain Beneficial Owners
and Management........................................................ 17
Selling Shareholder................................................... 18
Certain Relationships and Related Transactions........................ 19
Description of Securities............................................. 20
Plan of Distribution.................................................. 21
Legal Matters......................................................... 22
Experts............................................................... 22
Where You Can Find More Information.................................... 22
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities........................................ 23
Index to Consolidated Financial Statements............................ F-1
You may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, including, the section entitled
"Risk Factors" before deciding to invest in our common stock. Joystar, Inc. is
referred to throughout this prospectus as "Joystar," "we" or "us."
General
Joystar is one of the fastest growing travel agency networks. The Company
specializes in selling complex travel products including cruises, vacation
packages and group travel through its national sales force of over 2,500 of
independent travel agents. Joystar's comprehensive business solutions combine
innovative technology, marketing opportunities and expert support services to
independent and home-based travel agents giving them more time to sell travel.
With Joystar, professional travel agents can concentrate on promoting travel and
servicing their clients without the administrative and financial burden of
owning/operating a traditional storefront travel agency.
The Company maintains its corporate offices at 95 Argonaut St. First Floor,
Aliso Viejo, CA 92656. The Company's telephone number is (949) 837-8101.
This Offering
Shares offered by Selling
Stockholders.................................................. Up to 7,378,436 including 4,710,742 of which are shares and
2,667,694 are of which are issuable upon exercise of warrannts.
Common Stock to be outstanding after the offering............. 31,459,420
Use of Proceeds............................................... We will not receive any proceeds from the sale of the common stock
hereunder. We will, however, receive proceeds from the exercise of
our common stock purchase warrants. See "Use of Proceeds" for a
complete description.
Risk Factors.................................................. The purchase of our common stock involves a high degree of risk.You
should carefully review and consider "Risk Factors"beginning
on page3.
OTC Bulletin Board
Trading Symbol................................................ JYSR.OB
2
RISK FACTORS
An investment in our shares involves a high degree of risk. Before making an
investment decision, you should carefully consider all of the risks described in
this prospectus. If any of the risks discussed in this prospectus actually
occur, our business, financial condition and results of operations could be
materially and adversely affected. If this were to happen, the price of our
shares could decline significantly and you may lose all or a part of your
investment. The risk factors described below are not the only ones that may
affect us. Our forward-looking statements in this prospectus are subject to the
following risks and uncertainties. Our actual results could differ materially
from those anticipated by our forward-looking statements as a result of the risk
factors below. See "Forward-Looking Statements."
Risks Related to Our Business
We have not generated any revenues and may never achieve profitability
Revenues for the six months ended June 30, 2005 increased to $187,408 from
$41,059 for the six months ended June 30, 2004. In addition, revenues for the
year ended December 31, 2004 increased to $69,000 from $43,000 for the year
ended December 31, 2003. We had a cash balance of $88,318 at June 30, 2005 as
compared to $283,869 at December 31, 2004. For the six months ended June 30,
2005 and the year ended December 31, 2004, we had total net loss of $1,478,264
and 3,371,703, respectively. We cannot assure you that we can achieve or sustain
profitability in the future. Our operations are subject to the risks and
competition inherent in the establishment of a business enterprise. There can be
no assurance that future operations will be profitable. Revenues and profits, if
any, will depend upon various factors, including whether our product will
achieve market acceptance. We may not achieve our business objectives and the
failure to achieve such goals would have an adverse impact on us. These matters
raise substantial doubt about our ability to continue as a going concern.
Our auditors have included a going concern qualification in their opinion
Our auditors have qualified their opinion on our financial statements because of
concerns about our ability to continue as a going concern. These concerns arise
from the fact that we have not generated sufficient cash flows to meet our
obligations and sustain our operations. If we are unable to continue as a going
concern, you could lose your entire investment in us.
We may need to raise additional capital
In the future, we may be required to raise additional funds, particularly if we
exhaust our funds and are unable to generate positive cash flow as a result of
our operations. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. The inability to obtain
additional capital may reduce our ability to continue to conduct business
operations. If we are unable to obtain additional financing, we will likely be
required to curtail our research and development plans. Any additional equity
financing may involve substantial dilution to our then existing shareholders.
We do not maintain theft or casualty insurance, and only maintain modest
liability and property insurance coverage and therefore we could incur losses as
a result of an uninsured loss.
We do not maintain theft or casualty insurance and we have modest liability and
property insurance coverage, along with workmen's compensation and related
insurance. We cannot assure that we will not incur uninsured liabilities and
losses as a result of the conduct of our business. Any such insured loss or
liability could have a material adverse affect on our results of operations.
If we lose key employees or are unable to attract or retain qualified personnel,
our business could suffer.
Our success is highly dependent on our ability to attract and retain qualified
travel agents and personnel. Because consumers and suppliers rely on travel
agents as intermediaries to provide information on their travel choices and help
them purchase their trips, we are highly dependent on attracting and retaining
professional home-based travel agents. We currently employ over 1,300
independent travel agents; the Company aims to enroll 50,000 members by the end
of 2006 and 150,000 by 2010.
The following risks relate principally to our common stock and its market value:
3
There is a limited market for our common stock
Our common stock is quoted on the OTC Bulletin Board under the symbol "JYSR.OB."
There is a limited trading market for our common stock. Accordingly, there can
be no assurance as to the liquidity of any markets that may develop for our
common stock, the ability of holders of our common stock to sell our common
stock, or the prices at which holders may be able to sell our common stock.
Our stock price may be volatile
The market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including:
o technological innovations or new products and services by us or our
competitors;
o additions or departures of key personnel;
o sales of our common stock
o our ability to integrate operations, technology, products and
services;
o our ability to execute our business plan;
o operating results below expectations;
o loss of any strategic relationship;
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in our financial results.
Because we have a limited operating history with limited revenues to date, you
may consider any one of these factors to be material. Our stock price may
fluctuate widely as a result of any of the above listed factors.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
We have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our common stock
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. The payment of dividends on our
common stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if its stock price
appreciates.
Our common stock may be deemed penny stock with a limited trading market
Our common stock is currently listed for trading on the OTC Bulletin Board which
is generally considered to be a less efficient market than markets such as
NASDAQ or other national exchanges, and which may cause difficulty in conducting
trades and difficulty in obtaining future financing. Further, our securities are
subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock
rules apply to non-NASDAQ companies whose common stock trades at less than $5.00
per share or which have tangible net worth of less than $5,000,000 ($2,000,000
if the company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stock" because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the "penny stock
rules" for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
"penny stock rules," investors will find it more difficult to dispose of our
securities. Further, for companies whose securities are traded in the OTC
Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii) to
obtain coverage for significant news events because major wire services, such as
the Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make written or oral statements
that are "forward-looking," including statements contained in this prospectus
and other filings with the Securities and Exchange Commission, reports to our
stockholders and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements within the
4
meaning of the Act. In addition, other written or oral statements which
constitute forward-looking statements may be made by us or on our behalf. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "projects," "forecasts," "may," "should," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Important
factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:
(a) volatility or decline of our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital and barriers to raising the additional capital or to
obtaining the financing needed to implement its business plans;
(e) inadequate capital to continue business;
(f) changes in demand for our products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside parties;
(i) insufficient revenues to cover operating costs.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock hereunder. We
will, however, receive proceeds from the exercise of our common stock purchase
warrants.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes to those statements. In addition to
historical information, the following discussion and other parts of this
quarterly report contain forward-looking information that involves risks and
uncertainties.
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
We specialize in selling complex travel products including cruises, vacation
packages and group travel. Our comprehensive business solutions combine
innovative technology, marketing opportunities and expert support services to
independent and home-based travel agents giving them more time to sell travel.
As of August 15, 2005 the Company's membership was 2,528 agents.
We are developing a global travel marketplace in which travel suppliers can
reach, in a highly efficient manner, a large audience of consumers who are
actively planning and purchasing complex travel products including cruises and
vacation packages. In our quest to offer the best hosting services to
professional travel agents, we will begin development on iamatravelagent.com.
The Web sites will target service-oriented consumers who are looking for an
experienced travel professional to help them with their vacation planning. The
site is intended to create consumer leads for qualifying travel agents.
Our viability is dependent upon or ability to obtain future financing and the
success of our future operations. Our auditors, in their report on our financial
statement for the fiscal year ended December 31, 2004, have expressed concern
that these factors raise substantial doubt as to our ability to continue as a
going concern.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations, including the discussion on liquidity and capital resources, are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management re-evaluates its estimates and judgments, particularly those related
to the determination of the estimated recoverable amounts of trade accounts
receivable, impairment of long-lived assets, revenue recognition and deferred
tax assets.
6
Income taxes are accounted for under the asset and liability method. Under this
method, to the extent that we believe that the deferred tax asset is not likely
to be recovered, a valuation allowance is provided. In making this
determination, we consider estimated future taxable income and taxable timing
differences expected to reverse in the future. Actual results may differ from
those estimates.
Results Of Operations For The Fiscal Year Ended December 31, 2004, Compared To
Fiscal Year Ended December 31, 2003
The Company has been in the development stage since its inception.
Revenues for the year ended December 31, 2004 increased to $69,000 from $43,000
for the year ended December 31, 2003. The increase of $26,000 (60%), although in
dollars is not significant, is a step forward and our accelerated signing up of
additional travel agents as of the last quarter of 2004 and first quarter of
2005 should produce substantial increases in revenues for 2005.
Marketing and sales expenses for the year ended December 31, 2004 increased to
$1,453,000 from $401,000 for the year ended December 31, 2003. The increase of
$1,052,000 (263%) is due to the production of an infomercial and stock issued
for marketing services.
General and Administrative expenses for the year ended December 31, 2004
increased to $1,987,000 from $655,000 for the year ended December 31, 2003. The
increase of $1,332,000 (203%) is due primarily to the increased salaries and
wages of $488,000, increase in use of independent contractors - $349,000,
increased legal and accounting expenses related to SEC filings and lawsuit -
$136,000, increased rent of $24,000, increased utilities of $20,000, increased
insurance expense of $16,000, increased travel of $63,000 and an increase in all
other general and administrative expenses of $229,000.
Interest expense for the year ended December 31, 2004 decreased to $0 as
compared to $5,644 in the year ended December 31, 2003.
Net loss for the year ended December 31, 2004 increased to $3,371,000 from
$1,018,000 for the year ended December 31, 2003. The increase in loss $2,353,000
(231%) was primarily due to the increased expenses detailed.
Results of Operations for the Three and Six-Month Period Ended June 30, 2005
Compared to the Same Period in 2004
The Company recognizes revenue when the travel is completed and Joystar has been
paid the corresponding commission from the supplier.
Revenues recognized from travel completed for the quarter ended June 30, 2005,
increased 252% to $126,222 compared to $50,031 for the previous quarter ended
March 31, 2005.
Revenues recognized from travel completed for the six months ended June 30,
2005, increased 100% to $176,253 compared to $0 for the six months ended June
30, 2004.
Completed travel bookings for which Joystar was paid a commission for the
quarter ended June 30, 2005 increased 255% to $1,367,477 compared to $535,788
for the previous quarter ended March 31, 2005.
Completed travel bookings for which Joystar was paid a commission for the six
months ended June 30, 2005 increased 100% to $1,903,265 compared to $0 for the
six months ended June 30, 2004.
During the same period, membership increased by 820 travel agents to 2,022.
Additionally, Joystar received new travel bookings (not completed) totaling over
$4,300,000 during the 3 months ended June 30, 2005.
Marketing and sales expenses for the six months ended June 30, 2005 decreased
$636,000 to $374,000 compared to $1,010,000 for the six months ended June 30,
2004. This was due to Company's successful results of marketing over the past
year and the Company's ability to attract professional agents to its Network
more cost effectively.
General and administrative expenses for the six months ended June 30, 2005 were
$1,151,000 as compared to $613,000 for the six months ended June 30, 2004, an
increase of $538,000 due primarily to the increases in employees and salaries of
$356,000, insurance of $35,000, legal fees $31,000 and a general increase in
other expenses due to increased activity.
7
Liquidity And Capital Resources
In July, the Company closed a $1,640,000 private placement which included
$1,057,000 in cash and the conversion of $575,000 from debt to equity under the
same terms. The Company issued 2,082,143 shares of common stock for $728,750 as
part of the $1,627,000 financing. The Company intends to raise an additional 5
million dollars in 2005. The Company expects to finance the capital needed with
additional issuances of its securities. In order to fund the Company's growth,
the Company has engaged an NASD member firm to provide investment banking
services. There is no assurance that the Company will be able to secure such
financing.
At June 30, 2005 the Company had a cash balance of $88,318 as compared to a cash
balance of $283,869 at December 31, 2004.
The Company had negative working capital at June 30, 2005. In July, the Company
raised an additional $728,750 resulting in positive working capital. To date the
Company has financed operations by issuance of shares of common stock in private
placements of $3,011,000 and issuance of shares for services in the amount of
$3,144,000 including new money.
New Accounting Pronouncements
In December 2004 the FASB issued revised SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R sets accounting requirements for "share-based" compensation to
employees and requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation. SFAS
No. 123R is effective in interim or annual periods beginning after june 15,
2005. The Company will be required to adopt SFAS No. 123R in its third quarter
of fiscal 2005 and currently discloses the effect on net (loss) income and
(loss) earnings per share of the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation". The Company is currently
evaluating the impact of the adoption of SFAS 123R on its financial position and
results of operations, including the valuation methods and support for the
assumptions that underlie the valuation of the awards.
BUSINESS
Company History
Joystar, Inc. was incorporated in the State of California on February 5, 1998
under the name Advanced Refrigeration Technologies, Inc. Its original business
operations consisted of designing, manufacturing and marketing an energy
efficiency evaporator fan motor controller for walk-in refrigerators and
freezers. The Company was unsuccessful in that business and was unable to
continue its operations. From August 2002, the Company was actively engaged in
finding a potential investor to acquire it and bring in a new business.
As of June 11, 2003, the Company consummated a transaction, whereby the Company
acquired all of the issued and outstanding shares of Joystar, Inc., a Nevada
corporation ("Joystar - Nevada") in exchange for the issuance by the Company of
a total of 13,880,599 newly issued restricted shares of common voting stock to
the Joystar-Nevada shareholders pursuant to the Agreement and Plan of
Reorganization, dated as of June 10, 2003, by and between the Company and
Joystar (the "Closing"). The Company issued a total of 13,880,599 shares of
common stock of the Company to Joystar-Nevada shareholders in the transaction.
The Company paid $60,000 at the Closing of the transaction for some of the debts
of Advanced Refrigeration Technologies, Inc., and assumed additional liabilities
of the Company in the approximate amount of $55,000. Upon the Closing, the all
present officers of the Company resigned and William M. Alverson was appointed
as the Company's President, Chief Financial Officer and Secretary. Upon the
Closing, William M. Alverson was appointed to the Board of Directors of the
Company. An additional director was appointed as of June 18, 2003. Immediately
prior to the share exchange, there were approximately 3,322,840 shares of the
Company's common stock issued and outstanding. As a result of the acquisition,
there were approximately 17,203,439 shares of common stock issued and
outstanding.
The Asset Sale and Purchase Contract which was entered by and between Advanced
Refrigeration Technologies, Inc. and Advanced Refrigeration Controls, Inc, a
newly formed corporation by the former shareholders of the Company, included the
total assets consisting of inventories, fixed assets and patents for a total
value of $85,063 and the assumption of liabilities including primarily former
shareholders loans, for a total amount of $105,217. The Company had a gain of
$20,154 on the disposition of assets and liabilities.
As of June 4, 2004 Joystar, Inc., a Nevada corporation and a wholly-owned
subsidiary of the Company, was officially merged with and into Joystar, Inc., a
California corporation (formerly Advanced Refrigeration Technologies, Inc.)
pursuant to Section 1110(a) of the California Corporations Code and Section
92A.200 of Nevada Revised Statutes. In connection with the merger the Company
provided for the name change from Advanced Refrigeration Technologies, Inc. to
Joystar, Inc., pursuant to Section 1110(d) of the California Corporations Code.
The merger and the name change was approved by the Company's Board of Directors
pursuant to Section 1110(a). The shareholders approval of the Company was not
required under the California law to effect the merger and the name change and
was not obtained for this action.
8
The Company maintains its corporate offices at 95 Argonaut St. First Floor,
Aliso Viejo, CA 92656. The Company's telephone number is (949) 837-8101.
General
We are one of the largest and fastest growing travel agency networks. We
specialize in selling complex travel products including cruises, vacation
packages and group travel through its national sales force of over 2,500 of
independent travel agents. Our comprehensive business solutions combine
innovative technology, marketing opportunities and expert support services to
independent and home-based travel agents giving them more time to sell travel.
With Joystar, professional travel agents can concentrate on promoting travel and
servicing their clients without the administrative and financial burden of
owning/operating a traditional storefront travel agency.
Market
Consumers planning and purchasing a trip generally engage in a predictable
process that begins with considering destinations, dates and budgets, and
progresses to a series of purchase decisions involving transportation,
accommodations and destination activities. Historically, this planning and
purchasing process has been inefficient because consumers have to spend a
significant amount of time piecing together the information from a variety of
sources. Consumers frequently consulted many different media and people, such as
guidebooks, magazines, travel agents, friends, co-workers and individual travel
suppliers. The supply side of the travel industry can be equally inefficient.
The supplier community includes hundreds of airlines, thousands of hotels,
dozens of car rental companies, numerous vacation packagers and cruise lines and
hundreds of thousands of destination services merchants such as restaurants,
attractions, and local transportation and tour providers. These suppliers spend
substantial amounts of money to reach and attract potential purchasers. The
fragmental nature of the global consumer travel market makes it difficult and
inefficient for suppliers to effectively target those consumers who are
currently engaged in the travel planning process.
Consumers and suppliers rely on travel agents as intermediaries to provide
information on their travel choices and help them purchase their trips. Joystar
travel agents have access to comprehensive information on the availability and
pricing of airline seats through global distribution systems. The Company makes
it possible for our travel agents to provide consumers reliable, comprehensive
travel information.
The Company has been able to combat the inefficiency and fragmentation of the
industry with technology. Joystar uses technology to make the process of
planning and purchasing travel easier for their agents and customers.
The Company plans to offer travel planning servicesin the United Sates, the
United Kingdom, Canada, and the Puerto Rico. Joystar products are planned to
include direct-to- consumer travel planning services sold via the Internet and
call centers, our co-branded private label business.
Revenue and Distribution Model
Our main revenue models are as follows:
Under the travel agency model, the Company acts as either an intermediary, or a
merchant. When we transact travel bookings acting as an intermediary in the
transaction, we pass a customer's reservation to the travel supplier (airline,
hotel, cruise line, car rental, etc.). We receive a commission from the travel
supplier after the travel is completed. In the agency transaction, the supplier
sets the retail price paid by the customer, and is the merchant of record for
the transaction. In a merchant transaction, Joystar receives access to
consolidator fares (wholesale airline seats and hotel rooms) from suppliers at
deeply discounted negotiated rates. Joystar determines the "mark-up" and
processes the transactions as the merchant of record. Acting as a merchant
enables Joystar to achieve a higher level of gross profit than in the agency
model and generally provides better prices to customers than an agency
transaction. Integrating merchant inventory with the online booking technology
platform enables the Company to create a significant benefit to the Company's
agents, customers and preferred suppliers.
Under the host agency model, we provide syndicated technology, hosting, and
support services to a growing network of professional home-based travel agents.
Joystar provides its agents with all of the training, tools and back office
support for them to operate a successful and rewarding business. In addition to
the commissions earned, Joystar's national sales force of independent agents are
granted stock options in the Company. Additional benefits to Joystar agents
include access to Solo 401K retirement plans and 529 college saving plans for
the agents' children and grandchildren.
9
Competition
We cannot assure you that we will be able to compete successfully against
current and future competitors. Competitive pressures faced by us could have a
material adverse effect on our business, operating results and financial
condition.
We believe that establishing, maintaining and enhancing the Joystar brand will
be a critical aspect of our efforts to attract and expand our online traffic.
The number of Internet sites that offer competing services, many of which
already have well-established brands in online services or the travel industry
generally, increases the importance of establishing and maintaining brand
recognition. Promotion of the Joystar brand will depend largely on our success
in providing a high-quality online experience supported by a high level of
customer service. In addition, to attract and retain online users and to respond
to competitive pressures, we intend to increase our spending substantially on
marketing and advertising with the intention of expanding our brand recognition.
However, we cannot assure you that these expenditures will be effective to
promote our brand or that our marketing efforts generally will achieve our
goals.
If we are unable to provide high-quality online services or customer support, if
we fail to promote and maintain our brand or if we incur excessive expenses in
these efforts, our business, operating results and financial condition would be
materially adversely affected. If we are unable to introduce and sell new
products and services, our business may be harmed.
We need to broaden the range of travel products and services and increase the
availability of products and services that we offer in order to enhance our
service. We will incur substantial expenses and use significant resources trying
to expand the range of products and services that we offer. However, we may not
be able to attract sufficient travel suppliers and other participants to provide
desired products and services to our consumers. In addition, consumers may find
that delivery through our service is less attractive than other alternatives. If
we launch new products and services and they are not favorably received by
consumers, our reputation and the value of the Joystar brand could be damaged.
Our relationships with consumers and travel suppliers are mutually dependent
since consumers will not use a service that does not offer a broad range of
travel services. Similarly, travel suppliers will not use a service unless
consumers actively make travel purchases through it. We cannot predict whether
we will be successful in expanding the range of products and services that we
offer. If we are unable to expand successfully, our business, operating results
and financial condition may be materially adversely affected. We may be unable
to plan and manage our operations and growth effectively.
On March 1, 2005, Joystar announced that the Company's membership had surpassed
1,000 professional, home-based agents. This milestone makes the Company not only
one of the fastest growing, but also one of the largest host agency in the
industry in terms of professional agent members. Joystar launched AGENT
ADVANTAGE PRO, its hosting program for professional home-based agents in August
of last year with an initial goal of reaching 500 members by July 2005. In
November the Company announced hitting the 500 agent mark and by year end
membership had grown to over 700 agents.
A recent report by Credit Suisse/First Boston on the emerging home-based travel
agency model estimates there are between 15,000-20,000 professional home-based
travel agents in America. This number is expected to grow to over 30,000 by 2007
and near 50,000 by 2010. These professional agents, who have left their
traditional storefront travel agencies to operate a home-based agency, represent
an estimated $7.6 billion in travel sales.
On February 28, 2005 Joystar announced a new program for professional home-based
travel agents. PRO-100 offers independent and home-based travel agents all of
the benefits of the Company's popular AGENT ADVANTAGE PRO, including a consumer
website, "Agents Only" extranet and live toll free support.
When implemented later this month, Joystar will offer two booking solutions, a
consumer view and an "Agents Only" booking tool. This combination blends
real-time access to cruise line inventory to deliver the best response times and
closing ratios. The features included are:
Co-branded Private Label Cruise Web-Site - An easy, no maintenance solution
providing cruise content, technology, and fulfillment with no up-front costs.
Private Label Cruise Web-Site - Content, technology, and fulfillment services
are housed in a customized user interface. Maintains look and feel as well as
branding integrity of the partner's Web site. Connectivity as well as access to
robust cruise content, including cruise descriptions, cabin categories, deck
plans, amenities, and more.
In 2005, over 10 million passengers spent approximately $15 billion on cruises.
According to a recent Credit Suisse/First Boston report on "The Emerging
Home-based Travel Agency Model", it is estimated that the current 90/10 channel
mix between travel agents and non-traditional sources (supplier direct and
online agencies) will shift to roughly 75/25 by 2008. Joystar's online cruise
booking solution will allow our agents to stay ahead of the curve.
10
Additionally, Joystar's home-based travel agents and pure online travel sellers
that sell cruises now have a technology that will increase sales and enhance
profit margins. The engine also benefits our cruise line partners by reducing
sales and distribution expenses.
On March 15, 2005 Joystar announced the opening of The Joystar Miami Cruise
Center and enhanced commission opportunities for the Company's travel agent
network. The Florida based Cruise Center will assist our agents in growing their
cruise business. The Joystar Miami Cruise Center adds another important support
component to the largest segment of our business - cruises. Our agent members
benefit from having access to our California support staff, along with a cruise
support staff in Florida. The cruise center staff has years of experience in
selling group and individual cruises.
The Miami Cruise Center has been recognized as a Carnival Top Account; a
Radisson Seven Seas Cruises Top account; a Cunard Inner Circle Agency; a Holland
America Centurion Agency; a Norwegian Cruise Lines Capitan's Club Agency; a
Princess I-Excel Agency and has held Key Account status with Celebrity and Royal
Caribbean Cruise Lines. These preferred supplier relationships give Joystar
agents access to top account commission levels and special promotions. This,
combined with our new online cruise booking engine, empowers Joystar members to
compete head to head, with the likes of Expedia, Travelocity and other large
cruise only agencies.
Government Regulation
Joystar must comply with laws and regulations relating to the travel industry
and the sale of travel services. These include registering with various states
and countries as a seller of travel, complying with certain disclosure
requirements and participating in state restitution funds. Both the Federal
Trade Commission and the Department of Transportation take the position that
their regulations prohibiting unfair and deceptive advertising practices apply
to our business.
Currently, few laws and regulations apply directly to the Internet and
commercial online services and, to the extent such laws exist or apply to us, we
believe we are in compliance with all of them. The following summary does not
purport to be complete discussion of all enacted or pending regulations and
policies that may affect our business. This summary focuses primarily on the
enacted federal, state and international legislation specific to businesses that
operate as we do. For further information concerning the nature and extent of
federal, state and international regulation of online businesses, you should
review public notices and rulings of the U.S. Congress, state and local
legislature and international bodies.
Due to the growth of the Internet and online commerce, coupled with publicity
regarding Internet fraud, new laws and regulations are continually being
considered (at the federal, state and international levels) regarding property
ownership, sales and other taxes, pricing and content, advertising, intellectual
property rights, libel, user privacy, and information security. New laws or
different applications of existing laws would likely impose additional burdens
on companies conducting business online and may decrease the growth of the
Internet or commercial online services. In turn, this could decrease the demand
for our products and services or increase our cost of doing business. We cannot
predict whether any of the proposed privacy legislation currently pending will
be enacted and what effect, if any, it would have on our company.
Most states have enacted legislation to regulate the protection of consumer's
information on the Internet. Much of this legislation is focused on financial
institutions and health care providers. The legislation that has become state
law is a small percentage of the number still pending, and is similar to what
has been enacted at the federal level. The Company cannot predict whether any of
the proposed state privacy legislation currently pending review will be enacted
and what effect, if any, it would have on our Company.
Employees
As of August 17, 2005, we had a total of 27 full time, part time, and temporary
staff. None of our employees are represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
Seasonality
Our limited operating history and anticipated rapid growth will make it
difficult for us to assess the impact of seasonal factors on our business.
Nevertheless, we expect our business to be subject to seasonal fluctuations,
reflecting seasonal trends for the products and services offered by our
websites. For example, demand for travel bookings may increase in anticipation
of summer vacations and holiday periods, but online travel bookings may decline
with reduced Internet usage during the summer months. These factors could cause
our revenues to fluctuate from quarter to quarter. Our results may also be
affected by seasonal fluctuations in the inventory made available to our service
11
by travel suppliers. Airlines, for example, typically enjoy high demand for
tickets through traditional distribution channels for travel during holiday
periods. As a result, during these periods, airlines may either have fewer
inventories to offer through our service or available tickets may be less
competitively priced. These same factors are expected to affect rental cars,
hotels and other travel products and services.
DESCRIPTION OF PROPERTY
The Company maintains its corporate offices in Aliso Viejo, CA 92656. The
Company leased office space under an operating lease, which expired in April of
2005. The Company was advised that the building was being sold and the Company
would be required to vacate. The Company acquired new office space and moved in
February 2005, subsequent to the year ended December 31, 2004. The Company
occupies approximately 6,135 square fees pursuant to the lease agreement entered
on February 15, 2005. The Company pays $1.80 per square foot for the first 0-12
months, full service gross; $1.85 per square foot, full service gross for the
next 13-24 months, and $1.90 per square, full service gross for the next 25-36
months. The lease agreement is for a term of 36 months with an option to extend
for a period of three years.
Rental expense was $70,860 and $47,000 for the years ended December 31, 2004 and
2003, respectively.
We believe that our existing facilities are adequate to meet our current needs
and that suitable additional or alternative space will be available in the
future on commercially reasonable terms, although we have no assurance that
future terms would be as favorable as our current terms.
The Company has not invested in any real property at this time nor does the
Company intend to do so. The Company has no formal policy with respect to
investments in real estate or investments with persons primarily engaged in real
estate activities.
LEGAL PROCEEDINGS
In March, 2004 a former employee of the Company who was terminated prior to the
acquisition of Joystar, filed a lawsuit in Orange County Superior Court for
breach of contract and specific performance relating to the exercise of options,
among other causes of action. A proposed settlement has been submitted to the
Company in which the Company will issue an additional 300,000 shares and a cash
payment of $12,700 for cost. As of the date of this report, this agreement has
not yet been finalized. The Company's financial statements do not reflect any
adjustment to record the possible settlement.
An independent third party stockbroker has filed a lawsuit against the Company
for refusal to register certain shares to them. A proposed settlement has been
submitted by the Company in which the Company will register an additional
138,600 shares. As of the date of this report, this agreement has not yet been
finalized. The Company's financial statements do not reflect any adjustment to
record the possible settlement.
12
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following table sets forth current information regarding our executive
officers, senior managers and directors:
Name Age Positions
____ ___ _________
William M. Alverson....... 40 Director, Chief Executive Officer,
and Chief Financial Officer
Katherine West............ 35 Director, Executive Vice President
William Fawcett........... 60 Director
William M. Alverson, Chief Executive Officer, Chief Financial Officer and
Director. Mr. Alverson has been an officer and director of the Company since its
inception. Mr. Alverson has spent the last fifteen years working in the
financial and travel services industries. He began his career as a financial
advisor at American Express. He also served as Chairman and Chief Executive
Officer at a financial services firm where he guided private companies through
their first rounds of financing and public listings. In 1995, Mr. Alverson
founded and served as Chairman and CEO of a travel services company with
independent contractors. Under his leadership, that company grew from seven to
220 employees handling the back office support to over 44,000 travel agents
nationwide. Since then he has been active in financing and consulting to both
private and public companies including Baby Genius, Inc. and FreeRealTime.com.
Katherine West, Executive Vice President and Director. West has been the Officer
and Director of the Company since the inception of Joystar, Inc. Mrs. West
supervises the Vice President of Agent Services and Vice President of Travel
Services. Additionally, she is responsible for the day to day management and
supervision of customer service, human resources, accounting, budget, payroll
and contracts. Mrs. West began her management career in the travel industry in
1989 with Thrifty Car Rental where she was responsible for the franchise's
operations, reporting, forecasting, and accounting & tax preparation. From 1992
to 1996 she held the position of Senior Account Executive with Metromedia
Communications, Inc. During her career with the telecom giant, she consistently
exceeded revenue targets with a primary focus on small to mid-sized businesses
and trade associations. She is married to William M. Alverson, the founder of
the Company.
William Fawcett, was appointed by the Board of Directors of Joystar as the
director of the Company in November, 2004. Mr. Fawcett has an MBA from Harvard
Business School, is a graduate of Loyola Law School and also graduated with
honors from Boston College. Mr. Fawcett is on the Dean's Graduate School
Advisory Board for Concordia University and is a professor for Concordia's
Master of Business Administration (MBA) Entrepreneurial program. In addition to
being an outside Director for Joystar, he also serves on the Board of Directors
of Case Post, Inc. Fawcett has been the recipient of the Jordan Whitney Award
for Infomercial Excellence, the Aurora Award for the Best Infomercial in 1997,
Two Clios for production of direct-response TV commercials, a Cannes Film Award
for Best Sports Documentary and a Spanish Infomercial Telemundo Award Best in
Class.
Board Committees
The Company does not currently have standing audit, nominating or compensation
committees of the Board of Directors, or committees performing similar
functions.
13
EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid to our Chief Executive Officer, William M.
Alverson, as well as our Executive Vice President, and former Officers.
Annual Compensation*
Other Annual
Name and Principal Position Year Salary Bonus Compensation
($) ($) ($)
-------------------------- ------------- ------------- ------------- -------------
William M. Alverson 2004 $ 180,000 -0- $ 60,000(1)
President, Chief Executive 2003 $ 120,000 -0- -0-
Officer, Chief Financial 2002 $ 46,000 -0- -0-
Officer
Katherine West 2004 $ 88,500 -0- $ 30,000(1)
Executive Vice President 2003 $ 60,000 -0- -0-
2002 $ 35,000 -0- -0-
Rick R. McEwan 2004 -0- -0- -0-
Former President 2003 -0- -0- -0-
2002 $ 18,000 -0- -0-
Allan E. Schrum 2004 -0- -0- -0-
Former Vice President of 2003 -0- -0- -0-
Engineering 2002 $ 4,500 -0- -0-
Clare C. Schrum 2004 -0- -0- -0-
Former Secretary, Chief 2003 -0- -0- -0-
Financial Officer(1) 2002 $ 13,500 -0- -0-
-----------------
* In accordance with the rules and regulations of the Securities and Exchange
Commission, this table omits columns pertaining to compensation that was not
awarded.
(1) On August 27, 2004, the Company authorized 100,000 shares of common stock to
be issued to Mr. Alverson and 50,000 shares of common stock to be issued to Ms.
West for services rendered in fiscal year ended December 31, 2004 valued at
$60,000 and $30,000, respectively. As of the date of this report, such 150,000
shares have not been issued yet.
On August 27, 2004, the Company approved a grant of options to purchase 150,000
shares of common stock under the Company's 2003 Equity Compensation Plan at
$0.66 per share, 110% of the market price on that date to the Company's
executive officers (100,000 options to be issued to Mr. Alverson and 50,000
options to be issued to Ms. West) for services rendered in the fiscal year ended
December 31, 2004. The options had not been issued as of the date of this
report.
Stock Option Plan
The Company issued 810,000 shares of common stock pursuant to the Company's
Stock Option Plans on June 11, 2003 valued at the market price of the stock on
that date $0.03. On August 27, 2004 the Company agreed to grant options to
purchase 150,000 share of common stock under the Company's 2003 Equity
Compensation Plan at $0.66 per share, 110% of the market price on that date. The
options had not been issued at December 31, 2004.
Employment Agreements
The Company has not yet finalized the employment agreements with the Company's
Chief Executive Officer, William M. Alverson and Katherine T. West, the
Company's Executive Officer. The Company's Board of Directors approved the major
terms of such employment agreements, which include an annual salary of $180,000
for Mr. Alverson and the issuance of 100,000 shares of common stock and an
option to purchase 100,000 shares of the Company's common stock. Ms. West's
compensation includes an annual salary of $88,500, the issuance of 50,000 shares
of common stock and an option to purchase 50,000 shares of the Company's common
stock. None of the above shares or options have been issued yet.
14
On July 30, 2003 the Company entered into a two and three year employment
Agreements with two employees. The agreement provided for 100,000 and 300,000
Shares of restricted common stock to be issued. The value of the compensation
was based on the stock price on the agreement date of $0.42, a total $168,000.
The Company issued the 400,000 shares November 14, 2003 and recorded
compensation expense of of $63,000 for the year ended December 31, 2004 and
$25,750 for period ended December 31, 2003. The deferred compensation was
$78,750 at December 31, 2004.
On July 30, 2003 the Company entered into a four-year employment agreement for a
Vice President of Business Development. The agreement provides for 2,000,000
shares of restricted Common stock to be issued. The value of the compensation
was based on the stock price on the agreement date of $0.42, a total of
$840,000. The Company issued the 2,000,000 shares November 14, 2003 and recorded
compensation expense of $210,000 for the year ended December 31, 2004 and
$87,500 for period ended December 31, 2003. The deferred compensation was
$542,500 at December 31, 2004.
15
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock has been quoted on the OTC Bulletin Board under the symbol
"JYSR.OB." The following table shows the reported high and low closing bid
quotations per share for our common stock based on information provided by the
OTC Bulletin Board. Particularly since our common stock is traded infrequently,
such over-the-counter market quotations reflect inter-dealer prices, without
markup, markdown or commissions and may not necessarily represent actual
transactions or a liquid trading market.
Year Ended December 31, 2005 High Low
---- ---
Quarter ended June 30, 2005 $0.62 $0.30
Quarter ended March 31, 2005 $0.89 $0.39
Year Ended December 31, 2004 High Low
---- ---
Quarter ended December 31, 2004 $1.80 $0.55
Quarter ended September 30, 2004 $1.98 $0.45
Quarter ended June 30, 2004 $2.17 $0.44
Quarter ended March 31, 2004 $3.20 $0.84
Year Ended December 31, 2003 High Low
---- ---
Quarter ended December 31, 2003 $2.25 $1.35
Quarter ended September 30, 2003 $2.40 $0.40
Quarter ended June 30, 2003 $1.00 $0.01
Quarter ended March 31, 2003 $0.07 $0.01
Number of Stockholders
As of August 9, 2005, there were approximately 131 holders of record of our
common stock.
Dividend Policy
The Company does not expect to pay any dividends at this time. The payment of
dividends, if any, will be contingent upon the Company's revenues and earnings,
if any, capital requirements, and general financial condition. The payment of
any dividends will be within the discretion of the Company's Board of Directors
and may be subject to restrictions under the terms of any debt or other
financing arrangements that the Company may enter into in the future. The
Company presently intends to retain all earnings, if any, for use in the
Company's business operations and accordingly, the Board does not anticipate
declaring any dividends in the foreseeable future.
16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates beneficial ownership of our common stock as of
August 9, 2005 by each person or entity known by us to beneficially own more
than 5% of the outstanding shares of our common stock; each of our executive
officers and directors; and all of our executive officers and directors as a
group. Unless otherwise indicated, the address of each beneficial owner listed
below is c/o XsunX, Inc., 65 Enterprise, Aliso Viejo, California 92656.
Percentage of Shares
Name of Beneficial Owner Number of Shares Beneficially Owned (1)
------------------------ ---------------- ----------------------
William Alverson 12,198,000(2) 50.91%
Katherine West 12,198,000(3) 50.91%
William Fawcett 100,000 *%
All Officers and Directors as a Group 12,298,000 51%
_____________________
* less than 1%
(1) Applicable percentage ownership is based on 30,106,026 shares of common
stock outstanding as of August 9, 2005. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock that are currently exercisable or exercisable within 60 days of
August 9, 2005 are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Includes 1,552,000 shares of common stock held by Katherine T. West with
respect to which shares Mr. Alverson, her husband, disclaims beneficial
ownership.
(3) Includes 10,646,000 shares of common stock held by William Alverson with
respect to which shares Ms. West, his wife, disclaims beneficial ownership.
17
SELLING SHAREHOLDERS
The following table lists certain information with respect to the selling
shareholders as follows: (i) each selling shareholder's name, (ii) the number of
outstanding shares of common stock beneficially owned by the selling
shareholders prior to this offering; (iii) the number of shares of common stock
to be beneficially owned by each selling shareholder after the completion of
this offering assuming the sale of all of the shares of the common stock offered
by each selling shareholder; and (iv) if one percent or more, the percentage of
outstanding shares of common stock to be beneficially owned by each selling
shareholder after the completion of this offering assuming the sale of all of
the shares of common stock offered by each selling shareholder. Except as noted,
none of the selling shareholders have had any position, office, or other
material relationship with us or any of our predecessors or affiliates within
the past three years.
Shares Beneficially Owned Shares Being Offered Pursuant to Shares Beneficially Owned After
Prior to Offering this Prospectus(1) the Offering(2)
Selling Stockholder Number Percent(1) Number Number Percent(1)
------------------- ------ ---------- ------- ------ ----------
Jerome Belson 187,500 * 187,500(3) 0 0
James Scibelli 107,144 * 107,144(4) 0 0
Steven T. Kelley 90,000 * 90,000(5) 0 0
Daniel J. Walsh 90,000 * 90,000(5) 0 0
Kevin J. Martin 90,000 * 90,000(5) 0 0
Robert Karsten 240,000 * 240,000(6) 0 0
Paul Becker 150,000 * 150,000(7) 0 0
Martin & Beata Beck 90,000 * 90,000(8) 0 0
E. Gerald Kay 150,000 * 150,000(9) 0 0
Nite Capital LP 428,571 1.4% 428,571(10) 0 0
Whalehaven Capital Fund Limited 1,500,000 4.9% 1,500,000(11) 0 0
Yip Yuk Heng 450,000 1.5% 450,000(12) 0 0
Kyaw Myint 450,000 1.5% 450,000(13) 0 0
Robert Ripley 428,571 1.4% 428,571(14) 0 0
Albert Confenti 42,858 * 42,858(15) 0 0
Jeff Confenti 107,142 * 107,142(16) 0 0
William Alverson 12,198,000(20) 50.91% 1,578,818(17) 9,733,672(20) 30.9%
Katherine West 12,198,000(21) 50.91% 885,510(18) 9,733,672(21) 30.9%
First Montauk Securities Corp. 33,815 * 33,815(19 0 0
Herb Kurinsky 16,907 * 16,907(19) 0 0
Victor K. Kurylak 16,907 * 16,907(19) 0 0
Ernest Pellegrino 74,000 * 74,000(19) 0 0
Max Povolotsky 65,000 * 65,000(19) 0 0
Daniel J. Walsh 44,799 * 44,799(19) 0 0
Devin J. Martin 44,799 * 44,799(19) 0 0
Angela Metelitsa 16,095 * 16,095(19) 0 0
________________
* less than 1%.
18
(1) Applicable percentage ownership is based on 30,106,026 shares of common
stock outstanding as of August 3, 2005. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock that are currently exercisable or exercisable within 60 days of
August 9, 2005 are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Assumes that all securities registered will be sold.
(3) Includes up to 125,000 shares of common stock and 62,500 shares issuable
upon exercise of warrants.
(4) Includes 71,429 shares of common stock and 35,715 shares issuable upon
exercise of warrants.
(5) Includes 60,000 shares of common stock and 30,000 shares issuable upon
exercise of warrants.
(6) Includes 160,000 shares of common stock and 80,000 shares issuable upon
exercise of warrants.
(7) Includes 100,000 shares of common stock and 50,000 shares issuable upon
exercise of warrants.
(8) Includes 60,000 shares of common stock and 30,000 shares issuable upon
exercise of warrants.
(9) Includes 100,000 shares of common stock and 50,000 shares issuable upon
exercise of warrants.
(10) Includes 285,714 shares of common stock and 142,857 shares issuable upon
exercise of warrants.
(11) Includes 1,000,000 shares of common stock and 500,000 shares issuable upon
exercise of warrants.
(12) Includes 300,000 shares of common stock and 150,000 shares issuable upon
the exercise of warrants.
(13) Includes 300,000 shares of common stock and 150,000 shares issuable upon
the exercise of warrants.
(14) Includes 285,714 shares of common stock and 142,857 shares issuable upon
the exercise of warrants.
(15) Includes 28,572 shares of common stock and 14,286 shares issuable upon the
exercise of warrants.
(16) Includes 71,428 shares of common stock and 35,714 shares issuable upon the
exercise of warrants.
(17) Includes 1,052,545 shares of common stock and 526,273 shares issuable upon
the exercise of warrants.
(18) Includes 590,340 shares of common stock and 295,170 shares issuable upon
the exercise of warrants
(19) Includes shares issuable upon exercise of warrants.
(20) Includes 1,552,000 shares of common stock held by Katherine T. West with
respect to which shares Mr. Alverson, her husband, disclaims beneficial
ownership.
(21) Includes 10,646,000 shares of common stock held by William Alverson with
respect to which shares Ms. West, his wife, disclaims beneficial ownership
The following is a description of the selling shareholders relationship to us
and how each the selling shareholder acquired the shares to be sold in this
offering:
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had an unsecured loan dated December 15, 2004, payable to William M.
Alverson, its Chief Executive Officer in the amount of $259,834, due on demand
with interest at 6%.
In March, 2005, Katherine T. West, the Company's director and Executive Vice
President loaned the Company an amount equal to $105,997.
19
As of July 18, 2005, William M. Alverson and Katherine T. West converted their
respective loans to the Company, as well as their accrued salary through such
date, totaling an aggregate of $575,000, to equity. In addition to common stock
shares, each received one warrant to purchase the Company's common stock for
each two shares purchased. The warrants have the exercise price of $0.50 per
share and expire in five years from the date of issuance. The warrants are
subject to call provisions as described in the warrant agreement. The
subscribers have certain registration rights to register the shares and
warrants.
DESCRIPTION OF SECURITIES TO BE REGISTERED
The following description of our capital stock and provisions of our articles of
incorporation and bylaws, each as amended, is only a summary. You should also
refer to the copies of our articles of incorporation and bylaws which are
included as exhibits to our Report on 10-KSB for the fiscal year ended December
31, 2004.
As of July 18, 2005, we sold through private placement up to $1,100,000, for a
total of 2,082,143 shares of our common stock, no par value per share, at a
purchase price of $0.35 per share to institutional and accredited investors.
Additionally, William M. Alverson, the Company's CEO and one other officer and
director converted their respective loans to the Company totaling $575,000 to
equity under the same terms. In addition to common stock shares, each subscriber
received one warrant to purchase the Company's common stock for each two shares
purchased. The warrants have the exercise price of $0.50 per share and expire in
five years from the date of issuance. The warrants are subject to call
provisions as described in the warrant agreement. The subscribers have certain
registration rights to register the shares and the warrants purchased in the
placement.
Limited Standstill Agreement
In Connection with the sale for an aggregate of up to $1,100,000 of Common Stock
and Warrants, the Company entered into a Limited Standstill Agreement with the
Holders of the Company's secured convertible promissory notes and warrants.
Among the Holders are two Company directors, William A. Alverson and Katherine
West.
The Holders agreed not to sell or otherwise dispose of any securities of the
Company, other than in connection with an offer made to all shareholders of the
Company or any merger, consolidation or similar transaction involving the
Company, from the date of the Subscription Agreement until the Registration
Statement has been effective for nine months from the Closing Date, as defined
in the Subscription Agreement.
Common Stock
Holders of our common stock are entitled to one vote for each share held on all
matters submitted to a vote of our stockholders. Holders of our common stock are
entitled to receive dividends ratably, if any, as may be declared by the board
of directors out of legally available funds, subject to any preferential
dividend rights of any outstanding preferred stock. Upon our liquidation,
dissolution or winding up, the holders of our common stock are entitled to
receive ratably our net assets available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding preferred
stock. Holders of our common stock have no preemptive, subscription, redemption
or conversion rights. The outstanding shares of common stock are fully paid and
nonassessable. The rights, preferences and privileges of holders of our common
stock are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock which we may designate and issue in the
future without further stockholder approval.
Preferred Stock
Our board of directors is authorized without further stockholder approval, to
issue from time to time up to a total of 10,000,000 shares of preferred stock in
one or more series and to fix or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
term of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of these series without
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of our
management without further action by the stockholders and may adversely affect
the voting and other rights of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. Currently, there are no shares of preferred stock outstanding
and we have no present plans to issue any shares of preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Integrity Stock
Transfer, 2920 North Green Valley Parkway, Building 5, Suite 527, Henderson,
Nevada 89014.
20
PLAN OF DISTRIBUTION
The selling shareholders, or their pledgees, donees, transferees, or any of
their successors in interest selling shares received from a named selling
shareholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be selling
shareholders) may sell the common stock offered by this prospectus from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. The selling shareholders may sell the common stock by one or more of
the following methods, without limitation:
o Block trades in which the broker or dealer so engaged will attempt to
sell the common stock as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o An exchange distribution in accordance with the rules of any stock
exchange on which the common stock is listed;
o Ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o Privately negotiated transactions;
o In connection with short sales of company shares;
o Through the distribution of common stock by any selling shareholder to
its partners, members or shareholders;
o By pledge to secure debts of other obligations;
o In connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions in
standardized or over-the-counter options;
o Purchases by a broker-dealer as principal and resale by the broker-dealer
for its account; or
o In a combination of any of the above.
These transactions may include crosses, which are transactions in which the
same broker acts as an agent on both sides of the trade. The selling
shareholders may also transfer the common stock by gift. We do not know of any
arrangements by the selling shareholders for the sale of any of the common
stock.
The selling shareholders may engage brokers and dealers, and any brokers or
dealers may arrange for other brokers or dealers to participate in effecting
sales of the common stock. These brokers or dealers may act as principals, or as
an agent of a selling shareholder. Broker-dealers may agree with a selling
shareholder to sell a specified number of the stocks at a stipulated price per
share. If the broker-dealer is unable to sell common stock acting as agent for a
selling shareholder, it may purchase as principal any unsold shares at the
stipulated price. Broker-dealers who acquire common stock as principals may
thereafter resell the shares from time to time in transactions in any stock
exchange or automated interdealer quotation system on which the common stock is
then listed, at prices and on terms then prevailing at the time of sale, at
prices related to the then-current market price or in negotiated transactions.
Broker-dealers may use block transactions and sales to and through
broker-dealers, including transactions of the nature described above. The
selling shareholders may also sell the common stock in accordance with Rule 144
or Rule 144A under the Securities Act, rather than pursuant to this prospectus.
In order to comply with the securities laws of some states, if applicable, the
shares of common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers.
From time to time, one or more of the selling shareholders may pledge,
hypothecate or grant a security interest in some or all of the shares owned by
them. The pledgees, secured parties or person to whom the shares have been
hypothecated will, upon foreclosure in the event of default, be deemed to be
selling shareholders. The number of a selling shareholder's shares offered under
this prospectus will decrease as and when it takes such actions. The plan of
distribution for that selling shareholder's shares will otherwise remain
unchanged. In addition, a selling shareholder may, from time to time, sell the
shares short, and, in those instances, this prospectus may be delivered in
connection with the short sales and the shares offered under this prospectus may
be used to cover short sales.
To the extent required under the Securities Act, the aggregate amount of
selling shareholders' shares being offered and the terms of the offering, the
names of any agents, brokers, dealers or underwriters, any applicable commission
and other material facts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or a post-effective amendment to the
registration statement of which this prospectus is a part, as appropriate. Any
underwriters, dealers, brokers or agents participating in the distribution of
21
the common stock may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a selling shareholder and/or purchasers of
selling shareholders' shares, for whom they may act (which compensation as to a
particular broker-dealer might be less than or in excess of customary
commissions). Neither we nor any selling shareholder can presently estimate the
amount of any such compensation.
The selling shareholders and any underwriters, brokers, dealers or agents
that participate in the distribution of the common stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
concessions, commissions or fees received by them and any profit on the resale
of the securities sold by them may be deemed to be underwriting discounts and
commissions. If a selling shareholder is deemed to be an underwriter, the
selling shareholder may be subject to certain statutory liabilities including,
but not limited to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act. Selling shareholders who are deemed underwriters within
the meaning of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The SEC staff is of a view that selling
shareholders who are registered broker-dealers or affiliates of registered
broker-dealers may be underwriters under the Securities Act. We will not pay any
compensation or give any discounts or commissions to any underwriter in
connection with the securities being offered by this prospectus.
A selling shareholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with that selling
shareholder, including, without limitation, in connection with distributions of
the common stock by those broker-dealers. A selling shareholder may enter into
option or other transactions with broker-dealers, who may then resell or
otherwise transfer those common stock. A selling shareholder may also loan or
pledge the common stock offered hereby to a broker-dealer and the broker-dealer
may sell the common stock offered by this prospectus so loaned or upon a default
may sell or otherwise transfer the pledged common stock offered by this
prospectus.
The selling shareholders and other persons participating in the sale or
distribution of the common stock will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under the Exchange Act, including
Regulation M. This regulation may limit the timing of purchases and sales of any
of the common stock by the selling shareholders and any other person. The
anti-manipulation rules under the Exchange Act may apply to sales of common
stock in the market and to the activities of the selling shareholders and their
affiliates. Regulation M may restrict the ability of any person engaged in the
distribution of the common stock to engage in market-making activities with
respect to the particular common stock being distributed for a period of up to
five business days before the distribution. These restrictions may affect the
marketability of the common stock and the ability of any person or entity to
engage in market-making activities with respect to the common stock.
We cannot assure you that the selling shareholders will sell all or any
portion of the common stock offered by this prospectus. In addition, we cannot
assure you that a selling shareholder will not transfer the shares of our common
stock by other means not described in this prospectus.
LEGAL MATTERS
The validity of the common stock has been passed upon by Sichenzia Ross Friedman
Ference LLP, New York, New York.
EXPERTS
The December 31, 2004 financial statements included in the Prospectus have been
audited by Mendoza Berger & Company, LLP, a limited liability partnership of
certified public accountants to the extent and for the periods set forth in
their report appearing elsewhere herein and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the SEC an annual report on Form 10-KSB under the Securities Act.
This annual report does not contain all of the information in the registration
statement and the exhibits and schedules that were filed with the registration
statement. For further information with respect to the common stock and us, we
refer you to the annual report and the exhibits and schedules that were filed
with the annual report. A copy of the annual report and the exhibits and
schedules that were filed with the annual report may be inspected without charge
at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth
Street, NW, Washington, DC 20549. Copies of all or any part of the annual report
may be obtained from the SEC upon payment of the prescribed fee. Information
regarding the operation of the public reference rooms may be obtained by calling
the SEC at 1-800-SEC-0330. The SEC maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of the site is
http://www.sec.gov.
22
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities, other than the payment by us of
expenses incurred or paid by our directors, officers or controlling persons in
the successful defense of any action, suit or proceedings, is asserted by such
director, officer, or controlling person in connection with any securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issues.
Our officers and directors are accountable to our shareholders as fiduciaries,
which means such officers and directors are required to exercise good faith and
integrity in handling our affairs. A shareholder may be able to institute legal
action on behalf of himself and all other similarly situated shareholders to
recover damages where we have failed or refused to observe the law. Shareholders
may, subject to applicable rules of civil procedure, be able to bring a class
action or derivative suit to enforce their rights, including rights under
certain federal and state securities laws and regulations. Shareholders who have
suffered losses in connection with the purchase or sale of their interest in us
due to a breach of a fiduciary duty by one of our officers or directors in
connection with such sale or purchase including, but not limited to, the
misapplication by any such officer or director of the proceeds from the sale of
any securities, may be able to recover such losses from us. We and our
affiliates may not be liable to its shareholders for errors in judgment or other
acts or omissions not amounting to intentional acts.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense or any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We have no agreements with any of its directors or executive officers providing
for indemnification of any such persons with respect to liability arising out of
their capacity or status as officers and directors.
At present, there is no pending litigation or proceeding involving a director or
executive officers as to which indemnification is being sought.
23
INDEX TO JOYSTAR FINANCIAL STATEMENTS
Page
Financial Statements
Joystar Balance Sheets as of June 30, 2005........................................ F-2
Joystar Statements of Operations for the three and six months ended
June 30, 2005 and 2004............................................................ F-3
Joystar Statement of Stockholder Equity (Deficit) F-4
Joystar Statements of Cash Flows for the six months ended
June 30, 2005 and 2004............................................................ F-5
Notes to Financial Statements..................................................... F-6
Report of Independent Registered Public Accounting Firm.................................. F-9
Financial Statements
Joystar Balance Sheets as of December 31, 2004 and 2003........................... F-10
Joystar Statements of Operations for the Years Ended
December 31, 2004 and 2003........................................................ F-11
Joystar Statements of Changes in Stockholders' Deficit for the Years Ended
December 31, 2004 and 2003........................................................ F-12
Joystar Statements of Cash Flows for the Years ended
December 31, 2004 and 2003........................................................ F-13
Notes to Joystar Financial Statements............................................. F-14
JOYSTAR, INC.
BALANCE SHEETS
(UNAUDITED)
------------------------------------------------------------------------------------------
June 30, December 31,
2005 2004
----------- -----------
ASSETS
Current assets:
Cash $ 88,318 $ 283,869
Other receivables 25,172 100
Prepaid expenses 11,657 16,265
----------- -----------
Total current assets 125,147 300,234
Property and equipment, net 46,669 37,327
----------- -----------
Total assets $ 171,816 $ 337,561
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 190,401 $ 144,416
Accrued salaries 2,061 172,038
Accrued payroll taxes 376,708 203,970
Accrued rent 35,000 35,000
Loans from shareholder 471 259,834
----------- -----------
Total current liabilities 604,641 815,258
Commitments and contingency -- --
Stockholders' equity:
Preferred stock, no par value, 10,000,000
shares authorized; none issued -- --
Common stock, no par value, 50,000,000
shares authorized; 27,857,383 and 23,228,633
shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively 6,155,299 4,178,663
Stock issued for deferred compensation (484,750) (621,250)
Stock subscribed not issued, 227,333 shares and
887,333 shares at June 30, 2005 and December
31, 2004, respectively 204,800 794,800
Accumulated deficit (6,308,174) (4,829,910)
----------- -----------
Total stockholders' (deficit) (432,825) (477,697)
----------- -----------
Total liabilities and stockholders'
equity (deficit) $ 171,816 $ 337,561
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
JOYSTAR, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
---------------------------------------------------------------------------------------------------------
For the six For the six For the three For the three
months ended months ended months ended months ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Gross Revenues:
Travel commissions $ 187,408 $ 41,059 $ 137,899 $ 9,815
Cost of revenues 130,791 -- 98,047 --
------------- ------------- ------------- -------------
Net revenues 56,617 41,059 39,852 9,815
Operating expenses:
General and administrative 1,151,168 613,283 646,975 250,148
Marketing and sales 374,072 1,009,564 195,834 668,614
------------- ------------- ------------- -------------
Total operating expenses 1,525,240 1,622,847 842,809 918,762
------------- ------------- ------------- -------------
Loss from operations before
interest and taxes (1,468,623) (1,581,788) (802,957) (908,947)
Interest expense 9,641 -- 9,641 --
Provision for taxes - State -- 2,560 -- 2,560
------------- ------------- ------------- -------------
Net loss $ (1,478,264) $ (1,584,348) $ (812,598) $ (911,507)
============= ============= ============= =============
Loss per share $ (0.06) $ (0.07) $ (0.03) $ (0.04)
============= ============= ============= =============
Weighted average number of common
shares outstanding 24,031,395 21,239,656 24,618,082 21,395,965
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-3
JOYSTAR, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK Stock issued Stock Total
--------------------------- for Subscribed Stockholders'
Number of Deferred not Accumulated Equity
Shares Amount Compensation Issued (Deficit) (Deficit)
------------ ------------ ------------ ------------ ------------ -----------
Balance at December 31, 2004 23,228,633 $ 4,178,663 $ (621,250) $ 794,800 $(4,829,910) $ (477,697)
Stock issued for services 705,294 366,891 -- -- -- 366,891
Stock issued for cash 2,582,070 1,140,270 -- (590,000) -- 550,270
Stock issued for note payable to shareholder 742,411 259,834 -- -- -- 259,834
Stock issued for accrued payroll 571,429 200,000 -- -- -- 200,000
Stock issued for interest 27,546 9,641 -- -- -- 9,641
Deferred compensation earned -- -- 136,500 -- -- 136,500
Net loss -- -- -- -- (1,478,264) (1,478,264)
------------ ------------ ------------ ------------ ------------ ------------
Balance June 30, 2005 27,857,383 $ 6,155,299 $ (484,750) $ 204,800 $(6,308,174) $(432,825)
============ ============ ============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
JOYSTAR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------------------------------------------------------------
For the six For the six
months ended months ended
June 30, 2005 June 30, 2004
------------- -------------
Cash flows from operating activities:
Net loss $(1,478,264) $(1,584,348)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 6,739 3,638
Stock issued for services 531,353 893,272
Stock issued for interest 9,641
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses 4,609 190
Decrease (increase) in other receivables (25,072) 1,000
Increase (decrease) in accounts payable 45,985 (17,191)
Increase in accrued salaries 2,061 79,637
Increase in payroll taxes 164,786 --
Increase in accrued rent 7,952 466
------------ ------------
Net cash used by operations (730,210) (623,336)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (16,081) (15,594)
------------ ------------
Net cash used by investing activities (16,081) (15,594)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in loans from shareholders 470 (500)
Issuance of common stock 550,270 275,480
Reduction of shareholder loan, subscribed
60,000 shares of common stock -- (83,295)
Stock subscribed not issued -- 443,000
------------ ------------
Net cash provided by financing activities 550,740 634,685
------------ ------------
Decrease in cash (195,551) (4,245)
Cash at the beginning of the period 283,869 136,319
------------ ------------
Cash at the end of the period $ 88,318 $ 132,074
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock for services $ 531,353 $ 893,272
Income taxes paid $ -- $ --
Shares issued for shareholder loan $ 259,834 $ 83,295
Shares issued for interest $ 9,641 $ --
Subscribed shares issued $ 590,000 $ --
Shares issued for accrued prior year compensation $ 172,038 $ --
The accompanying notes are an integral part of these financial statements.
F-5
JOYSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
---------------------
Joystar, Inc. a California corporation (" the Company") was incorporated on
February 5, 1998. The Company specializes in selling complex travel products
including cruises, vacation packages and group travel through its national sales
force of independent travel agents.
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 six months ended June 30, 2005 and 2004 are not
necessarily indicative of the results that may be expected for any future
period. The balance sheet at December 31, 2004 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, 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
REVENUE RECOGNITION
--------------------
The Company recognizes revenue when the travel is completed and Joystar
has been paid the corresponding commission from the supplier. The
Company records revenues from travel related sales transactions where
the Company both purchases from the supplier and sells to the customer
the requested travel service. This is reflected in the Statement of
Operations at the net amount, which reflects the gross amount charged
to the customer less the cost paid to the supplier. The Company also
receives commissions from travel suppliers for processing reservations.
Revenues derived in the future from annual memberships or other
activities where a time factor is involved will be deferred over the
appropriate period and recognized as earned.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful life of the assets,
which is seven years for furniture and equipment and three years for
computer equipment.
USE OF ESTIMATES
----------------
The preparation of financial statements in accordance 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, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-6
INCOME TAXES
------------
Deferred income taxes are reported using the liability method. Deferred
tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
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. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
NET LOSS 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. The Company has no common stock equivalents, which
would dilute earnings per share.
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. However, the Company had been in the development stage
since its inception, 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 its
development stage operations. However, there is no assurance that the
necessary funds will be realized by securing debt or through stock
offerings.
4. LEGAL PROCEEDINGS
-----------------
In March, 2004 a former employee of the Company who was terminated
prior to the acquisition of Joystar, filed a lawsuit in Orange County
Superior Court for breach of contract and specific performance relating
to the exercise of options, among other causes of action. A proposed
settlement has been submitted to the Company in which the Company will
issue an additional 300,000 shares and a cash payment of $12,700 for
cost. As of the date of this report, this agreement has not yet been
finalized. The Company's financial statements do not reflect any
adjustment to record the possible settlement.
F-7
An independent third party stockbroker has filed a lawsuit against the
Company for refusal to register certain shares to them. A proposed
settlement has been submitted by the Company in which the Company will
register an additional 138,600 shares. As of the date of this report,
this agreement has not yet been finalized. The Company's financial
statements do not reflect any adjustment to record the possible
settlement.
5. SUBSEQUENT EVENTS
-----------------
As of July 18, 2005, the Company sold in its private placement of up to
$1,100,000, a total of 2,082,143 shares of its common stock, no par
value per share, at a purchase price of $0.35 per share to
institutional and accredited investors. Additionally, William M.
Alverson, the Company's CEO and one other officer and director
converted their respective loans to the Company totaling $575,000 to
equity under the same terms. In addition to common stock shares, each
subscriber received one warrant to purchase the Company's common stock
for each two shares purchased. The warrants have the exercise price of
$0.50 per share and expire in five years from the date of issuance. The
warrants are subject to call provisions as described in the warrant
agreement. The subscribers have certain registration rights to register
the shares and the warrants purchased in the placement.
The number of warrants outstanding at June 30, 2005 and subsequent to
the shares issued in July were 821,443 and 1,862,514, respectively. The
Company issued 20,000 shares of common stock for services in the amount
of $10,300.
Subsequent to June 30, 2005 the Company acquired the assets of Vacation
and Cruise Resources, Inc. DBA Miami Cruise Center for $25,000 cash and
137,500 of restricted common shares valued at the closing price on the
date of issue $70,125.
F-8
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors and Stockholders
Joystar, Inc.
We have audited the accompanying balance sheets of Joystar, Inc. (a development
stage enterprise) (the Company) as of December 31, 2004 and 2003, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the years then ended and for the period from inception (May 23, 2001)
through December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Joystar, Inc. as of December
31, 2004 and 2003, and the results of its operations and cash flows for the
years then ended and for the period from inception (May 23, 2001) through
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed further in Note 3, the
Company has been in the development stage since its inception (May 23, 2001) and
continues to incur significant losses. The Company's viability is dependent upon
its ability to obtain future financing and the success of its future operations.
These factors raise substantial doubt as to the Company's ability to continue as
a going concern. Management's plan in regard to these matters is also described
in Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Mendoza Berger & Company, LLP
Irvine, California
March 24, 2005
F-9
JOYSTAR, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
--------------------------------------------------------------------------------
December 31, December 31,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash $ 283,869 $ 136,319
Other receivables 100 2,000
Prepaid expenses 16,265 8,042
----------- -----------
Total current assets 300,234 146,361
Property and equipment, net 37,327 22,690
----------- -----------
Total assets $ 337,561 $ 169,051
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 144,416 $ 132,198
Accrued salaries 172,038 150,235
Accrued payroll taxes 203,970 48,239
Accrued rent 35,000 35,000
Loans from officers 259,834 83,795
----------- -----------
Total current liabilities 815,258 449,467
Commitments and contingency -- --
Stockholders' equity (deficit):
Preferred stock, no par value, 10,000,000
shares authorized; none issued -- --
Common stock, no par value, 50,000,000
shares authorized; 23,228,633 and
21,051,277 shares issued and outstanding
at December 31, 2004 and 2003, respectively 4,178,663 1,895,241
Stock issued for deferred compensation (621,250) (894,250)
Stock subscribed not issued, 887,333 shares
and 118,667 shares at December 31, 2004
and 2003, respectively 794,800 176,800
Deficit accumulated during development stage (4,829,910) (1,458,207)
----------- -----------
Total stockholders' equity (deficit) (477,697) (280,416)
----------- -----------
Total liabilities and stockholders'
equity (deficit) $ 337,561 $ 169,051
=========== ===========
The accompanying notes are an integral part of these financial statements
F-10
JOYSTAR, INC.
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
Cumulative
amounts from
For the year For the year inception (May
ended December ended December 23, 2001) to
December 31, December 31, December 31,
2004 2003 2004
------------ ------------ ------------
Income:
Travel agent programs and commissions $ 68,995 $ 43,170 $ 118,428
------------ ------------ ------------
Operating expenses:
General and administrative 1,987,475 655,535 2,850,243
Marketing and sales 1,453,223 400,868 1,976,509
------------ ------------ ------------
Total operating expenses 3,440,698 1,056,403 4,826,752
------------ ------------ ------------
Loss from operations before
interest and taxes (3,371,703) (1,013,233) (4,708,324)
Interest expense -- 5,644 5,644
Provision for taxes - State -- --
------------ ------------ ------------
Net loss $ (3,371,703) $ (1,018,877) $ (4,713,968)
============ ============ ============
Loss per share $ (0.15) $ (0.06)
============ ============
Weighted average number of common shares
outstanding 21,863,227 18,106,979
============ ============
The accompanying notes are an integral part of these financial statements
F-11
JOYSTAR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION (MAY 23, 2001) TO DECEMBER 31, 2004
--------------------------------------------------------------------------------
Deficit
COMMON STOCK Stock issued Stock Accumulated Total
--------------------------- for Subscribed During the Stockholders'
Number of Deferred not Development Equity
Shares Amount Compensation Issued Stage (Deficit)
------------ ------------ ------------ ------------ ------------ ------------
Balance at inception - May 23, 2001 -- $ -- $ -- $ -- $ -- $ --
Stock issued for services 16,715,000 16,715 -- -- -- 16,715
Net loss -- -- -- -- (16,715) (16,715)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 16,715,000 16,715 -- -- (16,715) --
Stock issued various dates for cash
at $1.50 per share 70,667 105,998 -- -- -- 105,998
Net loss -- -- -- -- (306,673) (306,673)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 16,785,667 122,713 -- -- (323,388) (200,675)
Shares canceled by majority
shareholder (3,000,000) -- -- -- -- --
Stock issued various dates
for cash at $1.50 per share 94,932 142,300 -- -- -- 142,300
------------ ------------ ------------ ------------ ------------ ------------
Balance June 11, 2003 date of
acquisition of Joystar, Inc. shares
in a reverse merger 13,880,599 265,013 -- -- (323,388) (58,375)
Cancel Joystar shares (13,880,599) -- -- -- -- --
Advanced Refrigeration shares
outstanding at June 11, 2003 3,322,840 -- -- -- -- --
Issue Advanced Refrigeration
Technologies, Inc. shares 13,880,599 -- -- -- (115,942) (115,942)
Stock issued pursuant to the stock
option plan June 11, 2003 at
market value of stock $0.03 per
share 810,000 24,300 -- -- -- 24,300
Stock issued for services 215,000 15,000 -- -- -- 15,000
Stock issued for past and future
compensation 2,400,000 1,008,000 -- -- -- 1,008,000
Future compensation deferred until earned -- -- (894,250) -- -- (894,250)
Stock issued various dates for cash
at between $0.50 and $1.50 per share 394,267 531,500 -- -- -- 531,500
Stock issued for services 28,571 51,428 -- -- -- 51,428
Stock subscribed not issued 118,667 shares -- -- -- 176,800 -- 176,800
Net loss -- -- -- -- (1,018,877) (1,018,877)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 21,051,277 1,895,241 (894,250) 176,800 (1,458,207) (280,416)
Stock issued for services 1,475,133 1,507,942 -- -- -- 1,507,942
Stock issued for cash 642,223 692,185 -- -- -- 692,185
Stock issued for note payable 60,000 83,295 -- -- -- 83,295
Deferred compensation earned -- -- 273,000 -- -- 273,000
Stock subscribed not issued 768,666 shares -- -- -- 618,000 -- 618,000
Net loss -- -- -- -- (3,371,703) (3,371,703)
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 2004 23,228,633 $ 4,178,663 $ (621,250) $ 794,800 $(4,829,910) $ (477,697)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
F-12
JOYSTAR, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Cumulative
amounts from
For the year For the year inception (May
ended ended 23, 2001) to
December 31, December 31, December 31,
2004 2003 2004
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(3,371,703) $(1,018,877) $(4,713,968)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 8,765 2,608 11,373
Stock issued for services 1,780,942 204,478 2,002,135
Changes in assets and liabilities:
Increase in prepaid expenses (8,223) (8,042) (16,265)
Increase in other receivables 1,900 (2,000) (100)
Increase in accounts payable 12,218 122,480 144,416
Increase in accrued salaries and
payroll taxes 177,534 116,663 376,008
Increase in accrued rent -- (19,000) 35,000
----------- ----------- -----------
Net cash used by operations (1,398,567) (601,690) (2,161,401)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (23,402) (22,892) (48,700)
----------- ----------- -----------
Net cash used by investing activities (23,402) (22,892) (48,700)
----------- ----------- -----------
Cash flows from financing activities:
Loans from officers 259,334 21,218 259,334
Issuance of common stock 692,185 673,800 1,555,778
Stock subscribed not issued 618,000 176,800 794,800
Payment of debt in reverse acquisition -- (115,942) (115,942)
----------- ----------- -----------
Net cash provided by financing activities 1,569,519 755,876 2,493,970
----------- ----------- -----------
Increase in cash 147,550 131,294 283,869
Cash at the beginning of the year 136,319 5,025 --
----------- ----------- -----------
Cash at the end of year $ 283,869 $ 136,319 $ 283,869
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of stock and stock subscribed
($22,500) for services $ 1,802,692 $ 204,478 $ 2,023,885
Income taxes paid $ 2,585 $ -- $ 2,585
Shares issued for shareholder loan $ 83,295 $ -- $ 83,295
Interest paid $ -- $ 5,644 $ 5,644
The accompanying notes are an integral part of these financial statements
F-13
JOYSTAR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND CUMULATIVE FROM INCEPTION (MAY 23, 2001) TO DECEMBER 31, 2004
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
On June 11, 2003, Joystar, Inc. (formerly Advanced Refrigeration Technologies,
Inc. a California corporation) (" the Company") acquired all of the issued and
outstanding common stock of Joystar, Inc., a Nevada corporation ("Joystar") in
exchange for the issuance by the Company of a total of 13,880,599 newly issued
restricted shares of common voting stock to the Joystar shareholders pursuant to
the Agreement and Plan of Reorganization dated as of June 10, 2003. Prior to the
issuance of the shares, the Company had 3,322,840 shares of common stock issued
and outstanding. Subsequent to the exchange there were 17,203,439 shares issued
and outstanding. The shareholders of Joystar own 81% of the common stock
outstanding of the Company after the issuance of the 13,880,599 shares.
The acquisition of Joystar by the Company on June 11, 2003 has been accounted
for as a purchase and treated as a reverse acquisition since the former owners
of Joystar controlled 81% of the total shares of Common Stock of the Company
outstanding immediately following the acquisition.
On this basis, the historical financial statements prior to June 11, 2003 have
been restated to be those of the accounting acquirer Joystar. The historical
stockholders' equity prior to the reverse acquisition has been retroactively
restated (a recapitalization) for the equivalent number of shares received in
the acquisition after giving effect to any difference in par value of the
issuer's and acquirer's stock. The original 3,322,840 shares of common stock
outstanding prior to the exchange reorganization have been reflected as an
addition in the stockholders' equity account of the Company on June 11, 2003.
As of June 4, 2004 Joystar, Inc., a Nevada corporation and wholly owned
subsidiary of the Company), was officially merged with and into Joystar, Inc., a
California Corporation (formerly Advanced Refrigeration Technologies, Inc.). In
connection with the merger the Company provided for the name change from
Advanced Refrigeration Technologies, Inc. to Joystar, Inc. The merger and the
name change was approved by the Company's Board of Directors. The Company no
longer files consolidated financial statements. This merger had no effect on
income for this or any prior period reported.
The Company has been in the development stage since its inception May 23, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the Company, and
its wholly owned subsidiary Joystar, Inc.. All material inter-company balances
and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
-------------------
The Company recognizes revenue when the earnings process is complete. The
Company records revenues from travel related sales transactions where the
Company both purchases from the supplier and sells to the customer the requested
travel service. This is reflected in the Consolidated Statement of Operations at
the net amount, which reflects the gross amount charged to the customer less the
cost paid to the supplier. The Company also receives commissions from travel
suppliers for processing reservations. (To date all revenues have been derived
from such transactions.)
Revenues derived in the future from annual memberships or other activities where
a time factor is involved will be deferred over the appropriate period and
recognized as earned.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful life of the assets, which is seven years for
furniture and equipment and three years for computer equipment.
F-14
USE OF ESTIMATES
----------------
The preparation of financial statements in accordance 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, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
INCOME TAXES
------------
Deferred income taxes are reported using the liability method. Deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. 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. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
NET LOSS 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. The Company has no common stock
equivalents, which would dilute earnings per share.
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.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In December 2004 the FASB issued revised SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R sets accounting requirements for "share-based" compensation to
employees and requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation. SFAS
No. 123R is effective in interim or annual periods beginning after june 15,
2005. The Company will be required to adopt SFAS No. 123R in its third quarter
of fiscal 2005 and currently discloses the effect on net (loss) income and
(loss) earnings per share of the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation". The Company is currently
evaluating the impact of the adoption of SFAS 123R on its financial position and
results of operations, including the valuation methods and support for the
assumptions that underlie the valuation of the awards.
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. However, the
Company has been in the development stage since its inception (May 23, 2001),
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 its development stage
operations. However, there is no assurance that the necessary funds will be
realized by securing debt or through stock offerings.
F-15
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, DECEMBER 31,
2004 2003
--------------- ---------------
Office furniture $ 24,511 $ 11,900
Computers 24,189 13,398
--------------- ---------------
48,700 25,298
Less: accumulated
depreciation 11,373 2,608
--------------- ---------------
$ 37,327 $ 22,690
=============== ===============
5. CAPITAL STOCK
COMMON STOCK
------------
On November 2, 2001, the Company issued 16,715,000 restricted shares of common
stock at $0.001 per share totaling $16,715 for services rendered in connection
with the start up of the Company.
At various dates in 2002, the Company issued for cash of $105,998, 70,667 shares
of common stock at $1.50 per share through a private placement, pursuant to
provisions of Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D.
At various dates in 2003, the Company issued for cash of $673,800, 489,199
shares of common stock at $0.50 to $1.50 per share through a private placement,
pursuant to provisions of Section 4(2) of the Securities Act of 1933 and Rule
506 of Regulation D.
COMMON STOCK SPLIT
------------------
On November 1, 2001, the Board of Directors of the Company approved a stock
split of the Company's common stock at a ratio of 1,000 for 1. All references in
the accompanying financial statements to the number of common stock and per
share amounts reflect the stock split.
STOCK CANCELED
--------------
A majority shareholder canceled 3,000,000 shares of stock in anticipation of the
acquisition of Advanced Refrigeration Technologies, Inc. on June 11, 2003.
STOCK ISSUED IN REVERSE MERGER JUNE 11, 2003
--------------------------------------------
The Company acquired all of the issued and outstanding common stock of Joystar,
Inc., a Nevada corporation ("Joystar") in exchange for the issuance by the
Company of a total of 13,880,599 newly issued restricted shares of common voting
stock dated as of June 10, 2003.
STOCK ISSUED UNDER STOCK OPTION PLAN AND FOR PAYMENT OF SERVICES
----------------------------------------------------------------
The Company issued 810,000 shares of common stock pursuant to the Company's
Stock Option Plans on June 11, 2003 valued at the market price of the stock on
that date $0.03.
The Company issued 215,000 shares of common stock in payment of invoices for
professional services of $15,000 in June, 2003.
On July 30, 2003 the Company entered into a two and three year employment
Agreements with two employees. The agreement provided for 100,000 and 300,000
Shares of restricted common stock to be issued. The value of the compensation
was based on the stock price on the agreement date of $0.42, a total $168,000.
The Company issued the 400,000 shares November 14, 2003 and recorded
compensation expense of of $63,000 for the year ended December 31, 2004 and
$25,750 for period ended December 31, 2003. The deferred compensation was
$78,750 at December 31, 2004.
F-16
On July 30, 2003 the Company entered into a four-year employment agreement for a
Vice President of Business Development. The agreement provides for 2,000,000
shares of restricted Common stock to be issued. The value of the compensation
was based on the stock price on the agreement date of $0.42, a total of
$840,000. The Company issued the 2,000,000 shares November 14, 2003 and recorded
compensation expense of $210,000 for the year ended December 31, 2004 and
$87,500 for period ended December 31, 2003. The deferred compensation was
$542,500 at December 31, 2004.
On November 11, 2003 the Company issued 28,571 common shares of restricted stock
for services valued at the market price of the Company's stock on that date
$1.80, $51,428.
During the year ended December 31, 2004, the Company issued 642,223 shares of
common stock in a private placement for a total sales price of $692,185 an
average sales price of $1.08 per share. During 2003 and 2004 the Company has
received subscriptions to purchase 537,333 shares of common stock for $704,800
and authorized 150,000 shares subscribed for additional officers compensation
$90,000 at December 31, 2004.
During the year ended December 31, 2004 the Company issued 1,475,133 shares of
common stock for services valued at the fair market value price of the Company's
stock on the dates issued $1,507,942 an average of $1.02 a share.
Loans payable to shareholder at December 31, 2003, $83,295 were converted to
60,000 shares of common stock during the year ended December 31, 2004.
On August 27, 2004 the Company agreed to grant options to purchase 150,000 share
of common stock under the Company's 2003 Equity Compensation Plan at $0.66 per
share, 110% of the market price on that date. The options had not been issued at
December 31, 2004.
As of November 8, 2004, the Company commenced its private placement offering of
up to $1,000,000 of units consisting of four shares of common stock and one
warrant to purchase a share of common stock at an exercise price of $1.25 per
share. Each unit is being sold at $2.00 purchase price. The units are offered by
the Company to accredited investors only in reliance on Section 505 of the
Regulation D of the Securities Act of 1933. 100,000 units have been subscribed
as of December 31, 2004.
6. LEGAL PROCEEDINGS
In March, 2004 a former employee of the Company who was terminated prior to the
acquisition of Joystar, filed a lawsuit in Orange County Superior Court for
breach of contract and specific performance relating to the exercise of options,
among other causes of action. A proposed settlement has been submitted to the
Company in which the Company will issue an additional 300,000 shares and a cash
payment of $12,700 for cost. As of the date of this report, this agreement has
not yet been finalized. The Company's financial statements do not reflect any
adjustment to record the possible settlement.
An independent third party stockbroker has filed a lawsuit against the Company
for refusal to register certain shares to them. A proposed settlement has been
submitted by the Company in which the Company will register an additional
138,600 shares. As of the date of this report, this agreement has not yet been
finalized. The Company's financial statements do not reflect any adjustment to
record the possible settlement.
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. No grants have been made yet under 2003 Equity Compensation Plan.
On June 11, 2003 the Company granted and issued a total of 810,000 shares under
the 2000 and 2002 stock compensation plans for services to the Company. The
valuation of the shares issued were at the market price on the Grant date $0.03,
$24,300.
F-17
8. INCOME TAXES
The components of the deferred tax asset is as follows:
DECEMBER 31, DECEMBER 31,
2004 2003
--------------- ---------------
Deferred tax assets:
Net operating loss carry-forward $ 1,665,000 $ 530,000
Less: valuation allowance (1,665,000) (530,000)
--------------- ---------------
Net deferred tax assets $ -- $ --
=============== ==============
The Company's operations are headquartered in the State of California and are
subject to California state income taxes. The Company had available
approximately 4,170,000 and $1,328,000 of unused Federal and State net operating
loss carry-forwards at December 31, 2004 and December 31, 2003, respectively
that may be applied against future taxable income. These net operating loss
carry-forwards expire through 2023 for Federal purposes. There is no assurance
that the Company will realize the benefit of the net operating loss
carry-forwards.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely that some or all of the deferred tax assets will not be realized. At
December 31, 2004 and 2003, valuations for the full amount of the net deferred
tax asset were established due to the uncertainties as to the amount of the
taxable income that would be generated in future years.
Reconciliation of the differences between the statutory tax rate and the
effective income tax rate is as follows:
DECEMBER 31, DECEMBER 31,
2004 2003
--------------- ---------------
Statutory federal tax (benefit) rate (34.00)% (34.00)%
Statutory state tax (benefit) rate (5.83)% (5.83)%
--------------- ---------------
Effective tax rate (39.83)% (39.83)%
Valuation allowance 39.83% 39.83%
--------------- ---------------
Effective income tax rate 0.00% 0.00%
=============== ===============
F-18
9. COMMITMENTS
OPERATING LEASE
The Company leased office space under an operating lease, which expired in April
of 2005. The Company was advised that the building was being sold and the
Company would be required to vacate. The Company acquired new office space and
moved in February 2005, subsequent to the year ended December 31, 2004. The new
lease is for 36 months with an option to renew for 36 months.
Future payments on the operating lease are as follows:
2005 $ 110,430
2006 $ 135,584
2007 $ 139,265
2008 $ 23,313
Rental expense was $70,860 and $47,000 for the years ended December 31, 2004 and
2003, respectively.
10. OFFICERS LOAN PAYABLE
The Company has an unsecured loan dated December 15, 2004, payable to officers
$259,834 due on December 15, 2005 with interest at 6%.
11. SUBSEQUENT EVENT As of November 8, 2004, the Company commenced its private
placement offering of up to $1,000,000 of units consisting of four shares of
common stock and one warrant to purchase a share of common stock at an exercise
price of $1.25 per share. Each unit is being sold at $2.00 purchase price. The
units are offered by the Company to accredited investors only in reliance on
Section 505 of the Regulation D of the Securities Act of 1933. The Company
issued 100,000 units (400,000 shares, $200,000) that were subscribed as of
December 31, 2004 in February and March 2005.
The Company has issued 320,000 shares of common stock for services rendered in
February and March 2005 valued at $200,000.
F-19
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
LIMITATION OF LIABILITY: INDEMNIFICATION
Section 204 of the California General Corporation Law permits a corporation to
include in its Articles of Incorporation provisions eliminating or limiting the
personal liability of directors for monetary damages in an action brought by or
in the right of the corporation for breach of a director's fiduciary duties,
subject to certain limitations. Section 317 of the California General
Corporation Law requires a corporation to indemnify its directors and other
agents to the extent they incur expenses in successfully defending lawsuits
brought against them by reason of their status as directors or agents. Section
317 also permits a corporation to indemnify its directors and other agents to a
greater extent than specifically required by law.
Our Articles of Incorporation, as amended, eliminate the personal liability of
directors of the Company for monetary damages to the fullest extent permissible
under California law. Our Bylaws require that the Company, to the maximum extent
permitted by California law, indemnify each of its agents against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceeding arising by reason of the fact such person is
or was an agent of Joystar. The term "agent" includes any person who (i) is or
was a director, officer, employee or other agent of Joystar; (ii) is or was
serving at the request of Joystar, as a director, officer, employee or agent of
another business entity; or (iii) was a director, officer, employee or agent of
a corporation which was a predecessor corporation of Joystar or of another
enterprise at the request of such predecessor corporation.
The effect of these provisions in our Articles of Incorporation and Bylaws is to
eliminate our ability and that of our shareholders (through shareholder
derivative suits) to recover monetary damages against a director except as
limited by California law. These provisions do not limit or eliminate the rights
of Joystar or those of any shareholder to seek non-monetary relief. In any
proceeding arising by reason of the fact a person is or was an agent of Joystar,
the agent will be indemnified if he or she acted in good faith and in a manner
the person reasonably believed to be in the best interests of the corporation
and, in the case of a criminal proceeding, had no reasonable cause to believe
the conduct of the person was unlawful. There can be no indemnification with
respect to any matter as to which the agent is adjudged to be liable to Joystar,
unless and only to the extent that the court in which such proceeding was
brought determines upon application that, in view of all of the circumstances of
the case, the agent is fairly and reasonably entitled to indemnity for expenses
as the court shall deem proper.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling Joystar
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses
payable by Joystar, Inc. in connection with the offering described in this
registration statement. All of the amounts shown are estimates except the
Securities and Exchange Commission registration fee:
Securities and Exchange Commission Registration Fee $ 362.74
Accounting Fees and Expenses $ 10,000*
Legal Fees and Expenses $ 30,000*
Miscellaneous $ 4,637.26*
----------
Total $ 45,000*
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company acquired all of the issued and outstanding common stock of Joystar,
Inc., a Nevada corporation ("Joystar") in exchange for the issuance by the
Company of a total of 13,880,599 newly issued restricted shares of common voting
stock dated as of June 10, 2003.
The Company issued 215,000 shares of common stock in payment of invoices for
professional services of $15,000 in June, 2003.
The Company issued the 400,000 shares as of November 14, 2003 and recorded
compensation expense of $63,000 for the year ended December 31, 2004 and $25,750
for period ended December 31, 2003.
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Pursuant to an employment agreement for a Vice President of Business
Development, the Company issued the 2,000,000 shares on November 14, 2003 and
recorded compensation expense of $210,000 for the year ended December 31, 2004
and $87,500 for period ended December 31, 2003.
On November 11, 2003 the Company issued 28,571 common shares of restricted stock
for services valued at the market price of the Company's stock on that date of
$1.80, $51,428.
During the quarter ended September 30, 2003, the Company sold in its private
placement a total of 316,267 shares of its common stock at a purchase price of
$1.50 per share, for the total purchase price of $474,400. During the quarter
ended June 30, 2003, the Company sold 60,000 shares of its common stock at a
purchase price of $1.50 in its private placement.
During the year ended December 31, 2004, the Company issued 642,223 shares of
common stock in a private placement for a total sales price of $692,185 an
average sales price of $1.08 per share. During 2003 and 2004 the Company has
received subscriptions to purchase 537,333 shares of common stock for $704,800
and authorized 150,000 shares subscribed for additional officers compensation
$90,000 at December 31, 2004. Such 150,000 shares have not been issued yet.
During the year ended December 31, 2004 the Company issued 1,475,133 shares of
common stock for services valued at the fair market value price of the Company's
stock on the dates issued $1,507,942 an average of $1.02 a share.
Loans payable to shareholder at December 31, 2003, $83,295 were converted to
60,000 shares of common stock during the year ended December 31, 2004.
As of November 8, 2004, the Company commenced its private placement offering of
up to $1,000,000 of units consisting of four shares of common stock and one
warrant to purchase a share of common stock at an exercise price of $1.25 per
share. Each unit is being sold at $2.00 purchase price. The Company issued
100,000 units (400,000 shares, $200,000) that were subscribed as of December 31,
2004 in February and March 2005.
The Company has issued 320,000 shares of common stock for services rendered in
February and March 2005 valued at $200,000.
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of Joystar or executive officers of
Joystar, and transfer was restricted by Joystar in accordance with the
requirements of the Securities Act of 1933. In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment,
and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
ITEM 27. EXHIBITS
Exhibit Number Description
------------------ -- ------------------------------------------------------------------------------------------------
2.1 Agreement of Plan of Reorganization (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, filed with the SEC on June 11, 2003).
2.2 Articles of Merger (incorporated by reference to exhibit 2.2 to the Company's Quarterly Report
on Form 10-QSB/A, filed with the SEC on July 1, 2005).
2.3 Certificate of Ownership (incorporated by reference to exhibit 2.3 to the Company's Quarterly
Report on Form 10-QSB/A, filed with the SEC on July 1, 2005).
3.01 Certificate of Incorporation of the Company.**
3.02 By-Laws of the Company.**
4.01 Form of Stock Certificate.**
5.01 Opinion and Consent of Sichenzia Ross Friedman Ference LLP.*
10.1 Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q, filed with the SEC on August 16, 2005).
10.2 Warrant Agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q, filed with the SEC on August 16, 2005).
10.3 Funds Escrow Agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q, filed with the SEC on August 16, 2005).
10.4 Limited Standstill Agreement (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q, filed with the SEC on August 16, 2005).
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23.1 Consent of Sichenzia Ross Friedman Ference LLP. (included
Exhibit 5.1) *
23.2 Consent of Mendoza Berger & Company LLP.*
24.1 Power of Attorney.*
* Filed herewith
** To be filed by amendment
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Aliso Viejo, California, on this 18th day of August,
2005.
JOYSTAR, INC.
By: /s/ William Alverson
------------------------
William Alverson
Chief Executive Officer
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints William Alverson his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and any
subsequent registration statements pursuant to Rule 462 of the Securities Act of
1933 and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that attorney-in-fact or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ William Alverson Chairman, Chief Executive Officer,
-------------------- President, Chief Financial Officer August 18, 2005
William Alverson
/s/ Katherine West Director, Executive Vice President August 18, 2005
------------------
Katherine West
Director August 18, 2005
-------------------
William Fawcett
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