UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2007
( ) Transition report pursuant of Section 13 or 15(d) of the Securities
Exchange Act of 1939 for the transition period _______ to _______
COMMISSION FILE NUMBER 000-25973
JOYSTAR, INC.
(Exact name of registrant as specified in its charter)
California 68-0406331
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
95 Argonaut St. Aliso Viejo, CA 92656, Telephone (949) 837-8101
--------------------------------------------------------------------------------
(Address of Principal Executive Offices, including Registrant's zip code
and telephone number)
--------------------------------------------------------------------------------
Former address
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of the registrant's common stock as of March 30, 2007:
48,973,918 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Balance Sheets 3
(b) Statements of Operations 4
(c) Statement of Stockholders' Equity (deficit) 5
(d) Statements of Cash Flows 6
(e) Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 17
Item 3. Controls and Procedures 22
PART II. OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults On Senior Securities 23
Item 4. Submission of Items to a Vote 23
Item 5. Other Information 23
Item 6. 24
(a) Exhibits
(b) Reports on Form 8K
SIGNATURES AND CERTIFICATES 25
2
JOYSTAR, INC.
BALANCE SHEETS
March 31, 2007 December 31,
2006
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 2,515,208 $ 2,102,861
Accounts receivable 3,479,592 2,701,253
Prepaid expenses 76,757 76,757
------------ ------------
Total current assets $ 6,071,557 $ 4,880,871
Property and equipment, net 386,651 267,036
Intangible assets, net of amortization 49,605 50,525
Other assets 18,970 18,970
------------ ------------
Total assets $ 6,526,783 $ 5,217,402
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,799,678 $ 1,743,324
Deferred Merchant Bookings 381,143 --
Accrued salaries 81,205 75,770
Accrued expenses 128,865 128,865
Accrued liabilities 653,785 534,491
Accrued rent 35,125 34,825
Loans from shareholders 472 472
Accrued liability related
to warrants and stock purchase rights 6,378,587 7,801,193
------------ ------------
Total current liabilities 10,458,860 10,318,940
------------ ------------
Commitments -- --
Stockholders' equity
Preferred stock, no par value, 10,000,000
shares authorized; none issued -- --
Common stock, no par value, 50,000,000
shares authorized;
48,933,404 and 48,772,430 shares issued
and outstanding at March 31, 2007
and December 31, 2006 respectively 14,170,780 14,071,359
Stock issued for deferred compensation (70,000) (122,500)
Stock subscribed not issued, 356,000 shares at
March 31, 2007 and December 31, 2006 313,501 313,501
Accumulated (deficit) (18,346,358) (19,363,898)
------------ ------------
Total stockholders' equity (deficit) (3,932,077) (5,101,538)
------------ ------------
Total liabilities and stockholders' equity $ 6,526,783 $ 5,217,402
============ ============
The accompanying notes are an integral part of these financial statements
3
JOYSTAR, INC.
STATEMENTS OF OPERATIONS
For the Three Months ended
March 31, 2007 March 31, 2006
------------ ------------
Revenue $ 2,472,733 $ 2,182,672
Operating Expenses:
Selling and marketing 2,203,781 1,480,238
General and administrative 682,485 1,128,422
Technology 24,815 57,091
------------ ------------
Total operating expenses 2,911,081 2,665,751
------------ ------------
Operating loss (438,348) (483,079)
------------ ------------
Other income/(expense)
Interest Income 18,624 --
Gain/(Loss)on fair value of warrants
and stock purchase rights 1,437,264 (940,502)
------------ ------------
Other income/(expense) 1,455,888 (940,502)
------------ ------------
Income/(Loss) before income taxes 1,017,540
Income tax provision -- --
------------ ------------
Net Income/(loss) $ 1,017,540 $ (1,423,581)
============ ============
Net Income/(Loss) per share
Basic $ 0.02 $ (0.04)
Diluted $ 0.02 $ (0.04)
============ ============
Weighted average number of
common shares-
Basic 48,873,505 37,781,741
Diluted 55,107,387 37,781,741
============ ============
The accompanying notes are an integral part of these financial statements
4
JOYSTAR, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Three Months ended March 31, 2007
COMMON STOCK
Stock issued Stock Total
for Subscribed Stockholders'
Number of Deferred not Accumulated Equity
Shares Amount Compensation Issued (Deficit) (Deficit)
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 2006 48,772,430 $ 14,071,359 $ (122,500) $ 313,501 $(19,363,898) $ (5,101,538)
Deferred Compensation Earned -- -- 52,500 -- -- 52,500
Stock Issued for Cash -- 200 -- -- -- 200
Stock Issued for Services 160,974 86,969 -- -- -- 86,969
Share based compensation -- 12,252 -- -- -- 12,252
Net Income -- -- -- -- 1,017,540 1,017,540
Balance March 31, 2007 (Unaudited) 48,933,404 $ 14,170,780 $ (70,000) $ 313,501 $(18,346,358) $ (3,932,077)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
JOYSTAR, INC.
STATEMENTS OF CASH FLOW
For the three months ended
March 31, 2007 March 31, 2006
----------- -----------
Cash flows from operating activities
Net Income/ (loss) $ 1,017,540 $(1,423,575)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 19,885 11,049
Share based compensation 12,252 161,582
Stock issued for services 86,969 155,401
Stock issued for interest
Non-cash expense -- 102
Changes in assets and liabilities
Increase in prepaid expenses -- (27,500)
Increase in receivables (778,339) (732,867)
Increase in accounts payable 1,056,354 (173,459)
Increase in deferred merchant bookings 381,143 --
Increase in accrued salaries/rent and payroll taxes 125,029 204,306
Increase/(Decrease) in accrued liability relating (1,422,606) 940,502
to warrants and other stock purchase rights
----------- -----------
Net cash used by operations 498,227 (884,465)
----------- -----------
Cash flows from investing activities
Acquisition of property and equipment (138,580) (54,363)
----------- -----------
Net cash used by investing activities (138,580) (54,363)
Cash flows from financing activities
Loans from shareholders -- --
Issuance of common stock for cash 200 1,749,102
Stock subscribed but not issued -- --
----------- -----------
Net cash provided by financing activities 200 1,749,102
----------- -----------
Non-cash add-in
Stock issued for deferred compensation 52,500
Increase(Decrease) in cash 412,347
810,273
Cash at the beginning of the period 2,102,861
218,948
----------- -----------
Cash at the end of the period $ 2,515,208 $ 1,029,120
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of stock for services $ 86,969 $ 155,401
Shares issued for deferred compensation $ 52,500 $ --
Subscribed shares issued $ -- $ 300,000
Share based compensation $ 12,252 $ 161,582
The accompanying notes are an integral part of these financial statements
6
JOYSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006
NOTE 1 -- ORGANIZATION
DESCRIPTION OF BUSINESS
Joystar, Inc., (a California corporation) specializes in selling complex travel
products including cruises, vacation packages and group travel through its
national sales force of independent travel agents and independent travel
agencies in the United States. These travel products and services are offered
both online and offline through a diversified portfolio of brands including:
Joystar-branded travel websites, private label websites, and
VacationCompare.com. We refer to Joystar, Inc. and its brands collectively as
"Joystar," the "Company," "us," "we" and "our" in these financial statements.
All adjustments (consisting only of normal recurring adjustments) have been made
which, in the opinion of management, are necessary for a fair presentation.
Results of operations for the three months ended March 31, 2007 and 2006 are not
necessarily indicative of the results that may be expected for any future
period. The balance sheet at December 31, 2006 was derived from audited
financial statements.
Certain information and footnote disclosures, normally included in financial
statements Prepared in accordance with accounting principles generally accepted
in the United States of America, have been omitted. These financial statements
should be read in conjunction with the audited financial statements and notes
for the year ended December 31, 2006.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
We use estimates and assumptions in the preparation of our financial statements
in accordance with accounting principles generally accepted in the United States
("GAAP"). Our estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
date of our financial statements. These estimates and assumptions also affect
the reported amount of net income during any period. Our actual financial
results could differ significantly from these estimates. Our significant
estimates underlying our financial statements include revenue recognition,
accounting for merchant payables, recoverability of long-lived and intangible
assets and goodwill, income taxes, and stock-based compensation.
7
REVENUE RECOGNITION
We offer travel products and services through two business models: the travel
agency model and the host agency model.
Under the travel agency model, we act as the agent in the transaction, passing
reservations booked by the traveler to the relevant travel provider. We receive
commissions or ticketing fees from the travel supplier and/or traveler. We
record revenue based principally on Staff Accounting Bulletin ("SAB") No. 104
"Revenue Recognition." We recognize revenue when it is earned and realizable
based on the following criteria: persuasive evidence of an arrangement exists,
services have been rendered, the price is fixed or determinable and
collectibility is reasonably assured.
The prevailing accounting guidance with respect to the presentation of revenue
on a gross versus a net basis is contained in Emerging Issues Task Force No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent ("EITF
99-19")." The consensus of this literature is that the presentation of revenue
as "the gross amount billed to a customer because it has earned revenue from the
sale of goods or services or the net amount retained (that is, the amount billed
to a customer less the amount paid to a supplier) because it has earned a
commission or fee" is a matter of judgment that depends on the relevant facts
and circumstances. If the conclusion drawn is that we perform as an agent or a
broker without assuming the risks and rewards of ownership of goods, revenue
should be reported on a net basis.
In making an evaluation of this issue, some of the factors that should be
considered are: whether we are the primary obligor in the arrangement (strong
indicator); whether we have general inventory risk (before customer order is
placed or upon customer return) (strong indicator); and whether we have latitude
in establishing price. EITF 99-19 clearly indicates that the evaluations of
these factors, which at times can be contradictory, are subject to significant
judgment and subjectivity.
Our travel agency revenue comes from cruise transactions, vacation package
transactions, airline ticket transactions, hotel transactions as well as car
rental reservations. We record travel agency revenue on a net basis when the
traveler books the transaction, as we have no significant post-delivery
obligations. We record an allowance for cancellations and on this revenue based
on historical experience. Under our host agency model, we offer technology,
marketing, and support services to a growing network of independent travel
agencies.
We recognize agency revenues on hotel, cruise and car rental reservations at the
earlier of notification of the amount of the commission from a commission
clearinghouse or a supplier or on receipt of the commissions from an individual
supplier. Override commissions are recognized each period based upon our
projected and actual attainment of predetermined target sales levels. Where
historical financial data is not available to project the target sales levels,
we record the override commission upon receipt of the commission from the
supplier.
SEASONALITY
We generally experience seasonal fluctuations in the demand for our travel
products and services. For example, leisure travel bookings are generally the
highest in the first quarter and gradually decline over the subsequent three
quarters. The first quarter is highest due to "Wave Season", when an estimated
70% of the yearly cruise line inventory is booked. There is a gradual drop off
in the second and third quarters as travelers plan and book their spring, summer
and winter vacations. In the fourth quarter, the number of leisure bookings
decreases significantly. We have been able to offset the quarterly decline in
bookings and revenue typical to the industry through the aggressive growth of
our travel agent network
8
Our merchant revenues are derived from transactions where we are the merchant of
record and determine the price. We have agreements with suppliers for blocks of
inventory that we sell and these sales generate the majority of our total
merchant revenues. We do not have purchase obligations for unsold inventory.
Recognition of merchant revenue occurs on the date the traveler uses the
inventory, such as the date of airline departure or hotel stay.
The Company generates membership service revenues derived from the operation of
the host-agency model in which the Company provides support services to travel
agents. These revenues include fee-based month-to-month non-obligatory payments,
set-up fees and ongoing membership dues for members in renewal periods paid
annually.
The Company receives overrides from certain travel suppliers in the form of
commissions as well as co-op marketing earnings base on the Company's gross
travel bookings with the supplier, recognized each period based upon the
Company's actual attainment of predetermined target sales levels.
Accounting estimates are an integral part of the financial statements prepared
by management and are based on management's current judgments. Those judgments
are normally based on knowledge and experience about past and current events and
on assumptions about future events. Commission revenue for reservations is paid
to the company by the travel suppliers, typically upon completion of the travel
associated with the reservation. Because the average time lag between booking
date and commission payment date is approximately six months, the company
recognizes a reserve against revenues for bookings that may not produce a
collectible commission due to possible cancellations or other factors. For the
three months ended March 31, 2007 the company recognized a reserve equal to 15%
of the gross commissions generated. The company will be monitoring receivables
and adjusting the reserve levels on a regular basis, as required.
Our host agency revenue includes the set-up, monthly and annual renewal fees we
receive from our travel agency partners and are recorded in the period we
receive them.
OTHER
We record revenue from all other sources either upon delivery or when we provide
the service.
CASH AND CASH EQUIVALENTS
Our cash and cash equivalents include cash and liquid financial instruments with
original maturities of 90 days or less when purchased.
9
PROPERTY AND EQUIPMENT
We record property and equipment at cost, net of accumulated depreciation and
amortization. We also capitalize certain costs incurred related to the
development of internal use software in accordance with Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and EITF No. 00-02, "Accounting for Website Development Costs."
We capitalize costs incurred during the application development stage related to
the development of internal-use software. We expense costs incurred related to
the planning and post-implementation phases of development as incurred.
We compute depreciation using the straight-line method over the estimated useful
lives of the assets, which range from three to five years for computer equipment
and capitalized software development, and three to seven years for furniture and
other equipment. We amortize leasehold improvement using the straight-line
method, over the shorter of the estimated useful life of the improvement or the
remaining term of the lease.
INTANGIBLE ASSET
The Company acquired a client list for $55,125 in order to promote sales. The
Company believes that the client list has a minimal useful life of five years
and is amortizing it over that time. If it should lose value prior to the five
years the Company will write it off earlier. The amortization for the three
months ended March 31, 2007 and March 31, 2006 was $920 and $920 respectively.
Management reviews, on an annual basis, the carrying value of its intangible
asset in order to determine whether impairment has occurred. Impairment is based
on several factors including the Company's projection of future discounted
operating cash flows. If an impairment of the carrying value were to be
indicated by this review, the Company would perform the second step of the
impairment test in order to determine the amount of impairment, if any. There
was no impairment charge during the three months ended March 31, 2007 and 2006.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," we record income
taxes under the liability method. Deferred tax assets and liabilities reflect
the expected future tax consequences of temporary differences between the
carrying amounts of assets and liabilities for book and tax purposes. We
determine deferred income taxes based on the differences in accounting methods
and timing between financial statement and income tax reporting. Accordingly, we
determine the deferred tax asset or liability for each temporary difference
based on the tax rates that we expect will be in effect when we realize the
underlying items of income and expense. We consider many factors when assessing
the likelihood of future realization of our deferred tax assets, including our
recent earnings experience by jurisdiction, expectations of future taxable
income, and the carryforward periods available to us for tax reporting purposes,
as well as other relevant factors. We may establish a valuation allowance to
reduce deferred tax assets to the amount we expect to realize. Due to inherent
complexities arising from the nature of our businesses, future changes in income
tax law, tax sharing agreements or variances between our actual and anticipated
operating results, we make certain judgments and estimates. Therefore, actual
income taxes could vary from these estimates.
10
ADVERTISING EXPENSE
We incur advertising expense consisting of offline costs, including print
advertising, and online advertising expense to promote our brands. We expense
the production costs associated with advertisements in the period in which the
advertisement first takes place. We expense the costs of communicating the
advertisement as incurred each time that the advertisement is shown. We incurred
advertising expenses of $122,785 and $57,201 during the three month periods
ended March 31, 2007 and 2006, especitvely.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R, Share-Based Payment. Prior to January 1, 2006, the Company
accounted for share-based payments under the recognition and measurement
provisions of APB Opinion NO. 25, Accounting for Stock Issued to Employees, and
related Interpretations, as permitted by FASB Statement No. 123, Accounting for
Stock Based Compensation. In accordance with APB 25, no compensation cost was
required to be recognized for options granted that had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The Company adopted FAS 123R using the modified prospective transition method.
Under this method, compensation cost recognized in the year ended December 31,
2006 includes: a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of FAS 123, and b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of FAS 123R.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 "Earnings Per Share" which requires the Company to present basic and
diluted earnings per share, for all periods presented. The computation of loss
per common share (basic and diluted) is based on the weighted average number of
shares actually outstanding during the period. Diluted earnings per share give
effect to all potential dilutive common shares outstanding during the period of
computation. The computation of diluted earnings per share does not assume
conversion, exercise or contingent exercise of securities that would have an
anti-dilutive effect on earnings.
The following table reconciles basic earnings per share and diluted earnings
per share and the related weighted average number of shares outstanding for
the three months ended March 31, 2007:
DISCLOSURE FOR RECONCILIATION
OF BASIC AND DILUTED
EARNINGS PER SHARE
For the Quarter Ended March, 31, 2007
-------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
---------- ---------- --------
Net income $1,017,540
BASIC EPS
Income available to common stockholders $1,017,540 48,873,505 $ 0.02
========
Options 737,934
Warrants 5,495,948
---------- ----------
DILUTED EPS
Income available to common
stockholders + assumed conversions $1,017,540 55,107,387 $ 0.02
========== ========== ========
11
Stock warrants to purchase 1,256,572 shares of common stock at $1.00 per share
were outstanding during the quarter ended March 31, 2007 but were not included
in the computation of diluted EPS because the warrants' exercise price was
greater than the market price of the common shares as of March 31, 2007. The
warrants were still outstanding on March 31, 2007 and expire in 2008 and 2011.
No vested stock options were outstanding during the quarter for which the
exercise price was greater than the market price of the common shares as of
March 31, 2007.
ACCRUED LIABILITY RELATED TO WARRANTS AND STOCK PURCHASE RIGHTS
The Company accounts for freestanding derivative financial instruments
potentially settled in its own common stock under Emerging Issues Task Force
("EITF") Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." As the Company
potentially does not have sufficient authorized shares available to settle its
open stock-based contracts, the initial fair value of the applicable contracts
(consisting primarily of non-employee stock warrants and rights to purchase
common stock- (see Note 5) has been classified as "accrued liability related to
warrants and stock purchase rights" on the accompanying balance sheet and
measured subsequently at fair value (based on a Black-Scholes computation), with
gains and losses included in the statement of operations. The accrued liability
has a balance of $6,378,587 at March 31. 2007.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and various current
liabilities. The estimated fair value of these instruments approximates their
carrying value.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has reviewed recent accounting pronouncements that have been adopted
and have concluded that they will not have any material impact on its financial
statements.
CERTAIN RISKS AND CONCENTRATIONS
Our business is subject to certain risks and concentrations including dependence
on relationships with our travel agent partners and travel suppliers, dependence
on third party technology providers, exposure to risks associated with online
commerce security and credit card fraud. We are highly dependent on our
relationships with major cruise lines and packaged vacation companies. We also
depend on global distribution system partners and third party service providers
for certain fulfillment services.
Financial instruments, which potentially subject us to concentration of credit
risk, consist primarily of cash and cash equivalents. We maintain some cash and
cash equivalents balances with financial institutions that are in excess of
Federal Deposit Insurance Corporation insurance limits.
12
3. GOING CONCERN
The accompanying financial statements, which have been prepared in conformity
with accounting principles generally accepted in the United States of America,
contemplates the continuation of the Company as a going concern. The Company has
sustained significant losses and has used capital raised through the issuance of
stock and debt to fund activities. Continuation of the Company as a going
concern is contingent upon establishing and achieving profitable operations.
Such operations will require management to secure additional financing for the
Company in the form of debt or equity.
Management believes that actions currently being taken to revise the Company's
funding requirements will allow the Company to continue. However, there is no
assurance that the necessary funds will be realized by securing debt or through
stock offerings.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, DECEMBER 31,
2007 2006
--------- ---------
Office furniture/computers $ 301,920 $ 211,270
Booking engine software 67,265 57,940
Web sites 119,344 80,739
--------- ---------
488,529 349,949
Less: accumulated depreciation (101,878) (82,913)
--------- ---------
$ 386,651 $ 267,036
========= =========
5. CAPITAL STOCK
COMMON STOCK
During the three months ended March 31, 2007, the Company issued 160,974 common
shares for services for a total of $86,969.
At March 31, 2007 the Company has 13,257,302 warrants outstanding to purchase
shares of common stock at exercise prices ranging from $0.35 to $$1.00. The
warrants have lives of one to five years remaining.
6. STOCK OPTIONS
The Board of Directors has approved in April, 2003 a Company stock option plan,
which was amended by the Company in July, 2003. All the shares (480,000 shares)
under 2002 Equity and Stock Option Plan were issued in June, 2003. In July,
2003, the Company approved 2003 Equity Compensation Plan which provides for the
grant to directors, officers, employees and consultants of the Company of stock
based awards and options to purchase up to an aggregate of 2,500,000 shares of
Common Stock. On August 16, 2006 the plan was amended to provide for grants of
options stock based awards up to an aggregate of 3,500,000 shares of Common
Stock.
13
On December 13, 2005, the Company authorized for two of its officers to receive
1,500,000 shares of common stock. The shares were valued at $330,000 or $0.22
per share. The shares are considered subscribed and not issued at December 31,
2005. The Company has charged $330,000 to compensation expense during the year
ended December 31, 2005.
The following table summarizes activity for all stock options for the period
ended March 31, 2007:
2007
----------------------------
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF SHARES PRICE
----------- ---------
Outstanding, beginning of period 4,137,600 $ 0.53
Granted 310,000 1.39
Exercised -- --
Forfeited and expired -- --
----------- ---------
Outstanding, end of period 4,447,600 $ 0.53
=========== =========
Options exercisable, end of period 843,000 $ 0.53
Weighted average fair value of
options granted during the year $ 0.09
===========
The fair value of the stock options granted during the three months ended March
31, 2007 was approximately $27,000 or $0.09 per stock option, and was determined
using the Black Scholes option pricing model. The factors used for the three
months ended March 31, 2007, were the option exercise price of $0.98 to $1.50
per share, a 5 year life of the options, volatility measure of 47.5%, a dividend
rate of 0% and a risk free interest rate of 4.54% for 2007.
The following table summarizes information about stock options outstanding at
March 31, 2007, with exercise prices equal to the fair market value on the date
of grant with no restrictions on exercisability after vesting:
14
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ------------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
------------------- ----------------- ---------------- -------------- --------------- --------------
$0.50 to $1.50 4,447,600 4.00 $ 0.53 843,000 $ 0.53
=================== ================= ================ ============== =============== ==============
As of March 31, 2007, there was approximately $548,000 in unrecognized
compensation cost related to unvested stock options. The amount unrecognized
compensation cost will be recognized over its weighted average life of
approximately four years.
7. INCOME TAXES
The components of the deferred tax asset are as follows:
MARCH 31, DECEMBER 31,
2007 2006
----------- ------------
Deferred tax assets:
Net operating loss carry-forward $4,815,000 $ 4,629,000
Less: valuation allowance (4,815,000) (4,629,000)
----------- ------------
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 $9,712,157 and $8,715,000 and of unused Federal and State net
operating loss carry-forwards at December 31, 2006 and December 31, 2005,
respectively that may be applied against future taxable income. These net
operating loss carry-forwards expire through 2024 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, 2005 and 2004, 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, 2006 DECEMBER 31, 2005
----------------- -----------------
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%
========== ==========
15
8. COMMITMENTS
LEASE COMMITMENTS
The Company acquired office space in California in February 2005. The lease was
for 36 months with an option to renew for 36 months. The Company entered into a
lease for its office in Florida in October, 2005. The lease is for 36 months and
there is no renewal option on the lease.
Future payments on the operating lease are as follows:
2007 $ 222,901
2008 86,040
-----------
$ 308,941
===========
Rental expense was $21,586 and $60,792 for the quarters ended March 31, 2007 and
2006, respectively.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
---------------------------------------------------------
The information contained in this section has been derived from our
financial statements and should be read together with our consolidated financial
statements and related notes included elsewhere in this annual report. The
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those expressed or
implied in these forward-looking statements as a result of various factors,
including those set forth at the end of this section under "Factors That May
Impact Our Results of Operations".
OVERVIEW
Joystar, Inc. sells complex leisure travel products through our virtual
network of travel agents, company branded and private label websites. We empower
travel entrepreneurs and leisure travelers with the tools and information they
need to efficiently research, plan, and book travel. The effect of having such a
massive and growing network of independent and home-based travel retailers all
booking under the Joystar Agency umbrella is significantly increasing our sales
and revenue, and building strong brand recognition.
We refer to Joystar, Inc. and its brands collectively as "Joystar," the
"Company," "us," "we" and "our" in this management's discussion and analysis of
financial condition and results of operations.
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Tens of thousands of travel agents who are closing their storefront
agencies and moving to a home-based operation are creating a value migration in
the rapidly emerging host travel agency model. Because of our strong value
proposition, we have been very successful in attracting profession travel agents
and at the same time, eroding our competitors' market share. Since going to
market with our hosting programs in August 2004, Joystar has signed up over
4,000 travel agents making it one of the fastest growing and largest leisure
travel network in the industry.
Throughout 2006, Joystar's commission levels with our preferred suppliers
increased substantially. With the acquisition of the Miami Cruise Center, the
enhanced commission levels that Joystar offers travel agents are some of the
highest in the industry.
TRENDS
The travel industry and particularly the travel agency business model, has
experienced significant change in this decade. The advent of the Internet and
online travel agencies has forever changed the way travel products are
distributed. Travel agents were forced to retool their business models which
included the elimination of high costs associated with operating a store fronts
and identifying markets where their knowledge and service would ensure they
remained relevant in the eyes of travelers.
Today, similar to the way real estate agents, mortgage bankers, stock
brokers and insurance agents have been able to effectively telecommute, tens of
thousands of experienced travel sellers operate their businesses virtually.
According to a recent report issued by Credit Suisse/First Boston, there are
currently 25,000 professional, home-based agents. This number is expected to
grow to approximately 50,000 agents by 2010.
In the United States, telecommuting has been growing at 15% a year since
1990. It is believed that approximately 80% of Fortune 1000 companies are likely
to employ telecommuters within this decade.
Factors that will continue to affect the future of telecommuting worldwide
include the availability of bandwidth and fast Internet connections in a given
country; social methodologies for balancing work control and work freedom; the
perceived values and economies in telecommuting; and the opportunities and need
for working collaboratively across large distances, including globally.
According to the Direct Sales Association, the number of Americans
operating a home-based business has grown from 8.5 million in 1996 to 14.1
million in 2005.
The baby-boomer population is estimated at over 70 million domestically
and 450 million worldwide. This group is expected to spend both their
discretionary time and income on travel related products and services.
STRATEGY
We intend to aggressively innovate on behalf of travel agents including
building a scalable, service -oriented technology platform which will extend
across our consumer brands. We expect this to increase the income opportunity+
for our travel network as we will be providing them consumer leads and also
drive profitability for the company as we will create travel bookings at a lower
commission payout than our existing host travel agent programs.
We also intend to continue innovating on behalf of our preferred supplier
partners. As an example, we launched Starbase, a customer relationship
management system for our agents to better manage their businesses. Starbase
streamlines the interaction and booking process between our agents, customers
and suppliers. Through this "direct connect" technology, our agents can complete
the booking process with some of our cruise lines and vacation suppliers easier
and in a more cost effective for our suppliers. It also automatically notifies
Joystar's internal accounting of bookings and cancellations and provides agents
with real time commission tracking. In the absence of this direct connect
technology, these processes are completed manually via a proprietary extranet.
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Currently, cruise vacations represent over two-thirds of our travel
products sold. Although we expect continued significant increase in our cruise
business, our goal is to grow our land-based vacation packages and tours to
represent 75% of total gross bookings.
Our preferred supplier development team is negotiating with major vacation
suppliers to increase our commissions to the levels we have attained with our
major cruise suppliers. We believe this will attract high producing vacation
agents to our network and drive sales and product mix.
SEASONALITY
We generally experience seasonal fluctuations in the demand for our travel
products and services. For example, leisure travel bookings are generally the
highest in the first quarter and gradually decline over the subsequent three
quarters. The first quarter is highest due to wave season, when an estimated 70%
of the yearly cruise line inventory is booked. There is a gradual drop off in
the second and third quarters as travelers plan and book their spring, summer
and winter vacations. In the fourth quarter, the number of leisure bookings
decreases significantly. We have been able to offset the quarterly decline in
bookings and revenue typical to the industry through the aggressive growth of
our travel agent network.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
To understand our financial position and results of operations, it is
important to understand our critical accounting policies and estimates and the
extent to which we use judgment and estimates in applying those policies. We
prepared our financial statements and accompanying notes in accordance with
generally accepted accounting principles in the United States. Preparation of
the financial statements and accompanying notes requires that we make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as of the date of the
financial statements and revenue and expenses during the periods reported. We
base our estimates on historical experience, where applicable and other
assumption that we believe are reasonable under the circumstances. Actual
results may differ from our estimates under different assumptions or conditions.
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There are certain critical estimates that we believe require significant
judgment in the preparation of our financial statements. We consider an
accounting estimate to be critical if:
o It requires us to make assumption because information was not
available at the time or it included matters that were highly
uncertain at the time we were making the estimate, and
o Changes in the estimate or different estimates that we could have
selected may have had a material impact on our financial condition
or results of operations.
For more information on each of these policies, see Note 2 -- Significant
Accounting Policies, in the notes to financial statements. We discuss
information about the nature and rationale for our critical accounting estimates
below.
STOCK-BASED COMPENSATION
We record stock-based compensation expense net of estimated forfeitures.
In determining the estimated forfeiture rates for stock-based awards, we
periodically conduct an assessment of the actual number of equity awards that
have been forfeited to date as well as those expected to be forfeited in the
future. We consider many factors when estimating expected forfeitures, including
the type of award, the employee class and historical experience. The estimate of
stock awards that will ultimately be forfeited requires significant judgment and
to the extent that actual results or updated estimates differ from our current
estimates, such amounts will be recorded as a cumulative adjustment in the
period such estimates are revised.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2 --
Significant Accounting Policies, in the notes to financial statements.
OPERATING METRICS
Gross bookings represent the total retail value of transactions booked for
both agency and merchant transactions, recorded at the time of booking
reflecting the total price due for travel, including taxes, fees and other
charges, and are generally not reduced for cancellations and refunds.
RESULTS OF OPERATIONS
Please refer to the financial statements, which are a part of this report,
for further information regarding the results of operations of the Company.
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2006
GROSS TRAVEL BOOKINGS
Gross travel bookings for the three months ended March 31, 2007 increased
to $24,216,139 compared to $18,036,630 for the three months ended March 31,
2006. Gross travel bookings refers to the total dollar value, inclusive of all
taxes and fees, of all travel services purchased by consumers. The term "gross
travel bookings" is a "non-GAAP financial measure, as such term is defined by
the Securities and Exchange Commission, and may differ from non-GAAP financial
measures used by other companies. The measure of "gross travel bookings" is in
no way derived from the financial statements. Revenue recorded in the Company's
financial statements represents a percentage of commissions or ticketing fees
paid by travel suppliers on travel bookings, membership services revenue and
override commissions from travel suppliers. The Company believes that the
measure "gross travel bookings" is useful for investors to evaluate the
Company's future ongoing performance because they enable a more meaningful
comparison of the activity levels of the Company's travel agent network with its
historical results from prior periods.
REVENUE
Revenues for the three months ended March 31, 2007 increased to $2,472,733
compared to $2,182,672 for the three months ended March 31, 2006.
20
The increase in both gross travel bookings and revenues are due to
continued substantial growth of our travel agent network and higher preferred
supplier commission levels. Offsetting these increases was the fact that the
company took a reserve against revenues of 15% in the three months ended March
31, 2007 while no reserve was taken in the three months ended March 31, 2006.
See the discussion of reserves in Note 2 to the Financial Statements.
SELLING AND MARKETING
Selling and marketing expenses relate to direct advertising and
distribution expense, including traffic generation from Internet, search
engines, private label and affiliate programs. The remainder of the expense
relates to personnel costs, including staffing in our Agent Support Services and
Preferred Supplier Relations to enhance supplier commission levels.
Marketing and sales expenses for the three months ended March 31, 2007
were $2,203,781 compared to $1,480,238 for the three months ended March 31,
2006. The increase of $723,543 was primarily due to the increased payments to
our travel agents as a result of their increased sales levels. Selling and
marketing expenses relate to travel agent commissions, direct advertising and
distribution expense, including traffic generation from Internet, search
engines, private label and affiliate programs.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses for the three months ended March 31,
2007 decreased to $682,485 from $1,128,422 for three months ended March 31,
2006. The decrease was primarily due to reductions in compensation, professional
fees, telephone and travel expenses. We expect absolute amounts spent on
corporate personnel and professional service to increase over time as we develop
new business units requiring additional headcount and continue incurring
incremental costs associated with being a public company.
TECHNOLOGY AND CONTENT
Technology and content expense includes product development expenses such
as payroll and related expenses and depreciation of technology infrastructure,
travel agent intranets, travel agent website, and consumer and social networking
site development costs. In 2006, moved our software development to an
India-based operation with our own employees. We employ web developers and
designers in Kuala Lumpur, Pakistan, India and Spain. We also began outsourcing
the development of certain large scale projects to China including the
development of our consumer travel comparison marketplace, VacationCompare.com
and our group travel social networking site, Travelstar.com.
Technology and content expenses for the three months ended March 31, 2007
were $24,815. Given the increasing complexity of our business, geographic
expansion, increased supplier integration, service-oriented architecture
improvements and other initiatives, we expect absolute amounts spent in
technology and content to increase over time. The Company recently hired a Chief
Technology Officer.
ACCRUED LIABILITY RELATED TO WARRANTS AND STOCK PURCHASE RIGHTS
The Company accounts for freestanding derivative financial instruments
potentially settled in its own common stock under Emerging Issues Task Force
("EITF") Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." As the Company
potentially does not have sufficient authorized shares available to settle its
open stock-based contracts, the initial fair value of the applicable contracts
(consisting primarily of non-employee stock warrants and rights to purchase
common stock) (see Note 5) has been classified as "accrued liability related to
warrants and stock purchase rights" on the accompanying balance sheet and
measured subsequently at fair value (based on a Black-Scholes computation), with
gains and losses included in the statement of operations. The accrued liability
has a balance of $6,387,587 as of March 31, 2007.
Net other income for the three months ended March 31, 2007 was $1,422,606
Compared to an expense of $(940,502) in the three months ended March 31, 2006.
This change was primarily due a reduction in the Accrued Liability Related to
Warrants and Stock Purchase Rights.
The Company left development stage as of January 1, 2005 when it started
to make substantially more sales.
21
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $2,515,208 at March 31, 2007 as
compared to $2,102,861 at December 31, 2006. The Company has recovered cash from
trade accounts receivable. During the three months ended March 31, 207 the
Company issued $86,969 in shares for services
PROFITABILITY/LOSS
Net income for the three months ended March 31, 2007 was $1,017,540
compared to a net loss of $1,423,575 for the three months ended March 31, 2006.
The increase in net income was due to a reduction in the provision of the
accrued liability of related to warrants and stock purchase rights. The
Company's operating loss for the three months ended March 31, 2007 was $438,348
compared to an operating loss of $480,379 for the three months ended March 31,
2006.
Our business continues to be dominated by complex leisure travel.
Commission revenue for these types of bookings is paid to the company by travel
suppliers, typically upon completion of the travel. Because the average time lag
between booking travel and receiving the commission is approximately six months,
we determined it prudent to recognize a reserve against revenues for the
possibility of cancellations or other factors. Therefore, we recognized a
reserve equal to 15% of the gross commissions generated for the three months
ended March 31, 2007. The company will be monitoring receivables and adjusting
the reserve levels on a regular basis, as required.
Item 3. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of March 31, 2007, that the design and operation of
our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
whether or not disclosure is required.
During the quarter ended March 31, 2007, there were no changes in our
internal controls over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
22
PART II. OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended March 31, 2007, the Company issued 20,000 shares of
common stock valued at an average purchase price of $0.95 per share and 6,250
shares of common stock valued at $0.98 per share to employees for services
rendered.
The shares of the Company's common stock were issued and sold in reliance upon
the exemption provided by Section 4(2) and/or Regulation D of the
Securities Act of 1933.
Item 3. Defaults on Senior Securities NONE
Item 4. Submission of Items to a Vote
On January 23, 2007, a majority of the shareholders of the Company representing
not less than 27,197,842 shares of the 48,928,974 shares outstanding of the
common stock or 55.58% have consented in writing to change the Company's name to
Travelstar, Inc. and to increase the authorized capital of the Company to 210
million shares consisting of 200 million shares of common stock and 10 million
shares of preferred stock. Such approval and consent constitute the approval and
consent of a majority of the total number of shares of outstanding of common
stock and are sufficient under the California General Corporation Law and the
Company's Bylaws to approve the above actions.
Item 5. Other Information NONE
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Item 6.
(a) Exhibits
--------
The following Exhibits are incorporated herein by reference or are filed
with this report as indicated below.
Exhibit No. Description
----------- -----------
* Exhibit 10.1 Subscription Agreement
* Exhibit 10.2 Warrant Agreement
* Exhibit 10.3 Escrow Agreement
* Exhibit 10.4 Standstill Agreement
* Exhibit 10.5 Agreement for the purchase and sale of assets between
Vacation and Cruise Resources, Inc. and Joystar, Inc.
dated August 11, 2005.
* Exhibit 10.6 Employment Agreement with William M. Alverson.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act
b) Reports on 8K during the quarter:
Form 8-K filed on March 21, 2007.
* Previously filed with the Securities and Exchange Commission.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
JOYSTAR, INC.
Date: May 15, 2007
By: /s/ William Alverson
---------------------------------
Chief Executive Officer
By: /s/ Jerry Galant
---------------------------------
Chief Financial Officer
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