UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2006
( ) 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 [ ]
The number of shares of the registrant's common stock as of March 31, 2006:
40,301,485 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
TABLE OF CONTENTS
PAGE
----
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 12
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults On Senior Securities
Item 4. Submission of Items to a Vote
Item 5. Other Information
Item 6. 16
(a) Exhibits
(b) Reports on Form 8K
SIGNATURES AND CERTIFICATES 17
2
JOYSTAR, INC.
BALANCE SHEETS
March 31, 2006 December 31,
(UNAUDITED) 2005
(Restated) (Restated)
------------ ------------
ASSETS
Current assets:
Cash $ 1,029,120 $ 218,948
Commission receivables 1,131,695 398,827
Prepaid expenses 76,072 48,572
------------ ------------
Total current assets 2,236,887 666,347
Property and equipment, net 182,957 138,723
Intangible asset 53,285 54,205
------------ ------------
Total assets $ 2,473,129 $ 859,275
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 172,591 $ 198,814
Accounts payable-merchants 174,908 321,643
Accrued salaries 71,896 46,786
Accrued expenses 128,865 128,865
Accrued payroll taxes 591,454 412,258
Accrued rent 34,500 35,000
Accrued Liability related to warrants
and stock purchase rights 940,502 --
Loans from shareholder 472 472
------------ ------------
Total current liabilities 2,115,188 1,143,838
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; 40,301,485 and
34,103,309 shares issued and outstanding
at March 31, 2006 and December 31, 2005
respectively 10,254,611 7,952,026
Stock issued for deferred compensation (292,500) (356,000)
Stock subscribed not issued, 1,727,333
shares at March 31, 2006 and 2,584,476
shares at December 31, 2005, respectively 534,800 834,800
Accumulated (deficit) (10,138,970) (8,715,389)
------------ ------------
Total stockholders' equity (deficit) 357,941 (284,563)
------------ ------------
Total liabilities and stockholders'
Equity (Deficit) $ 2,473,129 $ 859,275
============ ============
The accompanying notes are an integral part of these financial statements
3
JOYSTAR, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
-----------------------------------------------------------------------------------------
For the three For the three
months ended months ended
March 31, 2006 March 31, 2005
(Restated) (Restated)
-------------- --------------
Revenue $ 2,182,672 $ 120,575
------------ ------------
Operating expenses:
Selling and marketing 1,480,238 282,048
General and administrative 1,128,422 504,193
Technology and content 57,091 --
------------ ------------
Total operating expenses 2,665,751 786,241
------------ ------------
Operating loss (483,079) (665,666)
Interest expense -- --
Loss on fair value of warrants
and stock purchase rights (940,502) --
------------ ------------
Loss before income taxes (1,423,581) (665,666)
Income tax provision -- --
------------ ------------
Net loss $ (1,423,581) $ (665,666)
============ ============
Loss per share-basic and diluted $ (0.04) $ (0.03)
============ ============
Weighted average number of common shares outstanding 37,781,741 23,438,466
============ ============
The accompanying notes are an integral part of these financial statements
4
JOYSTAR, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(Restated)
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, 2005 34,103,309 $ 7,952,026 $ (356,000) $ 834,800 $ (8,715,389) $ (284,563)
Stock issued for services 246,455 91,901 -- -- -- 91,901
Stock issued for cash 5,951,721 2,049,102 -- (300,000) -- 1,749,102
Deferred compensation earned -- -- 63,500 -- -- 63,500
Share based compensation 161,582 161,582
Net loss -- -- -- -- (1,423,581) (1,423,581)
------------ ------------ ------------ ------------ ------------ ------------
Balance March 31, 2006 (Unaudited) 40,301,485 $ 10,254,611 $ (292,500) $ 534,800 $ (10,138,970) $ 357,941
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
5
JOYSTAR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
----------------------------------------------------------------------------------------
For the three For the three
months ended months ended
March 31, 2006 March 31, 2005
(Restated) (Restated)
-------------- --------------
Cash flows from operating activities:
Net loss $(1,423,581) $ (665,666)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 11,049 2,889
Stock issued for services 155,401 274,750
Share based compensation 161,582
Non-cash expense 102 --
Changes in assets and liabilities:
(Increase) in prepaid expenses (27,500) (23,936)
(Increase) in other receivables (732,767) (2,354)
(Decrease) increase in accounts payable (173,459) 13,472
Increase in accrued salaries and payroll
Taxes 204,306 100,643
Increase in Accrued Liability related to warrants
And stock purchase rights 940,502 --
----------- -----------
Net cash used in operating activities (884,465) (300,202)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (54,363) (14,000)
----------- -----------
Net cash used in investing activities (54,363) (14,000)
----------- -----------
Cash flows from financing activities:
Loans from shareholders -- 105,997
Issuance of common stock 1,749,000 --
----------- -----------
Net cash provided by financing activities 1,749,000 105,997
----------- -----------
Increase (Decrease) in cash 810,172 (208,205)
Cash at the beginning of the year 218,948 283,869
----------- -----------
Cash at the end of the period $ 1,029,120 $ 75,664
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock for services $ 155,401 $ 274,750
=========== ===========
Share based compensation $ 161,582 $ --
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
Interest paid $ -- $ --
=========== ===========
Subscribed shares issued $ 300,000 $ 200,000
=========== ===========
Shares issued for accrued prior year compensation $ 63,500 $ 68,250
=========== ===========
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, 2006 AND 2005
(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. The
Company has re-classified certain accounts of March 31, 2005 to be consistent
with March 31, 2006 classifications.
Results of operations for the three months ended March 31, 2006 and 2005 are not
necessarily indicative of the results that may be expected for any future
period. The balance sheet at December 31, 2005 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, 2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
REVENUE RECOGNITION
--------------------
The Company passes reservations booked by customers to the relevant
travel supplier and receives a commission or ticketing fee from the
travel supplier for its services. The supplier sets the price to be
paid by the consumer and the travel supplier appears as merchant of
record for the transactions. The revenues are typically recognized at
the time the reservation is booked.
The Company generates membership services revenue 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 based on the Company's gross
travel bookings with the supplier recognized each period based upon the
Company's actual attainment of predetermined target sales levels.
7
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.
INTANGIBLE ASSET
----------------
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, 2006.
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.
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 4) has been classified as "accrued liability related to
warrants and stock purchase rights" on the accompanying balance sheet and
measured subsequently at fair value (based on a Black-Scholes computation), with
gains and losses included in the statement of operations. The accrued liability
had a balance of $940,502 at March 31, 2006.
8
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 common stock equivalents, including
warrants, which would dilute earnings per share.
RECLASSIFICATIONS
-----------------
The Company has reclassified certain amounts relating to prior period
March 31, 2005 results to conform to our March 31, 2006 results. The
reclassifications did not affect our financial position, cash flows,
revenue, operating loss or net loss of the prior period.
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. 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.
4. COMMON STOCK
------------
During the three months ended the Company issued 246,455 shares of
common stock for services for $91,901 and 5,951,721 shares of common
stock for cash for $2,049,102 of which $300,000 shares had been
subscribed.
At March 31, 2006 the Company has 12,478,161 warrants outstanding to
purchase shares of common stock at exercise price between $0.35 and
$0.50. The warrants have remaining lives of one to five years
remaining.
During the three months ended March 31, 2006, two officers earned
$63,500 in deferred stock Compensation.
5. RESTATEMENT OF FINANCIAL STATEMENTS
In connection with the preparation of audit of the December 31, 2006 audit of
the Company's financial statements and letters of comment received from the
Securities and Exchange Commission, we determined that there were errors in the
accounting treatment and reported amounts in our previously filed financial
statements. As a result, we determined to restate our financial statements for
both the year ended December 31, 2006 and the interim financial periods.
In connection with the restatement, we are designing internal procedures and
controls for purposes of the preparation and certification of our financial
statements going forward. In this process, we identified certain errors in
accounting determinations and judgments, which have been reflected in the
restated financial statements.
9
These restated financial statements include adjustments related to the
following:
Accrued liability related to warrants and stock purchase rights and Loss on fair
value of warrants and stock purchase rights: During 2006, the Company had issued
more shares of its common stock and other common stock equivalents including
warrants and stock options which exceeded the authorized shares of common stock
that the Company could issue. Accordingly, $940,502 was added to the accrued
liability and the loss on fair value of warrants and stock purchase rights was
recognized as of and for the three months ended March 31, 2006. The March 31,
2006, financial statements, have been revised to reflect these adjustments. The
above adjustment did not affect previously reported cash balances as of December
31, 2005.
Share compensation expense was recognized as of December 31, 2006 and included
in the financial statements for the year ended December 31, 2006. The Company
has determined that it should restate its financial statements for the interim
financial periods to reflect share compensation expense as iincurred during the
appropriate period.
The following financial statement line items were corrected for the three months
ended March 31, 2006:
As originally presented Restated
----------------------- --------
Loss on fair value of warrants
and stock purchase rights 0 $ 940,502
Share compensation expense 0 $ 161,582
Loss before income taxes $(321,497) $(1,423,581)
Net Loss $(321,497) $(1,423,581)
Loss per Share $ (0.01) $ (0.04)
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.
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 annual activity for all stock options
for the three month period ended March 31:
2006
------------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding, beginning
of year 3,733,000 $ 0.51
Granted 135,000 0.50
Exercised -- --
Forfeited and expired -- --
--------- --------
Outstanding, end of period 3,868,000 $ 0.51
========= ========
Options exercisable, end of period 150,000 $ 0.66
Weighted average fair value of options
granted during the period $ 0.47
=========
The fair value of the stock options granted during the three months
ended March 31, 2006 and 2005, was approximately $64,000 or $0.47 per
stock option, respectively, and was determined using the Black Scholes
option pricing model. The factors used for the three months ended March
31, 2006, were the option exercise price of $0.50 per share, a 5 year
life of the options, volatility measure of 85%, a dividend rate of 0%
and a risk free interest rate ranging from of 4.95% and 4.28% for 2006.
There were 150,000 stock options exercisable with a weighted average
exercise price of $0.66 as of March 31, 2006.
10
The following table summarizes information about stock options
outstanding at March 31, 2006, with exercise prices equal to the fair
market value on the date of grant with no restrictions on
exercisability after vesting:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
NUMBER LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
------------------------------- ------------------ ------------------- ----------------- ------------------- --------------------
$0.50 to $0.67 3,868,000 4.75 $ 0.51 150,000 $ 0.66
=============================== ================== =================== ================= =================== ====================
As of March 31, 2006, there was approximately $496,000 in unrecognized
compensation cost related to unvested stock options. The amount
unrecognized compensation cost will be recognized over its weighted
average life of approximately five years.
The following table illustrates the effect on net loss and loss per
share if the fair value recognition provisions of FAS 123(R) to options
granted under our stock option plan was applied in the previous period:
FOR THE THREE
MONTHS ENDED
MARCH 31, 2005
------------------
Net loss as reported $ (665,666)
Less: stock based employee compensation
expense included in reported net loss --
Add: compensation expense determined
under fair value method, net of tax (161,582)
------------------
$ (827,248)
==================
Net loss per common share, basic and diluted:
As reported $ (0.03)
==================
Pro forma net loss per common share $ (0.04)
------------------
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, DECEMBER 31,
2006 2005
--------- ---------
Office furniture/computers $ 195,111 $ 139,313
Booking engine software 28,385 28,385
--------- ---------
223,496 167,698
Less: accumulated depreciation (39,104) (28,975)
--------- ---------
$ 184,392 $ 138,723
========= =========
11
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.
General
Joystar specializes in selling complex travel products including cruises,
vacation packages and group travel through its national sales force of
independent travel agents. The effect of having such a large 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.
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.
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 3,000 travel agents
making us one of the fastest growing and largest leisure travel network in the
industry.
Throughout 2005, Joystar's commission levels with our preferred suppliers
increased substantially. This trend has continued in the first quarter of 2006.
The Company is constantly negotiating with its preferred suppliers for higher
commissions and overrides. As commissions and overrides increase with higher
bookings with our preferred suppliers, we believe this will have a positive
impact on the profitability of the Company.
12
According to a report issued by Credit Suisse/First Boston, there are currently
20,000 professional travel agents working from their homes. This number is
expected to grow to approximately 50,000 agents by 2010. In the management's
opinion, Joystar is on track to have an approximate twenty percent market share
by the end of 2006 and aims to increase that to thirty percent market share by
the end of 2007.
In 2005, we engaged an NASD member firm to provide investment banking services.
The Company raised approximately 3.5 million dollars in the last two quarters of
2005 and the first quarter of 2006. We intend to raise an additional 5 million
dollars in 2006 and apply for a listing on either the American Stock Exchange or
NASDAQ in the fourth quarter. There are no assurances that this will occur.
Our business is dependent on the health and growth of the travel industry.
Travel is highly sensitive to traveler safety concerns, and thus declines after
acts of terrorism that affect the safety of travelers. The terrorist attacks of
September 11, 2001, resulted in a decrease in new travel bookings worldwide and
may reduce our revenues in future quarters. The long-term effects of these
events could include, among other things, a protracted decrease in demand for
air travel due to fears regarding additional acts of terrorism, military
responses to acts of terrorism and increased costs and reduced operations by
airlines due, in part, to new security directives adopted by the Federal
Aviation Administration. These effects, depending on their scope and directives,
which we cannot predict at this time, together with any future terrorist
attacks, could significantly impact our long-term results of operations or
financial condition.
RESULTS OF OPERATIONS
Gross travel bookings for the first quarter 2006 increased 1306% to $18,036,630
from $1,282,440 for the first quarter of 2005.
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 Joystar'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. Joystar 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
performance with its historical results from prior periods.
Revenues during the quarter increased 1710% to $2,183,000 compared to $121,000
for the first quarter 2005. The increase of $2,062,000 is due to the substantial
increase in professional agent membership and increase in commission levels from
our preferred suppliers.
Selling and Marketing
Selling and marketing expenses relate to primarily to agent commissions and
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 quarter ended March 31, 2006 were
$1,480,000 compared to $282,000 for the quarter ended March 31, 2005. The
increase was due entirely to commissions on the increased revenues.
General and Administrative
General and Administrative expenses for the quarter ended March 31, 2006 were
$1,128,400, compared to $504,000 for the quarter ended March 31, 2005. The
increase of $624,000 was due to increased headcount and payrolls ($351,000)in
our new Miami office, share based compensation expense of $162,000, increased
accounting and legal (63,000), increased rent($39,000)due to new office in
Miami, and an increase in travel expenses ($26,000).
13
Technology and Content
Technology and content expense includes product development expenses such as
payroll and related expenses and depreciation of website development costs.
Technology and content expenses for the three months ended March 31, 2006 were
$57,000 as we increased our software development and engineering teams, and
increased our level of site innovation. 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.
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 4) has been classified as "accrued liability related to
warrants and stock purchase rights" on the accompanying balance sheet and
measured subsequently at fair value (based on a Black-Scholes computation), with
gains and losses included in the statement of operations. The accrued liability
had a balance of $940,502 at March 31, 2006.
LIQUIDITY AND SOURCES OF CAPITAL
--------------------------------
During the three months ended March 31, 2006 the Company issued 5,951,721 shares
of common stock for cash $2,049,102 of which $300,000 had been received in the
prior year as subscribed stock. The Company intends to raise an additional 5
million dollars in 2006. 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 March 31, 2006 the Company had a cash balance of $1,029,120 as compared to a
cash balance of $218,948 at December 31, 2005.
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, 2006, 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, 2006, 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.
14
PART II. OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As of January 27, 2006, the Company sold a total of $1,650,000 purchase price of
the units consisting of shares of common stock and warrants offered in its
private placement. The units consisted of the shares of the Company's common
stock, no par value per share, at a purchase price of $0.35 per share and
warrants to purchase two shares of common stock at $0.50 exercise price. The
warrants expire in two years from the date of issuance. The Company issued a
total of 4,714,286 shares of its common stock in its private placement. The
subscribers do not have any registration rights to register the shares and the
warrants purchased in the private placement. The Company received total net
proceeds of approximately $1,650,000, since no commissions were paid in cash.
The net proceeds were applied by the Company for working capital purposes. The
units were sold to accredited investors only, including an officer of the
Company.
The shares and warrants were being offered and sold by the Company to investors
whom the Company had reasonable grounds to believe are "accredited investors"
within the meaning of Rule 501 of Regulation D under the Securities Act of 1933,
as amended (the "Securities Act"). The investors were provided access to
business and financial about the Company and had such knowledge and experience
in business and financial matters that they were able to evaluate the risks and
merits of an investment in the Company. Each certificate evidencing securities
to be issued to the investors will include a legend to the effect that the
securities have not been registered under the Securities Act and could not be
resold absent registration or the availability of an applicable exemption from
registration. No general solicitation or advertising has been used in connection
with the transaction.
The issuance of the shares and warrants is believed to be exempt from the
registration requirements of the Securities Act by reason of Section 4(2) of the
Securities Act and the rules and regulations, including Regulation D thereunder,
as transactions by an issuer not involving a public offering.
Item 3. Defaults on Senior Securities NONE
Item 4. Submission of Items to a Vote NONE
Item 5. Other Information NONE
15
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:
Forms 8-K filed on January 25, 2006 and January 30, 2006.
* Previously filed with the Securities and Exchange Commission.
16
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: December 10, 2007
By: /s/ William Alverson
-------------------------------------
President and Chief Executive Officer
17