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 September 30, 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 September 30, 2006:
44,281,742 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 13
Item 3. Controls and Procedures 15
PART II. OTHER INFORMATION 16
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. 17
(a) Exhibits
(b) Reports on Form 8K
SIGNATURES AND CERTIFICATES 18
2
JOYSTAR, INC.
BALANCE SHEETS
(UN-AUDITED)
September 30, December 31,
2006 2005
(Restated)
------------ ------------
ASSETS
Current assets:
Cash $ 1,275,098 $ 218,948
Other receivables 3,638,454 398,827
Prepaid expenses 71,727 48,572
------------ ------------
Total current assets 4,985,279 666,347
Property and equipment, net 181,898 138,723
Intangible asset, net amortization 51,445 54,205
------------ ------------
Total assets $ 5,218,622 $ 859,275
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 156,179 $ 198,814
Accounts payable-merchants 1,446,429 321,643
Accrued salaries 124,411 46,786
Accrued expenses 128,865 128,865
Accrued payroll taxes 972,907 412,258
Accrued Liability related to warrants
and stock purchase rights 3,302,671
Accrued rent 34,525 35,000
Loans from shareholder 472 472
------------ ------------
Total current liabilities 6,166,459 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; 44,281,742 and
34,103,309 shares issued and outstanding
at September 30, 2006 and December 31,
2005 respectively 11,590,716 7,952,026
Stock issued for deferred compensation (175,000) (356,000)
Stock subscribed not issued, 77,733
shares at September 30, 2006 and 2,584,476
shares at December 31, 2005, respectively 115,001 834,800
Accumulated (deficit) (12,478,554) (8,715,389)
------------ ------------
Total stockholders' equity (deficit) (947,837) (284,563)
------------ ------------
Total liabilities and stockholders'
Equity (deficit) $ 5,218,622 $ 859,275
============ ============
The accompanying notes are an integral part of these financial statements
3
JOYSTAR, INC.
STATEMENTS OF OPERATIONS
(UN-AUDITED)
For the nine For the nine For the three For the three
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
(Restated) (Restated)
------------ ------------ ------------ ------------
Revenue $ 6,850,791 $ 621,000 $ 2,114,540 $ 135,000
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 4,208,591 1,369,862 1,308,643 566,407
General and administrative 2,965,856 1,718,975 800,477 567,807
Technology and content 135,556 -- 52,633 --
------------ ------------ ------------ ------------
Total operating expenses 7,310,003 3,088,837 2,161,753 1,134,214
------------ ------------ ------------ ------------
Operating loss (459,212) (2,467,837) (47,213) (999,214)
Loss on fair value of warrants
and stock purchase rights (3,302,671) (1,610,061)
Interest expense -- (9,641) -- --
------------ ------------ ------------ ------------
Loss before income taxes (3,761,883) (2,477,478) (1,657,274) (999,214)
Income tax provision 1,282 -- 1,282 --
------------ ------------ ------------ ------------
Net income (loss) $ (3,763,165) $ (2,477,478) (1,658,556) $ (999,214)
============ ============ ============ ============
Loss per share- $ (0.09) $ (0.10) $ (0.04) $ (0.03)
Basic and diluted ============ ============ ============ ============
Weighted average number of common
shares outstanding 40,971,493 26,033,552 43,502,474 29,972,580
============ ============ ============ ============
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 3,174,169 1,207,077 -- (420,000) -- 787,077
Cost of issuing stock included
in services -- (345,107) -- -- -- (345,107)
Stock issued for cash 7,004,264 2,594,855 -- (300,000) -- 2,294,855
Subscribed stock (400 shares) -- -- -- 201 -- 201
Deferred compensation earned -- -- 181,000 -- -- 181,000
Share based compensation 181,865 181,865
Net loss -- -- -- -- (3,763,165) (3,763,165)
------------ ------------ ------------ ------------ ------------ ------------
Balance September 30, 2006 (Un-audited) 44,281,742 $ 11,590,716 $ (175,000) $ 115,001 $(12,478,554) $ (947,837)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
5
JOYSTAR, INC.
STATEMENTS OF CASH FLOWS
(UN-AUDITED)
For the nine For the nine
months ended months ended
September 30, September 30,
2006 2005
(Restated)
----------- -----------
Cash flows from operating activities:
Net loss $(3,763,165) $(2,477,478)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 41,667 10,701
Stock issued for services 622,970 984,303
Stock issued for interest -- 9,641
Share based compensation 181,865
Changes in assets and liabilities:
(Increase) in prepaid expenses (23,155) (30,307)
(Increase) in other receivables (3,239,627) (71,217)
Increase (Decrease) in accounts payable (42,635) 45,355
Increase in accounts payable-merchants 1,124,787 226,820
Increase in accrued salaries 77,625 62,356
Increase in payroll taxes 560,649 191,727
(Decrease) in accrued rent (475) --
Increase in accrued liability relating to
Warrants and stock purchase rights 3,302,671
----------- -----------
Net cash used in operating activities (1,156,823) (1,048,099)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (82,083) (80,343)
----------- -----------
Net cash used in investing activities (82,083) (80,343)
----------- -----------
Cash flows from financing activities:
Loans from shareholders -- 472
Subscribed stock 201 --
Issuance of common stock 2,294,855 1,158,632
----------- -----------
Net cash provided by financing activities 2,295,056 1,159,104
----------- -----------
Increase in cash 1,056,150 30,662
Cash at the beginning of the year 218,948 283,869
----------- -----------
Cash at the end of the period $ 1,275,098 $ 314,531
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock for services $ 622,970 $ 984,303
=========== ===========
Share based compensation $ 181,865 $ --
=========== ===========
Income taxes paid $ 1,282 $ --
=========== ===========
Shares issued for shareholder loan -- 259,834
=========== ===========
Shares issued for interest $ -- $ 9,641
=========== ===========
Shares issued for fixed assets and customer
list $ -- $ 70,125
=========== ===========
Subscribed shares issued $ 720,000 $ 590,000
=========== ===========
Shares issued for accrued prior year
compensation $ 181,000 $ 172,038
=========== ===========
The accompanying notes are an integral part of these financial statements
6
JOYSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Un-audited)
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 September 30, 2005 to be
consistent with September 30, 2006 classifications.
Results of operations for the nine months ended September 30, 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
----------------
The Company amortizes its intangible asset over its useful life of five
years. Management reviews, on an annual basis, the carrying value of
its intangible asset in order to determine whether impairment has
occurred. Impairment is based on several factors including the
Company's projection of future discounted operating cash flows. If an
impairment of the carrying value were to be indicated by this review,
the Company would perform the second step of the impairment test in
order to determine the amount of impairment, if any. There was no
impairment charge during the nine months ended September 30, 2006.
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 $3,302,671 at
September 30, 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.
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 no common stock equivalents, which
would dilute earnings per share.
RECLASSIFICATIONS
-----------------
The Company has reclassified certain amounts relating to prior period
September 30, 2005 results to conform to our September 30, 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 nine months ended September 30, 2006 the Company issued
3,174,169 shares of common stock for services valued at a total of
$1,207,077. Of the total shares issued for services for the nine months
the Company issued 1,650,000 shares subscribed at a value of $420,000,
and 460,143 shares valued at $345,107.
The Company issued 7,004,264 shares of common stock for cash for
$2,594,855 of which $300,000 had been received in the prior year as
subscribed stock.
At September 30, 2006 the Company has 9,478,572 warrants outstanding to
purchase shares of common stock at $0.50 per share and 1,407,158
warrants outstanding to purchase shares of common stock at $0.35 per
share.
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
the 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:
Cash and Accrued expenses: During the year ended December 31, 2006, the Company
issued cash disbursements totaling $144,068. These cash disbursements were
reconciling items for an extended period of time and management determined that
the disbursements should have been voided and reissued. Accordingly, the
balances for cash and accrued expenses have been increased by $144,068 at
September 30, 2006. The September 30, 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.
Accrued liability related to warrants and stock purchase rights and Loss on fair
value of warrants and stock purchase rights: During 2006, the Company had issued
more shares of its common stock and other common stock equivalents including
warrants and stock options which exceeded the authorized shares of common stock
that the Company could issue. Accordingly, $1,610,061 and $3,302,671 of accrued
liability and the loss on fair value of warrants and stock purchase rights was
recognized as of and for the three and nine months respectively ended September
30, 2006. The September 30, 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 September 30, 2006
As originally
presented Restated
--------- --------
Loss on fair value of warrants
And stock purchase rights 0 $ 1,610,061
Share compensation expense 0 $ 1,011
Loss before income taxes $ (46,202) $(1,657,274)
Net Income/(Loss) $ (47,484) $(1,658,556)
Earnings/(Loss) per Share $ (0.00) $ (0.04)
The following financial statement line items were corrected for the nine months
ended September 30, 2006
As originally
presented Restated
--------- --------
Loss on fair value of warrants
And stock purchase rights 0 $ 3,302,671
Share compensation expense 0 $ 181,865
Loss before income taxes $ (277,347) $(3,761,883)
Net Loss $ (278,629) $(3,763,165)
Loss per Share $ (0.01) $ (0.09)
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.
10
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 nine months
ended September 30, 2006:
2006
------------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding, beginning
of year 3,733,000 $ 0.51
Granted 385,000 0.76
Exercised -- --
Forfeited and expired -- --
--------- --------
Outstanding, end of period 4,118,000 $ 0.53
========= ========
Options exercisable, end of period 843,000 $ 0.53
Weighted average fair value of options
granted during the period $ 0.09
=========
The fair value of the stock options granted during the nine months ended
September 30, 2006 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 nine months ended September 30, 2006, were the option exercise price of
$0.50 to $0.90 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 2006.
The following table summarizes information about stock options outstanding at
September 30, 2006, with exercise prices equal to the fair market value on the
date of grant with no restrictions on exercisability after vesting:
11
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 September 30, 2006, 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. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2006 2005
--------- ---------
Office furniture/computers $ 209,420 $ 139,313
Booking engine software 28,385 28,385
--------- ---------
237,805 167,698
Less: accumulated depreciation (67,682) (28,975)
--------- ---------
$ 170,123 $ 138,723
========= =========
12
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.
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
Gross travel bookings for the three months ended September 30, 2006 increased
221% to $16,220,487 compared to $5,040,091 for the third quarter ended
September, 30 2005. Gross travel bookings for the nine months ended September
30, 2006 increased 408% to $49,276,487 compared to $9,683,756 for the nine
months ended September 30, 2005.
Revenues
Revenues for the three months ended September 30, 2006 increased 263% to
$2,114,540 from $581,326 for the three months ended September 30, 2005. Revenue
for the nine months ended September 30, 2006 increased 542% to $6,850,791
compared to $1,066,785 for the nine months ended September 30, 2005.
13
The increases in both gross travel bookings and revenues are due to continued
substantial growth in our leisure travel agent network and our ability to
negotiate higher commissions with our preferred suppliers.
Revenue margins (defined as net revenue as a percentage of gross bookings) for
the nine months ended September 30,2006 increased to 14% compared to 11.5% for
the nine months ended September 30, 2005. The increased revenue margin was due
to growth in our fee-based membership as well as overrides and co-op marketing
dollars.
Travel Network
Our network of leisure travel agents increased by 616 members in the third
quarter ended September 30, 2006 as compared to 536 and 374 in the second and
first quarters of 2006 respectively.
Net Loss for the three months ended September 30, 2006 was $1,658,556 compared
to a net loss of $834,073 for the three months ended September 30,2005.
Liquidity
At September 30, 2006 the company's net cash increased to $1,275,098 compared to
$218,948 at December 31, 2005.
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.
Selling and Marketing expenses for the three months ended September 30, 2006
were $1,308,643 compared to $847,592 for the three months ended September 30,
2005. The increase was due entirely to commissions paid to our travel agent
network on the increased revenues generated.
General and Administrative
General and Administrative expenses for the three months ended September 30,
2006 were $800,477 compared to $567,807 for the three months ended September 30,
2005. The increase of $232,670 was due primarily to increased headcount to
support growth, expansion of Miami operations and an increase in travel expenses
relating to agent recruitment and the legal and accounting fees associated with
being a public company.
General and Administrative expenses for the third quarter decreased sequentially
$236,479 from $1,036,956 in the previous quarter ended June 30, 2006. The
decrease was primary driven by management's ability to control fixed spending to
stay in line with the seasonality of the travel industry and more specifically
softness in consumer demand in the cruise industry.
14
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 nine months ended September 30, 2006
were $135,556 as we increased our software development 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 $3,302,671 at September 30, 2006.
LIQUIDITY AND SOURCES OF CAPITAL
--------------------------------
During the nine months ended September 30, 2006 the Company issued 7,004,264
shares of common stock for cash $2,594,855 of which $300,000 had been received
in the prior year as subscribed stock.
At September 30, 2006 the Company had a cash balance of $1,275,098 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 September 30, 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 September 30, 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.
15
PART II. OTHER INFORMATION
Item 1. Legal proceedings NONE
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds NONE
Item 3. Defaults on Senior Securities NONE
Item 4. Submission of Items to a Vote NONE
Item 5. Other Information
As of November 1, 2006, Joystar, Inc., a California corporation (the "Company")
signed subscription agreements for the purchase of a total of 3,212,000 shares
of its common stock, no par value per share, at a purchase price of $0.625 per
share with certain institutional and accredited investors, for a total purchase
price of $2,007,500. As a part of the private placement, the Company also signed
warrant purchase agreements with such investors for the purchase of Series A and
B Warrants by the investors. One Series A Warrant and one Series B Warrant is to
be issued for each four Shares issued, for a total of 803,000 Series A Warrants
and 803,000 Series B Warrants. The per Warrant Share exercise price to acquire a
Warrant Share upon exercise of a Series A Warrant is $0.85 and the per Warrant
Share exercise price to acquire a Warrant Share upon exercise of a Series B
Warrant is $1.00. The Series A and B Warrants are exercisable until five (5)
years after the Closing Date. The Company anticipates the closing of the
transaction and the issuance of the securities within the next five business
days.
16
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:
None
* Previously filed with the Securities and Exchange Commission.
17
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
---------------------------------
Chief Executive Officer
18